SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Philip Morris Companies Inc.
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(Exact name of registrant as specified in its charter)
Virginia 13-3260245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
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Former name, former address and former fiscal year, if changed since last report
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
At October 31, 1997, there were 2,424,393,006 shares outstanding of the
registrant's common stock, par value $0.33 1/3 per share.
<PAGE>
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3 - 4
Condensed Consolidated Statements of Earnings
For the Nine Months Ended September 30, 1997 and 1996 5
For the Three Months Ended September 30, 1997 and 1996 6
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1997 7
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 28 - 52
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 53
Item 6. Exhibits and Reports on Form 8-K. 53
Signature 54
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Consumer products
Cash and cash equivalents $ 779 $ 240
Receivables, net 5,050 4,466
Inventories:
Leaf tobacco 3,903 4,143
Other raw materials 1,993 1,854
Finished product 3,029 3,005
------- -------
8,925 9,002
Other current assets 1,397 1,482
------- -------
Total current assets 16,151 15,190
Property, plant and equipment, at cost 19,999 19,972
Less accumulated depreciation 8,390 8,221
------- -------
11,609 11,751
Goodwill and other intangible assets
(less accumulated amortization of
$4,670 and $4,391) 17,823 18,998
Other assets 3,688 3,015
------- -------
Total consumer products assets 49,271 48,954
Financial services and real estate
Finance assets, net 5,593 5,345
Real estate held for development and sale 314
Other assets 179 258
------- -------
Total financial services and
real estate assets 5,772 5,917
------- -------
TOTAL ASSETS $55,043 $54,871
======= =======
See notes to condensed consolidated financial statements.
Continued
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars)
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
LIABILITIES
Consumer products
Short-term borrowings $ 189 $ 260
Current portion of long-term debt 1,687 1,846
Accounts payable 2,305 3,409
Accrued marketing 2,170 2,106
Accrued taxes, except income taxes 1,467 1,331
Other accrued liabilities 3,896 3,668
Income taxes 1,342 1,269
Dividends payable 972 978
-------- -------
Total current liabilities 14,028 14,867
Long-term debt 12,440 11,827
Deferred income taxes 832 731
Accrued postretirement health care costs 2,438 2,372
Other liabilities 5,515 5,773
-------- -------
Total consumer products liabilities 35,253 35,570
Financial services and real estate
Short-term borrowings 319 173
Long-term debt 843 1,134
Deferred income taxes 3,723 3,636
Other liabilities 264 140
-------- -------
Total financial services and
real estate liabilities 5,149 5,083
-------- -------
Total liabilities 40,402 40,653
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued) 935 935
Earnings reinvested in the business 24,519 22,478
Currency translation adjustments (947) 192
-------- -------
24,507 23,605
Less cost of repurchased stock
(381,968,524 and 374,615,043 shares) 9,866 9,387
-------- -------
Total stockholders' equity 14,641 14,218
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 55,043 $54,871
======== =======
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions, except per share data)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1997 1996
-------- --------
Operating revenues $54,722 $52,414
Cost of sales 19,978 20,001
Excise taxes on products 12,348 11,232
------- -------
Gross profit 22,396 21,181
Marketing, administration and research costs 11,904 11,724
Settlement charges (Note 3) 812
Amortization of goodwill 438 443
------- -------
Operating income 9,242 9,014
Interest and other debt expense, net 815 824
------- -------
Earnings before income taxes 8,427 8,190
Provision for income taxes 3,412 3,358
------- -------
Net earnings $ 5,015 $ 4,832
======= =======
Weighted average number of shares 2,425 2,471
======= =======
Per share data:
Net earnings $ 2.07 $ 1.96
======= =======
Dividends declared $ 1.20 $ 1.07
======= =======
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions, except per share data)
(Unaudited)
For the Three Months Ended
September 30,
--------------------------
1997 1996
-------- --------
Operating revenues $18,092 $17,414
Cost of sales 6,571 6,596
Excise taxes on products 4,101 3,726
------- -------
Gross profit 7,420 7,092
Marketing, administration and research costs 3,854 3,871
Settlement charges (Note 3) 812
Amortization of goodwill 142 150
------- -------
Operating income 2,612 3,071
Interest and other debt expense, net 249 281
------- -------
Earnings before income taxes 2,363 2,790
Provision for income taxes 957 1,144
------- -------
Net earnings $ 1,406 $ 1,646
======= =======
Weighted average number of shares 2,423 2,454
======= =======
Per share data:
Net earnings $ 0.58 $ 0.67
======= =======
Dividends declared $ 0.40 $ 0.40
======= =======
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1996 and
the Nine Months Ended September 30, 1997
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Earnings Total
Reinvested Currency Cost of Stock-
Common in the Translation Repurchased holders'
Stock Business Adjustments Stock Equity
------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $ 935 $19,779 $ 467 $(7,196) $13,985
Net earnings 6,303 6,303
Exercise of stock options
and issuance of other stock
awards (28) 609 581
Cash dividends declared
($1.47 per share) (3,606) (3,606)
Currency translation adjustments (275) (275)
Stock repurchased (2,800) (2,800)
Net unrealized appreciation
on securities 30 30
------ ------- ------ ------- -------
Balances, December 31, 1996 935 22,478 192 (9,387) 14,218
Net earnings 5,015 5,015
Exercise of stock options
and issuance of other stock
awards (66) 264 198
Cash dividends declared
($1.20 per share) (2,910) (2,910)
Currency translation adjustments (1,139) (1,139)
Stock repurchased (743) (743)
Net unrealized appreciation
on securities 2 2
------ ------- ------ ------- -------
Balances, September 30, 1997 $ 935 $24,519 $ (947) $(9,866) $14,641
====== ======= ====== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1997 1996
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 4,881 $ 4,744
- Financial services and real estate 134 88
------- -------
Net earnings 5,015 4,832
Adjustments to reconcile net earnings to
operating cash flows:
Consumer products
Depreciation and amortization 1,246 1,259
Deferred income tax provision 130 220
Gains on sales of businesses (182) (68)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (942) (630)
Inventories (331) (617)
Accounts payable (972) (915)
Income taxes (40) 260
Other working capital items 663 (240)
Other 335 207
Financial services and real estate
Deferred income tax provision 113 110
Gain on sale of business (103)
Other 156 104
------- -------
Net cash provided by operating activities 5,088 4,522
------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (1,176) (1,108)
Purchases of businesses, net of acquired cash (628) (515)
Proceeds from sales of businesses 402 154
Other 12
Financial services and real estate
Investments in finance assets (501) (306)
Proceeds from finance assets 256 154
Proceeds from sale of business 427
------- -------
Net cash used in investing activities (1,220) (1,609)
------- -------
See notes to condensed consolidated financial statements.
Continued
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1997 1996
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net (repayment) issuance of short-term borrowings $(1,006) $ 329
Long-term debt proceeds 2,852 1,966
Long-term debt repaid (1,330) (1,487)
Financial services and real estate
Net issuance (repayment) of short-term borrowings 146 (450)
Long-term debt proceeds 175 363
Long-term debt repaid (387)
Repurchase of outstanding stock (805) (2,097)
Dividends paid (2,916) (2,483)
Issuance of shares 97 341
Other (72) (31)
------- -------
Net cash used in financing activities (3,246) (3,549)
Effect of exchange rate changes on cash and
cash equivalents (83) (43)
------- -------
Cash and cash equivalents:
Increase (decrease) 539 (679)
Balance at beginning of period 240 1,138
------- -------
Balance at end of period $ 779 $ 459
======= =======
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
The interim condensed consolidated financial statements of Philip Morris
Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's
management that all adjustments necessary for a fair statement of the interim
results presented have been reflected therein. All such adjustments were of a
normal recurring nature. Operating revenues and net earnings for any interim
period are not necessarily indicative of results that may be expected for the
entire year.
These statements should be read in conjunction with the consolidated financial
statements and related notes which appear in the Company's annual report to
stockholders and which are incorporated by reference into the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
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.
Note 2. Capital Stock:
On February 26, 1997, the Company's Board of Directors declared a three-for-one
split of the Company's common stock, effected by a distribution on April 10,
1997, of two shares for each share held of record at the close of business on
March 17, 1997. In addition, the par value of the Company's common stock was
changed from $1.00 to $0.33 1/3 per share and authorized shares of common stock
were increased from 4 billion to 12 billion shares. All share and per share data
have been restated to reflect this stock split for all periods presented.
Note 3. Contingencies:
Legal proceedings covering a wide range of matters are pending in various U.S.
and foreign jurisdictions against the Company, its subsidiaries, including
Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco
subsidiary, and indemnitees. Various types of claims are raised in these
proceedings, including products liability, consumer protection, antitrust,
securities law, tax, patent infringement, employment matters and claims for
contribution.
OVERVIEW OF TOBACCO-RELATED LITIGATION
Types and Number of Cases
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery actions, including class
actions, brought by state and local governments, unions and others seeking
reimbursement for Medicaid and/or other health care expenditures allegedly
caused by cigarette smoking. The theories of recovery asserted and defenses
raised in these cases are described below under "Smoking and Health Litigation"
and "Health Care Cost Recovery Litigation." Damages claimed in some of the
smoking and health class actions and health care cost recovery cases range into
the billions of dollars.
There continues to be a substantial increase in the number of tobacco-related
cases pending in the United States, with many of the new cases having been filed
in Florida and New York on behalf of individual plaintiffs. As of November 1,
1997, there were approximately 365 smoking and health cases filed and served on
behalf of individual plaintiffs in the United States against PM Inc. and, in
some cases,
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the Company (excluding approximately 50 cases in Texas that were voluntarily
dismissed but which may be refiled under certain conditions), compared to
approximately 300 such cases as of June 30, 1997, and approximately 200 such
cases as of September 30, 1996. Seventeen of the individual cases involve
allegations of various personal injuries allegedly related to exposure to
environmental tobacco smoke ("ETS").
In addition, as of November 1, 1997, there were approximately 45 purported
smoking and health class actions pending in the United States against PM Inc.
and, in some cases, the Company (including four that involve allegations of
various personal injuries related to exposure to ETS) compared to approximately
40 such cases on June 30, 1997, and 20 such cases on September 30, 1996.
Most of these actions purport to constitute statewide class actions and were
filed after the Fifth Circuit Court of Appeals, in the Castano case, reversed a
federal district court's certification of a purported nationwide class action on
behalf of persons who were allegedly "addicted" to tobacco products. One
purported smoking and health class action is pending in Canada (against an
entity in which the Company, through subsidiaries, owns a 40% interest) and
another in Brazil against affiliates of the Company. Recently, a purported
smoking and health class action was filed in Nigeria against a subsidiary of
Philip Morris International Inc., the Company's international tobacco
subsidiary.
As of November 1, 1997, approximately 95 health care cost recovery actions were
pending, compared to approximately 70 on June 30, 1997, and 20 on September
30, 1996. In California, individuals and local governments and other
organizations purportedly acting as "private attorneys general" have filed suits
seeking, among other things, injunctive relief, restitution and disgorgement of
profits for alleged violations of California's consumer protection statutes
(Ellis, et al. v. R.J. Reynolds Tobacco Company, et al.; Cordova, et al. v.
Liggett Group, Inc., et al.).
Verdicts in Recent Cases
In August 1996, a Florida jury awarded a former smoker and his spouse $750,000
in a smoking and health case against another United States cigarette
manufacturer (Carter v. American Tobacco Co., et al.), and that manufacturer was
subsequently ordered to pay approximately $1.8 million in attorneys fees and
costs. Neither PM Inc. nor the Company was a party to that litigation. The
defendant in that action has appealed the verdict. Later that month, a jury
returned a verdict for defendants in a smoking and health case in Indiana
against United States cigarette manufacturers, including PM Inc. (Rogers v. R.J.
Reynolds Tobacco Company, et al.). Plaintiff has filed a motion seeking a new
trial based on the alleged discovery of new evidence. In May and October 1997,
Florida juries also returned verdicts for defendants in smoking and health cases
involving another United States cigarette manufacturer (Connor v. R.J. Reynolds
Tobacco Company; Karbiwnyk v. R.J. Reynolds Tobacco Company). In September 1997,
a court in Brazil awarded plaintiffs in a smoking and health case the Brazilian
real equivalent of $81,000, attorneys' fees (in an amount to be determined by
the court) and a monthly annuity for 35 years equal to two-thirds of the
deceased smoker's last monthly salary (Alves v. Souza Cruz). Defendant is
appealing the judgment. Neither the Company nor its affiliates were parties to
that action.
Settlements
In recent months, PM Inc. and other companies in the domestic tobacco industry
agreed to settle a smoking and health class action brought on behalf of flight
attendants alleging injury caused by exposure to ETS aboard aircraft and two
health care cost recovery actions brought by the states of Florida and
Mississippi. These settlements are discussed below under the headings "Smoking
and Health
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Litigation -- Broin," "Health Care Cost Recovery Litigation -- Florida" and
"Health Care Cost Recovery Litigation -- Mississippi."
Trial Dates
A number of smoking and health cases and health care cost recovery actions
pending against PM Inc. and, in some cases, the Company, are scheduled for trial
through the end of 1998, although trial dates are subject to change. A Florida
class action is set for trial in February 1998 (Engle, et al. v. R.J. Reynolds
Tobacco Company, et al.). A New York class action may commence during the first
quarter of 1998, although a firm trial date has not yet been set (Frosina, et
al. v. Philip Morris, Inc., et al.). A Maryland class action is scheduled to go
to trial in September 1998 (Richardson, et al. v. Philip Morris Incorporated, et
al.). The Texas health care cost recovery trial, previously scheduled to begin
in September, has been delayed and no new trial date has been set at this time.
The Minnesota health care cost recovery action is scheduled for trial in January
1998. Several other health care cost recovery actions are scheduled for trial
later in 1998: Washington (September), Arizona (October) and Oklahoma
(November). Approximately 30 other individual cases are currently scheduled for
trial in 1998 against PM Inc. and, in some cases, the Company, of which
approximately 20 are set for trial in Florida commencing in June 1998.
A description of certain recent developments in smoking and health class
actions, health care cost recovery litigation and certain other actions pending
against the Company and/or its subsidiaries and affiliates follows.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases 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, violations of
deceptive trade practice laws and consumer protection statutes, and claims under
the federal Racketeer Influenced and Corrupt Organization Act ("RICO") and state
RICO statutes. Plaintiffs in these actions seek various forms of relief,
including compensatory and punitive damages, creation of a medical monitoring
fund, disgorgement of profits, various injunctive and equitable relief. Defenses
raised by defendants in these cases include lack of proximate cause, assumption
of the risk, comparative fault and/or contributory negligence, statutes of
limitations or repose, and preemption by the Federal Cigarette Labeling and
Advertising Act, as amended (the "Labeling Act"). In June 1992, the United
States Supreme Court held that the Labeling Act, as enacted in 1965, does not
preempt common law damage claims but that the Labeling Act, as amended in 1969,
preempts claims arising after July 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 Labeling 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 legislation to eliminate the federal preemption defense, proposed
in Congress in recent years, were enacted. It is not possible to predict whether
any such legislation will be enacted.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recently Filed Smoking and Health Class Actions
Since July 1, 1997 through November 1, 1997, the following smoking and health
class actions have been filed against PM Inc. and, in some cases, the Company
and/or its other subsidiaries:
Daley, et al. v. American Brands, Inc., et al., Circuit Court, Cook County,
Illinois, filed July 7, 1997.
Piscitello, et al. v. Philip Morris, Incorporated, Superior Court, Middlesex
County, New Jersey, filed July 28, 1997.
Azorsky, et al. v. R.J. Reynolds Tobacco Company, et al., United States
District Court, Western District, Pennsylvania, filed August 15, 1997.
McCauley, et al. v. Brown & Williamson Tobacco Corporation, et al., United
States District Court, Northern District, Georgia, filed August 20, 1997.
DaSilva, et al. v. Nigerian Tobacco Company, et al., High Court of Lagos State,
Nigeria, filed September 8, 1997.
Bush, et al. v. Philip Morris Incorporated, et al., United States District
Court, Eastern District, Texas, filed September 10, 1997.
Nwanze, et al. v. Philip Morris Companies, Inc., et al., United States District
Court, Southern District, New York, filed September 29, 1997.
Badillo, et al. v. The American Tobacco Company, Inc., et al., United States
District Court, Nevada, filed October 8, 1997.
Newborn, et al. v. Brown & Williamson Tobacco Corporation, et al., United States
District Court, Western District, Tennessee, filed October 9, 1997.
Certain Developments in Smoking and Health Class Actions
In addition to the recently filed smoking and health class actions listed above,
since July 1, 1997, there have been certain developments in the smoking and
health class actions.
Broin -- This class action was settled in October 1997 by PM Inc. and other
companies in the domestic tobacco industry, subject to final approval by the
court. The class, as certified by the court, consisted of "all non-smoking
flight attendants who are or have been employed by airlines based in the United
States and are suffering from various diseases and disorders caused by their
exposure to second-hand smoke in airline cabins." The defendants expressly did
not admit liability for injury of any member of the settlement class or that ETS
can cause any disease. Under the settlement, the settling defendants will pay
$300 million to establish a foundation to sponsor scientific research with
respect to diseases associated with cigarette smoking. These funds will be paid
in three equal annual installments, with interest, commencing in April 1998.
Settling defendants also agreed to pay attorneys' fees of up to $46 million and
costs of $3 million, subject to court approval. PM Inc.'s share of all the
foregoing payments (exclusive of interest) is approximately $175 million and was
charged to expense in the third quarter of 1997. The settling defendants also
agreed to support the enactment of federal legislation prohibiting smoking on
segments of international flights originating or terminating in the United
States. Under the settlement, all defendants (and certain other entities and
persons) are released from liability for the claims asserted in the present
action. Each individual member of the class, however, may later bring an
individual action for diseases and conditions existing on or before January 15,
1997 ("retained claims") based upon certain legal theories against the settling
defendants with the following limitations:
1. The individual claims can only seek compensatory damages; they may not
seek punitive damages;
2. The defendants retain all defenses against the individual claims,
except as noted below.
In any individual lawsuits brought by members of the settlement class for
retained claims seeking damages on account of specified diseases the settling
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
defendants have assumed the burden of proof as to whether ETS can cause certain
conditions, but the plaintiff retains the burden of proving that his or her
condition was caused by exposure to ETS. Such individual lawsuits may be brought
in Dade County, Florida, or wherever the venue is proper. The settling
defendants have also agreed not to raise a statute of limitations defense with
respect to any retained claims brought by a member of the settlement class
within one year after final court approval of the settlement. The settlement
does not apply to, nor does it have any effect on, "future" claims brought by
members of the settlement class for any new and unrelated diseases or conditions
that arose or might arise after January 15, 1997. Broin, et al. v. Philip Morris
Incorporated, et al., Circuit Court, Dade County, Florida, filed October 31,
1991.
Engle -- The trial of this class action is scheduled to begin in February 1998.
Recently, the court reversed an earlier order that had granted defendants
partial summary judgment on the grounds that plaintiffs' claims were preempted
by the Labeling Act. Engle, et al. v. R.J. Reynolds Tobacco Company, et al.,
Circuit Court, Dade County, Florida, filed May 5, 1994.
Barnes (formerly Arch) -- In October 1997, the court decertified the class and
granted defendants' motions for summary judgment against the individual named
plaintiffs. Barnes, et al. v. The American Tobacco Company Inc., et al., United
States District Court, Eastern District, Pennsylvania, filed August 8, 1996.
Frosina -- In October 1997, the court certified the class. Defendants are
appealing the class certification. The trial of this case, originally scheduled
to begin in November 1997, may commence during the first quarter of 1998.
Frosina, et al. v. Philip Morris, Inc., et al., Supreme Court of the State of
New York, County of New York, filed June 19, 1996.
Reed -- In August 1997, the court denied plaintiffs' motion for class
certification and denied a motion by five individuals to intervene as class
representatives. Reed, et al. v. Philip Morris Incorporated, et al., Superior
Court of the District of Columbia, filed June 21, 1996.
Langdeau -- In October 1997, this case was dismissed without prejudice by the
Tribal Court on the grounds that plaintiffs failed to effect proper service of
process and otherwise failed to follow Tribal Court rules. Langdeau, et al. v.
The American Tobacco Company, et al., Tribal Court, Lower Brule Sioux Tribe,
Lower Brule, South Dakota, filed June 4, 1997.
Thomas -- In October 1997, plaintiffs voluntarily dismissed this purported class
action without prejudice. Thomas, et al. v. American Tobacco Company, Inc., et
al., Circuit Court for the County of Wayne, State of Michigan, filed June 6,
1997.
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, foreign, state and local government
entities, unions, federal and state taxpayers, Native American tribes and others
seek reimbursement for Medicaid and/or other health care expenditures allegedly
caused by tobacco products and, in some cases, for future expenditures and
damages as well. In one of these cases private citizens seek recovery of alleged
tobacco-related health care expenditures by the federal Medicaid and Medicare
programs and, in another case, seek recovery of such expenditures by the
Department of Defense and the Department of Veterans Administration. In one
purported class action, Blue Cross/Blue Shield subscribers in the United States
are seeking reimbursement of allegedly increased medical insurance premiums
caused by tobacco products. In the Native American cases, claims are also
asserted for alleged lost productivity of tribal government employees. Other
relief sought by some but not all plaintiffs includes punitive damages, treble
damages for alleged antitrust
-14-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
law violations, injunctions prohibiting alleged marketing and sales to minors,
disclosure of research, disgorgement of profits, funding of anti-smoking
programs, disclosure of nicotine yields and payment of attorney and expert
witness fees.
The claims asserted in these health care cost recovery actions vary. In most of
these cases plaintiffs assert the equitable claim that the tobacco industry was
"unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Other claims made
by some but not all plaintiffs include the equitable claim of indemnity, common
law claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under federal and state
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under federal and state RICO statutes.
Defenses raised by defendants include failure to state a valid claim, lack of
benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot
recover because they participated in, and benefited from, the sale of
cigarettes), lack of antitrust injury, federal preemption, lack of proximate
cause and statute of limitations. In addition, defendants argue that they should
be entitled to "set-off" any alleged damages to the extent the plaintiff
benefits economically from the sale of cigarettes through the receipt of excise
taxes or otherwise. Defendants also argue that these cases are improper because
plaintiffs must proceed under principles of subrogation and assignment. Under
traditional theories of recovery, a payor of medical costs (such as an insurer
or a state) can seek recovery of health care costs from a third party solely by
"standing in the shoes" of the injured party. Defendants argue that plaintiffs
should be required to bring an action on behalf of each individual health care
recipient and should be subject to all defenses available against the injured
party. In certain of these cases, defendants have also challenged the ability of
the plaintiffs to use contingency fee counsel to prosecute these actions.
Further, certain cigarette companies, including PM Inc., have filed declaratory
judgment actions in Massachusetts, Texas, Maryland, Connecticut, Utah, New
Jersey, Alaska and Hawaii seeking to block the health care cost recovery actions
in those states and/or to prevent the state from hiring contingency fee counsel.
The Maryland and New Jersey actions have been dismissed. The plaintiff tobacco
companies have sought appeals to overturn these dismissals. The New Jersey
appellate court has refused to hear the appeal.
Recently Filed Health Care Cost Recovery Actions
Since July 1, 1997 through November 1, 1997, the following health care cost
recovery actions have been filed against PM Inc. and, in some cases, the Company
and/or its other subsidiaries.
Connecticut Pipe Trades Health Fund, et al. v. Philip Morris, Inc., et al.,
United States District Court, Connecticut, filed July 1, 1997.
Seafarers Welfare Plan and United Industrial Workers Welfare Plan v. Philip
Morris, Inc., et al., United States District Court, Maryland, Southern
Division, filed July 2, 1997.
Laborers and Operating Engineers Utility Agreement Health and Welfare Trust Fund
for Arizona v. Philip Morris Incorporated, et al., United States District
Court, Arizona, filed July 7, 1997.
Woods v. The American Tobacco Company, et al., Superior Court, Wake County,
North Carolina, filed July 10, 1997.
West Virginia Laborers Pension Fund v. Philip Morris, Inc., et al., United
States District Court, Southern District, West Virginia, Huntington
Division, filed July 11, 1997.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Rhode Island Laborers Health and Welfare Fund, et al. v. Philip Morris
Incorporated, et al., United States District Court, Providence, Rhode
Island, filed on or about July 20, 1997.
Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et al.,
United States District Court, Southern District, New York, filed July 28,
1997.
Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip Morris,
Inc., et al., United States District Court, Eastern District, Louisiana,
filed August 15, 1997.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris, Inc., et
al., United States District Court, Eastern District, Pennsylvania, filed
August 20, 1997.
State of Georgia v. Philip Morris, Inc., et al., Superior Court, Fulton County,
Georgia, filed August 29, 1997.
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip
Morris, Inc., et al., United States District Court, Eastern District,
Missouri, filed September 2, 1997.
Southeast Florida Laborers District Council Health and Welfare Trust Fund, et
al. v. Philip Morris, Inc., et al., United States District Court, Southern
District, Florida, filed September 11, 1997.
West Virginia--Ohio Valley Area International Brotherhood of Electrical Workers
Welfare Fund v. The American Tobacco Company, et al., United States
District Court, West Virginia, filed September 11, 1997.
The Crow Creek Sioux Tribe v. The American Tobacco Company, et al., Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997.
Teamsters Union No. 142, Health and Welfare Trust Fund, et al. v. Philip Morris
Incorporated, et al., United States District Court, Northern District,
Indiana, filed September 15, 1997.
Operating Engineers Local 12 Health and Welfare Trust, et al. v. American
Tobacco Co., Inc., et al., United States District Court, Central District,
California, filed September 16, 1997.
Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Inc., et al.,
Supreme Court, New York County, New York, filed September 17, 1997.
New Jersey Carpenters Health Fund, et al. v. Philip Morris, Inc., et al.,
United States District Court, New Jersey, filed September 25, 1997.
New Mexico and West Texas Multi-Craft Health and Welfare Trust Fund, et al. v.
Philip Morris, Inc., et al., Second Judicial District Court, Bernalillo
County, New Mexico, filed October 10, 1997.
Goodpasture v. American Tobacco Company, Inc., et al., United States District
Court, Kansas, filed October 15, 1997.
Moore v. American Tobacco Company, et al., United States District Court, Kansas,
filed October 15, 1997.
The Republic of the Marshall Islands v. The American Tobacco Company, et al.,
High Court, Republic of the Marshall Islands, filed October 20, 1997.
Central States Joint Board Health & Welfare Trust Fund v. Philip Morris, Inc.,
et al., Circuit Court, Cook County, Illinois, filed October 20, 1997.
International Brotherhood of Teamsters, Local 734 Health & Welfare Trust Fund v.
Philip Morris, Inc., et al., Circuit Court, Cook County, Illinois, filed
October 20, 1997.
Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et al.,
United States District Court, Eastern District, Texas, Beaumont Division,
filed October 31, 1997.
In addition to these actions, other foreign, state and local government entities
and others, including unions, have announced that they are considering filing
health care cost recovery actions.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Certain Developments in Health Care Cost Recovery Actions
In addition to the recently filed health care cost recovery actions listed
above, since July 1, 1997, there have been certain developments in the health
care cost recovery actions.
Florida -- In August 1997, PM Inc. and other companies in the domestic tobacco
industry entered into a settlement agreement with the State of Florida to settle
all present and future economic claims relating to the subject matter of
Florida's health care cost recovery action. 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, filed February 21, 1996.
Under the settlement agreement, the settling defendants have deposited into an
escrow account $550 million, representing the State's estimate of its share of
the $10 billion initial payment under the proposed Resolution discussed below
under the caption "Proposed Resolution of Certain Regulatory and Litigation
Issues." This amount was allocated among the settling defendants in accordance
with their relative market capitalization, resulting in a charge to expense by
PM Inc. of $374 million in the third quarter of 1997.
On September 15, 1998 and annually thereafter on December 31, the settling
defendants will make ongoing payments into a special account for the benefit of
the State in the following amounts: 1998: $220 million; 1999: $247.5 million;
2000: $275 million; 2001: $357.5 million; 2002: $357.5 million; and each year
thereafter: $440 million. These amounts equal that portion of the annual
industry payments under the proposed Resolution which is contemplated to be paid
to Florida. These payments would be adjusted for inflation and changes in volume
as provided in the proposed Resolution. The settling defendants have reimbursed
Florida's expenses and those of its attorneys. PM Inc.'s share of this payment
resulted in a charge to expense in the third quarter of 1997 of approximately
$11 million. The settling defendants have also agreed to pay reasonable
attorneys' fees of Florida's private contingency fee counsel. The amount of such
fees will be set by a panel of independent arbitrators. Each of these payments
would be allocated among the settling defendants in accordance with their
relative unit volume of domestic tobacco product sales.
Certain of Florida's private contingency fee counsel filed charging liens
against the funds paid by defendants into the Florida escrow account. In filing
the charging liens, contingency counsel argued that the settlement agreement had
no effect on their rights under their contingency fee agreement with Florida. On
November 12, 1997, the court ordered all parties to comply with the provisions
for obtaining attorneys' fees, as set forth in the settlement agreement, and
quashed the charging liens. Contingency fee counsel are appealing this ruling.
Under the settlement agreement, the settling defendants will also support a
two-year pilot program by Florida aimed at reducing the use of tobacco products
by persons under the age of eighteen, and have paid into escrow $200 million for
the pilot program. PM Inc.'s share of this payment resulted in a charge to
expense in the third quarter of 1997 of approximately $99 million.
The settling defendants also agreed to discontinue all tobacco product
billboards, signs in arenas and stadia and transit advertisements in Florida
within several months and to support new legislative and administrative
initiatives to prohibit the sale of cigarettes in vending machines, except in
adult-only facilities, and to strengthen civil penalties for sales of tobacco
products to minors and for possession of tobacco products by minors.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
If legislation implementing the proposed Resolution or its substantial
equivalent is enacted, the settlement will remain in place, but the terms of the
federal legislation will supersede the settlement agreement (except for the
terms of the pilot program and payments thereunder) and the ongoing payments
described above will be adjusted so that Florida would receive the same payments
as it would receive under the proposed Resolution, provided that in all events
Florida will be entitled to the amount of the initial payment described above
without any adjustment.
The agreement also provides that if federal legislation implementing the
proposed Resolution or its substantial equivalent is enacted, the parties
contemplate that Florida and any other similar state which has made an
exceptional contribution to secure resolution of these matters may apply to a
panel of independent arbitrators for reasonable compensation for its efforts in
securing the proposed Resolution. The settling defendants have agreed not to
oppose an application of $250 million by Florida, payable over five years. The
parties have agreed to a nationwide annual cap for all such payments of $100
million.
The agreement also provides that if the settling defendants enter into any
future pre-verdict settlement agreement with a non-federal governmental
plaintiff on more favorable terms (after due consideration of relevant
differences in population or other appropriate factors), Florida will obtain
treatment at least as relatively favorable as such governmental plaintiff.
The agreement provides that it is not an admission or concession or evidence of
any liability or wrongdoing on the part of any party, and is entered into by the
settling defendants solely to avoid the further expense, inconvenience, burden
and uncertainty of litigation.
Finally, the agreement provides that the court retains jurisdiction over
plaintiffs' claim for non-economic injunctive relief. The court has scheduled a
trial date for September 8, 1998 on this claim in the event that the proposed
Resolution, or its substantial equivalent, is not enacted.
Mississippi -- In July 1997, PM Inc. and other companies in the United States
tobacco industry entered into a Memorandum of Understanding (the "MOU") with the
State of Mississippi setting forth the principal terms and conditions of an
agreement in principle to settle all present and future claims relating to the
subject matter of Mississippi's health care cost recovery action. Moore v. The
American Tobacco Company, et al., Chancery Court of Jackson County, Mississippi,
filed May 23, 1994. A final settlement agreement, based on the MOU, was signed
on October 17, 1997.
Under the settlement agreement, the settling defendants have deposited into an
escrow account $170 million, representing Mississippi's estimate of its share of
the $10 billion initial payment under the proposed Resolution and have paid an
additional $15 million (subject to later adjustment) to reimburse Mississippi
and its attorneys for legal expenses. The settling defendants have also
deposited into an escrow account approximately $62 million to support a pilot
program aimed at reducing the use of tobacco products by persons under the age
of eighteen. PM Inc.'s share of all of the foregoing payments was approximately
$153 million. This amount was charged to expense in the third quarter of 1997.
The settlement also provides that beginning December 31, 1998, the settling
defendants will pay into escrow 1.7% of that portion of the annual industry
payments under the proposed Resolution which is contemplated to be paid to the
states. These payments, which are not offset by potential credits for civil tort
liability and which would be adjusted as provided in the proposed Resolution,
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
could result in payments to the State of Mississippi of $68 million with respect
to 1998 and $76.5 million with respect to 1999. These amounts would increase
annually to $136 million with respect to 2003 and would continue at that level
thereafter. The settling defendants will also be responsible for the attorneys'
fees of counsel for Mississippi (which will be set by a panel of arbitrators).
Each of these payments would be allocated among the settling defendants in
accordance with their relative volume of domestic cigarette sales.
If legislation implementing the proposed Resolution or its substantial
equivalent is enacted, the settlement will remain in place, but the terms of the
federal legislation will supersede the settlement agreement (except for the
terms of the pilot program and payments thereunder) and the foregoing payment
amounts will be adjusted so that Mississippi would receive the same payment as
it would receive under the proposed Resolution, provided that in all events
Mississippi will be entitled to the $170 million initial payment described above
without any adjustment.
The settlement agreement also provides that if the settling defendants enter
into any future pre-verdict settlement agreement with a non-federal governmental
plaintiff on more favorable terms (after due consideration of relevant
differences in population or other appropriate factors), Mississippi will obtain
treatment at least as relatively favorable as such governmental plaintiff. In
addition, in the event of any future settlement or final judgment with respect
to the claims for non-economic injunctive relief pending in Florida's health
care cost recovery action, the terms of the Mississippi settlement agreement
will be revised so that Mississippi will receive comparable benefits (after due
consideration of relevant differences in population or other appropriate
factors).
The settlement agreement also provides that if federal legislation implementing
the proposed Resolution or its substantial equivalent is enacted, the parties
contemplate that Mississippi and any other similar state which has made an
exceptional contribution to secure resolution of these matters may apply to a
panel of independent arbitrators for reasonable compensation for its efforts in
securing the proposed Resolution. The settling defendants have agreed not to
oppose an application of $75 million by Mississippi, payable over five years.
The parties have agreed to a nationwide annual cap for all such payments of $100
million.
The settlement agreement also provides that the settling defendants will
discontinue all tobacco billboards, signs in arenas and stadia, and transit
advertisements in Mississippi within several months and will support legislative
and administrative initiatives to prohibit the sale of cigarettes in vending
machines, except in adult-only facilities, and to strengthen civil penalties for
sales of tobacco products to minors and for possession of tobacco products by
minors.
Finally, the settlement agreement provides that it is not an admission or
concession or evidence of any liability or wrongdoing on the part of any party,
and is entered into by the settling defendants solely to avoid the further
expense, inconvenience, burden and uncertainty of litigation.
Texas -- In September 1997, the court denied defendants' motions for summary
judgment and denied defendants' motions to dismiss as to the RICO, simple and
gross negligence, strict liability, breach of express and implied warranties,
common law fraud (actual and constructive), simple and gross negligent
misrepresentation, conspiracy and concert of action, aiding and abetting and
vicarious responsibility/respondeat superior causes of action. The court granted
defendants' motions to dismiss as to the antitrust, restitution/unjust
enrichment, common law public nuisance, negligent performance of a voluntary
undertaking, and Texas Deceptive Trade Practices and Consumer Protection Act
claims. The court also entered an order dividing the trial into three separate
phases. The court directed that Phase I of the trial will consider whether
defendants have engaged in conduct prohibited by the RICO statute and any
defenses that may be applicable to the initial liability phase of civil RICO.
Phase II of the trial will consider issues that relate to any duties imposed
upon the parties, any breach of those duties, whether any misrepresentations
have been made, whether elements of conspiracy have been satisfied and any
defenses that may be applicable to the initial liability elements of these
various claims. Phase III, which will occur only if plaintiff prevails in Phase
I or Phase II, will consider issues that relate to causation, the materiality of
misrepresentations, reliance and the amount of damages. In October 1997, the
United States Court of
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Appeals for the Fifth Circuit denied defendants' petition for review of various
of the trial court's rulings, including the decision to permit the State to
establish causation through the use of statistical proof without making a
showing of individual injury and the decision to trifurcate the trial. Trial in
this matter, originally scheduled to begin in September of this year, has been
delayed. No new trial date has been set. The State of Texas v. The American
Tobacco Company, et al., United States District Court, Eastern District of
Texas, filed March 28, 1996.
Massachusetts -- In October 1997, the court denied in part defendants' motions
to dismiss the complaint, but reserved ruling on plaintiff's claims of
special duty and a portion of plaintiff's deceptive trade practices claim.
Commonwealth of Massachusetts v. Philip Morris Inc., et al., Superior Court,
Middlesex County, filed December 19, 1995.
Washington -- In August 1997, the court reinstated plaintiff's previously
dismissed consumer protection statute claims for damages solely to the extent
such claims are confined to relief sought for individual consumers, but not for
the State itself. Trial of this case is scheduled for September 1998. State of
Washington v. American Tobacco Co., Inc., et al., Superior Court of Washington,
King County, filed June 5, 1996.
Alabama -- This health care cost recovery action was brought as a purported
class action on behalf of Alabama taxpayers. In September 1997, the court
dismissed plaintiffs' claims that were asserted on behalf of the State of
Alabama, but denied defense motions to dismiss claims insofar as they related to
plaintiffs' individual claims or those asserted on behalf of children. Crozier,
et al. v. The American Tobacco Company, et al., Circuit Court, Montgomery
County, Alabama, filed August 18, 1996.
Los Angeles County -- The court consolidated for trial the claims under
California's consumer protection statutes with similar claims in the Ellis and
Cordova cases referenced above under the heading "Overview of Tobacco-Related
Litigation--Types and Number of Cases." Trial is scheduled to begin in February
1999. County of Los Angeles v. R.J. Reynolds Tobacco Company, et al., Superior
Court of California, San Diego, filed August 5, 1996.
Arizona -- After having been instructed by the former governor of Arizona to
dismiss the case, the attorney general had filed an amended complaint that
abandoned claims for Medicaid payments, but sought recovery of other health care
costs as well as other damages and forms of relief. In October 1997, the new
governor authorized the attorney general to amend the complaint to include a
claim for Medicaid reimbursement. State of Arizona, et al. v. American Tobacco
Co., Inc., et al., Superior Court, Maricopa County, Arizona, filed August 20,
1996.
Illinois -- In November, 1997, the court denied defendants' motions to dismiss
the antitrust, negligence and conspiracy claims and granted defendants' motions
to dismiss the special duty, restitution, nuisance and unjust enrichment claims.
People of the State of Illinois v. Philip Morris, Inc., et al., Circuit Court of
Cook County, Illinois, filed November 12, 1996.
Iowa -- In August 1997, the court dismissed plaintiff's claims for deception,
breach of assumed duty, disgorgement of profits, and indemnity. The court also
denied defendants' motion to dismiss plaintiff's claims for violation of the
Iowa Consumer Fraud Act, civil conspiracy, aiding and abetting, nuisance, and
injunctive relief. State of Iowa v. R.J. Reynolds Tobacco Co., et al., District
Court for Polk County, Iowa, filed November 26, 1996.
California -- In October 1997, the court struck several of defendants'
affirmative defenses including comparative fault, assumption of risk, failure to
mitigate, improper class action, federal preemption (in part), lack of standing,
separation of powers doctrine, lack of authority to retain contingency counsel,
improper accumulation of actions and "antitrust-related defenses." People of the
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
State of California, et al. v. Philip Morris, Inc., et al., San Francisco
Superior Court, County of San Francisco, filed September 5, 1996.
University of South Alabama -- In August 1997, the court granted the attorney
general's motion to dismiss the action on the ground that the university, as an
instrumentality of the State, did not have authority to bring this action on its
own behalf. University of South Alabama v. The American Tobacco Company, et al.,
United States District Court, Southern District of Alabama, filed May 19, 1997.
The Lower Brule Sioux Tribe -- In October 1997, this case was dismissed without
prejudice by the Tribal Court on the grounds that plaintiffs failed to effect
proper service of process and otherwise failed to follow Tribal Court rules. The
Lower Brule Sioux Tribe, et al. v. The American Tobacco Company, et al., Tribal
Court, Lower Brule Sioux Tribe, Lower Brule, South Dakota, filed May 28, 1997.
Iowa Laborers District Council Health and Welfare Fund -- This case was
voluntarily dismissed without prejudice by plaintiffs in September 1997. The
Iowa Laborers District Council Health and Welfare Fund, et al. v. Philip Morris,
Inc., et al., United States District Court, Southern District of Iowa, filed
June 20, 1997.
The Chehalis Tribe -- In October 1997, plaintiffs voluntarily dismissed this
case without prejudice. The Chehalis Tribe, et al. v. The American Tobacco
Company, et al., Chehalis Tribal Court, Oakville, Washington, filed June 23,
1997.
Marshall Islands -- This case, originally filed in June 1997, was voluntarily
dismissed by plaintiffs without prejudice in July 1997. The Citizens of the
Republic of the Marshall Islands v. The American Tobacco Company, et al., United
States District Court, Hawaii, filed June 18, 1997. A new health care cost
recovery action was recently filed by the Republic of the Marshall Islands. The
Republic of the Marshall Islands v. The American Tobacco Company, et al., High
Court, Republic of the Marshall Islands, filed October 20, 1997.
CERTAIN OTHER TOBACCO-RELATED LITIGATION
In September 1997, Raymark Industries, Inc., an asbestos company, filed suits in
Georgia and Florida against domestic tobacco manufacturers, including PM Inc.
and others, for contribution for damages Raymark incurred in asbestos
litigation. Raymark Industries, Inc. v. Brown & Williamson Tobacco Corporation,
et al., United States District Court, Northern District, Georgia, filed
September 15, 1997; Raymark Industries, Inc. v. R.J. Reynolds Tobacco Company,
et al., United States District Court, Northern District, Florida, filed
September 15, 1997. Causes of action alleged in the complaint include
negligence, strict liability, fraud and misrepresentation, and conspiracy.
Plaintiff seeks contribution and/or indemnity for the defense and payment of
asbestos claims in an amount specified to be in excess of $400 million.
In November 1997, Fibreboard Corporation and Owens Corning, former asbestos
manufacturers, filed suit against domestic tobacco manufacturers, including PM
Inc., and others, to recover, among other things, past sums paid by these
companies to individuals with smoking-related diseases. Fibreboard Corporation
and Owens Corning v. The American Tobacco Company, et al., Superior Court,
Alameda County, California, filed November 6, 1997. Plaintiffs also seek
punitive damages. Causes of action alleged in the complaint include unfair
competition, unjust enrichment and restitution, indemnity, spoliation (i.e.,
alleged concealment of evidence) and declaratory relief.
CERTAIN OTHER ACTIONS
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in several purported class actions that were 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, filed April 4, 1994 and State Board of
Administration of Florida, et al. v. Philip Morris Companies Inc., et al.,
United
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
States District Court for the Southern District of New York, filed September 7,
1994. In those cases, plaintiffs asserted 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 claimed 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 April 1996, the court entered an order stipulating the
dismissal of the State Board claims. In August 1996, the court entered judgment
dismissing the claims in Kurzweil. In April 1997, the district court granted a
motion filed by the Kurzweil plaintiffs to vacate the judgment and for leave to
amend their complaint. Defendants' appeal of this ruling was dismissed by the
Court of Appeals on August 5, 1997, for lack of appellate jurisdiction.
Since April 1996, five purported class action suits have been filed in Wisconsin
alleging that Kraft Foods, Inc. ("Kraft") and others engaged in a conspiracy to
fix and depress the prices of bulk cheese and milk through their trading
activity on the National Cheese Exchange. Plaintiffs seek injunctive and
equitable relief and treble damages. Stuart, et al. v. Kraft Foods, Inc., et
al., United States District Court, Eastern District of Wisconsin, filed April 4,
1996; Sheeks, et al. v. Kraft Foods, Inc., et al., United States District Court,
Eastern District of Wisconsin, filed September 24, 1996; Servais, et al. v.
Kraft Foods, Inc. and the National Cheese Exchange, Inc., Circuit Court of Dane
County, Wisconsin, filed May 5, 1997; Dodson, et al. v. Kraft Foods, Inc., et
al., United States District Court, Western District of Wisconsin, filed July 1,
1997; Noll, et al. v. Kraft Foods, Inc., et al., United States District Court,
Western District of Wisconsin, filed July 11, 1997. The court has granted the
Sheeks and Stuart plaintiffs' respective motions for voluntary dismissal without
prejudice. Plaintiffs in the three remaining cases have filed a single
consolidated class action complaint in Wisconsin seeking certification of a
class consisting of all milk producers in the U.S. In October 1997, a purported
class action suit was filed against Kraft only. Vincent, et al. v. Kraft Foods,
Inc., Circuit Court of Cook County, Illinois, filed October 27, 1997. This suit
contains allegations similar to those in the consolidated Wisconsin class action
discussed above, but only seeks a class comprised of Kraft's milk suppliers.
In September 1997, a purported class action was commenced by private plaintiffs
in Alabama state court alleging that the U.S. tobacco companies and others
conspired to fix cigarette prices in Alabama, that agreements leading to the
price increases were reached during the negotiations leading to the proposed
Resolution discussed below, and that prices were increased pursuant to the
alleged conspiracy in 1997. The purported class consists of Alabama residents
who purchased cigarettes in 1997. Plaintiffs seek actual damages of no more than
$500 per class member and statutory damages of $500 for each instance of injury
or damages, and costs and interest. In September 1997, the state court
conditionally certified the class. Defendants subsequently removed the case to
federal court, and the federal court then vacated the state court's conditional
class certification. Mosley, et al. v. Philip Morris Companies Inc., et al.,
United States District Court, Southern District of Alabama, filed September 24,
1997.
Tax assessments alleging the nonpayment of taxes in Italy (value added taxes for
the years 1988 to 1995 and income taxes for the years 1987 to 1995) have been
served upon certain affiliates of the Company. The aggregate amount of unpaid
taxes assessed to date is alleged to be the Italian lire equivalent of $2.7
billion. In addition, the Italian lire equivalent of $6.3 billion in interest
and penalties have been assessed. The Company anticipates that value added and
income tax assessments may also be received in respect of 1996. In September
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1997, in the first of several appeals filed by an affiliate of the Company, the
Italian administrative tax court in Milan overturned one of the assessments for
value added taxes. A hearing on a second appeal was held in October 1997, and
hearings on additional appeals are currently scheduled for December 1997 and
January 1998. In a separate proceeding in Naples, a court has dismissed charges
of criminal association against certain present and former officers and
directors of affiliates of the Company, but permitted charges of tax evasion to
proceed to trial. The Company, its affiliates and the officers and directors who
are subject to the proceedings believe they have complied with applicable
Italian tax laws and are vigorously contesting the pending tax assessments and
the pending proceedings in Naples.
It is not possible to predict the outcome of the litigation pending against the
Company and its subsidiaries. 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 that have received widespread media
attention, including the announcement in March 1997 that another cigarette
manufacturer had settled certain health care cost recovery actions and a
purported nationwide smoking and health class action, and a decision by a
federal district court on a motion for summary judgment not to preclude the
United States Food and Drug Administration (the "FDA") from asserting
jurisdiction over cigarettes as "drugs" or "medical devices," which decision is
now under appeal. These developments, as well as the widespread media attention
given to the proposed Resolution discussed below and the settlements of the
Florida and Mississippi health care cost recovery actions and the Broin class
action, may negatively affect the perception of potential triers of fact with
respect to the tobacco industry, possibly to the detriment of certain pending
litigation, and may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of 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 unfavorable outcome of certain pending litigation or by the
proposed Resolution discussed below or by settlement, if any, of certain pending
cases. However, implementation of the proposed Resolution would resolve the most
significant tobacco litigation against the Company and its subsidiaries.
Furthermore, the Company and each of its subsidiaries named as a defendant
believe, 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.
Except as described below under the heading "Proposed Resolution of Certain
Regulatory and Litigation Issues--Effects on Litigation," all such cases are,
and will continue to be, vigorously defended.
PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES
On June 20, 1997, PM Inc. and other companies in the United States tobacco
industry entered into a Memorandum of Understanding to support the adoption of
federal legislation and any necessary ancillary undertakings, incorporating the
features described in the proposed Resolution attached to the Memorandum of
Understanding (together, the "Resolution"). The proposed Resolution, which is
subject to approval of the boards of directors of the participating companies,
can be implemented only by federal legislation. The Company's Board of Directors
approved the proposed Resolution in June 1997. If enacted into law, the
legislation would resolve many of the regulatory and litigation issues affecting
the United States tobacco industry and, thereby, reduce uncertainties facing the
industry and increase stability in business and capital markets.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
There can be no assurance that federal legislation in the form of the proposed
Resolution will be enacted or that it will be enacted without modification that
is materially adverse to the Company or that any modification would be
acceptable to the Company or that, if enacted, the legislation would not face
legal challenges. Moreover, the negotiation and signing of the proposed
Resolution could affect other federal, state and local regulation of the United
States tobacco industry and regulation of the international tobacco industry.
The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access restrictions,
licensing of tobacco retailers, the adoption and enforcement of "no sales to
minors" laws by states, surcharges against the industry for failure to achieve
underage smoking reduction goals (discussed below), regulation of tobacco
products by the FDA, public disclosure of industry documents and research,
smoking cessation programs, compliance programs by the industry, public smoking
and smoking in the workplace, enforcement of the proposed Resolution, industry
payments (discussed below) and litigation (discussed below).
Surcharge for Failure to Achieve Underage Smoking Reduction Goals
The proposed Resolution would impose surcharges on the industry if required
reductions in underage smoking are not achieved. A "look back" provision would
require the following reductions in the incidence of underage smoking from
estimated levels over the past decade: 30% in the fifth and sixth years after
enactment of implementing federal legislation, 50% in the seventh, eighth and
ninth years, and 60% in the tenth year, with incidence remaining at such reduced
levels thereafter.
For any year in which these required reductions are not met, the FDA must impose
a mandatory surcharge on the participating members of the cigarette industry
based upon an approximation of the present value of the profit the companies
would earn over the lives of the number of underage consumers in excess of the
required reduction. The annual surcharge would be $80 million (as adjusted for
changes in population and cigarette profitability) for each percentage point by
which the reduction in underage smoking falls short of the required reductions
(as adjusted to prevent double counting of persons whose smoking has already
resulted in the imposition of a surcharge in previous years). The annual
surcharge would be subject to a $2 billion annual cap (as adjusted for
inflation). The surcharge would be the joint and several obligation of
participating manufacturers allocated among participating manufacturers based on
their market share of the United States cigarette industry and would be payable
on or before July 1 of the year in which it is assessed. Manufacturers could
receive a partial refund of this surcharge (up to 75%) only after paying the
assessed amount and only if they could thereafter prove to the FDA that they had
fully complied with the proposed Resolution, had taken all reasonably available
measures to reduce youth tobacco usage and had not acted to undermine the
achievement of the reduction goals.
Industry Payments
The proposed Resolution would require participating manufacturers to make
substantial payments in the year of implementation and thereafter ("Industry
Payments"). Participating manufacturers would be required to make an aggregate
$10 billion initial Industry Payment on the date federal legislation
implementing the terms of the proposed Resolution is signed. This Industry
Payment would be based on relative market capitalizations and the Company
currently estimates that its share of the initial Industry Payment would be
approximately $6.6 billion (to be adjusted downward for initial payments made to
Mississippi and Florida pursuant to settlements of health care cost recovery
actions). Thereafter, the companies would be required to make specified annual
Industry Payments determined and allocated among the companies based on volume
of domestic
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
sales as long as the companies continue to sell tobacco products in the United
States. These Industry Payments, which would begin on December 31 of the first
full year after implementing federal legislation is signed, would be in the
following amounts (at 1996 volume levels): year 1: $8.5 billion; year 2: $9.5
billion; year 3: $11.5 billion; year 4: $14 billion; and each year thereafter:
$15 billion. These Industry Payments would be increased by the greater of 3% or
the previous year's inflation rate determined with reference to the Consumer
Price Index. The Industry Payments would increase or decrease in proportion to
changes from 1996 domestic sales volume levels. Volume declines would be
measured based on adult sales volume figures; volume increases would be measured
by total sales volume. If sales volume declines but the industry's domestic net
operating profit exceeds base year inflation-adjusted levels, the reduction in
the annual Industry Payment due to volume decline, if any, would be offset to
the extent of 25% of the increased profit. At current levels of sales and prior
to any adjustment for inflation, the proposed Resolution would require total
Industry Payments of $368.5 billion over the first 25 years (subject to credits
described below in connection with potential civil tort liability).
The Industry Payments would be separate from any surcharges required under the
"look back" provision discussed above under the heading "Surcharge for Failure
to Achieve Underage Smoking Reduction Goals." The Industry Payments would
receive priority and would not be dischargeable in any bankruptcy or
reorganization proceeding and would be the obligation only of entities selling
tobacco products in the United States (and not their affiliated companies). The
proposed Resolution provides that all payments by the industry would be ordinary
and necessary business expenses in the year of payment, and no part thereof
would be either in settlement of an actual or potential liability for a fine or
penalty (civil or criminal) or the cost of a tangible or intangible asset. The
proposed Resolution would provide for the pass-through to consumers of the
annual Industry Payments in order to promote the maximum reduction in underage
use.
Effects on Litigation
If enacted, the federal legislation provided for in the proposed Resolution
would settle present attorney general health care cost recovery actions (or
similar actions brought by or on behalf of any governmental entity other than
the federal government), parens patriae and smoking and health class actions and
all "addiction"/dependence claims and would bar similar actions from being
maintained in the future. However, the proposed Resolution provides that no stay
applications will be made in pending governmental actions without the mutual
consent of the parties. In recent months PM Inc. and other companies in the
domestic tobacco industry agreed to settle two health care cost recovery actions
in Mississippi and Florida and a smoking and health class action brought on
behalf of flight attendants alleging injury caused by exposure to ETS aboard
aircraft. The Company may enter into discussions to postpone or settle other
actions pending the enactment of the legislation contemplated by the proposed
Resolution. No assurance can be given whether a postponement or settlement will
be achieved, or, if achieved, as to the terms thereof. The proposed Resolution
would not affect any smoking and health class action or any health care cost
recovery action that is reduced to final judgment before implementing federal
legislation is effective.
Under the proposed Resolution, the rights of individuals to sue the tobacco
industry would be preserved, as would existing legal doctrine regarding the
types of tort claims that can be brought under applicable statutory and case law
except as expressly changed by implementing federal legislation. Claims,
however, could not be maintained on a class or other aggregated basis and could
be maintained only against tobacco manufacturing companies (and not their
retailers,
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
distributors or affiliated companies). In addition, all punitive damage claims
based on past conduct would be resolved as part of the proposed Resolution and
future claimants could seek punitive damages only with respect to claims
predicated upon conduct taking place after the effective date of implementing
federal legislation. Finally, except with respect to actions pending as of June
9, 1997, third-party payor (and similar) claims could be maintained only based
on subrogation of individual claims. Under subrogation principles, a payor of
medical costs can seek recovery from a third party only by "standing in the
shoes" of the injured party and being subject to all defenses available against
the injured party.
The proposed Resolution contemplates that participating tobacco manufacturers
would enter into a joint sharing agreement for civil liabilities relating to
past conduct. Judgments and settlements arising from tort actions would be paid
as follows. The proposed Resolution would set an annual aggregate cap of up to
33% of the annual base Industry Payment (including any reductions for volume
declines). Any judgments or settlements exceeding the cap in a year would roll
over into the next year. While judgments and settlements would run against the
defendant, they would give rise to an 80-cents-on-the-dollar credit against the
annual Industry Payment. Finally, any individual judgments in excess of $1
million would be paid at the rate of $1 million per year unless every other
judgment and settlement could first be satisfied within the annual aggregate
cap. In all circumstances, however, the companies would remain fully responsible
for costs of defense and certain costs associated with the fees of attorneys
representing certain plaintiffs in the litigation that would be settled by the
proposed Resolution.
Financial Effects
The Company anticipates that its share of the industry's $10 billion initial
payment, which it currently estimates would be approximately $6.6 billion
(adjusted downward for initial payments made to Mississippi and Florida pursuant
to settlements of health care cost recovery actions) would be charged to expense
in the period in which federal legislation implementing the terms of the
proposed Resolution is enacted. In addition, the Company currently anticipates
that implementation of the proposed Resolution would require a significant
charge to expense in the period of enactment to comply with the proposed
Resolution's regulations on advertising, marketing and production. The initial
payment would be funded from a combination of available cash, commercial paper
issuances, bank borrowings and long-term debt issuances in global markets. The
initial payment would have a material adverse effect on the Company's operating
income and cash flows in the quarter and year in which the proposed Resolution
is enacted and on its financial position. The initial payment would result in
higher debt and higher interest expense, the amounts of which would depend upon
the final form of the proposed Resolution, borrowing requirements and interest
rates.
The Company anticipates that PM Inc.'s share of future annual Industry Payments
related to cigarette sales would be charged to expense as the related sales
occur and would be funded through price increases. The Company anticipates that
annual surcharges, if any, imposed by the FDA for failure to meet required
reduction levels in underage smoking beginning in the fifth year after the
proposed Resolution is implemented would be charged to expense in the year of
assessment or in the year prior thereto if it is then probable that such
assessment will be made.
The Company believes that implementation of the proposed Resolution would
materially adversely affect the volume, operating revenues, cash flows and/or
operating income of the Company in future years. The degree of the adverse
impact would depend, among other things, on the rates of decline in United
States
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
cigarette sales in the premium and discount segments, PM Inc.'s share of the
domestic premium and discount cigarette segments, interest rates and the timing
of principal payments on debt incurred to finance the initial payment due under
the proposed Resolution, and the effect of the proposed Resolution on cigarette
consumption and the regulatory and litigation environment outside the United
States.
Note 4. New Accounting Standards:
In 1996, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued Statement of Position ("SOP") No. 96-1,
"Environmental Remediation Liabilities," which, as required, was adopted by the
Company as of January 1, 1997. The adoption and application of SOP No. 96-1 had
no material effect on the Company's 1997 results of operations or financial
position for the three or nine month periods ended September 30, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which is
effective for the year ending December 31, 1997. SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS") and requires
the presentation of both basic and diluted EPS. Based upon the Company's current
capitalization structure, the basic and diluted EPS amounts calculated in
accordance with SFAS No. 128 are expected to approximate the Company's EPS
amounts computed in accordance with Accounting Principles Board Opinion No. 15,
"Earnings Per Share."
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- ------------------------------------------------------------------------
Consolidated Operating Results
For the Nine Months Ended September 30,
Operating Revenues
---------------------------------------
(in millions)
1997 1996
---- ----
Tobacco $ 30,506 $ 27,837
Food 20,619 20,888
Beer 3,318 3,418
Financial services and real estate 279 271
-------- --------
Operating revenues $ 54,722 $ 52,414
======== ========
Operating Income
---------------------------------------
(in millions)
1997 1996
---- ----
Tobacco $ 6,339 $ 6,356
Food 3,065 2,909
Beer 410 392
Financial services and real estate 256 139
-------- --------
Operating companies income 10,070 9,796
Amortization of goodwill (438) (443)
General corporate expenses (334) (313)
Minority interest in earnings of
consolidated subsidiaries (56) (26)
-------- --------
Operating income $ 9,242 $ 9,014
======== ========
For the Three Months Ended September 30,
Operating Revenues
---------------------------------------
(in millions)
1997 1996
---- ----
Tobacco $ 10,433 $ 9,497
Food 6,455 6,710
Beer 1,125 1,118
Financial services and real estate 79 89
-------- --------
Operating revenues $ 18,092 $ 17,414
======== ========
Operating Income
---------------------------------------
(in millions)
1997 1996
---- ----
Tobacco $ 1,667 $ 2,226
Food 947 941
Beer 125 117
Financial services and real estate 150 49
-------- --------
Operating companies income 2,889 3,333
Amortization of goodwill (142) (150)
General corporate expenses (112) (103)
Minority interest in earnings of
consolidated subsidiaries (23) (9)
-------- --------
Operating income $ 2,612 $ 3,071
======== ========
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Operating revenues and operating income for the first nine months of 1997
increased $2.3 billion (4.4%) and $228 million (2.5%), respectively, over the
comparable 1996 period. Operating revenues were higher due primarily to
increases in domestic and international tobacco and North American food
operations. Operating income was reduced as a result of pretax charges of $812
million taken by PM Inc., the Company's domestic tobacco subsidiary, for
up-front payments related to settling health care cost recovery litigation in
Mississippi and Florida and a one-time charge for settling the Broin case, a
Florida class action brought on behalf of non-smoking flight attendants.
Excluding the settlement charges, operating income increased 11.5%, reflecting
favorable results of operations in domestic tobacco, international tobacco,
North American food, beer and financial services operations.
Operating revenues for the third quarter of 1997 increased $678 million (3.9%)
over the comparable 1996 period, while operating income for the third quarter of
1997 decreased $459 million (14.9%) from the third quarter of 1996, reflecting
settlement charges of $812 million discussed previously. Operating revenues were
higher due primarily to increases in domestic and international tobacco.
Excluding the settlement charges, operating income increased 11.5%, reflecting
favorable results of operations in domestic tobacco, international tobacco,
North American food, beer and financial services operations.
Currency movements, primarily the strengthening of the U.S. dollar versus key
European and Asian currencies, decreased operating income by $334 million and
$154 million in the first nine months and third quarter of 1997, respectively,
versus the comparable 1996 periods. Although the Company cannot predict future
movements in currency rates, it anticipates that the strength of the U.S. dollar
will continue to have an unfavorable impact on operating income for the
remainder of 1997 and will negatively impact 1998 at current exchange rates.
Net earnings per share of $2.07 in the first nine months of 1997 increased by
5.6% over the comparable 1996 period, due to higher net earnings and fewer
shares outstanding. Net earnings per share of $0.58 in the third quarter of 1997
decreased 13.4% from the comparable 1996 period due to lower net earnings,
partially offset by fewer shares outstanding. Net earnings in both periods in
1997 were lowered by the after-tax effect of PM Inc.'s settlement charges ($496
million). Excluding the impact of these charges, net earnings and earnings per
share increased over the comparable 1996 period by 14.1% and 15.8%,
respectively, for the first nine months and 15.6% and 16.4%, respectively, for
the third quarter. As a result of share repurchases, the weighted average number
of shares outstanding decreased 1.9% to 2,425 million shares in the first nine
months of 1997 and decreased 1.3% to 2,423 million shares in the third quarter
of 1997 from the comparable 1996 periods.
The Company does not believe that the anticipated costs of Year 2000 systems
conversions will have a material impact on the Company's future consolidated
results of operations. However, in any given reporting period, such costs may be
a factor in describing changes in operating income for the Company's business
segments.
Operating Results by Business Segment
Tobacco
Business Environment
As discussed below, the tobacco industry, including PM Inc., the Company's
domestic tobacco subsidiary, and Philip Morris International Inc. ("PMI"), the
Company's international tobacco subsidiary, have faced, and continue to face, a
number of issues which may adversely affect volume, operating revenues, cash
flows, operating income and financial position.
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<PAGE>
In the United States, these issues include proposed federal regulatory controls
(including, as discussed below, the issuance of final regulations by the United
States Food and Drug Administration (the "FDA") which regulate cigarettes as
"drugs" or "medical devices"); actual and proposed excise tax increases; new and
proposed federal, state and local governmental and private restrictions on
smoking (including proposals to ban or restrict smoking in workplaces and in
buildings permitting public access); new and proposed restrictions on tobacco
manufacturing, marketing, advertising (including decisions by certain companies
to limit or not accept tobacco advertising) and sales; new and proposed
legislation and regulations to require substantial additional health warnings on
cigarette packages and in advertising, and to eliminate the tax deductibility of
tobacco advertising and promotional costs; actual and proposed requirements
regarding disclosure of cigarette ingredients and other proprietary information;
increased assertions of adverse health effects associated with both smoking and
exposure to environmental tobacco smoke ("ETS"); legislation or other
governmental action seeking to ascribe to the industry responsibility and
liability for the purported adverse health effects associated with both smoking
and exposure to ETS; the diminishing social acceptance of smoking; increased
pressure from anti-smoking groups; unfavorable press reports; governmental and
grand jury investigations; increased smoking and health litigation, including
private plaintiff class action litigation and health care cost recovery actions
brought by state and local governments, unions and others seeking reimbursement
for Medicaid and/or other health care expenditures allegedly caused by cigarette
smoking; and the proposed legislative resolution of certain regulatory and
litigation issues affecting the United States tobacco industry discussed below.
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 is currently $12 per 1,000 cigarettes ($0.24 per pack of 20
cigarettes). In August 1997, legislation was enacted that will raise the federal
excise tax to $17 per 1,000 cigarettes ($0.34 per pack of 20 cigarettes)
starting in the year 2000 and then to $19.50 per 1,000 cigarettes ($0.39 per
pack of 20 cigarettes) in 2002. In general, excise taxes, sales taxes and other
cigarette-related taxes levied by various states, counties and municipalities
have been increasing, and additional increases have been proposed in a number of
states. These taxes vary considerably and, when combined with the current
federal excise tax, may be as high as $1.50 per pack.
In the opinion of PM Inc. and PMI, past increases in excise and similar taxes
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 PMI, and might cause sales to shift
from the premium segment to the discount segment.
In August 1996, the FDA issued final regulations pursuant to which it asserts
jurisdiction over cigarettes as "drugs" or "medical devices" under the
provisions of the Food, Drug and Cosmetic Act. The final regulations include
severe restrictions on the distribution, marketing and advertising of
cigarettes, and would require the industry to comply with a wide range of
labeling, reporting, recordkeeping, manufacturing, and other requirements
applicable to medical devices and their manufacturers. For the most part, the
regulations were scheduled to become effective on August 28, 1997. The FDA's
exercise 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 final regulations, and could materially adversely
affect the volume, operating revenues and operating income of PM Inc. PM Inc.
and other domestic cigarette manufacturers and an advertising firm sued the FDA,
seeking a judicial declaration that the FDA has no authority to regulate
cigarettes and asking the court to permanently enjoin the FDA from enforcing its
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. In April 1997, a U.S. district court ruled that
Congress has not precluded the FDA from regulating cigarettes as "drugs" or
"medical devices" and that the FDA may so regulate cigarettes if the facts
asserted in support of the
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<PAGE>
FDA's assertion of jurisdiction are proven to be correct. The court also ruled,
however, that the section of the Food, Drug and Cosmetic Act relied upon by the
agency does not give the FDA authority to implement its regulations restricting
cigarette advertising and promotions. The court stayed implementation of the
FDA's regulations scheduled for August 28, 1997. The court left in effect the
specific regulations that took effect in February 1997 establishing a federal
minimum age of 18 for the sale of tobacco products and requiring proof of age
for anyone under age 27. The tobacco company plaintiffs, including PM Inc., are
appealing that portion of the district court's order relating to the FDA's
assertion of jurisdiction. The FDA is appealing that portion of the order
enjoining the advertising and promotion restrictions. The respective appeals
were heard by the U.S. Court of Appeals for the Fourth Circuit in August 1997.
The outcome of the litigation challenging the FDA regulations cannot be
predicted.
In August 1996, the Commonwealth of Massachusetts enacted legislation that would
require cigarette manufacturers to disclose to the Massachusetts Department of
Public Health ("DPH") the flavorings and other ingredients used in each brand of
cigarettes sold in the Commonwealth, and to provide "nicotine-yield ratings" for
their products based on standards to be established by the DPH. PM Inc. believes
that enforcement of the statute, which is scheduled to take effect on December
15, 1997, could permit the disclosure by DPH to the public of valuable
proprietary information concerning its brands. PM Inc. and three other domestic
cigarette manufacturers have filed suit in federal district court in Boston
challenging the legislation as being preempted by the Federal Cigarette Labeling
and Advertising Act, as amended (the "Labeling Act") and as violating the
commerce, full faith and credit, due process and takings clauses of the U.S.
Constitution. In February 1997, the court ruled on summary judgment motions that
the Labeling Act does not preempt the requirement that ingredient information be
provided to the Commonwealth and that decision was subsequently affirmed by the
First Circuit Court of Appeals. The plaintiffs will continue to assert their
other constitutional claims. The ultimate outcome of this lawsuit cannot be
predicted. The enactment of this legislation has encouraged efforts to enact,
and the enactment of, ingredients disclosure legislation in other states, such
as Texas and Minnesota.
In June 1995, PM Inc. announced that it had 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.
Some foreign countries have also taken steps to restrict or prohibit cigarette
advertising and promotion, to require ingredient disclosure (such as Thailand),
to impose maximum constituent levels, to increase taxes on cigarettes, to
control prices, to restrict imports, to ban or severely restrict smoking in
workplaces and public places, and otherwise to discourage cigarette smoking. It
is not possible to predict what, if any, other foreign governmental legislation
or regulations will be adopted relating to the manufacturing, advertising, sale
or use of cigarettes or to the tobacco industry generally.
PM Inc. has received requests for information (including grand jury subpoenas)
in connection with governmental investigations of the tobacco industry, and is
cooperating with respect to such requests. Certain present and former employees
of PM Inc. have testified or have been asked to testify in connection with
certain of these matters. The investigations are as follows:
PM Inc. has been informed that an investigation by the United States Attorney
for the Southern District of New York, which had been initiated following the
publication of an article in The New York Times that made allegations about PM
Inc. documents and supposedly secret research relating to nicotine, has been
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<PAGE>
consolidated with the United States Department of Justice investigation
discussed immediately below.
PM Inc. has been informed of an investigation by the United States Attorney for
the Eastern District of New York relating to The Council for Tobacco
Research-U.S.A., Inc., a research organization of which PM Inc. is a sponsor;
and an investigation by the United States Department of Justice relating to
issues raised in testimony provided by tobacco industry executives before
Congress and other related matters.
PM Inc. has been advised that the Federal Trade Commission has commenced an
investigation to determine whether PM Inc. unfairly restricts the distribution
of competing manufacturers' cigarette brands through its merchandising practices
at the wholesale and retail levels.
While the outcomes of these investigations cannot be predicted, PM Inc. believes
it has acted lawfully.
In March 1997, Liggett Group Inc. ("Liggett"), a United States cigarette
manufacturer with approximately 2% of the domestic cigarette market, announced
agreements with the attorneys general of twenty-two states to settle the health
care cost recovery actions pending against Liggett in those states. Liggett also
entered into an agreement to settle a purported nationwide class action suit
which, subject to court approval, provides, during its 25-year term, for (i) the
mandatory settlement of all present and future claims by Liggett smokers and
their estates and families, as well as claims by individuals who allege injury
from exposure to ETS, and (ii) the settlement of all present and future claims
against Liggett by individuals or entities alleging economic loss as a result of
payments for the treatment of diseases or medical conditions allegedly caused by
cigarette smoking or exposure to ETS. As a part of the settlements, Liggett
agreed, among other things, (i) to pay 25% of its "Pre-tax Income," if any, for
the next 25 years into a settlement fund, subject to certain conditions and
offsets, (ii) to comply with certain aspects of the FDA regulations discussed
above, (iii) to acknowledge that cigarettes cause health problems and that
nicotine is "addictive," (iv) to add a warning to each package of its cigarettes
and its advertising stating that "Smoking is Addictive," (v) to acknowledge that
cigarette companies have targeted marketing programs toward minors, and (vi) to
cooperate with otherwise adverse parties in certain investigations and lawsuits
and, in furtherance thereof, to waive the attorney-client privilege and other
protections with respect to certain of its documents and information and to
assist in obtaining court adjudication with respect to documents ("protected
documents") in its possession that are subject to joint defense or other
privileges and protections held by other members of the tobacco industry. The
issue of Liggett's proposed disclosure of these protected documents is being
litigated in state courts. In Florida's health care cost recovery action certain
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of these protected documents were publicly disclosed pursuant to court order.
The settlement agreements contain certain provisions that would apply to any
other member of the tobacco industry having a share of the domestic cigarette
market of less than 30% that acquires, or is acquired by, Liggett. Each
settlement can be terminated by Liggett upon the occurrence of specified events.
Liggett has sought to have the purported nationwide class action certified, and
the related settlement agreement approved, in actions brought in Alabama state
court and in federal court in West Virginia. In March 1997, the Alabama state
court conditionally certified the nationwide class and preliminarily approved
the related settlement agreement, subject to final approval after a fairness
hearing. In August 1997, the federal court in the West Virginia case withdrew
its earlier preliminary approval of the settlement and the settlement class and
denied plaintiffs' motion to certify the class.
As further discussed in Note 3 to the Condensed Consolidated Financial
Statements ("Note 3"), there is litigation pending in various jurisdictions
related to tobacco products. These cases generally fall within three categories:
(i) smoking and health cases alleging personal injury brought on behalf of
individual plaintiffs, (ii) smoking and health cases alleging personal injury
and purporting to be brought on behalf of a class of individual plaintiffs, and
(iii) health care cost recovery actions. Damages claimed in some of the smoking
and health class actions and health care cost recovery cases range into the
billions of dollars.
There continues to be a substantial increase in the number of tobacco-related
cases pending in the United States, with many of the new cases having been filed
in Florida and New York on behalf of individual plaintiffs. As of November 1,
1997, there were approximately 365 smoking and health cases filed and served on
behalf of individual plaintiffs in the United States against PM Inc. and, in
some cases, the Company (excluding approximately 50 cases in Texas that were
voluntarily dismissed but which may be refiled under certain conditions),
compared to approximately 300 such cases as of June 30, 1997, and approximately
200 such cases as of September 30, 1996. Seventeen of the individual cases
involve allegations of various personal injuries allegedly related to exposure
to ETS.
In addition, as of November 1, 1997, there were approximately 45 purported
smoking and health class actions pending in the United States against PM Inc.
and, in some cases, the Company (including four that involve allegations of
various personal injuries related to exposure to ETS) compared to approximately
40 such cases on June 30, 1997, and 20 such cases on September 30, 1996. Most of
these actions purport to constitute statewide class actions and were filed after
the Fifth Circuit Court of Appeals, in the Castano case, reversed a federal
district court's certification of a purported nationwide class action on behalf
of persons who were allegedly "addicted" to tobacco products. One purported
smoking and health class action is pending in Canada and another in Brazil
against affiliates of the Company. Recently, a purported smoking and health
class action was filed in Nigeria against a subsidiary of PMI.
As of November 1, 1997, approximately 95 health care cost recovery actions were
pending compared to approximately 70 on June 30, 1997, and 20 on September
30, 1996. In California, individuals and local governments and other
organizations purportedly acting as "private attorneys general" have filed suits
seeking, among other things, injunctive relief, restitution and disgorgement of
profits for alleged violations of California's consumer protection statutes.
Legislation has recently been enacted in California removing a statutory bar to
the filing of smoking and health cases by private plaintiffs and health care
cost recovery actions by public entities under California law. As a result,
additional smoking and health cases similar to those now pending in other states
may be filed in California, and existing health care cost recovery actions in
California may be expanded to claim the benefit of the amended statute.
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Other foreign, state, and local government entities and others, including
unions, have announced that they are considering filing health care cost
recovery actions.
It is not possible to predict the outcome of the litigation pending against the
Company and its subsidiaries. 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 that have received widespread media
attention, including the announcement in March 1997 that another cigarette
manufacturer had settled certain health care cost recovery actions and a
purported nationwide smoking and health class action, and a decision by a
federal district court on a motion for summary judgment not to preclude the FDA
from asserting jurisdiction over cigarettes as "drugs" or "medical devices"
which decision is now under appeal. These developments, as well as the
widespread media attention given to the proposed Resolution, discussed below
under the heading "Proposed Resolution of Certain Regulatory and Litigation
Issues," and the settlements of the Florida and Mississippi health care cost
recovery actions and the Broin class action discussed in Note 3, may negatively
affect the perception of potential triers of fact with respect to the tobacco
industry, possibly to the detriment of certain pending litigation, and may
prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of 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 unfavorable outcome of certain pending litigation or by the
proposed Resolution discussed below or by settlement, if any, of certain pending
cases. However, implementation of the proposed Resolution would resolve the most
significant tobacco litigation against the Company and its subsidiaries.
Furthermore, the Company and each of its subsidiaries named as a defendant
believe, 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.
Except as described below under the heading "Proposed Resolution of Certain
Regulatory and Litigation Issues -- Effects on Litigation," all such cases are,
and will continue to be, vigorously defended.
PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES
On June 20, 1997, PM Inc. and other companies in the United States tobacco
industry entered into a Memorandum of Understanding to support the adoption of
federal legislation and any necessary ancillary undertakings, incorporating the
features described in the proposed Resolution attached to the Memorandum of
Understanding.
The Memorandum of Understanding and the proposed Resolution (together, the
"Resolution") resulted from negotiations with state attorneys general,
representatives of the public health community and attorneys representing
plaintiffs in certain smoking and health litigation. The proposed Resolution
contains certain regulatory and legislative provisions with which the industry
does not necessarily agree, but which the industry has agreed to accept in the
interest of achieving the proposed Resolution. The proposed Resolution, which is
subject to approval of the boards of directors of the participating companies,
can be implemented only by federal legislation. The Company's Board of Directors
approved the proposed Resolution in June 1997. If enacted into law, the
legislation would resolve many of the regulatory and litigation issues affecting
the United States tobacco industry and, thereby, reduce uncertainties facing the
industry and increase stability in business and capital markets.
Certain members of the public health community have expressed concern with
certain aspects of the proposed Resolution, the White House has announced policy
guidelines supporting modifications to the proposed Resolution and various
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members of Congress have introduced or indicated that they may introduce
alternative legislation. Accordingly, there can be no assurance that federal
legislation in the form of the proposed Resolution will be enacted or that it
will be enacted without modification that is materially adverse to the Company
or that any modification would be acceptable to the Company or that, if enacted,
the legislation would not face legal challenges. In any event, implementation of
the proposed Resolution would materially adversely affect the financial position
of the Company in the year of implementation and would materially adversely
affect the volume, operating revenues, cash flows and/or operating income of the
Company in future years. Moreover, the negotiation and signing of the proposed
Resolution could affect other federal, state and local regulation of the United
States tobacco industry and regulation of the international tobacco industry.
The following summary of the proposed Resolution is qualified by reference to
the complete text, which has been filed with the Securities and Exchange
Commission as Exhibit 10 to the Company's Current Report on Form 8-K dated June
20, 1997, and which is incorporated herein by reference. Certain terms of the
proposed Resolution would apply to all tobacco products sold in the United
States; certain terms would apply only to tobacco manufacturers that consent to
participate in the proposed Resolution; other terms would apply only to
non-consenting manufacturers.
Advertising and Marketing Restrictions
The proposed Resolution would incorporate certain restrictions previously
promulgated by the FDA and add additional restrictions to curtail tobacco
product advertising and marketing. Among other things, it would:
Prohibit the use of human images and cartoon characters, such as Joe Camel
and the Marlboro man, in all tobacco-product advertising.
Ban all outdoor tobacco-product advertising, including advertising in
enclosed stadia and advertising inside a retail establishment that is
directed outside.
Except for advertising in adult-only facilities or adult publications,
limit tobacco-product advertising to black text on a white background.
Ban sponsorships (including concerts and sporting events) in the name, logo
or selling message of a tobacco brand.
Ban all non-tobacco merchandise (such as caps, jackets and bags) bearing
the name, logo or selling message of a tobacco brand.
Ban offers of non-tobacco items or gifts based on proof of purchase of
tobacco products.
Ban direct or indirect payments for tobacco product placement in movies,
television programs and video games.
Prohibit direct and indirect payments to "glamorize" tobacco use in media
appealing to minors, including live and recorded music performances.
Prohibit tobacco-product advertising on the Internet unless designed to be
inaccessible in or from the United States.
In addition, the proposed Resolution would require that use of currently
employed product descriptors such as "low tar" and "light" be accompanied by a
mandatory health disclaimer in advertisements, and would prohibit the use of any
new descriptors embodying express or implied health claims unless approved by
the FDA. The FDA would also have the corresponding power, but not the
obligation, to modify advertising restrictions with respect to tobacco products
that it concludes present sufficiently reduced health risks. Exemplars of all
new
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advertising and tobacco product labeling would be submitted to the FDA for its
ongoing review.
Warnings and Labeling
The proposed Resolution would mandate a new set of rotating warnings to be
placed on packages of tobacco products with greater prominence than previous
warnings (25% of the front of cigarette packs at the top of the pack). The new
rotating warnings would also appear in all advertisements in an area that would
occupy 20% of press advertisements. Cigarette packs and advertisements would
also carry the FDA mandated statement of intended use ("Nicotine Delivery
Device"), and the FDA would be authorized to require that they also carry
disclaimers about "tar and nicotine yields."
Access Restrictions
The proposed Resolution would restrict access to tobacco products by minors.
Without preventing state and local governments from imposing stricter measures,
the proposed Resolution would incorporate regulations previously promulgated by
the FDA that restrict access to tobacco products and would also add additional
restrictions. Taken together, these access restrictions would include the
following:
Setting a minimum age of 18 to purchase tobacco products.
Requiring retailers to check photo identification of anyone under 27 years
of age.
Establishing a requirement of face-to-face transactions for all sales of
tobacco products.
Banning the sale of tobacco products from opened packages, requiring a
minimum package size of 20 cigarettes, and banning the sampling of tobacco
products.
Banning the distribution of tobacco products through the mail except for
sales subject to proof of age (with subsequent FDA review to determine if
minors are obtaining tobacco products through the mail).
Imposing retailer compliance obligations to ensure that all displays,
advertising, labeling, and other items conform with all applicable
requirements.
Banning all sales of tobacco products through vending machines.
Banning self-service displays of tobacco products except in adult-only
facilities.
Licensing of Tobacco Retailers
The proposed Resolution would require that any entity that sells tobacco
products directly to consumers obtain a license. Sellers would be subject to
monetary penalties and suspension or loss of their licenses if they do not
comply with the access restrictions. The federal government and state and local
authorities would enforce these access and licensing provisions through funding
provided by Industry Payments, as defined below under the heading "Industry
Payments."
State Enforcement
The proposed Resolution would require states to adopt "no sales to minors" laws
and would contain economic incentives for the states to enforce such laws. If a
state does not meet "no sales to minors" performance targets, the FDA may refuse
to pay that state certain funds otherwise payable under the proposed Resolution.
To comply with the "no sales to minors" law, the state must achieve compliance
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rate results of 75% by the fifth year after enactment of federal legislation,
85% by the seventh year and 90% by the tenth year and each year thereafter.
Compliance would be measured as a percentage of random, unannounced compliance
checks in which the retailer refused to sell tobacco products to minors. Funds
withheld from states for failure to achieve the performance targets would, in
turn, be reallocated to those states that demonstrated superior "no sales to
minors" enforcement records.
Surcharge for Failure to Achieve Underage Smoking Reduction Goals
The proposed Resolution would impose surcharges on the industry if required
reductions in underage smoking are not achieved. A "look back" provision would
require the following reductions in the incidence of underage smoking from
estimated levels over the past decade: 30% in the fifth and sixth years after
enactment of implementing federal legislation, 50% in the seventh, eighth and
ninth years, and 60% in the tenth year, with incidence remaining at such reduced
levels thereafter.
For any year in which these required reductions are not met, the FDA must impose
a mandatory surcharge on the participating members of the cigarette industry
based upon an approximation of the present value of the profit the companies
would earn over the lives of the number of underage consumers in excess of the
required reduction. The annual surcharge would be $80 million (as adjusted for
changes in population and cigarette profitability) for each percentage point by
which the reduction in underage smoking falls short of the required reductions
(as adjusted to prevent double counting of persons whose smoking has already
resulted in the imposition of a surcharge in previous years). The annual
surcharge would be subject to a $2 billion annual cap (as adjusted for
inflation). The surcharge would be the joint and several obligation of
participating manufacturers allocated among participating manufacturers based on
their market share of the United States cigarette industry and would be payable
on or before July 1 of the year in which it is assessed. Manufacturers could
receive a partial refund of this surcharge (up to 75%) only after paying the
assessed amount and only if they could thereafter prove to the FDA that they had
fully complied with the proposed Resolution, had taken all reasonably available
measures to reduce youth tobacco usage and had not acted to undermine the
achievement of the reduction goals. The FDA would use the surcharges to fund its
administrative costs and to fund grants to states for additional efforts to
reduce underage smoking.
Regulation
Under the proposed Resolution, the FDA would oversee the development,
manufacturing, marketing and sale of tobacco products in the United States,
including FDA oversight of ingredients and imposition of standards for reducing
or eliminating the level of certain constituents, including nicotine.
Under the proposed Resolution, tobacco would continue to be categorized as a
"drug" and a "device" under the Food, Drug and Cosmetic Act. The FDA's authority
to regulate tobacco products as "restricted medical devices" would be explicitly
recognized and tobacco products would be classified as a new subcategory of
Class II devices.
For a period of at least twelve years after implementing legislation is
effective, the FDA would be permitted, subject to certain procedures and
judicial review, to adopt performance standards that require the modification of
existing tobacco products, including the gradual reduction, but not the
elimination, of nicotine yields, and the possible elimination of other
constituents or components of the tobacco product, based upon a finding that the
modification: (i) will result in a significant reduction of the health risks
associated with such products to consumers thereof; (ii) is technologically
feasible; and (iii) will not result in the creation of a significant demand for
contraband or other tobacco products that do not meet the performance standards.
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The proposed Resolution would also require, effective three years after
implementing legislation is effective, that no cigarette sold in the United
States can exceed a 12 mg. "tar" yield, using the Federal Trade Commission's
presently existing methodology to determine "tar" yields.
Beginning twelve years after implementing legislation becomes effective, the FDA
would be permitted to set performance standards that exceed those discussed
above, including the elimination of nicotine and the elimination of other
constituents or other demonstrated harmful components of tobacco products, based
upon a finding that: (i) the safety standard will result in a significant
overall reduction of the health risks to tobacco consumers as a group; (ii) the
modification is technologically feasible; and (iii) the modification will not
result in the creation of a significant demand for contraband or other tobacco
products that do not meet the performance standards. An FDA determination to
eliminate nicotine would have to be based upon a preponderance of the evidence
and be subject to judicial review and a two-year phase-in to permit
Congressional review.
The proposed Resolution would require disclosure of non-tobacco ingredients to
the FDA, require manufacturers to submit within five years a safety assessment
for non-tobacco ingredients currently used, and require manufacturers to obtain
comparable review for any new non-tobacco ingredients. The FDA would have
authority to disapprove an ingredient's safety. The proposed Resolution also
outlines legislation that would require companies to notify the FDA of
technology they develop or acquire that reduces the risk from tobacco products
and that would mandate cross-licensing of technology that the FDA determines
reduces the risk from tobacco products and that would authorize the FDA to
mandate the introduction or licensing of "less hazardous tobacco products" that
are technologically feasible.
The proposed Resolution would subject the tobacco industry to "good
manufacturing practice" standards, including requirements regarding quality
control systems, FDA inspections and record-keeping and reporting.
Public Disclosure
The proposed Resolution would require the tobacco industry to disclose to the
public previously confidential internal laboratory research as well as certain
other documents relating to smoking and health, "addiction" or nicotine
dependency, "safer or less hazardous" cigarettes and underage tobacco use and
marketing. The proposed Resolution would also require the industry to disclose
all such internal laboratory research generated in the future. The proposed
Resolution would provide protection for proprietary information and applicable
privileges, and would establish a streamlined process by which interested
persons could contest claims of privilege.
Cessation Programs
The proposed Resolution would authorize the Secretary of Health and Human
Services to accredit smoking cessation programs and techniques that the agency
determines to be potentially effective.
Compliance Programs
Participating tobacco manufacturers would be required to create, and to update
each year, plans to ensure compliance with all applicable laws and regulations,
to identify ways to reduce underage use of tobacco products, and to provide
internal incentives for reducing underage use and for developing products with
"reduced risk."
Participating manufacturers would also be required to implement compliance
programs setting compliance standards and procedures for employees and agents
that are reasonably capable of reducing violations. These programs must assign
to
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specific high-level personnel the overall responsibility for overseeing
compliance, forbid delegation of substantial discretionary authority to
individuals who have shown a propensity to disregard corporate policies,
establish training or equivalent means of educating employees and agents, and
institute appropriate disciplinary measures and steps to respond to violations
and prevent similar ones from recurring.
Participating manufacturers would be required to promulgate corporate principles
that express and explain the company's commitment to compliance, reduction of
underage tobacco use, and development of "reduced risk" tobacco products. They
would be required to work with retail organizations on compliance, including
retailer compliance checks and financial incentives for compliance, and disband
certain industry associations and only form new ones subject to regulatory
oversight.
Participating manufacturers would be subject to fines and penalties for
breaching any of these obligations. Companies would be required to direct their
employees to report known or alleged violations to the company compliance
officer, who in turn would be required to provide reports to the FDA. Finally,
companies would be prohibited from taking adverse action against
"whistleblowers" who report violations to the government.
Public Smoking
The proposed Resolution would mandate minimum federal standards governing
smoking in public facilities (with states and localities retaining power to
impose stricter requirements). These restrictions, which would be enforced by
the Occupational Safety and Health Administration, would:
Restrict indoor smoking in "public facilities" to ventilated areas with
systems that exhaust the air directly to the outside, maintain the smoking
area at "negative pressure" compared with adjoining areas and do not
recirculate the air inside the public facility.
Ensure that no employee may be required to enter a designated smoking area
while smoking is occurring.
Exempt restaurants (other than fast food restaurants) and bars, private
clubs, hotel guest rooms, casinos, bingo parlors, tobacco merchants and
prisons.
Enforcement
Violations of the proposed Resolution's terms would carry civil and criminal
penalties based upon the penalty provisions of the Food, Drug and Cosmetic Act
and, where applicable, the provisions of the United States criminal code.
Special enhanced civil penalties of up to ten times the penalties applicable to
similar violations by drug companies would attach to violations of the
obligations to disclose research about health effects of tobacco products and
information about the toxicity of non-tobacco ingredients.
Terms of the proposed Resolution would be embodied in state consent decrees,
giving the states concurrent enforcement powers. State enforcement could not
impose obligations or requirements beyond those imposed by the proposed
Resolution (except where the proposed Resolution specifically does not preempt
additional state-law obligations) and would be limited to the penalties
specified in the proposed Resolution and by prohibition of duplicative
penalties.
Industry Payments
The proposed Resolution would require participating manufacturers to make
substantial payments in the year of implementation and thereafter ("Industry
Payments"). Participating manufacturers would be required to make an aggregate
$10 billion initial Industry Payment on the date federal legislation
implementing
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the terms of the proposed Resolution is signed. This Industry Payment would be
based on relative market capitalizations and the Company currently estimates
that its share of the initial Industry Payment would be approximately $6.6
billion (to be adjusted downward for initial payments made to Mississippi and
Florida pursuant to settlements of health care cost recovery actions).
Thereafter, the companies would be required to make specified annual Industry
Payments determined and allocated among the companies based on volume of
domestic sales as long as the companies continue to sell tobacco products in the
United States. These Industry Payments, which would begin on December 31 of the
first full year after implementing federal legislation is signed, would be in
the following amounts (at 1996 volume levels): year 1: $8.5 billion; year 2:
$9.5 billion; year 3: $11.5 billion; year 4: $14 billion; and each year
thereafter: $15 billion. These Industry Payments would be increased by the
greater of 3% or the previous year's inflation rate determined with reference to
the Consumer Price Index. The Industry Payments would increase or decrease in
proportion to changes from 1996 domestic sales volume levels. Volume declines
would be measured based on adult sales volume figures; volume increases would be
measured by total sales volume. If sales volume declines but the industry's
domestic net operating profit exceeds base year inflation-adjusted levels, the
reduction in the annual Industry Payment due to volume decline, if any, would be
offset to the extent of 25% of the increased profit. At current levels of sales
and prior to any adjustment for inflation, the proposed Resolution would require
total Industry Payments of $368.5 billion over the first 25 years (subject to
credits described below in connection with potential civil tort liability).
The Industry Payments would be separate from any surcharges required under the
"look back" provision discussed above under the heading "Surcharge for Failure
to Achieve Underage Smoking Reduction Goals." The Industry Payments would
receive priority and would not be dischargeable in any bankruptcy or
reorganization proceeding and would be the obligation only of entities selling
tobacco products in the United States (and not their affiliated companies). The
proposed Resolution provides that all payments by the industry would be ordinary
and necessary business expenses in the year of payment, and no part thereof
would be either in settlement of an actual or potential liability for a fine or
penalty (civil or criminal) or the cost of a tangible or intangible asset. The
proposed Resolution would provide for the pass-through to consumers of the
annual Industry Payments in order to promote the maximum reduction in underage
use.
The Industry Payments would be made to a central trust and then allocated among
various programs and entities to provide funds for federal and state enforcement
efforts; federal, state and local governments' health benefit programs; public
benefits to resolve past punitive damages claims that might be asserted in
private litigation; and the expenses related to the administration of federal
legislation enacted pursuant to the proposed Resolution. A portion of these
expenditures would be to fund a variety of public and private non-profit efforts
to discourage minors from beginning to use tobacco products and to assist
current tobacco consumers to quit. Those programs include research, public
education campaigns, individual cessation programs, and impact grants.
Effects on Litigation
If enacted, the federal legislation provided for in the proposed Resolution
would settle present attorney general health care cost recovery actions (or
similar actions brought by or on behalf of any governmental entity other than
the federal government), parens patriae and smoking and health class actions and
all "addiction"/dependence claims and would bar similar actions from being
maintained in the future. However, the proposed Resolution provides that no stay
applications will be made in pending governmental actions without the mutual
consent of the parties. In recent months PM Inc. and other companies in the
domestic tobacco industry agreed to settle two health care cost recovery actions
in Mississippi and Florida and a smoking and health class action brought on
behalf of flight attendants alleging injury caused by exposure to ETS aboard
aircraft. The Company may enter into discussions to postpone or settle other
actions pending the enactment of the legislation contemplated by the proposed
Resolution. No assurance can be given whether a postponement or settlement will
be achieved, or, if achieved, as to the terms thereof. The proposed Resolution
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would not affect any smoking and health class action or any health care cost
recovery action that is reduced to final judgment before implementing federal
legislation is effective.
Under the proposed Resolution, the rights of individuals to sue the tobacco
industry would be preserved, as would existing legal doctrine regarding the
types of tort claims that can be brought under applicable statutory and case law
except as expressly changed by implementing federal legislation. Claims,
however, could not be maintained on a class or other aggregated basis and could
be maintained only against tobacco manufacturing companies (and not their
retailers, distributors or affiliated companies). In addition, all punitive
damage claims based on past conduct would be resolved as part of the proposed
Resolution and future claimants could seek punitive damages only with respect to
claims predicated upon conduct taking place after the effective date of
implementing federal legislation. Finally, except with respect to actions
pending as of June 9, 1997, third-party payor (and similar) claims could be
maintained only based on subrogation of individual claims. Under subrogation
principles, a payor of medical costs can seek recovery from a third party only
by "standing in the shoes" of the injured party and being subject to all
defenses available against the injured party.
The proposed Resolution contemplates that participating tobacco manufacturers
would enter into a joint sharing agreement for civil liabilities relating to
past conduct. Judgments and settlements arising from tort actions would be paid
as follows. The proposed Resolution would set an annual aggregate cap of up to
33% of the annual base Industry Payment (including any reductions for volume
declines). Any judgments or settlements exceeding the cap in a year would roll
over into the next year. While judgments and settlements would run against the
defendant, they would give rise to an 80-cents-on-the-dollar credit against the
annual Industry Payment. Finally, any individual judgments in excess of $1
million would be paid at the rate of $1 million per year unless every other
judgment and settlement could first be satisfied within the annual aggregate
cap. In all circumstances, however, the companies would remain fully responsible
for costs of defense and certain costs associated with the fees of attorneys
representing certain plaintiffs in the litigation that would be settled by the
proposed Resolution.
Non-participating Manufacturers
The proposed Resolution would contain certain measures to ensure that
non-participating manufacturers are not free to undercut the proposed Resolution
by selling tobacco products at lower prices because they were not making the
Industry Payments.
Financial Effects
The Company anticipates that its share of the industry's $10 billion initial
payment, which it currently estimates would be approximately $6.6 billion (to be
adjusted downward for initial payments made to Mississippi and Florida pursuant
to settlements of health care cost recovery actions) would be charged to expense
in the period in which federal legislation implementing the terms of the
proposed Resolution is enacted. In addition, the Company currently anticipates
that implementation of the proposed Resolution would require a significant
charge to expense in the period of enactment to comply with the proposed
Resolution's regulations on advertising, marketing and production. The initial
payment would be funded from a combination of available cash, commercial paper
issuances, bank borrowings and long-term debt issuances in global markets. The
initial payment would have a material adverse effect on the Company's operating
income and cash flows in the quarter and year in which the proposed Resolution
is enacted and on its financial position. The initial payment would result in
higher debt and higher interest expense, the amounts of which would depend upon
the final form of the proposed Resolution, borrowing requirements and interest
rates.
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The Company anticipates that PM Inc.'s share of future annual Industry Payments
related to cigarette sales would be charged to expense as the related sales
occur and would be funded through price increases. The Company anticipates that
annual surcharges, if any, imposed by the FDA for failure to meet required
reduction levels in underage smoking beginning in the fifth year after the
proposed Resolution is implemented would be charged to expense in the year of
assessment or in the year prior thereto if it is then probable that such
assessment will be made.
The Company believes that implementation of the proposed Resolution would
materially adversely affect the volume, operating revenues, cash flows and/or
operating income of the Company in future years. The degree of the adverse
impact would depend, among other things, on the rates of decline in United
States cigarette sales in the premium and discount segments, PM Inc.'s share of
the domestic premium and discount cigarette segments, interest rates and the
timing of principal payments on debt incurred to finance the initial payment due
under the proposed Resolution, and the effect of the proposed Resolution on
cigarette consumption and the regulatory and litigation environment outside the
United States.
At the request of a United States Senate task force analyzing the financial
impact of the proposed Resolution on the tobacco industry, PM Inc., together
with other companies in the United States tobacco industry, submitted a report
to the task force. The report concludes, among other things, that (i) "[t]he
industry conservatively estimates that retail [cigarette] prices will increase
by an absolute minimum of $1.20 per pack by the fifth year and by an absolute
minimum of $1.50 per pack by the tenth year of implementation of the proposed
[R]esolution", (ii) "[c]igarette consumption would decline by up to 43% in the
next decade . . . and [the industry] believes the decline in consumption could
be greater," and (iii) "[i]ndustry pretax earnings will suffer even if unit
margins rise to offset the higher burden of unit fixed costs in the face of
declining sales volumes." The report is filed as Exhibit 99 hereto and is
incorporated herein by reference. The foregoing estimates constitute
forward-looking information and are based on assumptions with respect to
elasticity, smoking trends and retail price structure, among others, as set
forth in the report and in the preceding paragraph. Any change in the final
terms of the proposed Resolution could materially alter the conclusions
contained in the report. The Company does not undertake to update the
information contained in this paragraph in the event of such change.
In view of the foregoing, the Company may reevaluate its share repurchase and
dividend policies.
Operating Results
For the Nine Months Ended September 30,
--------------------------------------------
Operating Revenues Operating Income
-------------------- ------------------
(in millions)
1997 1996 1997 1996
---- ---- ---- ----
Domestic tobacco $ 9,959 $ 9,251 $2,685 $3,131
International tobacco 20,547 18,586 3,654 3,225
------- ------- ------ ------
Total $30,506 $27,837 $6,339 $6,356
======= ======= ====== ======
Domestic tobacco. During the first nine months of 1997, PM Inc.'s operating
revenues increased 7.7% over the comparable 1996 period, due to pricing ($408
million), higher volume ($254 million) and improved product mix ($46 million).
Operating income for the first nine months of 1997 decreased 14.2% from the
comparable 1996 period, due primarily to tobacco litigation settlement charges
($812 million) higher marketing, administration and research costs
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($209 million, primarily higher marketing expense) and higher fixed
manufacturing expense ($55 million), partially offset by pricing ($408 million),
higher volume ($162 million) and improved product mix ($43 million).
As discussed in Note 3, "Contingencies," of the Notes to the Condensed
Consolidated Financial Statements, in the third quarter of 1997, PM Inc. and
other companies in the United States tobacco industry entered into agreements to
settle health care cost recovery actions in Mississippi and Florida, and, in
October 1997, PM Inc. and other companies in the United States tobacco industry
entered into an agreement to settle a class action lawsuit in Florida. Based on
the agreements, PM Inc. recorded settlement charges of $812 million in the third
quarter of 1997. Excluding the impact of settlement charges, PM Inc.'s operating
income for the first nine months of 1997 increased 11.7% over the comparable
1996 period.
PM Inc.'s shipment volume for the first nine months of 1997 was 177.0 billion
units, an increase of 2.8% over the first nine months of 1996 on higher Marlboro
volume and wholesaler purchases, which the Company believes was in anticipation
of price increases. Marlboro shipment volume increased 7.5 billion units (6.4%)
to 123.7 billion units for a 34.3% share of the total industry, an increase of
2.2 share points over the first nine months of 1996. Domestic tobacco industry
volume declined 0.4%; however, PM Inc. estimates that, excluding the effects of
increased wholesaler buying mentioned above, the industry's volume continued to
decline in line with historical trends of 1% to 2% per annum. While PM Inc.
cannot predict future growth rates, it believes that, over the long term,
industry shipments will continue to decline in line with these historical
trends, subject to the effects, if implemented, of the proposed Resolution
discussed under "Tobacco--Business Environment" above.
PM Inc.'s shipment market share was 49.1%, an increase of 1.5 share points over
the comparable 1996 period. Based on shipments, the premium and discount
segments accounted for approximately 72.6% and 27.4%, respectively, of domestic
cigarette industry volume in the first nine months of 1997, versus approximately
71.5% and 28.5%, respectively, in the comparable 1996 period. This reflects a
continued shift to the higher-margin premium segment, which began in the second
half of 1993.
In the premium segment, PM Inc.'s volume increased 4.6%, compared with a 1.1%
increase for the industry, resulting in a premium segment share of 58.0%, an
increase of 1.9 share points over the first nine months of 1996, reflecting
higher Marlboro volume.
In the discount segment, PM Inc.'s shipments decreased 6.7%, to 25.4 billion
units in the first nine months of 1997 compared with an industry decline of
4.2%, resulting in a discount segment share of 25.7%, a decrease of 0.7 share
points from the first nine months of 1996. Basic shipment volume increased 233
million units to 17.6 billion units, for a 17.8% share of the discount segment,
an increase of 0.9 share points over the first nine months of 1996.
Retail sales data (compiled by the ACNielsen Company) indicate PM Inc. and
Marlboro market shares of 50.9% and 35.1%, respectively, during the first nine
months of 1997, compared with 49.3% and 33.2%, respectively, in the comparable
1996 period.
PM Inc. cannot predict future change or rates of change in the relative sizes of
the premium and discount segments or in PM Inc.'s shipments, shipment market
share or retail market share; however, it believes that implementation of the
proposed Resolution discussed above would materially adversely affect PM Inc.'s
shipments.
In September 1997, PM Inc. announced a price increase of $3.50 per thousand
cigarettes on its domestic premium and discount brands. PM Inc. previously
announced a price increase of $2.50 per thousand cigarettes on its domestic
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premium and discount brands in March 1997 and increased the price of its
domestic premium and discount brands by $2.00 per thousand cigarettes in the
second quarter of 1996.
In October 1997, PM Inc. announced that it would commence limited consumer
acceptability research on a new cigarette smoking system. The new smoking system
includes a cigarette specially designed to be smoked while partially inside an
electronic Puff Activated Lighter(TM) so that the cigarette burns only when
puffed. The limited consumer research is expected to take approximately 12
months to complete.
International tobacco. During the first nine months of 1997, tobacco operating
revenues of PMI increased 10.6% over the comparable 1996 period, due to higher
foreign excise taxes ($1.2 billion, principally for the consolidation of
previously unconsolidated and newly acquired subsidiaries), favorable volume/mix
($525 million), price increases ($554 million) and the consolidation of
previously unconsolidated and newly acquired subsidiaries ($431 million),
partially offset by unfavorable currency movements ($719 million). Operating
income for the first nine months of 1997 increased 13.3% over the comparable
1996 period, due to price increases, net of cost increases ($443 million),
favorable volume/mix ($330 million) and the consolidation of previously
unconsolidated and newly acquired subsidiaries ($60 million), partially offset
by unfavorable currency movements ($306 million) and higher marketing,
administration and research costs.
PMI's volume grew 40.3 billion units (7.8%) in the first nine months of 1997
over the comparable 1996 period to 558.1 billion units, including local brands
manufactured by Tabaqueira, Portugal's leading tobacco company, and ZPT-Krakow,
Poland's largest cigarette manufacturer. PMI acquired a controlling interest in
these companies during the first quarters of 1997 and 1996, respectively. Volume
advanced in most markets, including Germany, Italy, the Benelux countries,
Spain, Central and Eastern Europe, the Baltics, Turkey, the Middle East, the
Asia/Pacific region and Mexico. Volume was down in France, Japan and Australia.
However, Marlboro gained both volume and market share in France and Japan.
Volume continued to grow for PMI's portfolio of international brands, including
Marlboro, PMI's largest brand. PMI recorded market share gains in most major
markets.
For the Three Months Ended September 30,
-------------------------------------------
Operating Revenues Operating Income
------------------- ------------------
(in millions)
1997 1996 1997 1996
---- ---- ---- ----
Domestic tobacco $ 3,590 $3,284 $ 426 $1,098
International tobacco 6,843 6,213 1,241 1,128
------- ------ ------ ------
Total $10,433 $9,497 $1,667 $2,226
======= ====== ====== ======
Domestic tobacco. During the third quarter of 1997, PM Inc.'s operating revenues
increased 9.3% over the comparable 1996 period, due to pricing ($159 million),
higher volume ($128 million) and improved product mix ($19 million). Operating
income for the 1997 third quarter decreased 61.2% from the comparable 1996
period, due primarily to tobacco litigation settlement charges ($812 million),
higher marketing, administration and research costs ($111 million, primarily
higher marketing expense) and higher fixed manufacturing expense ($28 million),
partially offset by pricing ($159 million), higher volume ($82 million) and
improved product mix ($17 million). Excluding the impact of previously discussed
settlement charges, PM Inc.'s operating income increased 12.8%.
PM Inc.'s shipment volume for the third quarter of 1997 was 62.8 billion units,
an increase of 4.0% over the third quarter of 1996. The increase in PM Inc.'s
shipments was due largely to higher Marlboro volume and wholesaler purchases,
which the Company believes was in anticipation of price increases, which also
affected industry volume. For the third quarter of 1997, Marlboro shipment
volume increased 3.2 billion units (7.7%) to 44.4 billion units for a 34.7%
share of the total industry, an increase of 1.9 share points over the third
quarter of 1996. Domestic tobacco industry volume increased 1.8%, reflecting
increases in wholesaler purchases; however, PM Inc. estimates that, excluding
the effects of
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increased wholesaler buying mentioned above, the industry's volume continued to
decline in line with historical trends of 1% to 2% per annum. While PM Inc.
cannot predict future growth rates, it believes that, over the long term,
industry shipments will continue to decline in line with these historical
trends, subject to the effects, if implemented, of the proposed Resolution
discussed under "Tobacco--Business Environment" above.
PM Inc.'s 1997 third quarter shipment market share was 49.2%, an increase of 1.0
share points over the comparable 1996 period. Based on shipments, the premium
and discount segments accounted for approximately 73.3% and 26.7%, respectively,
of domestic cigarette industry volume in the third quarter of 1997, versus
approximately 71.9% and 28.1%, respectively, in the comparable 1996 period. This
reflects a continued shift to the higher-margin premium segment, which began in
the second half of 1993.
In the premium segment, PM Inc.'s volume increased 6.2%, compared with a 3.8%
increase for the industry, resulting in a premium segment share of 58.0%, an
increase of 1.3 share points over the third quarter of 1996, due largely to
higher Marlboro volume.
In the discount segment, PM Inc.'s shipments decreased 8.0%, to 8.5 billion
units in the third quarter of 1997 compared with an industry decline of 3.3%,
resulting in a discount segment share of 25.0%, down 1.3 share points from the
third quarter of 1996. Basic shipment volume increased 114 million units to 6.1
billion units for a 17.9% share of the discount segment, an increase of 0.9
share points over the third quarter of 1996.
Retail sales data (compiled by the ACNielsen Company) indicate PM Inc. and
Marlboro market shares of 51.3% and 35.7%, respectively, during the third
quarter of 1997, compared with 49.7% and 33.7%, respectively, in the comparable
1996 period.
PM Inc. cannot predict future change or rates of change in the relative sizes of
the premium and discount segments or in PM Inc.'s shipments, shipment market
share or retail market share; however, it believes that implementation of the
proposed Resolution discussed above would materially adversely affect PM Inc.'s
shipments.
International tobacco. During the third quarter of 1997, tobacco operating
revenues of PMI increased 10.1% over the comparable 1996 period, due to higher
foreign excise taxes ($445 million, principally for the consolidation of
previously unconsolidated and newly acquired subsidiaries), favorable volume/mix
($183 million), price increases ($170 million) and the consolidation of
previously unconsolidated and newly acquired subsidiaries ($139 million),
partially offset by unfavorable currency movements ($307 million). Operating
income for the 1997 third quarter increased 10.0% over the comparable 1996
period, due primarily to price increases, net of cost increases ($146 million),
favorable volume/mix ($102 million), the consolidation of previously
unconsolidated and newly acquired subsidiaries ($21 million), partially offset
by higher marketing, administrative and research costs and unfavorable currency
movements ($141 million).
PMI's volume grew 12.9 billion units (7.3%) in the third quarter of 1997 over
the comparable 1996 period to 190.1 billion units, including local brands
manufactured by Tabaqueira, in which PMI acquired a controlling interest in
January 1997. Volume advanced in most markets, including Germany, Italy, the
Benelux countries, Spain, Central and Eastern Europe, the Baltics, Turkey,
Mexico and the Asia/Pacific region, where gains in most of this region's markets
were partially offset by lower volume in Japan due to the impact of the April
tax-driven retail price increase. In France, industry and PMI volume were down.
However, in Japan and France, Marlboro gained both volume and market share.
Volume continued to grow for PMI's portfolio of international brands, including
Marlboro, PMI's largest brand. PMI recorded market share gains in most major
markets.
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Food
Business Environment
Kraft Foods, Inc. ("Kraft"), the largest processor and marketer of retail
packaged food in the United States, and its subsidiary Kraft Foods
International, Inc. ("KFI"), which markets coffee, confectionery and grocery
products in Europe and the Asia/Pacific region, are subject to fluctuating
commodity costs and competitive challenges in various product categories and
markets. Certain subsidiaries and affiliates of PMI that manufacture and sell
food products in Latin America are also subject to competitive challenges in
various product categories and markets. In addition, the results of KFI, as well
as PMI's food operations in Latin America, are subject to the impact of currency
fluctuations.
Steps continue to be taken to build the value of premium brands, reduce costs
and improve the Company's food business portfolio. The North American food
business has been reorganized to streamline operations and improve effectiveness
and customer response. The realignment included the creation of a unified sales
force in the United States. KFI has been realigned to capitalize on future
growth opportunities and reorganized into separate regional units.
During 1996, Kraft sold its bagel business and KFI sold its margarine businesses
in the U.K. and Italy. In the first nine months of 1997, KFI sold a Scandinavian
sugar confectionery business and Kraft sold certain of its maple-flavored syrup
businesses, including the Log Cabin and Country Kitchen brands. Kraft and KFI
have also sold several smaller non-strategic businesses in 1996 and 1997.
In October 1997, PMI sold its Brazilian ice cream business along with its share
of a Brazilian ice cream joint venture for $930 million, subject to adjustment.
The sale is expected to result in a pretax gain in excess of $700 million in
the fourth quarter of 1997.
The Company is currently evaluating cost reduction alternatives regarding its
international food operations, which may result in material charges to fourth
quarter 1997 operating income.
Kraft acquired the Taco Bell grocery business during the third quarter of 1996.
In Latin America, PMI acquired nearly all of the remaining voting shares of
Industrias de Chocolate Lacta S.A. ("Lacta"), a Brazilian chocolate
confectionery company, in the second quarter of 1996.
The North American and international food businesses are affected by fluctuating
commodity costs, particularly coffee bean prices, which can influence consumer
and trade buying patterns, affect retail price volatility and lead to price
competition in some markets. During the first quarter of 1997, coffee prices
rose dramatically due primarily to speculation concerning 1997's South American
crop and unusually low world stocks. Coffee bean prices reached a twenty-year
high in late May and led to price increases by Kraft, KFI and their competitors.
Coffee volume declined in the first nine months of 1997 from the comparable 1996
period as customers reacted to commodity-driven price increases. Kraft and KFI
estimate that coffee consumption may remain sluggish, as higher than average
coffee bean prices persist. Kraft was also affected by record high cheese
commodity costs in 1996, as well as other higher dairy commodity costs, arising
from low U.S. milk production. Cheese and dairy commodity costs moderated in the
first quarter of 1997 and have remained stable.
Kraft's cereal business continues to be affected by intense price competition,
particularly from value brands. In response, Kraft implemented a price rollback
and simplified couponing of its cereal products in the second quarter of 1996.
Several competitors followed with similar pricing strategies. The reduction of
cereal prices in 1996 lowered operating revenues and operating income in 1996
and the first quarter of 1997 in relation to prior period results.
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Operating Results
For the Nine Months Ended September 30,
--------------------------------------------
Operating Revenues Operating Income
------------------- ------------------
(in millions)
1997 1996 1997 1996
---- ---- ---- ----
North American food $12,779 $12,509 $2,245 $2,062
International food 7,840 8,379 820 847
------- ------- ------ ------
Total $20,619 $20,888 $3,065 $2,909
======= ======= ====== ======
North American food. During the first nine months of 1997, operating revenues
increased 2.2% over the comparable 1996 period, due to volume increases in
ongoing operations ($382 million), pricing ($211 million) and the impact of
acquisitions ($47 million), partially offset by the impact of divestitures ($267
million), unfavorable product mix ($89 million) and unfavorable currency
movements ($14 million). Operating income for the first nine months of 1997
increased 8.9% over the comparable 1996 period, due primarily to price increases
and net cost decreases (aggregating $268 million) and volume increases in
ongoing operations ($233 million), partially offset by the impact of
divestitures ($41 million), unfavorable product mix ($21 million) and higher
marketing, administration and research costs ($256 million, due primarily to
higher marketing expense, which included additional marketing activities for
new products). Included in marketing, administration and research costs was a
gain of $159 million on the sale of certain maple-flavored syrup businesses, as
well as charges of $64 million related to the discontinuation of several small
operations, Year 2000 systems conversion costs of $38 million and the above
mentioned additional marketing expense for new product initiatives.
Excluding operating results of the divested North American food businesses
discussed above, operating revenues and operating income increased 4.4% and
11.2%, respectively, in the first nine months of 1997 over the comparable 1996
period.
Strong ongoing volume gains were achieved in frozen pizza, driven by new
products; meals, due to strength in macaroni and cheese dinners and the
acquisition and subsequent growth of Taco Bell grocery products; beverages, on
the strength of ready-to-drink products; cereals, aided by new product
introductions and the implementation of a price rollback as discussed
previously; and desserts and snacks, due to new product introductions and
strength in refrigerated ready-to-eat desserts and shelf stable puddings. Volume
gains were also realized in processed meats, driven by continued growth of lunch
combinations (including new product introductions) and growth in hot dogs and
cold cuts. Cheese volume also increased, benefiting from new products and
marketing initiatives. Coffee volume declined in the first nine months of 1997
from the comparable 1996 period as customers reacted to commodity-driven price
increases.
International food. Operating revenues for the first nine months of 1997
decreased 6.4% from the comparable 1996 period, due to unfavorable currency
movements ($609 million), lower volume/mix ($249 million) and the impact of
divestitures ($156 million), partially offset by the impact of newly acquired
and previously unconsolidated subsidiaries ($263 million) and pricing ($212
million). Operating income for the first nine months of 1997 decreased 3.2% over
the first nine months of 1996, due to lower volume ($76 million), cost
increases, net of price increases (aggregating $33 million), unfavorable
currency movements ($28 million) and the impact of divestitures ($25 million),
partially offset by the impact of newly acquired and previously unconsolidated
subsidiaries ($39 million) and lower marketing, administration and research
costs ($88 million).
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<PAGE>
Excluding operating results of the divested international food businesses
discussed above, operating revenues decreased 4.7% and operating income
decreased 0.2% in the first nine months of 1997 from the comparable 1996 period.
Lower ongoing volume for the first nine months of 1997 for KFI was due primarily
to lower coffee and confectionery volumes and to one less selling week during
the first quarter of 1997 compared to the first quarter of 1996. KFI's coffee
volume decreased during the first nine months of 1997, reflecting customers'
reactions to commodity-driven price increases. KFI's confectionery volume
declined, due primarily to an exceptionally warm summer in Scandinavia and lower
volume in Romania and Bulgaria, reflecting poor economic environments. KFI's
cheese and grocery volumes decreased due primarily to the impact of one less
selling week during the first quarter of 1997, partially offset by gains in
KFI's Asian markets. PMI's food volume in Latin America for the first nine
months of 1997 increased over the comparable 1996 period, due primarily to the
acquisition of Lacta and higher volume in beverages.
For the Three Months Ended September 30,
-----------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1997 1996 1997 1996
---- ---- ---- ----
North American food $4,048 $4,062 $687 $642
International food 2,407 2,648 260 299
------ ------ ---- ----
Total $6,455 $6,710 $947 $941
====== ====== ==== ====
North American food. During the third quarter of 1997, operating revenues
decreased 0.3% from the comparable 1996 period, due primarily to the impact of
divestitures ($114 million), unfavorable product mix ($24 million) and
unfavorable currency movements ($9 million), partially offset by pricing ($76
million), volume increases in ongoing operations ($49 million) and the impact of
acquisitions ($8 million). Operating income for the third quarter of 1997
increased 7.0% over the comparable 1996 period, due primarily to price increases
and net cost decreases (aggregating $146 million) and volume increases in
ongoing operations ($26 million), partially offset by the impact of divestitures
($24 million), unfavorable product mix ($5 million) and higher marketing,
administration and research costs ($98 million, due primarily to higher
marketing expense which included additional marketing activities for new
products). Included in marketing, administration and research costs was a gain
of $159 million on the sale of certain maple-flavored syrup businesses, as well
as charges of $64 million related to the discontinuation of several small
operations, Year 2000 systems conversion costs of $28 million and the above
mentioned additional marketing expense for new product initiatives.
Excluding operating results of the divested North American businesses discussed
above, operating revenues and operating income increased 2.5% and 11.2%,
respectively, in the third quarter of 1997 over the comparable 1996 period.
Strong ongoing volume gains were achieved in meals, due to strength in macaroni
and cheese dinners and instant stuffing as well as the acquisition and
subsequent growth of Taco Bell grocery products; beverages, on the strength of
ready-to-drink products; cheese, benefiting from new products and marketing
initiatives as well as a favorable comparison with the third quarter of 1996,
when shipments declined following a commodity-driven price increase; and frozen
pizza, driven by new products. Volume gains were realized in processed meats,
driven by continued growth of lunch combinations (including new product
introductions) and growth in hot dogs and cold cuts; desserts and snacks, due to
new product introductions in refrigerated ready-to-eat and dry packaged
desserts; and cereals, aided by new product introductions. Volume was down in
barbecue sauce and spoonable
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dressings. Coffee volume declined in the third quarter of 1997 from the
comparable 1996 period as customers reacted to commodity-driven price increases.
International food. Operating revenues for the third quarter of 1997 decreased
9.1% from the third quarter of 1996, due to unfavorable currency movements ($266
million), lower volume/mix ($124 million) and the impact of divestitures ($40
million), partially offset by pricing ($124 million) and the impact of newly
acquired and previously unconsolidated subsidiaries ($65 million). Operating
income for the third quarter of 1997 decreased 13.0% from the third quarter of
1996, due to cost increases, net of price increases ($54 million), lower volume
($20 million), unfavorable currency movements ($11 million) and the impact of
divestitures ($7 million), partially offset by the impact of newly acquired and
previously unconsolidated subsidiaries ($4 million) and lower marketing,
administration and research costs ($49 million). During the quarter, cost
increases lowered margins in key European coffee and cocoa businesses reflecting
higher U.S. dollar- and sterling-denominated coffee and cocoa costs.
Excluding operating results of the divested international food businesses
discussed above, operating revenues decreased 7.7% and operating income
decreased 11.0% in the third quarter of 1997 from the comparable 1996 period.
Lower third quarter ongoing volume for KFI primarily reflects a decline in
coffee volume during the third quarter of 1997 as a result of market contraction
as consumers respond to commodity-driven price increases. KFI's confectionery
volume declined slightly, due primarily to exceptionally warm weather in
Scandinavia and volume declines in Romania and Bulgaria, reflecting poor
economic environments. KFI's cheese and grocery volumes increased reflecting
recoveries in sliced beef volume in Italy, and peanut butter volume in
Australia, which had been adversely affected by a product recall in 1996. In
addition, cheese and grocery volume grew in KFI's Asian markets. PMI's food
volume in Latin America for the third quarter of 1997 increased over the
comparable 1996 period, due primarily to the acquisition of Lacta and higher
volume in beverages.
Beer
Nine Months ended September 30
Operating revenues of the Miller Brewing Company ("Miller") for the first nine
months of 1997 decreased $100 million (2.9%) from the comparable 1996 period,
due to unfavorable price/mix ($80 million) and lower volume ($20 million).
Operating income for the first nine months of 1997 increased $18 million (4.6%)
over the comparable 1996 period, due primarily to lower marketing,
administration and research costs ($53 million) and lower fixed manufacturing
expense ($21 million), partially offset by unfavorable price/mix ($51 million)
and lower volume ($8 million). Operating revenues, manufacturing costs and
marketing, administration and research costs were impacted by actions taken by
Miller in the fourth quarter of 1996 to restore growth, streamline its
organization and reduce costs.
Miller's 1997 shipment volume of 34.3 million barrels for the first nine months
of 1997 decreased 0.6% from the comparable 1996 period, reflecting lower
shipments of premium-priced brands. Lower shipment volume was due largely to a
decision to reduce wholesaler inventories in 1997 and an unfavorable comparison
to last year, which was favorably affected by the launch of Miller Beer.
However, wholesalers' sales to retailers in the first nine months of 1997
increased slightly from the comparable 1996 period, reflecting higher sales of
Miller Lite, as Miller's new advertising and promotional campaigns renewed focus
on core brands.
Quarter ended September 30
Operating revenues for Miller for the third quarter of 1997 increased $7 million
(0.6%) from the comparable 1996 period due to higher volume ($40 million),
partially offset by unfavorable price/mix ($33 million). Operating income for
the third quarter of 1997 increased $8 million (6.8%) over the comparable 1996
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period, due primarily to higher volume ($16 million), lower fixed manufacturing
expense ($9 million) and lower marketing, administration and research costs ($4
million), partially offset by unfavorable price/mix ($21 million).
Miller's 1997 third quarter shipment volume of 11.8 million barrels increased
3.6% from the comparable 1996 period, reflecting higher shipments of
premium-priced and budget-priced brands. Shipments of Miller Lite rose, driven
by new advertising and promotional activity. Shipment volume increases were also
recorded for Miller High Life, Red Dog, Milwaukee's Best, Icehouse and Foster's.
Wholesalers' sales to retailers in the third quarter increased slightly.
Financial Services and Real Estate
During the third quarter of 1997, Philip Morris Capital Corp. ("PMCC") sold its
real estate subsidiary, Mission Viejo Company, for a pretax gain of $103
million. Operating revenues and operating income from PMCC's financial services
business increased in the first nine months and third quarter due to the
continued growth of its finance lease portfolio.
Financial Review
Net Cash Provided by Operating Activities
During the first nine months of 1997, cash provided by operating activities was
$5.1 billion, $566 million higher than in the first nine months of 1996, due
primarily to higher net earnings and lower cash requirements for working capital
items. The $5.1 billion of cash provided by operating activities during the
first nine months of 1997 is after making up-front payments of $606 million for
settling litigation.
Net Cash Used in Investing Activities
During the first nine months of 1997, cash used in investing activities was $1.2
billion, compared with $1.6 billion used during the comparable 1996 period. The
change was due primarily to higher cash provided by divestitures. During 1997,
cash provided by divestitures reflects the sale of Mission Viejo Company and
several food businesses. Cash used in acquisitions during 1997 reflects the
purchase of a tobacco operation in Portugal and an increased equity interest in
a Mexican cigarette business. In the fourth quarter of 1997, PMI sold its
Brazilian ice cream businesses for proceeds of $930 million, subject to
adjustment.
Net Cash Used in Financing Activities
During the first nine months of 1997, the Company's net cash used in financing
activities decreased to $3.2 billion, compared to $3.5 billion used in the first
nine months of 1996, due primarily to lower stock repurchases, partially offset
by higher dividends paid and lower net proceeds from the issuance of debt.
Debt
The Company's total debt and consumer products debt were $15.5 billion and $14.3
billion, respectively, at September 30, 1997, compared to $15.2 billion and
$13.9 billion, respectively, at December 31, 1996. At both September 30, 1997
and December 31, 1996, the Company's ratio of consumer products debt to total
equity was 0.98. The ratio of total debt to total equity was 1.06 and 1.07 at
September 30, 1997 and December 31, 1996, respectively.
The Company has negotiated new revolving bank credit agreements totaling $10.0
billion. These facilities are used to support the Company's commercial paper
borrowings and are available for acquisitions and other corporate purposes. An
agreement for $2.0 billion expires in October 1998. An agreement for $8.0
billion expires in 2002, enabling the Company to refinance short-term debt on a
long-term basis, based upon its intent and ability to refinance such debt. At
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September 30, 1997, $0.5 billion of consumer products commercial paper was
reclassified as long-term debt. 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.
As discussed above in "Tobacco--Business Environment," PM Inc. estimates that
the proposed Resolution in its current form, would result in an initial payment
by PM Inc. of approximately $6.6 billion upon enactment (to be adjusted downward
for initial payments made to Mississippi and Florida pursuant to settlements of
health care cost recovery actions). The Company anticipates that the payment
would be funded from a combination of available cash, commercial paper
issuances, bank borrowings and long-term debt issuances in global markets. The
Company further anticipates that the payment will result in significant
increases in its consumer products debt to total equity ratio, total debt to
total equity ratio and total debt outstanding.
The Company operates internationally, with manufacturing and sales facilities in
various locations around the world. The Company continually evaluates its
foreign currency net asset exposure (primarily the Swiss franc, German mark,
Netherlands guilder, Swedish krona and Canadian dollar) based on current market
conditions and business strategies, and 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 U.S. dollar value of aggregate notional principal
amounts for these agreements outstanding was equivalent to $1.4 billion and $2.2
billion at September 30, 1997 and December 31, 1996, respectively. Of these
amounts, $726 million and $1.5 billion related to consumer products debt at
September 30, 1997 and December 31, 1996, respectively.
The Company enters into forward exchange and option contracts, for purposes
other than trading, to reduce the effects of fluctuating foreign currency on
foreign currency denominated current assets, liabilities, commitments and
short-term intercompany transactions. At September 30, 1997 and December 31,
1996, the Company had entered into contracts, with maturities of less than one
year and U.S. dollar equivalents of $3.0 billion (including $1.8 billion in
option contracts) and $1.7 billion, respectively.
Use of the above mentioned derivative financial instruments has not had a
material impact on the Company's financial position at September 30, 1997 or
results of operations for the three and nine months then ended.
The Company's credit ratings by Moody's at September 30, 1997 and December 31,
1996 were "P-1" in the commercial paper market and "A2" for long-term debt
obligations. The Company's credit ratings by Standard & Poor's ("S&P") at
September 30, 1997 and December 31, 1996 were "A-1" in the commercial paper
market and "A" for long-term debt obligations. In April 1997, S&P placed the
debt ratings of the Company on its CreditWatch list with the intent of
monitoring tobacco litigation developments.
Equity and Dividends
On February 26, 1997, the Company's Board of Directors declared a three-for-one
split of the Company's common stock, effected by a distribution on April 10,
1997, of two shares for each share held of record at the close of business on
March 17, 1997. All share and per share data have been restated to reflect this
stock split for all periods presented.
During the first nine months of 1997, the Company repurchased 18.2 million
shares of its common stock at an aggregate cost of $743 million. Of these
purchases, 16.9 million shares ($692 million) were made pursuant to the
Company's repurchase program, announced in 1994, to purchase up to $6.0 billion
of its common stock in the open market, and the remainder were made under an
$8.0 billion share repurchase program approved by the Board of Directors in the
first quarter of
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1997. These 1997 repurchases, net of 10.9 million shares issued under the
Company's stock award plans during 1997, resulted in lower weighted average
shares outstanding for the first nine months and third quarter of 1997 as
compared to the first nine months and third quarter of 1996. No shares were
repurchased during the third quarter of 1997.
Dividends paid in 1997 were 17.4% higher than in 1996, reflecting a higher
dividend rate in the first half of 1997, partially offset by fewer shares
outstanding. The Board of Directors increased the Company's quarterly dividend
rate to $0.40 per share in the third quarter of 1996, resulting in an annualized
dividend rate of $1.60 per share.
As discussed above in the last paragraph of "Tobacco--Business
Environment--Proposed Resolution of Certain Regulatory and Litigation Issues,"
the Company may reevaluate its share repurchase and dividend policies.
During the first nine months of 1997, currency translation adjustments reduced
equity by $1.1 billion due to the strengthening of the U.S. dollar versus
European currencies, primarily the Swiss franc, German mark, Netherlands guilder
and Swedish krona.
New Accounting Standards
In 1996, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued Statement of Position ("SOP") No. 96-1,
"Environmental Remediation Liabilities," which, as required, was adopted by the
Company as of January 1, 1997. The adoption and application of SOP No. 96-1 had
no material effect on the Company's 1997 results of operations or financial
position for the three or nine month periods ended September 30, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which is
effective for the year ending December 31, 1997. SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS") and requires
the presentation of both basic and diluted EPS. Based upon the Company's current
capitalization structure, the basic and diluted EPS amounts calculated in
accordance with SFAS No. 128 are expected to approximate the Company's EPS
amounts computed in accordance with Accounting Principles Board Opinion No. 15,
"Earnings Per Share."
Contingencies
See Note 3 to the Condensed Consolidated Financial Statements for a discussion
of contingencies.
Forward-Looking and Cautionary Statements
Reference is made to Item 1 (c) "Other Matters--Forward-Looking and Cautionary
Statements" in the Company's Form 10-K regarding 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, including
forward-looking statements contained in this report. Reference is also made to
the section herein under the heading "Tobacco--Business Environment."
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 3, "Contingencies," of the Notes to the
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
report, and to "Tobacco--Business Environment," of the Management's Discussion
and Analysis of Financial Condition and Results of Operations included in Part
I, Item 2 of this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 By-Laws, as amended, of the Company.
4.3 5-Year Revolving Credit Agreement dated as of October 14,
1997, among the Company and the Initial Lenders named therein
and Citibank, N.A. and The Chase Manhattan Bank, as
Administrative Agents, and Credit Suisse First Boston, as
Syndication Agent, and Deutsche Bank AG, New York Branch, as
Documentation Agent.
12 Statement regarding computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
99 Report to the Senate Democratic Task Force on Tobacco, Impact
of Proposed Resolution on U.S. Cigarette Industry, dated
October 8, 1997.
(b) Reports on Form 8-K. Since the beginning of the quarter for which
this report is filed, the Registrant filed a Current Report on Form
8-K, dated July 2, 1997, concerning the proposed Resolution and
other recent developments, including an agreement in principle to
settle Mississippi's health care cost recovery action, and a Current
Report on Form 8-K, dated August 25, 1997, concerning an agreement
to settle Florida's health care cost recovery action.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
/s/ LOUIS C. CAMILLERI
Louis C. Camilleri, Senior Vice President and
Chief Financial Officer
November 13, 1997
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Exhibit 3.2
BY-LAWS
of
PHILIP MORRIS COMPANIES INC.
ARTICLE I
Meetings of Stockholders
Section 1. Annual Meetings. - The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting, and any postponement or adjournment thereof,
shall be held on such date and at such time as the Board of Directors may in its
discretion determine.
Section 2. Special Meetings. - Unless otherwise provided by law, special
meetings of the stockholders may be called by the chairman of the Board of
Directors, or in the chairman's absence, the deputy chairman of the Board of
Directors (if any), the vice chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) or, in the
absence of all of the foregoing, an executive vice president or by order of the
Board of Directors, whenever deemed necessary.
Section 3. Place of Meetings. - All meetings of the stockholders shall be
held at such place in the Commonwealth of Virginia as from time to time may be
fixed by the Board of Directors.
Section 4. Notice of Meetings. - Written notice, stating the place, day
and hour and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by mail not less than ten nor more
than sixty days before the date of the meeting (except as a different time is
specified herein or by law), to each stockholder of record having voting power
in respect of the business to be transacted thereat, at his or her address as it
appears on the stock transfer books of the Corporation.
Notice of a stockholders' meeting to act on an amendment of the Articles
of Incorporation, a plan of merger or share exchange, a proposed sale of all, or
substantially all of the Corporation's assets, otherwise than in the usual and
regular course of business, or the dissolution of the Corporation shall be
given, in the manner provided above, not less than twenty-five nor more than
sixty days before the date of the meeting and shall be accompanied, as
appropriate, by a copy of the proposed amendment, plan of merger or share
exchange or sale agreement.
August 27, 1997
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Notwithstanding the foregoing, a written waiver of notice signed by the
person or persons entitled to such notice, either before or after the time
stated therein, shall be equivalent to the giving of such notice. A stockholder
who attends a meeting shall be deemed to have (i) waived objection to lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he or she objects to holding the meeting or transacting business at the
meeting, and (ii) waived objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless he or she objects to considering the matter when it is presented.
Section 5. Quorum. - At all meetings of the stockholders, unless a greater
number or voting by classes is required by law, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the vote
of a greater number or voting by classes is required by law or the Articles of
Incorporation, and except that in elections of directors those receiving the
greatest number of votes shall be deemed elected even though not receiving a
majority. Less than a quorum may adjourn.
Section 6. Organization and Order of Business. - At all meetings of the
stockholders, the chairman of the Board of Directors or, in the chairman's
absence, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if one shall have
been elected by the Board of Directors) or, in the absence of all of the
foregoing, the most senior executive vice president, shall act as chairman. In
the absence of all of the foregoing officers or, if present, with their consent,
a majority of the shares entitled to vote at such meeting, may appoint any
person to act as chairman. The secretary of the Corporation or, in the
secretary's absence, an assistant secretary, shall act as secretary at all
meetings of the stockholders. In the event that neither the secretary nor any
assistant secretary is present, the chairman may appoint any person to act as
secretary of the meeting.
The chairman shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to vote at such meeting and who complies with
the notice
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procedures set forth in this Section 6. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the secretary of the Corporation. To be timely, a stockholder's notice must be
given, either by personal delivery or by United States certified mail, postage
prepaid, and received at the principal executive offices of the Corporation (i)
not less than 120 days nor more than 150 days before the first anniversary of
the date of the Corporation's proxy statement in connection with the last annual
meeting of stockholders or (ii) if no annual meeting was held in the previous
year or the date of the applicable annual meeting has been changed by more than
30 days from the date contemplated at the time of the previous year's proxy
statement, not less than 60 days before the date of the applicable annual
meeting. A stockholder's notice to the secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting,
including the complete text of any resolutions to be presented at the annual
meeting, and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's stock transfer books,
of such stockholder proposing such business, (c) a representation that such
stockholder is a stockholder of record and intends to appear in person or by
proxy at such meeting to bring the business before the meeting specified in the
notice, (d) the class and number of shares of stock of the Corporation
beneficially owned by the stockholder and (e) any material interest of the
stockholder in such business. Notwithstanding anything in the By-Laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 6. The chairman of an
annual meeting shall, if the facts warrant, determine that the business was not
brought before the meeting in accordance with the procedures prescribed by this
Section 6. If the chairman should so determine, he or she shall so declare to
the meeting and the business not properly brought before the meeting shall not
be transacted. Notwithstanding the foregoing provisions of this Section 6, a
stockholder seeking to have a proposal included in the Corporation's proxy
statement shall comply with the requirements of Regulation 14A under the
Securities Exchange Act of 1934, as amended (including, but not limited to, Rule
14a-8 or its successor provision). The secretary of the Corporation shall
deliver each such stockholder's notice that has been timely received to the
Board of Directors or a committee designated by the Board of Directors for
review.
Section 7. Voting. - A stockholder may vote either in person or by proxy
executed in writing by the stockholder or by his or her duly authorized
attorney-in-fact. No stockholder may authorize more than four persons to act for
him or her, and any proxy shall be delivered to the secretary of the meeting at
or prior to the time designated by the chairman or in the order of business for
so delivering such proxies. No proxy shall be valid after eleven months from its
date, unless otherwise provided in the proxy. Each holder of record of stock of
any class shall, as to all
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matters in respect of which stock of such class has voting power, be entitled to
such vote as is provided in the Articles of Incorporation for each share of
stock of such class standing in the holders's name on the books of the
Corporation. Unless required by statute or determined by the chairman to be
advisable, the vote on any questions need not be by ballot. On a vote by ballot,
each ballot shall be signed by the stockholder voting or by such stockholder's
proxy, if there be such proxy.
Section 8. Inspectors. - At every meeting of the stockholders for election
of directors, the proxies shall be received and taken in charge, all ballots
shall be received and counted and all questions touching the qualifications of
voters, the validity of proxies, and the acceptance or rejection of votes shall
be decided, by two inspectors. Such inspectors shall be appointed by the
chairman of the meeting. They shall be sworn faithfully to perform their duties
and shall in writing certify to the returns. No candidate for election as
director shall be appointed or act as inspector.
ARTICLE II
Board of Directors
Section 1. General Powers. - The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors.
Section 2. Number. - The number of directors shall be fourteen (14).
Section 3. Term of Office and Qualification. - Each director shall serve
for the term for which he or she shall have been elected and until a successor
shall have been duly elected.
Section 4. Nomination and Election of Directors. - At each annual meeting
of stockholders, the stockholders entitled to vote shall elect the directors. No
person shall be eligible for election as a director unless nominated in
accordance with the procedures set forth in this Section 4. Nominations of
persons for election to the Board of Directors may be made by the Board of
Directors or any committee designated by the Board of Directors or by any
stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section 4. Such nominations, other than those made by the Board of
Directors or any committee designated by the Board of Directors, may be made
only if written notice of a stockholder's intent to nominate one or more persons
for election as directors at the applicable meeting of stockholders has been
given, either by personal delivery or by United States certified mail, postage
prepaid, to the secretary of the Corporation and received (i) not less than 120
days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
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stockholders, or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than 60 days before the date of the applicable annual meeting, or (iii)
with respect to any special meeting of stockholders called for the election of
directors, not later than the close of business on the seventh day following the
date on which notice of such meeting is first given to stockholders. Each such
stockholder's notice shall set forth (a) as to the stockholder giving the
notice, (i) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder, (ii) a representation that such stockholder
is a stockholder of record and intends to appear in person or by proxy at such
meeting to nominate the person or persons specified in the notice, (iii) the
class and number of shares of stock of the Corporation beneficially owned by
such stockholder, and (iv) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder; and (b) as to each person whom the
stockholder proposes to nominate for election as a director, (i) the name, age,
business address and, if known, residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of stock of the Corporation which are beneficially owned by such person,
(iv) any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors or is otherwise
required by the rules and regulations of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934, as amended, and (v) the
written consent of such person to be named in the proxy statement as a nominee
and to serve as a director if elected. The secretary of the Corporation shall
deliver each such stockholder's notice that has been timely received to the
Board of Directors or a committee designated by the Board of Directors for
review. Any person nominated for election as director by the Board of Directors
or any committee designated by the Board of Directors shall, upon the request of
the Board of Directors or such committee, furnish to the secretary of the
Corporation all such information pertaining to such person that is required to
be set forth in a stockholder's notice of nomination. The chairman of the
meeting of stockholders shall, if the facts warrant, determine that a nomination
was not made in accordance with the procedures prescribed by this Section 4. If
the chairman should so determine, he or she shall so declare to the meeting and
the defective nomination shall be disregarded.
Section 5. Organization. - At all meetings of the Board of Directors, the
chairman of the Board of Directors or, in the chairman's absence, the deputy
chairman of the Board of Directors (if any), the vice chairman of the Board of
Directors (if any), the president (if one shall have been elected by the Board
of Directors) or, in the absence of all of the foregoing, the senior most
executive vice president, shall act as chairman of the meeting. The secretary of
the Corporation or, in the secretary's absence, an assistant secretary, shall
act as secretary of meetings of
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the Board of Directors. In the event that neither the secretary nor any
assistant secretary shall be present at such meeting, the chairman of the
meeting shall appoint any person to act as secretary of the meeting.
Section 6. Vacancies. - Any vacancy occurring in the Board of Directors,
including a vacancy resulting from amending these By-Laws to increase the number
of directors by thirty percent or less, may be filled by the affirmative vote of
a majority of the remaining directors though less than a quorum of the Board of
Directors.
Section 7. Place of Meeting. - Meetings of the Board of Directors, regular
or special, may be held either within or without the Commonwealth of Virginia.
Section 8. Organizational Meeting. - The annual organizational meeting of
the Board of Directors shall be held immediately following adjournment of the
annual meeting of stockholders and at the same place, without the requirement of
any notice other than this provision of the By-Laws.
Section 9. Regular Meetings: Notice. - Regular meetings of the Board of
Directors shall be held at such times and places as it may from time to time
determine. Notice of such meetings need not be given if the time and place have
been fixed at a previous meeting.
Section 10. Special Meetings. - Special meetings of the Board of Directors
shall be held whenever called by order of the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if any) or two of
the directors. Notice of each such meeting, which need not specify the business
to be transacted thereat, shall be mailed to each director, addressed to his or
her residence or usual place of business, at least two days before the day on
which the meeting is to be held, or shall be sent to such place by telegraph,
telex or telecopy or be delivered personally or by telephone, not later than the
day before the day on which the meeting is to be held
Section 11. Waiver of Notice. - Whenever any notice is required to be
given to a director of any meeting for any purpose under the provisions of law,
the Articles of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, either before or after
the time stated therein, shall be equivalent to the giving of such notice. A
director's attendance at or participation in a meeting waives any required
notice to him or her of the meeting unless at the beginning of the meeting or
promptly upon the director's arrival, he or she objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
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Section 12. Quorum and Manner of Acting. - Except where otherwise provided
by law, a majority of the directors fixed by these By-Laws at the time of any
regular or special meeting shall constitute a quorum for the transaction of
business at such meeting, and the act of a majority of the directors present at
any such meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum, a majority of those present may adjourn
the meeting from time to time until a quorum be had. Notice of any such
adjourned meeting need not be given.
Section 13. Order of Business. - At all meetings of the Board of Directors
business may be transacted in such order as from time to time the Board of
Directors may determine.
Section 14. Committees. - In addition to the executive committee
authorized by Article III of these By-Laws, other committees, consisting of two
or more directors, may be designated by the Board of Directors by a resolution
adopted by the greater number of (i) a majority of all directors in office at
the time the action is being taken or (ii) the number of directors required to
take action under Article II, Section 12 hereof. Any such committee, to the
extent provided in the resolution of the Board of Directors designating the
committee, shall have and may exercise the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation,
except as limited by law.
ARTICLE III
Executive Committee
Section 1. How Constituted and Powers. - The Board of Directors, by
resolution adopted pursuant to Article II, Section 14 hereof, may designate, in
addition to the chairman of the Board of Directors, one or more directors to
constitute an executive committee, who shall serve during the pleasure of the
Board of Directors. The executive committee, to the extent provided in such
resolution and permitted by law, shall have and may exercise all of the
authority of the Board of Directors.
Section 2. Organization, Etc. - The executive committee may choose a
chairman and secretary. The executive committee shall keep a record of its acts
and proceedings and report the same from time to time to the Board of Directors.
Section 3. Meetings. - Meetings of the executive committee may be called
by any member of the committee. Notice of each such meeting, which need not
specify the business to be transacted thereat, shall be mailed to each member of
the committee, addressed to his or her residence or usual place of business, at
least two
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days before the day on which the meeting is to be held or shall be sent to such
place by telegraph, telex or telecopy or be delivered personally or by
telephone, not later than the day before the day on which the meeting is to be
held.
Section 4. Quorum and Manner of Acting. - A majority of the executive
committee shall constitute a quorum for transaction of business, and the act of
a majority of those present at a meeting at which a quorum is present shall be
the act of the executive committee. The members of the executive committee shall
act only as a committee, and the individual members shall have no powers as
such.
Section 5. Removal. - Any member of the executive committee may be
removed, with or without cause, at any time, by the Board of Directors.
Section 6. Vacancies. - Any vacancy in the executive committee shall be
filled by the Board of Directors.
ARTICLE IV
Officers
Section 1. Number. - The officers of the Corporation shall be a chairman
of the Board of Directors, a deputy chairman of the Board of Directors (if
elected by the Board of Directors), a president (if elected by the Board of
Directors), one or more vice chairmen of the Board of Directors (if elected by
the Board of Directors), a chief operating officer (if elected by the Board of
Directors), one or more vice presidents (one or more of whom may be designated
executive vice president or senior vice president), a treasurer, a controller, a
secretary, one or more assistant treasurers, assistant controllers and assistant
secretaries and such other officers as may from time to time be chosen by the
Board of Directors. Any two or more offices may be held by the same person.
Section 2. Election, Term of Office and Qualifications. - All officers of
the Corporation shall be chosen annually by the Board of Directors, and each
officer shall hold office until a successor shall have been duly chosen and
qualified or until the officer resigns or is removed in the manner hereinafter
provided. The chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any) and the vice chairmen of the
Board of Directors (if any) shall be chosen from among the directors.
Section 3. Vacancies. - If any vacancy shall occur among the officers of
the Corporation, such vacancy shall be filled by the Board of Directors.
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Section 4. Other Officers, Agents and Employees - Their Powers and Duties.
- - The Board of Directors may from time to time appoint such other officers as
the Board of Directors may deem necessary, to hold office for such time as may
be designated by it or during its pleasure, and the Board of Directors or the
chairman of the Board of Directors may appoint, from time to time, such agents
and employees of the Corporation as may be deemed proper, and may authorize any
officers to appoint and remove agents and employees. The Board of Directors or
the chairman of the Board of Directors may from time to time prescribe the
powers and duties of such other officers, agents and employees of the
Corporation.
Section 5. Removal. - Any officer, agent or employee of the Corporation
may be removed, either with or without cause, by a vote of a majority of the
Board of Directors or, in the case of any agent or employee not appointed by the
Board of Directors, by a superior officer upon whom such power of removal may be
conferred by the Board of Directors or the chairman of the Board of Directors.
Section 6. Chairman of the Board of Directors and Chief Executive Officer.
- - The chairman of the Board of Directors shall preside at meetings of the
stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
Section 7. Deputy Chairman of the Board of Directors. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if elected by the Board of Directors) shall preside at meetings of
the stockholders and of the Board of Directors. The deputy chairman shall be
responsible to the chairman of the Board of Directors and shall perform such
duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman of
the Board of Directors on matters within the deputy chairman's knowledge which
the interests of the Corporation may require be brought to the chairman's
notice.
Section 8. President. - In the absence of the chairman of the Board of
Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business
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and affairs under the basic policies set by the Board of Directors and the
chairman of the Board of Directors. He or she shall from, time to time, report
to the chairman of the Board of Directors on matters within the president's
knowledge which the interests of the Corporation may require be brought to the
chairman's notice. In the absence of the chairman of the Board of Directors and
the deputy chairman of the Board of Directors (if any), the president (if any)
shall, except as otherwise directed by the Board of Directors, have all of the
powers and the duties of the chairman of the Board of Directors. The president
(if any) shall do and perform such other duties as from time to time the Board
of Directors or the chairman of the Board of Directors may prescribe.
Section 9. Vice Chairmen of the Board of Directors. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice chairman of the Board of Directors shall be responsible to
the chairman of the Board of Directors. Each vice chairman of the Board of
Directors shall from time to time report to the chairman of the Board of
Directors on matters within the vice chairman's knowledge which the interests of
the Corporation may require be brought to the chairman's notice. In the absence
or inability to act of the chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any) and the president (if any), such
vice chairman of the Board of Directors as the chairman of the Board of
Directors may designate for the purpose shall have the powers and discharge the
duties of the chairman of the Board of Directors. In the event of the failure or
inability of the chairman of the Board of Directors to so designate a vice
chairman of the Board of Directors, the Board of Directors may designate a vice
chairman of the Board of Directors who shall have the powers and discharge the
duties of the chairman of the Board of Directors.
Section 10. Chief Operating Officer. - The chief operating officer (if
any) shall be responsible to the Chairman of the Board of Directors for the
principal operating businesses of the Corporation and shall perform those duties
which may from time to time be assigned.
Section 11. Vice Presidents. - The vice presidents of the Corporation
shall assist the chairman of the Board of Directors, the deputy chairman of the
Board of Directors, the president (if any) and the vice chairmen (if any) of the
Board of Directors in carrying out their respective duties and shall perform
those duties which may from time to time be assigned to them. The chief
financial officer shall be a vice president of the Corporation (or more senior)
and shall be responsible for the management and supervision of the financial
affairs of the Corporation.
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Section 12. Treasurer. - The treasurer shall have charge of the funds,
securities, receipts and disbursements of the Corporation. He or she shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such banks or trust companies or with such bankers or other
depositaries as the Board of Directors may from time to time designate. The
treasurer shall render to the Board of Directors, the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), the vice chairmen of the Board of Directors (if any), and the chief
financial officer, whenever required by any of them, an account of all of his
transactions as treasurer. If required, the treasurer shall give a bond in such
sum as the Board of Directors may designate, conditioned upon the faithful
performance of the duties of the treasurer's office and the restoration to the
Corporation at the expiration of his or her term of office or in case of death,
resignation or removal from office, of all books, papers, vouchers, money or
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation. The treasurer shall perform such other
duties as from time to time may be assigned to him or her.
Section 13. Assistant Treasurers. - In the absence or disability of the
treasurer, one or more assistant treasurers shall perform all the duties of the
treasurer and, when so acting, shall have all the powers of, and be subject to
all restrictions upon, the treasurer. Assistant treasurers shall also perform
such other duties as from time to time may be assigned to them.
Section 14. Secretary. - The secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in a book or books
kept for that purpose. He or she shall keep in safe custody the seal of the
Corporation, and shall affix such seal to any instrument requiring it. The
secretary shall have charge of such books and papers as the Board of Directors
may direct. He or she shall attend to the giving and serving of all notices of
the Corporation and shall also have such other powers and perform such other
duties as pertain to the secretary's office, or as the Board of Directors, the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), the president (if any) or any vice chairman of the Board of
Directors may from time to time prescribe.
Section 15. Assistant Secretaries. - In the absence or disability of the
secretary, one or more assistant secretaries shall perform all of the duties of
the secretary and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the secretary. Assistant secretaries shall
also perform such other duties as from time to time may be assigned to them.
Section 16. Controller. - The controller shall be administrative head of
the controller's department. He or she shall be in charge of all functions
relating to accounting and the preparation and analysis of budgets and
statistical reports and shall establish, through appropriate channels, recording
and reporting procedures
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<PAGE>
and standards pertaining to such matters. The controller shall report to the
chief financial officer and shall aid in developing internal corporate policies
whereby the business of the Corporation shall be conducted with the maximum
safety, efficiency and economy. The controller shall be available to all
departments of the Corporation for advice and guidance in the interpretation and
application of policies which are within the scope of his or her authority. The
controller shall perform such other duties as from time to time may be assigned
to him or her.
Section 17. Assistant Controllers. - In the absence or disability of the
controller, one or more assistant controllers shall perform all of the duties of
the controller and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the controller. Assistant controllers
shall also perform such other duties as from time to time may be assigned to
them.
ARTICLE V
Contracts, Checks, Drafts, Bank Accounts, Etc.
Section 1. Contracts. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the chairman of the Board of Directors may authorize
shall have the power to execute any contract or other instrument on behalf of
the Corporation; no other officer, agent or employee shall, unless otherwise in
these By-Laws provided, have any power or authority to bind the Corporation by
any contract or acknowledgement, or pledge its credit or render it liable
pecuniarily for any purpose or to any amount.
Section 2. Loans. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the Board of Directors may authorize shall have the
power to effect loans and advances at any time for the Corporation from any
bank, trust company or other institution, or from any corporation, firm or
individual, and for such loans and advances may make, execute and deliver
promissory notes or other evidences of indebtedness of the Corporation, and, as
security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may pledge, hypothecate or transfer any and all
stocks, securities and other personal property at any time held by the
Corporation, and to that end endorse, assign and deliver the same.
Section 3. Voting of Stock Held. - The chairman of the Board of Directors,
the deputy chairman of the Board of Directors (if any), the president (if any),
any
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<PAGE>
vice chairman of the Board of Directors (if any), any vice president or the
secretary may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation to cast the votes that the Corporation may be entitled
to cast as a stockholder or otherwise in any other corporation, any of whose
stock or securities may be held by the Corporation, at meetings of the holders
of the stock or other securities of such other corporation, or to consent in
writing to any action by any other such corporation, and may instruct the person
or persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed on behalf of the Corporation
such written proxies, consents, waivers or other instruments as such officer may
deem necessary or proper in the premises; or the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), any vice chairman of the Board of Directors (if any), any vice
president or the secretary may attend in person any meeting of the holders of
stock or other securities of such other corporation and thereat vote or exercise
any and all powers of the Corporation as the holder of such stock or other
securities of such other corporation.
ARTICLE VI
Certificates Representing Shares
Certificates representing shares of the Corporation shall be signed by the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), or the vice chairman of the Board of Directors (if any), or
the president of the Corporation (if any) and the secretary or an assistant
secretary. Any and all signatures on such certificates, including signatures of
officers, transfer agents and registrars, may be facsimile.
ARTICLE VII
Dividends
The Board of Directors may declare dividends from funds of the Corporation
legally available therefor.
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<PAGE>
ARTICLE VIII
Seal
The Board of Directors shall provide a suitable seal or seals, which shall
be in the form of a circle, and shall bear around the circumference the words
"Philip Morris Companies Inc." and in the center the word and figures "Virginia,
1985."
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall be the calendar year.
ARTICLE X
Amendment
The power to alter, amend or repeal the By-Laws of the Corporation or to
adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by
the Board of Directors may be repealed or changed by the stockholders, or new
ByLaws may be adopted by the stockholders, and the stockholders may prescribe
that any By-Laws made by them shall not be altered, amended or repealed by the
directors.
ARTICLE XI
Emergency By-Laws
If a quorum of the Board of Directors cannot be readily assembled because
of some catastrophic event, and only in such event, these By-Laws shall, without
further action by the Board of Directors, be deemed to have been amended for the
duration of such emergency, as follows:
Section 1. Section 6 of Article II shall read as follows:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting of
the Board of Directors called in accordance with these By-Laws.
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<PAGE>
Section 2. The first sentence of Section 10 of Article II shall read as
follows:
Special meetings of the Board of Directors shall be held whenever called
by order of the chairman of the Board of Directors or a deputy chairman
(if any), or of the president (if any) or any vice chairman of the Board
of Directors (if any) or any director or of any person having the powers
and duties of the chairman of the Board of Directors, the deputy chairman,
the president or any vice chairman of the Board of Directors.
Section 3. Section 12 of Article II shall read as follows:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the
transaction of business at such meeting, and the action of a majority of
such directors shall be the act of the Board of Directors, provided,
however, that in the event that only one director is present at any such
meeting no action except the election of directors shall be taken until at
least two additional directors have been elected and are in attendance.
-15-
Exhibit 4.3
U.S.$8,000,000,000
5-YEAR REVOLVING CREDIT AGREEMENT
Dated as of October 14, 1997
Among
PHILIP MORRIS COMPANIES INC.
and
THE INITIAL LENDERS NAMED HEREIN
and
CITIBANK, N.A.
and
THE CHASE MANHATTAN BANK
as Administrative Agents
and
CREDIT SUISSE FIRST BOSTON
as Syndication Agent
and
DEUTSCHE BANK AG, NEW YORK BRANCH
as Documentation Agent
<PAGE>
TABLE OF CONTENTS Page
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms......................................... 1
SECTION 1.02. Computation of Time Periods................................... 11
SECTION 1.03. Accounting Terms.............................................. 11
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01. The Revolving Credit Advances................................. 11
SECTION 2.02. Making the Revolving Credit Advances.......................... 12
SECTION 2.03. The Competitive Bid Advances.................................. 13
SECTION 2.04. Fees.......................................................... 17
SECTION 2.05. Termination or Reduction of the Commitments................... 17
SECTION 2.06. Repayment of Revolving Credit Advances........................ 18
SECTION 2.07. Interest on Revolving Credit Advances......................... 18
SECTION 2.08. Additional Interest on Eurocurrency Rate Advances............. 18
SECTION 2.09. Interest Rate Determination................................... 19
SECTION 2.10. Prepayments of Advances....................................... 20
SECTION 2.11. Increased Costs............................................... 21
SECTION 2.12. Illegality.................................................... 22
SECTION 2.13. Payments and Computations..................................... 22
SECTION 2.14. Taxes......................................................... 24
SECTION 2.15. Sharing of Payments, Etc...................................... 25
SECTION 2.16. Evidence of Debt.............................................. 25
SECTION 2.17. Use of Proceeds............................................... 26
ARTICLE III
CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01. Conditions Precedent to Effectiveness......................... 26
SECTION 3.02. Initial Advance to Each Designated Subsidiary................. 27
SECTION 3.03. Conditions Precedent to Each Revolving Credit Borrowing....... 28
SECTION 3.04. Conditions Precedent to Each Competitive Bid Borrowing........ 29
SECTION 3.05. Determinations Under Section 3.01............................. 29
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of PM Companies................ 29
<PAGE>
ii
TABLE OF CONTENTS Page
ARTICLE V
COVENANTS OF PM COMPANIES
SECTION 5.01. Affirmative Covenants......................................... 30
SECTION 5.02. Negative Covenants............................................ 31
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default............................................. 32
ARTICLE VII
THE ADMINISTRATIVE AGENTS
SECTION 7.01. Authorization and Action...................................... 34
SECTION 7.02. Administrative Agents' Reliance, Etc.......................... 34
SECTION 7.03. Citibank, Chase and Affiliates................................ 35
SECTION 7.04. Lender Credit Decision........................................ 35
SECTION 7.05. Indemnification............................................... 35
SECTION 7.06. Successor Administrative Agents............................... 35
SECTION 7.07. Administrative Sub-Agent...................................... 36
SECTION 7.08. Syndication and Documentation Agents.......................... 36
ARTICLE VIII
GUARANTY
SECTION 8.01. Guaranty...................................................... 36
SECTION 8.02. Guaranty Absolute............................................. 36
SECTION 8.03. Waivers....................................................... 37
SECTION 8.04. Continuing Guaranty........................................... 37
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Amendments, Etc............................................... 38
SECTION 9.02. Notices, Etc.................................................. 38
SECTION 9.03. No Waiver; Remedies........................................... 38
SECTION 9.04. Costs and Expenses............................................ 38
SECTION 9.05. Right of Set-off.............................................. 39
SECTION 9.06. Binding Effect................................................ 40
SECTION 9.07. Assignments and Participations................................ 40
<PAGE>
iii
TABLE OF CONTENTS Page
SECTION 9.08. Designated Subsidiaries....................................... 42
SECTION 9.09. Governing Law................................................. 42
SECTION 9.10. Execution in Counterparts..................................... 42
SECTION 9.11. Judgment...................................................... 42
SECTION 9.12. Jurisdiction, Etc............................................. 43
SECTION 9.13. Substitution of Currency...................................... 43
SECTION 9.14. Confidentiality............................................... 44
SECTION 9.15. Integration................................................... 44
Schedules
Schedule I - List of Applicable Lending Offices [Intentionally Omitted]
Exhibits
Exhibit A-1 - Form of Revolving Credit Note
Exhibit A-2 - Form of Competitive Bid Note
Exhibit B-1 - Form of Notice of Revolving Credit Borrowing
Exhibit B-2 - Form of Notice of Competitive Bid Borrowing
Exhibit C - Form of Assignment and Acceptance
Exhibit D - Form of Designation Agreement
Exhibit E-1 - Form of Opinion of Counsel for PM Companies
Exhibit E-2 - Form of Opinion of Counsel for PM Companies
Exhibit F - Form of Opinion of Counsel for Designated Subsidiary
Exhibit G - Form of Opinion of Counsel for Citibank, as Administrative Agent
<PAGE>
5-YEAR REVOLVING CREDIT AGREEMENT
Dated as of October 14, 1997
PHILIP MORRIS COMPANIES INC., a Virginia corporation ("PM
Companies"), the banks, financial institutions and other institutional lenders
(the "Initial Lenders") listed on the signature pages hereof, and CITIBANK, N.A.
("Citibank") and THE CHASE MANHATTAN BANK ("Chase"), as administrative agents
(each, in such capacity, an "Administrative Agent"), CREDIT SUISSE FIRST BOSTON,
as syndication agent (in such capacity, the "Syndication Agent") and DEUTSCHE
BANK AG, NEW YORK BRANCH, as documentation agent (in such capacity, the
"Documentation Agent") for the Lenders (as hereinafter defined), 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):
"Administrative Sub-Agent" means Citibank International plc.
"Advance" means a Revolving Credit Advance or a Competitive Bid
Advance.
"Agents" means each Administrative Agent, the Syndication Agent, the
Documentation Agent and the Administrative Sub-Agent.
"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:
Long-Term Applicable
Senior Unsecured Facility
Debt Rating Fee Rate
---------------- ----------
AA- and Aa3 (or higher) 0.0550%
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 0.1500%;
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 Required Lenders, the Applicable
Facility Fee Rate shall be 0.150%.
<PAGE>
2
"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) 0.0950%
A- and A3 or higher
but lower than AA- and Aa3 0.1250%
BBB and Baa2 or higher,
but lower than A- and A3 0.2000%
Lower than BBB and Baa2 0.3000%;
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 Required Lenders, the Applicable
Interest Rate Margin shall be 0.300%.
"Applicable Lending Office" means, with respect to each Lender, such
Lender's Domestic Lending Office in the case of a Base Rate Advance and
such Lender's Eurocurrency Lending Office in the case of a Eurocurrency
Rate Advance and, in the case of a Competitive Bid Advance, the office of
such Lender notified by such Lender to Citibank, as Administrative Agent,
as its Applicable Lending Office with respect to such Competitive Bid
Advance.
"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, 1997, 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, 1997,
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
Citibank, as Administrative Agent, in substantially the form of Exhibit C
hereto.
<PAGE>
3
"Base Rate" means a fluctuating interest rate per annum 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) the sum (adjusted to the nearest 1/4 of 1% or, if there is
no nearest 1/4 of 1%, to the next higher 1/4 of 1%) of 1/2 of 1% per
annum, plus 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; and
(c) 1/2 of one percent per annum above the Federal Funds Rate.
"Base Rate Advance" means a Revolving Credit Advance denominated in
Dollars that bears interest as provided in Section 2.07(a)(i).
"Borrowers" means, collectively, PM Companies and each Designated
Subsidiary that shall become a party to this Agreement pursuant to Section
9.08.
"Borrowing" means a Revolving Credit Borrowing or a Competitive Bid
Borrowing.
"Business Day" means a day of the year on which banks are not
required or authorized by law to close in New York City and, if the
applicable Business Day relates to any Eurocurrency Rate Advances or LIBO
Rate Advances on which dealings are carried on in the London interbank
market and banks are open for business in London and in the country of
issue of the currency of such Eurocurrency Rate Advance or LIBO Rate
Advance (or, in the case of an Advance denominated in the euro, in
Frankfurt, Germany) and, if the applicable Business Day relates to any
Local Rate Advances on which banks are open for business in the country of
issue of the currency of such Local Rate Advance.
"Citibank's Administrative Agent Account" means (a) in the case of
Advances denominated in Dollars, the account of Citibank, as
Administrative Agent, maintained by Citibank, as Administrative Agent, at
Citibank at its office at Two Penns Way, Suite 200, New Castle, Delaware
19720, Account No. 36852248, Attention: Dave Meckler, (b) in the case of
Advances denominated in any Foreign Currency, the account of the
Administrative Sub-Agent, designated in writing from time to time by
Citibank, as Administrative Agent, to PM Companies and the Lenders for
such purpose and (c) in any such case, such other account of Citibank, as
Administrative Agent, as is designated in writing from time to time by
Citibank, as Administrative Agent, to PM Companies and the Lenders for
such purpose.
"Committed Currencies" means lawful currency of the United Kingdom
of Great Britain and Northern Ireland, lawful currency of the Federal
Republic of Germany, lawful currency of the Republic of France, lawful
currency of The Swiss Federation, lawful currency of The Netherlands,
lawful currency of Japan and lawful currency of the European Economic and
Monetary Union.
<PAGE>
4
"Commitment" means as to any Lender (a) the Dollar amount set forth
opposite such Lender's name on the signature pages hereof or (b) if such
Lender has entered into any Assignment and Acceptance, the Dollar amount
set forth for such Lender in the Register maintained by Citibank, as
Administrative Agent, pursuant to Section 9.07(d), as such amount may be
reduced pursuant to Section 2.05.
"Competitive Bid Advance" means an advance by a Lender to any
Borrower as part of a Competitive Bid Borrowing resulting from the
competitive bidding procedure described in Section 2.03 and refers to a
Fixed Rate Advance, a LIBO Rate Advance or a Local Rate Advance.
"Competitive Bid Borrowing" means a borrowing consisting of
simultaneous Competitive Bid Advances from each of the Lenders whose offer
to make one or more Competitive Bid Advances as part of such borrowing has
been accepted under the competitive bidding procedure described in Section
2.03.
"Competitive Bid Note" means a promissory note of any Borrower
payable to the order of any Lender, in substantially the form of Exhibit
A-2 hereto, evidencing the indebtedness of such Borrower to such Lender
resulting from a Competitive Bid Advance made by such Lender to such
Borrower.
"Competitive Bid Reduction" 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, 1997, 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%.
"Convert", "Conversion" and "Converted" each refers to a conversion
of Revolving Credit Advances of one Type into Revolving Credit Advances of
the other Type pursuant to Section 2.07, 2.09 or 2.12.
"Debt" means (i) indebtedness for borrowed money or for the deferred
purchase price of property or services, whether or not 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 any other Person of the kinds referred to in clause (i) or
(ii) above.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
"Designated Subsidiary" means any wholly-owned Subsidiary of PM
Companies designated for borrowing privileges under this Agreement
pursuant to Section 9.08.
"Designation Agreement" means, with respect to any Designated
Subsidiary, an agreement in the form of Exhibit D hereto signed by such
Designated Subsidiary and PM Companies.
<PAGE>
5
"Dollars" and the "$" sign each means lawful currency of the United
States of America.
"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 Citibank, as
Administrative Agent.
"Effective Date" has the meaning specified in Section 3.01.
"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
$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 Lender; (vii) an
affiliate of any Lender; and (viii) any other bank, commercial finance
company, insurance company or other Person approved in writing by PM
Companies, which approval shall be notified to Citibank, as Administrative
Agent.
"Equivalent" in Dollars of any Foreign Currency on any date means
the equivalent in Dollars of such Foreign Currency determined by using the
quoted spot rate at which the Administrative Sub-Agent's principal office
in London offers to exchange Dollars for such Foreign Currency in London
prior to 4:00 P.M. (London time) (unless otherwise indicated by the terms
of this Agreement) on such date as is required pursuant to the terms of
this Agreement, and the "Equivalent" in any Foreign Currency of Dollars
means the equivalent in such Foreign Currency of Dollars determined by
using the quoted spot rate at which the Administrative Sub-Agent's
principal office in London offers to exchange such Foreign Currency for
Dollars in London prior to 4:00 P.M. (London time) (unless otherwise
indicated by the terms of this Agreement) on such date as is required
pursuant to the terms of this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"ERISA Affiliate" means any Person that for purposes of Title IV of
ERISA is a member of any Borrower's controlled group, or under common
control with any Borrower, within the meaning of Section 414 of the
Internal Revenue Code.
"ERISA Event" means (a) (i) 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 (ii) 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; (b) the
application for a minimum funding waiver with respect to a Plan; (c) 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); (d) the cessation of operations at a facility of any
Borrower or PM Companies or any of their
<PAGE>
6
ERISA Affiliates in the circumstances described in Section 4062(e) of
ERISA; (e) 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; (f) 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; (g) the adoption of an
amendment to a Plan requiring the provision of security to such Plan,
pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of
proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or 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.
"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.
"Eurocurrency Lending Office" means, with respect to any Lender, the
office of such Lender specified as its "Eurocurrency 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 Citibank, as
Administrative Agent.
"Eurocurrency Rate" means, for any Interest Period for each
Eurocurrency Rate Advance comprising part of the same Revolving Credit
Borrowing, an interest rate per annum determined by Citibank, as
Administrative Agent, to be the offered rate per annum at which deposits
in Dollars or in the applicable Committed Currency appear on Telerate
Pages 3740 and 3750 (or any successor pages, respectively) as of 11:00
A.M. (London time) two Business Days before the first day of such Interest
Period, or in the event such offered rate is not available from the
Telerate Pages, the 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
Dollars or in the applicable Committed Currency 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
substantially equal to such Reference Bank's Eurocurrency Rate Advance
comprising part of such Revolving Credit Borrowing to be outstanding
during such Interest Period and for a period equal to such Interest
Period. If the Eurocurrency Rate does not appear on Telerate Pages 3740
and 3750 (or any successor pages, respectively), the Eurocurrency Rate for
any Interest Period for each Eurocurrency Rate Advance comprising part of
the same Revolving Credit Borrowing shall be determined by Citibank, as
Administrative Agent, on the basis of applicable rates furnished to and
received by Citibank, as Administrative Agent, from the Reference Banks
two Business Days before the first day of such Interest Period, subject,
however, to the provisions of Section 2.08.
"Eurocurrency Rate Advance" means a Revolving Credit Advance
denominated in Dollars or in a Committed Currency that bears interest as
provided in Section 2.07(a)(ii).
"Eurocurrency Rate Reserve Percentage" for any Interest Period for
all Eurocurrency Rate Advances or LIBO Rate Advances comprising part of
the same Borrowing means the reserve percentage applicable two Business
Days before 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, without limitation, any emergency, supplemental or other
marginal reserve requirement) for a member bank of the Federal Reserve
System in New York City with respect to liabilities or assets consisting
of or including Eurocurrency Liabilities (or with respect to any
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7
other category of liabilities that includes deposits by reference to which
the interest rate on Eurocurrency Rate Advances or LIBO Rate Advances is
determined) 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.
"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 that is a Business Day, the
average of the quotations for such day on such transactions received by
Citibank, as Administrative 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, 1997, 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%.
"Fixed Rate Advances" has the meaning specified in Section
2.03(a)(i), which Advance shall be denominated in Dollars or in any
Foreign Currency.
"Foreign Currency" means any Committed Currency, the lawful currency
of Canada and any other lawful currency (other than Dollars) that is
freely transferable or convertible into Dollars.
"Home Jurisdiction Withholding Taxes" means (a) in the case of PM
Companies, withholding for United States income taxes, United States
back-up withholding taxes and United States withholding taxes and (b) in
the case of a Designated Subsidiary, withholding taxes imposed by the
jurisdiction under the laws of which such Designated Subsidiary is
organized or any political subdivision thereof.
"Interest Period" means, for each Eurocurrency Rate Advance
comprising part of the same Revolving Credit Borrowing and each LIBO Rate
Advance comprising part of the same Competitive Bid Borrowing, the period
commencing on the date of such Eurocurrency Rate Advance or LIBO Rate
Advance or the date of the Conversion of any Base Rate Advance into such
Eurocurrency Rate Advance and ending on the last day of the period
selected by the Borrower requesting such Borrowing pursuant to the
provisions below and, thereafter, with respect to Eurocurrency Rate
Advances, each subsequent period commencing on the last day of the
immediately preceding Interest Period and ending on the last day of the
period selected by such Borrower pursuant to the provisions below. The
duration of each such Interest Period shall be one, two, three or six
months, or, if acceptable to all Lenders, nine or twelve months, as such
Borrower may select upon notice received by Citibank, as Administrative
Agent, not later than 11:00 A.M.
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8
(New York City time) on the third Business Day prior to the first day of
such Interest Period; provided, however, that:
(i) such Borrower may not select any Interest Period that ends
after the Termination Date;
(ii) 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, however, 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; and
(iii) whenever the first day of any Interest Period occurs on
a day of an initial calendar month for which there is no numerically
corresponding day in the calendar month that succeeds such initial
calendar month by the number of months equal to the number of months
in such Interest Period, such Interest Period shall end on the last
Business Day of such succeeding calendar month.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"Lenders" means the Initial Lenders and each Eligible Assignee that
shall become a party hereto pursuant to Section 9.07.
"LIBO Rate" means, for any Interest Period for all LIBO Rate
Advances comprising part of the same Competitive Bid Borrowing, an
interest rate per annum determined by Citibank, as Administrative Agent,
to be the offered rate per annum at which deposits in Dollars or in the
relevant Foreign Currency appear on Telerate Pages 3740 and 3750 (or any
successor pages, respectively) as of 11:00 A.M. (London time) two Business
Days before the first day of such Interest Period, or in the event such
offered rate is not available from the Telerate Pages, the 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 Dollars or in the relevant
Foreign Currency 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 substantially equal to the amount
that would be the Reference Banks' respective ratable shares of such
Borrowing if such Borrowing were to be a Revolving Credit Borrowing to be
outstanding during such Interest Period and for a period equal to such
Interest Period. If the LIBO Rate does not appear on the Telerate Pages
3740 and 3750 (or any successor pages, respectively), the LIBO Rate for
any Interest Period for each LIBO Rate Advance comprising part of the same
Competitive Bid Borrowing shall be determined by Citibank, as
Administrative Agent, on the basis of applicable rates furnished to and
received by Citibank, as Administrative Agent, from the Reference Banks
two Business Days before the first day of such Interest Period, subject,
however, to the provisions of Section 2.08.
"LIBO Rate Advances" means a Competitive Bid Advance denominated in
Dollars or in any Foreign Currency and bearing interest based on the LIBO
Rate.
"Local Rate Advances" means a Competitive Bid Advance denominated in
any Foreign Currency sourced from the jurisdiction of issuance of such
Foreign Currency and bearing interest at a fixed rate.
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9
"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 Union 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 $1,000,000,000.
"Multiemployer Plan" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which any Borrower or any ERISA Affiliate
is 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 (a) is maintained for employees of any
Borrower or any ERISA Affiliate and at least one Person other than such
Borrower and the ERISA Affiliates or (b) was so maintained and in respect
of which such Borrower 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, 1997, 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%.
"1995 Loan Agreements" has the meaning specified in Section 3.01(c).
"Note" means a Revolving Credit Note or a Competitive Bid Note.
"Notice of Competitive Bid Borrowing" has the meaning specified in
Section 2.03(a).
"Notice of Revolving Credit Borrowing" has the meaning specified in
Section 2.02(a).
"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 2.14(b).
"Payment Office" means, for any Foreign Currency, such office of
Citibank as shall be from time to time selected by Citibank, as
Administrative Agent, and notified by Citibank, as Administrative Agent,
to PM Companies and the Lenders.
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10
"PBGC" means the Pension Benefit Guaranty Corporation (or any
successor).
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association,
joint venture, limited liability company 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.
"Proceeding" has the meaning specified in Section 4.01(f).
"Reference Banks" means Citibank, Chase, Credit Suisse First Boston
and Deutsche Bank AG, New York Branch.
"Register" has the meaning specified in Section 9.07(d).
"Required Lenders" means at any time Lenders owed at least 66-2/3%
of the then aggregate unpaid principal amount (based on the Equivalent in
Dollars at such time) of the Revolving Credit Advances owing to Lenders,
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 nor any Borrower, nor any of their respective
affiliates, if a Lender, shall be included in (i) the Lenders holding such
amount of the Revolving Credit Advances or having such amount of the
Commitments or (ii) determining the aggregate unpaid principal amount of
the Revolving Credit Advances or the total Commitments).
"Revolving Credit Advance" means an advance by a Lender to any
Borrower as part of a Revolving Credit Borrowing and refers to a Base Rate
Advance or a Eurocurrency Rate Advance (each of which shall be a "Type" of
Revolving Credit Advance).
"Revolving Credit Borrowing" means a borrowing consisting of
simultaneous Revolving Credit Advances of the same Type made by each of
the Lenders pursuant to Section 2.01.
"Revolving Credit Note" means a promissory note of any Borrower
payable to the order of any Lender, delivered pursuant to a request made
under Section 2.16 in substantially the form of Exhibit A-1 hereto,
evidencing the aggregate indebtedness of such Borrower to such Lender
resulting from the Revolving Credit Advances made by such Lender to such
Borrower.
"Single Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (a) is maintained for employees of any
Borrower or any ERISA Affiliate and no Person other than such Borrower and
the ERISA Affiliates or (b) was so maintained and in respect of which such
Borrower or any ERISA Affiliate could have liability under Section 4069 of
ERISA in the event such plan has been or were to be terminated.
"Subsidiary" of any Person means any corporation of which (or in
which) more than 50% of (a) the outstanding capital stock having voting
power to elect a majority of the Board of Directors of such corporation
(irrespective of whether 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
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11
directly or indirectly owned or controlled by such Person, by such Person
and one or more of its other Subsidiaries or by one or more of such
Person's other Subsidiaries.
"Termination Date" means the earlier of October 14, 2002 and the
date of termination in whole of the Commitments pursuant to Section 2.05
or 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.
"Withdrawal Liability" shall have the meaning given such term under
Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. 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
mean "to but excluding".
SECTION 1.03. 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, 1997, 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 Revolving Credit Advances. Each Lender severally
agrees, on the terms and conditions hereinafter set forth, to make Revolving
Credit Advances to any Borrower from time to time on any Business Day during the
period from the Effective Date until the Termination Date in an aggregate amount
(based in respect of any Revolving Credit Advances to be denominated in a
Committed Currency on the Equivalent in Dollars determined on the date of
delivery of the applicable Notice of Revolving Credit Borrowing) for all of the
Borrowers not to exceed at any time outstanding such Lender's Commitment,
provided, however, that the aggregate amount of the Commitments of the Lenders
shall be deemed used from time to time to the extent of the aggregate amount
(based in respect of any Competitive Bid Advance denominated in a Foreign
Currency on the Equivalent in Dollars at such time) of the Competitive Bid
Advances then outstanding and such deemed use of the aggregate amount of the
Commitments shall be allocated among the Lenders ratably according to their
respective Commitments (such deemed use of the aggregate amount of the
Commitments being a "Competitive Bid Reduction"); provided further that the
aggregate amount of Revolving Credit Borrowings and Competitive Bid Borrowings
denominated in Foreign Currencies (based on the Equivalent in Dollars on the
Business Day of each Notice of Revolving Credit Borrowing or Notice of
Competitive Bid Borrowing) shall not exceed $2,000,000,000 at any time
outstanding. Each Revolving Credit Borrowing shall be in an aggregate amount of
no less than $50,000,000 (or the Equivalent thereof in any Committed Currency
determined on the date of delivery of the applicable Notice of Revolving Credit
Borrowing) and shall consist of Revolving Credit Advances of the same Type made
on the same day by the Lenders ratably according to their respective
Commitments. Within the limits of each Lender's Commitment and subject
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12
to this Section 2.01, any Borrower may borrow under this Section 2.01, prepay
pursuant to Section 2.10 and reborrow under this Section 2.01.
SECTION 2.02. Making the Revolving Credit Advances. (a) Each
Revolving Credit Borrowing shall be made on notice, given not later than (x)
11:00 A.M. (New York City time) on the third Business Day prior to the date of
the proposed Revolving Credit Borrowing in the case of a Revolving Credit
Borrowing consisting of Eurocurrency Rate Advances denominated in Dollars, (y)
4:00 P.M. (London time) on the third Business Day prior to the date of the
proposed Revolving Credit Borrowing in the case of a Revolving Credit Borrowing
consisting of Eurocurrency Rate Advances denominated in any Committed Currency,
or (z) 11:00 A.M. (New York City time) on the first Business Day prior to the
date of the proposed Revolving Credit Borrowing in the case of a Revolving
Credit Borrowing consisting of Base Rate Advances, by any Borrower to Citibank,
as Administrative Agent (and, in the case of a Revolving Credit Borrowing
consisting of Eurocurrency Rate Advances, simultaneously to the Administrative
Sub-Agent), which shall give to each Lender prompt notice thereof by telecopier
or telex. Each such notice of a Revolving Credit Borrowing (a "Notice of
Revolving Credit Borrowing") shall be by telephone, confirmed immediately in
writing, or telecopier or telex in substantially the form of Exhibit B-1 hereto,
specifying therein the requested (i) date of such Revolving Credit Borrowing,
(ii) Type of Advances comprising such Revolving Credit Borrowing, (iii)
aggregate amount of such Revolving Credit Borrowing, and (iv) in the case of a
Revolving Credit Borrowing consisting of Eurocurrency Rate Advances, initial
Interest Period and currency for each such Revolving Credit Advance. Each
Borrower agrees that each Notice of Revolving Credit Borrowing shall be
delivered by PM Companies from its office in New York, New York or its office in
Zug, Switzerland. Each Lender shall, before 11:00 A.M. (New York City time) on
the date of such Revolving Credit Borrowing, in the case of a Revolving Credit
Borrowing consisting of Advances denominated in Dollars, and before 11:00 A.M.
(London time) on the date of such Revolving Credit Borrowing, in the case of a
Revolving Credit Borrowing consisting of Eurocurrency Rate Advances denominated
in any Committed Currency, make available for the account of its Applicable
Lending Office to Citibank, as Administrative Agent, at the applicable
Citibank's Administrative Agent Account, in same day funds, such Lender's
ratable portion of such Revolving Credit Borrowing. After receipt of such funds
by Citibank, as Administrative Agent, and upon fulfillment of the applicable
conditions set forth in Article III, Citibank, as Administrative Agent, will
make such funds available to the Borrower requesting the Revolving Credit
Borrowing at the address of Citibank, as Administrative Agent, referred to in
Section 9.02 or at the applicable Payment Office, as the case may be.
(b) Anything in subsection (a) above to the contrary notwithstanding, no
Borrower may select Eurocurrency Rate Advances for any Revolving Credit
Borrowing if the obligation of the Lenders to make Eurocurrency Rate Advances
shall then be suspended pursuant to Section 2.09 or 2.12.
(c) Each Notice of Revolving Credit Borrowing of any Borrower shall be
irrevocable and binding on such Borrower. In the case of any Revolving Credit
Borrowing that the related Notice of Revolving Credit Borrowing specifies is to
be comprised of Eurocurrency Rate Advances, the Borrower requesting such
Revolving Credit Borrowing shall 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 Revolving Credit Borrowing for such
Revolving Credit Borrowing the applicable conditions set forth in Article III,
including, without limitation, any loss (excluding 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 Revolving Credit
Advance to be made by such Lender as part of such Revolving Credit Borrowing
when such Revolving Credit Advance, as a result of such failure, is not made on
such date.
(d) Unless Citibank, as Administrative Agent, shall have received notice
from a Lender prior to the date of any Revolving Credit Borrowing that such
Lender will not make available to Citibank, as Administrative Agent, such
Lender's ratable portion of such Revolving Credit Borrowing, Citibank, as
Administrative Agent, may
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13
assume that such Lender has made such portion available to Citibank, as
Administrative Agent, on the date of such Revolving Credit Borrowing in
accordance with subsection (a) of this Section 2.02 and Citibank, as
Administrative Agent, may, in reliance upon such assumption, make available to
the Borrower proposing such Revolving Credit Borrowing on such date a
corresponding amount. If and to the extent that such Lender shall not have so
made such ratable portion available to Citibank, as Administrative Agent, such
Lender and such Borrower severally agree to repay to Citibank, as Administrative
Agent, forthwith 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 Citibank, as Administrative
Agent, at (i) in the case of such Borrower, the higher of (A) the interest rate
applicable at the time to Revolving Credit Advances comprising such Revolving
Credit Borrowing and (B) the cost of funds incurred by Citibank, as
Administrative Agent, in respect of such amount and (ii) in the case of such
Lender, (A) the Federal Funds Rate in the case of Advances denominated in
Dollars or (B) the cost of funds incurred by Citibank, as Administrative Agent,
in respect of such amount in the case of Advances denominated in Committed
Currencies. If such Lender shall repay to Citibank, as Administrative Agent,
such corresponding amount, such amount so repaid shall constitute such Lender's
Revolving Credit Advance as part of such Revolving Credit Borrowing for purposes
of this Agreement.
(e) The failure of any Lender to make the Revolving Credit Advance to be
made by it as part of any Revolving Credit Borrowing shall not relieve any other
Lender of its obligation, if any, hereunder to make its Revolving Credit Advance
on the date of such Revolving Credit Borrowing, but no Lender shall be
responsible for the failure of any other Lender to make the Revolving Credit
Advance to be made by such other Lender on the date of any Revolving Credit
Borrowing.
SECTION 2.03. The Competitive Bid Advances. (a) Each Lender
severally agrees that any Borrower may make Competitive Bid 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 30 days prior to the Termination Date
in the manner set forth below; provided that, following the making of each
Competitive Bid Borrowing, (x) the aggregate amount of the Advances denominated
in a Foreign Currency (based on the Equivalent in Dollars at the time such
Competitive Bid Borrowing is requested) then outstanding shall not exceed
$2,000,000,000 and (y) the aggregate amount of the Advances (based in respect of
any Advance denominated in a Foreign Currency on the Equivalent in Dollars at
the time such Competitive Bid Borrowing is requested) then outstanding shall not
exceed the aggregate amount of the Commitments of the Lenders.
(i) Any Borrower may request a Competitive Bid Borrowing under this
Section 2.03 by delivering to Citibank, as Administrative Agent (and, in
the case of a Competitive Bid Borrowing not consisting of Fixed Rate
Advances or LIBO Rate Advances to be denominated in Dollars,
simultaneously to the Administrative Sub-Agent), by telecopier or telex, a
notice of a Competitive Bid Borrowing (a "Notice of Competitive Bid
Borrowing"), in substantially the form of Exhibit B-2 hereto, specifying
therein the requested (A) date of such proposed Competitive Bid Borrowing,
(B) aggregate amount of such proposed Competitive Bid Borrowing, (C)
interest rate basis and day count convention to be offered by the Lenders,
(D) currency of such proposed Competitive Bid Borrowing, (E) in the case
of a Competitive Bid Borrowing consisting of LIBO Rate Advances, Interest
Period, or in the case of a Competitive Bid Borrowing consisting of Fixed
Rate Advances or Local Rate Advances, maturity date for repayment of each
Fixed Rate Advance or Local Rate Advance to be made as part of such
Competitive Bid Borrowing (which maturity date may not be earlier than the
date occurring seven days after the date of such Competitive Bid Borrowing
or later than the earlier of (I) 360 days after the date of such
Competitive Bid Borrowing and (II) the Termination Date), (F) interest
payment date or dates relating thereto, (G) location of such Borrower's
account to which funds are to be advanced and (H) other terms (if any) to
be applicable to such Competitive Bid Borrowing, not later than (w) 10:00
A.M. (New York City time) at least two Business Days prior to the date of
the proposed Competitive Bid Borrowing, if such Borrower shall specify in
the
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14
Notice of Competitive Bid Borrowing that the rates of interest to be
offered by the Lenders shall be fixed rates per annum (the Advances
comprising any such Competitive Bid Borrowing being referred to herein as
"Fixed Rate Advances") and that the Advances comprising such proposed
Competitive Bid Advances shall be denominated in Dollars, (x) 10:00 A.M.
(New York City time) at least four Business Days prior to the date of the
proposed Competitive Bid Borrowing, if such Borrower shall specify in the
Notice of Competitive Bid Borrowing that the Competitive Bid Borrowing
shall be LIBO Rate Advances denominated in Dollars, (y) 10:00 A.M. (London
time) at least two Business Days prior to the date of the proposed
Competitive Bid Borrowing, if such Borrower shall specify in the Notice of
Competitive Bid Borrowing that the Advances comprising such proposed
Competitive Bid Advances shall be either Fixed Rate Advances denominated
in any Foreign Currency or Local Rate Advances denominated in any Foreign
Currency and (z) 10:00 A.M. (London time) at least four Business Days
prior to the date of the proposed Competitive Bid Borrowing, if such
Borrower shall instead specify in the Notice of Competitive Bid Borrowing
that the Advances comprising such Competitive Bid Borrowing shall be LIBO
Rate Advances denominated in any Foreign Currency. Each Notice of
Competitive Bid Borrowing shall be irrevocable and binding on such
Borrower. Any Notice of Competitive Bid Borrowing by a Designated
Subsidiary shall be given to Citibank, as Administrative Agent, or to the
Administrative Sub-Agent, as the case may be, in accordance with the
preceding sentence through PM Companies from its office in New York, New
York or its office in Zug, Switzerland on behalf of such Designated
Subsidiary. Citibank, as Administrative Agent, shall in turn promptly
notify each Lender of each request for a Competitive Bid Borrowing
received by it from such Borrower by sending such Lender a copy of the
related Notice of Competitive Bid Borrowing.
(ii) Each Lender may, if, in its sole discretion, it elects to do
so, irrevocably offer to make one or more Competitive Bid Advances to the
Borrower proposing the Competitive Bid Borrowing as part of such proposed
Competitive Bid Borrowing at a rate or rates of interest specified by such
Lender in its sole discretion, by notifying Citibank, as Administrative
Agent, or the Administrative Sub-Agent, as the case may be (which shall
give prompt notice thereof to such Borrower), (A) before 9:30 A.M. (New
York City time) on the Business Day prior to the date of such proposed
Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing
consisting of Fixed Rate Advances denominated in Dollars, (B) before 9:30
A.M. (New York City time) on the third Business Day prior to the date of
such proposed Competitive Bid Borrowing, in the case of a Competitive Bid
Borrowing consisting of LIBO Rate Advances denominated in Dollars, (C)
before 12:00 noon (London time) on the Business Day prior to the date of
such proposed Competitive Bid Borrowing, in the case of a Competitive Bid
Borrowing consisting of either Fixed Rate Advances denominated in any
Foreign Currency or Local Rate Advances denominated in any Foreign
Currency and (D) before 12:00 noon (London time) on the third Business Day
prior to the date of such proposed Competitive Bid Borrowing, in the case
of a Competitive Bid Borrowing consisting of LIBO Rate Advances
denominated in any Foreign Currency, of the minimum amount and maximum
amount of each Competitive Bid Advance which such Lender would be willing
to make as part of such proposed Competitive Bid Borrowing (which amounts
or the Equivalent thereof in Dollars, as the case may be, 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 Competitive Bid
Advance; provided that, if Citibank in its capacity as a Lender shall, in
its sole discretion, elect to make any such offer, it shall notify such
Borrower of such offer at least 30 minutes before the time and on the date
on which notice of such election is to be given to Citibank, as
Administrative Agent, or to the Administrative Sub-Agent, as the case may
be, by the other Lenders. If any Lender shall elect not to make such an
offer, such Lender shall so notify Citibank, as Administrative Agent,
before 9:30 A.M. (New York City time) or the Administrative Sub-Agent
before 12:00 noon (London time) on the date on which notice of such
election is to be given to Citibank, as Administrative Agent, or to the
Administrative Sub-Agent, as the case may be, by the other Lenders, and
such Lender
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15
shall not be obligated to, and shall not, make any Competitive Bid Advance
as part of such Competitive Bid Borrowing; provided further that the
failure by any Lender to give such notice shall not cause such Lender to
be obligated to make any Competitive Bid Advance as part of such proposed
Competitive Bid Borrowing.
(iii) The Borrower proposing the Competitive Bid Borrowing shall, in
turn, (A) before 12:00 noon (New York City time) on the Business Day prior
to the date of such proposed Competitive Bid Borrowing, in the case of a
Competitive Bid Borrowing consisting of Fixed Rate Advances denominated in
Dollars, (B) before 12:00 noon (New York City time) on the third Business
Day prior to the date of such proposed Competitive Bid Borrowing, in the
case of a Competitive Bid Borrowing consisting of LIBO Rate Advances
denominated in Dollars, (C) before 3:00 P.M. (London time) on the Business
Day prior to the date of such proposed Competitive Bid Borrowing, in the
case of a Competitive Bid Borrowing consisting of either Fixed Rate
Advances denominated in any Foreign Currency or Local Rate Advances
denominated in any Foreign Currency and (D) before 3:00 P.M. (London time)
on the third Business Day prior to the date of such Competitive Bid
Borrowing, in the case of a Competitive Bid Borrowing consisting of LIBO
Rate Advances denominated in any Foreign Currency, either:
(x) cancel such Competitive Bid Borrowing by giving Citibank,
as Administrative Agent, notice to that effect, or
(y) accept one or more of the offers made by any Lender or
Lenders pursuant to paragraph (ii) above, in its sole discretion, by
giving notice to Citibank, as Administrative Agent, or to the
Administrative Sub-Agent, as the case may be, of the amount of each
Competitive Bid 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 Citibank, as Administrative
Agent, or by the Administrative Sub-Agent, as the case may be, on
behalf of such Lender for such Competitive Bid Advance pursuant to
paragraph (ii) above) to be made by each Lender as part of such
Competitive Bid Borrowing, and reject any remaining offers made by
Lenders pursuant to paragraph (ii) above by giving Citibank, as
Administrative Agent, or the Administrative Sub-Agent, as the case
may be, notice to that effect. Such Borrower shall accept the offers
made by any Lender or Lenders to make Competitive Bid Advances in
order of the lowest to the highest rates of interest offered by such
Lenders. If two or more Lenders have offered the same interest rate,
the amount to be borrowed at such interest rate will be allocated
among such Lenders in proportion to the maximum amount that each
such Lender offered at such interest rate.
(iv) If the Borrower proposing the Competitive Bid Borrowing
notifies Citibank, as Administrative Agent, or the Administrative
Sub-Agent, as the case may be, that such Competitive Bid Borrowing is
cancelled pursuant to paragraph (iii)(x) above, or if such Borrower fails
to give timely notice in accordance with paragraph (iii) above, Citibank,
as Administrative Agent, or the Administrative Sub-Agent, as the case may
be, shall give prompt notice thereof to the Lenders and such Competitive
Bid Borrowing shall not be made.
(v) If the Borrower proposing the Competitive Bid Borrowing accepts
one or more of the offers made by any Lender or Lenders pursuant to
paragraph (iii)(y) above, Citibank, as Administrative Agent, or the
Administrative Sub-Agent, as the case may be, shall in turn promptly
notify (A) each Lender that has made an offer as described in paragraph
(ii) above, of the date and aggregate amount of such Competitive Bid
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 Competitive Bid Advance as part of such
Competitive Bid Borrowing, of the amount of each Competitive Bid Advance
<PAGE>
16
to be made by such Lender as part of such Competitive Bid Borrowing, and
(C) each Lender that is to make a Competitive Bid Advance as part of such
Competitive Bid Borrowing, upon receipt, that Citibank, as Administrative
Agent, or the Administrative Sub-Agent, as the case may be, has received
forms of documents appearing to fulfill the applicable conditions set
forth in Article III. Each Lender that is to make a Competitive Bid
Advance as part of such Competitive Bid Borrowing shall, before 11:00 A.M.
(New York City time), in the case of Competitive Bid Advances to be
denominated in Dollars or 11:00 A.M. (London time), in the case of
Competitive Bid Advances to be denominated in any Foreign Currency, on the
date of such Competitive Bid Borrowing specified in the notice received
from Citibank, as Administrative Agent, or from the Administrative
Sub-Agent, as the case may be, pursuant to clause (A) of the preceding
sentence or any later time when such Lender shall have received notice
from Citibank, as Administrative Agent, pursuant to clause (C) of the
preceding sentence, make available for the account of its Applicable
Lending Office to Citibank, as Administrative Agent, (x) in the case of a
Competitive Bid Borrowing denominated in Dollars, at its address referred
to in Section 9.02, in same day funds, such Lender's portion of such
Competitive Bid Borrowing in Dollars and (y) in the case of a Competitive
Bid Borrowing in a Foreign Currency, at the Payment Office for such
Foreign Currency as shall have been notified by Citibank, as
Administrative Agent, to the Lenders prior thereto, in same day funds,
such Lender's portion of such Competitive Bid Borrowing in such Foreign
Currency. Upon fulfillment of the applicable conditions set forth in
Article III and after receipt by Citibank, as Administrative Agent, of
such funds, Citibank, as Administrative Agent, will make such funds
available to such Borrower at the location specified by such Borrower in
its Notice of Competitive Bid Borrowing. Promptly after each Competitive
Bid Borrowing Citibank, as Administrative Agent, will notify each Lender
of the amount of the Competitive Bid Borrowing, the consequent Competitive
Bid Reduction and the dates upon which such Competitive Bid Reduction
commenced and will terminate.
(vi) If the Borrower proposing the Competitive Bid Borrowing
notifies Citibank, as Administrative Agent, or the Administrative
Sub-Agent, as the case may be, that it accepts one or more of the offers
made by any Lender or Lenders pursuant to paragraph (iii)(y) above, such
notice of acceptance shall be irrevocable and binding on such Borrower.
Such Borrower shall 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 the related Notice of Competitive Bid
Borrowing for such Competitive Bid Borrowing the applicable conditions set
forth in Article III, including, without limitation, any loss (excluding
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 Competitive Bid Advance to be made by such Lender as
part of such Competitive Bid Borrowing when such Competitive Bid Advance,
as a result of such failure, is not made on such date.
(b) Each Competitive Bid Borrowing shall be in an aggregate amount of
$50,000,000 (or the Equivalent thereof in any Foreign Currency, determined as of
the time of the applicable Notice of Competitive Bid Borrowing) or an integral
multiple of $1,000,000 (or the Equivalent thereof in any Foreign Currency,
determined as of the time of the applicable Notice of Competitive Bid Borrowing)
in excess thereof and, following the making of each Competitive Bid Borrowing,
the Borrower that has borrowed such Competitive Bid Borrowing shall be in
compliance with the limitations 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, any 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 Competitive Bid Borrowing shall not be made within two
Business Days of the date of any other Competitive Bid Borrowing.
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17
(d) Each Borrower that has borrowed through a Competitive Bid Borrowing
shall repay to Citibank, as Administrative Agent, for the account of each Lender
that has made a Competitive Bid Advance, on the maturity date of each
Competitive Bid Advance (such maturity date being that specified by such
Borrower for repayment of such Competitive Bid Advance in the related Notice of
Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above and
provided in the Competitive Bid Note evidencing such Competitive Bid Advance),
the then unpaid principal amount of such Competitive Bid Advance. Except as
required by Section 2.10(b), no Borrower shall have any right to prepay any
principal amount of any Competitive Bid Advance unless, and then only on the
terms, specified by such Borrower for such Competitive Bid Advance in the
related Notice of Competitive Bid Borrowing delivered pursuant to subsection
(a)(i) above and set forth in the Competitive Bid Note evidencing such
Competitive Bid Advance.
(e) Each Borrower that has borrowed through a Competitive Bid Borrowing
shall pay interest on the unpaid principal amount of each Competitive Bid
Advance from the date of such Competitive Bid Advance to the date the principal
amount of such Competitive Bid Advance is repaid in full, at the rate of
interest for such Competitive Bid Advance specified by the Lender making such
Competitive Bid Advance in its notice with respect thereto delivered pursuant to
subsection (a)(ii) above, payable on the interest payment date or dates
specified by such Borrower for such Competitive Bid Advance in the related
Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i)
above, as provided in the Competitive Bid Note evidencing such Competitive Bid
Advance. Upon the occurrence and during the continuance of an Event of Default,
such Borrower shall pay interest on the amount of unpaid principal of each
Competitive Bid Advance owing to a Lender, payable in arrears on the date or
dates interest is payable thereon, at a rate per annum equal at all times to 1%
per annum above the rate per annum required to be paid on such Competitive Bid
Advance under the terms of the Competitive Bid Note evidencing such Competitive
Bid Advance unless otherwise agreed in such Competitive Bid Note.
(f) The indebtedness of any Borrower resulting from each Competitive Bid
Advance made to such Borrower as part of a Competitive Bid Borrowing shall be
evidenced by a separate Competitive Bid Note of such Borrower payable to the
order of the Lender making such Competitive Bid Advance.
SECTION 2.04. Fees. (a) Facility Fee. PM Companies agrees to pay to
Citibank, as Administrative Agent, for the account of each Lender a facility fee
on the aggregate amount of such Lender's Commitment (whether or not used and
without giving effect to any Competitive Bid Reduction) from the date hereof in
the case of each Initial Lender 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) Agents' Fees. PM Companies shall pay to each Administrative Agent, the
Syndication Agent and the Documentation Agent for their respective own accounts
such fees as may from time to time be agreed between PM Companies and each such
Agent.
SECTION 2.05. Termination or Reduction of the Commitments. (a)
Optional. PM Companies shall have the right, upon at least three Business Days'
notice to Citibank, as Administrative Agent, to terminate in whole or reduce
ratably in part the unused portions of the respective Commitments of the
Lenders, provided that each partial reduction shall be in the aggregate amount
of no less than $50,000,000 and provided further that the aggregate amount of
the Commitments of the Lenders shall not be reduced to an amount that is less
than the aggregate principal amount of the Competitive Bid Advances denominated
in Dollars then outstanding plus the Equivalent in Dollars (determined as of the
date of the notice of prepayment) of the aggregate principal amount of the
Competitive Bid Advances denominated in Foreign Currencies then outstanding.
<PAGE>
18
(b) Mandatory. 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
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 Revolving Credit Advances. Each Borrower
shall repay to Citibank, as Administrative Agent, for the ratable account of the
Lenders on the Termination Date the aggregate principal amount of the Revolving
Credit Advances then outstanding.
SECTION 2.07. Interest on Revolving Credit Advances. (a) Scheduled
Interest. Each Borrower shall pay interest on the unpaid principal amount of
each Revolving Credit Advance owing by such Borrower to each Lender from the
date of such Revolving Credit Advance until such principal amount shall be paid
in full, at the following rates per annum:
(i) Base Rate Advances. During such periods as such Revolving Credit
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 in arrears monthly on the
20th day of each month and on the date such Base Rate Advance shall be
Converted or paid in full.
(ii) Eurocurrency Rate Advances. During such periods as such
Revolving Credit Advance is a Eurocurrency Rate Advance, a rate per annum
equal at all times during each Interest Period for such Revolving Credit
Advance to the sum of (x) the Eurocurrency Rate for such Interest Period
for such Revolving Credit Advance plus (y) the Applicable Interest Rate
Margin in effect from time to time, payable in arrears on the last day of
such Interest Period and, if such Interest Period has a duration of more
than three months, on each day that occurs during such Interest Period
every three months from the first day of such Interest Period and on the
date such Eurocurrency Rate Advance shall be Converted or paid in full.
(b) Default Interest. Upon the occurrence and during the continuance of an
Event of Default, each Borrower shall pay interest on the unpaid principal
amount of each Revolving Credit Advance owing to each Lender, payable in arrears
on the dates referred to in clause (a)(i) or (a)(ii) above, at a rate per annum
equal at all times to 1% per annum above the Base Rate in effect from time to
time.
SECTION 2.08. Additional Interest on Eurocurrency 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
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19
Liabilities, additional interest on the unpaid principal amount of each
Eurocurrency 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
Eurocurrency Rate for the Interest Period for such Advance from (ii) the rate
obtained by dividing such Eurocurrency Rate by a percentage equal to 100% minus
the Eurocurrency 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 Citibank, as Administrative Agent.
SECTION 2.09. Interest Rate Determination. (a) (i) In the event that
the relevant Eurocurrency Rate or LIBO Rate does not appear on the Telerate
Pages 3740 and 3750 (or any successor pages, respectively), each Reference Bank
agrees to furnish to Citibank, as Administrative Agent, timely information for
the purpose of determining each Eurocurrency Rate and each LIBO Rate. If any one
or more of the Reference Banks shall not furnish such timely information to
Citibank, as Administrative Agent, for the purpose of determining any such
interest rate, Citibank, as Administrative Agent, shall determine such interest
rate on the basis of timely information furnished by the remaining Reference
Banks.
(ii) Citibank, as Administrative Agent, shall give prompt notice to
PM Companies and the Lenders of the applicable interest rate determined by
Citibank, as Administrative Agent, for purposes of Section 2.07(a)(i) or (ii) or
the determination of the applicable LIBO Rate, and the rate, if any, furnished
by each Reference Bank for the purpose of determining the interest rate under
Section 2.07(a)(ii) or the applicable LIBO Rate.
(b) If, with respect to any Eurocurrency Rate Advances, the Required
Lenders notify Citibank, as Administrative Agent, that (i) they are unable to
obtain matching deposits in the London inter-bank market at or about 11:00 A.M.
(London time) on the second Business Day before the making of a Borrowing in
sufficient amounts to fund their respective Revolving Credit Advances as a part
of such Borrowing during its Interest Period or (ii) the Eurocurrency Rate for
any Interest Period for such Advances will not adequately reflect the cost to
such Required Lenders of making, funding or maintaining their respective
Eurocurrency Rate Advances for such Interest Period, Citibank, as Administrative
Agent, shall forthwith so notify PM Companies and the Lenders, whereupon (A) the
Borrower of such Eurocurrency Rate Advances will, on the last day of the then
existing Interest Period therefor, (1) if such Eurocurrency Rate Advances are
denominated in Dollars, either (x) prepay such Advances or (y) Convert such
Advances into Base Rate Advances and (2) if such Eurocurrency Rate Advances are
denominated in any Committed Currency, either (x) prepay such Advances or (y)
redenominate such Advances into an Equivalent amount of Dollars and Convert such
Advances into Base Rate Advances and (B) the obligation of the Lenders to make,
or to Convert Revolving Credit Advances into, Eurocurrency Rate Advances shall
be suspended until Citibank, as Administrative Agent, shall notify PM Companies
and the Lenders that the circumstances causing such suspension no longer exist;
provided that, if the circumstances set forth in clause (ii) above are
applicable, the applicable Borrower may elect, by notice to Citibank, as
Administrative Agent, and the Lenders, to continue such Advances in such
Committed Currency for Interest Periods of not longer than one month, which
Advances shall thereafter bear interest at a rate per annum equal to the
Applicable Margin plus, for each Lender, the cost to such Lender (expressed as a
rate per annum) of funding its Eurocurrency Rate Advances by whatever means it
reasonably determines to be appropriate. Each Lender shall certify its cost of
funds for each Interest Period to Citibank, as Administrative Agent, and the PM
Companies as soon as practicable (but in any event not later than ten Business
Days after the first day of such Interest Period).
(c) If any Borrower shall fail to select the duration of any Interest
Period for any Eurocurrency Rate Advances in accordance with the provisions
contained in the definition of "Interest Period" in Section 1.01, Citibank, as
Administrative Agent, will forthwith so notify such Borrower and the Lenders and
such Advances will automatically, on the last day of the then existing Interest
Period therefor, (i) if such Eurocurrency Rate Advances
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20
are denominated in Dollars, Convert into Base Rate Advances and (ii) if such
Eurocurrency Rate Advances are denominated in a Committed Currency, be
redenominated into an Equivalent amount of Dollars and be Converted into Base
Rate Advances.
(d) Upon the occurrence and during the continuance of any Event of Default
under Section 6.01(a), (i) each Eurocurrency Rate Advance will automatically, on
the last day of the then existing Interest Period therefor, (A) if such
Eurocurrency Rate Advances are denominated in Dollars, be Converted into Base
Rate Advances and (B) if such Eurocurrency Rate Advances are denominated in any
Committed Currency, be redenominated into an Equivalent amount of Dollars and be
Converted into Base Rate Advances and (ii) the obligation of the Lenders to
make, or to Convert Advances into, Eurocurrency Rate Advances shall be
suspended; provided that PM Companies and the applicable Borrower may elect, by
notice to Citibank, as Administrative Agent, and the Lenders within one Business
Day of such Event of Default, to continue such Advances in such Committed
Currency, whereupon Citibank, as Administrative Agent, may require that each
Interest Period relating to such Eurocurrency Rate Advances shall bear interest
at the Overnight Eurocurrency Rate for a period of three Business Days and
thereafter, each such Interest Period shall have a duration of not longer than
one month. "Overnight Eurocurrency Rate" means the rate per annum applicable to
an overnight period beginning on one Business Day and ending on the next
Business Day equal to the sum of 1%, the Applicable Interest Rate Margin and the
average, rounded upward to the nearest whole multiple of 1/16 of 1%, if such
average is not such a multiple, of the respective rates per annum quoted by each
Reference Bank to Citibank, as Administrative Agent, on request as the rate at
which it is offering overnight deposits in the relevant currency in amounts
comparable to such Reference Bank's Eurocurrency Rate Advances.
(e) If fewer than two Reference Banks furnish timely information to
Citibank, as Administrative Agent, for determining the Eurocurrency Rate or LIBO
Rate for any Eurocurrency Rate Advances or LIBO Rate Advances, as the case may
be,
(i) Citibank, as Administrative Agent, shall forthwith notify PM
Companies and the Lenders that the interest rate cannot be determined for
such Eurocurrency Rate Advances or LIBO Rate Advances, as the case may be,
(ii) with respect to Eurocurrency Rate Advances, each such Advance
will, on the last day of the then existing Interest Period therefor, (A)
if such Eurocurrency Rate Advance is denominated in Dollars, be prepaid by
the applicable Borrower or be automatically Converted into a Base Rate
Advance and (B) if such Eurocurrency Rate Advance is denominated in any
Committed Currency, be prepaid by the applicable Borrower or be
automatically redenominated into an Equivalent amount of Dollars and be
Converted into a Base Rate Advance (or if such Advance is then a Base Rate
Advance, will continue as a Base Rate Advance), and
(iii) the obligation of the Lenders to make Eurocurrency Rate
Advances or LIBO Rate Advances or to Convert Revolving Credit Advances
into Eurocurrency Rate Advances shall be suspended until Citibank, as
Administrative Agent, shall notify PM Companies and the Lenders that the
circumstances causing such suspension no longer exist.
SECTION 2.10. Prepayments of Advances. (a) Optional Prepayments of
Revolving Credit Advances. Each Borrower may, in the case of any Eurocurrency
Rate Advance upon at least three Business Days' notice to Citibank, as
Administrative Agent, or, in the case of any Base Rate Advance, upon notice
given to Citibank, as Administrative Agent, not later than 11:00 A.M. (New York
City time) on the date of the proposed prepayment, in each case stating the
proposed date and aggregate principal amount of the prepayment, and if such
notice is given such Borrower shall, prepay the outstanding principal amount of
the Revolving Credit Advances
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21
comprising part of the same Revolving Credit 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 (x) each partial prepayment
shall be in an aggregate principal amount of no less than $50,000,000 or the
Equivalent thereof in a Committed Currency (determined on the date notice of
prepayment is given) and (y) in the event of any such prepayment of a
Eurocurrency Rate Advance, such Borrower shall be obligated to reimburse the
Lenders in respect thereof pursuant to Section 9.04(b).
(b) Mandatory Prepayments. (i) If Citibank, as Administrative Agent,
notifies PM Companies that, on any interest payment date, the sum of (A) the
aggregate principal amount of all Advances denominated in Dollars then
outstanding plus (B) the Equivalent in Dollars (determined on the third Business
Day prior to such interest payment date) of the aggregate principal amount of
all Advances denominated in Foreign Currencies then outstanding exceeds 105% of
the aggregate Commitments of the Lenders on such date, PM Companies and each
other Borrower shall, within two Business Days after receipt of such notice,
prepay the outstanding principal amount of any Advances owing by such Borrower
in an aggregate amount sufficient to reduce such sum to an amount not to exceed
100% of the aggregate Commitments of the Lenders on such date.
(ii) If Citibank, as Administrative Agent, notifies PM Companies
that, on any interest payment date, the Equivalent in Dollars (determined on the
third Business Day prior to such interest payment date) of the aggregate
principal amount of all Advances denominated in Foreign Currencies outstanding
exceeds 105% of $2,000,000,000, PM Companies and each other Borrower shall,
within two Business Days after receipt of such notice, prepay the outstanding
principal amount of any Advances denominated in a Foreign Currency owing by such
Borrower in an aggregate amount sufficient to reduce such amount to
$2,000,000,000 or less.
(iii) The Borrower shall, on each Business Day, prepay an aggregate
principal amount of the Advances equal to the amount by which (A) the aggregate
principal amount of the Advances then outstanding exceeds (B) the aggregate of
the Commitments (after giving effect to the Competitive Bid Reduction) on such
Business Day.
(iv) Each prepayment made pursuant to this Section 2.10(b) shall be
made together with any interest accrued to the date of such prepayment on the
principal amounts prepaid and, in the case of any prepayment of a Eurocurrency
Rate Advance, a LIBO Rate Advance or a Local Rate Advance on a date other than
the last day of an Interest Period or at its maturity, any additional amounts
which such Borrower shall be obligated to reimburse to the Lenders in respect
thereof pursuant to Section 9.04(b). Citibank, as Administrative Agent, shall
give prompt notice of any prepayment required under this Section 2.10(b) to the
Borrowers and the Lenders.
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 included in the Eurocurrency 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 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 Eurocurrency Rate Advances or LIBO Rate Advances (excluding for
purposes of this Section 2.11 any such increased costs resulting from (i) Taxes
or Other Taxes (as to which Section 2.14 shall govern) and (ii) changes in the
basis of taxation of overall net income or overall gross income by the United
States or by the foreign jurisdiction or state under the laws of which such
Lender is organized or has its Applicable Lending Office or any political
subdivision thereof), then the Borrower of the affected Advances shall from time
to time, upon demand by such Lender (with a copy of such demand to Citibank, as
Administrative Agent), pay to Citibank, as Administrative Agent, for the account
of such Lender additional amounts sufficient to compensate such Lender for such
increased cost; provided, however, that before making any such demand, each
Lender agrees to use reasonable efforts (consistent with its internal policy and
legal and regulatory restrictions) to designate a different Applicable Lending
Office if the making
<PAGE>
22
of such a designation would avoid the need for, or reduce the amount of, such
increased cost and would 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 Citibank, as
Administrative Agent, by such Lender, shall be conclusive and binding for all
purposes, absent manifest error.
(b) 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 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. Illegality. Notwithstanding any other provision of
this Agreement, if any Lender shall notify Citibank, as Administrative Agent,
that the introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or any central bank or other governmental
authority asserts that it is unlawful, for any Lender or its Eurocurrency
Lending Office to perform its obligations hereunder to make Eurocurrency Rate
Advances in Dollars or any Committed Currency or LIBO Rate Advances in Dollars
or any Foreign Currency or to fund or maintain Eurocurrency Rate Advances in
Dollars or any Committed Currency or LIBO Rate Advances in Dollars or any
Foreign Currency hereunder, (a) each Eurocurrency Rate Advance or LIBO Rate
Advance, as the case may be, will automatically, upon such demand, if such
Eurocurrency Rate Advance or LIBO Rate Advance is denominated in Dollars, be
Converted into a Base Rate Advance or an Advance that bears interest at the rate
set forth in Section 2.07(a)(i), as the case may be, and (ii) if such
Eurocurrency Rate Advance or LIBO Rate Advance is denominated in any Foreign
Currency, be redenominated into an Equivalent amount of Dollars and be Converted
into a Base Rate Advance or an Advance that bears interest at the rate set forth
in Section 2.07(a)(i), as the case may be, and (b) the obligation of the Lenders
to make Eurocurrency Rate Advances or LIBO Rate Advances or to Convert Revolving
Credit Advances into Eurocurrency Rate Advances shall be suspended until
Citibank, as Administrative Agent, shall notify PM Companies and the Lenders
that the circumstances causing such suspension no longer exist; provided,
however, that before making any such demand, each Lender agrees to use
reasonable efforts (consistent with its internal policy and legal and regulatory
restrictions) to designate a different Eurocurrency Lending Office if the making
of such a designation would allow such Lender or its Eurocurrency Lending Office
to continue to perform its obligations to make Eurocurrency Rate Advances or to
continue to fund or maintain Eurocurrency Rate Advances and would not, in the
judgment of such Lender, be otherwise disadvantageous to such Lender.
SECTION 2.13. Payments and Computations. (a) PM Companies and each
Borrower shall make each payment hereunder, except with respect to principal of,
interest on, and other amounts relating to, Advances
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23
denominated in a Foreign Currency, not later than 11:00 A.M. (New York City
time) on the day when due in Dollars to Citibank, as Administrative Agent, at
the applicable Citibank's Administrative Agent Account in same day funds. PM
Companies and each Borrower shall make each payment hereunder with respect to
principal of, interest on, and other amounts relating to, Advances denominated
in a Foreign Currency, not later than 11:00 A.M. (at the Payment Office for such
Foreign Currency) on the day when due in such Foreign Currency to Citibank, as
Administrative Agent, in same day funds, by deposit of such funds to the
applicable Citibank's Administrative Agent Account in same day funds. Citibank,
as Administrative Agent, will promptly thereafter cause to be distributed like
funds relating to the payment of principal or interest or facility fees ratably
(other than amounts payable pursuant to Section 2.03, 2.11, 2.14 or 9.04(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 9.07(c), from and after the effective date
specified in such Assignment and Acceptance, Citibank, as Administrative Agent,
shall make all payments hereunder 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 Citibank, as Administrative Agent,
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
Citibank, as Administrative Agent, on the basis of a year of 365 or 366 days, as
the case may be, all computations of interest based on the Eurocurrency Rate or
the Federal Funds Rate and of facility fees shall be made by Citibank, as
Administrative Agent, on the basis of a year of 360 days and computations in
respect of Competitive Bid Advances shall be made by Citibank, as Administrative
Agent, or the Administrative Sub-Agent, as the case may be, as specified in the
applicable Notice of Competitive Bid Notice (or, in each case of Advances
denominated in Foreign Currencies where market practice differs, in accordance
with market practice), 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 facility fees are payable. Each determination by Citibank, as
Administrative 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 facility fee, as the case may be;
provided, however, that, if such extension would cause payment of interest on or
principal of Eurocurrency Rate Advances or LIBO Rate Advances to be made in the
next following calendar month, such payment shall be made on the next preceding
Business Day.
(e) Unless Citibank, as Administrative Agent, shall have received notice
from any Borrower prior to the date on which any payment is due to the Lenders
hereunder that such Borrower will not make such payment in full, Citibank, as
Administrative Agent, may assume that such Borrower has made such payment in
full to Citibank, as Administrative Agent, on such date and Citibank, as
Administrative Agent, may, in reliance upon such assumption, cause to be
distributed to each Lender on such due date an amount equal to the amount then
due such Lender. If and to the extent such Borrower shall not have so made such
payment in full to Citibank, as Administrative Agent, each Lender shall repay to
Citibank, as Administrative 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 Citibank, as Administrative Agent, at (i) the Federal Funds Rate in
the case of Advances denominated in Dollars or (ii) the cost of funds incurred
by
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24
Citibank, as Administrative Agent, in respect of such amount in the case of
Advances denominated in Foreign Currencies.
SECTION 2.14. Taxes. (a) Any and all payments by each Borrower and
PM Companies hereunder shall be made, in accordance with Section 2.13, 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, (i) in the case of each Lender and Citibank, as
Administrative Agent, taxes imposed on its net income, and franchise taxes
imposed on it, by the jurisdiction under the laws of which such Lender or
Citibank, as Administrative Agent (as the case may be), is organized or any
political subdivision thereof, (ii) in the case of each Lender, taxes imposed on
its net 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 Citibank, as Administrative 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
Citibank, as Administrative Agent (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities in respect of payments
hereunder 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 Citibank, as Administrative 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 2.14) such Lender or Citibank, as Administrative Agent (as
the case may be), receives an amount equal to the sum it would have received had
no such deductions been made, (ii) such Borrower or PM Companies shall make such
deductions and (iii) such Borrower or 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 or PM Companies shall pay any present or
future stamp or documentary taxes or any other excise or property taxes, charges
or similar levies that arise from any payment made hereunder or from the
execution, delivery or registration of, performing under, or otherwise with
respect to, this Agreement (hereinafter referred to as "Other Taxes").
(c) Each Borrower and PM Companies shall indemnify each Lender and
Citibank, as Administrative Agent, for and hold it harmless against the full
amount of Taxes or Other Taxes (including, without limitation, Taxes and Other
Taxes imposed by any jurisdiction on amounts payable under this Section 2.14)
paid by such Lender or Citibank, as Administrative 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 Citibank, as Administrative 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 shall furnish to Citibank, as Administrative Agent, at its
address referred to in Section 9.02, the original or a certified copy of a
receipt evidencing such payment. If any Borrower or PM Companies determines that
no Taxes are payable in respect thereof, such Borrower or PM Companies shall, at
the request of Citibank, as Administrative Agent, furnish or cause the payor to
furnish, Citibank, as Administrative Agent, and each Lender an opinion of
counsel reasonably acceptable to Citibank, as Administrative Agent, stating that
such payment is exempt from Taxes.
(e) Each Lender, on or prior to the date of its execution and delivery of
this Agreement in the case of each Initial Lender and on the date of the
Assignment and Acceptance pursuant to which it becomes a Lender in the case of
each other Lender, and from time to time thereafter as requested in writing by
any Borrower, PM Companies or Citibank, as Administrative Agent (but only so
long as such Lender remains lawfully able to do so), shall provide each of
Citibank, as Administrative Agent, PM Companies and such Borrower with any form
or certificate that is required by any taxing authority (including, if
applicable, two original Internal Revenue Service
<PAGE>
25
Form 1001 or 4224, as appropriate, or any successor or other form prescribed by
the Internal Revenue Service), certifying that such Lender is exempt from or
entitled to a reduced rate of Home Jurisdiction Withholding Taxes on payments
pursuant to this Agreement. Unless the Borrowers, PM Companies and Citibank, as
Administrative Agent, have received forms or other documents satisfactory to
them indicating that payments hereunder are not subject to Home Jurisdiction
Withholding Taxes or are subject to such tax at a rate reduced by an applicable
tax treaty, such Borrower, PM Companies or Citibank, as Administrative Agent,
shall withhold taxes from such payments at the applicable statutory rate in the
case of payments to or for any Lender.
(f) Each Initial Lender hereby confirms as of the Effective Date, and each
other Lender confirms as of the effective date of the Assignment and Acceptance
pursuant to which it becomes a party hereto, in favor of Citibank, as
Administrative Agent, that either (i) such Lender is not resident in the United
Kingdom and is beneficially entitled to the Advances and the interest thereon or
(ii) it is a bank as defined for the purposes of Section 349 of the Income and
Corporation Taxes Act of 1988 of the United Kingdom and is beneficially entitled
to the Advances and the interest thereon, and each Lender agrees to notify
Citibank, as Administrative Agent, if there is any change in its position from
that set forth in this clause (f).
(g) Any Lender claiming any additional amounts payable pursuant to this
Section 2.14 agrees to use reasonable efforts (consistent with its internal
policy and legal and regulatory restrictions) to change the jurisdiction of its
Applicable Lending Office if the making of such a change would avoid the need
for, or reduce the amount of, any such additional amounts that may thereafter
accrue and would not, in the reasonable judgment of such Lender, be otherwise
disadvantageous to such Lender.
SECTION 2.15. Sharing of Payments, Etc. If any Lender shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off, or otherwise) on account of the Revolving Credit Advances owing to
it (other than pursuant to Section 2.11, 2.14 or 9.04(b)) in excess of its
ratable share of payments on account of the Revolving Credit Advances obtained
by all the Lenders, such Lender shall forthwith purchase from the other Lenders
such participations in the Revolving Credit Advances owing to 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 set-off) 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 2.16. 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 Revolving
Credit Advance owing to such Lender from time to time, including the amounts of
principal and interest payable and paid to such Lender from time to time
hereunder in respect of Revolving Credit Advances. Each Borrower agrees that
upon notice by any Lender to such Borrower (with a copy of such notice to
Citibank, as Administrative Agent) to the effect that a Revolving Credit Note is
required or appropriate in order for such Lender to evidence (whether for
purposes of pledge, enforcement or otherwise) the Revolving Credit Advances
owing to, or to be made by, such Lender, such Borrower shall promptly execute
and deliver to such Lender a Revolving Credit Note payable to the order of such
Lender in a principal amount up to the Commitment of such Lender.
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26
(b) The Register maintained by Citibank, as Administrative Agent, pursuant
to Section 9.07(d) 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 Borrowing made hereunder, the Type of Advances comprising
such Borrowing and, if appropriate, 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 Citibank, as Administrative Agent, from the Borrowers
hereunder and each Lender's share thereof.
(c) Entries made in good faith by Citibank, as Administrative Agent, in
the Register pursuant to subsection (b) above, and by each Lender in its account
or accounts pursuant to subsection (a) above, shall be prima facie evidence of
the amount of principal and interest due and payable or to become due and
payable from each Borrower to, in the case of the Register, each Lender and, in
the case of such account or accounts, such Lender, under this Agreement, absent
manifest error; provided, however, that the failure of Citibank, as
Administrative Agent, or such Lender to make an entry, or any finding that an
entry is incorrect, in the Register or such account or accounts shall not limit
or otherwise affect the obligations of any Borrower under this Agreement.
SECTION 2.17. Use of Proceeds. The proceeds of the Advances shall be
available (and each Borrower agrees that it shall use such proceeds) for general
corporate purposes of PM Companies and its Subsidiaries.
ARTICLE III
CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01. Conditions Precedent to Effectiveness. This Agreement
shall become effective on and as of the first date (the "Effective Date") on
which the following conditions precedent have been satisfied:
(a) PM Companies shall have notified each Lender and Citibank, as
Administrative Agent, in writing as to the proposed Effective Date.
(b) On the Effective Date, the following statements shall be true
and Citibank, as Administrative Agent, shall have received for the account
of each Lender a certificate signed by a duly authorized officer of PM
Companies, dated the Effective Date, stating that:
(i) The representations and warranties contained in Section
4.01 are correct on and as of the Effective Date, and
(ii) No event has occurred and is continuing that constitutes
a Default.
(c) Citibank, as Administrative Agent, shall have received on or
before the Effective Date a letter from PM Companies dated on or before
such day, terminating in whole the commitments of the banks parties to (i)
the 5-Year Loan and Guaranty Agreement dated as of October 26, 1995 (the
"PMC Agreement") among PM Companies, the banks parties thereto and
Citibank, as agent, and (ii) the 5-Year Revolving Credit Agreement dated
as of October 26, 1995 (the "PMCC Agreement") among PM Companies, Philip
Morris Capital Corporation, the banks parties thereto and Citibank, as
agent (collectively, the "1995 Loan Agreements") and each of the Initial
Lenders that is a party to the 1995 Loan Agreements hereby waives, upon
execution of this Agreement, the five Business Days' notice required by
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27
Section 2.05(a) of the PMC Agreement and Section 2.04 of the PMCC
Agreement, respectively, relating to the termination of the commitments
under such 1995 Loan Agreement.
(d) PM Companies and its Subsidiaries shall have satisfied all of
their respective obligations under the 1995 Loan Agreements including,
without limitation, the payment of all fees under such agreements.
(e) Citibank, as Administrative Agent, shall have received on or
before the Effective Date the following, each dated such day, in form and
substance satisfactory to Citibank, as Administrative Agent:
(i) Certified copies of the resolutions of the Board of
Directors of PM Companies approving this Agreement, and of all
documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to this Agreement.
(ii) A certificate of the Secretary or an Assistant Secretary
of PM Companies certifying the names and true signatures of the
officers of PM Companies authorized to sign this Agreement and the
other documents to be delivered hereunder.
(iii) Favorable opinions of counsel (which may be in-house
counsel) for PM Companies, substantially in the form of Exhibits E-1
and E-2 hereto.
(iv) A favorable opinion of Shearman & Sterling, counsel for
Citibank, as Administrative Agent, substantially in the form of
Exhibit G hereto.
(v) A certificate of the chief financial officer of PM
Companies certifying that as of June 30, 1997 (A) 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 (B) the
aggregate amount of Debt included in clause (A) of this subsection
(v) 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.
(f) This Agreement shall have been executed by PM Companies,
Citibank and Chase, as Administrative Agents, Credit Suisse First Boston,
as Syndication Agent, and Deutsche Bank AG, New York Branch, as
Documentation Agent, and Citibank, as Administrative Agent, shall have
been notified by each Initial Lender that such Initial Lender has executed
this Agreement.
SECTION 3.02. Initial Advance to Each Designated Subsidiary. The
obligation of each Lender to make an initial Advance to each Designated
Subsidiary following any designation of such Designated Subsidiary as a Borrower
hereunder pursuant to Section 9.08 is subject to the receipt by Citibank, as
Administrative Agent, on or before the date of such initial Advance of each of
the following, in form and substance satisfactory to Citibank, as Administrative
Agent, and dated such date, and in sufficient copies for each Lender:
(a) Certified copies of the resolutions of the Board of Directors of
such Designated Subsidiary (with a certified English translation if the
original thereof is not in English) approving this Agreement, and of all
documents evidencing other necessary corporate action and governmental
approvals, if any, with respect to this Agreement.
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28
(b) A certificate of a proper officer of such Designated Subsidiary
certifying the names and true signatures of the officers of such
Designated Subsidiary authorized to sign this Agreement and the other
documents to be delivered hereunder.
(c) A certificate signed by a duly authorized officer of the
Designated Subsidiary, dated as of the date of such initial Advance,
certifying that such Designated Subsidiary shall have obtained all
governmental and third party authorizations, consents, approvals
(including exchange control approvals) and licenses required under
applicable laws and regulations necessary for such Designated Subsidiary
to execute and deliver this Agreement and to perform its obligations
thereunder.
(d) The Designation Agreement of such Designated Subsidiary,
substantially in the form of Exhibit D hereto.
(e) A favorable opinion of counsel (which may be in-house counsel)
to such Designated Subsidiary, dated the date of such initial Advance,
covering, to the extent customary and appropriate for the relevant
jurisdiction, the opinions outlined on Exhibit F hereto.
(f) Such other approvals, opinions or documents as any Lender,
through Citibank, as Administrative Agent, may reasonably request.
SECTION 3.03. Conditions Precedent to Each Revolving Credit
Borrowing. The obligation of each Lender to make a Revolving Credit Advance on
the occasion of each Revolving Credit Borrowing shall be subject to the
conditions precedent that the Effective Date shall have occurred and on the date
of such Revolving Credit Borrowing the following statements shall be true (and
each of the giving of the applicable Notice of Revolving Credit Borrowing and
the acceptance by the Borrower requesting such Revolving Credit Borrowing of the
proceeds of such Revolving Credit Borrowing shall constitute a representation
and warranty by such Borrower that on the date of such Borrowing such statements
are true):
(a) the representations and warranties contained in Section 4.01
(except the representations set forth in the last sentence of subsection
(e) and in subsection (f) thereof (other than clause (i) thereof)) are
correct on and as of the date of such Revolving Credit Borrowing, before
and after giving effect to such Revolving Credit Borrowing and to the
application of the proceeds therefrom, as though made on and as of such
date, and additionally, if such Revolving Credit Borrowing shall have been
requested by a Designated Subsidiary, the representations and warranties
of such Designated Subsidiary contained in its Designation Agreement are
correct on and as of the date of such Revolving Credit Borrowing, before
and after giving effect to such Revolving Credit Borrowing and to the
application of the proceeds therefrom, as though made on and as of such
date;
(b) no event has occurred and is continuing, or would result from
such Revolving Credit Borrowing or from the application of the proceeds
therefrom, that constitutes a Default; and
(c) If such Revolving Credit 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 PM
Companies'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 statement in (b) above shall also
be true on a pro forma basis as if such transaction or purchase shall have
been completed.
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29
SECTION 3.04. Conditions Precedent to Each Competitive Bid
Borrowing. The obligation of each Lender that is to make a Competitive Bid
Advance on the occasion of a Competitive Bid Borrowing to make such Competitive
Bid Advance as part of such Competitive Bid Borrowing is subject to the
conditions precedent that (i) Citibank, as Administrative Agent, shall have
received the written confirmatory Notice of Competitive Bid Borrowing with
respect thereto, (ii) on or before the date of such Competitive Bid Borrowing,
but prior to such Competitive Bid Borrowing, Citibank, as Administrative Agent,
shall have received a Competitive Bid Note payable to the order of such Lender
for each of the one or more Competitive Bid Advances to be made by such Lender
as part of such Competitive Bid Borrowing, in a principal amount equal to the
principal amount of the Competitive Bid Advance to be evidenced thereby and
otherwise on such terms as were agreed to for such Competitive Bid Advance in
accordance with Section 2.03, and (iii) on the date of such Competitive Bid
Borrowing the following statements shall be true (and each of the giving of the
applicable Notice of Competitive Bid Borrowing and the acceptance by the
Borrower requesting such Competitive Bid Borrowing of the proceeds of such
Competitive Bid Borrowing shall constitute a representation and warranty by such
Borrower that on the date of such Competitive Bid Borrowing such statements are
true):
(a) the representations and warranties contained in Section 4.01 are
correct on and as of the date of such Competitive Bid Borrowing, before
and after giving effect to such Competitive Bid Borrowing and to the
application of the proceeds therefrom, as though made on and as of such
date, and, if such Competitive Bid Borrowing shall have been requested by
a Designated Subsidiary, the representations and warranties of such
Designated Subsidiary contained in its Designation Agreement are correct
in on and as of the date of such Competitive Bid Borrowing, before and
after giving effect to such Competitive Bid Borrowing and to the
application of the proceeds therefrom, as though made on and as of such
date, and
(b) no event has occurred and is continuing, or would result from
such Competitive Bid Borrowing or from the application of the proceeds
therefrom, that constitutes a Default.
SECTION 3.05. Determinations Under Section 3.01. For purposes of
determining compliance with the conditions specified in Section 3.01, each
Lender shall be deemed to have consented to, approved or accepted or to be
satisfied with each document or other matter required thereunder to be consented
to or approved by or acceptable or satisfactory to the Lenders unless an officer
of Citibank, as Administrative Agent, responsible for the transactions
contemplated by this Agreement shall have received notice from such Lender prior
to the date that PM Companies, by notice to the Lenders, designates as the
proposed Effective Date, specifying its objection thereto. Citibank, as
Administrative Agent, shall promptly notify the Lenders of the occurrence of the
Effective Date.
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 Notes to be delivered by it are within its corporate powers, have been
duly authorized by all necessary corporate action, and do
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30
not contravene (i) its charter or by-laws or (ii) in any material respect,
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 Notes to be delivered by it.
(d) This Agreement is, and each of the Notes to be delivered by it
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
Subsidiaries as at June 30, 1997 and the consolidated statements of
earnings of PM Companies and its Subsidiaries for the six months then
ended fairly present, in all material respects and subject to year-end
audit adjustments, the consolidated financial condition of PM Companies
and its Subsidiaries as at such date and the consolidated results of the
operations of PM Companies and its Subsidiaries for the six-month period
ended on such date, all in accordance with generally accepted accounting
principles consistently applied. Except as disclosed in PM Companies'
quarterly report on Form 10-Q for the quarter ended June 30, 1997, and in
any Current Report on Form 8-K filed subsequent to June 30, 1997 but prior
to October 14, 1997, since June 30, 1997 there has been no material
adverse change in such condition or operations.
(f) There is no pending or threatened action or proceeding affecting
it or any of its Subsidiaries before any court, governmental agency or
arbitrator (a "Proceeding"), (i) that purports to affect the legality,
validity or enforceability of this Agreement or (ii) except for
Proceedings disclosed in PM Companies' Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1997 and June 30, 1997, its Annual Report on
Form 10-K for the year ended December 31, 1996, its Current Reports on
Form 8-K dated June 20, 1997, June 25, 1997, July 2, 1997 and August 25,
1997 and in any Current Report on Form 8-K filed subsequent to August 25,
1997 but prior to the Effective Date or, with respect to events occurring
after the date of the most recent such document but prior to October 14,
1997, a certificate delivered to the Lenders, that may materially
adversely affect the financial condition or operations of PM Companies and
its Subsidiaries taken as a whole.
(g) It owns directly or indirectly 100% of the capital stock of each
other Borrower and 100% of the capital stock of Philip Morris.
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:
(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, complying with ERISA and paying before the same become
delinquent all taxes, assessments and governmental charges imposed upon it
or upon its property except to the extent contested
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31
in good faith), noncompliance with which would materially adversely affect
the financial condition or operations of PM Companies and its Subsidiaries
taken as a whole.
(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; provided that, if under the proposed Memorandum
of Understanding and proposed resolution attached thereto, or under
federal legislation implementing similar terms, entered into on June 20,
1997 by Philip Morris, an initial payment is made by or on behalf of
Philip Morris as part of the aggregate $10,000,000,000 initial payment
proposed to be made by the tobacco industry on the date federal
legislation implementing the terms of the above mentioned resolution (or
federal legislation implementing similar terms) is signed, such payment
will not be included in such calculation.
(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
Subsidiaries as of the end of such quarter and consolidated
statements of earnings of PM Companies and its 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 100 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
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; and
(v) such other information respecting the condition or
operations, financial or otherwise, of PM Companies or any Major
Subsidiary as any Lender through Citibank, as Administrative 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:
(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
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32
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 10% 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. Consolidate with or merge into, or convey or
transfer its properties and assets substantially as an entirety to, any
Person, or permit any Subsidiary directly or indirectly owned by it to do
so, unless, immediately after giving effect thereto, no 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 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 Required Lenders.
(c) 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
any Advance when the same becomes due and payable; or any Borrower shall
fail to pay interest on any Advance, or PM Companies shall fail to pay any
fees payable under Section 2.04, within ten days after the same becomes
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), 5.02(b)
or 5.02(c), (ii) any term covenant or agreement contained in Section
5.02(a) if such failure shall remain unremedied for 15 days after written
notice thereof shall have been given to PM Companies by Citibank, as
Administrative Agent, or any Lender or (iii) any
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33
other term, covenant or agreement contained in this Agreement on its part
to be performed or observed if such failure shall remain unremedied for 30
days after written notice thereof shall have been given to PM Companies by
Citibank, as Administrative 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 $100,000,000 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 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 Required Lenders; or any Debt of any Borrower or PM Companies or any
Major Subsidiary which is outstanding in a principal amount of at least
$100,000,000 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 Required 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 60 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 of its property
constituting a substantial part of the property of PM Companies and its
Subsidiaries taken as a whole) 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
(f) Any judgment or order for the payment of money in excess of
$100,000,000 shall be rendered against any Borrower or PM Companies or any
Major Subsidiary and there shall be any period of 45 consecutive days
during which a stay of enforcement of such unsatisfied judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect; or
(g) Any Borrower, PM Companies or any ERISA Affiliate shall incur,
or shall be reasonably likely to incur, liability in excess of
$500,000,000 in the aggregate as a result of one or more of the following:
(i) the occurrence of any ERISA Event; (ii) the partial or complete
withdrawal of any Borrower, PM Companies or any ERISA Affiliate from a
Multiemployer Plan; or (iii) the reorganization or termination of a
Multiemployer Plan; provided, however, that no Event of Default under this
clause (g) shall be deemed to have occurred if the Borrower, PM Companies
or any ERISA Affiliate shall have made arrangements satisfactory to the
Lenders to discharge or otherwise satisfy such liability (including the
posting of a bond or other security); or
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34
(h) So long as any Subsidiary of PM Companies is a Designated
Subsidiary, the guaranty provided by PM Companies under Article VIII
hereof 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, Citibank, as Administrative Agent, (i) shall at the
request, or may with the consent, of the Required 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 Required 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 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 ADMINISTRATIVE AGENTS
SECTION 7.01. Authorization and Action. Each Lender hereby appoints
and authorizes the Administrative Agents to take such action as agent on its
behalf and to exercise such powers and discretion under this Agreement as are
delegated to the Administrative Agents by the terms hereof, together with such
powers and discretion as are reasonably incidental thereto. As to any matters
not expressly provided for by this Agreement (including, without limitation,
enforcement or collection of the Notes), the Administrative Agents 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 Required Lenders, and such
instructions shall be binding upon all Lenders and all holders of Notes;
provided, however, that no Administrative Agent shall be required to take any
action that exposes such Administrative Agent to personal liability or that is
contrary to this Agreement or applicable law. Each of the Administrative Agents
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. Administrative Agents' Reliance, Etc. Neither the
Administrative Agents nor any of their 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 willful misconduct. Without limitation of the generality of the
foregoing, the Administrative Agents: (i) may treat the Lender that made any
Advance as the holder of the Debt resulting therefrom until Citibank, as
Administrative 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 9.07; (ii) may consult with legal counsel (including counsel
for PM Companies or any Borrower), independent public 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 (whether written or oral) 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 PM Companies or any Borrower or to
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35
inspect the property (including the books and records) of PM Companies or such
Borrower; (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 (which may
be by telecopier, telegram or telex) believed by it to be genuine and signed or
sent by the proper party or parties.
SECTION 7.03. Citibank, Chase and Affiliates. With respect to its
Commitment and the Advances made by it, each of Citibank and Chase shall have
the same rights and powers under this Agreement as any other Lender and may
exercise the same as though it were not an Administrative Agent; and the term
"Lender" or "Lenders" shall, unless otherwise expressly indicated, include
Citibank and Chase in their individual capacities. Citibank and Chase and their
affiliates may accept deposits from, lend money to, act as trustee under
indentures of, accept investment banking engagements from and generally engage
in any kind of business with, PM Companies, any Borrower, any of its
Subsidiaries and any Person who may do business with or own securities of PM
Companies, any Borrower or any such Subsidiary, all as if Citibank and Chase
were not Administrative Agents 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 an Administrative Agent, the
Syndication Agent, the Documentation 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 any Administrative Agent, the
Syndication Agent, the Documentation 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 each
Administrative Agent (to the extent not reimbursed by PM Companies or the
Borrowers), ratably according to the respective principal amounts of the
Revolving Credit Advances then owing to each of them (or if no Revolving Credit
Advances are at the time outstanding, 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 that may be imposed
on, incurred by, or asserted against such Administrative Agent in any way
relating to or arising out of this Agreement or any action taken or omitted by
such Administrative Agent under this Agreement (collectively, the "Indemnified
Costs"), provided that no Lender shall be liable for any portion of the
Indemnified Costs resulting from such Administrative Agent's gross negligence or
willful misconduct. Without limitation of the foregoing, each Lender agrees to
reimburse such Administrative Agent promptly upon demand for its ratable share
of any out-of-pocket expenses (including counsel fees) incurred by such
Administrative 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 such
Administrative Agent is not reimbursed for such expenses by PM Companies or the
Borrowers. In the case of any investigation, litigation or proceeding giving
rise to any Indemnified Costs, this Section 7.05 applies whether any such
investigation, litigation or proceeding is brought by any Administrative Agent,
any Lender or a third party.
SECTION 7.06. Successor Administrative Agents. An Administrative
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
Required Lenders. Upon the resignation or removal of Citibank, as Administrative
Agent, Chase, as Administrative Agent, shall succeed to and become vested with
all the rights, powers, discretion, privileges and duties of Citibank, as
Administrative Agent, and Citibank, as Administrative Agent shall be
<PAGE>
36
discharged from its duties and obligations under this Agreement. Upon any other
such resignation or removal which results in there being no Administrative Agent
hereunder, the Required Lenders shall have the right to appoint a successor
Administrative Agent. If no successor Administrative Agent shall have been so
appointed by the Required Lenders, and shall have accepted such appointment,
within 30 days after the retiring Administrative Agent's giving of notice of
resignation or the Required Lenders' removal of the retiring Administrative
Agent, then the retiring Administrative Agent may, on behalf of the Lenders,
appoint a successor Administrative Agent, which shall be 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. Upon the
acceptance of any appointment as Administrative Agent hereunder by a successor
Administrative Agent, such successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, discretion, privileges
and duties of the retiring Administrative Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations under this Agreement.
After any retiring Administrative Agent's resignation or removal hereunder as
Administrative 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
Administrative Agent under this Agreement.
SECTION 7.07. Administrative Sub-Agent. The Administrative Sub-Agent
has been designated under this Agreement to carry out duties of Citibank, as
Administrative Agent. The Administrative Sub-Agent shall be subject to each of
the obligations in this Agreement to be performed by the Administrative
Sub-Agent, and each of the Borrowers and the Lenders agrees that the
Administrative Sub-Agent shall be entitled to exercise each of the rights and
shall be entitled to each of the benefits of Citibank, as Administrative Agent,
under this Agreement as relate to the performance of its obligations hereunder.
SECTION 7.08. Syndication and Documentation Agents. Credit Suisse
First Boston and Deutsche Bank AG, New York Branch have been designated as
Syndication Agent and Documentation Agent, respectively, under this Agreement,
but the use of such titles does not impose on either of them any duties or
obligations greater than those of any other Lender.
ARTICLE VIII
GUARANTY
SECTION 8.01. Guaranty. PM Companies 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, 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 Citibank, as Administrative Agent, or the Lenders in enforcing any
rights under the Guaranty.
SECTION 8.02. Guaranty Absolute. PM Companies 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 Citibank, as
Administrative Agent, or the Lenders with respect thereto. The liability of PM
Companies 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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37
(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 Citibank, as Administrative 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) PM Companies 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 Citibank, as
Administrative 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) PM Companies 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 PM Companies'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 Citibank, as Administrative
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 PM Companies 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
Citibank, as Administrative Agent, and the Lenders and shall forthwith be paid
to Citibank, as Administrative 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. PM Companies 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.
SECTION 8.04. Continuing Guaranty. This Guaranty is a continuing
guaranty and shall (a) 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, (b) be binding upon PM Companies, its successors and
assigns, and (c) inure to the benefit of and be enforceable by the Lenders,
Citibank, as Administrative Agent, and their respective successors, transferees
and assigns.
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ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by any Borrower or PM
Companies therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Required 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 Sections 3.01 and 3.02, (b) increase
the Commitments of the Lenders or subject the Lenders to any additional
obligations, (c) reduce the principal of, or interest on, the Revolving Credit
Advances or any fees or other amounts payable hereunder, (d) postpone any date
fixed for any payment of principal of, or interest on, the Revolving Credit
Advances or any fees or other amounts payable hereunder, (e) change the
percentage of the Commitments or of the aggregate unpaid principal amount of the
Revolving Credit Advances, or the number of Lenders, that shall be required for
the Lenders or any of them to take any action hereunder, (f) release PM
Companies from any of its obligations under Article VIII or (g) amend this
Section 9.01; provided further that no waiver of the conditions specified in
Section 3.04 in connection with any Competitive Bid Borrowing shall be effective
unless consented to by all Lenders making Competitive Bid Advances as part of
such Competitive Bid Borrowing; and provided further that no amendment, waiver
or consent shall, unless in writing and signed by Citibank, as Administrative
Agent, in addition to the Lenders required above to take such action, affect the
rights or duties of Citibank, as Administrative Agent, under this Agreement or
any Revolving Credit Advance.
SECTION 9.02. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic or
telex communication) and mailed, telecopied, telegraphed, telexed or delivered,
if to any Borrower, at its address c/o Philip Morris Companies Inc., 120 Park
Avenue, New York, New York 10017, Attention: Treasurer; if to PM Companies in
its capacity as the guarantor under Article VIII, at its address at 120 Park
Avenue, New York, New York 10017, Attention: Secretary; if to any Initial
Lender, 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
Citibank, as Administrative Agent, at its address at Two Penns Way, Suite 200,
New Castle, Delaware 19720, Attention: Dave Meckler; or, as to any Borrower, PM
Companies or Citibank, as Administrative Agent, at such other address as shall
be designated by such party in a written notice to the other parties and, as to
each other party, at such other address as shall be designated by such party in
a written notice to PM Companies and Citibank, as Administrative Agent. All such
notices and communications shall, when mailed, telecopied, telegraphed or
telexed, be effective when deposited in the mails, telecopied, delivered to the
telegraph company or confirmed by telex answerback, respectively, except that
notices and communications to Citibank, as Administrative Agent, pursuant to
Article II, III or VII shall not be effective until received by Citibank, as
Administrative Agent. Delivery by telecopier of an executed counterpart of any
amendment or waiver of any provision of this Agreement or of any Exhibit hereto
to be executed and delivered hereunder shall be effective as delivery of a
manually executed counterpart thereof.
SECTION 9.03. No Waiver; Remedies. No failure on the part of any
Lender or Citibank, as Administrative Agent, to exercise, and no delay in
exercising, any right hereunder or under any Note 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.
SECTION 9.04. Costs and Expenses. (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
<PAGE>
39
for administration related to the overhead of Citibank, as Administrative
Agent), modification and amendment of this Agreement and the documents to be
delivered hereunder, including, without limitation, the reasonable fees and
out-of-pocket expenses of counsel for Citibank, as Administrative Agent, with
respect thereto and with respect to advising Citibank, as Administrative Agent,
as to its rights and responsibilities under this Agreement, and all costs and
expenses of the Lenders and Citibank, as Administrative Agent, if any
(including, without limitation, reasonable counsel fees and expenses of the
Lenders and Citibank, as Administrative 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 Eurocurrency Rate Advance, LIBO
Rate Advance or Local Rate Advance is made other than on the last day of the
Interest Period for such Advance or at its maturity, 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 9.07(a) or for any other reason, PM Companies shall, upon
demand by any Lender (with a copy of such demand to Citibank, as Administrative
Agent), pay to Citibank, as Administrative 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 (excluding 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)(iii), 2.11, 2.14 and this
Section 9.04(b) shall survive the payment in full of principal and interest
hereunder.
(c) Each Borrower and PM Companies jointly and severally agree to
indemnify and hold harmless Citibank, as Administrative 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 PM Companies's entering
into this Agreement, or to any actions or omissions of any Borrower or PM
Companies, 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 whether or not an Indemnified Party is a party thereto
and whether or not such investigation, litigation or proceeding is brought by PM
Companies or any Borrower or any other Person; provided, however, that neither
any Borrower nor PM Companies 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 9.05. Right of Set-off. 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 Citibank, as
Administrative 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 PM Companies or any Borrower against any and
all of the obligations of any Borrower or PM Companies now or hereafter existing
under this Agreement, 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
<PAGE>
40
Borrower or PM Companies, as the case may be, after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of each Lender and its
Affiliates under this Section are in addition to other rights and remedies
(including, without limitation, other rights of set-off) that such Lender and
its Affiliates may have.
SECTION 9.06. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of PM Companies, Citibank, as Administrative Agent,
Chase, as Administrative Agent, and each Lender and their respective successors
and assigns, except that neither any Borrower nor PM Companies shall have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the Lenders.
SECTION 9.07. Assignments and Participations. (a) Each Lender may
and, if demanded by PM Companies upon at least five Business Days' notice to
such Lender and Citibank, as Administrative Agent, will assign to one or more
Persons all or a portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Commitment and the
Revolving Credit Advances owing to it); provided, however, that (i) each such
assignment shall be of a constant, and not a varying, percentage of all 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
9.07(a), any Competitive Bid Advances owing to such Lender or any Competitive
Bid Notes held by it), (ii) the amount of 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 9.07(a) shall be
arranged by PM Companies after consultation with Citibank, as Administrative
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 9.07(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 Citibank,
as Administrative Agent, for its acceptance and recording in the Register, an
Assignment and Acceptance, together with a processing and recordation fee of
$3,500, provided that, if such assignment is made as a result of a demand by PM
Companies under this Section 9.07(a), PM Companies shall pay or cause to be paid
such $3,500 fee. 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 9.04) 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
<PAGE>
41
Agreement or any other instrument or document 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 its 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 Citibank, as Administrative 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 Citibank, as
Administrative Agent, to take such action as agent on its behalf and to exercise
such powers and discretion under this Agreement as are delegated to Citibank, as
Administrative Agent, by the terms hereof, together with such powers and
discretion as are reasonably incidental thereto; and (vii) such assignee agrees
that it will perform in accordance with their terms all of the obligations that
by the terms of this Agreement are required to be performed by it as a Lender.
(c) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee representing that it is an Eligible Assignee,
together with any Revolving Credit Note or Notes subject to such assignment,
Citibank, as Administrative 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.
(d) Citibank, as Administrative Agent, shall maintain at its address
referred to in Section 9.02 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, Citibank, as Administrative
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, any Borrower or any Lender at
any reasonable time and from time to time upon reasonable prior notice.
(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,
the Advances owing to it and any 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) PM Companies, the other Borrowers,
Citibank, as Administrative 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 and (iv) no participant under any such
participation shall have any right to approve any amendment or waiver of any
provision of this Agreement, or any consent to any departure by any Borrower or
PM Companies therefrom, except to the extent that such amendment, waiver or
consent would reduce the principal of, or interest on, the Advances or any fees
or other amounts payable hereunder, in each case to the extent subject to such
participation, or postpone any date fixed for any payment of principal of, or
interest on, the Advances or any fees or other amounts payable hereunder, in
each case to the extent subject to such participation.
(f) Any Lender may, in connection with any assignment or participation or
proposed assignment or participation pursuant to this Section 9.07, 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
<PAGE>
42
assignee or participant shall agree to preserve the confidentiality of any
confidential information relating to PM Companies received by it from such
Lender.
(g) Notwithstanding any other provision set forth in this Agreement, any
Lender may at any time create a security interest in all or any portion of its
rights under this Agreement (including, without limitation, the Advances owing
to it and any Note or Notes held by it) in favor of any Federal Reserve Bank in
accordance with Regulation A of the Board of Governors of the Federal Reserve
System.
SECTION 9.08. Designated Subsidiaries. (a) Designation. PM Companies
may at any time, and from time to time, by delivery to Citibank, as
Administrative Agent, of a Designation Agreement duly executed by PM Companies
and the respective Subsidiary and substantially in the form of Exhibit D hereto,
designate such Subsidiary as a "Designated Subsidiary" for purposes of this
Agreement and such Subsidiary shall thereupon become a "Designated Subsidiary"
for purposes of this Agreement and, as such, shall have all of the rights and
obligations of a Borrower hereunder. Citibank, as Administrative Agent, shall
promptly notify each Lender of each such designation by PM Companies and the
identity of the respective Subsidiary.
(b) Termination. Upon the payment and performance in full of all of the
indebtedness, liabilities and obligations under this Agreement of any Designated
Subsidiary then, so long as at the time no Notice of Revolving Credit Borrowing
or Notice of Competitive Bid Borrowing in respect of such Designated Subsidiary
is outstanding, such Subsidiary's status as a "Designated Subsidiary" shall
terminate upon notice to such effect from Citibank, as Administrative Agent, to
the Lenders (which notice Citibank, as Administrative Agent, shall give
promptly, and only upon its receipt of a request therefor from PM Companies).
Thereafter, the Lenders shall be under no further obligation to make any Advance
hereunder to such Designated Subsidiary.
SECTION 9.09. Governing Law. This Agreement and the Notes shall be
governed by, and construed in accordance with, the laws of the State of New
York, except as referred to in Section 9.13.
SECTION 9.10. 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.
SECTION 9.11. Judgment. (a) If for the purposes of obtaining
judgment in any court it is necessary to convert a sum due hereunder in Dollars
into another currency, the parties hereto agree, to the fullest extent that they
may effectively do so, that the rate of exchange used shall be that at which in
accordance with normal banking procedures Citibank, as Administrative Agent,
could purchase Dollars with such other currency at Citibank's principal office
in London at 11:00 A.M. (London time) on the Business Day preceding that on
which final judgment is given.
(b) If for the purposes of obtaining judgment in any court it is necessary
to convert a sum due hereunder in a Foreign Currency into Dollars, the parties
agree to the fullest extent that they may effectively do so, that the rate of
exchange used shall be that at which in accordance with normal banking
procedures Citibank, as Administrative Agent, could purchase such Foreign
Currency with Dollars at Citibank's principal office in London at 11:00 A.M.
(London time) on the Business Day preceding that on which final judgment is
given.
(c) The obligation of any Borrower in respect of any sum due from it in
any currency (the "Primary Currency") to any Lender or Citibank, as
Administrative Agent, hereunder shall, notwithstanding any judgment in any other
currency, be discharged only to the extent that on the Business Day following
receipt by such Lender or
<PAGE>
43
Citibank, as Administrative Agent (as the case may be), of any sum adjudged to
be so due in such other currency, such Lender or Citibank, as Administrative
Agent (as the case may be), may in accordance with normal banking procedures
purchase the applicable Primary Currency with such other currency; if the amount
of the applicable Primary Currency so purchased is less than such sum due to
such Lender or Citibank, as Administrative Agent (as the case may be), in the
applicable Primary Currency, such Borrower agrees, as a separate obligation and
notwithstanding any such judgment, to indemnify such Lender or Citibank, as
Administrative Agent (as the case may be), against such loss, and if the amount
of the applicable Primary Currency so purchased exceeds such sum due to any
Lender or Citibank, as Administrative Agent (as the case may be), in the
applicable Primary Currency, such Lender or Citibank, as Administrative Agent
(as the case may be), agrees to remit to such Borrower such excess.
SECTION 9.12. Jurisdiction, Etc. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its property, to
the nonexclusive jurisdiction of any New York State court or federal court of
the United States of America sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to this
Agreement, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in any such
New York State court or, to the extent permitted by law, in such federal court.
Each Borrower (other than PM Companies) hereby agrees that service of process in
any such action or proceeding brought in any such New York State court or in
such federal court may be made upon PM Companies at its offices at 120 Park
Avenue, New York, New York 10017, Attention: Secretary (the "Process Agent") and
each Designated Subsidiary hereby irrevocably appoints the Process Agent its
authorized agent to accept such service of process, and agrees that the failure
of the Process Agent to give any notice of any such service shall not impair or
affect the validity of such service or of any judgment rendered in any action or
proceeding based thereon. Each Borrower hereby further irrevocably consents to
the service of process in any action or proceeding in such courts by the mailing
thereof by any parties hereto by registered or certified mail, postage prepaid,
to such Borrower at its address specified pursuant to Section 9.02. Each of the
parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that any party may otherwise have to serve legal process in any
other manner permitted by law or to bring any action or proceeding relating to
this Agreement or the Notes in the courts of any jurisdiction.
(b) PM Companies hereby accepts its appointment as Process Agent and
agrees that (i) it will maintain an office in New York, New York through the
Termination Date and will give Citibank, as Administrative Agent, prompt notice
of any change of its address, (ii) it will perform its duties as Process Agent
to receive on behalf of each Designated Subsidiary and its property service of
copies of the summons and complaint and any other process which may be served in
any action or proceeding in any New York State or Federal court sitting in New
York City arising out of or relating to this Agreement and (iii) it will forward
forthwith to each Designated Subsidiary at its then current address copies of
any summons, complaint and other process which PM Companies receives in
connection with its appointment as Process Agent.
(c) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the Notes in any New
York State or federal court. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
SECTION 9.13. Substitution of Currency. If any countries parties to
the Treaty on the European Economic and Monetary Union adopts the Euro in
substitution for its national currency in effect on the date hereof, the
regulations of the European Commission relating to the Euro shall apply to this
Agreement and the Notes. The
<PAGE>
circumstances and consequences described in this Section 9.13 entitle none of
the Borrowers, PM Companies, any Agent nor any Lender to rescission, notice,
repudiation, adjustment or renegotiation of the terms and conditions of this
Agreement or the Notes or to raise other defenses or to request any compensation
claim, nor will they affect any of the other obligations of any Borrower or PM
Companies under this Agreement and the Notes.
SECTION 9.14. Confidentiality. None of the Agents nor any Lender
shall disclose any confidential information relating to PM Companies or any
Borrower to any other Person without the consent of PM Companies, other than (a)
to such Agent's or such Lender's affiliates and their officers, directors,
employees, agents and advisors and, as contemplated by Section 9.07(f), to
actual or prospective assignees and participants, and then, in each such case,
only on a confidential basis, provided, however, that such actual or prospective
assignee or participant shall have been made aware of this Section 9.14 and
shall have agreed to be bound by its provisions as if it were a party to this
Agreement, (b) as required by any law, rule or regulation or judicial process
and (c) as requested or required by any state, federal or foreign authority or
examiner regulating banks or banking.
SECTION 9.15. Integration. This Agreement and the Notes represent
the agreement of PM Companies, the other Borrowers, the Administrative Agents
and the Lenders with respect to the subject matter hereof, and there are no
promises, undertakings, representations or warranties by the Administrative
Agents, PM Companies, the other Borrowers or any Lender relative to the subject
matter hereof not expressly set forth or referred to herein or in the Notes
other than the matters referred to in Section 2.04(b).
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
----------------------------------------
Title:
CITIBANK, N.A., as Administrative Agent
By
----------------------------------------
Title:
THE CHASE MANHATTAN BANK,
as Administrative Agent
By
----------------------------------------
Title:
CREDIT SUISSE FIRST BOSTON,
as Syndication Agent
By
----------------------------------------
Title:
By
----------------------------------------
Title:
<PAGE>
DEUTSCHE BANK AG, NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH, as
Documentation Agent
By
----------------------------------------
Title:
By
----------------------------------------
Title:
Initial Lenders
Commitment
$320,000,000.00 ABN AMRO BANK N.V., NEW YORK
BRANCH
By
----------------------------------------
Title:
$40,000,000.00 BANCA MONTE DEI PASCHI DI SIENA, S.p.A.
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$64,000,000.00 BANCA DI ROMA
By
----------------------------------------
Title:
By
----------------------------------------
Title:
<PAGE>
$120,000,000.00 BANCA COMMERICALE ITALIANA- NEW
YORK BRANCH
By
----------------------------------------
By
----------------------------------------
$80,000,000.00 BANCA POPOLARE DI MILANO
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$180,000,000.00 BANCO BILBAO VIZCAYA
By
----------------------------------------
Title:
$20,000,000.00 BANCO COMERCIAL PORTUGUES, SFE
By
----------------------------------------
Title:
$20,000,000.00 BANCO ESPIRITO SANTO E COMERICAL
By
----------------------------------------
Title:
$20,000,000.00 BANCO EXTERIOR DE ESPANA S.A.,
NEW YORK BRANCH
By
----------------------------------------
Title:
<PAGE>
$140,000,000.00 BANK OF AMERICA NT&SA
By
----------------------------------------
Title:
$53,066,666.40 BANK BRUSSELS LAMBERT, NEW YORK BRANCH
By
----------------------------------------
Title:
$56,000,000.00 BANKBOSTON, N.A.
By
----------------------------------------
Title:
$8,000,000.00 BANK OF LOUISVILLE AND TRUST CO.
By
----------------------------------------
Title:
$120,000,000.00 THE BANK OF NEW YORK
By
----------------------------------------
Title:
$160,000,000.00 THE BANK OF TOKYO- MITSUBISHI, LTD,
NEW YORK BRANCH
By
----------------------------------------
Title:
$180,000,000.00 BANKERS TRUST COMPANY
By
----------------------------------------
Title:
<PAGE>
$106,000,000.00 BANQUE PARIBAS
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$200,000,000.00 BANQUE NATIONALE DE PARIS
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$80,000,000.00 BERLINER BANK AG/ BB-KN
By
----------------------------------------
Title:
$40,000,000.00 CAISSE NATIONALE DE CREDIT AGRICOLE
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$96,000,000.00 CARIPLO-CASSA DI RISPARMIO DELLE
PROVINCIE LOMBARDE SPA
By
----------------------------------------
Title:
$603,432,666.60 CITIBANK, N.A.
By
----------------------------------------
Title:
<PAGE>
$603,432,666.60 THE CHASE MANHATTAN BANK
By
----------------------------------------
Title:
$100,000,000.00 CIBC INC.
By
----------------------------------------
Title:
$60,000,000.00 CORESTATES BANK, N.A.
By
----------------------------------------
Title:
$20,000,000.00 CREDIT COMMERICAL DE FRANCE
By
----------------------------------------
Title:
$20,000,000.00 CREDIT LYONNAIS NEW YORK BRANCH
By
----------------------------------------
Title:
$603,432,666.60 CREDIT SUISSE FIRST BOSTON
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$40,000,000.00 CREDITO ITALIANO, S.p.A
By
----------------------------------------
Title:
By
----------------------------------------
Title:
<PAGE>
$40,000,000.00 CRESTAR BANK
By
----------------------------------------
Title:
$200,000,000.00 THE DAI-ICHI KANGYO BANK, LTD
By
----------------------------------------
Title:
$64,000,000.00 DEN DANSKE BANK AKTIESELSKAB,
CAYMAN ISLANDS BRANCH
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$33,333,333.60 DEN NORSKE BANK ASA
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$603,432,666.60 DEUTSCHE BANK AG, NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH
By
----------------------------------------
Title:
By
----------------------------------------
Title:
<PAGE>
$280,000,000.00 DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By
----------------------------------------
Title:
----------------------------------------
$40,000,000.00 FIRSTAR BANK MILWAUKEE, N.A.
By
----------------------------------------
Title:
$40,000,000.00 FIRST BANK NATIONAL ASSOCIATION
By
----------------------------------------
Title:
$92,000,000.00 THE FIRST NATIONAL BANK OF CHICAGO
By
----------------------------------------
Title:
$72,000,000.00 FLEET NATIONAL BANK
By
----------------------------------------
Title:
$80,000,000.00 THE FUJI BANK, LIMITED, NEW YORK
BRANCH
By
----------------------------------------
Title:
$120,000,000.00 GENERALE BANK
By
----------------------------------------
Title:
<PAGE>
$200,000,000.00 ING BANK, N.V.
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$80,000,000.00 ISTITUTO BANCARIO SAN PAOLO DI
TORINO SPA
By
----------------------------------------
Title:
$29,200,000.00 M&I MARSHALL & ILSLEY BANK
By
----------------------------------------
Title:
$320,000,000.00 MARINE MIDLAND BANK
By
----------------------------------------
Title:
$85,333,333.60 NATIONAL AUSTRALIA BANK LIMITED
By
----------------------------------------
Title:
$168,000,000.00 NATIONSBANK, N.A.
By
----------------------------------------
Title:
$92,000,000.00 NORDDEUTSCHE LANDSBANK
GIROZENTRALE CAYMAN ISLANDS
BRANCH
By
----------------------------------------
Title:
<PAGE>
$64,000,000.00 NORINCHUKIN BANK, NEW YORK BRANCH
By
----------------------------------------
Title:
$20,000,000.00 THE NORTHERN TRUST COMPANY
By
----------------------------------------
Title:
$92,000,000.00 PNC BANK, NATIONAL ASSOCIATION
By
----------------------------------------
Title:
$33,336,000.00 RZB FINANCE LLC
By
----------------------------------------
Title:
$160,000,000.00 THE SAKURA BANK, LIMITED
By
----------------------------------------
Title:
$80,000,000.00 THE SANWA BANK LIMITED
By
----------------------------------------
Title:
$20,000,000.00 STANDARD CHARTERED BANK
By
----------------------------------------
Title:
$34,000,000.00 STATE STREET BANK AND TRUST
COMPANY
By
----------------------------------------
Title:
<PAGE>
$48,000,000.00 SVENSKA HANDELSBANKEN
By
----------------------------------------
Title:
$320,000,000.00 SOCIETE GENERALE FINANCE (IRELAND)
LIMITED
By
----------------------------------------
Title:
$80,000,000.00 UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By
----------------------------------------
Title:
By
----------------------------------------
Title:
$136,000,000.00 WACHOVIA BANK, N.A.
By
----------------------------------------
Title:
$40,000,000.00 WELLS FARGO BANK
By
----------------------------------------
Title:
<PAGE>
$20,000,000.00 WESTDEUTSCHE LANDESBANK
GIROZENTRALE
By
----------------------------------------
Title:
$60,000,000.00 THE YASUDA TRUST & BANKING
COMPANY., LTD., NEW YORK BRANCH
By
----------------------------------------
Title:
$8,000,000,000 Total of the Commitments
<PAGE>
EXHIBIT A-1 - FORM OF
REVOLVING CREDIT
PROMISSORY NOTE
Dated: _______________, 199_
FOR VALUE RECEIVED, the undersigned, [NAME OF BORROWER], a
__________ corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
__________ (the "Lender") for the account of its Applicable Lending Office on
the Termination Date (each as defined in the Credit Agreement referred to below)
the principal sum of U.S. $[amount of the Lender's Commitment in figures] or, if
less, the aggregate principal amount of the Revolving Credit Advances made by
the Lender to the Borrower pursuant to the 5-Year Credit Agreement dated as of
October 14, 1997 among Philip Morris Companies Inc., [the Borrower,] the Lender
and certain other lenders parties thereto, Citibank,N.A., as Administrative
Agent, The Chase Manhattan Bank, as Administrative Agent, Credit Suisse First
Boston, as Syndication Agent, and Deutsche Bank AG, New York Branch, as
Documentation Agent for the Lender and such other lenders (as amended or
modified from time to time, the "Credit Agreement"; the terms defined therein
being used herein as therein defined) outstanding on the Termination Date.
The Borrower promises to pay interest on the unpaid principal amount
of each Revolving Credit Advance from the date of such Revolving Credit Advance
until such principal amount is paid in full, at such interest rates, and payable
at such times, as are specified in the Credit Agreement.
Both principal and interest in respect of each Revolving Credit
Advance (i) in Dollars are payable in lawful money of the United States of
America to Citibank, as Administrative Agent, at its account maintained at Two
Penns Way, New Castle, Delaware, 19720, in same day funds and (ii) in any
Committed Currency are payable in such currency at the applicable Payment Office
in same day funds. Each Revolving Credit Advance owing to the Lender by the
Borrower pursuant to the Credit Agreement, and all payments made on account of
principal thereof, shall be recorded by the Lender and, prior to any transfer
hereof, endorsed on the grid attached hereto which is part of this Promissory
Note.
This Promissory Note is one of the Revolving Credit Notes referred
to in, and is entitled to the benefits of, the Credit Agreement. The Credit
Agreement, among other things, (i) provides for the making of Revolving Credit
Advances by the Lender to the Borrower from time to time in an aggregate amount
not to exceed at any time outstanding the Dollar amount first above mentioned or
the Equivalent thereof in one or more Committed Currencies, the indebtedness of
the Borrower resulting from each such Revolving Credit Advance being evidenced
by this Promissory Note, (ii) contains provisions for determining the Dollar
Equivalent of Revolving Credit Advances denominated in Committed Currencies and
(iii) contains provisions for acceleration of the maturity hereof upon the
happening of certain stated events and also for prepayments on account of
principal hereof prior to the maturity hereof upon the terms and conditions
therein specified.
[NAME OF BORROWER]
By
----------------------------------------
Name:
Title:
<PAGE>
LOANS AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
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Amount of
Amount of Principal Unpaid
Type of Advance in Interest Paid Principal Notation
Date Advance Relevant Currency Rate or Prepaid Balance Made By
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
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</TABLE>
<PAGE>
EXHIBIT A-2 - FORM OF
COMPETITIVE BID
PROMISSORY NOTE
U.S.$_______________ Dated: _______________, 199_
FOR VALUE RECEIVED, the undersigned, [NAME OF BORROWER], a
_________________________ corporation (the "Borrower"), HEREBY PROMISES TO PAY
to the order of _________________________ (the "Lender") for the account of its
Applicable Lending Office (as defined in the 5-Year Revolving Credit Agreement
dated as of October 14, 1997 among Philip Morris Companies Inc., [the Borrower,]
the Lender and certain other lenders parties thereto, Citibank,N.A., as
Administrative Agent, The Chase Manhattan Bank, as Administrative Agent, Credit
Suisse First Boston, as Syndication Agent, and Deutsche Bank AG, New York
Branch, as Documentation Agent for the Lender and such other lenders (as amended
or modified from time to time, the "Credit Agreement"; the terms defined therein
being used herein as therein defined)), on _______________, 199_, the principal
amount of [U.S.$_______________][ for a Competitive Bid Advance in a Foreign
Currency, list currency and amount of such Advance].
The Borrower promises to pay interest on the unpaid principal amount
hereof from the date hereof until such principal amount is paid 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
_____ days for the actual number of days elapsed).
Both principal and interest are payable in lawful money of
__________ to Citibank, N.A., as Administrative Agent, for the account of the
Lender at the office of _________________________, at _________________________
in same day funds.
This Promissory Note is one of the Competitive Bid Notes referred to
in, and is entitled to the benefits of, the Credit Agreement. The Credit
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.
This Promissory Note shall be governed by, and construed in
accordance with, the laws of the State of New York.
[NAME OF BORROWER]
By
-------------------------------------
Title:
<PAGE>
EXHIBIT B-1 - FORM OF NOTICE OF
REVOLVING CREDIT BORROWING
Citibank, as Administrative Agent
for the Lenders parties
to the Credit Agreement
referred to below
_________________________
_________________________ [Date]
Attention: _______________
Ladies and Gentlemen:
The undersigned, Philip Morris Companies Inc., refers to the 5-Year
Revolving Credit Agreement, dated as of October 14, 1997 (as amended or modified
from time to time, the "Credit Agreement", the terms defined therein being used
herein as therein defined), among the undersigned, certain Lenders parties
thereto and Citibank, N.A., as Administrative Agent, The Chase Manhattan Bank,
as Administrative Agent, Credit Suisse First Boston, as Syndication Agent, and
Deutsche Bank AG, New York Branch, as Documentation Agent for said Lenders, and
hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit
Agreement that the undersigned hereby requests a Revolving Credit Borrowing
under the Credit Agreement, and in that connection sets forth below the
information relating to such Revolving Credit Borrowing (the "Proposed Revolving
Credit Borrowing") as required by Section 2.02(a) of the Credit Agreement:
(i) The Business Day of the Proposed Revolving Credit Borrowing is
_______________, 199_.
(ii) The Type of Advances comprising the Proposed Revolving Credit
Borrowing is [Base Rate Advances] [Eurocurrency Rate Advances].
(iii) The aggregate amount of the Proposed Revolving Credit
Borrowing is [$_______________][for a Revolving Credit Borrowing in a
Committed Currency, list currency and amount of Revolving Credit
Borrowing].
[(iv) The initial Interest Period for each Eurocurrency Rate Advance
made as part of the Proposed Revolving Credit Borrowing is _____
month[s].]
[(v) The name of the Borrower is __________.]
The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the Proposed Revolving
Credit Borrowing:
(A) the representations and warranties contained in Section 4.01 of
the Credit Agreement (except the representations set forth in the last
sentence of subsection (e) thereof and in subsection (f) thereof (other
than clause (i) thereof)) and, if the Borrower is a Designated Subsidiary,
the representations and warranties of such Designated Subsidiary contained
in its Designation Agreement, are correct, before and after giving effect
to the Proposed Revolving Credit Borrowing and to the application of the
proceeds therefrom, as though made on and as of such date;
<PAGE>
2
(B) no event has occurred and is continuing, or would result from
such Proposed Revolving Credit Borrowing or from the application of the
proceeds therefrom, that constitutes a Default;
(C) if such Proposed Revolving Credit 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 PM
Companies'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 an transaction of the
type referred to in Section 5.02(b) of the Credit Agreement, the
statements in clause (B) above will be true and correct after giving
effect to such transaction or purchase; and
(D) the aggregate principal amount of the Proposed Revolving Credit
Borrowing and all other Borrowings to be made on the same day under the
Credit Agreement is within the applicable unused Commitments of the
Lenders.
Very truly yours,
PHILIP MORRIS COMPANIES INC.
By
---------------------------------
Title:
<PAGE>
EXHIBIT B-2 - FORM OF NOTICE OF
COMPETITIVE BID BORROWING
Citibank, N.A., as Administrative Agent
for the Lenders parties
to the Credit Agreement
referred to below
____________________
____________________ [Date]
Attention: _______________
Ladies and Gentlemen:
The undersigned, Philip Morris Companies Inc., refers to the 5-Year
Revolving Credit Agreement, dated as of October 14, 1997 (as amended or modified
from time to time, the "Credit Agreement", the terms defined therein being used
herein as therein defined), among the undersigned, certain Lenders parties
thereto and Citibank, N.A., as Administrative Agent, The Chase Manhattan Bank,
as Administrative Agent, Credit Suisse First Boston, as Syndication Agent, and
Deutsche Bank AG, New York Branch, as Documentation Agent for said Lenders, and
hereby gives you notice, irrevocably, pursuant to Section 2.03 of the Credit
Agreement that the undersigned hereby requests a Competitive Bid Borrowing under
the Credit Agreement, and in that connection sets forth the terms on which such
Competitive Bid Borrowing (the "Proposed Competitive Bid Borrowing") is
requested to be made:
(A) Date of Competitive Bid Borrowing ________________________
(B) Amount of Competitive Bid Borrowing ________________________
(C) [Maturity Date] [Interest Period] ________________________
(D) Interest Rate Basis ________________________
(E) Day count convention ________________________
(F) Interest Payment Date(s) ________________________
(G) [Currency] ________________________
(H) Name of Borrower ________________________
(I) Borrower's Account Location ________________________
(J) ___________________ ________________________
The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the Proposed
Competitive Bid Borrowing:
(a) the representations and warranties contained in Section 4.01 of
the Credit Agreement and, if the Borrower is a Designated Subsidiary, the
representations and warranties of such Designated Subsidiary contained in
its Designation Agreement, are correct, before and after giving effect to
the Proposed Revolving Credit Borrowing and to the application of the
proceeds therefrom, as though made on and as of such date;
(b) no event has occurred and is continuing, or would result from
such Proposed Revolving Credit Borrowing or from the application of the
proceeds therefrom, that constitutes a Default; and
<PAGE>
2
(c) the aggregate amount of the Proposed Competitive Bid Borrowing
and all other Borrowings to be made on the same day under the Credit
Agreement is within the aggregate amount of the unused Commitments of the
Lenders.
The undersigned hereby confirms that the Proposed Competitive Bid
Borrowing is to be made available to it in accordance with Section 2.03(a)(v) of
the Credit Agreement.
Very truly yours,
PHILIP MORRIS COMPANIES INC.
By
----------------------------------
Title:
<PAGE>
EXHIBIT C - FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the 5-Year Revolving Credit Agreement dated as
of October 14, 1997 (as amended or modified from time to time, the "Credit
Agreement") among Philip Morris Companies Inc., a Virginia corporation (the
"Borrower"), the Lenders (as defined in the Credit Agreement) and Citibank,
N.A., as Administrative Agent, The Chase Manhattan Bank, as Administrative
Agent, Credit Suisse First Boston, as Syndication Agent, and Deutsche Bank AG,
New York Branch, as Documentation Agent for the Lenders. Terms defined in the
Credit Agreement are used herein with the same meaning.
The "Assignor" and the "Assignee" referred to on Schedule I hereto
agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, an interest in and to
the Assignor's rights and obligations under the Credit Agreement as of the date
hereof (other than in respect of Competitive Bid Advances and Competitive Bid
Notes) equal to the percentage interest specified on Schedule 1 hereto of all
outstanding rights and obligations under the Credit Agreement (other than in
respect of Competitive Bid Advances and Competitive Bid Notes). After giving
effect to such sale and assignment, the Assignee's Commitment and the amount of
the Revolving Credit Advances owing to the Assignee will be as set forth on
Schedule 1 hereto. Each of the Assignor and the Assignee represents and warrants
that it is authorized to execute and deliver this Assignment and Acceptance.
2. The Assignor (i) 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; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Credit Agreement
or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of the Credit Agreement or any other instrument or document furnished
pursuant thereto; and (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of PM Companies or any
Borrower or the performance or observance by PM Companies or any Borrower of any
of its obligations under the Credit Agreement or any other instrument or
document furnished pursuant thereto.
3. The Assignee (i) confirms that it has received a copy of the
Credit 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 Assignment and Acceptance; (ii) agrees that it will, independently and
without reliance upon Citibank, as Administrative Agent, any other 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 Credit Agreement; (iii) confirms that it
is an Eligible Assignee; (iv) appoints and authorizes Citibank, as
Administrative Agent, and the other Agents to take such action as agent on its
behalf and to exercise such powers and discretion under the Credit Agreement as
are delegated to Citibank, as Administrative Agent, and the other Agents, as the
case may be, by the terms thereof, together with such powers and discretion as
are reasonably incidental thereto; (v) agrees that it will perform in accordance
with their terms all of the obligations that by the terms of the Credit
Agreement are required to be performed by it as a Lender; and (vi) attaches any
U.S. Internal Revenue Service forms required under Section 2.14 of the Credit
Agreement.
4. Following the execution of this Assignment and Acceptance, it
will be delivered to Citibank, as Administrative Agent, for acceptance and
recording by Citibank, as Administrative Agent. The effective date for this
Assignment and Acceptance (the "Effective Date") shall be the date of acceptance
hereof by Citibank, as Administrative Agent, unless otherwise specified on
Schedule 1 hereto.
<PAGE>
2
5. Upon such acceptance and recording by Citibank, as Administrative
Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit
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 Credit Agreement.
6. Upon such acceptance and recording by Citibank, as Administrative
Agent, from and after the Effective Date, Citibank, as Administrative Agent,
shall make all payments under the Credit Agreement in respect of the interest
assigned hereby (including, without limitation, all payments of principal,
interest and facility fees with respect thereto) to the Assignee. The Assignor
and Assignee shall make all appropriate adjustments in payments under the Credit
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.
8. This Assignment and Acceptance 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 Schedule 1 to this Assignment and Acceptance by telecopier shall
be effective as delivery of a manually executed counterpart of this Assignment
and Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused
Schedule 1 to this Assignment and Acceptance to be executed by their officers
thereunto duly authorized as of the date specified thereon.
<PAGE>
Schedule 1
to
Assignment and Acceptance
Percentage interest assigned: _____%
Assignee's Commitment: $__________
Aggregate outstanding principal amount of Revolving Credit
Advances assigned: $__________
Effective Date*: _______________, 199_
[NAME OF ASSIGNOR], as Assignor
By
--------------------------------------
Title:
Dated: _______________, 199_
[NAME OF ASSIGNEE], as Assignee
By
--------------------------------------
Title:
Dated: _______________, 199_
Domestic Lending Office:
[Address]
Eurocurrency Lending Office:
[Address]
Accepted this
__________ day of _______________, 199_
CITIBANK, N.A., as Administrative Agent
By
------------------------------------
Title:
- ----------
* This date should be no earlier than five Business Days after the
delivery of this Assignment and Acceptance to Citibank, as
Administrative Agent.
<PAGE>
2
[Approved this __________ day
of _______________, 199_
[NAME OF BORROWER]
By ]*
---------------------------------
Title:
- ----------
* Required if the Assignee is an Eligible Assignee solely by reason of
clause (viii) of the definition of "Eligible Assignee".
<PAGE>
EXHIBIT D - FORM OF
DESIGNATION AGREEMENT
[DATE]
To each of the Lenders
parties to the Credit Agreement
(as defined below) and to Citibank, N.A.
as Administrative Agent for such Lenders
Ladies and Gentlemen:
Reference is made to the 5-Year Credit Agreement dated as of October
14, 1997 among Philip Morris Companies Inc. ("PM Companies"), certain other
borrowers parties thereto, the Lenders named therein, Citibank, N.A., as
Administrative Agent, The Chase Manhattan Bank, as Administrative Agent, Credit
Suisse First Boston, as Syndication Agent, and Deutsche Bank AG, New York
Branch, as Documentation Agent, for said Lenders (the "Credit Agreement"). Terms
used herein and defined in the Credit Agreement shall have the respective
meanings ascribed to such terms in the Credit Agreement.
Please be advised that PM Companies hereby designates its
undersigned Subsidiary, ____________ ("Designated Subsidiary"), as a "Designated
Subsidiary" under and for all purposes of the Credit Agreement.
The Designated Subsidiary, in consideration of each Lender's
agreement to extend credit to it under and on the terms and conditions set forth
in the Credit Agreement, does hereby assume each of the obligations imposed upon
a "Designated Subsidiary" and a "Borrower" under the Credit Agreement and agrees
to be bound by the terms and conditions of the Credit Agreement. In furtherance
of the foregoing, the Designated Subsidiary hereby represents and warrants to
each Lender as follows:
(a) The Designated Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of
______________________.
(b) The execution, delivery and performance by the Designated
Subsidiary of this Designation Agreement, the Credit Agreement and the
Notes to be delivered by it are within the Designated Subsidiary's
corporate powers, have been duly authorized by all necessary corporate
action and do not contravene (i) the Designated Subsidiary's charter or
by-laws or (ii) any law, rule, regulation or order of any court or
governmental agency or 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 the Designated
Subsidiary of this Designation Agreement, the Credit Agreement or the
Notes to be delivered by it.
(d) This Designation Agreement is, and the Notes to be delivered by
the Designated Subsidiary when delivered will be, legal, valid and binding
obligations of the Designated Subsidiary enforceable against the
Designated Subsidiary in accordance with their respective terms, subject
to the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar law affecting
<PAGE>
2
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 Designated Subsidiary or any of its Subsidiaries before any court,
governmental agency or arbitrator which purports to affect the legality,
validity or enforceability of this Designation Agreement, the Credit
Agreement or any Note of the Designated Subsidiary.
Very truly yours,
PHILIP MORRIS COMPANIES INC.
By
------------------------------
Name:
Title:
[THE DESIGNATED SUBSIDIARY]
By
------------------------------
Name:
Title:
<PAGE>
EXHIBIT E-1 - FORM OF
OPINION OF COUNSEL
FOR PM COMPANIES
[Letterhead of Hunton & Williams]
[Effective Date]
To each of the Lenders parties
to the 5-Year Credit Agreement dated
as of October 14, 1997
among Philip Morris Companies Inc.,
said Lenders and Citibank, N.A., as
Administrative Agent for said Lenders, and
to Citibank, N.A. as Administrative Agent
Philip Morris Companies Inc.
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 3.01(e)(iii) of
the 5-Year Revolving Credit Agreement, dated as of October 14, 1997 (the "Credit
Agreement"), among Philip Morris Companies Inc. ("PM Companies"), the Lenders
parties thereto and Citibank, N.A., as Administrative Agent, The Chase Manhattan
Bank, as Administrative Agent, Credit Suisse First Boston, as Syndication Agent,
and Deutsche Bank AG, New York Branch, as Documentation Agent for said Lenders.
Terms defined in the Credit Agreement are used herein as therein defined.
We have acted as counsel for PM Companies in connection with the
preparation, execution and delivery of the Credit Agreement.
In that connection, we have examined:
(1) The Credit Agreement.
(2) The documents furnished by PM Companies pursuant to Article III
of the Credit Agreement.
(3) The Articles of Incorporation of PM Companies and all amendments
thereto (the "Charter").
(4) The by-laws of PM Companies and all amendments thereto (the
"By-laws").
We have also examined the originals, or copies certified to our satisfaction, of
such corporate records of PM Companies, certificates of public officials and of
officers of PM Companies, and agreements, instruments and other documents, as we
have deemed necessary as a basis for the opinions expressed below. 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 or
its officers or of public officials. We have assumed the due execution and
delivery, pursuant to due authorization, of the Credit Agreement by the Initial
Lenders and Citibank, as Administrative Agent.
<PAGE>
Our opinions expressed below are limited to the law of the State of
New York, the Commonwealth of Virginia and the Federal law of the United States.
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 the State of Virginia.
2. The execution, delivery and performance by PM Companies of the
Credit Agreement and the Notes, and the consummation of the transactions
contemplated thereby, are within PM Companies's corporate powers, have
been duly authorized by all necessary corporate action, and do not
contravene (i) the Charter or the By-laws or (ii) any law, rule or
regulation applicable to PM Companies (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or
(iii) to the best of our knowledge, any contractual or legal restriction
binding on or affecting PM Companies. The Credit Agreement and any Notes
delivered on the date hereof have been duly executed and delivered on
behalf of PM Companies.
3. No authorization, approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery and performance by
PM Companies of the Credit Agreement and the Notes.
4. The Credit Agreement is the legal, valid and binding obligation
of PM Companies enforceable against PM Companies in accordance with its
terms. The Notes issued on the date hereof are the legal, valid and
binding obligations of PM Companies, enforceable against PM Companies in
accordance with their respective terms.
5. PM Companies directly or indirectly owns 100% of the capital
stock of Philip Morris.
The opinion set forth in paragraph 4 above as to enforceability is
subject to the effect of any applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or similar law affecting creditors'
rights generally and to the effect of general principles of equity and any
implied covenant of good faith and fair dealing.
Very truly yours,
<PAGE>
EXHIBIT E-2 - FORM OF
OPINION OF COUNSEL
FOR PM COMPANIES
[Effective Date]
To each of the Lenders parties
to the 5-Year Credit Agreement dated
as of October 14, 1997
among Philip Morris Companies Inc.,
said Lenders and Citibank, N.A., as
Administrative Agent for said Lenders, and
to Citibank, N.A. as Administrative Agent
Philip Morris Companies Inc.
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 3.01(e)(iii) of
the 5-Year Revolving Credit Agreement, dated as of October 14, 1997 (the "Credit
Agreement"), among Philip Morris Companies Inc. ("PM Companies"), the Lenders
parties thereto and Citibank, N.A., as Administrative Agent, The Chase Manhattan
Bank, as Administrative Agent, Credit Suisse First Boston, as Syndication Agent,
and Deutsche Bank AG, New York Branch, as Documentation Agent for said Lenders.
Terms defined in the Credit Agreement are used herein as therein defined.
I have acted as counsel for PM Companies in connection with the
preparation, execution and delivery of the Credit Agreement.
In that connection, I have examined originals, or copies certified
to our satisfaction, of such corporate records of PM Companies, certificates of
public officials and of officers of PM Companies, and agreements, instruments
and other documents, as I have deemed necessary as a basis for the opinions
expressed below. As to questions of fact material to such opinions, I have, when
relevant facts were not independently established by me, relied upon
certificates of PM Companies or its officers or of public officials.
Based upon the foregoing and upon such investigation as I have
deemed necessary, I am of the opinion that there is, to the best of my
knowledge, (i) no pending or threatened action or proceeding against PM
Companies or any of its Subsidiaries before any court, governmental agency or
arbitrator (a "Proceeding") that purport to affect the legality, validity,
binding effect or enforceability of the Credit Agreement or any of the Notes or
the consummation of the transactions contemplated thereby, and (ii) except for
Proceedings disclosed in the Annual Report on Form 10-K of PM Companies for the
fiscal year ended December 31, 1996, its Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997, its Current Reports on Form 8-K
dated June 20, 1997, June 25, 1997, July 2, 1997 and August 25, 1997, any
Current Reports on Form 8-K filed subsequent to August 25, 1997 or, with respect
to events occurring after the date of the most recent such document, a
certificate delivered to the Lenders and attached hereto, there are no
Proceedings that are likely to have a materially adverse effect upon the
financial condition or operations of PM Companies and its Subsidiaries taken as
a whole.
Very truly yours,
<PAGE>
EXHIBIT F - FORM OF
OPINION OF COUNSEL
FOR DESIGNATED SUBSIDIARY
[Effective Date]
To each of the Lenders parties
to the 5-Year Credit Agreement dated
as of October 14, 1997
among Philip Morris Companies Inc.,
said Lenders and Citibank, N.A., as
Administrative Agent for said Lenders, and
to Citibank, N.A. as Administrative Agent
Philip Morris Companies Inc.
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 3.02(e) of the
5-Year Revolving Credit Agreement, dated as of October 14, 1997 (the "Credit
Agreement"), among Philip Morris Companies Inc. ("PM Companies"), the Lenders
parties thereto and Citibank, N.A., as Administrative Agent, The Chase Manhattan
Bank, as Administrative Agent, Credit Suisse First Boston, as Syndication Agent,
and Deutsche Bank AG, New York Branch, as Documentation Agent for said Lenders.
Terms defined in the Credit Agreement are used herein as therein defined.
We have acted as counsel for __________ (the "Designated
Subsidiary") in connection with the preparation, execution and delivery of the
Designation Agreement.
In that connection, we have examined:
(1) The Designation Agreement.
(2) The Credit Agreement.
(3) The documents furnished by the Designated Subsidiary pursuant to
Article III of the Credit Agreement.
(4) The [Articles] [Certificate] of Incorporation of the Designated
Subsidiary and all amendments thereto (the "Charter").
(5) The by-laws of the Designated Subsidiary and all amendments
thereto (the "By-laws").
We have also examined the originals, or copies certified to our satisfaction, of
such corporate records of the Designated Subsidiary, certificates of public
officials and of officers of the Designated Subsidiary, and agreements,
instruments and other documents, as we have deemed necessary as a basis for the
opinions expressed below. As to questions of fact material to such opinions, we
have, when relevant facts were not independently established by us, relied upon
certificates of the Designated Subsidiary or its officers or of public
officials. We have assumed the due execution and delivery, pursuant to due
authorization, of the Credit Agreement by the Initial Lenders and Citibank, as
Administrative Agent.
<PAGE>
2
Based upon the foregoing and upon such investigation as we have
deemed necessary, we are of the following opinion:
1. The Designated Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of ____________.
2. The execution, delivery and performance by the Designated
Subsidiary of the Designation Agreement, the Credit Agreement and the
Notes to be delivered by it, and the consummation of the transactions
contemplated thereby, are within the Designated Subsidiary's corporate
powers, have been duly authorized by all necessary corporate action, and
do not contravene (i) the Charter or the By-laws or (ii) any law, rule or
regulation applicable to the Designated Subsidiary (including, without
limitation, Regulation X of the Board of Governors of the Federal Reserve
System) or (iii) to the best of our knowledge, any contractual or legal
restriction binding on or affecting the Designated Subsidiary. The
Designation Agreement, the Credit Agreement and the Notes delivered by the
Designated Subsidiary on the date hereof have been duly executed and
delivered on behalf of the Designated Subsidiary.
3. No authorization, approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery and performance by
the Designated Subsidiary of the Designation Agreement, the Credit
Agreement and the Notes delivered by the Designated Subsidiary.
4. The Designation Agreement and the Credit Agreement are the legal,
valid and binding obligations of the Designated Subsidiary enforceable
against the Designated Subsidiary in accordance with their respective
terms. The Notes issued on the date hereof by the Designated Subsidiary
are the legal, valid and binding obligations of the Designated Subsidiary,
enforceable against the Designated Subsidiary in accordance with their
respective terms.
5. There is, to the best of my knowledge, no pending or threatened
action or proceeding against the Designated Subsidiary or any of its
Subsidiaries before any court, governmental agency or arbitrator that
purport to affect the legality, validity, binding effect or enforceability
of the Designation Agreement, the Credit Agreement or any of the Notes
delivered by the Designated Subsidiary or the consummation of the
transactions contemplated thereby.
The opinion set forth in paragraph 4 above as to enforceability is
subject to the effect of any applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or similar law affecting creditors'
rights generally and to the effect of general principles of equity and any
implied covenant of good faith and fair dealing.
Very truly yours,
<PAGE>
EXHIBIT G
FORM OF OPINION OF
COUNSEL FOR CITIBANK,
AS ADMINISTRATIVE AGENT
[Letterhead of Shearman & Sterling]
October __, 1997
To the Initial Lenders party to the
Credit Agreement referred
to below and to Citibank, N.A.,
as Administrative Agent
Ladies and Gentlemen:
We have acted as special New York counsel to Citibank, N.A., as
Administrative Agent, in connection with the preparation, execution and delivery
of the 5-Year Credit Agreement dated as of October 14, 1997 (the "Credit
Agreement"), among Philip Morris Companies, Inc., a Virginia corporation (the
"Borrower"), and each of you (each a "Lender"). Unless otherwise defined herein,
terms defined in the Credit Agreement are used herein as therein defined.
In that connection, we have examined a counterpart of the Credit
Agreement executed by the Borrower and, to the extent relevant to our opinion
expressed below, the other documents delivered by the Borrower pursuant to
Section 3.01 of the Credit Agreement.
In our examination of the Credit Agreement and such other documents,
we have assumed, without independent investigation (a) the due execution and
delivery of the Credit Agreement by all parties thereto, (b) the genuineness of
all signatures, (c) the authenticity of the originals of the documents submitted
to us and (d) the conformity to originals of any documents submitted to us as
copies.
In addition, we have assumed, without independent investigation,
that (i) the Borrower is duly organized and validly existing under the laws of
the jurisdiction of its organization and has full power and authority (corporate
and otherwise) to execute, deliver and perform the Credit Agreement and the
Notes and (ii) the execution, delivery and performance by the Borrower of the
Credit Agreement have been duly authorized by all necessary action (corporate or
otherwise) and do not (A) contravene the certificate of incorporation, bylaws or
other constituent documents of the Borrower, (B) conflict with or result in the
breach of any document or instrument binding on the Borrower or (C) violate or
require any governmental or regulatory authorization or other action under any
law, rule or regulation applicable to the Borrower other than New York law or
United States federal law applicable to borrowers generally or, assuming the
correctness of the Borrower's statements made as representations and warranties
in Section 4.01(c) of the Credit Agreement, applicable to the Borrower. We have
also assumed that the Credit Agreement is the legal, valid and binding
obligation of each Lender, enforceable against such Lender in accordance with
its terms.
<PAGE>
4
Based upon the foregoing examination and assumptions and upon such
other investigation as we have deemed necessary and subject to the
qualifications set forth below, we are of the opinion that the Credit Agreement
is the legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its terms.
Our opinion above is subject to the following qualifications:
(i) Our opinion above is subject to the effect of any
applicable bankruptcy, insolvency (including, without limitation,
all laws relating to fraudulent transfers), reorganization,
moratorium or similar law affecting creditors' rights generally.
(ii) Our opinion above is also 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).
(iii) We express no opinion as to the enforceability of the
indemnification provisions set forth in Section 9.04 of the Credit
Agreement to the extent enforcement thereof is contrary to public
policy regarding the exculpation of criminal violations, intentional
harm and acts of gross negligence or recklessness.
(iv) Our opinion above is limited to the law of the State of
New York and the federal law of the United States of America 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 a jurisdiction other than the State of
New York wherein any Lender may be located or wherein enforcement of
the Credit Agreement or any of the Notes may be sought that limits
the rates of interest legally chargeable or collectible.
A copy of this opinion letter may be delivered by any of you to any
Person that becomes a Lender in accordance with the provisions of the Credit
Agreement. Any such Lender may rely on the opinion expressed above as if this
opinion letter were addressed and delivered to such Lender on the date hereof.
This opinion letter speaks only as of the date hereof. We expressly
disclaim any responsibility to advise you or any other Lender who is permitted
to rely on the opinion expressed herein as specified in the next preceding
paragraph of any development or circumstance of any kind including any change of
law or fact that may occur after the date of this opinion letter even though
such development, circumstance or change may affect the legal analysis, a legal
conclusion or any other matter set forth in or relating to this opinion letter.
Accordingly, any Lender relying on this opinion letter at any time should seek
advice of its counsel as to the proper application of this opinion letter at
such time.
Very truly yours,
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
-------------------
Nine Months Ended Three Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Earnings before income taxes and
cumulative effect of accounting changes $ 8,427 $ 2,363
Add (Deduct):
Equity in net earnings of less than 50%
owned affiliates (147) (42)
Dividends from less than 50% owned
affiliates 107 25
Fixed charges 1,095 353
Interest capitalized, net of amortization (15) (17)
------- -------
Earnings available for fixed charges $ 9,467 $ 2,682
======= =======
Fixed charges:
Interest incurred:
Consumer products $ 936 $ 300
Financial services and real estate 51 17
------- -------
987 317
Portion of rent expense deemed to represent
interest factor 108 36
------- -------
Fixed charges $ 1,095 $ 353
======= =======
Ratio of earnings to fixed charges 8.6 7.6
======= =======
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
-------------------
Years Ended December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Earnings before income
taxes and cumulative
effect of accounting
changes $ 10,683 $ 9,347 $ 8,216 $ 6,196 $ 8,608
Add (Deduct):
Equity in net earnings
of less than 50%
owned affiliates (227) (246) (184) (164) (107)
Dividends from less
than 50% owned
affiliates 160 202 165 151 125
Fixed charges 1,421 1,495 1,537 1,716 1,736
Interest capitalized,
net of amortization 13 2 (1) (13) (3)
-------- -------- ------- ------- --------
Earnings available for
fixed charges $ 12,050 $ 10,800 $ 9,733 $ 7,886 $ 10,359
======== ======== ======= ======= ========
Fixed charges:
Interest incurred:
Consumer products $ 1,197 $ 1,281 $ 1,317 $ 1,502 $ 1,525
Financial services
and real estate 81 84 78 87 95
-------- -------- ------- ------- --------
1,278 1,365 1,395 1,589 1,620
Portion of rent expense
deemed to represent
interest factor 143 130 142 127 116
-------- -------- ------- ------- --------
Fixed charges $ 1,421 $ 1,495 $ 1,537 $ 1,716 $ 1,736
======== ======== ======= ======= ========
Ratio of earnings to
fixed charges 8.5 7.2 6.3 4.6 6.0
======== ======== ======= ======= ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 3-5 of the
Company's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 779
<SECURITIES> 0
<RECEIVABLES> 5,211
<ALLOWANCES> (161)
<INVENTORY> 8,925
<CURRENT-ASSETS> 16,151
<PP&E> 19,999
<DEPRECIATION> 8,390
<TOTAL-ASSETS> 55,043
<CURRENT-LIABILITIES> 14,028
<BONDS> 13,283
0
0
<COMMON> 935
<OTHER-SE> 13,706
<TOTAL-LIABILITY-AND-EQUITY> 55,043
<SALES> 54,722
<TOTAL-REVENUES> 54,722
<CGS> 19,978
<TOTAL-COSTS> 32,326
<OTHER-EXPENSES> 13,154
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 815
<INCOME-PRETAX> 8,427
<INCOME-TAX> 3,412
<INCOME-CONTINUING> 5,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,015
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.07
</TABLE>
Exhibit 99
Impact of the Proposed Resolution on the U.S. Cigarette Industry
The Conrad Senatorial Task Force has requested the industry to estimate the
impact of the proposed resolution on cigarette consumption in the U.S. and its
potential effect on individual tobacco company stock prices. This paper attempts
to respond to this request despite the significant uncertainties associated with
these topics.
Cigarette Consumption
There has been much speculation on the impact of the proposed resolution on the
level and nature of future cigarette consumption in the U.S. Any projection is a
perilous exercise, but in this specific instance, it is particularly difficult
to predict with any degree of confidence the proposed resolution's effect on
cigarette consumption. This inherent uncertainty arises from the unprecedented
magnitude and scope of the combined impact of the numerous economic and
non-economic measures contained in the proposed resolution.
Cigarette consumption in the U.S. is estimated to have reached a level of 482.7
billion units in 1996 reflecting an annual average decline of 1.3 percent since
1990.(1)
Cigarette consumption levels are a function of numerous parameters and their
interrelationships. These parameters include price, price gaps, the availability
of substitute products, demographics, inflation, consumer disposable income,
social attitudes towards smoking, smoking restrictions, etc. Many of these
parameters are subject to considerable uncertainty and will be significantly
impacted by the proposed resolution.
Economists measure the impact of real price movements on the purchase of any
product through econometric modelling which yields a price elasticity ratio. For
example, a price elasticity ratio of -0.5 means that a real price increase of 10
percent generates a reduction in demand of 5 percent. Numerous studies have been
conducted that estimate the price elasticity of demand for cigarettes in the
U.S. market. The vast majority
- ----------
(1) Industry estimates of consumption derived from industry shipments adjusted
for trade inventory movements.
<PAGE>
suggest that elasticity falls between -0.40 and -0.45.(2) These studies rely on
historical data to measure elasticity and generally derive estimates based on
"short run" or immediate impacts. Some studies have attempted to measure the
"long run" elasticity of demand for cigarettes. A study by Economics Nobel Prize
laureate, Gary Becker, estimated that the long run response to a permanent
change in price falls between -0.73 and -0.79 with an average elasticity factor
of -0.75.(3) The Becker study implies that a 10 percent increase in real prices
will cause a short run decrease in cigarette sales of approximately 4 percent
and a long run decrease in cigarette demand of 7.5 percent.
A March 1994 analysis by Gravelle and Zimmerman of the Congressional Research
Service(4) also highlights the fact that the expected long run reduction in
demand for cigarettes will be much greater than in the short run. The study
implies that the long run elasticity could be as high as -1.2. Thus, under this
measure, a 10 percent price increase would result in a long run decline in
cigarette sales of 12 percent.
Price elasticity of demand is not independent of real price movements. When
consumer prices reach unprecedented levels, sensitivity to price also rises and
thus elasticity ratios become more pronounced. Accordingly, the industry
conservatively estimates that as a result of the real retail price increases
that will result from the implementation of the proposed resolution, price
elasticity is likely to fall between -0.5 and -0.75.
U.S. cigarette consumption is estimated to have a negative annual underlying
trend, independent of real price movements, of between 1 percent and 2
percent. (5) The proposed resolution incorporates a wide array of measures which
will clearly impact this underlying trend in demand. These measures include
access restrictions, well funded public education campaigns and billions of
dollars earmarked for cessation programs. While it is difficult to predict in an
accurate manner the extent to which the underlying negative trend will
accelerate, it can safely be assumed that at a very minimum it will increase to
a range of between 2 percent and 3 percent.
- ----------
(2) 1989 Surgeon General Report, Table 12 on Page 535.
(3) Becker et al, Analysis of Cigarette Addiction, the American Economic Review,
June 1994, Volume 84, No. 3, Page 407, Table 4.
(4) Gravelle and Zimmerman, Cigarette Taxes to Fund Health Care Reform: An
Economic Analysis, March 8, 1994, Congressional Research Service, The Library of
Congress.
(5) Patrick Fleenor, Tax Foundation - The Effect of Excise Tax Differentials on
the Interstate Smuggling and Cross-Border Sales of Cig, arettes in the U.S.,
October 1996, as well as industry estimates.
-2-
10/8/97
<PAGE>
In recent weeks the public health community and numerous officials have stated
that retail prices will increase by 62 cents per pack by the fifth year of
implementation of the proposed resolution. This number is grossly
underestimated. For example, it totally ignores the multipliers inherent in the
retail price structure of cigarettes, e.g., trade margins and state and local
general sales taxes. The industry conservatively estimates that retail prices
will increase by an absolute minimum of $1.20 per pack by the fifth year and by
an absolute minimum of $1.50 per pack by the tenth year of implementation of the
proposed resolution.(6) Accordingly, retail prices will rise at least to the
levels that are being advocated by the public health community and the President
without the imposition of any additional Federal or State excise taxes.(7)
The following table highlights cigarette demand levels that are derived from
price elasticity factors of -0.5 and -0.75 and a downward underlying trend in
demand of 2.5 percent:
Table 1
- --------------------------------------------------------------------------------
Projected Cigarette Consumption
1997 - 2007
(Billion Cigarettes)
% Variance
-----------------------
2002 vs. 2007 vs.
Elasticity 1997 2002 2007 1997 1997
- ---------- ---- ---- ---- ---- ----
-0.50 477.0 337.8 301.1 (29.2)% (36.9)%
-0.75 477.0 300.6 269.3 (37.0)% (43.5)%
- --------------------------------------------------------------------------------
Over a ten year period it is estimated that cigarette consumption would fall by
between 175.9 billion cigarettes and 207.7 billion cigarettes versus 1997
estimated consumption of 477 billion cigarettes.
Table 2 highlights the above-mentioned projections versus cigarette consumption
levels that would otherwise have materialized as a result of the secular
downward trend of approximately 1.5 percent:
- ----------
(6) See detailed retail price projections on Table 5, Page 9.
(7) Over and above the prevailing average State Excise tax of $0.33/pack and the
$0.39/pack Federal Excise tax as of 2002.
-3-
10/8/97
<PAGE>
Table 2
----------------------------------------------------------------
Projected Cigarette Consumption
1997 - 2007
(Billion Cigarettes)
1997 2002 2007
---- ---- ----
Base 477.0 442.3 410.1
Scenario 1 477.0 337.8 301.1
Scenario 2 477.0 300.6 269.3
% Variance
Versus Base:
Scenario 1 - (23.6)% (26.6)%
Scenario 2 - (32.0)% (34.3)%
----------------------------------------------------------------
Such volume declines will have a significant adverse impact on the entire
cigarette supply chain. Industry pretax earnings will suffer even if unit
margins rise to offset the higher burden of unit fixed costs in the face of
declining sales volumes.
The Federal Trade Commission has recently issued a report that alleges that the
industry could reap substantial benefits from the proposed resolution.(8)
Indeed, the FTC report claims that the industry could raise prices with impunity
and thereby generate huge windfall profits. The report also claims that the
industry would retain two thirds of incremental revenues to the detriment of the
public sector. The report's analysis and conclusions are seriously flawed for
the following reasons:
(i) The report erroneously assumes that increases in the retail price of
cigarettes beyond the level required to pass through the settlement
payments will accrue solely to the manufacturers. For example, under the
FTC report's "200% scenario" which entails a retail price of $3.04/pack,
the FTC report assumes that
- ----------
(8) Federal Trade Commission, Competition and the Financial Impact of the
Proposed Tobacco Industry Settlement, September, 1997.
-4-
10/8/97
<PAGE>
the manufacturers' price(9) net of taxes and settlement payments will be
$1.42/pack. As highlighted on Table 3, had the FTC used more accurate
assumptions in its projections, it would have concluded that the
manufacturers' price would be significantly lower than its study suggests
under its retail price assumptions.
Table 3
- --------------------------------------------------------------------------------
200% Price Increase
($ / pack) 2007
FTC Projection Amended FTC Projection(10)
-------------- --------------------------
Retail Price $3.04 $3.04
Federal Excise Tax(a) (0.24) (0.39)
State Excise Tax (0.32) (0.33)(b)
Settlement Payment(c) (0.62) (0.83)
Trade Margin (0.44)(d) (0.58)(e)
Sales Tax at 4.7% -- (0.14)
----- -----
Manufacturers' Price $1.42 $0.77
===== =====
(a) After the publication of the report, the FTC stated that the $0.15/pack
excise tax credit ($0.10/pack in 2000 and $0.05/pack in 2002) should not have
been factored into its assumptions.
(b) The weighted average state excise tax prevailing in July 1997 was
$0.3362/pack reflecting increases in New Hampshire, Utah and Rhode Island.
(c) The minimum 3 percent per annum escalator is omitted by the FTC.
(d) The FTC report does not explicitly divulge the trade margin assumption. The
trade margin is derived from the FTC report by deduction and is consistent with
the theory expounded in the report that any increase in retail price accrues
solely to the manufacturers.
(e) This conservatively assumes that the trade will earn a margin of only 12
percent on any increase in retail price beyond the $1.90/pack.
- --------------------------------------------------------------------------------
For perspective, it should be highlighted that the average manufacturers' net
selling price in 1996 was $0.80/pack.
- ----------
(9) Manufacturers' price to wholesalers.
(10) It follows from this analysis that the retail price would have to be
$3.81/pack to yield a manufacturers' price of $1.42/pack.
-5-
10/8/97
<PAGE>
(ii) The assumptions pertaining to industry profitability are simplistic at
best.
The FTC report uses a weighted average operating profit of $0.32/pack. The
Brown and Williamson Tobacco Corporation (B&W) which accounted for 17.2
percent of industry sales volume in 1996 is omitted from this calculation.
Had the FTC report included B&W's operating profits in the weighting, the
average operating profit would decline to $0.30/pack, a difference of $500
million dollars in annual industry pretax earnings.
The report fails to specify that a significant proportion of the
industry's cost base is composed of fixed costs, i.e., costs that are
independent of throughput along the entire supply chain. The report simply
assumes that all industry costs are variable. In other words, the FTC
assumes that all fixed costs will decline in line with projected volume
declines. Under the FTC's premise, a sales volume loss of one billion
cigarette packs would erode industry profits by $300 million dollars. In
fact the loss would be more than double this level, as fixed costs will
remain and the industry would lose the full marginal contribution
generated by this volume, i.e., approximately $640 million dollars.
The report admits that in order to "simplify the analysis" it ignores the
potential impact of a change in mix, i.e., a potential shift in demand
from premium priced brands to either discount or generic products. Premium
brands currently account for approximately 72 percent of total sales. For
purposes of illustration, should this segment decline to a level of 60
percent with a corresponding increase in the discount segment, the net
cost to the industry would be in excess of $600 million in operating
profits at prevailing unit margin levels.(11)
The FTC report estimates potential marketing and legal expenditure savings
that ostensibly would be derived from the implementation of the proposed
resolution. It is by no means certain that the industry will in fact
generate savings in its legal expenditures. The FTC fails to take account
of the industry's continued exposure to individual litigation and to its
obligations in terms of attorneys' fees. Moreover, the FTC fails to
account for any cost increases associated with the proposed resolution. It
notably omits from its assumptions:
- the interest costs related to the industry up-front payment of
$10 billion.
- ----------
(11) A shift in consumption to the discount segment will result in a lower
average retail price than otherwise would be the case and hence volume would be
marginally higher. The resulting higher volume would only partially offset the
significant margin erosion resulting from an adverse change in mix.
-6-
10/8/97
<PAGE>
- the significant expenditures required to fully comply with the
broad array of regulatory measures that are contained in the
proposed resolution.
- the implications of the proposed resolution on the cost of
tobacco. Future legislation will in all likelihood contain
provisions designed to protect domestic tobacco growers and
their communities from the impact of declining volumes. These
provisions are likely to increase the direct or indirect cost
of tobacco.
- any potential surcharge that would be imposed on the industry
in the event that underage smoking incidence would fail to
meet the reduction targets that are specified in the proposed
resolution.
(iii) The report chooses to neglect the historical pattern of state excise
tax increases which have risen at an annual average rate of
approximately 5 percent since 1990. It is simply unrealistic to
assume that both the Federal Excise Tax and State Excise Taxes will
remain at current levels for the next 25 years if industry
profitability should ever reach the unprecedented levels that are
suggested by the FTC report.
Company Share Prices
The inherent uncertainty pertaining to the impact of the proposed resolution on
the level and nature of future cigarette consumption and on industry
profitability also clearly applies to the reaction of the stock market.
It is an indisputable fact that the stock prices of tobacco companies
historically have been volatile and that the relative Price/Earnings ratios of
these companies have been adversely impacted by the threat of litigation,
despite the fact that the industry has consistently prevailed in the courts.
There are those on Wall Street who believe that the elimination of substantial
event risk provides predictability and thus should be a net positive for the
tobacco companies. They claim that these companies are all highly diversified
and thus the market discount afforded to these non-tobacco assets would be
removed.
-7-
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<PAGE>
Conversely, there are others on Wall Street who believe that the proposed
resolution will be a net negative for the tobacco companies. They believe that
the terms of the resolution are too onerous and that these companies can sustain
their successful track record in the courts. Moreover, they argue that any
potential expansion in their respective Price/Earnings ratios would be fully
offset by the erosion in profitability that these companies will incur as a
result of the resolution.
The fact of the matter is that no one is in a position to predict what may
happen to individual stock prices.
Table 4 highlights the performance of individual stock prices versus the S&P 500
at market close on September 25, 1997:
Table 4
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September 25, 1997 Stock Prices
-------------------------------
Year-End Year-End P/E
1995 1996 Ratio
-------- -------- -----
BAT Industries (7.7)% 8.2% 11
Loews 42.8% 18.8% 14
Philip Morris Companies 38.0% 10.2% 15
RJR Nabisco 8.3% (2.0)% 13
S&P 500 53.4% 21.7% 24
- --------------------------------------------------------------------------------
Table 4 clearly highlights that the stock market's reaction to date to the terms
of the proposed resolution has been negative as every single company has trailed
the S&P 500 since both year-end 1995 and year-end 1996 despite solid profit
growth and attractive dividend yields.
Wall Street is oriented towards the short term, and the bulk of the projections
emanating from Wall Street focus on a period of only 3 years and, in some rare
instances, 5 years. In addition, in a bull market everything is viewed
optimistically. The long term impact remains uncertain and will depend on each
individual company's ability to generate earnings growth through its other
businesses.
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Table 5
Minimum Retail Price Projections(13)
($ / pack of 20 Cigarettes)
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
On-going Settlement Payments (a) - 0.360 0.414 0.517 0.647 0.715 0.737 0.759 0.782 0.805 0.829
Industry Price (b) - 0.027 0.054 0.082 0.111 0.141 0.171 0.202 0.234 0.267 0.300
Federal Excise Tax - - - 0.100 0.100 0.150 0.150 0.150 0.150 0.150 0.150
Trade Margin (c) - 0.053 0.064 0.095 0.117 0.137 0.144 0.152 0.159 0.167 0.174
Sales Tax (d) - 0.021 0.025 0.037 0.046 0.054 0.056 0.059 0.062 0.065 0.068
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Increase - 0.461 0.557 0.831 1.021 1.197 1.258 1.322 1.387 1.454 1.521
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Retail Price 1.82(e) 2.28 2.38 2.65 2.84 3.02 3.08 3.14 3.21 3.27 3.34
</TABLE>
(a) Reflects on-going settlement payments adjusted for volume and indexed at
minimum annual rate of 3%.
(b) Only reflects adjustment for inflation of 2.5%.
(c) Assumes a combined 12% rate for both wholesalers and retailers. Current
average trade margin, expressed as a percentage of retail price, exceeds
20% and thus this assumption is extremely conservative.
(d) Reflects national average tax of 4.7%.
(e) Average weighted net price to consumer.
13 These projections exclude any additional federal or state excise taxes and
any additional payments that may be required under the terms of the
proposed resolution, e.g., surcharges pertaining to the lookback provision.
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