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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-8940
PHILIP MORRIS COMPANIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
13-3260245
(I.R.S. EMPLOYER IDENTIFICATION NO.)
120 PARK AVENUE, NEW YORK, N.Y.
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
10017
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-880-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
Common Stock, $1 par value
NAME OF EACH EXCHANGE ON
WHICH REGISTERED
New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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At March 6, 1997, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $107.8 billion. At
such date, there were 809,597,699 shares of the registrant's Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to stockholders for the year
ended December 31, 1996, are incorporated in Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of stockholders to be held on April 24, 1997,
is incorporated in Part III hereof and made a part hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Philip Morris Companies Inc. is a holding company whose principal
wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods, Inc., and Miller Brewing Company, are engaged
in the manufacture and sale of various consumer products. A wholly-owned
subsidiary of the Company, Philip Morris Capital Corporation, engages in various
financing and investment activities. As used herein, unless the context
indicates otherwise, the term "Company" means Philip Morris Companies Inc. and
its subsidiaries. The Company is the largest consumer packaged goods company in
the world.*
Philip Morris Incorporated ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.," and its subsidiaries and affiliates are
engaged in the manufacture and sale of cigarettes. PM Inc. is the largest
cigarette company in the United States. Philip Morris International Inc.
("Philip Morris International") is a holding company whose subsidiaries and
affiliates and their licensees are engaged primarily in the manufacture and sale
of tobacco products (mainly cigarettes) internationally. A subsidiary of Philip
Morris International is the leading United States exporter of cigarettes.
MARLBORO, the principal cigarette brand of these companies, has been the world's
largest-selling cigarette brand since 1972. Certain subsidiaries and affiliates
of Philip Morris International manufacture and sell a wide variety of food
products in Latin America.
Kraft Foods, Inc. ("Kraft"), is the largest processor and marketer of retail
packaged foods in the United States. A wide variety of cheese, processed meat
products, coffee and grocery products are manufactured and marketed in the
United States and Canada by Kraft. Subsidiaries and affiliates of Kraft Foods
International, Inc. ("Kraft Foods International"), a subsidiary of Kraft,
manufacture and market coffee, confectionery, cheese, grocery and processed meat
products in Europe and the Asia/Pacific region.
Miller Brewing Company ("Miller") is the second largest brewing company in
the United States.
SOURCE OF FUNDS--DIVIDENDS
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
In 1996, the Company's significant industry segments were tobacco products
(principally cigarettes), food products, beer, and financial services and real
estate. Operating revenues, operating profit (together with a reconciliation to
operating income) and identifiable assets attributable to each such segment for
each of the last three years are set forth in Note 10 to the Company's
consolidated financial statements and are incorporated herein by reference to
the Company's annual report to stockholders for the year ended December 31, 1996
(the "1996 Annual Report").
In 1996, operating profit from tobacco products was approximately 67% of the
Company's total operating profit (up from 65% in 1995), with PM Inc. and Philip
Morris International contributing 34% and 33%, respectively (compared with 34%
and 31%, respectively, in 1995). Food products, beer, and
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* References to the Company's competitive ranking in its various businesses
are based on sales data or, in the case of cigarettes and beer, shipments,
unless otherwise indicated.
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financial services and real estate accounted for approximately 27%, 4% and 2%,
respectively, of the Company's total operating profit in 1996 (compared with
29%, 4% and 2%, respectively, in 1995).
(C) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
PM Inc. manufactures, markets and sells cigarettes in the United States
(including military sales). Subsidiaries and affiliates of Philip Morris
International and their licensees manufacture, market and sell tobacco products
outside the United States and export tobacco products from the United States.
DOMESTIC TOBACCO PRODUCTS
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments in the United States of 230.8 billion units in 1996 (an
increase of 4.1% from 1995), accounting for 47.8% of the cigarette industry's
total estimated shipments in the United States (an increase of 1.7 share points
from 1995). The industry's estimated cigarette shipments in the United States
increased by 0.4% in 1996, compared with 1995, due to two additional shipping
days in 1996 and distributor buying patterns. While PM Inc. cannot predict
future growth rates, it believes that, over the long term, the United States
industry's shipments will continue to decline in line with their historical
average decline of 1% to 2% per annum. The following table sets forth the
industry's estimated cigarette shipments in the United States, PM Inc.'s
shipments and its share of United States industry shipments:
<TABLE>
<CAPTION>
YEARS ENDED PM INC.
DECEMBER 31 INDUSTRY* PM INC. SHARE OF INDUSTRY*
- ----------------------------------------------------- ----------- ----------- ---------------------
<S> <C> <C> <C>
(IN BILLIONS OF UNITS)
(%)
1996................................................. 483.3 230.8 47.8
1995................................................. 481.1 221.8 46.1
1994................................................. 489.6 219.4 44.8
</TABLE>
PM Inc.'s major premium brands are MARLBORO, BENSON & HEDGES, MERIT,
VIRGINIA SLIMS and PARLIAMENT. Its principal discount brands are BASIC and
CAMBRIDGE. All of its brands are marketed to satisfy differing preferences of
adult smokers. PM Inc. has been the leading cigarette company in the United
States market since 1983.+ MARLBORO is the largest selling cigarette brand in
the United States, with shipments of 156.2 billion units in 1996 (up 7.8% from
1995), equating to 32.3% of the United States market (up from 30.1% in 1995).
In 1996, the premium and discount segments accounted for approximately 71.6%
and 28.4%, respectively, of domestic cigarette industry volume, versus
approximately 70% and 30%, respectively, in 1995, reflecting a continued shift
to the higher-margin premium segment, which began in the second half of 1993.
In 1996, PM Inc.'s share of the premium segment was 56.3%, an increase of
1.9 share points over 1995. Shipments of premium cigarettes accounted for 84.4%
of PM Inc.'s 1996 volume, up from 82.7% in 1995. In 1996, United States industry
shipments within the discount segment declined 4.9% from 1995 levels; PM Inc.'s
1996 shipments within this category declined 6.3%, resulting in a share of 26.2%
of the discount segment (down 0.4 share points from 1995).
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, market
share (based on shipments) or retail market share.
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* Source: Wheat, First Securities, Inc., publishers of The Maxwell Consumer
Report.
+ Source: The Maxwell Consumer Report (issued by Wheat, First Securities,
Inc.).
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INTERNATIONAL TOBACCO PRODUCTS
Philip Morris International's total cigarette shipments grew 11.3% in 1996,
to approximately 660 billion units, including approximately 17 billion units of
local Polish brands acquired in 1996 (see discussion below). Philip Morris
International's share of the world cigarette market (excluding the United
States) was approximately 13% in 1996, up from approximately 12% in 1995. Philip
Morris International estimates that world cigarette industry unit shipments
(excluding the United States) were approximately 5.1 trillion units in 1996,
which represents a compounded annual increase of approximately 1% per year over
the last five years. Philip Morris International estimates that the
American-style segment of the world market (excluding the United States), of
which it accounts for approximately 36%, has increased at a compounded annual
rate of more than 3% per year over the last five years. It also estimates that
the American-style segment constituted approximately 32% of the world cigarette
market (excluding the United States) in 1996, up from approximately 31% in 1995.
Unit sales of Philip Morris International's principal brand, MARLBORO, increased
9.2% in 1996 over 1995, to 302.2 billion units, nearly 6% of the world cigarette
market (excluding the United States).
Philip Morris International has a cigarette market share of at least
15%--and in a number of instances substantially more than 15%--in more than 40
markets, including Argentina, Australia, Belgium, the Canary Islands, the Czech
Republic, Finland, France, Germany, Hong Kong, Italy, Japan, the Netherlands,
the Philippines, Poland, Singapore, Spain, Switzerland and Turkey. Philip Morris
International's leading international brands are MARLBORO, L&M, PHILIP MORRIS,
BOND STREET, CHESTERFIELD, LARK, PARLIAMENT, MERIT and VIRGINIA SLIMS.
In 1996, Philip Morris International increased capacity and improved
productivity through various acquisitions and capital projects. During the year,
Philip Morris International acquired a controlling interest in Poland's largest
tobacco company, Zaklady Przemyslu Tytoniowego w Krakowie S.A. Also in 1996,
Philip Morris International began exports for selected Asian markets from its
newly completed leaf-processing facility in Malaysia, and expanded its
infrastructure by investing in manufacturing and distribution facilities in
Europe and by opening additional sales and representative offices in Eastern
Europe. In January 1997, Philip Morris International acquired a controlling
interest in Tabaqueira-Empresa Industrial de Tabacos, S.A., Portugal's formerly
state-owned tobacco company.
TAXES, LEGISLATION, REGULATION AND OTHER MATTERS REGARDING TOBACCO AND SMOKING
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect volume,
operating revenues and operating profit of PM Inc., Philip Morris International
and the Company. These issues include tax increases, health concerns relating to
the use of tobacco products and exposure to environmental tobacco smoke ("ETS"),
governmental regulation, privately imposed smoking restrictions, governmental
and grand jury investigations, decreasing social acceptance of smoking,
increased pressure from anti-smoking groups and unfavorable press reports.
Cigarettes are subject to substantial excise taxes in the United States and
to similar taxes in most foreign markets. The United States federal excise tax
on cigarettes, last increased in 1993, is $12 per 1,000 cigarettes ($0.24 per
pack of 20 cigarettes). Recently, several measures have been proposed to
increase the federal excise tax on cigarettes. 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 $1.28 per pack.
In the opinion of PM Inc. and Philip Morris International, 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 Philip Morris
International, and might cause shifts from the premium segment to the discount
segment.
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Reports with respect to the alleged harmful physical effects of cigarette
smoking have been publicized for many years, and the sale, promotion and use of
cigarettes continue to be subject to increasing governmental regulation. Since
1964, the Surgeon General of the United States and the Secretary of Health and
Human Services have released a number of reports purporting to link cigarette
smoking with a broad range of health hazards, including various types of cancer,
coronary heart disease and chronic lung disease, and recommending various
governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992
and 1994 reports focus upon the purported "addictive" nature of cigarettes, the
purported effects of smoking cessation, the decrease in smoking in the United
States and the economic and regulatory aspects of smoking in the Western
Hemisphere, and cigarette smoking by adolescents, particularly the purported
"addictive" nature of cigarette smoking in adolescence.
In 1996, the journal SCIENCE reported the results of a study that suggest
that a metabolite of a chemical found in cigarette smoke may be involved in a
cellular mechanism leading to lung cancer. The Company believes that the study
merits careful review.
The Comprehensive Smoking Education Act (the "Smoking Education Act"),
enacted in 1984, requires cigarette manufacturers and importers to include the
following warning statements in rotating sequence on cigarette packages and in
advertisements: "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, And May Complicate Pregnancy"; "SURGEON GENERAL'S WARNING:
Quitting Smoking Now Greatly Reduces Serious Risks to Your Health"; "SURGEON
GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal Injury,
Premature Birth, And Low Birth Weight"; and "SURGEON GENERAL'S WARNING:
Cigarette Smoke Contains Carbon Monoxide." The Smoking Education Act also covers
the size and format of warnings on cigarette packages and in cigarette
advertising, and prescribes a modified version of the warnings for outdoor
billboard advertisements. In addition to the warning statements, pursuant to an
agreement sanctioned by the Federal Trade Commission (the "FTC"), cigarette
advertising in the United States must disclose the average "tar" and nicotine
yields of the advertised brand or variety. The FTC is considering proposing
changes to the existing method of measuring and disclosing "tar" and nicotine
yields.
Cigarette manufacturers and importers are also required to provide annually
to the Secretary of Health and Human Services a list of ingredients added to
tobacco in the manufacture of cigarettes, and the Secretary is directed to
report to Congress concerning the health effects, if any, of such ingredients.
Most of the cigarettes sold by Philip Morris International are sold in
countries where warning statement requirements for cigarette packages have been
adopted. In markets where such statements are not legally required, Philip
Morris International's policy is to place the United States Surgeon General's
warnings on all cigarette packages.
Studies with respect to the alleged health risk to nonsmokers of ETS have
received significant publicity. In 1986, the Surgeon General of the United
States and the National Academy of Sciences reported that nonsmokers were at
increased risk of lung cancer and respiratory illness due to ETS. In January
1993, the United States Environmental Protection Agency (the "EPA") issued a
report concluding, among other things, that ETS is a human lung carcinogen and
that ETS increases certain health risks for young children. In June 1993, PM
Inc. joined five other representatives of the tobacco manufacturing and related
industries in a lawsuit against the EPA, seeking a declaration that the EPA does
not have the authority to regulate ETS, and that, in view of the available
scientific evidence and the EPA's failure to follow its own guidelines in making
the determination, the EPA's final risk assessment be declared arbitrary and
capricious and ordered withdrawn. The outcome of this lawsuit cannot be
predicted. The EPA report, together with adverse publicity on ETS, have resulted
in the enactment of legislation and privately imposed limitations that restrict
or ban cigarette smoking in certain public places and some places of employment.
It has been reported that the International Agency for Research on Cancer of the
World Health Organization is conducting research on ETS that may be published
during 1997.
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Enactments by regulatory agencies and other governmental authorities,
together with private initiatives, have restricted or prohibited smoking aboard
certain common carriers, including domestic and certain international commercial
airline flights, in certain public places and in some places of employment.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could, as a practical
matter, ultimately ban smoking in the workplace. Hearings on this proposed rule
were held from September 1994 through March 1995. The period for post-hearing
submissions on the proposed rule ended in February 1996. OSHA has not yet issued
either a final rule or a proposed revised rule.
Television and radio advertising of cigarettes is prohibited in the United
States, and prohibited or restricted in many other countries. In June 1995, PM
Inc. entered into a consent decree with the Department of Justice, pursuant to
which it agreed to reposition its brand advertising at professional football,
baseball, basketball and hockey arenas so as to minimize incidental television
coverage.
In June 1992, the Alcohol, Drug Abuse and Mental Health Act was
reauthorized. This act requires states to adopt a minimum age of at least 18 for
purchases of tobacco products and to establish a system to monitor, report and
reduce the illegal sale of tobacco products to minors in order to continue
receiving federal funding for mental health and drug abuse programs. In January
1996, regulations implementing this legislation were announced by the Department
of Health and Human Services.
In June 1995, PM Inc. announced that it 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.
In May 1996, PM Inc. proposed that comprehensive federal legislation be
enacted to respond to concerns by the President and others regarding the use of
tobacco products by minors. The proposed legislation would establish a federal
minimum age of 18 for the sale of tobacco products, and would ban, restrict or
otherwise limit the following, among other things: cigarette vending machines;
tobacco product brand names, logos, characters and selling messages displayed on
non-tobacco-related items such as hats or T-shirts; tobacco product sponsorship
of events with significant youth audiences; outdoor advertisements for tobacco
products within 1,000 feet of any playground or elementary or secondary school,
including outward-facing window display advertising; advertisements for tobacco
products in or on trains, buses, subways and taxis, and in terminals, stations,
platforms or stops for these vehicles; and advertisements for tobacco products
in youth-oriented publications. The proposed legislation would restrict youth
access to tobacco products by calling for a ban on the sale of single cigarettes
or packs with fewer than 20 cigarettes; requiring all tobacco sales to be
face-to-face where proof of age can be verified for anyone appearing under age
21; mandating that tobacco products in retail establishments be displayed within
the control or line of sight of an employee; banning sampling except in
locations where minors are denied access; and requiring retailers and their
employees to certify that they understand and will comply with minimum-age laws.
To ensure compliance, the proposed legislation calls for penalties of up to
$50,000 for violations by a tobacco manufacturer. The proposed legislation also
calls for a $250 million contribution from the tobacco industry (based on market
share) over a five-year period to assist the government and others in
implementation and enforcement. The proposed legislation, which as of yet has
not been introduced into either house of Congress, would preclude the United
States Food and Drug Administration (the "FDA") from regulating tobacco
products, except with respect to brands for which a manufacturer makes an
express health claim to consumers.
In August 1996, the FDA issued final regulations purportedly designed to
reduce youth smoking. In the regulations, the FDA purports to exercise
jurisdiction over cigarettes as a "medical device" (a "nicotine
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delivery system") 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 are 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 adversely
affect the volume, operating revenues and operating profit of PM Inc. in amounts
that cannot be determined. PM Inc. and other domestic cigarette manufacturers
and an advertising firm have sued the FDA, seeking a judicial declaration that
the FDA has no authority to regulate cigarettes and asking the court to
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.
A hearing on the plaintiffs' motion for summary judgment was held on February
10, 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 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 Massachusetts Department of Public Health. PM Inc. believes
that enforcement of the statute, which is scheduled to take effect on July 1,
1997, could require the disclosure 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 (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. The
plaintiffs intend to appeal that decision, and will continue to assert their
other constitutional claims. The ultimate outcome of this lawsuit cannot be
predicted. The enactment of this legislation has encouraged, and continues to
encourage, efforts to enact similar legislation in other states. The Department
of Public Health has proposed regulations to implement the Massachusetts
legislation, and has invited public comment on the proposed regulations. PM Inc.
and three other domestic cigarette manufacturers filed comments objecting to the
proposed regulations. Final regulations have not been issued.
For several years, Congress has provided funds for the development of test
methodologies and standards aimed at measuring the propensity of cigarettes to
ignite upholstered furniture or mattresses. The Company cannot predict whether
these efforts will result in further legislation or regulation.
In recent years, various members of Congress have introduced
legislation--some of which has been the subject of hearings or floor
debate--that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, establish anti-smoking educational campaigns or
anti-smoking programs, or provide additional funding for governmental
anti-smoking activities, further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising, provide
that the Labeling Act and the Smoking Education Act could not be used as a
defense against liability under state statutory or common law, allow state and
local governments to restrict the sale and distribution of cigarettes, and
further restrict certain advertising of cigarettes and eliminate or reduce the
tax deductibility of tobacco advertising.
Some foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to require ingredient disclosure, 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.
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It is not possible to determine the outcome of the FDA regulatory initiative
or the related litigation, or to predict what, if any, other foreign or domestic
governmental legislation or regulations will be adopted relating to the
manufacturing, advertising, sale or use of cigarettes, or to the tobacco
industry generally. However, if any or all of the foregoing were to be
implemented, the volume, operating revenues and operating profit of PM Inc.,
Philip Morris International and the Company could be adversely affected, in
amounts that cannot be determined.
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:
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 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 consolidated with the United States Department of Justice
investigation discussed immediately above.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
PM Inc. has been informed that previously reported investigations by the
United States Attorney for the Eastern District of Virginia relating to Healthy
Buildings International, Inc., and by the United States Department of Justice
relating to the possibility of alleged joint activity to restrain competition in
the manufacture and sale of cigarettes, have been closed.
In July 1996, an affiliate of Philip Morris International received a request
for information from the Competition Directorate of the European Commission
concerning the relationship of certain affiliates of Philip Morris International
with the Italian state cigarette monopoly. Philip Morris International and its
affiliates believe that they have acted in accordance with European Community
law.
SMOKING AND HEALTH LITIGATION
Note 13 to the Company's consolidated financial statements ("Note 13"),
incorporated herein by reference to the Company's 1996 Annual Report, describes
certain litigation pending against the Company and its subsidiaries and related
entities. Item 3 herein describes certain subsequent developments in such
litigation. Further reference is made to such Note 13 and Item 3.
During 1996, press reports discussed proposals to forge a comprehensive
legislative solution to smoking and health claims against the tobacco industry.
The Company believes that any such legislation would involve significant, and
perhaps insurmountable, difficulties in reconciling the views of many competing
interests. However, the Company will explore all reasonable measures that may be
in the best interests of its shareholders and, toward that end, may enter into
discussions with appropriate parties. Were that to happen, the Company would not
contemplate making any further comment as to the existence or progress of any
such discussions. In any event, the Company continues to believe that it has a
number of valid defenses to the smoking and health cases pending against it and
will continue to defend all cases vigorously.
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DISTRIBUTION, COMPETITION AND RAW MATERIALS
PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, vending
machine operators and the armed services. Subsidiaries and affiliates of Philip
Morris International and their licensees market cigarettes and other tobacco
products worldwide, directly or through export sales organizations and other
entities with which they have contractual arrangements.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of competition. Promotional
activities include, in certain instances, allowances, the use of incentive
items, price reductions and other discounts. The tobacco products of the
Company's subsidiaries, affiliates and their licensees are advertised and
promoted through various media, although television and radio advertising of
cigarettes is prohibited in the United States and is prohibited or restricted in
many other countries.
PM Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domestic burley and flue-cured leaf tobaccos of various
grades and types each year, primarily at domestic auction. In addition, oriental
tobacco and certain other tobaccos are purchased outside the United States. The
tobacco is then graded, cleaned, stemmed and redried prior to its storage for
aging up to three years. Large quantities of leaf tobacco inventory are
maintained to support cigarette manufacturing requirements. Tobacco is an
agricultural commodity subject to United States government controls, including
the tobacco price support (subject to Congressional review) and production
adjustment programs administered by the United States Department of Agriculture
(the "USDA"), either of which can substantially affect market prices. PM Inc.
and Philip Morris International believe there is an adequate supply of tobacco
in the world markets to satisfy their current production requirements.
FOOD PRODUCTS
During 1995, 1996 and the first quarter of 1997, Kraft sold several domestic
and international food businesses, including its bakery business, its North
American margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses, its bagel business, its sugar confectionery business in
Scandinavia, its margarine businesses in the U.K. and Italy, and several small
international food businesses. The sales of these businesses have not had and
are not expected to have a material effect on the Company's results of
operations and have improved the profit margins of its food operations.
NORTH AMERICA
Kraft is the largest packaged food company in North America. Kraft's
principal products include cheese and cheese products, processed meat and
poultry products, coffee, ready-to-eat cereals, salad and other dressings,
powdered and ready-to-drink beverages, frozen pizza, packaged and refrigerated
desserts and snacks, packaged pasta dinners, lunch combinations, barbecue
sauces, frozen toppings and other cultured dairy and grocery products. Its
principal brands include KRAFT, VELVEETA and CRACKER BARREL cheese and cheese
products, PHILADELPHIA BRAND cream cheese, CHEEZ WHIZ cheese sauce, OSCAR MAYER
luncheon meats, hot dogs, bacon, ham and other meat products, LOUIS RICH
luncheon meats, poultry franks, turkey bacon and other poultry products,
LUNCHABLES lunch combinations, CLAUSSEN pickles, MAXWELL HOUSE, YUBAN and NABOB
coffees, GENERAL FOODS INTERNATIONAL COFFEES flavored coffees, POST ready-to-eat
cereals, MIRACLE WHIP salad dressing, KRAFT spoonable and pourable salad
dressings, KOOL-AID, TANG, CAPRI SUN, CRYSTAL LIGHT and COUNTRY TIME powdered
and ready-to-drink beverages, TOMBSTONE and JACK'S frozen pizzas and DIGIORNO
pastas, sauces, cheeses and frozen pizzas, JELL-O desserts, HANDI-SNACKS snacks,
KRAFT MACARONI & CHEESE dinners, KRAFT and BULL'S-EYE barbecue sauces, COOL WHIP
whipped toppings, STOVE TOP stuffing mix, MINUTE rice, LOG CABIN syrups, SHAKE
'N BAKE coatings, LIGHT N' LIVELY cultured dairy products, and TACO BELL grocery
products (acquired by Kraft in August 1996).
8
<PAGE>
INTERNATIONAL
Subsidiaries and affiliates of Kraft Foods International manufacture and
market a wide variety of coffee, confectionery, cheese and grocery and processed
meat products in Europe, the Middle East, Africa and the Asia/Pacific region. In
Latin America, subsidiaries and affiliates of Philip Morris International
manufacture and market a wide variety of food products, including ice cream,
various powdered soft drinks and a number of the other products sold by Kraft.
In 1996, approximately 82% of operating revenues for the international foods
businesses were derived from sales made in Europe. International brands include
a wide variety of the products sold by Kraft in North America, as well as JACOBS
CAFE, GEVALIA, CARTE NOIRE, JACQUES VABRE, KAFFE HAG, GRAND' MERE, KENCO,
SAIMAZA and SPLENDID coffees, MILKA, SUCHARD, KIBON, COTE D'OR, MARABOU,
TOBLERONE, FREIA, TERRY'S, DAIM and CALLARD & BOWSER confectionery products,
HOLLYWOOD chewing gum, DAIRYLEA, EL CASERIO and INVERNIZZI cheeses, MIRACOLI
pasta dinners and sauces, VEGEMITE spread, ESTRELLA and MAARUD snacks and
SIMMENTHAL meats. In 1996, Philip Morris International acquired nearly all of
the remaining voting shares of Industrias de Chocolate Lacta S.A., the leading
confectionery company in Brazil.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Kraft's products in North America are generally sold to supermarket chains,
wholesalers, club stores, mass merchandisers, distributors, individual stores
and other retail food outlets. Products are distributed through distribution
centers, satellite warehouses, company-operated and public cold-storage
facilities, depots and other facilities. Selling efforts are assisted by
national and regional advertising on television and radio and in magazines and
newspapers, as well as by sales promotions, product displays, trade incentives,
informative material offered to customers and other promotional activities.
Subsidiaries and affiliates of Kraft Foods International and Philip Morris
International sell their food products primarily in the same manner and also
through sales offices and agents. Advertising is tailored by product and country
to reach targeted audiences.
Kraft is subject to highly competitive conditions in all aspects of its
business. Competitors include large national and international companies and
numerous local and regional companies. Its food products also compete with
generic products and private label products of food retailers, wholesalers and
cooperatives. Kraft competes primarily on the basis of product quality, service,
marketing, advertising and price.
Kraft is a major purchaser of milk, cheese, green coffee beans, poultry,
meat cuts, wheat, cocoa, hazelnuts, vegetable oil, fruits and berries, and sugar
and other sweeteners. Kraft continuously monitors worldwide supply and cost
trends of these commodities to enable it to take appropriate action to obtain
ingredients needed for production.
Kraft purchases all of its milk requirements and a substantial portion of
its cheddar cheese requirements from independent sources, principally from
cooperatives and individual producers. The prices for United States milk and
other dairy product purchases are substantially influenced by government
programs, as well as market supply and demand.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products.
The purchase price of poultry and meat cuts is the major factor in the cost
of Kraft's processed meat products. Poultry and meat prices are cyclical and are
affected by market supply and demand. Meats for OSCAR MAYER processed products
are provided primarily by full-lot quantity purchases.
9
<PAGE>
Kraft is also a major user of packaging materials purchased from many
suppliers.
The prices paid for raw materials used in food products generally reflect
external factors such as weather conditions, commodity market activities,
currency fluctuations, and the effects of governmental agricultural programs.
Although the prices of the principal raw materials can be expected to fluctuate
as a result of government actions and/or market forces (which would directly
affect the cost of products and value of inventories), Kraft and Philip Morris
International believe such raw materials to be generally available from numerous
sources and in adequate supply.
REGULATION
Almost all of Kraft's United States food products (and packaging materials
therefor) are subject to regulations administered by the FDA or, with respect to
products containing meat and poultry, the USDA. Among other things, these
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish ingredients and/or manufacturing procedures for certain
standard foods, establish standards of identity for food, determine the safety
of food substances, and establish labeling standards and nutrition labeling
requirements for food products.
In addition, various states regulate the business of Kraft's United States
operating units by licensing dairy plants, enforcing federal and state standards
of identity for food, grading food products, inspecting plants, regulating
certain trade practices in connection with the sale of dairy products and
imposing their own labeling requirements on food products.
Many of the food commodities on which Kraft's United States businesses rely
are subject to governmental agricultural programs. These programs have
substantial effects on prices and supplies and are subject to Congressional
review.
Almost all of the activities of the Company's food operations outside of the
United States are subject to regulations similar to those applicable to Kraft's
United States businesses and are subject to local and national and, in some
cases, international (such as the European Union) regulatory provisions. The
rules and regulations relate to labeling, packaging, food content, pricing,
marketing and advertising, and related areas.
BEER
PRODUCTS
Miller's brands include MILLER LITE, MILLER LITE ICE, MILLER GENUINE DRAFT,
MILLER GENUINE DRAFT LIGHT, MILLER BEER and ICEHOUSE in the premium segment; the
MILLER HIGH LIFE family, including MILLER HIGH LIFE, MILLER HIGH LIFE LIGHT and
MILLER HIGH LIFE ICE, and RED DOG in the near-premium segment; LOWENBRAU, brewed
and sold in the United States under license from Lowenbrau Munchen AG in the
above-premium segment; MEISTER BRAU, MILWAUKEE'S BEST and MAGNUM MALT LIQUOR in
the below-premium segment; and SHARP'S non-alcohol brew. Competing in the
specialty segment are the LEINENKUGEL, CELIS and SHIPYARD brands. Miller also
owns and operates Molson Breweries U.S.A. Inc., the second largest beer importer
in the United States, whose brands include MOLSON, FOSTER'S and ASAHI. Shipment
volume for Miller, including imports, exports and non-alcohol brew, decreased
2.7% in 1996, compared with 1995, while the U.S. industry was up 1.8%. Despite
higher shipments of MILLER LITE in 1996, shipments of premium-priced brands
decreased, as did shipments of budget-priced brands. Lower volume was due to
softness in most of Miller's brands and intense competition. Miller's share of
the U.S. industry (based on shipments) was 21.6%, down 1.0 share point from
1995. Despite lower overall volume, Miller's premium shipments increased to
82.5% from 81.8% of Miller's total shipments.
10
<PAGE>
The following table sets forth, based on shipments, the U.S. industry's
sales of beer and brewed non-alcohol beverages, as estimated by Miller, Miller's
unit sales and its estimated share of industry sales:
<TABLE>
<CAPTION>
YEARS ENDED MILLER'S
DECEMBER 31 INDUSTRY MILLER SHARE OF INDUSTRY
- ------------------------------------------- --------- --------- -------------------
<S> <C> <C> <C>
(IN THOUSANDS OF
BARRELS) (%)
1996....................................... 202,332 43,799 21.6
1995....................................... 198,838 45,006 22.6
1994....................................... 199,572 45,243 22.7
</TABLE>
During 1996, Miller took a number of actions intended to restore growth,
streamline its organization and reduce costs, including a workforce reduction.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Beer products are distributed primarily through independent beer
wholesalers. The United States malt beverage industry is highly competitive,
with the principal methods of competition being product quality, price,
distribution, marketing and advertising. Miller engages in a wide variety of
advertising and sales promotion activities. Barley, hops, corn and water
represent the principal ingredients used in manufacturing Miller's beer
products, and are generally available in the market. The production process,
which includes fermentation and aging periods, is conducted throughout the year,
and at any one time Miller has on hand only a small quantity of finished
products. Containers (bottles, cans and kegs) for beer products are purchased
from various suppliers.
REGULATION
The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic beverages
manufactured for sale in the United States to include the following warning
statement on containers: "GOVERNMENT WARNING: (1) According to the Surgeon
General, women should not drink alcoholic beverages during pregnancy because of
the risk of birth defects; (2) Consumption of alcoholic beverages impairs your
ability to drive a car or operate machinery and may cause health problems." The
statute empowers the Bureau of Alcohol, Tobacco and Firearms to regulate the
size and format of the warning.
The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller, increases
in excise taxes have had, and could continue to have, an adverse effect on
shipments.
Advertising of alcoholic beverages, including beer, has come under
increasing scrutiny by governmental agencies, and others. The FTC's Division of
Advertising Practices is conducting an investigation of advertising of alcoholic
beverages. As part of its investigation, the Division of Advertising Practices
has issued to Miller a voluntary request for certain information and materials
relating to Miller's advertising. Miller is cooperating with this request. While
the outcome of the investigation cannot be predicted, Miller believes it has
acted lawfully.
FINANCIAL SERVICES AND REAL ESTATE
Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions, third-party financial
instruments, and engages in various financing activities for customers and
suppliers of the Company's subsidiaries. Mission Viejo Company, a wholly-owned
subsidiary of PMCC, is engaged in land planning, development and sales
activities in Southern California and in the Denver, Colorado, area. Total
assets of PMCC increased to $5.9 billion at December 31, 1996, compared with
$5.6 billion at December 31, 1995, reflecting an increase in net finance assets.
11
<PAGE>
OTHER MATTERS
CUSTOMERS
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
EMPLOYEES
At December 31, 1996, the Company employed approximately 154,000 people
worldwide.
TRADEMARKS
Trademarks are of material importance to all three of the Company's consumer
products businesses and are protected by registration or otherwise in the United
States and most other markets where the related products are sold.
ENVIRONMENTAL REGULATION
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations concerning the discharge of materials into the
environment, or otherwise related to environmental protection, including the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and Liability Act,
which imposes joint and several liability on each responsible party (commonly
known as "Superfund"). In 1996, subsidiaries (or former subsidiaries) of the
Company were involved in approximately 197 matters subjecting them to potential
remediation costs under Superfund or otherwise. The Company and its subsidiaries
expect to continue to make capital and other expenditures in connection with
environmental laws and regulations. Although it is not possible to predict
precise levels of environmental-related expenditures, compliance with such laws
and regulations, including the payment of any remediation costs and the making
of such expenditures, have not had and are not expected to have a material
adverse effect on the Company's results of operations, capital expenditures or
financial position.
SHARE REPURCHASE PROGRAM
On February 26, 1997, the Company announced a new program to spend up to $8
billion to repurchase shares of its Common Stock in open market transactions
over three years. This new program will commence following the anticipated
completion in the next few weeks of the Company's current three-year $6 billion
repurchase program. Under that program, through March 6, 1997, the Company
repurchased approximately 67 million shares of its Common Stock.
COMMON STOCK SPLIT
On February 26, 1997, the Company announced a three-for-one split of its
Common Stock, to be 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.
Effective at the close of business on March 17, 1997, the par value of the
Company's Common Stock will be changed from $1.00 to $0.33 1/3, and authorized
shares of Common Stock will be increased from 4 billion to 12 billion shares.
After giving effect to the stock split, earnings and dividends per share amounts
reported in the Company's consolidated financial statements, incorporated herein
by reference to the Company's 1996 Annual Report, would be as follows:
12
<PAGE>
<TABLE>
<CAPTION>
PER SHARE DATA: 1996 1995 1994
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Earnings before cumulative effect of accounting changes............................... $ 2.56 $ 2.17 $ 1.82
Cumulative effect of changes in method of accounting.................................. -- (.01) --
--------- --------- ---------
Net earnings.......................................................................... $ 2.56 $ 2.16 $ 1.82
--------- --------- ---------
--------- --------- ---------
Dividends declared.................................................................... $ 1.467 $ 1.217 $ 1.01
--------- --------- ---------
--------- --------- ---------
</TABLE>
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The tobacco industry continues to be subject worldwide to health concerns
relating to the use of tobacco products and exposure to ETS, legislation,
including tax increases, governmental regulation, privately imposed smoking
restrictions, governmental and grand jury investigations, and litigation. Each
of the Company's operating subsidiaries is subject to intense competition,
changes in consumer preferences, the effects of changing prices for its raw
materials and local economic conditions. The performance of each of Philip
Morris International and Kraft Foods International is affected by foreign
economies and currency movements. Developments in any of these areas, which are
more fully described elsewhere in Part I hereof and in Management's Discussion
and Analysis of Financial Condition and Results of Operations ("MD&A") on pages
21-29 of the Company's 1996 Annual Report, each of which is incorporated into
this section by reference, could cause the Company's results to differ
materially from results that have been or may be projected by or on behalf of
the Company. The Company cautions that the foregoing list of important factors
is not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of operating revenues, operating profit and identifiable assets
attributable to each of the Company's geographic segments and the amount of
export sales from the United States for each of the last three fiscal years are
set forth in Note 10 to the Company's consolidated financial statements,
incorporated herein by reference to the Company's 1996 Annual Report.
Subsidiaries of Philip Morris International, Kraft and Miller export tobacco
and tobacco-related products, coffee products, grocery products, cheese,
processed meats and beer. In 1996, the value of all exports from the United
States by these subsidiaries amounted to approximately $6.5 billion.
ITEM 2. DESCRIPTION OF PROPERTY.
TOBACCO PRODUCTS
PM Inc. owns nine tobacco manufacturing and processing facilities--six in
the Richmond, Virginia, area, two in Louisville, Kentucky, and one in Cabarrus
County, North Carolina. Subsidiaries and affiliates of Philip Morris
International own, lease or have an interest in 47 cigarette or component
manufacturing facilities in 28 countries outside the United States, including
cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands, and in
Berlin, Germany.
13
<PAGE>
FOOD PRODUCTS
The Company's subsidiaries have 60 manufacturing and processing facilities
and 229 distribution centers and depots throughout the United States, as well as
113 foreign manufacturing and processing facilities in 34 countries, and various
distribution and other facilities outside the United States. All significant
plants and properties used for production of food products are owned, although
the majority of the domestic distribution centers and depots are leased.
BEER
Miller currently owns and operates eight breweries, located in Milwaukee,
Wisconsin (two); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia;
Irwindale, California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller owns
a majority interest in the Celis Brewery in Austin, Texas, and the Shipyard
Brewery in Portland, Maine. Miller also owns a hops-processing facility in
Wisconsin, and owns or leases warehouses in several locations.
GENERAL
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs. In the fourth quarter of 1993, the Company provided for the
costs of restructuring its worldwide operations. The charge related primarily to
the downsizing or closure of approximately 40 manufacturing and other
facilities. Write-downs of such facilities included in the restructuring charge
were $429 million, of which $141 million, $211 million and $77 million related
to tobacco, food and beer facilities, respectively. The 1993 restructuring and
its impact on the Company's financial statements are described in the MD&A,
incorporated herein by reference to the Company's 1996 Annual Report.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to Note 13, incorporated herein by reference to the
Company's 1996 Annual Report, for a description of certain pending legal
proceedings. The following summarizes recent developments with respect to such
litigation.
In January 1997, defendants in the BROIN case, discussed in Note 13, filed a
motion to dismiss on the grounds that the suit is preempted by the Labeling Act.
In February 1997, the judge in the LACEY case, discussed in Note 13, entered
a written order confirming the court's oral decision to grant defendants' motion
for summary judgment on the grounds that the suit was preempted by the Labeling
Act.
In February 1997, the trial court in the CASTANO case, discussed in Note 13,
denied defendants' motions for summary judgment as to the individual claims
asserted by the two remaining named plaintiffs in the case.
In February 1997, plaintiffs in the SCOTT case, discussed in Note 13, filed
briefs that seek to change the scope of this purported class action to include
not only individuals with claims relating to "nicotine dependence" but also
those with claims of physical injury.
In February 1997, plaintiffs in the MCGINTY case, discussed in Note 13,
filed a class certification motion on behalf of all current residents of
Arkansas who were smokers as of November 4, 1996, and who began smoking at or
before age 19.
14
<PAGE>
In January 1997, the court in the HARRIS PRO SE case, discussed in Note 13,
dismissed PM Inc. and the Company.
In January 1997, a purported class action was filed in West Virginia state
court against United States cigarette manufacturers and others, including the
Company, on behalf of all "nicotine dependent" residents of West Virginia, their
estates and families. Defendants have removed this case to federal court.
MCCUNE, ET AL., V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT OF WEST VIRGINIA, CASE NO. 97-C-00204.
In February 1997, a purported class action was filed in Hawaii state court
against United States cigarette manufacturers and others, including the Company,
on behalf of citizens of Hawaii who have purchased and smoked cigarettes
manufactured by defendant tobacco companies and all persons who have claims
because of their personal relationship with those who purchased and smoked such
cigarettes. Defendants have removed this case to federal court. PETERSON, ET
AL., V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES DISTRICT
COURT, DISTRICT OF HAWAII, CASE NO. 97-00233-HG.
In February 1997, a purported class action was filed in Kansas state court
against United States cigarette manufacturers and others, including the Company,
on behalf of citizens of Kansas who have purchased and smoked cigarettes
manufactured by defendant tobacco companies and all persons who have claims
because of their personal relationship with those who purchased and smoked such
cigarettes. Defendants have removed this case to federal court. EMIG, ET AL., V.
THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES DISTRICT COURT,
DISTRICT OF KANSAS AT WICHITA, CASE NO. 97-1121-MLB.
In February 1997, a purported class action was filed in Oklahoma state court
against United States cigarette manufacturers and others, including the Company,
on behalf of citizens of Oklahoma who have purchased and smoked cigarettes
manufactured by defendant tobacco companies and those individuals who have
claims that derive from the individuals who purchased and smoked such
cigarettes. Defendants have removed this case to federal court. WALLS, ET AL.,
V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES DISTRICT COURT,
NORTHERN DISTRICT OF OKLAHOMA, CASE NO. 97-CIV-0218.
In February 1997, the court in the FLORIDA health care cost recovery action,
discussed in Note 13, granted plaintiffs' motion to strike all of defendants'
affirmative defenses to the counts brought under Florida's Medicaid recovery
statute. In response to defendants' motion for reconsideration, the court
permitted certain of the affirmative defenses to be asserted. The court also
ruled that defendants are entitled to the names of the individual Medicaid
recipients whose medical expenses form the basis of the State's damages and that
defendants may depose and obtain the medical records of twenty-five recipients
of defendants' choice.
In February 1997, the court in the WEST VIRGINIA health care cost recovery
action, discussed in Note 13, granted defendants' motion to dismiss the State's
common law and equitable claims on the grounds that the State did not have a
direct cause of action against defendants on these claims.
In February 1997, plaintiffs in the TEXAS health care cost recovery action,
discussed in Note 13, filed a motion seeking to prevent defendants from
asserting a "set off" defense based on the excise taxes that the State collects
from the sale of tobacco products.
In February 1997, certain defendants, including PM Inc., in the LOUISIANA
health care cost recovery action, discussed in Note 13, appealed the trial
court's ruling that the Attorney General of Louisiana had procedural capacity to
bring this action.
In February 1997, the court in the SAN FRANCISCO health care cost recovery
action, discussed in Note 13, granted defendants' motion to dismiss the suit,
with leave to file an amended complaint.
15
<PAGE>
In February 1997, defendants in the WASHINGTON health care cost recovery
action, discussed in Note 13, filed a motion to dismiss claims of special duty
and unjust enrichment and a claim for disgorgement of profits.
In March 1997, defendants in the CONNECTICUT health care cost recovery
action, discussed in Note 13, filed a motion seeking to dismiss the complaint on
various grounds.
In February 1997, defendants in the UTAH health care cost recovery action,
discussed in Note 13, filed a motion to dismiss the complaint on the grounds
that the State's exclusive remedy is subrogation.
In February 1997, the court in the declaratory judgment action filed by
plaintiff tobacco companies against the State of Utah, discussed in Note 13,
denied plaintiffs' motion for partial summary judgment challenging the ability
of the State to prosecute a health care cost recovery action on a contingent fee
basis.
In February 1997, defendants in the LOS ANGELES health care cost recovery
action, discussed in Note 13, moved to dismiss plaintiffs' misrepresentation and
breach of warranty claims.
In February 1997, defendants in the MICHIGAN health care cost recovery
action, discussed in Note 13, filed motions to dismiss the complaint on the
grounds that plaintiff's exclusive remedy is subrogation and in response to
plaintiff's motion attacking certain affirmative defenses.
In March 1997, the court dismissed the action, discussed in Note 13, brought
by plaintiff tobacco companies challenging the right of the New Jersey Attorney
General to bring a health care cost recovery action and to prosecute such a case
on a contingent fee basis.
In February 1997, defendants in the NEW YORK CITY health care cost recovery
action, discussed in Note 13, removed the case to federal court.
In January 1997, the State of New York filed a health care cost recovery
action in New York State court. Defendants have removed this action to federal
court. STATE OF NEW YORK AND DENNIS C. VACCO, ATTORNEY GENERAL OF THE STATE OF
NEW YORK V. PHILIP MORRIS INC., ET AL., UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK, CASE NO. 97-CIV-0794 (LMM).
In February 1997, the State of Hawaii filed a health care cost recovery
action in Hawaii state court. STATE OF HAWAII V. BROWN & WILLIAMSON TOBACCO
CORPORATION AS SUCCESSOR BY MERGER TO THE AMERICAN TOBACCO COMPANY, ET AL.,
FIRST CIRCUIT COURT, HONOLULU, HAWAII, CASE NO. 97-0441-01.
In February 1997, the State of Wisconsin filed a health care cost recovery
action in Wisconsin state court. STATE OF WISCONSIN V. PHILIP MORRIS
INCORPORATED, ET AL., CIRCUIT COURT, DANE COUNTY, WISCONSIN, CASE NO. 30704.
In February 1997, the State of Indiana filed a health care cost recovery
action in Indiana state court. STATE OF INDIANA V. PHILIP MORRIS INCORPORATED,
ET AL., MARION COUNTY SUPERIOR COURT, INDIANA, CASE NO. 49D07-9702-CT-0236.
As reported in Note 13, during 1996, tax assessments alleging the
underpayment of certain Italian taxes were asserted against affiliates of the
Company. In February 1997, the Italian tax authorities withdrew assessments
totaling $104.5 million, leaving total outstanding assessments of $693.9
million. The Company anticipates that further substantial tax assessments may be
claimed. The Company and its
16
<PAGE>
affiliates believe they have complied with applicable Italian tax laws and
intend to vigorously contest the assessments.
------------------------
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. All such cases
are, and will continue to be, vigorously defended. It is not possible to predict
the outcome of this litigation. Litigation is subject to many uncertainties, and
it is possible that some of these actions could be decided unfavorably. An
unfavorable outcome of a pending smoking and health case, such as the CARTER
case mentioned in Note 13, could encourage the commencement of additional
similar litigation. There have also been a number of adverse legislative,
regulatory, political and other developments concerning cigarette smoking and
the tobacco industry. These developments generally receive widespread media
attention. The Company is not able to evaluate the effect of these developing
matters on pending litigation and the possible commencement of additional
litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of all pending litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation. Management believes, however, that the ultimate outcome of all
pending litigation should not have a material adverse effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of March 1, 1997:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
<S> <C> <C>
Geoffrey C. Bible.................................... Chairman of the Board and Chief Executive Officer 59
John D. Bowlin....................................... President and Chief Executive Officer of Kraft Foods 46
International
Murray H. Bring...................................... Executive Vice President, External Affairs, and 62
General Counsel
Bruce S. Brown....................................... Vice President, Taxes 57
Louis C. Camilleri................................... Senior Vice President and Chief Financial Officer 42
Katherine P. Clark................................... Vice President and Controller 48
Dinyar S. Devitre.................................... Senior Vice President, Corporate Planning 49
Marc S. Goldberg..................................... Senior Vice President, Worldwide Operations and 53
Technology
G. Penn Holsenbeck................................... Vice President, Associate General Counsel and 50
Secretary
James M. Kilts....................................... Executive Vice President, Worldwide Food 49
George R. Lewis...................................... Vice President and Treasurer 55
John N. MacDonough................................... Chairman and Chief Executive Officer of Miller 53
James J. Morgan...................................... President and Chief Executive Officer of PM Inc. 54
Robert S. Morrison................................... Chairman and Chief Executive Officer of Kraft Foods, 54
Inc.
Steven C. Parrish.................................... Senior Vice President, Corporate Affairs 46
Timothy A. Sompolski................................. Senior Vice President, Human Resources and 44
Administration
William H. Webb...................................... President and Chief Executive Officer of Philip 57
Morris International
</TABLE>
All of the above-mentioned officers, with the exception of Messrs.
Holsenbeck and MacDonough, have been employed by the Company in various
capacities during the past five years. Mr. Holsenbeck was elected to his current
position with the Company in January 1995. Previously, Mr. Holsenbeck held
various positions with Bethlehem Steel Corporation, including Secretary and
Deputy General Counsel from 1992 to January 1995. Mr. MacDonough was Executive
Vice President, Marketing, of Anheuser-Busch International, Inc., from 1991
until September 1992, when he became President and Chief Operating Officer of
Miller. He assumed his current position in August 1993.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information called for by this Item is hereby incorporated by reference
to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 52 of
the Company's 1996 Annual Report and made a part hereof.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item is hereby incorporated by reference
to the information appearing under the caption "Selected Financial Data" on page
30 of the Company's 1996 Annual Report and made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 21-29 of the Company's 1996 Annual
Report and made a part hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is hereby incorporated by reference
to the Company's 1996 Annual Report as set forth under the caption "Quarterly
Financial Data (Unaudited)" on page 52 and in the Index to Consolidated
Financial Statements and Schedules (see Item 14) and made a part hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Except for the information relating to the executive officers of the Company
set forth in Part I of this Report, the information called for by Items 10, 11
and 12 is hereby incorporated by reference to the Company's definitive proxy
statement for use in connection with its annual meeting of stockholders to be
held on April 24, 1997, and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements and Schedules
<TABLE>
<CAPTION>
REFERENCE
--------------------------------
<S> <C> <C>
FORM 10-K 1996 ANNUAL
ANNUAL REPORT REPORT
PAGE PAGE
----------------- -------------
Data incorporated by reference to the Company's 1996
Annual Report:
Consolidated Balance Sheets at December 31, 1996 and 1995.... -- 32-33
Consolidated Statements of Earnings for the years ended
December 31, 1996, 1995 and 1994........................... -- 34
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994..................... -- 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................... -- 34-35
Notes to Consolidated Financial Statements................... -- 37-52
Report of Independent Accountants............................ -- 53
Data submitted herewith:
Report of Independent Accountants.............................. S-1 --
Financial Statement Schedule--Valuation and Qualifying
Accounts................................................... S-2 --
</TABLE>
Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed during
the last quarter of the period for which this Report is filed. Subsequent to the
last quarter of the period for which this Report is filed, the Company filed its
Current Report on Form 8-K dated January 30, 1997.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.15 are management contracts, compensatory plans or arrangements):
<TABLE>
<C> <S>
1.1. Form of Underwriting Agreement, including form of Terms Agreement.(1)
1.2. Form of Selling Agency Agreement.(2)
1.3. Form of First Amendment to Selling Agency Agreement.(3)
3.1. Restated Articles of Incorporation of the Company.(4)
3.2. By-Laws, as amended, of the Company.(5)
4.1. Plan of Exchange and Articles of Incorporation.(6)
4.2. Form of Indenture between the Company and The Chase Manhattan Bank, Trustee.(7)
4.3. 5-Year Loan and Guaranty Agreement dated as of October 26, 1995, among the Company,
the Banks named therein and Citibank, N.A., as Agent.(4)
10.1. Financial Counseling Program of PM Inc. and the Company.(8)
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
10.2. Philip Morris Benefit Equalization Plan, as amended.
10.3. Form of Employee Grantor Trust Enrollment Agreement.(4)
10.4. Automobile Policy of PM Inc. and the Company.(8)
10.5. Agreement, dated March 8, 1989, between the Company and Robert S. Morrison.
10.6. Agreement, dated October 12, 1987, between the Company and Murray H. Bring, as
amended.(3)
10.7. Agreement, dated November 1, 1989, between the Company and Murray H. Bring.(9)
10.8. Agreement, dated March 8, 1989, between the Company and James M. Kilts.(9)
10.9. Form of Employment Agreement between the Company and its executive officers.(9)
10.10. Supplemental Management Employees' Retirement Plan of the Company, as amended.
10.11. The Philip Morris 1992 Incentive Compensation and Stock Option Plan.(10)
10.12. 1992 Compensation Plan for Non-Employee Directors, as amended.(4)
10.13. Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996.(4)
10.14. The Philip Morris 1987 Long Term Incentive Plan.(11)
10.15. Form of Executive Master Trust between the Company, The Chase Manhattan Bank
(formerly known as Chemical Bank) and Handy Associates.(9)
12. Statements re computation of ratios.(1)
13. Pages 21-53 of the Company's 1996 Annual Report, but only to the extent set forth in
Items 1, 5, 6, 7, 8 and 14 hereof. With the exception of the aforementioned
information incorporated by reference in this Annual Report on Form 10-K, the
Company's 1996 Annual Report is not to be deemed "filed" as part of this Report.
21. Subsidiaries of the Company.
23. Consent of independent accountants.
24. Powers of attorney.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-49195) dated November 25, 1992.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-14 (No. 2-96149) dated March 1, 1985.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-16955) dated November 27, 1996.
21
<PAGE>
(8) Incorporated by reference to the Company's Registration Statement on Form
8-B (No. 1-8940) dated July 1, 1985.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(10) Incorporated by reference to the Company's proxy statement in connection
with its annual meeting of stockholders held on April 23, 1992, filed on
March 12, 1992.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
22
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PHILIP MORRIS COMPANIES INC.
BY: /S/ GEOFFREY C. BIBLE
------------------------------------------
(Geoffrey C. Bible,
Date: March 11, 1997 Chairman of the Board)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ GEOFFREY C. BIBLE Director, Chairman of the
- ------------------------------ Board and Chief March 11, 1997
(Geoffrey C. Bible) Executive Officer
/s/ LOUIS C. CAMILLERI Senior Vice President
- ------------------------------ and Chief Financial March 11, 1997
(Louis C. Camilleri) Officer
/s/ KATHERINE P. CLARK Vice President and
- ------------------------------ Controller March 11, 1997
(Katherine P. Clark)
* ELIZABETH E. BAILEY, MURRAY
H. BRING, HAROLD BROWN,
WILLIAM H. DONALDSON, JANE
EVANS, ROBERT E. R.
HUNTLEY, RUPERT MURDOCH,
JOHN D. NICHOLS, RICHARD
D. PARSONS, ROGER S.
PENSKE, JOHN S. REED,
STEPHEN M. WOLF, Directors
*BY: /S/ LOUIS C. CAMILLERI
- -----------------------------
(Louis C. Camilleri March 11, 1997
Attorney-in-fact)
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on our audits of the consolidated financial statements of Philip
Morris Companies Inc. has been incorporated by reference in this Form 10-K from
the 1996 annual report to stockholders of Philip Morris Companies Inc. and
appears on page 53 therein. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in the index in Item 14(a) on page 20 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
January 27, 1997
S-1
<PAGE>
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
COL. C
----------------------------
COL. B ADDITIONS COL. E
------------- ---------------------------- -------------
COL. A BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE AT
- ------------------------------------------------------ BEGINNING COSTS AND OTHER ------------- END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(A) (B)
1996:
CONSUMER PRODUCTS:
Allowance for discounts............................. $ 12 $ 492 $ -- $ 499 $ 5
Allowance for doubtful accounts..................... 163 27 16 39 167
Allowance for returned goods........................ 3 64 -- 62 5
----- ----- --- ----- -----
$ 178 $ 583 $ 16 $ 600 $ 177
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses................................ $ 101 $ -- $ -- $ -- $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
1995:
CONSUMER PRODUCTS:
Allowance for discounts............................. $ 15 $ 551 $ -- $ 554 $ 12
Allowance for doubtful accounts..................... 168 35 (12) 28 163
Allowance for returned goods........................ 4 40 -- 41 3
----- ----- --- ----- -----
$ 187 $ 626 $ (12) $ 623 $ 178
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses................................ $ 104 $ -- $ -- $ 3 $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
1994:
CONSUMER PRODUCTS:
Allowance for discounts............................. $ 18 $ 538 $ -- $ 541 $ 15
Allowance for doubtful accounts..................... 153 38 8 31 168
Allowance for returned goods........................ 4 100 -- 100 4
----- ----- --- ----- -----
$ 175 $ 676 $ 8 $ 672 $ 187
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses................................ $ 94 $ 10 $ -- $ -- $ 104
----- ----- --- ----- -----
----- ----- --- ----- -----
</TABLE>
- ------------------------
Notes:
(a) Related to divestitures, acquisitions and currency translation.
(b) Represents charges for which allowances were created.
S-2
<PAGE>
EXHIBIT 10.2
PHILIP MORRIS BENEFIT EQUALIZATION PLAN
Effective September 2, 1974
(As amended and in effect as of January 1, 1994)
<PAGE>
PHILIP MORRIS BENEFIT EQUALIZATION PLAN
The Philip Morris Benefit Equalization Plan governs the rights of a person
whose benefits under the Retirement Plan or the Profit-Sharing Plan, or both
Plans, are subject to the Statutory Limitations.
The Plan as hereinafter set forth shall, in the case of Benefit
Equalization Retirement Allowances payable under Article II, A hereof, be
effective with respect to each Employee whose date of retirement (as specified
in an application for retirement under Article II, B of the PM Retirement Plan)
is on or after April 1, 1993 or who has filed an application for an Optional
Payment pursuant to Article II, C(2) of the Plan after March 1, 1992. The
rights of a person who retired or otherwise terminated employment before March
1, 1993 shall be governed by the provisions of the Plan as in effect on the date
of retirement or other termination of employment, unless an application for an
Optional Payment was filed after March 1, 1992.
The Plan as hereinafter set forth shall, in the case of Benefit
Equalization Profit-Sharing Allowances payable under Article II, B hereof, be
effective with respect to Employees whose date of retirement or other
termination of employment is on or after April 1, 1993 or who has filed an
application for an Optional Payment pursuant to Article II, C(2) of the Plan
after March 1, 1992. The rights of a person who retired or otherwise terminated
employment before April 1, 1993 shall be governed by the provisions of the Plan
as in effect on the date of retirement or other termination of employment,
unless an application for an Optional Payment was filed after March 1, 1992.
That portion of the Philip Morris Benefit Equalization Plan which
provides benefits to a Beneficiary solely in excess of the Section 415
Limitations shall be treated as a separate plan from that portion of the Plan
which provides benefits to a Beneficiary attributable solely to the Compensation
Limitation or to the Compensation Limitation and the Section 415 Limitations.
<PAGE>
ARTICLE I
DEFINITIONS
The following terms as used herein shall have the meanings set forth below.
Capitalized terms used herein and not defined below shall have the meanings set
forth in the PM Retirement Plan or the Profit-Sharing Plan, as the context may
require.
(a) "ACTUARIAL EQUIVALENT" shall mean a benefit which is equivalent
in value to the benefit otherwise payable pursuant to the terms of the
Plan, based on the actuarial principles and assumptions set forth in
Exhibit "I" to the PM Retirement Plan; provided, however, that a Single Sum
Payment shall be the Actuarial Equivalent of the Benefit Equalization
Retirement Allowance payable in equal monthly payments during a twelve (12)
month period for the life of the Retired Employee, using the actuarial
principles and assumptions set forth in Exhibit "A" to the Plan.
(b) "ALLOWANCES" shall mean a Benefit Equalization Retirement
Allowance and a Benefit Equalization Profit-Sharing Allowance.
(c) "BENEFICIARY" shall mean an Employee or the Spouse or other
beneficiary of such Employee whose benefits under the Retirement Plan or
Profit-Sharing Plan, or both Plans, are subject to the Statutory
Limitations.
(d) "BENEFIT EQUALIZATION PROFIT-SHARING ALLOWANCE" or "PROFIT-
SHARING ALLOWANCE" shall mean the benefit determined under Article II, B hereof
and payable at the time and in the manner set forth in Article II, D hereof.
(e) "BENEFIT EQUALIZATION JOINT AND SURVIVOR ALLOWANCE" shall mean
the total amount payable during a twelve (12) month period as a reduced
Benefit Equalization Retirement Allowance to a Retired Employee for life
and after his death the amount payable to his Spouse for life equal to
one-half of the reduced Benefit Equalization Retirement Allowance payable
to the Retired Employee, which together shall be the Actuarial Equivalent
of the Benefit Equalization Retirement Allowance of the Retired Employee.
(f) "BENEFIT EQUALIZATION OPTIONAL PAYMENT ALLOWANCE" shall mean (1)
the total amount payable during a twelve (12) month period in accordance
with one of the payment methods described in Article II, A(4)(d) of the PM
Retirement Plan designated by the Employee in the application for an
Optional Payment under Article II, C(2) hereof pursuant to which the
Employee receives for life after his retirement a reduced Benefit
Equalization Retirement Allowance and after his death after retirement his
beneficiary receives for life a benefit according to the option elected by
1
<PAGE>
the Employee, which together shall be the Actuarial Equivalent of the
Benefit Equalization Retirement Allowance payable in equal monthly
payments for the life of the Employee after his retirement, or (2) the
total amount payable during a twelve (12) month period in accordance
with one of the payment methods described in Article II, A(4)(d) of
the PM Retirement Plan pursuant to an election described in Article
II, A(4)(c) of the PM Retirement Plan and designated by the Employee
in the application for an Optional Payment under Article II, C(2)
hereof pursuant to which the Employee receives for life after his
retirement a reduced Benefit Equalization Retirement Allowance and
after his death his beneficiary receives for life a benefit according
to the option elected by the Employee, which together shall be the
Actuarial Equivalent of the Benefit Equalization Retirement Allowance
accrued to the date of election.
(g) "BENEFIT EQUALIZATION RETIREMENT ALLOWANCE" shall mean the
benefit determined under Article II, A hereof and payable at the time and
in the manner set forth in Article II, C, provided, that payment to a
Retired Employee in any form shall be the Actuarial Equivalent of a Benefit
Equalization Retirement Allowance expressed as a benefit payable in equal
monthly payments during a twelve (12) month period for the life of the
Retired Employee commencing at the Retired Employee's Normal Retirement
Age.
(h) "BENEFIT EQUALIZATION SURVIVOR ALLOWANCE" shall mean the total
amount payable during a twelve (12) month period in equal monthly payments
for the life of the Spouse of a Deceased Employee or deceased Retired
Employee who has died after the date of his retirement and prior to the
date his Optional Payment under Paragraph I(r)(i) or (ii) hereof commences
to be paid in an amount equal to one-half of the reduced Benefit
Equalization Retirement Allowance which would have been payable as a
Benefit Equalization Joint and Survivor Allowance to the Deceased Employee
or deceased Retired Employee.
(i) "CHANGE IN CIRCUMSTANCE" shall mean (1) the marriage of the
Employee or Retired Employee, (2) the divorce of the Employee or Retired
Employee from his Spouse, provided such Spouse was designated as the
beneficiary in the currently effective application to receive an Optional
Payment, or the Employee or Retired Employee elected to receive an Optional
Payment pursuant to clause (i) of Paragraph (r) hereof, (3) the death of
the beneficiary designated in the application to receive an Optional
Payment, or (4) a medical condition, based on medical evidence satisfactory
to the Administrator, which is expected to result in the death of the
beneficiary (including the Spouse) who is designated to receive a benefit
after the death of the Retired Employee in accordance with the application
to receive an Optional Payment originally filed with the Administrator,
within five (5) years of the filing of an application for change in
Optional Payment method pursuant to Article II, C(2) or Article II,D(2)
hereof.
2
<PAGE>
(j) "COMMITTEE" shall mean the Corporate Employee Benefit Committee
of the Company charged with the administration of the Plan as from time to
time constituted.
(k) "COMPANY" shall mean Philip Morris Companies Inc.
(l) "COMPENSATION LIMITATION" shall mean the limitation of Section
401(a)(17) of the Code on the annual compensation of an Employee which may
be taken into account under the Plans.
(m) "DEFERRED RETIREMENT ALLOWANCE" shall mean the Retirement
Allowance payable pursuant to Article II, A(2) of the PM Retirement Plan.
(n) "EARLY RETIREMENT ALLOWANCE" shall mean the Retirement Allowances
payable pursuant to Article II, A(3) of the PM Retirement Plan.
(o) "EMPLOYEE" shall mean any person employed by a Participating
Company on a salaried basis whose benefits under the Retirement Plan or
Profit-Sharing Plan, or both Plans, are subject to the Statutory
Limitations.
(p) "FULL RETIREMENT ALLOWANCE" shall mean the Retirement Allowance
payable pursuant to Article II, A(1) of the PM Retirement Plan.
(q) "FUND" shall mean the trust fund provided for in the
Profit-Sharing Plan and established under the trust agreement with respect
to the Profit-Sharing Plan.
(r) "OPTIONAL PAYMENT" shall mean (1) in the case of a Benefit
Equalization Retirement Allowance, the following optional forms in which
the Benefit Equalization Retirement Allowance of an Employee who has made
an election pursuant to Article II, C(2) hereof may be paid: (i) in equal
monthly payments for the life of the Retired Employee, (ii) as a Benefit
Equalization Joint and Survivor Allowance, or (iii) as a Benefit
Equalization Optional Payment Allowance, and (2) in the case of a Benefit
Equalization Profit-Sharing Allowance, any of the methods of distribution
permitted under Article VI of the Profit-Sharing Plan (other than a Single
Sum Payment payable at the time specified in Article II, D(1) hereof) and
in the event the Retired Employee dies before distribution of his Benefit
Equalization Profit-Sharing Allowance is made, commences to be made or is
fully distributed, to the beneficiary designated in the notification set
forth in Article II, E, hereof, in accordance with the method of
distribution specified in such notification; provided however, that an
Employee may not revoke or modify the method or the timing of any
distribution of his Benefit Equalization Profit-Sharing Allowance later
than at the times specified in Article II, D(2) hereof. Any election to
receive an Optional Payment with respect to a Retired Employee's Allowances
under the Plan shall be
3
<PAGE>
independent of any election with respect to his benefits payable under
the Retirement Plan, the Profit-Sharing Plan, or any other plan of a
member of the Controlled Group.
(s) "PARTICIPATING COMPANY" shall mean the Company and any other
corporation which is a member of the Controlled Group and which, with the
approval of the Committee, determines to participate in the Plan for the
benefit of its eligible employees and executes such instruments of
participation as the Committee deems necessary.
(t) "PLAN" shall mean the Philip Morris Benefit Equalization Plan
described herein and in any amendments hereto.
(u) "PLANS" shall mean the Retirement Plan and the Profit-Sharing
Plan.
(v) "PM RETIREMENT PLAN" shall mean the Philip Morris Salaried
Employees' Retirement Plan, effective as of September 1, 1978 and as
amended from time to time.
(w) "PROFIT-SHARING PLAN" shall mean the Philip Morris Deferred
Profit-Sharing Plan, effective January 1, 1956 and as amended from time to
time.
(x) "RETIREMENT PLAN" shall mean the PM Retirement Plan and each
other defined benefit plan qualified under Section 401(a) of the Code
maintained by a member of the Controlled Group in which an Employee has an
accrued benefit, other than a defined benefit plan whose benefits in excess
of the Statutory Limitations are payable from one or more of the following
plans maintained by a member of the Controlled Group other than a
Participating Company: (1) an excess benefit plan (as defined in Section
3(36) of ERISA), or (2) a plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees.
(y) "SECTION 415 LIMITATIONS" shall mean: (1) in the case of the
Retirement Plan, the limitations on benefits applicable to defined benefit
plans set forth in Section 415 of the Code and the Treasury Regulations
promulgated thereunder, and (2) in the case of the Profit-Sharing Plan, the
limitations on contributions applicable to defined contribution plans set
forth in Section 415 of the Code and the Treasury Regulations promulgated
thereunder.
(z) "SINGLE SUM PAYMENT" shall mean (1) in the case of a Benefit
Equalization Retirement Allowance, the normal form of distribution to a
Retired Employee who is eligible for a Full, Deferred or Early Retirement
Allowance, which distribution shall be made in one payment to the Retired
Employee (or his Spouse or
4
<PAGE>
other beneficiary) at the time set forth in Article II, C(1)(a) hereof
and which is the Actuarial Equivalent of the Benefit Equalization
Retirement Allowance payable in equal monthly payments during a twelve
(12) month period for the life of the Retired Employee and (2) in the
case of a Benefit Equalization Profit-Sharing Allowance, the normal
form of distribution of the balance to the credit of a Retired
Employee as determined in accordance with Article II, B hereof, which
distribution shall be made in one payment to the Retired Employee (or
his Spouse or other beneficiary) at the time set forth in Article II,
D(1) hereof.
(aa) "STATUTORY LIMITATIONS" shall mean (1) the Section 415
Limitations and (2) the Compensation Limitation.
(ab) "VESTED RETIREMENT ALLOWANCE" shall mean the Retirement Allowance
payable pursuant to Article II, A(6) of the PM Retirement Plan.
5
<PAGE>
ARTICLE II
BENEFIT EQUALIZATION RETIREMENT ALLOWANCES AND
BENEFIT EQUALIZATION PROFIT-SHARING ALLOWANCES
A. Benefit Equalization Retirement Allowances and other benefits payable under
this Plan shall be as follows:
(1) (a) The Benefit Equalization Retirement Allowance with respect to a
Retired Employee who has retired on a Full, Deferred or Early Retirement
Allowance shall equal the amount by which the Full, Deferred or Early Retirement
Allowance under the Retirement Plan accrued to the date of retirement, if
computed without regard to the Statutory Limitations, exceeds the amount of the
Full, Deferred or Early Retirement Allowance actually payable under the
Retirement Plan; provided, however, that in the event the Benefit Equalization
Retirement Allowance with respect to the Retired Employee is paid in a Single
Sum Payment pursuant to Paragraph C(1)(a) hereof prior to the Retired Employee's
Benefit Commencement Date, the amount of such Benefit Equalization Retirement
Allowance shall equal the amount by which the Full, Deferred or Early Retirement
Allowance under the Retirement Plan accrued to the date of retirement, if
computed without regard to the Statutory Limitations, is reasonably estimated by
the Administrator to exceed the amount of the Full, Deferred or Early Retirement
Allowance which is projected by the Administrator to be actually payable under
the Retirement Plan.
(b) (i) The Spouse of a Retired Employee described in Subparagraph
(1)(a) above whose request for an Optional Payment pursuant to Article
I(r)(1)(i) or (ii) hereof has been granted by the Management Committee, but who
has died after the date of his retirement and prior to the date his Optional
Payment commences to be paid shall be eligible to receive a Benefit Equalization
Survivor Allowance.
(ii) The beneficiary of a Retired Employee described in
Subparagraph (1)(a) above whose request for a Benefit Equalization
Optional Payment Allowance pursuant to Article I(f)(1) has been
granted by the Management Committee, but who has died after the date
of his retirement and prior to the date his Optional Payment commences
to be paid shall be eligible to receive that portion of the Benefit
Equalization Optional Payment Allowance elected by the Retired
Employee which is payable after the death of the Retired Employee.
(2) (a) The Benefit Equalization Retirement Allowance with respect to a
Retired Employee who is only eligible for a Vested Retirement Allowance and who
is living on his Benefit Commencement Date shall equal the amount by which the
Vested Retirement Allowance under the Retirement Plan accrued to the date of his
termination of employment
6
<PAGE>
with the Controlled Group, if computed without regard to the Statutory
Limitations, exceeds the amount of the Vested Retirement Allowance actually
payable under the Retirement Plan.
(b) The Spouse of a Retired Employee described in Subparagraph 2(a)
above who has died after termination of his employment with the Controlled Group
and prior to his Benefit Commencement Date shall be eligible to receive a
Benefit Equalization Survivor Allowance.
(3) (a) The Spouse of a Deceased Employee who has died prior to the date
of his retirement or other termination from the service of any member of the
Controlled Group shall be eligible to receive a Benefit Equalization Survivor
Allowance unless the Management Committee has granted the request of the
Deceased Employee to receive a Benefit Equalization Optional Payment Allowance
described in Article I(f)(2) hereof in which event such Spouse shall receive the
Benefit Equalization Survivor Allowance accrued after the date specified in the
election.
(b) The beneficiary of a Deceased Employee or deceased Retired
Employee whose request for a Benefit Equalization Optional Payment Allowance
described in Article I(f)(2) has been granted by the Management Committee shall
be eligible to receive that portion of the Benefit Equalization Optional Payment
Allowance elected by the Retired Employee which is payable after the death of
the Deceased Employee or deceased Retired Employee.
B. Benefit Equalization Profit-Sharing Allowances payable under this Plan
shall be as follows:
The Benefit Equalization Profit-Sharing Allowance with respect to a Retired
Employee shall equal the amounts which would have been credited, but were
not credited to his Company Account as a result of the Statutory
Limitations. All such amounts shall be deemed to have been invested in
Part C of the Fund and valued in accordance with the provisions of the
Profit-Sharing Plan.
C. Commencement and termination of Benefit Equalization Retirement Allowances:
(1) (a) The Benefit Equalization Retirement Allowance payable pursuant to
Paragraph A(1)(a) hereof shall be distributed to the Retired Employee in a
Single Sum Payment no later than sixty (60) days following the Retired
Employee's date of retirement (or, if the Retired Employee dies after the date
of retirement and before distribution of his Single Sum Payment is made, to his
beneficiary as determined pursuant to Paragraph E hereof, in a Single Sum
Payment within sixty (60) days following the date of the Retired
7
<PAGE>
Employee's death) unless the Employee has elected to have distribution of his
Benefit Equalization Retirement Allowance made in accordance with Subparagraph
(2) hereof.
(b) The Benefit Equalization Retirement Allowance payable pursuant to
Paragraph A(2)(a) hereof shall be distributed as an Optional Payment under
Article I(r)(1)(i) or (ii) hereof (which Optional Payment shall be in the same
form which the Retired Employee's benefits are paid from the PM Retirement Plan)
and shall commence on the Employee's Benefit Commencement Date.
(c) (i) The Benefit Equalization Survivor Allowance payable pursuant
to Paragraphs A(1)(b)(i), (A)(2)(b) and A(3)(a) hereof shall commence to be paid
on the later of (A) the first day of the calendar month coincident with or next
following the date the Deceased Employee or deceased Retired Employee would have
attained the age of fifty-five (55) years, or (B) the first day of the calendar
month in which the Deceased Employee or deceased Retired Employee died, provided
that the Spouse may elect in accordance with the provisions of Article II,
A(5)(c) or (f) of the PM Retirement Plan, as applicable to the Spouse, that the
Benefit Equalization Survivor Allowance shall commence on the first day of any
month thereafter, but not later than the first day of the calendar month in
which the Deceased Employee or deceased Retired Employee would have attained his
Normal Retirement Age. Any such Benefit Equalization Survivor Allowance shall
terminate with the payment due on the first day of the month in which the Spouse
dies.
(ii) The benefit payable to the beneficiary of the Deceased
Employee or deceased Retired Employee pursuant to Paragraph
A(1)(b)(ii) or (3)(b) hereof shall commence on the first day of the
calendar month following the month in which the Deceased Employee or
deceased Retired Employee died.
(2) An Employee who is eligible to retire on a Full, Deferred or Early
Retirement Allowance and whose Benefit Equalization Retirement Allowance is
otherwise payable in a Single Sum Payment pursuant to Paragraph C(1)(a) hereof
may make application to the Administrator to receive an Optional Payment. The
application may be filed prior to the date the Employee is eligible for an Early
Retirement Allowance and shall specify the form of Optional Payment, the
beneficiary and the date on which the Optional Payment is to commence to be
made, which date shall be on or before the first day of the month coincident
with or next preceding the Employee's Required Benefit Commencement Date, but in
no event shall the Employee's Optional Payment commence to be paid prior to the
later of the first day of the month following the first anniversary of the date
of the filing of his application with the Administrator or the Employee's
Benefit Commencement Date; provided, however, that in the event the Employee or
former Employee incurs a Change in Circumstance on or after the date of the
filing of the application and prior to the date his Optional Payment commences
to be paid, the Employee or former Employee may file an application with the
Administrator within ninety (90) days of the Change in Circumstance,
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but in no event later than the date his Optional Payment is to commence, to
change the form of Optional Payment or to change the beneficiary who is
designated to receive a benefit after the death of the Retired Employee in
accordance with the Optional Payment method originally filed with the
Administrator; provided, further that any election to change the form of
Optional Payment filed after the date of his retirement and prior to the date
his Optional Payment is to commence may only change the form of Optional Payment
to one of the forms specified in Article I(r)(i) or (ii) hereof. In the case
of an Employee who eighteen (18) months prior to attaining the age of sixty-five
(65) years could be compulsorily retired by his Participating Company upon
attaining the age of sixty-five (65) years pursuant to Section 12(c) of the Age
Discrimination in Employment Act, any application to receive an Optional Payment
must be filed with the Administrator more than one (1) year preceding the date
the Employee attains the age of sixty-five (65) years. The Administrator shall
notify the Management Committee of all applications for an Optional Payment.
The Management Committee may grant or deny any such application in its sole and
absolute discretion. Any such application shall be of no force and effect if
(i) the Employee does not retire on a Full, Deferred or Early Retirement
Allowance, (ii) the Employee incurs a disability at any time before the date his
Optional Payment commences to be made which causes him to be eligible for
benefits under the Philip Morris Long-Term Disability Plan, or (iii) the
Employee is retired for ill health, disability or hardship under Article II,
A(3)(a) of the PM Retirement Plan, provided that in the event the application is
of no force and effect under clauses (ii) or (iii) hereof, payment of the
Employee's Benefit Equalization Retirement Allowance shall be made in a Single
Sum Payment pursuant to Paragraph C(1)(a) hereof within sixty (60) days of the
date of his retirement, but otherwise such application shall be irrevocable and
effective on the Employee's retirement on a Full, Deferred or Early Retirement
Allowance and the Employee's benefits shall commence on the date specified in
the application; provided, however, that (A) if within the one (1) year period
following the date of the filing of the application with the Administrator the
Employee's service with any member of the Controlled Group is involuntarily
terminated other than by reason of the Employee's death, disability or
misconduct (as determined by the Management Committee), such Employee's Optional
Payment shall commence to be paid on the Employee's Benefit Commencement Date,
or (B) if within the one (1) year period following the date of the filing of the
application with the Administrator the Employee voluntarily retires or his
employment is terminated for misconduct (as determined by the Management
Committee) by any member of the Controlled Group, the Optional Payment shall be
reduced as specified in Paragraph C(4)(a) hereof.
(3) (a) Notwithstanding the preceding provisions of this Paragraph, the
Committee may cause the distribution of the Benefit Equalization Retirement
Allowance to any group of similarly situated Beneficiaries in a Single Sum
Payment or as an Optional Payment.
(b) Notwithstanding the preceding provisions of this Paragraph, the
Administrator shall distribute an Employee's Benefit Equalization Retirement
Allowance in a
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Single Sum Payment if the Benefit Equalization Retirement Allowance payable in
equal monthly payments is not more than $250 per month.
(4) (a) The Benefit Equalization Retirement Allowance payable to an
Employee pursuant to clause (B) of Paragraph C(2) hereof shall be further
reduced by one percent (1%) for each month (or portion of a month) by which the
month in which the Employee's termination of employment precedes the first
anniversary of the filing of the application with the Administrator.
(b) Any Benefit Equalization Survivor Allowance or Benefit
Equalization Optional Payment Allowance payable under this Plan to any
Beneficiary other than a Retired Employee commencing at an age other than the
Retired Employee's Normal Retirement Age shall be the Actuarial Equivalent of
the Beneficiary's benefit payable pursuant to the terms of the Plan in equal
monthly payments for life commencing at the Retired Employee's Normal Retirement
Age.
D. Commencement and termination of Benefit Equalization Profit-Sharing
Allowances:
(1) The Benefit Equalization Profit-Sharing Allowance payable pursuant to
Paragraph B shall be distributed to the Retired Employee in a Single Sum Payment
no later than sixty (60) days following the Retired Employee's date of
retirement (or, if the Retired Employee dies after the date of retirement and
before distribution of his Single Sum Payment is made, to his beneficiary as
determined pursuant to Paragraph E hereof, in a Single Sum Payment within sixty
(60) days following the date of the Retired Employee's death) unless the
Employee's Benefit Equalization Profit-Sharing Allowance is distributed in
accordance with Subparagraph (2) hereof.
(2) An Employee who is eligible for a Benefit Equalization Profit-Sharing
Allowance may make application to the Administrator to receive an Optional
Payment. The application shall specify the form of Optional Payment, the
beneficiary and the date on which the Optional Payment is to be paid or commence
to be paid, which date shall be on or before the first day of the month
coincident with or next preceding the Employee's Required Benefit Commencement
Date, but in no event shall the Employee's Optional Payment commence to be paid
prior to the later of the first day of the month following the first anniversary
of the date of the filing of his application with the Administrator or the
Employee's date of retirement; provided, however, that in the event the Employee
or former Employee has elected to receive his Optional Payment over the joint
life expectancies of the Employee and his beneficiary and incurs a Change in
Circumstance described in Article I(i)(2), (3) or (4) hereof on or after the
date of the filing of the application and prior to the date his Optional Payment
commences to be paid, the Employee or former Employee may file an application
with the Administrator within ninety (90) days of the Change in Circumstance,
but in no event later than the date his Optional Payment commences to be made to
designate a new
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beneficiary or elect to receive his Optional Payment over the life expectancy of
the Employee or former Employee. In the case of an Employee who eighteen (18)
months prior to attaining the age of sixty-five (65) years could be compulsorily
retired by his Participating Company upon attaining the age of sixty-five (65)
years pursuant to Section 12(c) of the Age Discrimination in Employment Act, any
application to receive an Optional Payment must be filed with the Administrator
more than one (1) year preceding the date the Employee attains the age of
sixty-five (65) years. The Administrator shall notify the Management Committee
of all applications for an Optional Payment. The Management Committee may grant
or deny any such application in its sole and absolute discretion. If within the
one (1) year period following the date of the filing of the application with the
Administrator the Employee voluntarily retires (other than for ill health,
disability or hardship under Article II, A(3)(a) of the PM Retirement Plan),
voluntarily terminates his employment with his Participating Company (other than
for a disability which causes him to be eligible for benefits under the Philip
Morris Long-Term Disability Plan) or his employment is terminated for misconduct
(as determined by the Management Committee) by any member of the Controlled
Group, the Optional Payment shall be reduced in the same manner as specified in
Paragraph C(4)(a) hereof. If the Employee dies after the date of retirement and
prior to the date his Benefit Equalization Profit-Sharing Allowance is paid or
commences to be paid, payment shall be made to his designated beneficiary
commencing in the form and on the date specified in the application and if no
such form or commencement date shall be specified in the application, to his
designated beneficiary in a Single Sum Payment within sixty (60) days of the
date of his death.
(3) (a) Notwithstanding the preceding provisions of this Paragraph, the
Committee may cause the distribution of the Benefit Equalization Profit-Sharing
Allowance to any group of similarly situated Beneficiaries in a Single Sum
Payment or as an Optional Payment.
(b) Notwithstanding the preceding provisions of this Paragraph, the
Administrator shall distribute an Employee's Benefit Equalization Profit-Sharing
Allowance in a Single Sum Payment if the value of such Benefit Equalization
Profit-Sharing Allowance is not more than $10,000.
E. Application or Notification for payment of Allowances:
An application for a Retirement Allowance, Survivor Allowance or optional
form of benefit under the Retirement Plan shall be deemed notification to the
Administrator that payment of the Benefit Equalization Retirement Allowance or
other benefit is to be made or commence to be made to the Retired Employee,
Spouse
11
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or other beneficiary in accordance with the terms of this Plan. An application
for distribution of the Employee's Accounts shall be deemed notification to the
Administrator that payment of the Benefit Equalization Profit-Sharing Allowance
is to be made or commence to be made to the Retired Employee, Spouse or other
beneficiary in accordance with the terms of this Plan. In the event the
Employee shall not have elected an Optional Payment method with respect to his
Benefit Equalization Retirement Allowance, any such notification shall specify
the beneficiary to whom payment of the Single Sum Payment shall be made in the
event the Employee dies after the date of his retirement and prior to the date
the Single Sum Payment is made, provided, that if the Employee shall fail to
designate a beneficiary or if the beneficiary shall predecease the Employee, the
Administrator shall distribute the Single Sum Payment to the duly authorized
representative of the former Employee's estate.
12
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ARTICLE III
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE
Individual accounts shall be established for the benefit of each
Beneficiary under the Plan. Separate individual accounts shall be established
for that portion of each Beneficiary's benefits under the Plan attributable
solely to the Section 415 Limitations, and for that portion of each
Beneficiary's benefits under the Plan attributable solely to the Compensation
Limitation, or to the Compensation Limitation and the Section 415 Limitations.
If any portion of a Beneficiary's benefits are attributable to the Compensation
Limitation, the total amount of all benefits payable to the Beneficiary under
the Plan shall be paid from that portion of the Plan which provides benefits
attributable solely to the Compensation Limitation or to the Compensation
Limitation and the Section 415 Limitations. Any benefits payable from an
individual account shall be payable solely to the Beneficiary for whom such
account was established. The Plan shall be unfunded. All benefits intended to
be provided under the Plan shall be paid from time to time from the general
assets of the Employee's Participating Company and paid in accordance with the
provisions of the Plan; provided, however, that the Participating Companies
reserve the right to meet the obligations created under the Plan through one or
more trusts or other agreements. The contributions by each Participating
Company on behalf of its Employees to the individual accounts established
pursuant to the provisions of the Plan, whether in trust or otherwise, shall be
in an amount which such Participating Company, with the advice of an actuary,
determines to be sufficient to provide for the payment of the benefits under the
Plan.
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ARTICLE IV
THE CORPORATE EMPLOYEE BENEFIT COMMITTEE AND ITS DELEGATEES
The general administration of the Plan shall be vested in the Committee,
the Management Committee and the Administrator.
All powers, rights, duties and responsibilities assigned to the Committee,
the Management Committee and the Administrator under the Retirement Plan
applicable to this Plan shall be the powers, rights, duties and responsibilities
of the Committee, the Management Committee and the Administrator under the terms
of this Plan, except that the Committee, the Management Committee and the
Administrator shall not be fiduciaries (within the meaning of Section 3(21) of
ERISA) with respect to that portion of the Plan which is intended to be exempt
from the requirements of ERISA pursuant to Section 4(b)(5) thereof.
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ARTICLE V
AMENDMENT AND DISCONTINUANCE OF THE PLAN
The Board may, from time to time, and at any time, amend the Plan;
provided, however, that authority to amend the Plan is delegated to the
following committees or individuals where approval of the Plan amendment or
amendments by the shareholders of the Company is not required: (1) to the
Committee, if the amendment (or amendments) will not increase the annual cost of
the Plan by $10,000,000, (2) to the Management Committee, if the amendment (or
amendments) will not increase the annual cost of the Plan by $4,000,000, (3) to
the Administrator, if the amendment (or amendments) will not increase the annual
cost of the Plan by $500,000.
Any amendment to the Plan may effect a substantial change in the Plan and
may include (but shall not be limited to) any change deemed by the Company to be
necessary or desirable to obtain tax benefits under any existing or future laws
or rules or regulations thereunder; provided, however, that no such amendment
shall deprive any Beneficiary of any Allowances accrued at the time of such
amendment.
The Plan may be discontinued at any time by the Board; provided, however,
that such discontinuance shall not deprive any Beneficiary of any Allowances
accrued at the time of such discontinuance.
15
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ARTICLE VI
FORMS; COMMUNICATIONS
The Management Committee shall provide such appropriate forms as it may
deem expedient in the administration of the Plan and no action to be taken under
the Plan for which a form is so provided shall be valid unless upon such form.
All communi-cations concerning the Plan shall be in writing addressed to the
Committee, the Management Committee or the Administrator at such address as may
from time to time be designated. No communication shall be effective for any
purpose unless received by the Committee, the Management Committee or the
Administrator.
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ARTICLE VII
INTERPRETATION OF PROVISIONS
The Management Committee shall have the full power and authority to grant
or deny requests for payment of a Benefit Equalization Retirement Allowance in
accordance with a form of distribution authorized under the Retirement Plan and
the Committee shall have full power and authority with respect to all other
matters arising in the administration, interpretation and application of the
Plan. Any member of the Management Committee who makes a request for payment of
a Benefit Equalization Retirement Allowance in accordance with a form of
distribution authorized under the Retirement Plan shall excuse himself from any
and all deliberations and decisions of the Management Committee in connection
with such request.
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ARTICLE VIII
CHANGE IN CONTROL PROVISIONS
A. In the event of a Change of Control, each Employee shall be fully vested in
his Allowances and any other benefits accrued through the date of the
Change of Control ("Accrued Benefits"). Each Employee (or his beneficiary)
shall, upon the Change of Control, be entitled to a lump sum in cash,
payable within 30 days of the Change of Control, equal to the actuarial
equivalent of his Accrued Benefits, determined using actuarial assumptions
no less favorable than those used under the Supplemental Management
Employees' Retirement Plan immediately prior to the Change of Control.
B. Definition of Change of Control.
"Change of Control" shall mean the happening of any of the following
events:
(1) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, and
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
of Control: (i) any acquisition directly from the Company, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation pursuant to a transaction
described in clauses (i), (ii) and (iii) of paragraph (3) of this Section B; or
(2) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
18
<PAGE>
(3) Approval by the shareholders of the Company of a reorganization,
merger, share exchange or consolidation (a "Business Combination"), in each
case, unless, following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 80% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns the
Company through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities, as
the case may be, (ii) no Person (excluding any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(4) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition, (A)
more than 80% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) less than 20% of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by any Person (excluding any
employee benefit plan (or related trust) of the Company or such corporation),
except to the extent that such Person owned 20% or more of the Outstanding
Company Common Stock or Outstanding Company Voting Securities prior to the sale
or disposition and (C) at least a majority of the members of the board of
directors of such corporation were members of the Incumbent Board at the time of
the execution of the
19
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initial agreement, or of the action of the Board, providing for such sale or
other disposition of assets of the Company or were elected, appointed or
nominated by the Board.
20
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EXHIBIT A
PHILIP MORRIS BENEFIT EQUALIZATION PLAN
ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT
INTEREST RATE: Average of the interest rates established by the Pension
Benefit Guaranty Corporation to value immediate annuities in the case of a plan
termination for the 24 months preceding the Employee's date of retirement, less
1/2 of 1%.
MORTALITY ASSUMPTION: UP-1984 Unisex Mortality Table
21
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Exhibit 10.5
[Philip Morris Companies Inc. letterhead]
March 8, 1989
Mr. Robert S. Morrison
1193 Scott Avenue
Winnetka, IL 60093
Dear Bob:
On behalf of Philip Morris Companies Inc., I would like to thank you for your
efforts in connection with the integration of the management of our food
operations. Your continued participation in this integration is essential to
enable us to build an effective food operations management team that will assure
future growth and continued success. The purpose of this letter is to confirm
our recent understandings regarding your Deferred Incentive Payment.
In recognition of your importance to management of the food operations, we have
agreed that you will be paid a Deferred Incentive Payment designed to provide
you with a special incentive to remain with us during the integration of Kraft
and General Foods. Your Deferred Incentive Payment award will be computed and
paid to you at the time and in the form described in Appendix A.
If your employment terminates for any reason (including death), you will be
entitled, subject to the following provisions, to the amount of any Deferred
Incentive Payment, including any interest, dividends and appreciation thereon,
and also entitled to any unpaid compensation. Generally, any payment to which
you are entitled on termination of employment will be paid to you within 30 days
of your date of termination. However, if you retire or otherwise voluntarily
terminate employment prior to February 15, 1991, your Deferred Incentive Payment
will be paid in accordance with Appendix A. If your employment is terminated
prior to February 15, 1991, for any reason you will not be entitled to other
payments under any severance plan or policy.
Although our discussions have focused on your employment during the next two
years, we recognize the need to provide a level of
<PAGE>
continuing financial assurance after the expiration of the two-year business
integration period. In the event your employment is involuntarily terminated
without cause after February 15, 1991, you will receive an amount equal to the
greater of (1) the sum of your annual base salary at the rate in effect at the
time your employment is terminated and the annual incentive payment (excluding
amounts attributable to the Deferred Incentive Payment) which you received for
the most recent calendar year for which the computation of such award has been
made at the time of your termination of employment, or (2) the amount to which
you would be entitled under the terms of the normal severance plans or policies
of Philip Morris Companies Inc. or its subsidiaries then applicable to you.
Whenever your employment terminates, you and your family will be covered by
lifetime medical, dental and life insurance benefits on terms at least as
favorable as those currently available to other peer executives retiring from
service with Kraft, Inc., but not less favorable than those available to you and
your family, in the aggregate, under the medical, dental and life insurance
plans of Kraft, Inc. as of December 1, 1988 (for this purpose the Kraft, Inc.
life insurance plan for active employees shall be applicable until age 65 and
thereafter the Kraft, Inc. life insurance plan for retire employees shall be
applicable). If you are reemployed and are eligible to receive any medical or
dental benefits under your new employer's plans, the medical and dental plans of
Philip Morris Companies Inc. or its subsidiaries will only provide secondary
coverage to you and your family during such applicable period of eligibility
under the new employer's plans.
This letter is intended to summarize our previous understanding relating to your
employment with Philip Morris Companies Inc. and its subsidiaries. It replaces
any prior employment agreements you had with Kraft or Philip Morris Companies
Inc. or its subsidiaries, and any such agreements are to be of no effect.
However, nothing in this letter precludes you from participating in any
compensation plan, benefit plan or other executive benefit which is generally
available to similarly situated executives of Kraft Inc. or its successors and
which has not been expressly addressed by this letter. Nothing in this letter
replaces or otherwise changes the obligations of Philip Morris Companies Inc.
under its indemnification agreement with you dated December 16, 1988.
The payments referred to in this letter are obligations of your employer.
Philip Morris Companies Inc. will cause your employer to comply with the terms
of this letter and to assume its obligations and will also serve as a guarantor
with respect to the payments. In the event of any merger, reorganization or
similar event, Philip Morris Companies Inc. will cause any successor entity to
assume the obligations evidenced by this
- 2 -
<PAGE>
letter. In addition, if payment of any of the amounts provided for in Appendix
A subjects you to federal excise tax, on those amounts or any other amounts you
have received, you will receive additional payments sufficient to place you in
the position that would have existed had no such excise tax been payable.
If this letter accurately describes the matters set forth above, please sign the
enclosed copy of this letter and Appendix A which should be returned to us, and
will then constitute our entire agreement on this subject.
Sincerely,
PHILIP MORRIS COMPANIES INC.
By /s/ Richard L. Snyder
---------------------------------------------
Richard L. Snyder
Senior Vice President, Human Resources
Administration
Agreed to this 11th day of
March, 1989
By /s/ Robert S. Morrison
------------------------------
Robert S. Morrison
President, Kraft General Foods Canada
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<PAGE>
APPENDIX A
DEFERRED INCENTIVE PAYMENT
On the terms and conditions set forth in the attached letter agreement and this
Appendix, your employer and Philip Morris Companies Inc. promise to make the
Deferred Incentive Payment as follows:
(a) a "shadow stock account" will be credited as of February 15, 1989,
with 12,335 shadow shares. Each shadow share will have a value equal
to that of one share of the common stock of Philip Morris Companies
Inc.
(b) When dividends are paid on the common stock, additional shadow shares
will be credited to the account in an amount determined by multiplying
the number of shadow shares by the dividend per share paid on the
common stock and dividing this product by the closing price of the
common stock on the New York Stock Exchange on the date the dividend
is paid.
(c) The number and value of shadow shares will be appropriately adjusted
in the event of any stock dividend, stock split, subdivision or
combination of shares, reclassification or conversion of stock in the
event of a merger or consolidation, or similar event with respect to
the common stock so that the aggregate value of shadow shares credited
will be at least as great immediately after as immediately before any
such event. In the event of any dissolution or liquidation of Philip
Morris Companies Inc., or if trading in the common stock on the New
York Stock Exchange ceases for five or more consecutive days during
which such Exchange is open for trading, then regardless of any other
provision of this Appendix you will receive an immediate cash payment
of an amount equal to the value of the shadow stock account computed
on the basis of the average closing prices for the common stock on the
New York Stock Exchange on the last five days on which such stock was
traded.
(d) The number of shadow shares shall also be adjusted in the following
circumstances:
(i) In the event that on or before February 15, 1991, you die,
become disabled for six consecutive months, have your
employment involuntarily terminated, or take normal or
employer approved early retirement, the
<PAGE>
number of shadow shares credited to your shadow stock
account will be increased by the amount, if any, necessary
to bring the aggregate value of the shadow shares credited,
determined as of the date of any such event, to the amount
determined by crediting $1,233,403 with interest from
December 6, 1988 to the date of such event at a rate equal
to (A) the annual rate on 12 month obligations of the United
States Treasury on February 15, 1989 for the portion of the
period prior to February 15, 1990, and (B) the annual rate
on such obligations on February 15, 1990 (applied to the
balance of both principal and interest on that date) for any
portion of the period on or after February 15, 1990.
(ii) If you continue your employment with Philip Morris Companies
Inc. or any of its subsidiaries until February 15, 1991, the
number of shadow shares credited to your shadow stock
account shall be increased in the amount, if any, necessary
to bring the aggregate value of the shadow shares credited
to your account on February 15, 1991 to the amount
determined by crediting the dollar amount specified in (i)
above with interest at the rates and in the manner described
therein to February 15, 1991.
For purposes of this Appendix, other than for purposes of the last sentence of
paragraph (c), the value of each shadow share will be the closing price of a
share of the common stock on the most recent New York Stock Exchange trading day
preceding the date of the determination of value.
(e) The amount of the Deferred Incentive Payment payable to you will be
determined by multiplying the number of shadow shares credited to you
on the most recent New York Stock Exchange trading preceding payment
by the closing price of the common stock on such day. Such amount
shall be paid to you in cash, or at the discretion of Philip Morris
Companies Inc. in shares of common stock equal in number to your
shadow shares, at the time you select by initialing one of the
following alternative payment schedules:
[ ] The Deferred Incentive Payment will be paid within 30 days
after the earliest to occur of your death, disability for
six consecutive months, or other termination of employment;
<PAGE>
except in the event of your voluntary termination of
employment for reasons other than normal or employer
approved early retirement, the Deferred Incentive Payment
will be paid no earlier than February 15, 1991.
OR
[ X ] The Deferred Incentive Payment will be paid within 30 days
after the earliest to occur of your death, disability for
six consecutive months, other termination of employment, or
February 16, 1991; except in the event of your voluntary
termination of employment for reasons other than normal or
employer approved early retirement, the Deferred Incentive
Payment will be paid no earlier than February 15, 1991.
Your entitlement to the Deferred Incentive Payment does not constitute an
interest in specific assets of your employment or Philip Morris Companies Inc.
Your status with respect to such payment shall be that of an unsecured general
creditor.
The Deferred Incentive Payment may not be assigned or otherwise transferred by
you (other than by your will or by operation of law in the event of your death)
prior to the date you actually receive such payment or payments.
PHILIP MORRIS COMPANIES INC.
By /s/ Richard L. Snyder
----------------------------------
Richard L. Snyder
Senior Vice President, Human Resources
Administration
Agreed to this 11th day of
March, 1989
By /s/ Robert S. Morrison
-------------------------------------
Robert S. Morrison
President, Kraft General Foods Canada
<PAGE>
Exhibit 10.10
SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
OF
PHILIP MORRIS COMPANIES INC.
Effective October 1, 1987
(As amended and in effect as of January 1, 1994)
<PAGE>
SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
OF
PHILIP MORRIS COMPANIES INC.
The Supplemental Management Employees' Retirement Plan of Philip
Morris Companies Inc., as hereinafter set forth shall be effective with respect
to an Employee designated as a Participant (as defined herein) whose date of
retirement (as specified in an application for retirement in Article II, B of
the PM Retirement Plan) is on or after April 1, 1993, or who has filed an
application for an Optional Payment pursuant to Article II D(3) of the Plan
after March 1, 1992 and with respect to former Employees designated as
Participants on or after April 1, 1993. The rights of an Employee or former
Employee designated as a Participant who retired before such dates shall be
governed by the provisions of the Plan as in effect on the date of retirement
or, if later, the date of designation as a Participant, unless an application
for an Optional Payment was filed after March 1, 1992.
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<PAGE>
ARTICLE I
DEFINITIONS
The following terms as used herein shall have the meanings set forth
below. Capitalized terms used herein and not defined below shall have the
meanings set forth in the PM Retirement Plan or the Profit-Sharing Plan, as the
context may require.
(a) "Accredited Service" shall have the same meaning as in the PM
Retirement Plan, provided, however, that Accredited Service shall also
include the additional periods of Accredited Service which may be credited
to a Participant under the provisions of Article II, A(1)(a) of the Plan.
(b) "Actuarial Equivalent" shall mean a benefit which is equivalent
in value to the benefit otherwise payable pursuant to the terms of the
Plan, based on the actuarial principles and assumptions set forth in
Exhibit "I" to the PM Retirement Plan; provided, however, that a Single
Sum Payment shall be the Actuarial Equivalent of the Supplemental
Retirement Allowance payable in equal monthly payments during a twelve
(12) month period for the life of the Retired Participant, using the
actuarial principles and assumptions set forth in Exhibit "A" to the Plan.
(c) "Administrator" shall mean the Senior Vice President, Human
Resources and Administration of Philip Morris Companies Inc. (or his
delegatee) designated by the Committee to carry out certain
responsibilities in connection with the administration of the Plan.
(d) "Allowances" shall mean a Supplemental Retirement Allowance and
a Supplemental Profit-Sharing Allowance.
(e) "Appointee" shall mean the person or entity who, pursuant to the
provisions of the Plan, is empowered, in his, her or its sole discretion,
to designate an Employee as a Participant and grant one or more Allowances
under the Plan. The Appointee for an Employee who is not a chief executive
officer of a Participating Company shall be the chief executive officer of
his Participating Company. The Appointee for a Retired Employee and an
Employee who is a chief executive officer of a Participating Company other
than the Company shall be the Chief Executive Officer. The Appointee of
the Chief Executive Officer shall be the Committee.
(f) "Benefit Equalization Plan" shall mean the Philip Morris Benefit
Equalization Plan, effective as of September 2, 1974 and as amended from
time to time, but only to the extent that benefits are payable pursuant to
Article II, A thereof.
(g) "Change in Circumstance" shall mean (1) the marriage of the
Participant or Retired Participant, (2) the divorce of the Participant or
Retired Participant from his Spouse, provided such Spouse was designated
as the beneficiary in the currently effective application to receive an
Optional Payment, or the
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<PAGE>
Participant or Retired Participant elected to receive an Optional Payment
pursuant to clause (1) of Paragraph (u) hereof, (3) the death of the
beneficiary designated in the application to receive an Optional Payment,
or (4) a medical condition, based on medical evidence satisfactory to the
Administrator, which is expected to result in the death of the beneficiary
(including the Spouse) who is designated to receive a benefit after the
death of the Retired Employee in accordance with the application to
receive an Optional Payment originally filed with the Administrator,
within five (5) years of the filing of an application for change in
Optional Payment method pursuant to Article II, D(3) hereof.
(h) "Change of Control" shall mean the happening of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (i) the
then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting
power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that
the following acquisitions shall not constitute a Change of Control:
(i) any acquisition directly from the Company, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (iv) any acquisition by any
corporation pursuant to a transaction described in clauses (i), (ii)
and (iii) of paragraph 3 of this subsection (h); or
(2) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) Approval by the shareholders of the Company of a
reorganization, merger, share exchange or consolidation (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial
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<PAGE>
owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 80% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors,
as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the
extent that such ownership existed prior to the Business Combination
and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(4) Approval by the shareholders of the Company of (i) a
complete liquidation or dissolution of the Company or (ii) the sale
or other disposition of all or substantially all of the assets of
the Company, other than to a corporation, with respect to which
following such sale or other disposition, (A) more than 80% of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case
may be, (B) less than 20% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by any Person (excluding
any employee benefit plan (or related trust) of the Company or such
corporation), except to the extent that such Person owned 20% or
more of the Outstanding Company Common Stock or Outstanding Company
Voting
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<PAGE>
Securities prior to the sale or disposition and (C) at least a
majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such sale or other disposition of assets of the
Company or were elected, appointed or nominated by the Board.
(i) "Chief Executive Officer" shall mean the chief executive officer
of the Company.
(j) "Committee" shall mean the Corporate Employee Benefit Committee
of the Company charged with the administration of the Plan as from time to
time constituted.
(k) "Company" shall mean Philip Morris Companies Inc.
(l) "Deceased Participant" shall mean any former Participant who
died while he was a Participant, provided that no Optional Payment
pursuant to clause (3) of Paragraph (u) hereof will be made under the Plan
after the death of the Deceased Participant.
(m) "Deceased Retired Participant" shall mean a Retired Participant
who has elected to receive an Optional Payment but who has died prior to
the date his Optional Payment commences to be paid.
(n) "Deferred Retirement Allowance" shall mean the Retirement
Allowance payable pursuant to Article II, A(2) of the PM Retirement Plan.
(o) "Early Retirement Allowance" shall mean the Retirement
Allowances payable pursuant to Article II, A(3) of the PM Retirement Plan.
(p) "Employee" shall mean any person who (1) is employed on a
salaried basis by a Participating Company, (2) is a member of a select
group of management or a highly compensated employee of his Participating
Company and (3) is eligible to receive a Retirement Allowance under the PM
Retirement Plan. An Employee shall cease to be such under the Plan upon
termination of his service for any cause whatsoever; provided, however,
that he shall be deemed to be an Employee during the periods of service
accredited to him pursuant to Article III of the PM Retirement Plan.
(q) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time, and any successor thereto.
(r) "Fiduciary" shall mean the Committee, the Management Committee
and the Administrator to the extent that such person or body (1) exercises
any
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<PAGE>
discretionary authority or control respecting management of the Plan, or
(2) has discretionary authority or responsibility in the administration of
the Plan.
(s) "Full Retirement Allowance" shall mean the Retirement Allowance
payable pursuant to Article II, A(1) of the PM Retirement Plan.
(t) "Management Committee" shall mean the Philip Morris Management
Committee for Employee Benefits designated by the Committee to carry out
certain responsibilities in connection with the administration of the
Plan.
(u) "Optional Payment" shall mean the following forms in which a
Supplemental Retirement Allowance of a Participant who has made an
election pursuant to Article II, D(3) hereof may be paid: (1) in equal
monthly payments for the life of the Retired Participant, (2) as a
Supplemental Joint and Survivor Allowance, or (3) as a Supplemental
Optional Payment Allowance. Any election to receive an Optional Payment
with respect to a Retired Participant's Supplemental Retirement Allowance
under the Plan shall be independent of any election with respect to his
benefits under any Other Plan.
(v) "Other Plan" shall mean (1) the Retirement Plan, (2) the Benefit
Equalization Plan, (3) any other plan, except a defined contribution or
similar plan, maintained by the Company, or any domestic or foreign
subsidiary of the Company, which provides retirement income to one or more
employees on or after termination of employment and (4) any employment
contract or other agreement between an Employee and the Company or any
other member of the Controlled Group providing for retirement benefits or
benefits in the event of a termination of employment or a Change in
Control of the Company or of any other member of the Controlled Group.
(w) "Participant" shall mean an Employee or Retired Employee who is
designated as such by his Appointee pursuant to the terms of the Plan. The
designation of an Employee or Retired Employee as a Participant by a chief
executive officer of a Participating Company shall be communicated in
writing to the Committee. An Employee or Retired Employee shall become a
Participant as of the date designated in writing by his Appointee. Except
as otherwise specifically provided for in the Plan, a Participant shall
cease to be such whenever he ceases to be an Employee.
(x) "Participating Company" shall mean the Company and any other
corporation which is a member of the Controlled Group and which, with the
approval of the Committee determines to participate in the Plan for the
benefit of its Employees and executes such instruments of participation as
the Committee deems necessary.
(y) "Plan" shall mean this Supplemental Management Employees'
Retirement Plan of Philip Morris Companies Inc., as amended from time to
time.
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<PAGE>
(z) "PM Retirement Plan" shall mean the Philip Morris Salaried
Employees' Retirement Plan, effective as of September 1, 1978 and as
amended from time to time.
(aa) "Profit-Sharing Plan" shall mean the Philip Morris Deferred
Profit-Sharing Plan, effective as of January 1, 1956 and as amended
from time to time.
(bb) "Retired Participant" shall mean a Participant who ceases to be
such but is eligible for, or who has retired and is receiving a
Supplemental Retirement Allowance from the Plan. A former Employee shall
cease to be a Retired Participant as of the date he receives a Single Sum
Payment.
(cc) "Retirement Plan" shall mean the PM Retirement Plan and each
other defined benefit plan qualified under Section 401(a) of the Code
maintained by a member of the Controlled Group in which a Participant has
an accrued benefit.
(dd) "Single Sum Payment" shall mean (1) in the case of a
Supplemental Retirement Allowance, the normal form of distribution to a
Retired Participant who is eligible for a Full, Deferred or Early
Retirement Allowance, which distribution shall be made in one payment to
the Retired Participant (or his designated beneficiary) at the time set
forth in Article II, D(2)(a) hereof and which is the Actuarial Equivalent
of the Supplemental Retirement Allowance payable in equal monthly payments
during a twelve (12) month period for the life of the Retired Participant
and (2) the sole form of distribution of the Retired Participant's
Supplemental Profit-Sharing Allowance.
(ee) "Supplemental Joint and Survivor Allowance" shall mean the
total amount payable during a twelve (12) month period as a reduced
Supplemental Retirement Allowance to a Retired Participant for life and
after his death the amount payable to his Spouse for life equal to
one-half of the reduced Supplemental Retirement Allowance payable to the
Retired Participant, which together shall be the Actuarial Equivalent of
the Supplemental Retirement Allowance of the Retired Participant.
(ff) "Supplemental Optional Payment Allowance" shall mean (1) the
total amount payable during a twelve (12) month period in accordance with
one of the payment methods described in Article II, A(4)(d) of the PM
Retirement Plan designated by the Participant in the application for an
Optional Payment under Article II, D(3) hereof pursuant to which the
Participant receives for life after his retirement a reduced Supplemental
Retirement Allowance and after his death after retirement his beneficiary
receives for life a benefit according to the option elected by the
Employee, which together shall be the Actuarial Equivalent of the
Supplemental Retirement Allowance payable in equal monthly payments for
the life of the Participant after his retirement, or (2) the total amount
payable during a twelve (12)
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<PAGE>
month period in accordance with one of the payment methods described in
Article II, A(4)(d) of the PM Retirement Plan pursuant to an election
described in Article II, A(4)(c) of the PM Retirement Plan and designated
by the Participant in the application for an Optional Payment under
Article II, D(3) hereof pursuant to which the Participant receives for
life after his retirement a reduced Supplemental Retirement Allowance and
after his death his beneficiary receives for life a benefit according to
the option elected by the Participant, which together shall be the
Actuarial Equivalent of the Supplemental Retirement Allowance accrued to
the date of election.
(gg) "Supplemental Profit-Sharing Allowance" shall mean the benefit
determined and payable in a Single Sum Payment upon termination of a
Participant's service with the Controlled Group pursuant to Article III
hereof.
(hh) "Supplemental Retirement Allowance" shall mean the benefit
determined under Article II, A hereof and payable at the time and in the
manner set forth in Article II, D, provided, however, that, except as
otherwise required by Article II, A(1) or Article II, D(3) of the Plan,
payment to a Retired Participant in any form shall be the Actuarial
Equivalent of a Supplemental Retirement Allowance expressed as a benefit
payable in equal monthly payments during a twelve (12) month period for
the life of the Retired Participant commencing at the Retired
Participant's Normal Retirement Age.
(ii) "Supplemental Survivor Allowance" shall mean the total amount
payable during a twelve (12) month period in equal monthly payments for
the life of the Spouse of a Deceased Participant or Deceased Retired
Participant who has died after the date of his retirement and prior to the
date his Optional Payment under Paragraph (u)(1) or (2) hereof commences
to be paid in an amount equal to one-half of the reduced Supplemental
Retirement Allowance which would have been payable as a Supplemental Joint
and Survivor Allowance to the Deceased Participant or Deceased Retired
Participant. Payment of the Supplemental Survivor Allowance to the Spouse
of a Deceased Participant or Deceased Retired Participant who is eligible
for such benefit under Article II, B hereof shall be payable at the time
set forth in Article II, D(4) hereof.
(jj) "Supplemental Survivor Income Benefit Allowance" shall mean the
total amount payable during a twelve (12) month period to the Spouse of a
Deceased Participant or Deceased Retired Participant equal to one-half of
the reduced Supplemental Retirement Allowance which would have been
payable to the Deceased Participant or Deceased Retired Participant had he
elected to receive a Supplemental Joint and Survivor Allowance. Payment of
the Supplemental Survivor Income Benefit Allowance to the Spouse of a
Deceased Participant or Deceased Retired Participant who is eligible for
such benefit under Article II, B hereof shall be payable at the time set
forth in Article II, D(4) hereof.
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<PAGE>
(kk) "Supplemental Survivor Income Benefit Plan" shall mean the
Philip Morris Survivor Income Benefit Equalization Plan, effective as of
January 1, 1985 and as amended from time to time.
(ll) "Survivor Income Benefit Plan" shall mean the Philip Morris
Survivor Income Benefit Plan, effective as of February 1, 1974 and as
amended from time to time.
(mm) "Vested Retirement Allowance" shall mean the Retirement
Allowance payable pursuant to Article II, A(6) of the PM Retirement Plan,
provided, however, that a Participant who is only eligible for a Vested
Retirement Allowance may be deemed to be eligible for an Early Retirement
Allowance for any and all purposes of this Plan if in accordance with his
designation as a Participant in the Plan.
As used in this Plan, the masculine pronoun shall include the feminine and the
feminine pronoun shall include the masculine unless otherwise specifically
indicated.
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<PAGE>
ARTICLE II
SUPPLEMENTAL RETIREMENT ALLOWANCES
A. Supplemental Retirement Allowances payable under this Plan shall be as
follows:
(1) A Participant may be granted one or more of the following Supplemental
Retirement Allowances under the Plan:
(a) A Supplemental Retirement Allowance in an amount determined by
using the formula for calculating the Participant's Retirement Allowance under
the PM Retirement Plan, but, subject to the limitations of Subparagraph (2)
hereof, crediting Accredited Service in addition to that credited to the
Participant pursuant to the PM Retirement Plan in recognition of previous
service by the Participant deemed to be of special value to the Company or his
Participating Company;
(b) A Supplemental Retirement Allowance in an amount equal to (i) a
stated dollar amount per year, or (ii) a stated percentage of not more than
sixty (60) percent of the Participant's Five-Year Average Compensation, or (iii)
the Participant's Retirement Allowance under the PM Retirement Plan, which
Supplemental Retirement Allowance accrues at a rate as a percentage of the
Participant's Five-Year Average Compensation which is greater than the rate of
accrual under the PM Retirement Plan, such Supplemental Retirement Allowances to
be calculated in individual instances on the basis of specific instructions
which may depart only for such purpose from the terms, conditions and
requirements of the PM Retirement Plan; or
(c) A Supplemental Retirement Allowance in an amount determined by
using the formula for calculating the Participant's Retirement Allowance under
the PM Retirement Plan, such Supplemental Retirement Allowance to be payable on
and after the Participant's retirement in an amount which is greater than the
Retirement Allowance otherwise payable to the Participant at such age.
(2) If a Supplemental Retirement Allowance under Subparagraph (1) hereof
is determined pursuant to a formula in the PM Retirement Plan using the
Participant's Compensation (including awards under incentive compensation plans
of the Company), the aggregate number of years of Accredited Service used in
calculating the amount of the Participant's Supplemental Retirement Allowance
under this Plan shall not exceed thirty-five (35) years.
(3) The name of each Participant and the Supplemental Retirement Allowance
awarded to him pursuant to Subparagraph (1) above shall be set forth in Appendix
I to the Plan.
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<PAGE>
B. Supplemental Survivor Allowances, Supplemental Survivor Income Benefit
Allowances and Supplemental Optional Payment Allowances payable to the
Spouse or beneficiary of certain Deceased Participants and Deceased
Retired Participants shall be as follows:
(1) (a) If a Deceased Participant has died prior to date he would have
attained the age of sixty-five (65) years, his Spouse shall be eligible to
receive a Supplemental Survivor Allowance determined in accordance with the
applicable provisions of Article II, A(1) of this Plan.
(b) If a Deceased Participant who is eligible for a Supplemental
Retirement Allowance under Subparagraphs (a), (b)(iii) or (c) of Article II,
A(1) has died prior to date he would have attained the age of sixty-five (65)
years and has (or is deemed to have) completed five (5) or more years of
Accredited Service, his Spouse shall be eligible to receive a Supplemental
Survivor Income Benefit Allowance determined in accordance with Subparagraphs
(a), (b)(iii) or (c) of Article II, A(1) as applicable to such Deceased
Participant, assuming such Deceased Participant had continued in the employ of
his Participating Company until the age of sixty-five (65) years, that his
compensation (as defined in the Survivor Income Benefit Plan) for all periods of
time subsequent to his death and until age sixty-five (65) had been his
compensation as in effect immediately prior to his death and that the Deceased
Participant died the day after attaining the age of sixty-five (65) years,
reduced by the amount of any Supplemental Survivor Allowance payable pursuant to
Subparagraph (a) hereof.
(2) If a Deceased Participant has died after attaining the age of
sixty-five (65) years his Spouse shall be eligible to receive a Supplemental
Survivor Allowance determined in accordance with the applicable provisions of
Article II, A(1) hereof.
(3) (a) The Spouse of a Deceased Retired Participant (other than a
Deceased Retired Participant who is only eligible for a Vested Retirement
Allowance) whose request for an Optional Payment pursuant to Article I(u)(1)
hereof has been granted by the Management Committee, but who has died prior to
the date his Optional Payment commences to be paid shall be eligible to receive
a Supplemental Survivor Allowance determined in accordance with the applicable
provisions of Article II, A(1) of this Plan.
(b) The Spouse of a Deceased Retired Participant (other than a
Deceased Retired Participant who is only eligible for a Vested Retirement
Allowance) who prior to his death commenced to receive an Optional Payment
pursuant to Article I(u)(1) hereof shall be eligible to receive a Supplemental
Survivor Income Benefit Allowance.
(4) The Spouse of a Deceased Retired Participant who is only eligible for
a Vested Retirement Allowance under the PM Retirement Plan but who has died
prior to his Benefit Commencement Date shall be eligible to receive a
Supplemental Survivor Allowance determined in accordance with the applicable
provisions of Article II, A(1) of this Plan.
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<PAGE>
(5) The beneficiary of a Retired Participant whose request for a
Supplemental Optional Payment Allowance in accordance with Article I(ff)(1)
hereof has been granted by the Management Committee but who has died after the
date of his retirement and prior to the date his Optional Payment commences to
be paid shall be eligible to receive that portion of the Supplemental Optional
Payment Allowance elected by the Retired Participant which is payable after the
death of the Retired Participant.
(6) The beneficiary of a Deceased Participant or Deceased Retired
Participant whose request for a Supplemental Optional Payment Allowance
described in Article I(ff)(2) hereof has been granted by the Management
Committee shall be eligible to receive that portion of the Supplemental Optional
Payment Allowance elected by the Deceased Participant or Deceased Retired
Participant which is payable after the death of the Deceased Participant or
Deceased Retired Participant.
C. Reduction of benefits under the Plan
(1) (a) The Supplemental Retirement Allowance payable to a Retired
Participant pursuant to Article II, A hereof shall be reduced by the Actuarial
Equivalent of the benefits payable pursuant to any Other Plan to the extent that
service used to determine the amount of benefits payable from such Other Plan is
also used to calculate the amount of a Retired Participant's Supplemental
Retirement Allowance under this Plan and assuming that the Participant elected
to receive such benefits in equal monthly payments for his life; provided,
however, that (1) in the event the Supplemental Retirement Allowance is paid to
the Retired Participant (or his beneficiary) in a Single Sum Payment prior to
the Retired Participant's Benefit Commencement Date, such Supplemental
Retirement Allowance shall be computed in accordance with the applicable
provisions of Paragraph A(1) hereof, as reasonably estimated by the
Administrator, reduced by the Actuarial Equivalent of the projected annual
amount of benefits payable pursuant to any Other Plan assuming that such
benefits are payable to the Retired Participant in equal monthly payments for
life and (2) in the event the benefit equalization retirement allowance under
the Benefit Equalization Plan is paid to the Retired Participant (or his Spouse
or other beneficiary) in a single sum payment (as defined in the Benefit
Equalization Plan) prior to the Retired Participant's Benefit Commencement Date,
the amount of the reduction to the Participant's Supplemental Retirement
Allowance shall be determined in good faith by the Administrator.
(b) Any Supplemental Survivor Allowance or Supplemental Survivor
Income Benefit Allowance payable to the Spouse of a Deceased Participant or
Deceased Retired Participant pursuant to Article II, B hereof shall be reduced
by the Actuarial Equivalent of the maximum benefits for which the Spouse was
actually eligible under the Retirement Plan, the Benefit Equalization Plan, the
Survivor Income Benefit Plan and the Supplemental Survivor Income Benefit Plan
assuming that the Participant elected to receive a Retirement Allowance under
the Retirement Plan and a benefit equalization retirement
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allowance under the Benefit Equalization Plan in equal monthly payments for the
life of the Retired Participant.
(c) Any Supplemental Optional Payment Allowance payable to the
beneficiary of a Deceased Participant or Deceased Retired Participant pursuant
to Article II, B hereof shall be reduced by the Actuarial Equivalent of the
benefits payable pursuant to the Retirement Plan and the Benefit Equalization
Plan assuming that the Participant had elected to receive such benefits in equal
monthly payments for life.
(2) No benefits shall be payable to the Spouse or other beneficiary of a
Deceased Retired Participant pursuant to Article II, B hereof, if prior to his
death the Deceased Retired Participant received a Single Sum Payment from this
Plan or the Single Sum Payment is made after his death to his Spouse or a
beneficiary.
D. Notification for Supplemental Retirement Allowances; Commencement and
termination of Supplemental Retirement Allowances
(1) An application for a Retirement Allowance, Survivor Allowance or
optional form of benefit under the PM Retirement Plan shall be deemed
notification to the Administrator that payment of a Supplemental Retirement
Allowance or other benefit is to be made or commence to be made to the Retired
Participant, Spouse or other beneficiary in accordance with the terms of the
Plan. In the event the Participant shall not have elected an Optional Payment
method with respect to his Supplemental Retirement Allowance, any such
notification shall specify the beneficiary to whom payment of the Single Sum
Payment shall be made in the event the Participant dies after the date of
retirement and prior to the date the Single Sum Payment is made, provided, that
if the Participant shall fail to designate a beneficiary or if the beneficiary
shall predecease the Participant, the Administrator shall distribute the Single
Sum Payment to the duly authorized representative of the former Participant's
estate.
(2) (a) A Retired Participant who is eligible for a Full, Deferred or
Early Retirement Allowance shall receive his Supplemental Retirement Allowance
in a Single Sum Payment no later than sixty (60) days following the Retired
Participant's date of retirement (or, if the Retired Participant dies after the
date of retirement and before distribution of his Single Sum Payment is made, to
his beneficiary as determined pursuant to Subparagraph (1) hereof, in a Single
Sum Payment within sixty (60) days following the date of the Retired
Participant's death) unless the Participant has elected to have distribution of
his Supplemental Retirement Allowance made in accordance with Subparagraph (3)
hereof.
(b) The Supplemental Retirement Allowance with respect to an
Employee who is only eligible for a Vested Retirement Allowance shall be
distributed as an Optional Payment under clauses (1) or (2) of Article I(u)
hereof (which Optional Payment shall be in
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the same form which the Retired Participant's benefits are paid from the PM
Retirement Plan) and shall commence on the Participant's Benefit Commencement
Date.
(3) A Participant who is eligible to retire on a Full, Deferred or Early
Retirement Allowance and whose Supplemental Retirement Allowance is otherwise
payable in a Single Sum Payment pursuant to Paragraph D(1) hereof may make
application to the Administrator to receive an Optional Payment. The application
may be filed prior to the date the Participant is eligible for an Early
Retirement Allowance and shall specify the form of Optional Payment, the
beneficiary and the date on which the Optional Payment is to commence to be
made, which date shall be on or before the first day of the month coincident
with or next preceding the Participant's Required Benefit Commencement Date, but
in no event shall the Participant's Optional Payment commence to be paid prior
to the later of the first day of the month following the first anniversary of
the date of the filing of his application with the Administrator or the
Participant's Benefit Commencement Date; provided, however, that in the event
the Participant incurs a Change in Circumstance on or after the date of the
filing of the application and prior to the date his Optional Payment commences
to be paid, the Participant may file an application with the Administrator
within ninety (90) days of the Change in Circumstance, but in no event later
than the date his Optional Payment is to commence, to change the form of
Optional Payment or to change the beneficiary who is designated to receive a
benefit after the death of the Retired Participant in accordance with the
Optional Payment method originally filed with the Administrator; provided,
further, that any election to change the form of Optional Payment filed after
the date of his retirement and prior to the date his Optional Payment is to
commence may only change the form of Optional Payment to one of the forms
specified in Article I(u)(1) or (2) hereof. In the case of a Participant who
eighteen (18) months prior to attaining the age of sixty-five (65) years could
be compulsorily retired by his Participating Company upon attaining the age of
sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in
Employment Act, any application to receive an Optional Payment must be filed
with the Administrator more than one (1) year preceding the date the Participant
attains the age of sixty-five (65) years. The Administrator shall notify the
Management Committee of all applications for an Optional Payment. The Management
Committee may grant or deny any such application in its sole and absolute
discretion. Any such application shall be of no force and effect if (i) the
Participant does not retire on a Full, Deferred or Early Retirement Allowance,
(ii) the Participant incurs a disability at any time before the date his
Optional Payment commences to be paid which causes him to be eligible for
benefits under the Philip Morris Long-Term Disability Plan, or (iii) the
Participant is retired for ill health, disability or hardship under Article II,
A(3)(a) of the PM Retirement Plan, provided that in the event the application is
of no force and effect under clauses (ii) or (iii) hereof, payment of the
Participant's Supplemental Retirement Allowance shall be made in a Single Sum
Payment pursuant to Paragraph D (2)(a) hereof within sixty (60) days of the date
of his retirement, but otherwise such application shall be irrevocable and
effective on the Participant's retirement on a Full, Deferred or Early
Retirement Allowance and the Participant's benefits shall commence on the date
specified in the application; provided, however, that (A) if within the one (1)
year period following the date of the filing of the application with the
Administrator
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the Participant's service with any member of the Controlled Group is
involuntarily terminated other than by reason of the Participant's death,
disability or misconduct (as determined by the Management Committee), such
Participant's Optional Payment shall commence to be paid on the Participant's
Benefit Commencement Date, or (B) if within the one (1) year period following
the date of the filing of the application with the Administrator the Participant
voluntarily retires or his employment is terminated for misconduct (as
determined by the Management Committee) by any member of the Controlled Group,
the Optional Payment shall be reduced as specified in Subparagraph (6) hereof.
(4) The Supplemental Survivor Allowance payable to the Spouse of a
Deceased Participant pursuant to Paragraphs B(1)(a) or B(2) hereof or to the
Spouse of a Deceased Retired Participant pursuant to Paragraphs B(3)(a) and B(4)
above shall commence to be paid on the later of (a) the first day of the
calendar month coincident with or next following the date the Deceased
Participant or Deceased Retired Participant would have attained the age of
fifty-five (55) years, or (b) the first day of the calendar month in which the
Deceased Participant or Deceased Retired Participant died, provided that the
Spouse may elect in accordance with the provisions of Article II, A(5)(c) or (f)
of the PM Retirement Plan, as applicable to the Spouse, that the Supplemental
Survivor Allowance shall commence on the first day of any month thereafter, but
not later than the first day of the calendar month in which the Deceased
Participant or Deceased Retired Participant would have attained his Normal
Retirement Age and any such Supplemental Survivor Allowance shall terminate on
the first day of the month in which the Spouse dies. The Supplemental Survivor
Income Benefit Allowance payable to the Spouse of a Deceased Participant
pursuant to Paragraph B(1)(b) above or to the Spouse of a Deceased Retired
Participant pursuant to Paragraph B(3)(b) above shall commence and terminate
simultaneously with the date on which a survivor income benefit allowance would
have been payable to the Spouse pursuant to Article II, A(2)(b) or A(4), as
applicable, of the Survivor Income Benefit Plan. The Supplemental Optional
Payment Allowance payable to the beneficiary of a Deceased Retired Participant
pursuant to Paragraph B(5) hereof or to the beneficiary of a Deceased
Participant or Deceased Retired Participant pursuant to Paragraph B(6) above
shall commence on the first day of the calendar month following the month in
which the Deceased Participant or Deceased Retired Participant died.
(5) (a) Notwithstanding the previous provisions of this Paragraph, the
Committee may cause the distribution of the Supplemental Retirement Allowance or
other benefit to any group of similarly situated Retired Participants, or
Spouses or beneficiaries in a Single Sum Payment or as an Optional Payment.
(b) Notwithstanding the preceding provisions of this Paragraph, the
Administrator shall distribute a Participant's Supplemental Retirement Allowance
in a Single Sum Payment if the Supplemental Retirement Allowance payable in
equal monthly payments is not more than $250.
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<PAGE>
(6) (a) The Supplemental Retirement Allowance payable to a Retired
Participant pursuant to clause (B) of Subparagraph (3) hereof shall be further
reduced by one percent (1%) for each month (or portion of a month) by which the
month in which the Retired Participant's termination of employment precedes the
first anniversary of the filing of the application with the Administrator.
(b) The Supplemental Survivor Allowance of a Spouse of a Deceased
Participant or Deceased Retired Participant commencing at an age other than the
Deceased Participant's or Deceased Retired Participant's Normal Retirement Age
shall be the Actuarial Equivalent of the Supplemental Retirement Allowance
payable as a Joint and Survivor Supplemental Allowance at the Deceased
Participant's or Deceased Retired Participant's Normal Retirement Age unless
otherwise required by Article II, A(1) of the Plan. The Supplemental Optional
Payment Allowance payable to the beneficiary of a Deceased Participant or
Deceased Retired Participant commencing at an age other than the Deceased
Participant's or Deceased Retired Participant's Normal Retirement Age shall be
the Actuarial Equivalent of the Supplemental Retirement Allowance payable as a
Supplemental Optional Payment Allowance at the Deceased Participant's or
Deceased Retired Participant's Normal Retirement Age unless otherwise required
by Article II, A(1) of the Plan.
E. Cessation of accruals of Supplemental Retirement Allowance
Any right or claim to any Supplemental Retirement Allowance or other
benefit under the Plan which any Participant, Spouse or designated beneficiary
may have shall terminate if the Committee shall find that such Participant has
been guilty of fraud or dishonesty towards a Participating Company, or has
willfully damaged the property of a Participating Company, or has wrongfully
disclosed any secret process or imparted any confidential information, or has
done any other act materially inimical to the interest of a Participating
Company.
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ARTICLE III
SUPPLEMENTAL PROFIT-SHARING ALLOWANCES
A Participant may be granted a Supplemental Profit-Sharing Allowance equal
to the amount, if any, by which the sum of the Contribution which would have
been made to the Profit-Sharing Plan and the amount which would have been
credited to his account under the Benefit Equalization Plan had such Participant
been eligible to participate in such plans for a plan year, exceeds the amount,
if any, of employer contributions (excluding any contributions which the
Participant has elected to have an employer make on his behalf pursuant to a
cash or deferred arrangement) actually made or credited for the plan year on
behalf of such Participant under a defined contribution plan qualified under
Section 401(a) of the Code, an excess benefit plan (as defined in ERISA) and a
plan maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees maintained by any
other member of the Controlled Group.
Any amounts credited to a Participant's account pursuant to the provisions
of this Article III shall be deemed to have been invested in Part C of the Fund
under the Profit-Sharing Plan and shall be valued in accordance with the
provisions of the Profit-Sharing Plan.
A Retired Participant shall receive his Supplemental Profit-Sharing
Allowance in a Single Sum Payment no later than sixty (60) days following the
Participant's date of retirement or other termination of employment with the
Controlled Group.
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ARTICLE IV
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE
An individual account shall be established for the benefit of each
Participant (and Spouse or designated beneficiary) under the Plan. The Plan
shall be unfunded. All benefits intended to be provided under the Plan shall be
paid from time to time from the general assets the Participant's Participating
Company and paid in accordance with the provisions of the Plan; provided,
however, that the Participating Companies reserve the right to meet the
obligations created under the Plan through one or more trusts or other
arrangements. The contributions by each Participating Company on behalf of its
Participants to the individual accounts established under the Plan, whether in
trust or otherwise, shall be in an amount which such Participating Company and
the Management Committee, with the advice of an actuary, determines to be
sufficient to provide for the payment of the benefits under the Plan. No
Participant, Spouse or designated beneficiary shall, unless the Plan expressly
provides otherwise, have any right or claim whatsoever to any specific assets of
a Participating Company or of any trust.
Each Participating Company shall maintain such reserves on its books with
respect to Participants who are employed by such Participating Company as
determined by the actuary for the Plan.
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ARTICLE V
APPLICABILITY OF PROVISIONS OF PM RETIREMENT
PLAN AND SURVIVOR INCOME BENEFIT PLAN
Except as expressly provided to the contrary, all of the provisions,
conditions and requirements set forth in the PM Retirement Plan and where
applicable, the Survivor Income Benefit Plan, with respect to eligibility for
and payment of benefits thereunder shall be equally applicable to the granting
of Supplemental Retirement Allowances and other benefits to Participants and
Beneficiaries pursuant to this Plan and the payment thereof pursuant to the
provisions of Article III hereof. Whenever a Participant's rights under this
Plan are to be determined, appropriate reference shall be made to the PM
Retirement Plan.
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<PAGE>
ARTICLE VI
ADMINISTRATION
The Committee, the Management Committee and the Administrator shall be
responsible for the general administration of the Plan. The appropriate
Fiduciary shall have full authority to determine all questions arising in
connection with the Plan; provided, however, that any Fiduciary who makes a
request for payment of a Supplemental Retirement Allowance in accordance with a
form of distribution authorized under the Retirement Plan shall excuse himself
from any and all deliberations and decisions in connection with such request.
Decisions of the appropriate Fiduciary shall be conclusive and binding on all
persons.
The Fiduciaries may employ and rely on actuaries, legal counsel,
accountants and agents as they deem advisable.
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ARTICLE VII
CERTAIN RIGHTS AND LIMITATIONS
A. No benefit under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge,
and any attempt to do so shall be void; nor shall any benefit be in any
manner liable for or subject to the debts, contracts, liabilities,
engagements, or torts of the person entitled to such benefit. In the event
that the Administrator shall find that any Participant, Retired
Participant or Spouse or other beneficiary under the Plan has become
bankrupt or that any attempt has been made to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge any of his benefits under
the Plan, then such benefits shall cease and determine, and in that event,
the Administrator shall hold or apply the same to or for the benefit of
such Participant, Retired Participant, Spouse or other beneficiary or
apply the same to or for the benefit of such Participant, Retired
Participant, Spouse or other beneficiary, in such manner as the
Administrator may deem proper.
B. Except as otherwise expressly provided in the Plan, Supplemental
Retirement Allowances and other benefits shall be payable only if the
Participant meets all of the requirements for benefits under the Plan.
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ARTICLE VIII
AMENDMENT AND TERMINATION OF THE PLAN
A. The Board may, by resolution, from time to time and at any time, amend or
modify, in whole or in part, any and all of the provisions of the Plan;
provided, however, that authority to amend the Plan is delegated to the
following Fiduciaries where approval of the Plan amendment (or amendments)
by the shareholders of Philip Morris Companies Inc. is not required: (1)
to the Committee, if the amendment (or amendments) will not increase the
annual cost of the Plan by $10,000,000, (2) to the Management Committee,
if the amendment (or amendments) will not increase the annual cost of the
Plan by $4,000,000, and (3) to the Administrator, if the amendment (or
amendments) will not increase the annual cost of the Plan by $500,000;
provided, further, that no such amendment or modification shall adversely
affect the rights of any Participant, Retired Participant, Spouse or
beneficiary to benefits accrued at the time such amendment or modification
is adopted or becomes effective, whichever is later.
B. (1) The Board may terminate the Plan for any reason at any time, provided
that such termination shall not adversely affect the rights of any
Participant, Retired Participant, Spouse or beneficiary to benefits
accrued to the date of termination.
(2) In the event the Plan is terminated, each Participant, whether or not
such Participant is eligible to receive benefits under this Plan, shall be
immediately and fully vested in the benefits set forth in Article II
accrued to the date of termination of the Plan. Payment of any such
benefits shall be made or commence to be made at the time such Participant
(or his Spouse or designated beneficiary) meets, under the terms of the
Plan at the time of its termination, the requirement for payment of
benefits under the Plan.
C. Notwithstanding any other provision of the Plan to the contrary, in the
event of a Change of Control of the Company, each Participant shall
immediately be fully vested in the benefits set forth in Article II which
have accrued through the date of the Change of Control and, upon the
Change of Control, each Participant (or his Spouse or designated
beneficiary) shall be entitled to a Single Sum Payment in an amount which
is the Actuarial Equivalent of such accrued benefits, which amount shall
be paid within 30 days of the Change of Control.
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EXHIBIT A
SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
OF PHILIP MORRIS COMPANIES INC.
ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT
INTEREST RATE: Average of the interest rates established by the Pension
Benefit Guaranty Corporation to value immediate annuities in the case of a plan
termination for the 24 months preceding the Participant's date of retirement,
less 1/2 of 1%.
MORTALITY ASSUMPTION: UP-1894 Unisex Mortality Table
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Consolidated Operating Results--Operating Revenues
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Tobacco $36,549 $32,316 $28,671
Food 27,950 29,074 31,669
Beer 4,327 4,304 4,297
Financial services and real estate 378 377 488
- -------------------------------------------------------------------------------
Operating revenues $69,204 $66,071 $65,125
===============================================================================
Consolidated Operating Results--Operating Income
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Tobacco $ 8,263 $ 7,177 $ 6,162
Food 3,362 3,188 3,108
Beer 437 444 413
Financial services and real estate 192 164 208
- -------------------------------------------------------------------------------
Operating profit 12,254 10,973 9,891
Unallocated corporate expenses (485) (447) (442)
- -------------------------------------------------------------------------------
Operating income $11,769 $10,526 $ 9,449
===============================================================================
1996 Compared with 1995
Operating revenues for 1996 increased $3.1 billion (4.7%) and operating profit
increased $1.3 billion (11.7%) over 1995. Operating profit, as defined for
segment reporting purposes, is operating income before unallocated corporate
expenses. Operating revenues increased in 1996 over 1995 due primarily to
increases in tobacco revenues, partially offset by the impact of divestitures of
food businesses. Operating profit increased in 1996 over 1995 due primarily to
increases in the tobacco and food segments.
Excluding the results of divested North American food businesses
(discussed below in Food--Business Environment), operating revenues and
operating profit in 1996 increased $5.2 billion (8.1%) and $1.4 billion (12.9%),
respectively, over 1995.
Currency movements, primarily the strengthening of the U.S. dollar versus
the Japanese yen, decreased operating profit by $116 million in 1996. Although
the Company cannot predict future movements in currency rates, it anticipates
that the continued strength of the U.S. dollar versus the Japanese yen and
European currencies will have an unfavorable impact on operating profit in 1997.
Interest and other debt expense, net, decreased $93 million (7.9%)
compared to 1995, due primarily to a lower average interest rate on outstanding
debt and higher interest income in 1996.
Excluding the cumulative effect of accounting changes discussed below,
earnings per share of $7.68 in 1996 increased by 18.0% over 1995, due to higher
net earnings and lower shares outstanding. As a result of the Company's share
repurchase program, the weighted average number of shares outstanding decreased
to 821 million in 1996 from 842 million in 1995.
In 1996, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No. 96-1,
"Environmental Remediation Liabilities," which, as required, was adopted by the
Company as of January 1, 1997. The effect of adoption will not be material to
the Company's 1997 results of operations or financial position.
1995 Compared with 1994
Operating revenues for 1995 increased $946 million (1.5%) over 1994, primarily
due to increases in tobacco revenues, partially offset by the impact of
divestitures of food businesses. Operating profit increased $1.1 billion
(10.9%), reflecting increases in all consumer products business segments.
Currency movements, primarily the Japanese yen and German mark, increased
operating profit by $213 million in 1995. Excluding the results of divested food
businesses (discussed below), operating revenues and operating profit increased
$5.1 billion (8.7%) and $1.2 billion (13.0%), respectively, over 1994.
Interest and other debt expense, net, decreased $54 million (4.4%) in
1995, due primarily to lower average outstanding debt during the year, partially
offset by higher average commercial paper rates.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 116, "Accounting for Contributions Received
and Contributions Made." This Statement requires the Company to recognize an
unconditional promise to make a contribution as an expense in the period the
promise is made. The Company had previously expensed contributions when payment
was made. The cumulative effect at January 1, 1995 of adopting SFAS No. 116
reduced 1995 net earnings by $7 million ($.01 per share). The application of
SFAS No. 116 did not materially reduce 1995 earnings before cumulative effect of
accounting changes.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for non-U.S.
postretirement benefits other than pensions. The cumulative effect at January 1,
1995 of adopting SFAS No. 106, for the non-U.S. plans, reduced 1995 net earnings
by $21 million ($.02 per share). However, application of SFAS No. 106 for
non-U.S. employees during the year ended December 31, 1995 did not materially
reduce earnings before cumulative effect of accounting changes.
Excluding the 1995 cumulative effect of accounting changes discussed
above, net earnings increased by $753 million (15.9%) in 1995, primarily due to
increased operating profit ($1.1 billion), which was partially offset by a
higher income tax provision ($378 million).
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Excluding the 1995 cumulative effect of accounting changes discussed
above, earnings per share increased by 19.4% in 1995, due to a 15.9% increase in
net earnings to $5.5 billion and fewer shares outstanding. As a result of the
Company's share repurchase program, the weighted average number of shares
outstanding decreased to 842 million in 1995 from 867 million in 1994.
1993 Restructuring
In the fourth quarter of 1993, the Company provided for the restructuring of its
worldwide operations to reduce its cost structure and to improve its future
growth, profitability and cash flow. The charge related primarily to the
downsizing or closure of approximately 40 manufacturing and other facilities.
This restructuring charge reduced 1993 earnings before income taxes, net
earnings and earnings per share by $741 million, $457 million and $.52,
respectively. Included in this charge were asset write-downs of $429 million,
with the remainder of the charge representing anticipated cash expenditures to
be funded with cash provided by operating activities. During 1996, 1995 and
1994, the Company expended approximately $300 million in connection with this
program. The estimate of planned annual after-tax savings by year-end 1997 is
approximately $500 million.
Effective January 1, 1993, the Company adopted SFAS No. 112 "Employers'
Accounting for Postemployment Benefits." The liability established upon adoption
was sufficient to provide for costs associated with workforce reductions
contemplated by the 1993 restructuring.
Operating Results by Business Segment
Tobacco
Business Environment
The tobacco industry, including Philip Morris Incorporated ("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 and operating profit.
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 purport to
regulate tobacco products as "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; private plaintiff
class action litigation; and actions brought primarily by states and local
governments seeking Medicaid and health care reimbursement and existing and
proposed laws to help facilitate such recoveries.
In August 1996, the FDA issued final regulations purportedly designed to
reduce youth smoking. In the regulations, the FDA purports to exercise
jurisdiction over nicotine as a "drug" and over cigarettes as a "medical device"
(a "nicotine delivery system") under the provisions of the Food, Drug and
Cosmetic Act. The 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 are 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 adversely affect the volume, operating revenues and
operating profit of PM Inc. in amounts that cannot be determined. PM Inc. and
other domestic cigarette manufacturers and an advertising firm have sued the
FDA, seeking a judicial declaration that the FDA has no authority to regulate
cigarettes and asking the court to 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. A hearing on plaintiffs' motion for summary
judgment was held on February 10, 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 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 Massachusetts Department of Public Health. PM Inc. believes
that enforcement of the statute, which is scheduled to take effect on July 1,
1997, could require the disclosure 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 (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. The
plaintiffs intend to appeal that decision and will continue to assert their
other constitutional claims. The ultimate outcome of this lawsuit cannot be
predicted. The enactment of this legislation has encouraged, and continues to
encourage, efforts in other states to enact similar legislation. The Department
of Public Health has proposed
22
<PAGE>
regulations to implement the Massachusetts legislation, and has invited public
comment on the proposed regulations. PM Inc. and three other domestic cigarette
manufacturers filed comments objecting to the proposed regulations. Final
regulations have not been issued.
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.
In May 1996, PM Inc. proposed that comprehensive federal legislation be
enacted to respond to concerns by the President and others regarding the use of
tobacco products by minors. The proposed legislation would establish a federal
minimum age of 18 for the sale of tobacco products and would ban, restrict or
otherwise limit the following, among other things: cigarette vending machines;
tobacco product brand names, logos, characters and selling messages displayed on
non-tobacco-related items such as hats or T-shirts; tobacco product sponsorship
of events with significant youth audiences; outdoor advertisements for tobacco
products within 1,000 feet of any playground or elementary or secondary school,
including outward-facing window display advertising; advertisements for tobacco
products in or on trains, buses, subways and taxis, and in terminals, stations,
platforms or stops for these vehicles; and advertisements for tobacco products
in youth-oriented publications. The proposed legislation would restrict youth
access to tobacco products by calling for a ban on the sale of single cigarettes
or packs with fewer than 20 cigarettes; requiring all tobacco sales to be
face-to-face, where proof of age can be verified for anyone appearing to be
under age 21; mandating that tobacco products in retail establishments be
displayed within the control or line of sight of an employee; banning sampling
except in locations where minors are denied access; and requiring retailers and
their employees to certify that they understand and will comply with minimum-age
laws. To ensure compliance, the proposed legislation calls for penalties of up
to $50,000 for violations by a tobacco manufacturer. The proposed legislation
also calls for a $250 million contribution from the tobacco industry (based on
market share) over a five-year period to assist the government and others in
implementation and enforcement. The proposed legislation, which as of yet has
not been introduced in either house of Congress, would preclude the FDA from
regulating tobacco products.
Some foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to require ingredient disclosure, 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 to otherwise discourage cigarette smoking.
It is not possible to predict what, if any, other foreign or domestic
governmental legislation or regulations will be adopted relating to the
manufacturing, advertising, sale or use of cigarettes or to the tobacco industry
generally.
As further discussed in Note 13 to the Consolidated Financial Statements,
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 smokers,
(ii) smoking and health cases alleging personal injury and purporting to be
brought on behalf of a class of plaintiffs, and (iii) health care cost recovery
actions brought primarily by states and local governments seeking reimbursement
for Medicaid and other health care expenditures allegedly caused by cigarette
smoking.
In the individual and class action smoking and health cases pending
against PM Inc. and, in some cases, the Company and/or certain of its other
subsidiaries, plaintiffs allege "addiction" to cigarette smoking, personal
injury resulting from cigarette smoking and/or personal injury resulting from
exposure to ETS and seek compensatory and, in some cases, punitive damages in
amounts ranging into the billions of dollars. During the past two years, there
has been a substantial increase in the number of such smoking and health cases
in the United States, with a majority of the new cases having been filed in
Florida on behalf of individual plaintiffs. As of December 31, 1996, there were
185 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, compared
to 115 such cases as of December 31, 1995, and 84 such cases as of December 31,
1994. One hundred twenty-two of the cases filed and served as of December 31,
1996, were filed on behalf of individual plaintiffs in the state of Florida. Ten
of the individual cases involve allegations of various personal injuries
allegedly related to exposure to ETS.
In addition to the foregoing individual smoking and health cases, as of
January 27, 1997, there were 17 purported smoking and health class actions
pending in the United States against PM Inc. and, in some cases, the Company,
including one that involves allegations of various personal injuries related to
exposure to ETS. Twelve of these actions purport to constitute state-wide class
actions and were filed after the Fifth Circuit Court of Appeals, in the Castano
case discussed in Note 13 to the Consolidated Financial Statements, reversed a
federal district court's certification of a purported nation-wide class action
on behalf of persons who were allegedly addicted to tobacco products. Further
state-wide class actions have been threatened. One purported smoking and health
class action is pending in Canada and another in Brazil against affiliates of
the Company. 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. As
of January 27, 1997,
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26 health care cost recovery actions were pending. Other states and local
government entities have announced that they are considering filing health care
cost recovery actions.
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. All such cases
are, and will continue to be, vigorously defended. It is not possible to predict
the outcome of this litigation. Litigation is subject to many uncertainties, and
it is possible that some of these actions could be decided unfavorably. An
unfavorable outcome of a pending smoking and health case, such as the Carter
case discussed in Note 13 to the Consolidated Financial Statements, could
encourage the commencement of additional similar litigation. There have also
been a number of adverse legislative, regulatory, political and other
developments concerning cigarette smoking and the tobacco industry. These
developments generally receive widespread media attention. The Company is not
able to evaluate the effect of these developing matters on pending litigation
and the possible commencement of additional litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of all pending litigation.
It is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation. Management believes, however, that the ultimate outcome of all
pending litigation should not have a material adverse effect on the Company's
financial position.
During 1996, press reports discussed proposals to forge a comprehensive
legislative solution to smoking and health claims against the tobacco industry.
The Company believes that any such legislation would involve significant, and
perhaps insurmountable, difficulties in reconciling the views of many competing
interests. However, the Company will explore all reasonable measures that may be
in the best interests of its shareholders.
Tobacco--Operating Revenues
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Domestic tobacco $12,462 $11,493 $11,110
International tobacco 24,087 20,823 17,561
- -------------------------------------------------------------------------------
Total $36,549 $32,316 $28,671
===============================================================================
Tobacco--Operating Profit
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Domestic tobacco $ 4,206 $ 3,740 $ 3,302
International tobacco 4,078 3,453 2,877
Amortization of goodwill (21) (16) (17)
- -------------------------------------------------------------------------------
Total $ 8,263 $ 7,177 $ 6,162
===============================================================================
1996 Compared with 1995
Domestic tobacco. PM Inc.'s 1996 operating revenues increased 8.4% over 1995,
due to higher volume ($465 million, including excise taxes), pricing ($414
million) and improved product mix ($90 million). 1996 operating profit
increased 12.5% over 1995, due primarily to price increases, net of product
cost increases ($362 million), higher volume ($289 million), improved product
mix ($75 million) and lower fixed manufacturing expense ($82 million, due
primarily to the costs of a product recall in 1995), partially offset by
higher marketing, administration and research expense ($342 million).
PM Inc.'s 1996 shipment volume was 230.8 billion units, an increase of
4.1% over 1995, compared with an industry increase of 0.4%. Industry volume
increased due to two extra shipping days in 1996 and distributor buying
patterns. While PM Inc. cannot predict future growth rates, it believes that,
over the long term, industry shipments will continue to decline in line with
their historical average decline of 1% to 2% per annum.
Based on shipments, the premium and discount segments accounted for
approximately 71.6% and 28.4%, respectively, of domestic cigarette industry
volume in 1996, versus approximately 70.0% and 30.0%, respectively, in 1995,
reflecting a continued shift to the higher margin premium segment, which began
in the second half of 1993.
PM Inc.'s 1996 shipment market share was 47.8%, an increase of 1.7 share
points from 1995. In the premium segment, PM Inc.'s volume increased 6.3%,
compared with a 2.7% increase for the industry, resulting in a premium segment
share of 56.3%, an increase of 1.9 share points from 1995. Marlboro volume
increased 11.3 billion units (7.8%) for a 32.3% share of the total industry, an
increase of 2.2 share points from 1995. In the discount segment, PM Inc.'s
shipments decreased 6.3%, to 36.0 billion units in 1996 compared with an
industry decline of 4.9%, resulting in a discount segment share of 26.2%, a
decrease of 0.4 share points from 1995.
Retail sales data (compiled by the A.C. Nielsen Company) indicate PM Inc.
and Marlboro market shares of 49.4% and 33.3%, respectively, in 1996, compared
with 47.3% and 30.7%, respectively, in 1995. The retail market share for PM
Inc.'s other premium brands as a group was 9.0% in 1996, up slightly from 1995.
In the discount segment, Basic increased its segment share of retail sales to
17.4%, an increase of 1.6 share points from 1995.
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, market
share (based on shipments) or retail market share.
During the second quarter of 1996, PM Inc. implemented a price increase of
$2.00 per thousand cigarettes on its domestic premium and discount brands. PM
Inc. previously increased the price of its domestic brands by $1.50 per thousand
cigarettes in the second quarter of 1995.
24
<PAGE>
International tobacco. PMI's 1996 operating revenues increased 15.7%, due
primarily to higher foreign excise taxes ($1.6 billion, including those for
previously unconsolidated and newly acquired subsidiaries), favorable volume/mix
($1.1 billion), pricing ($469 million), and the impact of previously
unconsolidated and newly acquired subsidiaries ($390 million, excluding excise
taxes), partially offset by unfavorable currency movements ($287 million).
Operating profit increased 18.1%, due primarily to favorable volume/mix ($506
million) and price increases, net of higher costs ($297 million) and the impact
of previously unconsolidated and newly acquired subsidiaries ($22 million),
partially offset by unfavorable currency movements ($128 million) and higher
marketing and administration costs.
PMI's volume grew 67.1 billion units (11.3%) in 1996 over 1995 to 660.2
billion units, including local brands manufactured by Zaklady Przemyslu
Tytoniowego w Krakowie S.A., a Polish cigarette manufacturer in which PMI
acquired a controlling interest in February 1996. Excluding this acquisition,
PMI's overall volume grew 8.4%, which continued to be driven in part by the
expanding market of Eastern Europe. Although PMI cannot predict future growth
rates, it anticipates an eventual return to its historic level of annual growth
of 5% to 7%. In January 1997, PMI purchased a controlling interest in
Tabaqueira, Portugal's formerly state-owned tobacco company. The acquisition
will favorably impact volume in 1997.
Volume advanced in most major markets, including Germany, Italy, the
Netherlands, Belgium, Spain, Central and Eastern Europe, Turkey, the Middle
East, Japan, Korea, Singapore, the Philippines and Argentina. In Australia,
PMI's volume was lower, following the unusually high levels reached during the
1995 price war. Volume and share continued to decline in Mexico, due to economic
conditions and retail price increases. In Brazil, PMI lost volume and share due
to intense competition.
PMI's market shares rose in most major markets, with increases recorded in
Germany, Italy, France, the Netherlands, Belgium, Spain, Switzerland, Turkey,
Japan, Korea, Hong Kong, Singapore, the Philippines and Argentina.
1995 Compared with 1994
Domestic tobacco. During 1995, PM Inc.'s operating revenues increased 3.4%
from 1994, due primarily to pricing ($174 million), volume ($120 million) and
improved product mix ($83 million). Operating profit for 1995 increased 13.3%
from 1994, due primarily to pricing ($174 million), volume ($73 million),
improved product mix ($76 million), lower marketing, administration and
research costs ($60 million) and lower fixed manufacturing expense in 1995,
partially offset by the costs from a product recall in 1995.
PM Inc.'s shipment volume for 1995 was 221.8 billion units, an increase of
1.1% over 1994, compared with an industry decline of 1.7% during 1995. The
premium and discount segments accounted for approximately 70.0% and 30.0%,
respectively, of domestic cigarette industry shipment volume in 1995, versus
approximately 67.5% for the premium segment and 32.5% for the discount segment
in 1994, continuing the shift toward the premium segment that began in the
second half of 1993.
PM Inc.'s shipment market share for 1995 was 46.1%, an increase of 1.3
share points over 1994. In the premium segment, volume in PM Inc.'s brands
increased 3.5%, compared with a 1.9% increase for the industry, resulting in a
premium segment share of 54.5%, an increase of 0.9 share points from 1994.
Marlboro volume was up 7.1 billion units (5.2%) for a 30.1% share of the total
industry, an increase of 2.0 share points from 1994. In the discount segment, PM
Inc.'s shipments decreased 9.1%, to 38.5 billion units, in 1995 compared with an
industry decline of 9.2%, resulting in a discount segment share of 26.6%, an
increase of 0.1 share points from 1994.
Retail sales data (compiled by the A.C. Nielsen Company), indicate PM Inc.
and Marlboro market shares of 47.3% and 30.7%, respectively, in 1995, compared
with 46.2% and 28.6%, respectively, in 1994. The retail market share for PM
Inc.'s other premium brands as a group was 8.9% in 1995, unchanged from 1994. In
the discount segment, Basic increased its segment share of retail sales 1.3
points, to 15.8%, in 1995.
International tobacco. During 1995, operating revenues of PMI increased 18.6%,
due primarily to higher foreign excise taxes ($1.6 billion), favorable currency
movements ($708 million), higher volume/mix ($713 million) and price increases
($264 million). Operating profit increased 20.0% due primarily to higher
volume/mix ($338 million), price increases ($264 million) and favorable currency
movements ($210 million), partially offset by higher marketing, administration
and research costs ($264 million).
PMI's volume grew 57.2 billion units (10.7%) in 1995 to 593.2 billion
units. Volume advanced in most major markets, including Germany, Italy, Spain,
the Netherlands, Belgium, Central and Eastern Europe, Turkey, the Middle East,
Japan, Korea, the Philippines, Australia and Argentina. In Eastern Europe, which
includes parts of the former Soviet Union, PMI's volume climbed 54%. This
emerging market has in part driven PMI's volume growth to double its historic
growth level. Volume declined in France, due to tax-driven price increases; in
Mexico, due to continued poor economic conditions; and in Brazil, due to
competition. Importantly, however, volume and market share for Marlboro
increased in France and Brazil.
PMI's market shares reached record levels in most major international
markets, with strong gains in Germany, Italy, the Netherlands, Belgium, Spain,
the Czech and Slovak Republics, Turkey, Japan, Korea, Hong Kong, Singapore,
Australia and Argentina.
Food
Business Environment
Several steps have been taken in recent years to build the value of premium
brands, reduce costs and increase profitability in the Company's food
businesses. During 1995, the North American food business was reorganized to
combine the operations of Kraft USA and General Foods USA. The combined
organization, named Kraft Foods, Inc. ("Kraft"), has streamlined operations and
improved effectiveness and customer response. Also in 1995, the international
food business, Kraft Foods International, Inc. ("KFI"), was realigned to
capitalize on future growth opportunities and reorganized into separate regional
25
<PAGE>
units: Western Europe; Northern Europe; Central and Eastern Europe, Middle East
and Africa; and Asia/Pacific.
During 1995 and 1996, Kraft and KFI realigned their portfolios of
businesses to focus on higher-margin premium products. During 1995, Kraft sold
its bakery, North American margarine, specialty oils, marshmallows, caramels and
Kraft Foodservice distribution businesses. In addition, KFI sold several smaller
international food businesses. During 1996, Kraft sold its bagel business and
KFI sold several non-strategic businesses (including margarine businesses in the
U.K. and Italy) at net gains of $320 million. In addition, Kraft and KFI
initiated cost saving programs that included downsizing facilities and increased
severance for workforce reductions. The cost of these actions substantially
offset the gains from businesses sold. Kraft also acquired the Taco Bell grocery
and Del Monte shelf-stable pudding businesses during 1996 and 1995,
respectively. In Latin America, where certain subsidiaries and affiliates of PMI
manufacture and market a wide variety of food products, 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 have been and will
continue to be affected by green coffee bean price volatility. Throughout 1995,
green coffee bean prices were volatile, significantly affecting consumer buying
patterns and leading to intense price competition among coffee companies in some
markets. In 1996, intense competition continued as green coffee bean prices
declined. The green coffee bean price decline lowered 1996 operating revenues as
prices charged to consumers were reduced. Kraft was also affected by record high
cheese commodity costs, as well as other higher dairy commodity costs, arising
from low U.S. milk production. The increased commodity costs have led to higher
prices charged to consumers. Additionally, Kraft's cereal business was affected
by intense price competition, particularly from private label brands. In
response, Kraft implemented price reductions and simplified couponing of its
cereal products in the second quarter of 1996. Several competitors followed with
similar pricing strategies.
Food--Operating Revenues
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
North American food $16,447 $17,891 $21,556
International food 11,503 11,183 10,113
- -------------------------------------------------------------------------------
Total $27,950 $29,074 $31,669
===============================================================================
Food--Operating Profit
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
North American food $ 2,628 $ 2,542 $ 2,539
International food 1,303 1,218 1,153
Amortization of goodwill (569) (572) (584)
- -------------------------------------------------------------------------------
Total $ 3,362 $ 3,188 $ 3,108
===============================================================================
1996 Compared with 1995
North American food. During 1996, operating revenues decreased 8.1% from 1995,
due primarily to the impact of divestitures ($2.0 billion), product mix ($95
million) and pricing ($82 million), partially offset by volume increases in
ongoing operations ($662 million), the impact of acquisitions ($63 million) and
favorable currency movements ($39 million). Operating profit increased 3.4% over
1995 due primarily to volume increases in ongoing operations ($405 million) and
lower marketing, administration and research costs ($46 million), partially
offset by net price reductions and net cost increases ($158 million), the impact
of divestitures ($116 million), and product mix ($101 million). Kraft had net
gains from sales of businesses of $250 million in 1996. In addition, Kraft
initiated cost savings actions that included downsizing facilities. The cost of
these actions substantially offset the gains from businesses sold. The effect of
pricing on 1996 operating revenues was due primarily to price reductions in
coffee and cereals, partially offset by price increases in cheese. The effect of
net price reductions on 1996 operating profit was due primarily to price
reductions in cereals. The effect of net cost increases on 1996 operating profit
was due primarily to higher cheese commodity costs.
Excluding operating results of the divested businesses discussed above,
1996 North American food operating revenues and operating profit increased 3.8%
and 8.5%, respectively, over 1995.
Significant volume gains were achieved in beverages, on the strength of
ready-to-drink and powdered products, and in frozen pizza, helped by new product
introductions and geographic market expansion. Volume also increased in
desserts, due to strength in packaged and refrigerated products, as well as the
acquisition of a shelf-stable pudding product line in the fourth quarter of
1995; coffee, aided by sales of premium-priced line extensions; processed meats,
with growth in lunch combinations, driven by product introductions, and cold
cuts; and meals, due to strength in dinners and stuffing. Volume increased in
cereals in 1996, due primarily to product introductions and the implementation
of price reductions and simplified couponing in the second quarter. Despite
lower consumption in the process cheese category as prices rose, total cheese
volume grew slightly due to new product introductions.
International food. Operating revenues for 1996 increased 2.9% over 1995, due
primarily to higher volume ($44 million), the consolidation of previously
unconsolidated operations ($612 million) and the impact of acquisitions ($105
million), partially offset by pricing ($255 million, primarily coffee), the
impact of divestitures ($137 million) and unfavorable currency movements ($49
million). Operating profit during 1996 increased 7.0% over 1995, reflecting
higher volume ($23 million), cost decreases, net of price reductions ($81
million), the consolidation of previously unconsolidated operations ($66
million) and favorable currency movements ($7 million), partially offset by
higher marketing, administration and research costs ($101 million, primarily
higher marketing costs) and the impact of
26
<PAGE>
divestitures ($7 million). KFI had net gains of $70 million from sales of
businesses in 1996. In addition, KFI initiated cost savings actions that
included increased severance for workforce reductions. The cost of these actions
substantially offset the gains from businesses sold.
Higher international food volume was due primarily to the consolidation of
previously unconsolidated businesses, the acquisition of Lacta and growth in
coffee. KFI's coffee volume increased in all regions during 1996, particularly
in several key markets such as Germany and France, KFI's largest coffee markets.
The gains were a result of increased marketing and several premium product
introductions. KFI's confectionery volume increased, due primarily to the
emerging markets of Central and Eastern Europe, but declined in Western Europe
where competition remained intense. KFI's cheese and grocery volumes decreased,
due to divestitures of businesses, lower consumption of beef in Italy, and the
effects of a peanut butter recall in Australia, partially offset by increased
sales of snacks in Scandinavia. Latin America volume was higher as a result of
the acquisition of Lacta and strong sales of powdered soft drinks throughout the
region.
Steps were taken during 1996, and will continue in 1997, to lower KFI's
overhead costs and strengthen the marketing of KFI brands in the intensely price
competitive environments of Europe.
1995 Compared with 1994
North American food. During 1995, operating revenues decreased 17.0%, due
primarily to the impact of divestitures ($4.2 billion), partially offset by
increases in price/mix ($311 million) and volume ($226 million). Operating
profit increased 0.1% over 1994, due primarily to price increases, net of cost
increases ($61 million), gains on sales of businesses ($202 million), volume
increases ($97 million) and lower marketing, administration and research costs
($14 million), partially offset by the reduction in operating profit resulting
from divestitures ($166 million) and provisions for an early retirement program
and the write-down of assets of facilities to be closed or downsized
(aggregating $202 million).
Excluding operating results of divested businesses (discussed above),
North American food operating revenues and operating profit increased 3.3% and
7.3%, respectively, in 1995 compared with 1994.
Volume grew in beverages, on the strength of ready-to-drink fruit juices;
cheese, led by growth in the process and natural cheese segments; processed
meats, driven by lunch combinations and cold cuts, both of which were aided by
new product introductions; ready-to-eat and packaged desserts, due to enhanced
marketing efforts and the introduction of line extensions; frozen pizza, helped
by geographic expansion and new product introductions; and coffee, which
reported volume growth in premium products. Volume decreased in cereals, due to
a general slowdown in industry sales and heightened competition; and in pourable
and spoonable salad dressings, due to declines in industry sales. In Canada,
volume decreased, due primarily to weakness in the foodservice business,
partially offset by higher retail sales, which benefited from enhanced
advertising and marketing support. Market shares were higher in the majority of
North American food's top categories.
International food. Operating revenues for 1995 increased 10.6% over 1994, due
primarily to favorable currency movements ($652 million), price increases ($477
million, primarily coffee) and the impact of acquisitions ($92 million),
partially offset by volume decreases ($151 million). Operating profit increased
5.6% over 1994, due primarily to gains on sales of businesses as discussed below
($73 million), the gain on sale of an equity investment ($43 million), and
income from unconsolidated subsidiaries, reflecting higher volume in emerging
markets ($77 million), partially offset by provisions recorded primarily to
write-down assets of facilities to be closed ($73 million) and lower volume ($50
million).
During 1995, KFI sold a Scandinavian cereal operation, a U.K. frozen foods
operation and the international distribution rights of Kraft's bakery business.
Overall volume declined in 1995. In Western Europe, volume declined, due
to market softness and intense competition for core coffee and confectionery
products, particularly in Germany, KFI's largest European market. Despite
intense price competition in coffee and a soft confectionery market resulting
from an unusually hot summer, market shares increased in Germany in both the
roast and ground coffee and chocolate tablet categories. In Central and Eastern
Europe, volume increased in coffee and confectionery products, while the
Asia/Pacific region recorded increases in the coffee, and cheese and grocery
categories. In Latin America, total volume was higher in 1995, driven by
powdered soft drinks in Argentina and Brazil and higher ice cream volume in
Brazil, partially offset by lower ice cream volume in Argentina and lower
powdered soft drink volume in Mexico.
Beer
1996 Compared with 1995
Operating revenues of Miller Brewing Company ("Miller") for 1996 increased $23
million (0.5%) from 1995, due to price/mix improvements ($136 million) and the
impact of acquisitions ($7 million), partially offset by lower volume ($119
million). Operating profit decreased $7 million (1.6%) from 1995, due to lower
volume ($49 million) and unfavorable fixed manufacturing expense ($18 million),
partially offset by price/mix improvements, net of higher material costs ($25
million) and lower marketing, administration and research costs ($36 million,
primarily marketing). During 1996, Miller recorded its share of a restructuring
charge at 20%-owned Molson Canada and realized the benefit of lower than
anticipated costs for integrating Molson USA's operations. Also in 1996, Miller
took several actions to restore growth, streamline its organization and reduce
costs. These included a workforce reduction, the costs of which were charged
against the existing postemployment liability. The impact of these items was not
material to Miller's operating profit for 1996.
Miller's 1996 total shipment volume of 43.8 million barrels decreased 2.7%
from 1995. Despite higher shipments of Miller Lite in 1996, shipments of
premium-priced brands decreased, as did shipments of budget-priced brands. Lower
volume was due to softness in most of Miller's brands and intense competition.
Miller's market share of the U.S. malt industry (based on ship-
27
<PAGE>
ments) was 21.6%, down 1.0 share point from 1995. Despite lower overall volume,
Miller's premium shipments increased to 82.5% from 81.8% of Miller's total
shipments. Miller's volume and share in 1997 may decline further if current
competitive conditions continue.
1995 Compared with 1994
Operating revenues of Miller for 1995 increased $7 million (0.2%) from 1994,
due to price/mix improvements ($27 million), partially offset by volume
decreases. Operating profit increased $31 million (7.5%) over 1994, due to
price/mix improvements and lower costs (aggregating $39 million), partially
offset by volume decreases ($9 million).
Miller's 1995 shipment volume of 45.0 million barrels of beer decreased
0.5% from 1994, in line with the industry. Miller's domestic shipments were 1.1%
lower in 1995, reflecting the current softness in the domestic beer industry,
but were partially offset by growth in Miller's international sales. Shipments
of premium-priced beers rose 1.3% to account for 81.8% of shipments in 1995
compared with 80.4% in 1994. Premium brand growth was led by the initial success
of Red Dog and increased shipments of Miller Lite, reflecting enhanced
advertising and marketing. Shipments of Miller Genuine Draft and ice beers were
down versus the prior year. Miller's market share of the U.S. malt beverage
industry (based on shipments) was 22.6% in 1995, down 0.1 share point from 1994.
Financial Services and Real Estate
1996 Compared with 1995
In 1996, operating revenues from financial services and real estate operations
were flat, and operating profit increased 17.1% from 1995. Higher financial
services operating revenues and operating profit from Philip Morris Capital
Corporation ("PMCC") reflect the continued growth and gains realized from PMCC's
leasing and structured finance portfolio. 1996 operating revenues from real
estate operations of Mission Viejo Company ("MVC") decreased from 1995, due
primarily to an unfavorable comparison caused by a large land sale in Southern
California during 1995, but operating profit increased slightly in 1996 due to
higher margins.
1995 Compared with 1994
For 1995, operating revenues from financial services and real estate operations
decreased 22.7%, and operating profit decreased 21.1% from 1994. Lower financial
services operating profit reflects gains recognized in 1994 related to the sale
of PMCC's marketable securities portfolio. Operating profit from MVC's real
estate operations increased from 1994 levels, due primarily to improved
residential land sales volume in Colorado, and higher profit margins in
California.
Financial Review
Net Cash Provided by Operating Activities
During 1996, cash provided by operating activities was $7.7 billion, $782
million higher than in 1995 due primarily to higher net earnings, partially
offset by increased investments in working capital.
During 1995, cash provided by operating activities was $6.9 billion,
compared with $7.1 billion in 1994. The decrease was due primarily to an
investment in working capital, partially offset by higher net earnings.
Including payments of income taxes on sales of businesses and PMCC's
interest payment on zero coupon bonds, which matured in 1994, operating cash
flow was $7.6 billion, $6.7 billion and $6.9 billion, for 1996, 1995 and 1994,
respectively.
Net Cash Used in Investing Activities
During 1996, cash used in investing activities was $2.1 billion, compared with
$109 million during 1995. The change was due primarily to cash used in 1996 for
acquisitions (primarily for controlling interests in a Polish cigarette
manufacturer and a Brazilian chocolate confectionery company) compared with cash
received in 1995 from the sales of food businesses. During 1995, Kraft sold its
bakery businesses and its North American margarine, specialty oils,
marshmallows, caramels and Kraft Foodservice distribution businesses. In
addition, several smaller international food businesses were sold in 1995. Total
proceeds from the sales of these businesses were $2.1 billion. In 1996, the
Company sold several domestic and international food businesses, including the
North American bagel business, for proceeds of $612 million.
Cash used in investing activities for 1995 was $109 million, compared with
$1.2 billion for 1994. The change was due primarily to cash received from sales
of businesses in 1995, partially offset by a $797 million decrease in cash
provided by PMCC, reflecting the sale of PMCC's marketable securities portfolio
in 1994.
Capital expenditures for 1996 increased 9.9%, to $1.8 billion, of which
47% related to tobacco operations and 46% related to food operations, primarily
for modernization and consolidation of manufacturing facilities and expansion of
certain production capacity. Capital expenditures are estimated to be $1.9
billion in 1997 and a total of approximately $8.0 billion for the five-year
period 1997-2001, of which approximately 57% and 48%, respectively, are
projected for tobacco operations and approximately 36% and 43%, respectively,
are projected for food operations.
Net Cash Used in Financing Activities
During 1996, the Company's net cash used in financing activities increased to
$6.4 billion, from $5.6 billion in 1995, due primarily to increases in stock
repurchases ($659 million) and dividends paid ($523 million), partially offset
by lower net repayments of short-term borrowings and long-term debt. During
1995, the Company's net cash used in financing activities was $5.6 billion,
compared with $5.7 billion in 1994.
28
<PAGE>
Debt
The Company's total debt was $15.2 billion, $15.8 billion and $16.5 billion at
December 31, 1996, 1995 and 1994, respectively. Total consumer products debt
decreased $439 million in 1996, $606 million in 1995 and $1.4 billion in 1994,
due primarily to favorable cash flow and scheduled debt maturities.
At December 31, 1996, the Company's credit facilities amounted to
approximately $15.6 billion, of which approximately $15.3 billion were unused.
These include revolving bank credit agreements totaling $12.0 billion. An
agreement for $4.0 billion expires in October 1997. An agreement for $8.0
billion expires in 2000, enabling the Company to refinance short-term debt on a
long-term basis, based upon its intent and ability to refinance such debt. These
facilities are used to support the Company's commercial paper borrowings and are
available for acquisitions and other corporate purposes. The Company expects to
continue to refinance long-term and short-term debt from time to time. The
nature and amount of the Company's long-term and short-term debt and the
proportionate amount of each can be expected to vary as a result of future
business requirements, market conditions and other factors.
Fixed rate debt constituted approximately 86% and 79% of total consumer
products debt at December 31, 1996 and 1995, respectively. The average interest
rate on total consumer products debt, including the impact of currency swap
agreements discussed below, was approximately 7.5% and 7.7% at December 31, 1996
and 1995, respectively.
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, Swedish krona, British pound and Canadian dollar) based on current
market conditions and business strategies. It acts to manage such exposure, when
deemed prudent, through various hedging transactions. The Company has entered
into currency and related interest rate swap agreements to manage exposure to
currency movements. The aggregate notional principal amounts of these agreements
outstanding at December 31, 1996 and 1995 were $2.2 billion and $2.0 billion,
respectively, of which $1.5 billion related to consumer products debt at
December 31, 1996 and 1995, respectively.
The Company enters into forward exchange contracts, for purposes other
than trading, to reduce the effects of fluctuating foreign currency on foreign
currency denominated current assets, liabilities, commitments and short-term
intercompany transactions. At December 31, 1996 and 1995, the Company had
forward exchange contracts, with maturities of less than one year, of $1.7
billion and $1.2 billion, respectively.
The Company's credit ratings by Moody's at December 31, 1996, 1995 and
1994 were "P-1" in the commercial paper market and "A2" for long-term debt
obligations. The Company's credit ratings by Standard & Poor's at December 31,
1996, 1995 and 1994 were "A-1" in the commercial paper market and "A" for
long-term debt obligations.
Equity and Dividends
During 1996, the Company repurchased 28.6 million shares of its common stock at
an aggregate cost of $2.8 billion. These purchases were made pursuant to the
Company's repurchase program, announced in 1994, to purchase up to $6 billion of
its common stock in the open market. These 1996 repurchases, net of 7.9 million
shares issued under the Philip Morris 1992 Incentive Compensation and Stock
Option Plan in 1996, resulted in lower average shares outstanding. Through
December 31, 1996, cumulative purchases under the program totaled 64.1 million
shares at a cost of $5.3 billion.
Dividends paid in 1996 were 17.8% higher than in 1995, reflecting an
increase in dividends declared, partially offset by fewer shares outstanding. On
August 28, 1996, the Board of Directors increased the Company's quarterly
dividend rate to $1.20 per share, a 20.0% increase, resulting in an annualized
dividend rate of $4.80 per share.
At December 31, 1996, the ratio of consumer products debt to total equity
was 0.98, compared with 1.03 at December 31, 1995. The Company's ratio of total
debt to total equity at December 31, 1996 was 1.07 compared with 1.13 at
December 31, 1995. The changes in these ratios primarily reflect net repayments
of short-term borrowings and long-term debt and an increase in stockholders'
equity, due primarily to net earnings partially offset by share repurchases,
dividends declared and currency translation adjustments. Return on average
stockholders' equity increased to 44.7% in 1996 from 40.7% in 1995. The increase
from 1995 reflects higher earnings, partially offset by higher stockholders'
equity.
Cash and Cash Equivalents
Cash and cash equivalents decreased to $240 million at December 31, 1996 from
$1.1 billion at December 31, 1995. The decrease primarily reflects the use of
cash in 1996 for investments in foreign operations and normal working capital
requirements, including repayment of short-term borrowings.
Contingencies
See Note 13 to the 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" of 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.
29
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data--Fifteen-Year Review (in millions of dollars, except per share data)
============================================================================================
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 69,204 $ 66,071 $ 65,125 $ 60,901 $ 59,131
United States export sales 6,476 5,920 4,942 4,105 3,797
Cost of sales 26,560 26,685 28,351 26,771 26,082
Federal excise taxes on products 3,544 3,446 3,431 3,081 2,879
Foreign excise taxes on products 11,107 9,486 7,918 7,199 6,157
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 11,769 10,526 9,449 7,587 10,059
Interest and other debt expense, net (consumer products) 1,086 1,179 1,233 1,391 1,451
Earnings before income taxes and cumulative effect
of accounting changes 10,683 9,347 8,216 6,196 8,608
Pretax profit margin 15.4% 14.1% 12.6% 10.2% 14.6%
Provision for income taxes 4,380 3,869 3,491 2,628 3,669
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 6,303 5,478 4,725 3,568 4,939
Cumulative effect of accounting changes (28) (477)
Net earnings 6,303 5,450 4,725 3,091 4,939
Earnings per share before cumulative effect
of accounting changes 7.68 6.51 5.45 4.06 5.45
Per share cumulative effect of accounting changes (.03) (.54)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share 7.68 6.48 5.45 3.52 5.45
Dividends declared per share 4.40 3.65 3.03 2.60 2.35
Weighted average shares (millions) 821 842 867 878 906
Capital expenditures (consumer products) 1,782 1,621 1,726 1,592 1,573
Depreciation (consumer products) 1,038 1,023 1,025 1,042 963
- ----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (consumer products) 11,751 11,116 11,171 10,463 10,530
Inventories (consumer products) 9,002 7,862 7,987 7,358 7,785
Total assets 54,871 53,811 52,649 51,205 50,014
Total long-term debt 12,961 13,107 14,975 15,221 14,583
Total debt--consumer products 13,933 14,372 14,978 16,364 16,269
--financial services and real estate 1,307 1,454 1,494 1,792 1,934
- ----------------------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 3,336 2,827 2,496 2,168 2,248
Stockholders' equity 14,218 13,985 12,786 11,627 12,563
Common dividends declared as a % of net earnings 57.3% 56.3% 55.6% 73.8% 43.0%
Book value per common share 17.55 16.83 14.99 13.26 14.07
Market price of common share--high/low 119-85 5/8 94 3/8-55 3/4 64 1/2-47 1/4 77 5/8-45 86 5/8-69 1/2
- ----------------------------------------------------------------------------------------------------------------------------------
Closing price of common share at year-end 113 90 1/4 57 1/2 55 5/8 77 1/8
Price/earnings ratio at year-end 15 14 11 14 14
Number of common shares outstanding at
year-end (millions) 810 831 853 877 893
Number of employees 154,000 151,000 165,000 173,000 161,000
==================================================================================================================================
<CAPTION>
1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 56,458 $ 51,169 $ 44,080 $ 31,273 $ 27,650
United States export sales 3,061 2,928 2,288 1,863 1,592
Cost of sales 25,612 24,430 21,868 13,565 12,183
Federal excise taxes on products 2,978 2,159 2,140 2,127 2,085
Foreign excise taxes on products 5,416 4,687 3,608 3,755 3,331
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 8,622 7,946 6,789 4,397 3,990
Interest and other debt expense, net (consumer products) 1,651 1,635 1,731 670 646
Earnings before income taxes and cumulative effect
of accounting changes 6,971 6,311 5,058 3,727 3,344
Pretax profit margin 12.3% 12.3% 11.5% 11.9% 12.1%
Provision for income taxes 3,044 2,771 2,112 1,663 1,502
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 3,927 3,540 2,946 2,064 1,842
Cumulative effect of accounting changes (921) 273
Net earnings 3,006 3,540 2,946 2,337 1,842
Earnings per share before cumulative effect
of accounting changes 4.24 3.83 3.18 2.22 1.94
Per share cumulative effect of accounting changes (.99) .29
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share 3.25 3.83 3.18 2.51 1.94
Dividends declared per share 1.91 1.55 1.25 1.01 .79
Weighted average shares (millions) 925 925 927 932 951
Capital expenditures (consumer products) 1,562 1,355 1,246 1,024 718
Depreciation (consumer products) 938 876 755 608 564
- ----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (consumer products) 9,946 9,604 8,457 8,648 6,582
Inventories (consumer products) 7,445 7,153 5,751 5,384 4,154
Total assets 47,384 46,569 38,528 36,960 21,437
Total long-term debt 14,213 16,121 14,551 16,812 5,983
Total debt--consumer products 15,289 17,182 14,887 16,442 6,355
--financial services and real estate 1,611 1,560 1,538 1,504 1,378
- ----------------------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 1,803 2,083 1,732 1,559 2,044
Stockholders' equity 12,512 11,947 9,571 7,679 6,823
Common dividends declared as a % of net earnings 58.7% 40.5% 39.3% 40.3% 40.6%
Book value per common share 13.60 12.90 10.31 8.31 7.21
Market price of common share--high/low 81 3/4-48 1/4 52-36 45 1/2-25 25 1/2-20 1/8 31 1/8-18 1/8
- ----------------------------------------------------------------------------------------------------------------------------------
Closing price of common share at year-end 80 1/4 51 3/4 41 5/8 25 1/2 21 3/8
Price/earnings ratio at year-end 19 14 13 11 11
Number of common shares outstanding at
year-end (millions) 920 926 929 924 947
Number of employees 166,000 168,000 157,000 155,000 113,000
==================================================================================================================================
<CAPTION>
1986 1985 1984 1983 1982
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 25,542 $ 16,158 $14,102 $13,256 $11,720
United States export sales 1,193 923 925 970 978
Cost of sales 11,901 6,709 5,840 5,665 5,532
Federal excise taxes on products 2,075 2,049 2,041 1,983 1,180
Foreign excise taxes on products 2,653 1,766 1,635 1,527 1,435
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income 3,537 2,664 1,908 1,840 1,547
Interest and other debt expense, net (consumer products) 772 311 276 230 244
Earnings before income taxes and cumulative effect
of accounting changes 2,765 2,353 1,632 1,610 1,303
Pretax profit margin 10.8% 14.6% 11.6% 12.1% 11.1%
Provision for income taxes 1,287 1,098 743 706 521
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 1,478 1,255 889 904 782
Cumulative effect of accounting changes
Net earnings 1,478 1,255 889 904 782
Earnings per share before cumulative effect
of accounting changes 1.55 1.31 .91 .90 .78
Per share cumulative effect of accounting changes
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings per share 1.55 1.31 .91 .90 .78
Dividends declared per share .62 .50 .43 .36 .30
Weighted average shares (millions) 954 959 981 1,008 1,005
Capital expenditures (consumer products) 678 347 298 566 918
Depreciation (consumer products) 514 367 341 294 250
- ---------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (consumer products) 6,237 5,684 4,014 4,381 4,178
Inventories (consumer products) 3,836 3,827 2,653 2,599 2,834
Total assets 19,482 18,712 9,880 9,908 9,756
Total long-term debt 6,887 8,035 2,239 2,549 3,776
Total debt--consumer products 6,889 7,887 2,566 3,054 3,728
--financial services and real estate 1,141 944 436 141 83
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 1,519 1,233 907 825 627
Stockholders' equity 5,655 4,737 4,093 4,034 3,663
Common dividends declared as a % of net earnings 39.9% 38.1% 46.8% 40.5% 38.6%
Book value per common share 5.94 4.96 4.21 4.03 3.64
Market price of common share--high/low 19 1/2-11 11 7/8-9 10 3/8-7 3/4 9-6 3/4 8 1/2-5 1/2
- ---------------------------------------------------------------------------------------------------------------------------------
Closing price of common share at year-end 18 11 10 1/8 9 7 1/2
Price/earnings ratio at year-end 11 8 11 10 9
Number of common shares outstanding at
year-end (millions) 951 955 971 1,000 1,007
Number of employees 111,000 114,000 68,000 68,000 72,000
=================================================================================================================================
</TABLE>
See notes to the consolidated financial statements regarding the 1996
acquisitions, 1995 and 1996 divestitures of food businesses, the 1995 adoptions
of SFAS No. 116 and SFAS No. 106 for non-U.S. benefit plans, the 1993 adoption
of SFAS No. 112 and the 1993 restructuring of the Company's worldwide
operations.
30 & 31
<PAGE>
Consolidated Balance Sheets (in millions of dollars, except per share data)
================================================================================
at December 31, 1996 1995
- --------------------------------------------------------------------------------
Assets
Consumer products
Cash and cash equivalents $ 240 $ 1,138
Receivables, net 4,466 4,508
Inventories:
Leaf tobacco 4,143 3,332
Other raw materials 1,854 1,721
Finished product 3,005 2,809
- --------------------------------------------------------------------------------
9,002 7,862
Other current assets 1,482 1,371
- --------------------------------------------------------------------------------
Total current assets 15,190 14,879
Property, plant and equipment, at cost:
Land and land improvements 664 726
Buildings and building equipment 5,168 4,976
Machinery and equipment 12,481 11,542
Construction in progress 1,659 1,357
- --------------------------------------------------------------------------------
19,972 18,601
Less accumulated depreciation 8,221 7,485
- --------------------------------------------------------------------------------
11,751 11,116
Goodwill and other intangible assets
(less accumulated amortization of $4,391 and $3,873) 18,998 19,319
Other assets 3,015 2,866
- --------------------------------------------------------------------------------
Total consumer products assets 48,954 48,180
Financial services and real estate
Finance assets, net 5,345 4,991
Real estate held for development and sale 314 339
Other assets 258 301
- --------------------------------------------------------------------------------
Total financial services and real estate assets 5,917 5,631
- --------------------------------------------------------------------------------
Total Assets $54,871 $53,811
================================================================================
See notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Consumer products
Short-term borrowings $ 260 $ 122
Current portion of long-term debt 1,846 1,926
Accounts payable 3,409 3,364
Accrued liabilities:
Marketing 2,106 2,114
Taxes, except income taxes 1,331 1,075
Employment costs 942 995
Other 2,726 2,706
Income taxes 1,269 1,137
Dividends payable 978 834
- ------------------------------------------------------------------------------------------
Total current liabilities 14,867 14,273
Long-term debt 11,827 12,324
Deferred income taxes 731 356
Accrued postretirement health care costs 2,372 2,273
Other liabilities 5,773 5,643
- ------------------------------------------------------------------------------------------
Total consumer products liabilities 35,570 34,869
Financial services and real estate
Short-term borrowings 173 671
Long-term debt 1,134 783
Deferred income taxes 3,636 3,382
Other liabilities 140 121
- ------------------------------------------------------------------------------------------
Total financial services and real estate liabilities 5,083 4,957
- ------------------------------------------------------------------------------------------
Total liabilities 40,653 39,826
Contingencies (Note 13)
Stockholders' Equity
Common stock, par value $1.00 per share (935,320,439 shares issued) 935 935
Earnings reinvested in the business 22,478 19,779
Currency translation adjustments 192 467
- ------------------------------------------------------------------------------------------
23,605 21,181
Less cost of repurchased stock (124,871,681 and 104,150,433 shares) 9,387 7,196
- ------------------------------------------------------------------------------------------
Total stockholders' equity 14,218 13,985
- ------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $54,871 $53,811
==========================================================================================
</TABLE>
33
<PAGE>
Consolidated Statements of Earnings (in millions of dollars, except per share
data)
================================================================================
<TABLE>
<CAPTION>
for the years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $ 69,204 $ 66,071 $ 65,125
Cost of sales 26,560 26,685 28,351
Excise taxes on products 14,651 12,932 11,349
- --------------------------------------------------------------------------------------------
Gross profit 27,993 26,454 25,425
Marketing, administration and research costs 15,630 15,337 15,372
Amortization of goodwill 594 591 604
- --------------------------------------------------------------------------------------------
Operating income 11,769 10,526 9,449
Interest and other debt expense, net 1,086 1,179 1,233
- --------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative
effect of accounting changes 10,683 9,347 8,216
Provision for income taxes 4,380 3,869 3,491
- --------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 6,303 5,478 4,725
Cumulative effect of changes in method of accounting (28)
- --------------------------------------------------------------------------------------------
Net earnings $ 6,303 $ 5,450 $ 4,725
============================================================================================
Per share data:
Earnings before cumulative effect of accounting changes $ 7.68 $ 6.51 $ 5.45
Cumulative effect of changes in method of accounting (.03)
- --------------------------------------------------------------------------------------------
Net earnings $ 7.68 $ 6.48 $ 5.45
============================================================================================
</TABLE>
Consolidated Statements of Cash Flows (in millions of dollars)
================================================================================
<TABLE>
<CAPTION>
for the years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided By (Used In) Operating Activities
Net earnings--Consumer products $ 6,180 $ 5,345 $ 4,591
--Financial services and real estate 123 105 134
- ----------------------------------------------------------------------------------------------
Net earnings 6,303 5,450 4,725
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization 1,691 1,671 1,722
Deferred income tax provision 163 15 237
(Gains) losses on sales of businesses (320) (275) 19
Cumulative effect of accounting changes 46
Cash effects of changes, net of the effects from acquired
and divested companies:
Receivables, net 35 (466) (239)
Inventories (952) (5) (387)
Accounts payable 60 (260) 582
Income taxes 446 504 202
Other working capital items (448) (482) (288)
Other 467 354 180
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
Consolidated Statements of Cash Flows (continued)
================================================================================
<TABLE>
<CAPTION>
for the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial services and real estate
Deferred income tax provision $ 224 $ 299 $ 376
Decrease (increase) in real estate receivables 11 35 (30)
Decrease in real estate held for development and sale 25 61 86
Other 2 (22) (82)
- ------------------------------------------------------------------------------------------------------------
Operating cash flow before income taxes on sales of businesses and
interest payment on zero coupon bonds 7,707 6,925 7,103
Income taxes on sales of businesses (73) (238) (8)
Interest payment on zero coupon bonds--financial services and real estate (156)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,634 6,687 6,939
- ------------------------------------------------------------------------------------------------------------
Cash Provided By (Used In) Investing Activities
Consumer products
Capital expenditures (1,782) (1,621) (1,726)
Purchase of businesses, net of acquired cash (616) (217) (146)
Proceeds from sales of businesses 612 2,202 300
Other (47) 17 28
Financial services and real estate
Investments in finance assets (439) (613) (582)
Proceeds from finance assets 217 123 889
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,055) (109) (1,237)
- ------------------------------------------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities
Consumer products
Net (repayment) issuance of short-term borrowings (1,119) (21) 172
Long-term debt proceeds 2,699 564 97
Long-term debt repaid (1,979) (1,302) (1,817)
Financial services and real estate
Net (repayment) issuance of short-term borrowings (498) 67 (325)
Long-term debt proceeds 363 185
Long-term debt repaid (139) (44)
Repurchase of outstanding stock (2,770) (2,111) (1,532)
Dividends paid (3,462) (2,939) (2,487)
Stock rights redemption (9)
Issuance of shares 448 291 54
Other (88) (28) (20)
- ------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,406) (5,627) (5,717)
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (71) 3 17
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
(Decrease) increase (898) 954 2
Balance at beginning of year 1,138 184 182
- ------------------------------------------------------------------------------------------------------------
Balance at end of year $ 240 $ 1,138 $ 184
============================================================================================================
Cash paid: Interest--Consumer products $ 1,244 $ 1,293 $ 1,340
============================================================================================================
--Financial services and real estate $ 95 $ 89 $ 229
============================================================================================================
Income taxes $ 3,424 $ 3,067 $ 2,449
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
Consolidated Statements of Stockholders' Equity (in millions of dollars, except
per share data)
================================================================================
<TABLE>
<CAPTION>
Earnings Currency Cost of Total
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $935 $15,718 $(711) $(4,315) $11,627
Net earnings 4,725 4,725
Exercise of stock options and issuance
of other stock awards (217) 324 107
Cash dividends declared ($3.03 per share) (2,623) (2,623)
Currency translation adjustments 664 664
Stock repurchased (1,600) (1,600)
Net unrealized depreciation on securities (114) (114)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 935 17,489 (47) (5,591) 12,786
Net earnings 5,450 5,450
Exercise of stock options and issuance
of other stock awards (77) 470 393
Cash dividends declared ($3.65 per share) (3,065) (3,065)
Redemption of stock rights (9) (9)
Currency translation adjustments 514 514
Stock repurchased (2,075) (2,075)
Net unrealized depreciation on securities (9) (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 935 19,779 467 (7,196) 13,985
Net earnings 6,303 6,303
Exercise of stock options and issuance
of other stock awards (28) 609 581
Cash dividends declared ($4.40 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
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
Notes to Consolidated Financial Statements
================================================================================
Note 1. Summary of Significant Accounting Policies:
Basis of presentation:
The consolidated financial statements include all significant subsidiaries. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of operating revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Balance sheet accounts are segregated by two broad types of business.
Consumer products assets and liabilities are classified as either current or
non-current, whereas financial services and real estate assets and liabilities
are unclassified, in accordance with respective industry practices.
Cash and cash equivalents:
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Inventories:
Inventories are stated at the lower of cost or market. The last-in, first-out
("LIFO") method is used to cost substantially all domestic inventories. The cost
of other inventories is determined by the average cost or first-in, first-out
methods. It is a generally recognized industry practice to classify the total
amount of leaf tobacco inventory as a current asset although part of such
inventory, because of the duration of the aging process, ordinarily would not be
utilized within one year.
Advertising costs:
Advertising costs are expensed generally as incurred.
Depreciation, amortization and goodwill valuation:
Depreciation is recorded by the straight-line method. Substantially all goodwill
and other intangible assets are amortized by the straight-line method,
principally over 40 years. The Company periodically evaluates the recoverability
of goodwill and measures any impairment by comparison to estimated undiscounted
cash flows from future operations.
Financial instruments:
Derivative financial instruments are used by the Company to manage its foreign
currency and interest rate exposures. Realized and unrealized gains and losses
on foreign currency swaps that are effective as hedges of net assets in foreign
subsidiaries are offset against currency translation adjustments as a component
of stockholders' equity. The interest differential to be paid or received under
the currency and related interest rate swap agreements is recognized over the
life of the related debt and is included in interest and other debt expense,
net. Unrealized gains and losses on forward contracts that are effective as
hedges of assets, liabilities and commitments are deferred and recognized in
income as the related transaction is realized.
Accounting changes:
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." This Statement requires that
certain assets be reviewed for impairment and, if impaired, remeasured at fair
value, whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. The adoption of SFAS No. 121 at
January 1, 1996 and its application during 1996, had no material impact on the
Company's financial position or results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which allows companies either to measure
compensation cost in connection with the employee stock compensation plans using
a fair value based method or to continue to use an intrinsic value based method.
The Company will continue to use the intrinsic value based method, which
generally does not result in compensation cost. The Company's stock compensation
plans are discussed in Note 7.
Effective January 1, 1995, the Company adopted SFAS No. 116, "Accounting
for Contributions Received and Contributions Made." This Statement requires the
Company to recognize an unconditional promise to make a contribution as an
expense in the period the promise is made. The Company had previously expensed
contributions when payment was made. The cumulative effect at January 1, 1995 of
adopting SFAS No. 116 reduced 1995 net earnings by $7 million ($.01 per share).
The application of SFAS No. 116 did not materially reduce 1995 earnings before
cumulative effect of accounting changes.
Effective January 1, 1995, the Company adopted SFAS No. 106 for non-U.S.
postretirement benefits other than pensions. The cumulative effect at January 1,
1995 of adopting SFAS No. 106, for the non-U.S. plans, reduced 1995 net earnings
by $21 million ($.02 per share). However, application of SFAS No. 106 for
non-U.S. employees during the year ended December 31, 1995 did not materially
reduce earnings before cumulative effect of accounting changes.
In October 1996, the AICPA's Accounting Standards Executive Committee
issued Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
which requires adoption by the Company on January 1, 1997. The Company estimates
that the effect of adoption will not be material.
37
<PAGE>
Note 2. Divestitures and Acquisitions:
During 1996, the Company acquired a controlling interest in a Polish tobacco
company, at a cost of $285 million and nearly all of the remaining voting shares
of a Brazilian confectionery company, at a cost of $314 million. During 1996,
the Company sold several domestic and international food businesses for total
proceeds of $612 million and net pretax gains of $320 million. In addition, the
Company initiated cost saving programs that included downsizing facilities and
workforce reductions. The cost of these actions substantially offset the gains
from businesses sold. The effect of these and other smaller acquisitions and
dispositions, were not material to the Company's 1996 results of operations.
During 1995, the Company sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses. In addition, several smaller international food
businesses were sold. Operating revenues and operating income of these
businesses for the period owned in 1995 were $2.0 billion and $107 million,
respectively, and for the year ended December 31, 1994 were $5.9 billion and
$267 million, respectively. Net assets of the businesses sold were $1.8 billion.
Total proceeds and net pretax gains from the sales of these businesses were $2.1
billion and $275 million, respectively. As part of this divestiture program, the
Company offered an early retirement program and downsized or closed other food
facilities. The cost of these actions offset the gains from businesses sold.
During 1994, the Company sold The All American Gourmet Company (frozen
dinners business) for $170 million. The effect of this disposition, and other
smaller acquisitions and dispositions, was not material to the Company's 1994
results of operations.
Note 3. Inventories:
The cost of approximately 49% of inventories in 1996 and 50% of inventories in
1995 was determined using the LIFO method. The stated LIFO values of inventories
were approximately $965 million and $750 million lower than the current cost of
inventories at December 31, 1996 and 1995, respectively.
Note 4. Short-Term Borrowings and Borrowing Arrangements:
At December 31, the Company's short-term borrowings and related average interest
rates consisted of the following:
1996 1995
Average Average
Amount Year-End Amount Year-End
(in millions) Outstanding Rate Outstanding Rate
- -------------------------------------------------------------------------------
Consumer products:
Bank loans $ 295 8.1% $ 209 13.1%
Commercial paper 1,373 5.7% 2,495 5.8%
Amount reclassified
as long-term debt (1,408) (2,582)
- -------------------------------------------------------------------------------
$ 260 $ 122
===============================================================================
Financial services and
real estate:
Commercial paper $ 173 6.0% $ 671 5.9%
===============================================================================
The fair values of the Company's short-term borrowings at December 31, 1996 and
1995, based upon market rates, approximate the amounts disclosed above.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $15.6 billion at December
31, 1996. Approximately $15.3 billion of these facilities were unused at
December 31, 1996. Certain of these facilities are used to support commercial
paper borrowings, are available for acquisitions and other corporate purposes
and require the maintenance of a fixed charges coverage ratio.
The Company's credit facilities include revolving bank credit agreements
totaling $12.0 billion. An agreement for $4.0 billion expires in October 1997.
An agreement for $8.0 billion expires in 2000 enabling the Company to refinance
short-term debt on a long-term basis. Accordingly, short-term borrowings
intended to be refinanced were reclassified as long-term debt.
Note 5. Long-Term Debt:
At December 31, the Company's long-term debt consisted of the following:
(in millions) 1996 1995
- -------------------------------------------------------------------------------
Consumer products:
Short-term borrowings, reclassified $ 1,408 $ 2,582
Notes, 6.15% to 9.75% (average effective
rate 7.82%), due through 2008 9,550 8,598
Debentures, 6.0% to 8.5% (average effective
rate 10.77%), $1.2 billion face amount,
due through 2017 1,046 1,018
Foreign currency obligations:
Swiss franc, 2.13% to 6.88% (average effective
rate 5.80%), due through 2000 957 1,303
Deutsche mark, 2.75% to 6.38% (average
effective rate 5.96%), due through 2002 411 392
Other foreign 49 102
Other 252 255
- -------------------------------------------------------------------------------
13,673 14,250
Less current portion of long-term debt (1,846) (1,926)
- -------------------------------------------------------------------------------
$ 11,827 $ 12,324
===============================================================================
Financial services and real estate:
Eurodollar notes, 6.75% and 6.63% (average
effective rate 6.68%), due 1997 and 1999 $ 400 $ 400
Foreign currency obligations:
ECU notes, 9.25% and 8.50%, due 1997
and 1998 372 383
Deutsche mark, 6.5%, due 2003 166
French franc, 6.88%, due 2006 196
- -------------------------------------------------------------------------------
$ 1,134 $ 783
===============================================================================
38
<PAGE>
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
Financial
Consumer Services and
(in millions) Products Real Estate
- --------------------------------------------------------------------------------
1997 $1,846 $386
1998 1,516 186
1999 1,773 200
2000 845
2001 1,730
2002-2006 3,871 362
2007-2011 767
Thereafter 131
================================================================================
The revolving credit facility under which the consumer products short-term debt
was reclassified as long-term debt expires in 2000 and any amounts then
outstanding mature.
Based on market quotes, where available, or interest rates currently
available to the Company for issuance of debt with similar terms and remaining
maturities, the aggregate fair value of consumer products and financial services
and real estate long-term debt, including current portion of long-term debt, at
December 31, 1996 and 1995 was $15.3 billion and $15.9 billion, respectively.
Note 6. Capital Stock:
Shares of authorized common stock are 4 billion; issued, repurchased and
outstanding were as follows:
Shares Shares Net Shares
Issued Repurchased Outstanding
- -------------------------------------------------------------------------------
Balances,
January 1, 1994 935,320,439 (58,229,749) 877,090,690
Exercise of stock options
and issuance of other
stock awards 4,569,731 4,569,731
Repurchased (28,801,356) (28,801,356)
- -------------------------------------------------------------------------------
Balances,
December 31, 1994 935,320,439 (82,461,374) 852,859,065
Exercise of stock options
and issuance of other
stock awards 6,470,262 6,470,262
Repurchased (28,159,321) (28,159,321)
- -------------------------------------------------------------------------------
Balances,
December 31, 1995 935,320,439 (104,150,433) 831,170,006
Exercise of stock options
and issuance of other
stock awards 7,890,835 7,890,835
Repurchased (28,612,083) (28,612,083)
- -------------------------------------------------------------------------------
Balances,
December 31, 1996 935,320,439 (124,871,681) 810,448,758
===============================================================================
At December 31, 1996, 33,794,922 shares of common stock were reserved for stock
options and other stock awards under the Company's stock plans and 10,000,000
shares of Serial Preferred Stock, $1.00 par value, were authorized, none of
which have been issued.
Note 7. Stock Plans:
Under the Philip Morris 1992 Incentive Compensation and Stock Option Plan (the
"Plan"), the Company may grant to eligible employees stock options, stock
appreciation rights, restricted stock and annual incentive and long-term
performance cash awards. Up to 37 million shares of common stock are authorized
for grant, of which no more than 9 million shares may be awarded as restricted
stock. Shares available to be granted at December 31, 1996 and 1995 were
5,882,835 and 12,639,175, respectively.
Stock options are granted at an exercise price of not less than fair value
on the date of the grant. Stock options granted under the Plan generally become
exercisable on the first anniversary of the grant date and have a maximum term
of ten years.
The Company applies the intrinsic value based method permitted by SFAS No.
123 in accounting for the Plan. Accordingly, no compensation expense has been
recognized other than for restricted stock awards. Had compensation cost for
stock option awards under the Plan been determined based on the fair value at
the grant dates, the effect on the Company's 1996 and 1995 net earnings would
not have been material.
Option activity was as follows for the years ended December 31, 1994, 1995
and 1996:
Weighted
Shares Subject Options Average
to Option Exercisable Exercise Price
- --------------------------------------------------------------------------------
Balance at
January 1, 1994 30,035,681 $ 51.09
Options granted 511,610 69.73
Options exercised (2,394,089) 34.63
Options cancelled (388,045) 59.87
- --------------------------------------------------------------------------------
Balance at
December 31, 1994 27,765,157 27,253,547 52.73
Options granted 7,983,200 74.78
Options exercised (6,750,112) 45.69
Options cancelled (590,121) 68.46
- --------------------------------------------------------------------------------
Balance at
December 31, 1995 28,408,124 20,700,934 60.27
Options granted 7,542,405 108.25
Options exercised (8,436,980) 56.81
Options cancelled (442,422) 78.64
- --------------------------------------------------------------------------------
Balance at
December 31, 1996 27,071,127 19,649,932 $ 74.42
================================================================================
The weighted average exercise prices of options exercisable at December 31,
1996, 1995 and 1994 were $61.67, $54.83 and $52.41, respectively.
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1996, by range of exercise price:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$20.92-$35.42 1,805,676 2 years $ 30.56 1,805,676 $ 30.56
$46.31-$69.25 8,263,823 5 years 53.63 8,263,823 53.63
$73.56-$120.00 17,001,628 8 years 89.18 9,580,433 74.45
- ------------------------------------------------------------------------------------------------
27,071,127 19,649,932
========== ==========
</TABLE>
39
<PAGE>
The Company may grant shares of restricted stock and rights to receive shares
of stock to eligible employees, giving them in most instances all of the
rights of stockholders, except that they may not sell, assign, pledge or
otherwise encumber such shares and rights. Such shares and rights are subject
to forfeiture if certain employment conditions are not met. During 1996, 1995
and 1994 the Company granted 60,000, 212,000 and 2,636,940 shares,
respectively, of restricted stock to eligible U.S. based employees and also
issued to eligible non-U.S. employees rights to receive 48,000 and 1,034,320
like shares in 1995 and 1994, respectively. At December 31, 1996,
restrictions on the stock, net of forfeitures, lapse as follows:
1997-2,433,985 shares; 1998-50,000 shares; 1999-20,000 shares; 2000-262,000
shares; and 2002 and thereafter-223,000 shares.
The fair value of the restricted shares and rights at the date of grant is
amortized to expense ratably over the restriction period. The unamortized
portion is reported as a reduction of earnings reinvested in the business and
was $47 million on December 31, 1996.
Note 8. Earnings per Share:
Earnings per common share have been calculated on the weighted average number
of shares of common stock outstanding for each year, which was 821,108,904,
841,558,296 and 867,288,869 for 1996, 1995 and 1994, respectively.
Note 9. Pretax Earnings and Provision for Income Taxes:
Pretax earnings and provision for income taxes consisted of the following:
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Pretax earnings:
United States $ 7,399 $ 6,622 $ 5,781
Outside United States 3,284 2,725 2,435
- --------------------------------------------------------------------------------
Total pretax earnings $ 10,683 $ 9,347 $ 8,216
================================================================================
Provision for income taxes:
United States federal:
Current $ 1,836 $ 1,946 $ 1,540
Deferred 438 97 458
- --------------------------------------------------------------------------------
2,274 2,043 1,998
State and local 430 434 419
- --------------------------------------------------------------------------------
Total United States 2,704 2,477 2,417
- --------------------------------------------------------------------------------
Outside United States:
Current 1,727 1,175 919
Deferred (51) 217 155
- --------------------------------------------------------------------------------
Total outside
United States 1,676 1,392 1,074
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 4,380 $ 3,869 $ 3,491
================================================================================
At December 31, 1996, applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $4.2 billion of
accumulated earnings of foreign subsidiaries that are expected to be permanently
reinvested abroad. If these amounts were not considered permanently reinvested,
additional deferred income taxes of approximately $240 million would have been
provided.
The Company and its subsidiaries are subject to tax examinations in
various U.S. and foreign jurisdictions. The Company believes that adequate tax
payments have been made and accruals recorded for all years.
The effective income tax rate on pretax earnings differed from the U.S.
federal statutory rate for the following reasons:
1996 1995 1994
- -------------------------------------------------------------------------------
Provision computed at
U.S. federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes,
net of federal tax benefit 2.6 3.0 3.3
Rate differences--foreign
operations 3.3 1.9 1.0
Goodwill amortization 1.8 2.1 2.4
Other (1.7) (0.6) 0.8
- -------------------------------------------------------------------------------
Provision for income taxes 41.0% 41.4% 42.5%
===============================================================================
The tax effects of temporary differences which gave rise to consumer products
deferred income tax assets and liabilities consisted of the following:
December 31,
(in millions) 1996 1995
- -------------------------------------------------------------------------------
Deferred income tax assets:
Accrued postretirement and
postemployment benefits $ 1,070 $ 1,018
Accrued liabilities 588 451
Restructuring, strategic and other reserves 315 331
Other 399 764
- -------------------------------------------------------------------------------
Gross deferred income tax assets 2,372 2,564
Valuation allowance (87) (125)
- -------------------------------------------------------------------------------
Total deferred income tax assets 2,285 2,439
Deferred income tax liabilities:
Property, plant and equipment (1,699) (1,687)
Prepaid pension costs (286) (197)
- -------------------------------------------------------------------------------
Total deferred income tax liabilities (1,985) (1,884)
- -------------------------------------------------------------------------------
Net deferred income tax assets $ 300 $ 555
===============================================================================
Financial services and real estate deferred income tax liabilities are primarily
attributable to temporary differences from investments in finance leases.
40
<PAGE>
Note 10. Segment Reporting:
Tobacco, food, beer, and financial services and real estate are the major
segments of the Company's operations. The Company's major products are
cigarettes, coffee, cheese, chocolate confections, processed meat products,
various packaged grocery products and beer. The Company's consolidated
operations outside the United States, which are principally in the tobacco
and food businesses, are organized into geographic regions by segment, with
Europe the most significant. Intersegment transactions are not reported
separately since they are not material.
For purposes of segment reporting, operating profit is operating income
exclusive of certain unallocated corporate expenses. Substantially all goodwill
amortization is attributable to the food segment. Identifiable assets are those
assets applicable to the respective industry segments. See Note 2 regarding
divestitures and acquisitions.
Reportable segment data were as follows:
Data by Segment for the
years ended December 31,
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Operating revenues:
Tobacco $36,549 $32,316 $28,671
Food 27,950 29,074 31,669
Beer 4,327 4,304 4,297
Financial services and real estate 378 377 488
- --------------------------------------------------------------------------------
Total operating revenues $69,204 $66,071 $65,125
================================================================================
Operating profit:
Tobacco $ 8,263 $ 7,177 $ 6,162
Food 3,362 3,188 3,108
Beer 437 444 413
Financial services and real estate 192 164 208
- --------------------------------------------------------------------------------
Total operating profit 12,254 10,973 9,891
Unallocated corporate expenses 485 447 442
- --------------------------------------------------------------------------------
Operating income $11,769 $10,526 $ 9,449
================================================================================
Identifiable assets:
Tobacco $13,314 $11,196 $ 9,926
Food 32,934 33,447 34,822
Beer 1,707 1,751 1,706
Financial services and real estate 5,917 5,632 5,193
- --------------------------------------------------------------------------------
53,872 52,026 51,647
Other assets 999 1,785 1,002
- --------------------------------------------------------------------------------
Total assets $54,871 $53,811 $52,649
================================================================================
Depreciation expense:
Tobacco $ 378 $ 350 $ 360
Food 538 556 539
Beer 104 101 108
Capital expenditures:
Tobacco $ 829 $ 525 $ 529
Food 812 948 1,072
Beer 122 115 121
================================================================================
Data by Geographic Region for the
years ended December 31,
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Operating revenues:
United States--domestic $31,993 $32,479 $35,936
--export 6,476 5,920 4,942
Europe 24,232 23,076 19,888
Other 6,503 4,596 4,359
- --------------------------------------------------------------------------------
Total operating revenues $69,204 $66,071 $65,125
================================================================================
Operating profit:
United States $ 8,762 $ 8,031 $ 7,306
Europe 2,635 2,366 1,914
Other 857 576 671
- --------------------------------------------------------------------------------
Total operating profit 12,254 10,973 9,891
Unallocated corporate expenses 485 447 442
- --------------------------------------------------------------------------------
Operating income $11,769 $10,526 $ 9,449
================================================================================
Identifiable assets:
United States $33,314 $32,521 $33,622
Europe 15,836 15,981 14,845
Other 4,722 3,524 3,180
- --------------------------------------------------------------------------------
53,872 52,026 51,647
Other assets 999 1,785 1,002
- --------------------------------------------------------------------------------
Total assets $54,871 $53,811 $52,649
================================================================================
Note 11. Pension Plans:
The Company and its subsidiaries sponsor noncontributory defined benefit pension
plans covering substantially all U.S. employees. The plans provide retirement
benefits for salaried employees based generally on years of service and
compensation during the last years of employment. Retirement benefits for hourly
employees generally are a flat dollar amount for each year of service. The
Company funds these plans in amounts consistent with the funding requirements of
federal laws and regulations.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. The plans provide pension
benefits that are based primarily on years of service and employees' salaries
near retirement. The Company provides for obligations under such plans by
depositing funds with trustees or purchasing insurance policies. The Company
records liabilities for unfunded foreign plans.
41
<PAGE>
U.S. Plans
Net pension (income) cost consisted of the following:
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost--benefits earned
during the year $ 143 $ 110 $ 130
Interest cost on projected
benefit obligation 373 367 342
(Return) loss on assets
--actual (980) (1,344) 94
--deferred gain (loss) 447 848 (605)
Amortization of net gain upon
adoption of SFAS No. 87 (25) (26) (28)
Amortization of unrecognized net
loss (gain) from experience
differences 9 (13) (12)
Amortization of prior service cost 14 13 12
Other (income) cost (35) 75 49
- -------------------------------------------------------------------------------
Net pension (income) cost $ (54) $ 30 $ (18)
===============================================================================
During 1996, 1995 and 1994, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in curtailment and
settlement gains of $69 million and additional pension cost of $34 million in
1996, additional pension cost of $103 million and curtailment gains of $28
million in 1995 and additional pension cost of $49 million in 1994.
The funded status of U.S. plans at December 31 was as follows:
(in millions) 1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation--vested $ 3,871 $ 4,116
--nonvested 359 354
- -------------------------------------------------------------------------------
4,230 4,470
Benefits attributable to projected salaries 650 786
- -------------------------------------------------------------------------------
Projected benefit obligation 4,880 5,256
Plan assets at fair value 7,101 6,649
- -------------------------------------------------------------------------------
Excess of assets over projected benefit obligation 2,221 1,393
Unamortized net gain upon adoption of
SFAS No. 87 (108) (140)
Unrecognized prior service cost 124 131
Unrecognized net gain from experience
differences (1,404) (807)
- -------------------------------------------------------------------------------
Prepaid pension cost $ 833 $ 577
===============================================================================
The projected benefit obligation at December 31, 1996, 1995 and 1994 was
determined using an assumed discount rate of 7.75%, 7.25% and 8.5%,
respectively, and assumed compensation increases of 4.5% at December 31, 1996
and 1995 and 5.0% at December 31, 1994. The assumed long-term rate of return on
plan assets was 9% at December 31, 1996, 1995 and 1994. Plan assets consist
principally of common stock and fixed income securities.
The Company and certain of its subsidiaries sponsor deferred
profit-sharing plans covering certain salaried, nonunion and union employees.
Contributions and costs are determined generally as a percentage of pretax
earnings, as defined by the plans. Certain other subsidiaries of the Company
also maintain defined contribution plans. Amounts charged to expense for defined
contribution plans totaled $210 million, $201 million and $191 million in 1996,
1995 and 1994, respectively.
In addition, certain of the Company's subsidiaries participate in
multiemployer defined benefit plans. Contributions to these plans were
immaterial in 1996, 1995 and 1994.
Non-U.S. Plans
Net pension cost consisted of the following:
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost--benefits earned
during the year $ 80 $ 80 $ 72
Interest cost on projected benefit
obligation 166 160 136
(Return) loss on assets
--actual (201) (195) 4
--deferred gain (loss) 70 74 (113)
Amortization of net loss (gain) upon
adoption of SFAS No. 87 3 1 (1)
- -------------------------------------------------------------------------------
Net pension cost $ 118 $ 120 $ 98
===============================================================================
The funded status of the non-U.S. plans at December 31 was as follows:
<TABLE>
<CAPTION>
Assets Exceed Accumulated
Accumulated Benefits Exceed
Benefits Assets
(in millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit
obligation
--vested $ 1,336 $ 1,257 $ 721 $ 703
--nonvested 39 46 77 69
- -------------------------------------------------------------------------------------------------
1,375 1,303 798 772
Benefits attributable to
projected salaries 342 324 127 125
- -------------------------------------------------------------------------------------------------
Projected benefit obligation 1,717 1,627 925 897
Plan assets at fair value 1,891 1,780 36 59
- -------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 174 153 (889) (838)
Unamortized net (gain) loss upon
adoption of SFAS No. 87 (14) 11 13 14
Unrecognized net gain from
experience differences (22) (42) (5) (34)
- -------------------------------------------------------------------------------------------------
Prepaid (accrued)
pension cost $ 138 $ 122 $ (881) $ (858)
=================================================================================================
</TABLE>
The assumptions used in 1996, 1995 and 1994 were as follows:
1996 1995 1994
- -------------------------------------------------------------------------------
Discount rates 4.0% to 12.0% 4.5% to 10.0% 5.0% to 13.0%
Compensation
increases 3.0% to 8.0% 3.5% to 9.0% 3.5% to 11.0%
Long-term rates
of return on
plan assets 4.5% to 11.0% 4.5% to 11.0% 5.5% to 12.0%
===============================================================================
Plan assets consist primarily of common stock and fixed income securities.
42
<PAGE>
Note 12. Postretirement Benefits Other Than Pensions:
The Company and it subsidiaries have accrued the estimated cost of retiree
health care benefits during the active service periods of employees in the
United States and Canada. Health care benefits for retirees outside the United
States and Canada are generally covered through local government plans. The
Company and its U.S. and Canadian subsidiaries provide health care and other
benefits to substantially all retired employees, their covered dependents and
beneficiaries. Generally, employees who have attained age 55 and who have
rendered at least 5 to 10 years of service are eligible for these benefits.
Certain health care plans are contributory; others are noncontributory.
Net postretirement health care costs consisted of the following:
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost--benefits earned
during the period $ 59 $ 46 $ 57
Interest cost on accumulated
postretirement benefit obligation 180 179 165
Amortization of unrecognized net
loss (gain) from experience
differences 4 (2) 6
Amortization of unrecognized prior
service cost (12) (13) (15)
Other (income) cost (8) (13) 32
- -------------------------------------------------------------------------------
Net postretirement health
care costs $ 223 $ 197 $ 245
================================================================================
During 1996, 1995 and 1994, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in additional income or
cost.
The Company's postretirement health care plans currently are not funded.
The status of the plans at December 31 was as follows:
(in millions) 1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ 1,289 $ 1,353
Fully eligible active plan participants 278 253
Other active plan participants 859 927
- -------------------------------------------------------------------------------
2,426 2,533
Unrecognized net loss from
experience differences (75) (303)
Unrecognized prior service cost 127 140
- -------------------------------------------------------------------------------
Accrued postretirement health
care costs $ 2,478 $ 2,370
===============================================================================
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 9.0% in 1995, 8.5% in 1996
and 8.0% in 1997, gradually declining to 5.0% by the year 2003 and remaining at
that level thereafter. For Canadian plans, the assumed health care cost trend
rate was 15.0% in 1995, 14.0% in 1996 and 13.0% in 1997, gradually declining to
5.0% by the year 2005 and remaining at that level thereafter. A
one-percentage-point increase in the assumed health care cost trend rates for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 and net postretirement health care cost for the year then
ended by approximately 12% and 16%, respectively.
The accumulated postretirement benefit obligations for U.S. plans at
December 31, 1996, 1995 and 1994 were determined using assumed discount rates of
7.75%, 7.25% and 8.5%, respectively. The accumulated postretirement benefit
obligation at December 31, 1996 and 1995 for Canadian plans was determined using
an assumed discount rate of 8.25% and 9.75%, respectively.
Note 13. Contingencies:
Legal proceedings covering a wide range of matters are pending in various U.S.
and foreign jurisdictions against the Company and its subsidiaries, including
Philip Morris Incorporated ("PM Inc."), the Company's wholly-owned domestic
tobacco subsidiary. Various types of claims are raised in these proceedings,
including but not limited to products liability, antitrust, securities law, tax
and patent infringement matters.
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual smokers, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of plaintiffs, and
(iii) health care cost recovery actions brought primarily by states and local
governments seeking reimbursement for Medicaid and other health care
expenditures allegedly caused by cigarette smoking.
In the individual and class action smoking and health cases pending
against PM Inc. and, in some cases, the Company and/or certain of its other
subsidiaries, plaintiffs allege personal injury resulting from cigarette
smoking, "addiction" to cigarette smoking or exposure to environmental tobacco
smoke ("ETS") and seek compensatory and, in some cases, punitive damages in
amounts ranging into the billions of dollars. During the past two years, there
has been a substantial increase in the number of such smoking and health cases
in the United States, with a majority of the new cases having been filed in
Florida on behalf of individual plaintiffs. As of December 31, 1996, there were
185 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, compared
to 115 such cases as of December 31, 1995, and 84 such cases as of December 31,
1994. One hundred twenty-two of the cases filed and served as of December 31,
1996, were filed on behalf of individual plaintiffs in the state of Florida. Ten
of the individual cases involve allegations of various personal injuries
allegedly related to exposure to ETS.
In addition to the foregoing individual smoking and health cases, there
are 17 purported smoking and health class actions pending in the United States
against PM Inc. and, in some cases, the Company, including one that involves
allegations of various personal injuries related to exposure to ETS. Twelve of
these actions purport to constitute state-wide class actions and were filed
after the Fifth Circuit Court of Appeals, in the Castano case discussed below,
reversed a federal district court's certification of a purported nation-wide
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. In California, individuals
and local governments and other
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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. As
discussed below, 26 health care cost recovery actions are currently pending.
In August 1996, a 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.). Neither PM Inc. nor the Company was a
party to that litigation. 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
appealed the verdict.
Several smoking and health cases and health care cost recovery actions are
scheduled for trial in 1997, although trial dates are subject to change. One
individual smoking and health case in which PM Inc. is a defendant is scheduled
for trial during the first quarter of 1997 and a number of other individual
cases against the industry are scheduled for trial later in the year. A
purported class action on behalf of flight attendants alleging injury caused by
exposure to ETS aboard aircraft is set for trial in June 1997 in Florida state
court. A purported class action on behalf of Florida residents who allege injury
from alleged nicotine addiction is set for trial in September 1997. A similar
action on behalf of Pennsylvania residents is set for trial in October 1997.
Health care cost recovery actions are currently scheduled for trial in
Mississippi in June 1997, in Florida in August 1997 and in Texas in September
1997.
A description of 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, and violations of
deceptive trade practice laws and consumer protection statutes. 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.
A smoking and health class action against United States cigarette
manufacturers has been pending in Florida state court since October 1991 in
which a class has been certified consisting of "all non-smoking flight
attendants who are or have been employed by airlines based in the United States"
and who are allegedly suffering from exposure to ETS aboard aircraft. Broin, et
al. v. Philip Morris Incorporated, et al., Circuit of the Eleventh Judicial
Circuit in and for Dade County Florida, Case No. 91-49738-CA-20. Various
challenges to the class certification have been denied on appeal, and the case
is currently set for trial in June 1997.
Another smoking and health class action against United States cigarette
manufacturers has been pending in Florida state court since May 1994 in which a
class has been certified consisting of all Florida citizens and residents and
their survivors who have suffered injury "caused by their addiction to
cigarettes that contain nicotine." Engle, et al. v. R.J. Reynolds Tobacco
Company, et al., Circuit Court of the Eleventh Judicial Circuit in and for Dade
County, Florida, Case No. 94-08273-CA-20. Various challenges to the class
certification have been denied on appeal, and the case is currently set for
trial in September 1997.
In March 1994, a smoking and health class action was filed in Alabama
state court against three United States cigarette manufacturers, and was
subsequently removed to federal court. Lacey, et al. v. Lorillard Tobacco
Company, Inc. et al., United States District Court, Northern District of
Alabama, Jasper Division, Civil Action No. 94-4-B-0901-J. Plaintiffs, claiming
to represent all smokers who have smoked or are smoking cigarettes sold by
defendants in the State of Alabama, seek compensatory and punitive damages not
to exceed $48,500 per each class member as well as injunctive relief arising
from defendants' alleged failure to disclose additives used in their cigarettes.
In August 1996, the judge orally granted defendants' motion for summary judgment
on the grounds that the suit is preempted by the Labeling Act.
In March 1994, a smoking and health class action was filed in federal
district court in Louisiana against United States cigarette manufacturers and
others, including the Company, seeking certification of a purported class
consisting of all United States residents who allege that they are addicted, or
are the legal survivors of persons who were addicted, to tobacco products.
Castano, et al. v. The American Tobacco Company Inc., et al., United States
District Court, Eastern District of Louisiana, Case No. 94-1044. Plaintiffs
alleged that the cigarette manufacturers concealed and/or misrepresented
information regarding the addictive nature of nicotine and manipulated the
levels of nicotine in their tobacco products to make such products addictive. In
February 1995, the trial court certified the class and in
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May 1996, the Fifth Circuit Court of Appeals reversed the trial court's class
certification and remanded the case with instructions that the class allegations
be dismissed. Summary judgment motions against the two remaining named
plaintiffs in this case are pending.
Following the announcement of the Fifth Circuit's class decertification
decision in Castano, lawyers for the plaintiffs announced that they would file
"state-wide" smoking and health class actions in state courts. Subsequently,
smoking and health class actions based on claims similar to those in Castano (a
"nicotine-dependence class action") and, in some cases, claims of physical
injury as well (a "physical injury class action") were filed in a number of
states, as described below.
Immediately prior to the Fifth Circuit's decision in the Castano case, a
purported nicotine-dependence class action was filed in Indiana state court
against United States cigarette manufacturers and others. In June 1996,
defendants removed the case to federal court. Norton, et al. v. RJR Nabisco
Holdings Corporation, et al., United States District Court for the Southern
District of Indiana, Case No. IP96-0798-C-M/S. Plaintiffs' motion to remand the
case to state court is pending.
In May 1996, a purported physical injury class action was filed in
Maryland state court against United States cigarette manufacturers and others,
including the Company. The case was removed by defendants to federal court and
was subsequently remanded to state court. Richardson, et al. v. Philip Morris
Incorporated, et al., Circuit Court for Baltimore City, No. 96145050.
In May 1996, a purported nicotine-dependence class action was filed in
Louisiana state court against four United States cigarette manufacturers and
others, including the Company. Scott, et al. v. The American Tobacco Company,
Inc., et al., Civil District Court for the Parish of Orleans, State of
Louisiana, Docket No. 96-8461. A hearing on plaintiffs' motion for class
certification has been scheduled for February 1997.
In June 1996, a purported nicotine-dependence class action was filed in
New York state court against PM Inc., the Company, the Tobacco Institute and the
Council for Tobacco Research--U.S.A., Inc. Frosina, et al. v. Philip Morris
Inc., et al., Supreme Court of the State of New York, County of New York, Case
No. 96110950. In December 1996, defendants filed motions to dismiss the
complaint and to deny class certification.
In June 1996, a purported physical injury class action was filed in the
Superior Court of the District of Columbia against United States cigarette
manufacturers and others, including the Company. Reed v. Philip Morris
Incorporated, et al., Superior Court of the District of Columbia, Case No.
CA-05070-96. A hearing on whether plaintiffs can pursue a class action has been
scheduled for June 1997.
In August 1996, a purported nicotine-dependence class action was filed in
Pennsylvania state court against United States cigarette manufacturers and
others, including the Company, and was subsequently removed to federal court.
Arch, et al. v. American Tobacco Company Inc., et al., United States District
Court for the Eastern District of Pennsylvania, Case No. 96-5903-CN. A hearing
on class certification is set for March 1997, and the trial is scheduled for
October 1997.
In August 1996, a purported nicotine-dependence class action was filed in
Alabama state court, on behalf of Alabama and North Carolina residents, against
four United States cigarette manufacturers and others, including the Company. In
September 1996, the case was removed by defendants to federal court. Lyons, et
al. v. The American Tobacco Co., Inc., et al., United States District Court for
the Southern District of Alabama, Southern Division, Civil Action No.
96-0881-BH-S. Plaintiffs' motion to remand the case to state court is pending.
In August 1996, a purported nicotine-dependence class action was filed in
Ohio state court against United States cigarette manufacturers and others,
including the Company, and was subsequently removed to federal court.
Chamberlain, et al. v. The American Tobacco Co., et al., United States District
Court, Northern District of Ohio, Case No. 1:96CV2005. Plaintiffs' motion to
remand the case to state court is pending.
In August 1996, a purported physical injury class action was filed in
Florida state court against United States cigarette manufacturers, and others.
Walters, et al. v. Brown & Williamson Tobacco Corp., et al., Circuit Court,
Fourth Judicial District, Duval County, Florida.
In September 1996, a purported nicotine-dependence class action was filed
in Minnesota state court against four United States cigarette manufacturers and
others, including the Company. The case was removed by defendants to federal
court in September 1996. Masepohl, et al. v. The American Tobacco Co., Inc., et
al., United States District Court, District of Minnesota, Third Division, Case
No. CV3-96-888. Plaintiffs' motion to remand the case to state court is pending.
In October 1996, a purported nicotine-dependence class action was filed in
New Mexico state court against four United States cigarette manufacturers and
others, including the Company. Connor, et al. v. The American Tobacco Co., et
al., Second Judicial District Court, County of Bernalillo, State of New Mexico,
Case No. CV-96-9422.
In October 1996, a purported nicotine-dependence class action was filed in
federal court in Puerto Rico against four United States cigarette manufacturers
and others. Ruiz, et al. v. The American Tobacco Co., et al., United States
District Court for the District of Puerto Rico, Civil Action No. 96-2300.
In November 1996, a purported nicotine-dependence class action was filed
in federal court in Arkansas against United States cigarette manufacturers and
others, including the Company. McGinty, et al. v. The American Tobacco Co., et
al., United States District Court for the Eastern District of Arkansas, Western
Division, Case No. LRC 96-881.
In February 1995, Rothmans, Benson & Hedges, Inc. (in which the Company,
through subsidiaries, owns a 40% interest) was served with a statement of claim
commencing a purported class action in the Ontario Court of Justice, Toronto,
Canada, against Imperial Tobacco Limited, RJR-MacDonald Inc., and Rothmans,
Benson & Hedges, Inc. LeTourneau v. Rothmans et al., Ontario Court of Justice,
Toronto, Canada, Court File No. 95-CU-82186 (now captioned Caputo v. Imperial
Tobacco Limited, et al.). The lawsuit seeks damages in the amount of $1,000,000
(Canadian) per class member and punitive and exemplary
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damages and an order requiring the funding of rehabilitation centers. Plaintiffs
seek certification of a class of persons consisting of all current and former
cigarette smokers in Ontario, their families and the estates of deceased
smokers. Defendants' request for a more particular statement of claim prior to
delivering their statement of defense was partially granted and partially denied
in April 1996. Defendants have appealed that order.
In July 1995, a purported class action on behalf of all Brazilian smokers
and former smokers was filed in state court in Sao Paulo, Brazil, naming Philip
Morris Marketing, S.A., a wholly-owned subsidiary of the Company, as a
co-defendant. The Smoker Health Defense Association, et al. v. Souza Cruz, S.A.
and Philip Morris Marketing, S.A., 19th Lower Civil Court of the Central Courts
of the Judiciary District of Sao Paulo, Brazil. Plaintiffs allege that
defendants failed to warn that smoking is "addictive" and engaged in misleading
advertising. Plaintiffs have obtained an order, which was upheld on appeal,
reversing the burden of proof and placing the burden on defendants. Defendants
are seeking further appellate review of this order.
Pro se prisoners have filed two purported class actions against United
States cigarette manufacturers and others seeking, in one case, class
certification on behalf of prisoners in two Mississippi prisons based on alleged
exposure to ETS (Lyle, et al. v. Brown & Williamson Tobacco Corporation, et al.,
United States District Court for the Northern District of Mississippi, Civil
Action No. 3:96-CV-268WS) and, in the other, on behalf of all allegedly
nicotine-dependent persons in the United States (Harris, et al. v. Philip Morris
Incorporated, et al., United States District Court for the Eastern District of
Pennsylvania, Civil Action No. 3:96-CV 652). In October 1996, the court issued
an order dismissing the Lyle action. In November 1996, the court in Harris
entered an order denying class certification.
Health Care Cost Recovery Litigation
In certain of the pending proceedings, state and local government entities and
others seek reimbursement for Medicaid and/or other health care expenditures
allegedly caused by tobacco products. The claims asserted in these health care
cost recovery actions vary. All 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
state and federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under the Federal Racketeer
Influenced and Corrupt Organization Act ("RICO") or state RICO statutes.
Each plaintiff seeks reimbursement of Medicaid and/or other health care
costs. Other relief sought by some but not all plaintiffs includes punitive
damages, treble damages for alleged antitrust 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.
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 a state benefits
economically from the sale of cigarettes through the receipt of excise taxes or
otherwise. Defendants also argue that all of 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 related
declaratory judgment actions in several states seeking to block the health care
cost recovery actions in those states and/or to prevent the state from hiring
contingency fee counsel.
The following is a summary of certain developments in each of the health
care cost recovery suits pending against PM Inc. and, in some cases, the Company
and the related declaratory judgment actions filed by cigarette manufacturers.
Florida--In May 1994, the State of Florida enacted a statute which
purports, among other things, to abolish affirmative defenses in Medicaid
recovery actions. In June 1994, PM Inc. and others filed suit in Florida state
court challenging the constitutionality of the statute. Associated Industries of
Florida, Inc., et al. v. State of Florida Agency for Health Care Administration,
et al., Circuit Court of the Second Judicial Circuit in and for Leon County,
Florida, Case No. 94-3128. In June 1996, the Florida Supreme Court ruled that
the provisions of the statute that permitted the state to pursue its action
without identifying individual Medicaid recipients violated defendants' due
process rights under the Florida constitution and that defendants may rebut the
state's claims of causation and damages on a recipient-by-recipient basis. The
court held constitutional on its face the statutory provision abolishing
affirmative defenses normally available to a third party, including assumption
of the risk, but stated that this provision might be unconstitutional as applied
in the state's case. The court also held that the state's independent cause of
action created by the statute could apply only to Medicaid costs paid after the
amendment became effective in July 1994, that defendants could be held
individually liable under a market share theory, that the state could use
statistical evidence to present its case, and that the agency charged with
enforcing the statute was constitutionally established. In September 1996,
plaintiffs' petition for rehearing on the Florida Supreme Court's rulings on
abrogation of affirmative defenses and application of the statute to conduct
occurring before July 1994 was denied. In December 1996, PM Inc. and another
party filed a petition for a writ of certiorari to the United States Supreme
Court on the grounds that the statute violates due
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process because it creates a unique cause of action on behalf of the state which
abrogates certain common law and equitable principles, including affirmative
defenses.
In February 1995, the State of Florida filed a health care cost recovery
action under the statute in Florida state court. The State of Florida, et al. v.
The American Tobacco Company, et al., Circuit Court of the Fifteenth Judicial
Circuit in and for Palm Beach County, Florida, Case No. CL 95 1466 AO. In
September 1996, the trial court dismissed all of the state's claims except for
its negligence and strict liability counts arising from Medicaid payments made
after July 1, 1994, and its count for injunctive relief. The court also ordered
the state to disclose the identity of the Medicaid recipients. In October 1996,
the state filed a coded listing (without names) for all Medicaid recipients with
alleged smoking-related illnesses. The trial court accepted the coded listing
and, in January 1997, the Florida Supreme Court determined not to hear and
denied defendants' challenge to the sufficiency of the state's purported
identification of Medicaid recipients. In November 1996, plaintiffs amended
their complaint to add claims for violations of Florida's RICO and consumer
protection statutes. In December 1996, the court granted defendants' motion to
dismiss various claims brought under state statutes and denied the motion to
dismiss claims based on Florida's RICO statute and on a state false advertising
statute. In January 1997, defendants waived their rights to a pretrial
determination of whether plaintiffs can amend their complaint to include a
punitive damages claim. Defendants have reserved their rights to challenge the
punitive damages claim on factual or legal bases. Plaintiffs' motion to strike
defendants' affirmative defenses was heard on January 24, 1997. The trial in
this case is scheduled to begin in August 1997.
Mississippi--In May 1994, the Attorney General of Mississippi filed a
health care cost recovery action in Mississippi state court. Moore v. The
American Tobacco Company, et al., Chancery Court of Jackson County, Mississippi,
Case No. 94-1429. In February 1995, the court granted plaintiff's motion to
strike certain of defendants' challenges to the sufficiency of the complaint and
denied defendants' motion for judgment on the pleadings. In July 1995, plaintiff
filed a motion seeking to preclude defendants from asserting their "set off"
defenses. That motion is pending. The Governor of Mississippi and defendants
have filed petitions with the Mississippi Supreme Court challenging the
authority of the Attorney General to pursue this action. The Mississippi Supreme
Court heard arguments on both petitions in September 1996, but has not issued a
decision on either petition. The trial is scheduled to begin in June 1997.
Minnesota--In August 1994, the Attorney General of Minnesota and Blue
Cross and Blue Shield of Minnesota filed a health care cost recovery action in
Minnesota state court. Minnesota, et al. v. Philip Morris Incorporated, et al.,
Minnesota District Court, Second Judicial District, County of Ramsey, Case No.
C1-94-8565. In July 1996, the Minnesota Supreme Court ruled that Blue Cross did
not have standing to pursue its tort claims against defendants, but that it
could proceed against defendants for claims brought under antitrust and consumer
protection statutes. The Supreme Court also held that Blue Cross could pursue
directly its equitable claims, but only for injunctive (not monetary) relief.
The case is scheduled to go to trial in January 1998.
West Virginia--In September 1994, the Attorney General of West Virginia
filed a health care cost recovery action in West Virginia state court. McGraw v.
The American Tobacco Company, et al., Circuit Court of Kanawha County, West
Virginia, Case No. 94-1707. In October 1995, the court dismissed eight of ten
counts of the complaint and granted defendants' motion to prohibit prosecution
of this case pursuant to a contingent fee agreement with private counsel. In
June 1996, the Attorney General added the Public Employees' Insurance Agency as
a plaintiff. In November 1996, plaintiffs added the West Virginia Department of
Health and Human Resources as a plaintiff, and three law firms as defendants,
and asserted additional counts under theories of indemnity, negligent
misrepresentation, negligence, and strict product liability. In December 1996,
the court heard oral argument on defendants' motion to dismiss plaintiff's
common law and equitable claims. A hearing on defendants' motion to dismiss
plaintiff's statutory claims is scheduled for February 1997.
Texas--In March 1996, the Texas Attorney General filed a health care cost
recovery action in federal court in Texas. The State of Texas v. The American
Tobacco Company, et al., United States District Court, Eastern District of
Texas, Civil No. 5-96CV91. Trial in this action is set for September 1997 and
defendants have filed a number of motions to dismiss it. Defendants and others
had previously filed an action in Texas state court in November 1995, seeking a
declaration that the Texas Attorney General cannot pursue a health care cost
recovery action. Philip Morris Incorporated, et al. v. Dan Morales, Attorney
General of the State of Texas, et al., District Court of Travis County, Texas,
No. 94-14807. The state court has stayed the action for declaratory relief
pending the outcome of the Attorney General's suit.
Massachusetts--In December 1995, the Massachusetts Attorney General filed
a health care cost recovery action in Massachusetts state court. Commonwealth of
Massachusetts v. Philip Morris Inc., et al., Superior Court, Middlesex County,
Civil Action No. 95-7378. Defendants have moved to dismiss the complaint.
Defendants had previously filed an action in Massachusetts federal court in
November 1995, seeking to enjoin the Attorney General from prosecuting a health
care cost recovery action. Philip Morris Incorporated, et al. v. Scott
Harshbarger, United States District Court, District of Massachusetts, Case No.
95-12574-GAO. In November 1996, the federal district court denied the Attorney
General's motion to dismiss the complaint and stayed the injunction action.
Maryland--In May 1996, the State of Maryland filed a health care cost
recovery action in Maryland state court. State of Maryland v. Philip Morris
Incorporated, et al., Circuit Court for Baltimore County, Maryland, Case No.
96-122017/CL211017. Defendants' motion to dismiss the state's complaint is
scheduled to be heard on January 28, 1997. The trial is scheduled for January
1999. Defendants and others had previously filed a separate action in Maryland
state court seeking to enjoin the Maryland Attorney General from prosecuting a
health care cost recovery action pursuant to a contingent fee arrangement with
special counsel. Philip Morris Incorporated, et al. v. Parris N. Glendening,
Governor of the State of Maryland, et al., Circuit Court for Talbot County,
Maryland, Case No. CG 2829. In August 1996, the court granted defendants' motion
for summary judgment and dismissed the injunction action. Plaintiffs have
appealed.
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Louisiana--In March 1996, the Attorney General of Louisiana filed a health
care cost recovery action in Louisiana state court. Ieyoub, et al. v. The
American Tobacco Company, et al., 14th Judicial District Court, Parish of
Calcasieu, Louisiana, Case No. 96-1209. In January 1997, the court denied
defendants' motion to dismiss which argued that the Attorney General lacked the
authority to bring this action.
San Francisco--In June 1996, the City and County of San Francisco filed a
health care cost recovery action in California federal court and has since been
joined by ten other California counties. City and County of San Francisco, et
al. v. Philip Morris, Inc. et al., United States District Court, Northern
District of California, Civil No. C 96-2090. In January 1997, the court denied
defendants' motion to disqualify plaintiffs' contingency-fee counsel and took
under advisement defendants' motion to dismiss. In September 1996, plaintiffs in
the federal court action, joined by several medical associations, filed an
action in California state court seeking, among other things, injunctive relief
and disgorgement of profits for alleged violations of California's consumer
protection statutes. People of the State of California, et al. v. Philip Morris,
Inc. et al., San Francisco Superior Court, County of San Francisco, Case No.
980864. In January 1997, the court granted in part defendants' motion to dismiss
by requiring plaintiffs to replead certain causes of action and denied the
motion on other grounds.
Washington--In June 1996, the Attorney General of the State of Washington
filed a health care cost recovery action in Washington state court. State of
Washington v. American Tobacco Co., Inc., et al., Superior Court of Washington,
King County, No. 96-2-15056-8. In November 1996, the court dismissed claims
based on special duty, unjust enrichment and restitution to the state, but did
not dismiss claims brought under Washington's antitrust laws. The State of
Washington recently moved to amend its complaint with the stated intention of
correcting deficiencies found by the court to exist in the special duty and
unjust enrichment claims and to add a claim for restitution under Washington's
consumer protection statute. Trial is scheduled for September 1998.
Connecticut--In July 1996, the State of Connecticut filed a health care
cost recovery action in Connecticut state court. State of Connecticut v. Philip
Morris Inc., et al., Superior Court, Judicial District of Litchfield, Case No.
CV-96-01534405. Defendants had previously filed an action in federal district
court in June 1996, seeking to enjoin the Connecticut Attorney General from
bringing the health care cost recovery action. Philip Morris Inc., et al. v.
Richard Blumenthal, United States District Court, District of Connecticut, Case
No. 396CV01221 (PCD). This injunction action was dismissed in December 1996 and,
in January 1997, plaintiffs appealed the dismissal.
Utah--In September 1996, the Utah Attorney General filed a health care
cost recovery action in federal court in Utah. State of Utah v. R.J. Reynolds
Tobacco Company, et al., United States District Court, District of Utah, Case
No. 2:96CV 0829W. Defendants had previously filed an action in Utah state court
in July 1996, challenging the right of the Attorney General to bring such an
action and to prosecute the case pursuant to a contingent fee arrangement with
special counsel. Philip Morris Incorporated, et al. v. Janet C. Graham, Attorney
General of the State of Utah, et al., Third Judicial District Court of Salt Lake
County, Utah, No. 960904948CV. The parties have agreed that the state court
action will be stayed while the federal action is proceeding, except for the
challenge to the Attorney General's contingent fee arrangement with special
counsel. In December 1996, a motion for partial summary judgment challenging the
contingent fee arrangement was argued before the state court.
Los Angeles County--In August 1996, the County of Los Angeles filed a
health care cost recovery action in California state court. County of Los
Angeles v. R.J. Reynolds Tobacco Company, et al., Superior Court of California,
San Diego County.
Alabama--In August 1996, a health care cost recovery action was filed in
Alabama state court as a putative class action on behalf of taxpayers of the
State of Alabama. Following local rules, the state court entered an order
conditionally certifying the class. This action was subsequently removed by
defendants to federal court. Crozier, et al. v. The American Tobacco Company, et
al., United States District Court for the Middle District of Alabama, Case No.
96-A-1403-N. Plaintiffs' motion to remand to state court is pending.
Kansas--In August 1996, the Attorney General of Kansas filed a health care
cost recovery action in Kansas state court. State of Kansas, ex rel. Carla J.
Stovall, Attorney General v. R.J. Reynolds Tobacco Co., et al., District Court
of Shawnee County, Kansas, Case No. 96-CV-919. Defendants' motion to dismiss
this case is scheduled to be heard in April 1997.
Michigan--In August 1996, the Attorney General of Michigan filed a health
care cost recovery action in Michigan state court. Frank J. Kelley, Attorney
General, ex rel. State of Michigan v. Philip Morris Incorporated, et al.,
Circuit Court for the 30th Judicial Circuit, Ingham County, Michigan, Case No.
96-84281-CZ. In October 1996, defendants moved to dismiss certain counts of the
complaint and to strike claims for compensatory and punitive damages.
Oklahoma--In August 1996, the Attorney General of Oklahoma filed a health
care cost recovery action in Oklahoma state court. State of Oklahoma, et al. v.
R.J. Reynolds Tobacco Co., et al., District Court for Cleveland County,
Oklahoma, Case No. CJ-96-1499-L.
Arizona--In August 1996, the Attorney General of Arizona filed a health
care cost recovery action in Arizona state court. State of Arizona, et al. v.
American Tobacco Co., Inc., et al., Superior Court, Maricopa County, Arizona,
No. CV 96-14769. The Governor of Arizona has instructed the Attorney General to
dismiss the case. Subsequently, the Attorney General filed an amended complaint
that abandons claims for Medicaid payments, but seeks recovery of other health
care costs as well as other damages and forms of relief. Motions to dismiss the
complaint are pending. The trial is scheduled for October 1998.
Hawaii--In August 1996, PM Inc. and three other cigarette manufacturers
filed suit against the Hawaii Attorney General in federal district court in
Hawaii seeking declaratory and injunctive relief invalidating a threatened
health care cost recovery action by Hawaii. A hearing on defendant's motion to
dismiss is scheduled for March 1997. The action is scheduled to go to trial in
December 1997. Philip Morris Inc., et al. v. Margery Bronster, U.S. District
Court, Hawaii, Civ. No. 96-00722 HG.
Ohio--In September 1996, two Ohio local officials filed a health care cost
recovery action in Ohio state court, purportedly on behalf of the State of Ohio
and all Ohio taxpayers.
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Defendants removed the case to federal court in Ohio and have filed a motion to
dismiss challenging the standing of plaintiffs to bring this action. State ex
rel. Coyne, Jr., et al. v. The American Tobacco Co., et al., United States
District Court, Northern District of Ohio, Case No. 96-2247. Plaintiffs motion
to remand this action to state court is pending.
New Jersey--In September 1996, the New Jersey Attorney General filed a
health care cost recovery action in New Jersey state court. The State of New
Jersey v. R.J. Reynolds Tobacco Company, et al., Chancery Court, Middlesex
County, Case No. C-254-96. In August 1996, defendants filed a separate suit
challenging the right of the Attorney General to bring such an action and to
prosecute the case pursuant to a contingent fee arrangement with special
counsel. Philip Morris Incorporated, et al. v. Peter Verniero, Attorney General
of the State of New Jersey, et al., Superior Court of New Jersey, Chancery
Division, Mercer County, Case No. MER-C-000114-96. Defendants' motion to dismiss
the complaint and plaintiffs' motion for summary judgment are pending.
New York City--In October 1996, the City of New York and the New York City
Health and Hospitals Corporation filed a health care cost recovery action in New
York state court. City of New York, et al. v. The Tobacco Institute, et al.,
Supreme Court of the State of New York, County of New York, Case No. 406225/96.
Illinois--In November 1996, the Attorney General of Illinois filed a
health care cost recovery action in Illinois state court. People of the State of
Illinois v. Philip Morris, Inc., et al., Circuit Court of Cook County, Illinois,
Case No. 96 L 13146.
Iowa--In November 1996, the State of Iowa filed a health care cost
recovery action in Iowa state court. State of Iowa, ex rel. Thomas J. Miller, in
his capacity as Attorney General of the State of Iowa v. R.J. Reynolds Tobacco
Co., et al., District Court for Polk County, Iowa, Case No. CL71048.
Alaska--In January 1997, PM Inc. and three other cigarette manufacturers
filed suit against the Alaska Attorney General in federal district court seeking
declaratory and injunctive relief to prohibit a threatened health care cost
recovery action by Alaska on grounds that it would violate federal law. Philip
Morris Inc., et al. v. Bruce Botelho, U.S. District Court, Alaska, No. A 97-003
Civil (JWS).
Erie County--In January 1997, the County of Erie filed a health care cost
recovery action in New York state court. County of Erie v. The Tobacco
Institute, Inc., et al., Supreme Court of the State of New York, County of Erie,
Case No. I1997/359.
New York--On January 27, 1997, it was reported in the press that the State
of New York filed a health care cost recovery action.
Other state and local government entities have announced that they are
considering filing similar health care cost recovery actions.
In September 1996, a purported class action was filed in Tennessee state
court against four United States cigarette manufacturers and others on behalf of
all individuals and entities in the United States who have paid premiums to a
Blue Cross or Blue Shield organization for medical insurance. The complaint
alleges that defendants' actions have resulted in increased medical insurance
premiums for all class members and seeks recovery under various consumer
protection statutes as well as under theories of breach of special duty and
unjust enrichment. This case was removed by defendants to federal court. Perry,
et al. v. Philip Morris Incorporated, et al., United States District Court for
the Eastern District of Tennessee, Winchester Division, Civil Action No.
4:96-CV-106. Plaintiffs' motion to remand the case to state court is pending.
Other Tobacco Related Class Actions
In May 1995, PM Inc. announced a recall of certain of its products and in June
and July four purported class actions relating to the recall were filed. Three
of these cases have been dismissed. In October 1995, plaintiffs in the remaining
action, Tijerina, et al. v. Philip Morris, Inc., et al., United States District
Court, Northern District of Texas, Amarillo Division, Case No. 2-95-CV-120,
filed an amended complaint alleging that PM Inc. has, for many years, knowingly
manufactured filtered products that are defective because they contain
"defective filters." Plaintiffs purport to bring this action on behalf of all
persons who "are Texas residents and who have smoked Philip Morris filtered
cigarettes manufactured with Hoechst Celanese filter materials" and who have
suffered adverse health effects. Plaintiffs allege that the filters in these
products contain hazardous chemicals and that cellulose acetate fibers break
away from the filters and are inhaled and ingested by the consumer when the
filtered products are used. Plaintiffs further allege that they relied on PM
Inc.'s false and fraudulent misrepresentations, made through advertising,
regarding the safety of the use of the filters. Motions to dismiss certain of
plaintiffs' claims and motions for summary judgment are pending. In October
1996, the court denied plaintiffs' motion for class certification.
In June 1995, an action was filed in federal court in Maryland against PM
Inc. seeking certification of a purported class consisting of "all persons and
estates injured as a result of the defendant's alleged failure to manufacture a
fire safe cigarette since 1987." Sacks, et al. v. Philip Morris Inc., United
States District Court, District of Maryland, Case No. WMN-95-1840. Plaintiffs
alleged in their complaint that PM Inc. intentionally withheld and suppressed
material information relating to technology to produce a cigarette less likely
to cause fires and failed to design and sell its cigarettes using the alleged
technology. Compensatory and punitive damages were sought. In September 1996, an
order was entered denying plaintiffs' motion for leave to file an amended
complaint and granting defendant's motion to dismiss. Plaintiffs have appealed
the order.
Certain Other Actions
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in a complaint filed as a purported class action in
federal court in New York. Lawrence, et al. v. Philip Morris Companies Inc.,
et al., United States District Court, Eastern District of New York, Case No.
94 Civ. 1494 (JG). Plaintiffs allege that defendants violated the federal
securities laws by maintaining artificially high levels of profitability
through an inventory management practice pursuant to which defendants
allegedly shipped more inventory to customers than was necessary to satisfy
market demand. In August 1995, the court granted plaintiffs' motion for class
certification, certifying this action as a class action on behalf of all
persons (other than persons associated with defendants) who purchased common
stock of the Company during the period July 10, 1991 through
49
<PAGE>
April 1, 1993, inclusive, and who held such stock at the close of business on
April 1, 1993. In September 1996, the United States Court of Appeals for the
Second Circuit denied the Company's Petition for Writ of Mandamus which had
requested that the Court of Appeals direct the trial court to withdraw its order
granting class certification. In January 1997, the court granted a motion by an
alleged class member to intervene in the action and to be named an additional
class representative.
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, Case Nos. 94 Civ. 2373
(MBM) and 94 Civ. 2546 (MBM) and State Board of Administration of Florida, et
al. v. Philip Morris Companies Inc., et al., United States District Court for
the Southern District of New York, Case No. 94 Civ. 6399 (MBM). In those cases,
plaintiffs 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 September
1996, the Kurzweil plaintiffs filed an appeal from the judgment in the United
States Court of Appeals for the Second Circuit; plaintiffs withdrew the appeal
without prejudice in December 1996. In September 1996, the Kurzweil plaintiffs
filed a motion in the district court to vacate the judgment and for leave to
amend their complaint; this motion remains pending.
In March 1995, an antitrust action was filed in California state court
against four United States cereal manufacturers, including the Post Division of
Kraft Foods, Inc. ("Kraft"), by plaintiffs purporting to represent all
California residents who purchased defendants' cereal products during the four
years preceding the date upon which the complaint was filed. McIver, et al. v.
General Mills, Inc., et al., Superior Court of the State of California, County
of Santa Barbara, Case No. 206663. Plaintiffs seek treble damages and the return
of profits resulting from defendants' alleged conspiracy to fix and raise prices
of cereal products sold to California consumers. In April 1995, a second
purported class action similar to the earlier action was filed in the same
court. In August 1995, the two cases were consolidated. In September 1995, the
court granted defendants' motions for summary judgment. In December 1995,
plaintiffs filed an appeal of that decision with the California Court of Appeals
and, in January 1997, the Court of Appeals affirmed the trial court's dismissal
of this action.
In April 1996, an antitrust action was filed in federal court in Wisconsin
against Kraft as a purported class action. Stuart, et al. v. Kraft Foods, Inc.,
et al., United States District Court, Eastern District of Wisconsin, Case No.
96-C-391. An amended complaint filed in July 1996, named two other leading dairy
products manufacturers and the National Cheese Exchange as defendants. Plaintiff
purports to represent all persons and entities in the United States (excluding
governmental entities and political subdivisions) that sold milk and/or bulk
cheese directly to Kraft or any of its alleged co-conspirators at any time since
January 1, 1988. Plaintiff alleges that defendants engaged in a conspiracy to
fix and depress the prices of bulk cheese and milk through their trading
activity on the National Cheese Exchange and failed to deal in good faith with
their bulk cheese and milk suppliers by paying them prices based on the National
Cheese Exchange. Plaintiff seeks injunctive and equitable relief and treble
damages. In December 1996, plaintiffs' motion for class certification was denied
and defendants' motion to dismiss plaintiffs' action was denied without
prejudice.
In September 1996, a second antitrust action was filed in federal court in
Wisconsin against Kraft as a purported class action. Sheeks, et al. v. Kraft
Foods, Inc., et al., United States District Court, Eastern District of
Wisconsin, Case No. 96-C-1100. Plaintiffs are dairy farmers and assert virtually
identical claims to those in the Stuart case discussed above. In December 1996,
the court denied plaintiffs' motion to consolidate this action with the Stuart
case.
During 1996, tax assessments alleging the underpayment of Italian value
added taxes for the years 1988 to 1994 and income taxes for the year 1987 were
asserted against certain affiliates of the Company. The aggregate amount of
taxes claimed to be assessed to date, together with interest and penalties, is
$798.4 million. The Company anticipates that further substantial value added and
income tax assessments may be claimed. The Company and its affiliates believe
they have complied with applicable Italian tax laws and intend to vigorously
contest the assessments. A hearing concerning value added taxes is scheduled in
the Italian tax court for February 4, 1997.
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. All such cases
are, and will continue to be, vigorously defended. It is not possible to predict
the outcome of this litigation. Litigation is subject to many uncertainties, and
it is possible that some of these actions could be decided unfavorably. An
unfavorable outcome of a pending smoking and health case, such as the Carter
case discussed above, could encourage the commencement of additional similar
litigation. There have also been a number of adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry. These developments generally receive widespread media attention. The
Company is not able to evaluate the effect of these developing matters on
pending litigation and the possible commencement of additional litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of all pending litigation.
It is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation. Management believes, however, that the ultimate outcome of all
pending litigation should not have a material adverse effect on the Company's
financial position.
50
<PAGE>
Note 14. Additional Information:
(in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Years ended December 31:
Depreciation expense $ 1,038 $ 1,024 $ 1,027
===============================================================================
Rent expense $ 430 $ 390 $ 426
===============================================================================
Research and development
expense $ 515 $ 481 $ 435
===============================================================================
Advertising expense $ 3,633 $ 3,724 $ 3,358
===============================================================================
Interest and other debt expense, net:
Interest expense $ 1,183 $ 1,259 $ 1,288
Interest income (97) (80) (55)
- -------------------------------------------------------------------------------
$ 1,086 $ 1,179 $ 1,233
===============================================================================
Interest expense of financial
services and real estate
operations included in
cost of sales $ 80 $ 84 $ 78
===============================================================================
Note 15. Financial Services and Real Estate Operations:
Philip Morris Capital Corporation ("PMCC") is a wholly-owned subsidiary of the
Company. PMCC invests in leveraged and direct finance leases, other tax-oriented
financing transactions, third party financial instruments and engages in various
financing activities for customers and suppliers of the Company's subsidiaries.
Additionally, PMCC is engaged, through its wholly-owned subsidiary, Mission
Viejo Company, in land planning, development and sales activities in California
and Colorado.
Pursuant to a support agreement, the Company has agreed to retain
ownership of 100% of the voting stock of PMCC and make periodic payments to PMCC
to the extent necessary to ensure that earnings available for fixed charges
equal at least 1.25 times its fixed charges. No payments were required in 1996,
1995 or 1994.
Condensed balance sheet data at December 31, follow:
(in millions) 1996 1995
- --------------------------------------------------------------------------------
Assets
Finance leases $7,554 $6,858
Other investments 474 471
- --------------------------------------------------------------------------------
8,028 7,329
- --------------------------------------------------------------------------------
Less unearned income and allowances 2,682 2,336
- --------------------------------------------------------------------------------
Finance assets, net 5,346 4,993
Real estate held for development and sale 314 339
Other assets 258 302
- --------------------------------------------------------------------------------
Total assets $5,918 $5,634
================================================================================
Liabilities and stockholder's equity
Short-term borrowings $ 173 $ 671
Long-term debt 1,134 783
Deferred income taxes 3,636 3,382
Other liabilities 145 121
Stockholder's equity 830 677
- --------------------------------------------------------------------------------
Total liabilities and stockholder's equity $5,918 $5,634
================================================================================
The amounts shown above include receivables and payables with the Company and
its other subsidiaries. These amounts were eliminated in the Company's
consolidated balance sheets.
Finance leases consist of a portfolio of investments in transportation,
manufacturing facilities, power generation and real estate. Rentals receivable
for finance leases represent unpaid rentals, less principal and interest on
third-party nonrecourse debt, if any.
PMCC's investment securities, included in other investments, are
classified as available for sale and are recorded at fair value, with unrealized
gains and losses included as a component of stockholder's equity, net of related
deferred income taxes. Other investments also include real estate and commercial
receivables, the total estimated fair values of which, at December 31, 1996 and
1995, approximated their carrying values. Fair values were estimated by
discounting projected cash flows using the current rates for similar loans to
borrowers with similar credit ratings and maturities.
Condensed income statement data follow for the years ended December 31,
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenues:
Financial services $222 $197 $257
Real estate 157 184 236
- --------------------------------------------------------------------------------
Total revenues 379 381 493
Expenses:
Financial services 107 107 114
Real estate 98 129 190
- --------------------------------------------------------------------------------
Total expenses 205 236 304
Equity in earnings of limited
partnership investments 15 15 17
- --------------------------------------------------------------------------------
Earnings before income taxes 189 160 206
Provision for income taxes 66 55 72
- --------------------------------------------------------------------------------
Net earnings $123 $105 $134
================================================================================
Note 16. Financial Instruments:
Derivative financial instruments
The Company operates internationally, with manufacturing and sales facilities in
various locations around the world. Derivative financial instruments are used by
the Company for purposes other than trading, principally to reduce exposures to
market risks resulting from fluctuations in interest rates and foreign exchange
rates by creating offsetting exposures. The Company is not a party to leveraged
derivatives.
The Company has foreign currency and related interest rate swap agreements
which were executed to reduce the Company's borrowing costs and serve as hedges
of the Company's net assets in foreign subsidiaries, principally those
denominated in Swiss francs. At December 31, 1996 and 1995, the notional
principal amounts of these agreements were $2.2 billion and $2.0 billion,
respectively. Aggregate maturities at December 31, 1996 were as follows (in
millions): 1997-$853; 1998-$186; 1999-$391; 2000-$215 and 2002 and
thereafter-$540. The notional amount is the amount used for the calculation of
interest payments which are exchanged over the life of the swap transaction and
is equal to the amount of foreign currency or dollar principal exchanged at
maturity.
Forward exchange contracts are used by the Company to reduce the effect of
fluctuating foreign currencies on short-term foreign currency denominated
intercompany and third party transactions. At December 31, 1996 and 1995, the
Company had forward exchange contracts, with maturities of less than one year,
of $1.7 billion and $1.2 billion, respectively.
51
<PAGE>
Credit exposure and credit risk
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the swap agreements. However, such exposure was not material
at December 31, 1996, and the Company does not anticipate nonperformance.
Further, the Company does not have a significant credit exposure to an
individual counterparty.
Fair value
The aggregate fair value, based on market quotes, of the Company's total debt at
December 31, 1996 was $15.7 billion as compared to its carrying value of $15.2
billion. The aggregate fair value of the Company's total debt at December 31,
1995 was $16.7 billion as compared to its carrying value of $15.8 billion. The
estimated fair value of financial services and real estate other investments,
including commercial and real estate receivables, approximated their carrying
values at December 31, 1996 and 1995.
The carrying values of the foreign currency and related interest rate swap
agreements and of the forward contracts, which did not differ materially from
their fair values, were not material.
See Notes 4, 5 and 15 for additional disclosures of fair value for
short-term borrowings, long-term debt and financial instruments within the
financial services and real estate operations, respectively.
Note 17. Quarterly Financial Data (Unaudited):
1996 Quarters
(in millions, except per share data) 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Operating revenues $ 17,491 $ 17,509 $ 17,414 $16,790
================================================================================
Gross profit $ 6,989 $ 7,100 $ 7,092 $ 6,812
================================================================================
Net earnings $ 1,565 $ 1,621 $ 1,646 $ 1,471
================================================================================
Per share data:
Net earnings $ 1.89 $ 1.97 $ 2.01 $ 1.81
================================================================================
Dividends declared $ 1.00 $ 1.00 $ 1.20 $ 1.20
================================================================================
Market price--high $104 5/8 $107 1/4 $107 1/2 $ 119
--low $ 85 5/8 $ 85 5/8 $ 85 5/8 $89 3/4
================================================================================
During the year, the Company sold several domestic and international food
businesses at net pretax gains of $320 million, most of which were reflected in
fourth quarter earnings. In addition, the Company initiated cost saving programs
that included downsizing facilities and workforce reductions. The cost of these
actions substantially offset the gains from businesses sold. The net impact of
these divestitures and provisions was not material to fourth quarter operating
income, pretax earnings or earnings per share.
<TABLE>
<CAPTION>
1995 Quarters
(in millions, except per share data) 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 16,517 $ 17,129 $ 16,689 $ 15,736
==============================================================================================================
Gross profit $ 6,467 $ 6,816 $ 6,764 $ 6,407
==============================================================================================================
Earnings before cumulative effect of accounting changes $ 1,363 $ 1,410 $ 1,433 $ 1,272
Cumulative effect of changes in method of accounting (See Note 1) (28)
- --------------------------------------------------------------------------------------------------------------
Net earnings $ 1,335 $ 1,410 $ 1,433 $ 1,272
==============================================================================================================
Per share data:
Earnings before cumulative effect of accounting changes $ 1.60 $ 1.67 $ 1.71 $ 1.53
Cumulative effect of changes in method of accounting (.03)
- --------------------------------------------------------------------------------------------------------------
Net earnings $ 1.57 $ 1.67 $ 1.71 $ 1.53
==============================================================================================================
Dividends declared $ .825 $ .825 $ 1.00 $ 1.00
==============================================================================================================
Market price--high $ 68 $ 76 5/8 $ 84 1/8 $ 94 3/8
--low $ 55 3/4 $ 65 1/4 $ 71 3/8 $ 82 5/8
==============================================================================================================
</TABLE>
During the year, the Company sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses. In addition, several smaller international food
businesses were sold. Net pretax gains from the sales of these businesses were
$275 million, most of which were reflected in fourth quarter earnings. In the
fourth quarter of 1995, the Company also recorded provisions in connection with
these divestitures, primarily for an early retirement program and the write-down
of assets of food facilities to be downsized or closed. The net impact of these
divestitures and provisions was not material to fourth quarter operating income,
pretax earnings or earnings per share.
=================================
The principal stock exchange, on which the Company's common stock (par value $1
per share) is listed, is the New York Stock Exchange. At January 31, 1997 there
were approximately 139,700 holders of record of the Company's common stock.
52
<PAGE>
Report of Independent Accountants
================================================================================
To the Board of Directors and Stockholders of
Philip Morris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Philip Morris
Companies Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Philip Morris
Companies Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
January 27, 1997
Company Report on Financial Statements
================================================================================
The consolidated financial statements and all related financial
information herein are the responsibility of the Company. The financial
statements, which include amounts based on judgments, have been prepared in
accordance with generally accepted accounting principles. Other financial
information in the annual report is consistent with that in the financial
statements.
The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in accordance with
management's authorization and properly recorded, that assets are safeguarded,
and that accountability for assets is maintained. The system of internal
controls is characterized by a control-oriented environment within the Company,
which includes written policies and procedures, careful selection and training
of personnel, and audits by a professional staff of internal auditors.
Coopers & Lybrand L.L.P., independent accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed of six
non-management directors, meets periodically with Coopers & Lybrand L.L.P., the
Company's internal auditors and management representatives to review internal
accounting control, auditing and financial reporting matters. Both Coopers &
Lybrand L.L.P. and the internal auditors have unrestricted access to the Audit
Committee and may meet with it without management representatives being present.
53
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Certain active subsidiaries of the Company and their subsidiaries as of
December 31, 1996, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
1020147 Ontario Limited ......................................... Canada
464088 Ontario Limited .......................................... Canada
AB Estrella ..................................................... Sweden
AB Kraft Jacobs Suchard Lietuva.................................. Lithuania
A/O Almaty Tobacco Company ...................................... Kazakhstan
A/O Krasnadortabakprom .......................................... Russia
A/O Philip Morris NEVA .......................................... Russia
A/S Freia ....................................................... Norway
A/S Maarud ...................................................... Norway
Ajinomoto General Foods, Inc. ................................... Japan
Aktieselskabet FMD af 11 juni 1920 .............................. Denmark
American Specialty & Craft Beer Co. ............................. Delaware
Beijing Kraft Food Corporation Limited .......................... China
Burlington Foods, Inc............................................ United States
C.A. Tabacalera Nacional ........................................ Venezuela
Cafe GRAND'MERE S.A. ............................................ France
Cafe HAG S.A. ................................................... France
Callard & Bowser-Suchard, Inc. .................................. Delaware
Capri Sun, Inc. ................................................. Delaware
Celis Brewery, Inc. ............................................. Texas
Century Importers Inc. .......................................... Delaware
Churny Company, Inc. ............................................ Delaware
Comptoir De La Confiserie ....................................... France
Cote d'Or Italia S.p.A. ......................................... Italy
DE LA S.r.l. .................................................... Italy
Daesung Machinary ............................................... Korea
Dart Resorts Inc. ............................................... Delaware
Dong Suh Foods Corporation ...................................... Korea
Dong Suh Oil & Fats Co., Ltd. ................................... Korea
Egri Dohanygyar kft. ............................................ Hungary
El Gallito Industrial, S.A. ..................................... Costa Rica
Estrella A/S .................................................... Denmark
FTR Holding S.A. ................................................ Switzerland
Fabriques de Tabac Reunies S.A. ................................. Switzerland
Fattorie Osella S.p.A. .......................................... Italy
Franklin Baker Company of the Philippines ....................... Philippines
Freia Chokolade A/S ............................................. Denmark
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Gardner's Good Foods, Inc. ...................................... New Jersey
General Foods Credit Corporation ................................ Delaware
General Foods Credit Investors No. 1 Corporation ................ Delaware
General Foods Credit Investors No. 2 Corporation ................ Delaware
General Foods Credit Investors No. 3 Corporation ................ Delaware
General Foods Foreign Sales Corporation ......................... Virgin Islands (U.S.)
General Foods Pty. Ltd. ......................................... Australia
Grant Holdings, Inc. ............................................ Pennsylvania
Grundstucksgemeinschaft Kraft Jacobs Suchard GbR ................ Germany
Guangtong Food Company Ltd. ..................................... China
HAG GF AG ....................................................... Germany
Hansung Life Insurance Co. Ltd. ................................. Korea
HNB Investment Corp. ............................................ Delaware
Industrias de Chocolate Lacta S.A. ............................. Brazil
International Pet Foods Ltd. .................................... New Zealand
ION SA .......................................................... Greece
Jacob Leinenkugel Brewing Company, Inc. ......................... Wisconsin
Jacobs Suchard Beteiligungs Gesellschaft GmbH ................... Austria
Jacobs Suchard China Limited .................................... Hong Kong
Jacobs Suchard Figaro A.S. ...................................... Czechoslovakia
Jacobs Suchard Pavlides SA ...................................... Greece
KJS Namur SA .................................................... Belgium
Kharkov Tobacco Factory ......................................... Ukraine
Kraft Canada Inc. ............................................... Canada
Kraft Chorzele Sp. z o.o. ....................................... Poland
Kraft Food Ingredients Corp. .................................... Delaware
Kraft Foods AB .................................................. Sweden
Kraft Foods de Mexico S.A. de C.V. .............................. Mexico
Kraft Foods Holdings Norway, Inc. ............................... Delaware
Kraft Foods, Inc. ............................................... Delaware
Kraft Foods (Philippines), Inc. ................................. Philippines
Kraft Foods (Puerto Rico), Inc. ................................. Puerto Rico
Kraft Foods International, Inc. ................................. Delaware
Kraft Foods International Services, Inc.......................... United States
Kraft Foods (Asia-Pacific) Ltd. ................................. Hong Kong
Kraft Foods (Australia) Limited ................................. Australia
Kraft Foods (Singapore) Pte Ltd ................................. Singapore
Kraft Foods Limited ............................................. Australia
Kraft Foods Manufacturing Corporation ........................... Delaware
Kraft Freia Marabou AB........................................... Sweden
Kraft Foods (New Zealand) Limited ............................... New Zealand
Kraft Freia Marabou ApS ......................................... Denmark
Kraft Freia Marabou Danmark A/S ................................. Denmark
Kraft Freia Marabou Norden a.s. ................................. Norway
Kraft General Foods Europe GmbH ................................. Germany
Kraft General Foods Norge AS .................................... Norway
Kraft Hellas SA ................................................. Greece
Kraft Jacobs Suchard AG ......................................... Switzerland
Kraft Jacobs Suchard (Australia) Pty. Ltd. ...................... Australia
Kraft Jacobs Suchard (Schweiz) AG ............................... Switzerland
Kraft Jacobs Suchard BV ......................................... Netherlands
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Kraft Jacobs Suchard Bulgaria AD ................................ Bulgaria
Kraft Jacobs Suchard CS SPOL. S.R.O ............................ Czechoslovakia
Kraft Jacobs Suchard Central & Eastern Europe Service BV ........ Netherlands
Kraft Jacobs Suchard Coffex ..................................... France
Kraft Jacobs Suchard Erzeugnisse GmbH & Co. KG .................. Germany
Kraft Jacobs Suchard France SA .................................. France
Kraft Jacobs Suchard GmbH (Bremen) .............................. Germany
Kraft Jacobs Suchard Hungaria KFT ............................... Hungary
Kraft Jacobs Suchard Iberia, S.A. ............................... Spain
Kraft Jacobs Suchard Ireland Ltd. ............................... Ireland
Kraft Jacobs Suchard Laverune ................................... France
Kraft Jacobs Suchard Limited .................................... United Kingdom
Kraft Jacobs Suchard (Holdings) Limited (United Kingdom) ........ United Kingdom
Kraft Jacobs Suchard Management & Consulting AG ................. Switzerland
Kraft Jacobs Suchard Manufacturing GmbH & Co KG ................. Germany
Kraft Jacobs Suchard Oesterreich Gesellschaft MBH ............... Austria
Kraft Jacobs Suchard Polska Sp. z o.o. .......................... Poland
Kraft Jacobs Suchard Portugal Productos Alimentares Lda. ........ Portugal
Kraft Jacobs Suchard Produktion GmbH............................. Germany
Kraft Jacobs Suchard R & D, Inc. ................................ Delaware
Kraft Jacobs Suchard Reims ...................................... France
Kraft Jacobs Suchard Romania SA ................................. Romania
Kraft Jacobs Suchard S.A. ....................................... Belgium
Kraft Jacobs Suchard S.p.A. ..................................... Italy
Kraft Jacobs Suchard Strasbourg ................................. France
Kraft Japan, K.K. ............................................... Japan
Kraft Korea Inc.................................................. Korea, Republic of
Kraft Pizza Company ............................................. Delaware
Kraft Suchard Argentina, S.A. ................................... Argentina
Kraft Suchard Brasil S.A. ....................................... Brazil
Kraft Tianmei Food (Tianjin) Co., Ltd. .......................... China
Krema Limited ................................................... Ireland
La Loire Investment Corp. ....................................... Delaware
La Seine Investment Corp. ....................................... Delaware
Le Rhone Investment Corp. ....................................... Delaware
MBC Holdings, Inc. .............................................. Wisconsin
Malaco A/S ...................................................... Denmark
Marabou GmbH .................................................... Germany
Marsa Kraft Jacobs Suchard Sabanci
Gida Sanayi ve Ticaret A.S. ................................... Turkey
Martlet Importing Co. Inc. ...................................... New York
Massalin Particulares S.A. ...................................... Argentina
Maxpax France SA ................................................ France
Miller Brewing 1855, Inc. ....................................... Delaware
Miller Brewing Company .......................................... Wisconsin
Miller Brewing do Brasil, Ltda. ................................. Brazil
Miller Brewing of Canada, Ltd. .................................. Canada
Miller Brewing of Europe, Ltd. .................................. United Kingdom
Mirabell Salzburger Confiserie-und Bisquit GmbH ................. German Democratic Rep.
Mission Viejo Company ........................................... California
Molson Breweries U.S. Holdings Inc. ............................. Delaware
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Molson Breweries U.S.A. Inc. .................................... Delaware
Oy Estrella AB .................................................. Finland
Oy Kraft Freia Marabou Finland AB ............................... Finland
P.M. Beverage Holdings, Inc. .................................... Delaware
P.T. Kraft Ultrajaya Indonesia................................... Indonesia
Phenix Leasing Corporation ...................................... Delaware
Phenix Management Corporation ................................... Delaware
Philip Morris Asia Incorporated ................................. Delaware
Philip Morris Belgium S.A. ...................................... Belgium
Philip Morris Brasil S.A. ....................................... Delaware
Philip Morris Capital Corporation ............................... Delaware
Philip Morris Capital (Dublin) Limited .......................... Ireland
Philip Morris Capital (Ireland) Limited ......................... Ireland
Philip Morris Corporate Services Inc. ........................... Delaware
Philip Morris Credit Capital N.V. ............................... Netherlands Antilles
Philip Morris Europe S.A. ....................................... Delaware
Philip Morris Finance Europe B.V. ............................... Netherlands
Philip Morris G.m.b.H. .......................................... Germany
Philip Morris Holland B.V. ...................................... Netherlands
Philip Morris Hong Kong Limited.................................. Hong Kong
Philip Morris Incorporated ...................................... Virginia
Philip Morris International Finance Corporation ................. Delaware
Philip Morris International Inc. ................................ Delaware
Philip Morris Kabushiki Kaisha................................... Japan
Philip Morris Korea C.H. ........................................ Korea
Philip Morris Latin America Inc. ................................ Delaware
Philip Morris Limited ........................................... Australia
Philip Morris Management Corp. .................................. New York
Philip Morris Products Inc. ..................................... Virginia
Philip Morris SA, Philip Morris Sabanci Pazarlama ve Satis A.S. . Turkey
Philip Morris Sales Inc. ........................................ Delaware
Philip Morris Services India Inc. ............................... Delaware
Philip Morris (Malaysia) Sdn. Bhd. .............................. Malaysia
PHILSA Philip Morris Sabanci Sigara ve Tutunculuk
Sanayi ve Ticaret, A.S. ....................................... Turkey
Pietro Negroni Limited........................................... United Kingdom
Pietro Negroni S.A. ............................................. Switzerland
PMCC Investors No. 1 Corporation ................................ Delaware
PMCC Investors No. 2 Corporation ................................ Delaware
PMCC Investors No. 3 Corporation ................................ Delaware
PMCC Investors No. 4 Corporation ................................ Delaware
PMCC Leasing Corporation ........................................ Delaware
Porta Pack Corporation........................................... United States
Premierfoods Corporation ........................................ Taiwan
Ridg's Finer Foods, Inc. ........................................ Delaware
Roskill Cartage and Storage Limited ............................. New Zealand
Rye Ventures, Inc. .............................................. Delaware
SB Leasing Inc. ................................................. Delaware
Seven Seas Foods, Inc. .......................................... Delaware
Shunde Kraft Confectionery Company Limited ...................... China
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Societa Immobiliare Modenese S.p.A. ............................. Italy
Suchard Limited ................................................. United Kingdom
Suchard Schokolade Ges. mbH Bludenz (Austria) ................... Austria
Superior AgResource, Inc. ....................................... Delaware
Tabacalera Centroamericana S.A. ................................. Guatemala
Tabacalera Costarricense S.A. ................................... Costa Rica
Tabak A.S. ...................................................... Czech Republic
Taloca AG ....................................................... Switzerland
Terry's Suchard Limited ......................................... United Kingdom
UAB Philip Morris Lietuva ....................................... Lithuania
Unimat Corporation .............................................. Japan
Vict. Th. Engwall & Co., Inc. ................................... Delaware
Votesor BV ...................................................... Netherlands
Zaklady Przemyslu Cukierniczego 'Olza' SA ....................... Poland
Zaklady Przemyslu Tytoniowego w Krakowie S.A. ................... Poland
</TABLE>
5
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 13
to the registration statement of Philip Morris Companies Inc. (the "Company")
on Form S-14 (File No. 2-96149) and in the Company's registration statements on
Form S-3 (File No. 333-16955) and Form S-8 (File Nos. 333-20747, 333-16127,
33-1479, 33-1480, 33-10218, 33-13210, 33-14561, 33-17870, 33-37115, 33-38781,
33-39162, 33-40110, 33-48781, 33-59109, 33-63975 and 33-63977) of our reports
dated January 27, 1997, on our audits of the consolidated financial statements
and financial statement schedule of the Company as of December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
which reports are included or incorporated by reference in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 10, 1997
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Elizabeth E. Bailey
-----------------------------------
Elizabeth E. Bailey
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Murray H. Bring
-----------------------------------
Murray H. Bring
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Harold Brown
-----------------------------------
Harold Brown
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ William H. Donaldson
-----------------------------------
William H. Donaldson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Jane Evans
-----------------------------------
Jane Evans
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Robert E.R. Huntley
-----------------------------------
Robert E.R. Huntley
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Rupert Murdoch
-----------------------------------
Rupert Murdoch
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ John D. Nichols
-----------------------------------
John D. Nichols
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Richard D. Parsons
-----------------------------------
Richard D. Parsons
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Roger S. Penske
-----------------------------------
Roger S. Penske
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ John S. Reed
-----------------------------------
John S. Reed
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1996 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 26th day of February, 1997.
/s/ Stephen M. Wolf
-----------------------------------
Stephen M. Wolf
