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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Philip Morris Companies Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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[LOGO OF PHILIP MORRIS COMPANIES INC.]
PHILIP MORRIS
COMPANIES INC.
GEOFFREY C. BIBLE 120 PARK AVENUE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER NEW YORK, NY 10017
March 10, 1997
DEAR STOCKHOLDER:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders of
Philip Morris Companies Inc. The meeting will be held at 9:00 a.m. on
Thursday, April 24, 1997, at the Philip Morris Manufacturing Center, 3601
Commerce Road, Richmond, Virginia.
At the meeting, we will elect 13 directors and vote on a proposed new long-
term incentive plan and the selection of auditors. If presented, we will also
vote on three stockholder proposals. There will also be a report on the
Company's business, and stockholders will have an opportunity to ask
questions.
We anticipate that a large number of stockholders will attend the meeting. As
seating is limited, we suggest you arrive by 8:30 a.m., when the auditorium
will be opened. If the auditorium is filled, there will be additional seating
outside the auditorium from which the proceedings may be viewed. Those needing
special assistance at the meeting are requested to write the Corporate
Secretary at 120 Park Avenue, New York, New York 10017. IF YOU ARE A
REGISTERED STOCKHOLDER AND PLAN TO ATTEND THE MEETING, PLEASE DETACH AND
RETAIN THE ADMISSION TICKET AND MAP THAT IS ATTACHED TO THE PROXY CARD. IF
YOUR SHARES ARE HELD IN THE NAME OF A BROKER OR OTHER NOMINEE AND YOU DO NOT
HAVE AN ADMISSION TICKET, PLEASE BRING PROOF OF YOUR SHARE OWNERSHIP TO THE
MEETING.
The vote of each stockholder is important. I urge you to sign, date and return
the enclosed proxy card as promptly as possible. In this way, you can be sure
your shares will be voted, and you will spare your Company the expense of a
follow-up mailing.
Sincerely,
/s/ Geoffrey C. Bible
FOR FURTHER INFORMATION ABOUT THE ANNUAL MEETING,
PLEASE CALL 1-800-367-5415
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PHILIP MORRIS COMPANIES INC.
120 Park Avenue
New York, New York 10017
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD THURSDAY, APRIL 24, 1997
To the Stockholders of
PHILIP MORRIS COMPANIES INC.:
The Annual Meeting of Stockholders of Philip Morris Companies Inc. will be
held on Thursday, April 24, 1997, at the Philip Morris Manufacturing Center,
3601 Commerce Road, Richmond, Virginia, at 9:00 a.m. to:
(1) Elect 13 directors;
(2) Approve the proposed 1997 Performance Incentive Plan;
(3) Ratify the selection of auditors for the fiscal year ending December
31, 1997;
(4) Vote on three stockholder proposals if presented by their proponents;
and
(5) Transact such other business as may properly come before the meeting.
Only holders of record of Common Stock at the close of business on March 4,
1997, will be entitled to vote at the meeting.
G. Penn Holsenbeck
Vice President and Secretary
March 10, 1997
<PAGE>
PROXY STATEMENT
SOLICITATION OF PROXIES
This proxy statement is furnished by the Board of Directors (the "Board") of
Philip Morris Companies Inc., 120 Park Avenue, New York, New York 10017, in
connection with its solicitation of proxies for use at the Annual Meeting of
Stockholders to be held on Thursday, April 24, 1997, at 9:00 a.m., at the
Philip Morris Manufacturing Center, 3601 Commerce Road, Richmond, Virginia,
and at any and all adjournments thereof. Mailing of the proxy statement will
commence on or about March 10, 1997. Holders of record of the Company's Common
Stock (the "Common Stock") at the close of business on March 4, 1997, will be
entitled to one vote for each share held on all matters to come before the
meeting. On February 26, 1997, there were outstanding 809,704,063 shares of
Common Stock.
On February 26, 1997, the Board approved a three-for-one split of the Common
Stock. To effect the split, two additional shares of Common Stock will be
distributed on April 10, 1997, for each share of Common Stock held of record
at the close of business on March 17, 1997. The additional shares distributed
pursuant to the split will not be entitled to vote at this year's Annual
Meeting of Stockholders as such shares will not have been outstanding on the
record date for the meeting. The share and per share data set forth in the
Company's 1996 annual report and in this proxy statement, unless otherwise
noted, do not reflect the stock split. After giving effect to the stock split,
net earnings per share as reported in the 1996 annual report would have been
$2.56, $2.16 and $1.82 for the years ended December 31, 1996, 1995 and 1994,
respectively.
A proxy on the enclosed form may be revoked at any time before it has been
exercised. Unless the proxy is revoked or there is a direction to abstain on
one or more proposals, it will be voted on each proposal and, if a choice is
made with respect to any matter to be acted upon, in accordance with such
choice. If no choice is specified, the proxy will be voted as recommended by
the Board. The proxy will also serve to instruct the administrator of the
Company's Dividend Reinvestment and Voluntary Cash Payment Plan and the
trustee of each defined contribution plan sponsored by the Company how to vote
the plan shares of a participating stockholder or employee.
VOTING AT THE MEETING
A majority of the votes entitled to be cast on matters to be considered at the
meeting constitutes a quorum. If a share is represented for any purpose at the
meeting, it is deemed to be present for all other matters. Abstentions and
shares held of record by a broker or its nominee ("Broker Shares") that are
voted on any matter are included in determining the number of votes present.
Broker Shares that are not voted on any matter at the meeting will not be
included in determining whether a quorum is present.
The election of each nominee for director requires a plurality of the votes
cast. In order to be approved, the votes cast for the 1997 Performance
Incentive Plan, for the selection of auditors and for each stockholder
proposal must exceed the votes cast against such matters. Abstentions and
Broker Shares that are not voted on the matter will not be included in
determining the number of votes cast.
Stockholders' proxies are received by the Company's independent proxy
processing agent, and the vote is certified by independent inspectors of
election. Proxies and ballots that identify the vote of individual
stockholders will be kept confidential, except as necessary to meet legal
requirements, in cases where stockholders write comments on their proxy cards
or in a contested proxy solicitation. During the proxy solicitation period,
the Company will receive vote tallies from time to time from the inspectors,
but such tallies will provide aggregate figures rather than names of
stockholders. The independent inspectors will notify the Company if a
stockholder has failed to vote so that he or she may be reminded and requested
to do so.
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As used herein, the term "Company" or "Philip Morris" includes Philip Morris
Companies Inc. from July 1, 1985, and Philip Morris Incorporated prior to July
1, 1985, and, where appropriate, their subsidiaries.
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ELECTION OF DIRECTORS
GENERAL INFORMATION
The Board has responsibility for establishing broad corporate policies and for
the overall performance of the Company, although it is not involved in day-to-
day operations. Members of the Board are kept informed of the Company's
businesses by various reports and documents sent to them each month, as well
as by operating and financial reports made at Board and committee meetings by
the chairman of the board and other officers. In addition, the Board holds an
annual two- or three-day meeting to review the Company's Five-Year Plan.
Regular meetings of the Board are held each month, except July. The
organizational meeting follows immediately after the Annual Meeting of
Stockholders. The Board held eleven regular monthly meetings in 1996.
----------------
COMMITTEES OF THE BOARD
Various committees of the Board have been established to assist it in the
discharge of its responsibilities. Those committees are described below. The
biographical information on the nominees for director set forth in this proxy
statement includes committee memberships currently held by each nominee.
The AUDIT COMMITTEE meets with management, the Company's independent
accountants and its internal auditors to consider the adequacy of the
Company's internal controls and other financial reporting matters. The Audit
Committee recommends to the Board the engagement of the Company's independent
accountants, discusses with the independent accountants their audit
procedures, including the proposed scope of the audit, the audit results and
the accompanying management letters and, in connection with determining their
independence, reviews the services performed by the independent accountants.
This committee, which also monitors compliance with the Company's Business
Conduct Policy, consists of six non-employee directors and met four times in
1996.
The COMMITTEE ON PUBLIC AFFAIRS AND SOCIAL RESPONSIBILITY reviews and monitors
the Company's policies, practices and programs with respect to public issues
of importance to stockholders, the Company and the general public, to the
extent those matters are not the responsibility of other committees of the
Board. This committee consists of eleven directors and met four times in 1996.
The COMPENSATION COMMITTEE is responsible for administering the Company's
compensation programs and remuneration arrangements for its highest-paid
executives, including the chief executive officer, and for reviewing the
succession plan for the chief executive officer and other senior executives.
The Committee's Report on Executive Compensation appears elsewhere in this
proxy statement. The Compensation Committee consists of six non-employee
directors and met six times in 1996.
The CORPORATE EMPLOYEE PLANS INVESTMENT COMMITTEE, consisting of five
directors and one senior executive, held six meetings in 1996. This committee
oversees the investment of certain employee benefit plan assets.
The EXECUTIVE COMMITTEE, consisting of six directors, has authority to act for
the Board on most matters during intervals between Board meetings. This
committee met once in 1996.
The FINANCE COMMITTEE consists of seven directors and one senior executive and
met four times in 1996. It monitors the financial condition of the Company and
advises the Board with respect to financing needs, dividend policy, share
repurchase programs and other financial matters.
The NOMINATING AND CORPORATE GOVERNANCE COMMITTEE consists of seven non-
employee directors and met three times in 1996. This committee reviews the
qualifications of candidates for director suggested by Board members,
management, stockholders and other sources, considers the performance of
incumbent directors in determining whether to nominate them for reelection and
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recommends to the Board a slate of nominees for election as directors. It
advises the Board on all matters concerning corporate governance to the extent
these matters are not the responsibility of other committees, assesses the
Board's performance and makes recommendations to the Board on the retirement
policies for non-employee directors, the functions and duties of the
committees of the Board, general Board practices and the Company's relations
with its stockholders.
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THE NOMINEES
It is proposed that 13 directors be elected to hold office until the next
Annual Meeting of Stockholders and until their successors have been elected.
The Nominating and Corporate Governance Committee has recommended to the Board
and the Board has approved the persons named below as management's nominees
and, unless otherwise marked, a proxy will be voted for such persons. Each of
the nominees currently serves as a director and was elected by the
stockholders at the 1996 Annual Meeting. All nominees attended at least 75% of
the aggregate number of meetings of the Board and all committees of the Board
on which they served during 1996, except Messrs. Murdoch and Wolf.
Although management does not anticipate that any of the persons named below
will be unable or unwilling to stand for election, a proxy, in the event of
such an occurrence, may be voted for a substitute designated by the Board.
However, in lieu of designating a substitute, the Board may amend the By-Laws
to reduce the number of directors.
ELIZABETH E. Dr. Bailey assumed her present position in
BAILEY July 1991, having served from July 1990 to
John C. Hower June 1991 as a professor of industrial
Professor of administration at Carnegie-Mellon
Public Policy & University and as a visiting scholar at the
Management, The Yale School of Organization and Management.
Wharton School of From 1983 to 1990, she was dean of the
the University of Graduate School of Industrial
[Photo] Pennsylvania, Administration of Carnegie-Mellon
Philadelphia, PA University. Dr. Bailey serves as a director
of the College Retirement Equities Fund,
CSX Corporation, Honeywell Inc., and as a
trustee of The Brookings Institution and
the National Bureau of Economic Research.
She is a member of the Audit, Executive,
Nominating and Corporate Governance, and
Public Affairs and Social Responsibility
Committees.
Director since
1989
Age: 58
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GEOFFREY C. BIBLE Employed by the Company continuously since
Chairman of the 1976, Mr. Bible served Philip Morris
Board and Chief International Inc. in various executive
Executive Officer capacities from 1976 to 1990, becoming its
President and Chief Executive Officer in
1987. He served as President and Chief
Administrative Officer of Kraft Foods, Inc.
("Kraft Foods"), from 1990 to 1991,
Executive Vice President, International, of
the Company from 1991 to April 1993 and
Executive Vice President, Worldwide
Tobacco, from April 1993 to June 1994, when
he became President and Chief Executive
Officer. He assumed his present position in
February 1995. He is a director of British
Sky Broadcasting Group plc, the New York
Stock Exchange, Inc., Lincoln Center for
the Performing Arts, Inc., the
International Tennis Hall of Fame, the
Health Care Chaplaincy and a member of the
Board of Trustees of Thunderbird (American
Graduate School of International
Management). Mr. Bible is chairman of the
Executive and Finance Committees and a
member of the Committee on Public Affairs
and Social Responsibility.
Director since
1994
[Photo]
Age: 59
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MURRAY H. BRING Employed by the Company continuously since
1988, Mr. Bring had been a partner in Ar-
Executive Vice nold & Porter, Washington, DC, since 1967.
President, He became Associate General Counsel of the
External Affairs, Company in January 1988, Senior Vice Presi-
and General dent and General Counsel in July 1988 and
Counsel assumed his present position in December
1994. He is a director of the Whitney Mu-
seum of American Art, the New York Univer-
sity Law Center Foundation, The William J.
Brennan Center for Justice and The New York
City Opera. Mr. Bring is a member of the
Committee on Public Affairs and Social Re-
sponsibility.
[Photo] Director since
1988
Age: 62
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HAROLD BROWN Dr. Brown assumed his present position at
Counselor, Center the Center for Strategic and International
for Strategic and Studies in July 1992. Previously and from
International 1984, he was chairman of the Foreign Policy
Studies, Institute of the School of Advanced Inter-
Washington, DC; national Studies, The Johns Hopkins Univer-
Partner, Warburg sity. Dr. Brown has been a partner of
[Photo] Pincus & Co., New Warburg Pincus & Co. since 1990. Dr. Brown
York, NY, venture is a director of Alumax Inc., Cummins En-
capital firm gine Company, Inc., Evergreen Holdings,
Inc., International Business Machines Cor-
poration and Mattel, Inc. Dr. Brown is
chairman of the Nominating and Corporate
Governance Committee and a member of the
Compensation, Corporate Employee Plans In-
vestment, Finance, and Public Affairs and
Social Responsibility Committees.
Director since
1983
Age: 69
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WILLIAM H. Mr. Donaldson assumed his present position
DONALDSON with Donaldson, Lufkin & Jenrette in Octo-
Co-founder and ber 1995. He has been chairman of Donaldson
Senior Advisor, Enterprises, Inc., since June 1995. Previ-
Donaldson, Lufkin ously and from 1991, he was chairman and
& Jenrette, New chief executive officer of the New York
York, NY, Stock Exchange, Inc., and from 1980 until
investment 1991, he was chairman and chief executive
[Photo] banking firm; officer of Donaldson Enterprises, Inc. He
Chairman, serves as a director of Aetna Inc., Honey-
Donaldson well, Inc., the Committee for Economic De-
Enterprises, velopment, Lincoln Center for the Perform-
Inc., New York, ing Arts, Inc., and as a trustee for the
NY, private Marine Corps University Foundation, Car-
investment firm negie Endowment for International Peace and
the New York City Police Foundation. He
also serves as chairman of the Yale School
of Management Advisory Board. Mr. Donaldson
is chairman of the Corporate Employee Plans
Investment Committee and a member of the
Audit, Executive, Finance, and Nominating
and Corporate Governance Committees.
Director since
1979
Age: 65
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JANE EVANS Ms. Evans assumed her present position in
President and April 1995, having served as vice president
Chief Operating and general manager, Home & Personal Serv-
Officer, SmartTV, ices Division of U.S. West Communications,
Burbank, CA, Inc., from 1991 to 1995. From 1989 until
portable 1991, she was president and chief executive
interactivity and officer of the InterPacific Retail Group.
electronic Ms. Evans serves as a director of BancOne-
[Photo] commerce Arizona Corp., Edison Brothers Stores,
Inc., Georgia-Pacific Corporation and Kauf-
man and Broad Home Corporation. She is
chair of the Committee on Public Affairs
and Social Responsibility and a member of
the Corporate Employee Plans Investment and
Nominating and Corporate Governance Commit-
tees.
Director since
1981
Age: 52
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ROBERT E. R. Mr. Huntley retired as counsel to the law
HUNTLEY firm of Hunton & Williams in December 1995,
Retired lawyer, a position he had held since December 1988.
educator and Previously, Mr. Huntley had served as
businessman chairman, president and chief executive of-
ficer of Best Products Co., Inc., professor
of law at Washington and Lee School of Law
and president of Washington and Lee Univer-
sity. Mr. Huntley serves as a director of
360 Communications Corporation. He is
chairman of the Audit Committee and a mem-
ber of the Compensation, Finance, and Pub-
lic Affairs and Social Responsibility Com-
mittees.
Director since
1976
[Photo]
Age: 67
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RUPERT MURDOCH Mr. Murdoch became publisher of News Lim-
Chairman and ited of Australia in 1954 and in 1959 as-
Chief Executive sumed the position of chief executive of
of The News the subsequently formed parent company, The
Corporation News Corporation Limited, the interests of
Limited, New which include TV Guide and Fox Broadcasting
York, NY, Company in the United States and The Times
[Photo] publishing, and Sunday Times in the United Kingdom. He
motion pictures is a director of MCI Communications Corpo-
and television ration and British Sky Broadcasting Group
plc. Mr. Murdoch is a member of the Compen-
sation, Executive, and Public Affairs and
Social Responsibility Committees.
Director since
1989
Age: 65
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JOHN D. NICHOLS Mr. Nichols retired as chairman of Illinois
Retired; formerly Tool Works Inc., in May 1996, a position he
Chairman, had held since 1986. He had been chief ex-
Illinois Tool ecutive officer from 1982 to September
Works Inc., 1995. He serves as a director of Grand Ea-
Glenview, IL, gle Companies Inc., Household International
engineered Corporation, Rockwell International Corpo-
[Photo] components and ration, Stone Container Corporation, and
industrial Junior Achievement of Chicago, as a trustee
systems and of the Chicago Community Trust, the Lyric
consumables Opera of Chicago, the Museum of Science and
Industry, and the Chicago Symphony Orches-
tra, as a member of the Board of Overseers
for Harvard University, and as chairman of
the Art Institute of Chicago. He is a mem-
ber of the Finance, Nominating and Corpo-
rate Governance, and Public Affairs and So-
cial Responsibility Committees.
Director since
1992
Age: 66
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RICHARD D. Mr. Parsons assumed his present position in
PARSONS February 1995. Previously, he had been
President, Time chief executive officer of Dime Bancorp,
Warner Inc., New Inc. (formerly The Dime Savings Bank of New
York, NY, media York, FSB), from July 1990, having served
and entertainment as president and chief operating officer
from July 1988. He became chairman in 1991.
From 1979 to July 1988, he had been a part-
ner in the law firm of Patterson, Belknap,
Webb & Tyler. Mr. Parsons also serves as a
director of Citicorp, the Federal National
Mortgage Association, Time Warner Inc., the
Metropolitan Museum of Art, Lincoln Center
for the Performing Arts, Inc., and the
Rockefeller Brothers Fund, and as a trustee
of Howard University. He is a member of the
Audit, Compensation, Executive, Nominating
and Corporate Governance, and Public Af-
fairs and Social Responsibility Committees.
Director since
[Photo] 1990
Age: 48
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ROGER S. PENSKE Mr. Penske has been chairman and chief ex-
ecutive officer of Penske Corporation since
Chairman and 1969. He is also chairman and chief execu-
Chief Executive tive officer of Penske Motorsports, Inc.,
Officer, Penske Detroit Diesel Corporation and Penske Truck
Corporation, Leasing Corporation. Mr. Penske serves as a
transportation director of General Electric Company and
and automotive Gulfstream Aerospace Corporation, and as a
[Photo] services, Penske trustee of the Henry Ford Museum and
Motorsports, Greenfield Village. He is a member of the
Inc., Penske Finance and Public Affairs and Social Re-
Truck Leasing sponsibility Committees.
Corporation and
Detroit Diesel
Corporation,
Detroit, MI
Director since
1991
Age: 59
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JOHN S. REED Mr. Reed assumed his present positions with
Chairman of Citicorp and Citibank, N.A., in 1984. He
Citicorp and also serves as a director of Monsanto Com-
Citibank, N.A., pany, as a member of the Corporation, Mas-
New York, NY sachusetts Institute of Technology, and as
a trustee of the Rand Corporation, the
Spencer Foundation and Memorial Sloan-
Kettering Cancer Center. He is chairman of
the Compensation Committee and a member of
the Audit, Corporate Employee Plans Invest-
ment, Executive, Finance, and Nominating
and Corporate Governance Committees.
Director since
1975
[Photo]
Age: 58
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STEPHEN M. WOLF
Mr. Wolf assumed his present position in
Chairman and January 1996. Previously and from August
Chief Executive 1994, he was senior advisor in the invest-
Officer of US ment banking firm of Lazard Freres & Co.
Airways Group, LLC. Previously and from 1987, he was
Inc. and US chairman and chief executive officer of UAL
Airways, Inc., Corporation and United Air Lines, Inc. He
[Photo] Arlington, VA serves as a director of R.R. Donnelley &
Sons Company and as a trustee of Northwest-
ern University, The Brookings Institution
and the Rush-Presbyterian-St. Luke's Medi-
cal Center. He is a member of the Audit,
Compensation, Corporate Employee Plans In-
vestment, and Public Affairs and Social Re-
sponsibility Committees.
Director since
1993
Age: 55
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COMPENSATION OF DIRECTORS
Directors who are full-time employees of the Company receive no additional
compensation for services as a director. Non-employee directors receive an
annual retainer of $40,000 (effective July 1, 1996) and fees of $1,000 for
each Board meeting attended, $1,000 ($2,000 for the chairman) for each meeting
attended of the Board Committees described above, and $500 ($1,000 for the
chairman) for each other committee meeting attended. The chairmen of the Audit
and Compensation Committees receive a $10,000 annual retainer for additional
services rendered in that capacity, while the other Board committee chairmen
receive annual retainers of $5,000.
Each non-employee director receives an annual share distribution equal to the
lesser of (i) 400 shares, or (ii) that number of shares of Common Stock having
an aggregate fair market value equal to 100% of the annual retainer fee paid
during the preceding 12 months. On May 1, 1996, each eligible director
received 287 shares of Common Stock.
A non-employee director may elect to defer meeting fees and all or part of the
annual retainer. Deferred amounts are "credited" to an unfunded account and
may be "invested" in seven "investment choices," including a Common Stock
equivalent account. These "investment choices" parallel the
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investment options offered to employees under the Philip Morris Deferred
Profit-Sharing Plan and determine the "earnings" that are credited for
bookkeeping purposes to a director's account. Subject to certain restrictions,
a director is permitted to take cash distributions, in whole or in part, from
his or her account either prior to or following termination of service.
The Company has entered into employment agreements with each of its officer-
directors as described below under "Executive Compensation--Employment
Contracts, Termination of Employment and Change of Control Arrangements."
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EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
TO OUR STOCKHOLDERS:
The Compensation Committee is responsible for administering total compensation
programs that are designed to:
. Support the Company's efforts to develop world-class leaders;
. Match the Company's compensation plans to its business strategies, as
well as the external business environment;
. Maximize profitability through growth and efficiency, balancing
appropriately the short-term and long-term goals of the Company;
. Emphasize the relationship between pay and performance by placing a
significant portion of compensation at risk and subject to the
achievement of financial goals and objectives; and
. Align the interests of managers with those of stockholders through the
use of equity-based incentive awards to link a significant portion of
compensation to stock performance.
The Committee considered the following factors with respect to its actions in
1996:
. The financial performance of the Company, as measured by total
stockholder return, earnings per share growth, return on equity, volume
growth and cost reductions and implementation of strategic initiatives
with respect to targeted acquisitions and divestitures.
. The need to address issues of employee retention and the challenging
legal, legislative and regulatory environment within which the Company
operates.
. The improvement in key quantitative measures of Company performance
during the tenure of the chairman and chief executive officer.
The Committee believes that the actions undertaken in 1996 with respect to the
Company's compensation programs, as discussed below, met its objectives.
The Committee relates total compensation levels for the Company's executive
officers to the compensation paid to executives of the Peer Group of companies
set forth on page 12 (the "Peer Group"). All elements of compensation are
valued when making comparisons with the Peer Group. In addition, the Committee
takes into account both the performance and size of the Company relative to
the performance and size of the companies in the Peer Group.
The Committee believes that compensation for executive officers should be
linked to Company performance for incentive plan purposes. Accordingly, total
compensation is targeted for the upper, or fourth, quartile of compensation
paid to executives of the Peer Group when Company performance exceeds the
median of the Peer Group. When Company performance is at or near the median of
the Peer Group, total compensation is targeted at or near the median of the
Peer Group.
In evaluating Company performance, the Committee considers a number of
quantitative and qualitative factors, including total stockholder return,
return on equity, and earnings per share ("EPS") growth. For 1996, the overall
Company performance is in the upper, or fourth, quartile of the Peer Group.
Based on the most recent information available, total compensation for the
executive officer group ranked in the upper, or fourth, quartile relative to
the compensation paid by the Peer Group.
To achieve a further correlation between executive compensation and
performance, approximately two-thirds of the compensation awarded to the
executive officer group in 1996 was at-risk incentive compensation directly
related to the performance of the Company and its business units. This
includes
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annual cash bonuses and long-term incentive stock awards. By design, the
majority of executive officers' at-risk compensation consists of equity-based
compensation.
BASE SALARY. Base salary, which is designed to comprise approximately one-
quarter of total compensation for the executive officer group, is based on a
qualitative evaluation of a variety of factors, including level of
responsibility, time in position, prior experience and individual performance,
and a quantitative comparison to salaries paid within the Peer Group.
ANNUAL INCENTIVES. Annual cash bonuses are provided to senior executives and
middle-management employees. Early in 1996, the Committee approved a
compensation formula based on EPS to determine the annual incentive awards for
those officers (the "covered officers") whose compensation may be subject to
the deductibility limitations of Section 162(m) of the Internal Revenue Code
("IRC") (including those named in the Summary Compensation Table).
The annual incentive payments for 1996 for the remaining participants were
based upon a qualitative evaluation of corporate and business unit
performance. Specific weights were not assigned to the factors considered. At
the corporate level, the performance factors were cash flow, return on equity,
net earnings and EPS as measured against the prior year, as well as against
the annual business plan. Comparisons with the Peer Group and certain
strategic measures, such as portfolio management, response to the regulatory
and litigation environment, and management development were also considered.
At the business unit level, volume, return on assets, cash flow, operating
income and strategic measures were measured against the prior year and the
annual business plan.
In 1996, awards to the covered officers were based upon the Company's
exceeding the EPS goal and the Committee's subjective assessment of each
executive's individual contribution. For the other corporate participants,
goals were exceeded and bonuses were awarded accordingly. Performance varied
across the individual business units, and bonuses were awarded at, above or
below target levels accordingly.
LONG-TERM INCENTIVES. The Company's 1992 Incentive Compensation and Stock
Option Plan (the "1992 Incentive Plan") provides that stock options,
restricted stock, and long-term performance awards may be granted to key
executives who contribute to the management, growth and profitability of the
Company. As described, beginning on page 19, the 1992 Incentive Plan will
expire April 30, 1997, and the Company is requesting stockholder approval of a
new long-term incentive plan.
. STOCK OPTIONS. In 1996, the Committee targeted its stock option award
guidelines at the 65th percentile of the Peer Group. The size of actual
stock option awards was adjusted upward or downward based on a subjective
evaluation of individual contribution and potential.
. PREMIUM-PRICED STOCK OPTIONS. On January 30, 1996, the Committee awarded
premium-priced stock options to 51 senior executives, including four of
the executive officers named in the Summary Compensation Table. The
purpose of the award was to focus the senior management team on
delivering superior stockholder value. The options were granted at an
exercise price of $120 per share, which was approximately 28% above the
fair market value of the Common Stock on the date of grant. The size of
the individual option awards was based on the Committee's subjective
assessment of individual potential and contribution.
COMPENSATION OF THE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. No
adjustment to Mr. Bible's base salary was made in 1996. Mr. Bible's base
salary ranks in the top quartile of base salaries paid to chief executive
officers in the Peer Group.
Mr. Bible earned an annual incentive bonus for 1996 in accordance with the
formula established at the beginning of the year that is applicable to all
covered officers. Mr. Bible's bonus ranks in the upper, or fourth, quartile of
bonuses paid to the chief executive officers of the Peer Group.
9
<PAGE>
The Committee awarded Mr. Bible a restricted stock grant for 60,000 shares to
recognize Mr. Bible's outstanding contribution to the performance of the
Company and to further the Committee's stated objective of aligning Mr.
Bible's interests with those of stockholders through the use of equity-based
incentive awards. The restricted shares vest 100% during the year of
retirement at age 65.
At the same time that options were granted to other participants in the 1992
Incentive Plan, the Committee granted to Mr. Bible a ten-year, nonqualified
stock option for 200,000 shares of Common Stock, with an exercise price equal
to the fair market value on the date of grant. The factors considered in
determining the size of Mr. Bible's award were the stock option guidelines
established for all plan participants, Mr. Bible's performance with respect to
the achievement of key strategic, financial and management development
objectives, and Mr. Bible's stock awards relative to the chairmen and chief
executive officers of the Peer Group. The Committee also considered, as an
additional reference point, stock awards to chief executive officers at other
Fortune 100 companies.
As discussed above, one of the factors considered in determining the size of
Mr. Bible's restricted stock and stock option grants was Mr. Bible's
outstanding contribution to the performance of the Company and the marked
improvement in key quantitative measures of the Company's performance. The
table below sets forth measures of the Company's financial performance for
1996 and shows the compounded annualized rate of change in those measures from
the 12-month period preceding Mr. Bible's tenure as chief executive officer,
which began on June 20, 1994.
<TABLE>
<CAPTION>
12 MONTHS ENDED COMPOUNDED
----------------- ANNUALIZED RATE
ELEMENT OF COMPANY PERFORMANCE 6/30/94 12/31/96 OF CHANGE
------------------------------ ------- -------- ---------------
<S> <C> <C> <C>
. Net Earnings (in millions)............ $ 3,709 $ 6,303 +23.6%/year
. Operating Cash Flow (in millions)..... 6,633 7,707 +6.2%/year
. Market Value at End of Period (in
millions)............................ 44,700 91,581 +33.2%/year
. Annualized Dividend Rate Per Share.... 2.76 4.80 +24.8%/year
. Earnings Per Share.................... 4.25 7.68 +26.7%/year
. Return on Equity...................... 30.9% 44.7% +13.8 points(1)
</TABLE>
- --------
(1) Total percentage-point increase.
Mr. Bible's long-term incentive compensation awards rank in the upper quartile
of awards made to the chairmen and chief executive officers of the Peer Group.
The amount of his total compensation also places him in the upper quartile
relative to the Peer Group.
POLICY WITH RESPECT TO QUALIFYING COMPENSATION FOR DEDUCTIBILITY. Section
162(m) of the IRC generally limits to $1,000,000 the annual tax-deductible
compensation paid to a covered officer. However, the limitation does not apply
to performance-based compensation, provided certain conditions are satisfied.
The Company's policy is generally to preserve the federal income tax
deductibility of compensation paid. Accordingly, the Company has taken
appropriate actions, to the extent it believes feasible, to preserve the
deductibility of annual incentive, long-term performance, restricted stock,
and stock option awards. However, notwithstanding the Company's general
policy, the Committee has authorized and will continue to retain the authority
to authorize payments that may not be deductible if it believes that this is
in the best interests of the Company and its stockholders. The Committee
determined, after an analysis of competitive practice and a thorough review of
alternatives, that it was appropriate to continue to pay Mr. Bible a base
salary in excess of $1,000,000. This action will cause a portion of his
compensation to exceed the $1,000,000 deductibility limit. Certain other
elements of annual compensation, such as perquisites, dividends paid in cash
on restricted stock, payments related to reducing unfunded retirement
benefits, tax reimbursements and income resulting from payments made
10
<PAGE>
pursuant to plans that do not discriminate in favor of executive officers, may
cause a portion of covered officers' income to exceed the deductibility limit.
Compensation Committee:
John S. Reed, Chairman
Harold Brown
Robert E. R. Huntley
Rupert Murdoch
Richard D. Parsons
Stephen M. Wolf
11
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The following graph compares the cumulative total stockholder return on Philip
Morris Common Stock for the last five years with the cumulative total return
for the same period of the Peer Group(/1/), S&P 500 Index and S&P 500 Foods,
S&P 500 Beverages (Alcoholic) and S&P 500 Tobacco Indices(/2/). The graph
assumes the investment of $100 in Philip Morris Common Stock, the Peer Group,
the S&P 500 Index and the S&P 500 Food/Beverages/Tobacco Indices on December
31, 1991 and reinvestment of all dividends.
As can be seen in the graph, Philip Morris' five-year cumulative total
stockholder return has been affected by the Company's domestic tobacco pricing
and promotional strategy implemented during 1993 to preserve and increase
stockholder value over the long-term. As a result of these actions, Philip
Morris emerged as a stronger, more competitive company. Philip Morris' five-
year cumulative total stockholder return is above the S&P 500
Food/Beverages/Tobacco Indices.
In addition to the creation of stockholder value, the Company's executive
compensation program is based on financial and strategic results as discussed
in the Compensation Committee Report on Executive Compensation.
[Chart for Comparison of Five-Year Cumulative Total Return]
[Plot Points for Chart]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
PHILIP MORRIS $100.00 $ 99.04 $ 75.02 $ 81.90 $134.68 $176.35
PEER GROUP 100.00 96.96 101.35 110.52 158.09 205.39
S&P 500 100.00 107.61 118.41 120.01 164.95 202.73
S&P FOOD/BEV/TOBACCO 100.00 100.23 95.05 104.27 132.83 156.77
</TABLE>
- --------
(1) The Peer Group consists of the following companies, selected on the basis
of size, complexity and return to stockholders: American Brands, Inc., American
Home Products Corporation, Amoco Corporation, Anheuser-Busch Companies, Inc.,
ARCO, The Boeing Company, Bristol-Myers Squibb Company, Chevron Corporation,
The Coca-Cola Company, ConAgra, Inc., CPC International, Inc., E.I. du Pont de
Nemours and Company, Exxon Corporation, General Electric Company, General
Mills, Inc., H.J. Heinz Company, International Business Machines Corporation,
Johnson & Johnson, Merck & Company, Inc., Mobil Corporation, PepsiCo, Inc.,
Pfizer, Inc., The Procter & Gamble Company, RJR Nabisco, Inc., Sara Lee
Corporation and Texaco, Inc.
(2) No standardized industry index is considered a comparable peer group. The
following companies constitute the S&P 500 Foods, S&P 500 Beverages (Alcoholic)
and S&P 500 Tobacco Indices: Adolph Coors Company, American Brands, Inc.,
Anheuser-Busch Companies, Inc., Archer-Daniels-Midland Company, Brown-Forman
Corporation, Campbell Soup Company, ConAgra, Inc., CPC International, Inc.,
General Mills, Inc., H.J. Heinz Company, Hershey Foods Corporation, Kellogg
Company, The Quaker Oats Company, Ralston Purina Company, Sara Lee Corporation,
The Seagram Company, Ltd., Unilever N.V., UST Inc., and Wm. Wrigley Jr.
Company. Although the Company is a component of the S&P 500 Tobacco Index, it
has been excluded for the purpose of this presentation.
12
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- ------------------------- ---------
SECURITIES ALL OTHER
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED UNDERLYING COMPENSATION
POSITION YEAR SALARY BONUS COMPENSATION STOCK VALUE(1) OPTIONS LTIP (2)
------------------ ---- --------- --------- ------------ -------------- ---------- --------- ------------
$ $ $ $ SHS. $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoffrey C. Bible....... 1996 1,250,000 1,562,500 39,191(3) 5,700,000 200,000 -0- 187,500
Chairman of the Board 1995 1,125,000 1,350,000 21,929 -0- 140,000 -0- 157,657
and Chief Executive 1994 875,000 1,000,000 29,472 3,900,000 500,000 1,660,000 113,909
Officer
Murray H. Bring......... 1996 695,000 800,000 22,022(3) -0- 200,000 -0- 104,250
Executive Vice 1995 650,000 650,000 1,380 -0- 60,000 -0- 91,090
President, 1994 535,962 600,000 1,601 2,600,000 -0- 707,785 69,772
External Affairs, and
General Counsel
James M. Kilts.......... 1996 725,000 650,000 2,430 -0- 120,000 -0- 108,750
Executive Vice 1995 725,000 615,000 129,120(4) 1,639,000 65,000 -0- 101,601
President, 1994 603,077 575,000 3,057 1,248,000 -0- 1,139,939 34,630
Worldwide Food
William H. Webb......... 1996 618,750 690,000 18,384(3) -0- 120,000 -0- 92,813
President and Chief 1995 575,000 600,000 -0- 1,490,000 60,000 -0- 80,903
Executive Officer, 1994 504,807 500,000 -0- 1,144,000 -0- 993,890 65,416
Philip Morris
International Inc.
Robert S. Morrison...... 1996 668,269 590,000 1,205(3) -0- 95,000 -0- 38,586
Chairman and Chief 1995 635,000 460,000 119,816(4) 1,341,000 55,000 -0- 34,029
Executive Officer, 1994 573,077 360,000 1,074 1,248,000 -0- 853,158 30,680
Kraft Foods, Inc.
</TABLE>
- -------
(1) Dollar values of awards are based on the closing price of Common Stock on
the date of grant. The restricted stock awards reflected in the table,
together with shares resulting from the reinvestment of dividends thereon,
will vest in the year of retirement at age 65, unless otherwise determined by
the Compensation Committee. Dividends on the restricted stock awards,
otherwise payable in cash to the covered officers, are paid in additional
shares of restricted stock with the exception of dividends from the 1996 award
to G. C. Bible, which are paid in cash. At December 31, 1996, each of the
named executives officers held shares of restricted stock, with a value at
such date as follows: G. C. Bible, 143,514 shares, $16,217,082; M. H. Bring,
54,933 shares, $6,207,429; J. M. Kilts, 49,654 shares, $5,610,902; W. H. Webb,
44,996 shares, $5,084,548; R. S. Morrison, 42,000 shares, $4,746,000.
(2) The amounts in this column consist of allocations to defined contribution
plans. The Company provides funding for individual trusts for the covered
officers and certain other employees with vested accrued benefits under
nonqualified supplemental retirement plans. During 1996, $324,230, less
applicable tax withholding, was deposited in an individual trust for Mr.
Morrison to provide funding for allocations to Kraft Foods supplemental
defined contribution plans for prior years and for earnings credited through
the end of 1995 on such allocations. The funding of these amounts is not
intended to increase total promised benefits.
(3) Other annual compensation for 1996 includes reimbursement for taxes on a
portion of the earnings on assets held in trusts of individual officers. These
trust assets offset amounts otherwise payable by the Company for vested
benefits under supplemental retirement plans and are not intended to increase
total promised benefits.
(4) The amounts include payments for termination of an executive club
membership program and related taxes, for the following named executive
officers: J. M. Kilts, $60,482, related taxes $55,317; R. S. Morrison,
$60,000, related taxes $30,000.
13
<PAGE>
1996 OPTION GRANTS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE GRANT DATE
NAME GRANTED FISCAL YEAR PRICE EXPIRATION DATE(1) PRESENT VALUE(2)
- ---- ---------- ------------- --------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Geoffrey C. Bible....... 200,000 2.65% $104.6875 June 23, 2006 $5,768,000
Murray H. Bring......... 100,000 1.33 120.0000 January 30, 2003 994,000
100,000 1.33 104.6875 June 23, 2006 2,884,000
James M. Kilts.......... 65,000 0.86 120.0000 January 30, 2003 646,100
52,500 0.70 104.6875 June 23, 2006 1,514,100
2,500 0.03 88.3125 March 24, 2006 48,225
William H. Webb......... 65,000 0.86 120.0000 January 30, 2003 646,100
55,000 0.73 104.6875 June 23, 2006 1,586,200
Robert S. Morrison...... 50,000 0.66 120.0000 January 30, 2003 497,000
45,000 0.60 104.6875 June 23, 2006 1,297,800
</TABLE>
- --------
(1) Options that expire on June 23, 2006, and on March 24, 2006, are not
exercisable until one year after the date of grant. However, in the event of
death, permanent disability or retirement, the Compensation Committee has the
discretion to accelerate vesting. The options awarded to Messrs. Bring, Kilts,
Webb and Morrison that expire on January 30, 2003 were awarded with an
exercise price that was approximately 28% above the fair market value of the
Company's Common Stock on the date of the award. These premium-priced options
are exercisable in 20% increments over a five-year period in the case of
Messrs. Kilts, Webb and Morrison, and in 20% increments over the first three
years and 40% in the fourth year in the case of Mr. Bring. The Compensation
Committee has no discretion to accelerate the vesting of these premium-priced
options in the event of death, permanent disability or retirement.
(2) In accordance with the Securities and Exchange Commission rules, grant
date present value is determined using the Black-Scholes Model. The Black-
Scholes Model is a complicated mathematical formula widely used to value
exchange-traded options. However, stock options granted by the Company are
long-term, non-transferable and subject to vesting restrictions, while
exchange-traded options are short-term and can be exercised or sold
immediately in a liquid market. The Black-Scholes Model relies on several key
assumptions to estimate the present value of options, including the volatility
of, and dividend yield on, the security underlying the option, the risk-free
rate of return on the date of grant and the term of the option. In calculating
the grant date present values set forth in the table, volatility was based on
the daily stock market quotations for the one-year period preceding the grant
date, yield was based on an annual dividend rate of $4.00 per share (the
dividend rate in effect at the time the options were granted) and the risk-
free rate of return was fixed at the rate for a ten-year U.S. Treasury Note
for the month of grant as reported in the Federal Reserve Statistical Release
H.15(159). The following assumptions were used in the table:
<TABLE>
<CAPTION>
BLACK-SCHOLES
MODEL ASSUMPTIONS
----------------------------------------------------
RISK-FREE
EXPIRATION DATE VOLATILITY DIVIDEND YIELD RATE OF RETURN OPTION TERM
- --------------- ---------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
June 23, 2006.............. 23.291% 3.82% 6.91% 10 years
January 30, 2003........... 19.162 4.26 5.54 7 years
March 24, 2006............. 22.367 4.53 6.27 10 years
</TABLE>
Consequently, the grant date present values set forth in the table are only
theoretical values and may not accurately determine present value. The actual
value, if any, an optionee will realize will depend on the excess of market
value of the Common Stock over the exercise price on the date the option is
exercised.
14
<PAGE>
1996 OPTION EXERCISES AND YEAR-END VALUES
<TABLE>
<CAPTION>
TOTAL NUMBER OF
NUMBER SHARES UNDERLYING TOTAL VALUE OF UNEXERCISED
OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES HELD AT HELD AT
ACQUIRED DECEMBER 31, 1996(1) DECEMBER 31, 1996 (1)
ON VALUE ------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey C. Bible....... -0- $ -0- 950,720 200,000 $47,524,434 $1,662,500
Murray H. Bring......... 22,000 957,000 145,640 200,000 6,862,487 831,250
James M. Kilts.......... -0- -0- 214,980 120,000 11,302,210 498,125
William H. Webb......... 25,630 629,475 100,760 120,000 4,897,342 457,188
Robert S. Morrison...... -0- -0- 171,080 95,000 8,521,900 374,063
</TABLE>
- --------
(1) Based on the closing price of the Common Stock of $113.00 on December 31,
1996.
PENSION PLAN TABLE--PHILIP MORRIS RETIREMENT PLAN
<TABLE>
<CAPTION>
FIVE-YEAR
AVERAGE YEARS OF SERVICE (1)
ANNUAL ----------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------ -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 500,000 $129,931 $ 173,242 $ 216,552 $ 259,863 $ 303,173
750,000 195,556 260,742 325,927 391,113 456,298
1,000,000 261,181 348,242 435,302 522,363 609,423
1,250,000 326,806 435,742 544,677 653,613 762,548
1,500,000 392,431 523,242 654,052 784,863 915,673
1,750,000 458,056 610,742 763,427 916,113 1,068,798
2,000,000 523,681 698,242 872,802 1,047,363 1,221,923
2,250,000 589,306 785,742 982,177 1,178,613 1,375,048
2,500,000 654,931 873,242 1,091,552 1,309,863 1,528,173
2,750,000 720,556 960,742 1,200,927 1,441,113 1,681,298
3,000,000 786,181 1,048,242 1,310,302 1,572,363 1,834,423
</TABLE>
- --------
(1) At February 1, 1997, Messrs. Bible, Bring, Kilts and Webb had accredited
service of 13, 20, 2 and 31 years, respectively.
Messrs. Bible, Bring, Kilts and Webb are eligible for benefits under the tax-
qualified Philip Morris Salaried Employees Retirement Plan and one or more
supplemental nonqualified pension plans (collectively, the "Retirement Plan").
The Retirement Plan is a noncontributory plan maintained for the benefit of
certain employees of the Company. The Retirement Plan provides for fixed
retirement benefits in relation to the participant's years of accredited
service, five-year average annual compensation (the highest average annual
compensation during any period of five consecutive years out of ten years
preceding retirement) and applicable Social Security covered compensation
amount. Allowances are payable upon retirement at the normal retirement age of
65 and at earlier ages. Compensation includes the amount shown as annual
salary and bonus in the Summary Compensation Table. At December 31, 1996,
five-year average annual compensation for Mr. Bible was $1,713,500; Mr. Bring,
$987,892; Mr. Kilts, $1,025,027; and Mr. Webb, $869,725.
Examples of annual retirement allowances payable under the Retirement Plan
are set forth in the above table. The examples, which assume retirement at the
normal retirement age of 65, are based upon the Social Security covered
compensation amount in effect for an employee attaining age 65 in calendar
year 1996. Mr. Bible is also eligible to receive a retirement benefit under
the retirement plan of a Swiss subsidiary of the Company and under a domestic
nonqualified supplemental plan coordinated with the Swiss plan. At his current
annual salary, upon retirement at age 65, he would receive, in addition to the
retirement allowances payable to him under the Retirement Plan and the
15
<PAGE>
Kraft Foods Retirement Plan (see below), an annual benefit of SFr. 498,231
(approximately $350,107 on February 1, 1997). The Company provides funding for
individual trusts for the covered officers and certain other employees with
vested accrued benefits under nonqualified supplemental retirement plans.
During 1996, $560,752, less applicable tax withholding, was deposited in an
individual trust for Mr. Bring, with respect to benefits previously accrued
under Philip Morris supplemental pension plans. This amount offsets benefits
previously accrued and does not increase total promised benefits.
PENSION PLAN TABLE--KRAFT FOODS RETIREMENT PLAN
<TABLE>
<CAPTION>
FIVE-
YEAR AVERAGE YEARS OF SERVICE (1)
ANNUAL ----------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------ -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 500,000 $123,977 $ 165,302 $ 206,628 $ 247,953 $ 260,453
750,000 186,789 249,052 311,315 373,578 392,328
1,000,000 249,602 332,802 416,003 499,203 524,203
1,250,000 312,414 416,552 520,690 624,828 656,078
1,500,000 375,227 500,302 625,378 750,453 787,953
1,750,000 438,039 584,052 730,065 876,078 919,828
2,000,000 500,852 667,802 834,753 1,001,703 1,051,703
2,250,000 563,664 751,552 939,440 1,127,328 1,183,578
2,500,000 626,477 835,302 1,044,128 1,252,953 1,315,453
2,750,000 689,289 919,052 1,148,815 1,378,578 1,447,328
3,000,000 752,102 1,002,802 1,253,503 1,504,203 1,579,203
</TABLE>
- --------
(1) At February 1, 1997, Messrs. Bible, Kilts and Morrison had accredited
service of 1, 9 and 13 years, respectively.
Messrs. Bible, Kilts and Morrison are eligible for benefits under the tax-
qualified Kraft Foods Retirement Plan and a supplemental nonqualified Kraft
Foods pension plan (collectively, the "Kraft Foods Retirement Plan"). The
Kraft Foods Retirement Plan provides for fixed retirement benefits in relation
to the participant's years of service, five-year average annual compensation
(the highest average annual compensation during any period of five consecutive
years out of the ten years preceding retirement) and applicable Social
Security covered compensation amount. Compensation includes the amount shown
as annual salary and bonus in the Summary Compensation Table. At December 31,
1996, five-year average annual compensation for Mr. Bible was $1,713,500; for
Mr. Kilts, $1,025,027; and for Mr. Morrison, $905,934. The fixed retirement
benefit is also dependent upon the periods of service prior to January 1,
1989, in which the participant elected to make contributions.
Examples of annual pension benefits payable under the Kraft Foods Retirement
Plan are set forth in the above table. The examples, which assume retirement
at age 62 or later, are based on the Social Security covered compensation
amount in effect for an employee attaining age 65 in calendar year 1996. Since
participant contributions could be substantial in individual cases, the
benefit amounts shown in the table may be attributable in certain instances to
participant contributions to a significant degree, depending upon retirement
date and years of service. The Company provides funding for individual trusts
for covered officers and certain other employees with vested accrued benefits
under nonqualified supplemental retirement plans. During 1996, $252,062, less
applicable tax withholding, was deposited in an individual trust for Mr.
Morrison with respect to benefits previously accrued under Kraft Foods
supplemental pension plans. This amount offsets benefits previously accrued
and does not increase total promised benefits.
Reference is made to the material appearing under the caption "Pension Plan
Table--Philip Morris Retirement Plan" for additional information with respect
to Messrs. Bible and Kilts.
16
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The Company has entered into change of control employment agreements with each
of its officer-directors and each of its other executive officers, including
those named in the Summary Compensation Table. The agreements provide that, if
the executive is terminated other than for cause within three years after a
change of control of the Company or if the executive terminates his or her
employment for good reason within such three-year period or voluntarily during
the thirty-day period following the first anniversary of the change of
control, the executive is entitled to receive a lump-sum severance payment
equal to two and one-half times the sum of his base salary and highest annual
bonus, together with certain other payments and benefits, including
continuation of employee welfare benefits. An additional payment is required
to compensate the executive for excise taxes imposed upon payments under the
agreement.
Prior to the acquisition of Kraft, Inc. ("Kraft"), by the Company, Mr. Kilts
and Mr. Morrison, as well as certain other executives of Kraft, had entered
into employment agreements with Kraft that, among other things, provided for a
lump-sum cash payment upon termination of employment other than for cause.
Following the acquisition of Kraft, these employment agreements were replaced
with new agreements between the Company and the executives. Many of these new
agreements, including Mr. Kilts', established a deferred incentive payment
account to which was credited a specific number of units with values equal to
shares of Common Stock. This account is credited with any increase in the
market value of the number of units credited to the account together with the
market value of shares of Common Stock resulting from the reinvestment of
dividends. In the event of termination of employment, Mr. Kilts and Mr.
Morrison will be entitled to the continuation of medical, dental and life
insurance benefits. Mr. Kilts will also be entitled to the deferred incentive
payment. In the event of involuntary termination of employment without cause,
they will be entitled to a lump-sum cash payment equal to their then current
base salary and most recent applicable annual incentive compensation or a
payment pursuant to any applicable severance plan or policy, whichever is
greater. If receipt of the deferred incentive payment subjects Mr. Kilts to
any federal excise tax, the Company has agreed to make additional payments to
place him in the position that would have existed had no such excise tax been
payable. Mr. Kilts' account was originally credited with the equivalent of
43,784 shares of Common Stock. At December 31, 1996, this account had been
credited with the equivalent of a total of 59,678 shares and had a value of
$6,743,614.
Mr. Bring has entered into an employment agreement with the Company that
provides, among other things, for a minimum base salary and participation in
benefit plans, including an enhanced retirement benefit.
17
<PAGE>
OWNERSHIP OF EQUITY SECURITIES
The following table sets forth information regarding beneficial ownership of
Common Stock as of February 3, 1997, by each director, each executive officer
named in the Summary Compensation Table and by the directors and executive
officers of the Company as a group. The beneficial ownership of each director
and executive officer and of the group is less than 1% of the outstanding
shares.
<TABLE>
<CAPTION>
SOLE VOTING
AND INVESTMENT
NAME POWER(1) OTHER(2) TOTAL
---- -------------- -------- ---------
<S> <C> <C> <C>
Elizabeth E. Bailey........................ 5,096 5,096
Geoffrey C. Bible.......................... 950,875 158,926 1,109,801
Murray H. Bring............................ 168,216 73,720 241,936
Harold Brown............................... 1,200 3,401 4,601
William H. Donaldson....................... 11,801 11,801
Jane Evans................................. 4,291 4,291
Robert E. R. Huntley....................... 8,501 1,200 9,701
James M. Kilts............................. 235,836 50,184 286,020
Robert S. Morrison......................... 194,544 42,448 236,992
Rupert Murdoch............................. 27,701 27,701
John D. Nichols............................ 4,166 800 4,966
Richard D. Parsons......................... 3,922 3,922
Roger S. Penske............................ 3,101 3,101
John S. Reed............................... 15,015 15,015
William H. Webb............................ 121,849 45,476 167,325
Stephen M. Wolf............................ 2,066 2,066
Group...................................... 2,827,569 619,120 3,446,689
</TABLE>
- --------
(1) Includes maximum number of shares subject to purchase before April 3,
1997, upon the exercise of stock options, as follows: G. C. Bible, 950,720; M.
H. Bring, 165,640; J. M. Kilts, 230,480; R. S. Morrison, 181,080; W. H. Webb,
113,760; and group, 2,474,730.
(2) Includes shares owned by spouses, minor children and other relatives
sharing the home of the director or executive officer. Beneficial ownership of
these shares is disclaimed. Also includes shares held jointly with spouses,
shares of restricted stock held by executive officers and shares held in
certain fiduciary capacities (including such holdings by a spouse).
The following table sets forth information regarding persons or groups known
to the Company to be beneficial owners of more than 5% of the Company's
outstanding Common Stock.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF COMMON STOCK
SHARES OUTSTANDING ON
NAME AND ADDRESS OF BENEFICIALLY FEBRUARY 26,
BENEFICIAL OWNER OWNED 1997
------------------- ------------ --------------
<S> <C> <C>
FMR Corp..................................... 64,243,701(1) 7.93%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- --------
(1) According to Schedule 13G, dated February 14, 1997, filed with the
Securities and Exchange Commission jointly by FMR Corp., Edward C. Johnson 3d,
Abigail P. Johnson and Fidelity Management & Research Company ("Fidelity"),
Mr. Johnson is chairman and Ms. Johnson is a director of FMR Corp. and may be
deemed to be members of a controlling group with respect to FMR Corp. The
Schedule 13G indicates that at December 31, 1996, (i) Fidelity, a wholly-owned
subsidiary of FMR Corp., was the beneficial owner of 59,565,891 shares of
Common Stock in its capacity as investment adviser to various registered
investment companies (the "Fidelity Funds") (the power to
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<PAGE>
vote such shares resides solely with the boards of trustees of the Fidelity
Funds, while the power to dispose of such shares resides with Mr. Johnson, FMR
Corp., Fidelity and the Fidelity Funds); (ii) Fidelity Management Trust
Company, a bank that is wholly-owned by FMR Corp., was the beneficial owner of
4,360,060 shares of Common Stock; (iii) Mr. Johnson was the beneficial owner,
either directly or through trusts, of 34,250 shares of Common Stock; and (iv)
Fidelity International Limited, an investment adviser of which Mr. Johnson is
chairman but which is managed independently from FMR Corp., was the beneficial
owner of 283,500 shares of Common Stock. FMR Corp. and Fidelity International
Limited each disclaim beneficial ownership of Common Stock beneficially owned
by the other.
1997 PERFORMANCE INCENTIVE PLAN
INTRODUCTION
On February 26, 1997, the Board adopted the 1997 Performance Incentive Plan
(the "1997 Plan"), subject to stockholder approval. A copy of the 1997 Plan is
attached as Exhibit A.
The 1997 Plan is intended to replace the Company's 1992 Incentive Plan, which
expires on April 30, 1997. No further awards will be granted under the 1992
Incentive Plan. Under the proposed 1997 Plan, the Company may grant to key
employees stock options, stock appreciation rights, restricted stock, and
other stock-based awards, as well as cash-based annual and long-term incentive
awards. Your Board believes that the 1997 Plan will form an important part of
the Company's overall compensation program. The 1997 Plan will support the
Company's ongoing efforts to develop and retain world-class leaders and will
give the Company the ability to provide those employees with incentives that
are directly linked to the profitability of the Company's businesses and
increases in stockholder value.
SUMMARY OF 1997 PLAN
The following general description of certain features of the 1997 Plan is
qualified in its entirety by reference to Exhibit A.
ELIGIBILITY. Officers and other key salaried employees of the Company, its
subsidiaries and its affiliates who are responsible for or contribute to the
management, growth and profitability of the Company will be eligible to
receive awards under the 1997 Plan. No determination has been made as to which
of the Company's eligible employees (currently, approximately 8,000) will
receive grants under the 1997 Plan, and therefore, the benefits to be
allocated to any individual or to various groups of employees are not
presently determinable.
ADMINISTRATION. It is currently anticipated that the 1997 Plan will be
administered by the Compensation Committee or a subcommittee thereof. This
Committee will select the individuals to whom awards will be granted and will
set the terms of such awards. The Committee may delegate its authority under
the 1997 Plan to officers of the Company, subject to Board-approved
guidelines, with respect to employees who are not "executive officers" of the
Company.
SHARES RESERVED FOR DISTRIBUTION. Up to 120 million shares of Common Stock
(after giving effect to the three-for-one stock split approved by the Board on
February 26, 1997) may be issued under the 1997 Plan, representing less than
5% of the Company's shares outstanding after giving effect to the split. No
more than 30% of the shares issuable under the 1997 Plan may be awarded as
restricted stock or pursuant to certain "other stock-based awards" (as defined
below). The shares of Common Stock subject to any award that terminates,
expires or is cashed out without payment being made in the form of Common
Stock will again be available for distribution under the 1997 Plan, as will
shares that are used by an employee to pay withholding taxes or as payment for
the exercise price of an award.
CASH-BASED ANNUAL AND LONG-TERM INCENTIVE AWARDS. Cash-based annual and long-
term incentive awards may be granted under the 1997 Plan. Such awards will be
earned only if corporate, business unit or individual performance objectives
over performance cycles established by or under the
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<PAGE>
direction of the Committee are met. The performance objectives may vary from
participant to participant, group to group and period to period. The
performance objectives for awards that are intended to constitute "qualified
performance-based compensation" (see discussion below under the heading
Federal Income Tax Consequences) will be based upon one or more of the
following: earnings per share, total shareholder return, operating income, net
income, cash flow, return on equity, return on capital and Economic Value
Added(TM) (i.e., net after-tax operating profit less the cost of capital).
STOCK OPTIONS. The 1997 Plan will permit the granting of incentive stock
options ("ISOs"), which qualify for special tax treatment, and nonqualified
stock options. The exercise price for options will not be less than the fair
market value of Common Stock on the date of grant. The 1997 Plan permits the
Committee to elect to cancel an option upon exercise by the holder and pay the
holder, in cash or Common Stock, the difference between the fair market value
of the shares covered by the option and the exercise price.
STOCK APPRECIATION RIGHTS ("SARS"). SARs may also be granted either singly or
in combination with underlying stock options. SARs entitle the holder upon
exercise to receive an amount in any combination of cash or Common Stock (as
determined by the Committee) equal in value to the excess of the fair market
value of the shares covered by such right over the grant price. The grant
price for SARs will not be less than the fair market value of the Common Stock
on the date of grant.
RESTRICTED STOCK. Shares of restricted Common Stock may also be awarded. The
restricted stock would vest and become transferable upon the satisfaction of
conditions set forth in the applicable award agreement. The minimum vesting
period would be one year. Restricted stock awards may be subject to forfeiture
if, for example, the recipient's employment terminates before the award vests.
Except as specified at the time of grant, holders of restricted stock will
have voting rights and the right to receive dividends on their restricted
shares.
OTHER STOCK-BASED AWARDS. The 1997 Plan also provides for awards that are
denominated in, valued by reference to, or otherwise based on or related to,
Common Stock. These awards may include, without limitation, performance shares
and restricted stock units that entitle the recipient to receive, upon
satisfaction of performance goals or other conditions, a specified number of
shares of Common Stock or the cash equivalent thereof.
CHANGE IN CONTROL PROVISIONS. The 1997 Plan provides that in the event of a
"Change in Control" (as defined in the plan), all stock options and SARs will
become immediately exercisable, the restrictions applicable to outstanding
restricted stock and other stock-based awards will lapse, and, unless
otherwise determined by the Committee, the value of outstanding stock options,
SARs, restricted stock and other stock-based awards will be cashed out on the
basis of the highest price paid (or offered) during the preceding 60-day
period. In addition, outstanding incentive awards will be vested and paid out
on a prorated basis, based on the maximum award opportunity of such awards and
the number of months elapsed compared with the total number of months in the
performance cycle.
FEDERAL INCOME TAX CONSEQUENCES
Nonqualified Stock Options. Nonqualified stock options granted under the 1997
Plan are not taxable to an employee at grant but result in taxation at
exercise, at which time the employee will recognize ordinary income in an
amount equal to the difference between the option exercise price and the fair
market value of the shares on the exercise date. The Company will be entitled
to deduct a corresponding amount as a business expense in the year the
employee recognizes this income.
Incentive Stock Options. An employee will generally not recognize income on
receipt or exercise of an ISO so long as he or she has been an employee of the
Company or its subsidiaries from the date
20
<PAGE>
the option was granted until three months before the date of exercise;
however, the amount by which the fair market value of the stock at the time of
exercise exceeds the option price is a required adjustment for purposes of the
alternative minimum tax applicable to the employee. If the employee holds the
stock received on exercise of the option for one year after exercise (and for
two years from the date of grant of the option), any difference between the
amount realized upon the disposition of the stock and the amount paid for the
stock will be treated as long-term capital gain (or loss, if applicable) to
the employee. If the employee exercises an ISO and satisfies these holding
period requirements, the Company may not deduct any amount in connection with
the ISO.
In contrast, if an employee exercises an ISO but does not satisfy the holding
period requirements with respect to the stock acquired on exercise, the
employee generally will recognize ordinary income in the year of the
disposition equal to the excess, if any, of the fair market value of the stock
on the date of exercise over the option price; and any excess of the amount
realized on the disposition over the fair market value on the date of exercise
will be taxed as long- or short-term capital gain (as applicable). If,
however, the fair market value of the stock on the date of disposition is less
than on the date of exercise, the employee will recognize ordinary income
equal only to the difference between the amount realized on disposition and
the option price. In either event, the Company will be entitled to deduct an
amount equal to the amount constituting ordinary income to the employee in the
year of the premature disposition.
Stock Appreciation Rights. There are no immediate tax consequences to an
employee when an SAR is granted. When an employee exercises the right to the
appreciation in fair market value of stock represented by an SAR, payments
made, whether in cash or stock, are includible in the employee's gross income.
The Company will be entitled to deduct the same amount as a business expense
at the time. When payments are made in stock, the includible amount and
corresponding deduction equal the fair market value of the stock on the date
of exercise.
Restricted Stock. The federal income tax consequences of restricted stock
awards depend on the restrictions imposed on the stock. Generally, the fair
market value of the stock received will be includible in the employee's gross
income at receipt unless the property is subject to a substantial risk of
forfeiture (and is either nontransferable or after transfer remains subject to
such risk of forfeiture). In this case, taxation will be deferred until the
first taxable year the stock is no longer subject to substantial risk of
forfeiture. The employee may, however, make a tax election to include the
value of the stock in gross income in the year of receipt despite such
restrictions. Generally, the Company will be entitled to deduct the fair
market value of the stock transferred to the employee as a business expense in
the year the employee includes the compensation in income.
Other Stock-Based Awards/Incentive Awards. Any cash payments or the fair
market value of any Common Stock or other property an employee receives in
connection with other stock-based awards, incentive awards, or as unrestricted
payments equivalent to dividends on unfunded awards or on restricted stock are
includible in income in the year received or made available to the employee
without substantial limitations or restrictions. Generally, the Company will
be entitled to deduct the amount the employee includes in income as a business
expense in the year of payment.
Section 162(m) of the IRC places a $1 million annual limit on the deductible
compensation of certain executives of publicly traded corporations. The limit,
however, does not apply to "qualified performance-based compensation." The
Company believes that awards of options, SARs and certain other "performance-
based compensation" awards under the 1997 Plan will qualify for the
performance-based compensation exception to the deductibility limit, assuming
that the 1997 Plan is approved by stockholders.
21
<PAGE>
State tax consequences may in some cases differ from those described above.
Awards under the 1997 Plan will in some instances be made to employees who are
subject to tax in jurisdictions other than the United States and may result in
tax consequences differing from those described above.
OTHER INFORMATION
If approved by stockholders, the 1997 Plan will be effective on May 1, 1997,
and will expire on April 30, 2002, unless terminated earlier, or extended, by
your Board. Any awards granted before the 1997 Plan expires or is terminated
may extend beyond the expiration or termination date. The Board may amend the
1997 Plan at any time, provided that no such amendment will be made without
stockholder approval if such approval is required under applicable law, or if
such amendment would: (i) decrease the minimum exercise or grant price for
stock options, SARs and similar awards; or (ii) increase the number of shares
that may be issued under the plan.
The 1997 Plan provides that awards are not transferable except in the event of
the participant's death or unless otherwise required by law. Other terms and
conditions of each award will be set forth in award agreements, which can be
amended by the Committee. The Committee may require or permit deferral of the
payment of awards and may provide for the payment of interest or other
earnings on deferred amounts or the payment of dividend equivalents where the
deferred amounts are denominated in stock equivalents. Awards under the 1997
Plan may earn dividends or dividend equivalents, as determined by the
Committee.
Under the 1997 Plan, no employee may receive awards that cover in the
aggregate more than 10% of the shares reserved for distribution. The value of
an employee's annual incentive award may not exceed $5 million; individual
long-term incentive awards are limited to $3 million times the number of years
in the applicable performance cycle.
It is presently intended that the 1997 Plan constitute an "unfunded" plan for
incentive compensation. The plan authorizes the creation of trusts and other
arrangements to facilitate or ensure payment of the Company's obligations.
On February 26, 1997, the closing price of the Common Stock as reported in The
Wall Street Journal for New York Stock Exchange Composite Transactions was
$133.50.
REQUIRED VOTE. If a quorum exists at the Annual Meeting of Stockholders, the
1997 Plan will be approved if the votes cast in favor of the plan exceed the
votes cast against.
THE BOARD RECOMMENDS A VOTE FOR.
SELECTION OF AUDITORS
Upon the recommendation of the Audit Committee and subject to stockholder
approval, the Board has retained Coopers & Lybrand L.L.P. as the Company's
auditors for the fiscal year ending December 31, 1997. Coopers & Lybrand
L.L.P. has been the independent accountants of the Company since 1933. A
representative of Coopers & Lybrand L.L.P. will be present at the meeting. The
representative will be given an opportunity to make a statement if he or she
desires to do so and will be available to answer questions.
THE BOARD RECOMMENDS A VOTE FOR.
22
<PAGE>
STOCKHOLDER PROPOSALS
Various stockholders have submitted the three proposals set forth below. The
proposals have been duly considered by the Board, which has concluded that
their adoption would not be in the Company's best interests. For the reasons
set forth after each proposal, the Board recommends a vote AGAINST each
proposal.
PROPOSAL 1--PROTECTING YOUTH FROM SMOKING IN DEVELOPING COUNTRIES
The Sisters of Charity of New York, Mount St. Vincent-on-Hudson, 6301
Riverdale Avenue, Bronx, New York 10471-9930, claiming beneficial ownership of
100 shares of Common Stock, together with seven co-proponents, have submitted
the proposal set forth below. The names, addresses and shareholdings of the
co-proponents will be furnished upon request made to the Secretary of the
Company.
"WHEREAS our Company has launched a campaign to prevent youth from smoking in
the United States called "Action Against Access." It calls for the company not
to offer free samples of cigarettes or send cigarettes through the mail, place
warnings of packages indicating that sales to minors is prohibited, support
laws prohibiting tobacco sales to minors, and train retailers not to sell to
minors. We see this as an important step;
-- Due, in great part to our company's major marketing thrust, Philip
Morris' sale of cigarettes have soared in international markets, particularly
in the developing countries of Asia and Eastern Europe;
-- A recent study among school children (average age 10) in Hong Kong found
that 95% of the children recognize the brand name Marlboro;
-- At the same time, a 1992, Bush Administration, U.S. Government Accounting
Office report on "International Trade: Advertising and Promoting U.S.
Cigarettes in Selected Asian Countries," indicated extensive violation of host
country codes by U.S. cigarette companies;
-- A New York Times article (05/15/94) noted that: "Most governments in Asia
have launched anti-smoking campaigns, but their efforts tend to be overwhelmed
by the Madison Avenue glitz unleashed by the cigarette giants. Several Asian
nations have banned cigarette advertising on television and radio in recent
years, but the tobacco companies often find ways around the bans through
indirect promotions that skirt the law--sports events, glossy advertisements
for clothing brands or travel agencies that bear that name and logo of a
cigarette brand;"
-- Our company has used movie stars popular with U.S. teens, such as Roger
Moore and Tom Beringer, to advertise its cigarettes in Asia;
-- Our company was sued in the Philippines in 1987 by alleging that our
company advertised and marketed cigarettes to Filipino children using methods
that are prohibited in the United States. Successful litigation in the
Philippines or other developing countries could adversely effect the value of
our stock;
-- Lawsuits in the United States have alleged that, decades ago, our company
conducted advertising and marketing practices that enticed children to smoke.
If these lawsuits are successful the value of our stock could be effected and
used by people in other nations where similar actions may be demonstrated;
-- The World Health Organization (WHO) estimates that by the time young
smokers from developing countries reach their middle age years (2025), 7
million deaths from smoking will occur each year in those countries. These
figures represent epidemic proportions;
23
<PAGE>
RESOLVED that shareholders request management to implement the same programs
that the Company has voluntarily proposed and adopted in the United States to
prevent youth from smoking and buying our cigarettes in developing countries.
Supporting Statement
Much of the recent growth in cigarette sales has taken place in developing
countries. We think this proposal takes a fair and reasonable approach. To
protect children from developing countries from smoking and protect our
company in future litigation, we urge shareholders to vote for this proposal."
THE BOARD RECOMMENDS A VOTE AGAINST THIS PROPOSAL.
The Company has a long-standing policy against the sale of cigarettes to
minors and in favor of responsible marketing. Consistent with this policy,
which is applicable worldwide, the Company is committed to leading and
supporting initiatives to address the problem of youth smoking. Action Against
Access, which Philip Morris USA launched on June 27, 1995, is one example of
your Company's interest in preventing youth access to tobacco products.
Outside of the United States, Philip Morris International complies with all
applicable laws and regulations and has also for many years adhered to a
strict set of standards that governs its marketing activities. In developing
countries, Philip Morris International has supported such efforts as retail
education programs and the posting of minimum-age notices at retail; the
creation of retailer-endorsed campaigns where there is no legal minimum age;
and educational programs to dissuade minors from smoking.
While sharing the proponents' desire to prevent youth smoking, we disagree
with the approach set out in their proposal. Philip Morris International's
products are sold in over 180 countries, each with its own laws, market
conditions, culture and other individual characteristics. The proposal,
however, asks your management to take a program developed specifically for the
United States and apply it wherever the Company does business. In essence, the
proponents seek to commit the Company to a single, U.S.-oriented approach that
would likely deprive your management of the flexibility and discretion needed
to operate a global business efficiently and responsibly. By contrast, your
management thinks it makes more sense for the Company to continue to take
action against youth access in a manner that recognizes the diversity of
markets in which the Company operates.
THEREFORE, YOUR BOARD URGES STOCKHOLDERS TO VOTE AGAINST THIS PROPOSAL.
PROPOSAL 2--MODIFY CIGARETTES TO ELIMINATE BENZO(A)PYRENE FROM SMOKE
The Province of St. Joseph of the Capuchin Order, 1015 North Ninth Street,
Milwaukee, Wisconsin 53233, claiming beneficial ownership of 100 shares of
Common Stock, together with two co-proponents, submitted the proposal set
forth below. The names, addresses and shareholdings of the co-proponents will
be furnished upon request made to the Secretary of the Company.
"WHEREAS, for years scientists have demonstrated that cigarette smoking is
linked to various forms of cancer, especially lung cancer.
-- On October 18, 1996 Science magazine reported that a team of researchers
from the prestigious M.D. Anderson Cancer Center at the University of Texas in
Houston and the Beckman Research Institute of the City of Hope in Duarte,
California found a molecular mechanism that precisely indicates how
benzo(a)pyrene (BaP), a known carcinogen in cigarette smoke, can cause lung
cancer.
24
<PAGE>
-- According to Dr. John Minna, a researcher at the University of Texas
Southwestern Medical Center, the finding reported in Science "absolutely
pinpoints that mutations in lung cancer are caused by a carcinogen in
cigarette smoke."
-- Reporting on the Science study, an article in The New York Times declared
(10/18/96): The findings reported today establish the long-missing link, in
the opinion of experts in the field of cancer genetics, and may also play a
role in pending litigation about smoking illnesses and passive smoking."
-- That Wall Street recognized the significance of this study was evidenced
in the fact that, on the day the article appeared, Philip Morris stock
declined over $5.00.
-- Less than a week after the Science article appeared, it was reported that
a Philip Morris executive once had urged our Company to remove ingredients
resulting in BaP from cigarette smoke. In 1958, a memo reportedly written by a
Company researcher urged that ingredients creating BaP in smoked Marlboros and
Parliaments "must be removed" or "sharply reduced." His rationale was that "we
must do this not because we think it is harmful but simply because those who
are in a better position to know than ourselves suspect it may be harmful."
-- With the Science article "those who are in a better position to know
than" executives of our Company have now demonstrated conclusively that BaP
causes cancer;
RESOLVED that shareholders request the Board of Directors to take immediate
steps to modify all our tobacco products throughout the world so that smoke
from their use no longer creates benzo(a)pyrene unless company scientists can
prove conclusively that benzo(a)pyrene does not cause cancer in human beings.
Supporting Statement
Upon the publication of the news noting the causal connection between
benzo(a)pyrene (BaP) and lung cancer, our Company uncharacteristically termed
the study "extremely interesting" and in need of "careful review." As
shareholders we believe the warning about BaP's cancer-connection made 39
years ago by a research scientist of our own Company (who went on to become
our Company's vice president of research) further demonstrates the need for
immediate action. We believe this proposal is justified not only from fear of
more litigation but because eliminating BaP from the smoke of our cigarettes
is simply the right thing to do.
If you agree our Company should not knowingly create any product which
demonstrably undermines the health of and/or kills customers who use it please
vote "yes" for this proposal."
THE BOARD RECOMMENDS A VOTE AGAINST THIS PROPOSAL.
A member of the class of compounds called polycyclic aromatic hydrocarbons,
benzo[a]pyrene ("BAP") is a natural by-product of the combustion of organic
matter. As such it is commonly found in the environment, including in certain
foods. For example, charcoal-broiled or thoroughly roasted foods have
measurable levels of BAP.
Like many plants, tobacco can acquire small amounts of BAP from the air as a
consequence of air pollution. Tobacco smoke, by definition, results from the
combustion of organic matter. Thus, BAP has for many years been identified as
a constituent of tobacco smoke.
An article that appeared in an October 1996 issue of Science discussed the
possible relationship between a metabolite of BAP and the development of
cancer. The study reported in Science is neither conclusive as to a possible
mechanism of cancer development nor proof of a "missing link," but it is
extremely interesting and merits careful review.
25
<PAGE>
To date, the Company has not identified a commercially and technologically
feasible method to eliminate BAP from tobacco smoke. We will, however,
continue to follow the literature and scientific developments related to BAP
and/or its metabolites and look for opportunities to eliminate BAP from
tobacco smoke.
Management believes that the proposal is unreasonable since it would require
the Company to do something that is not currently feasible.
THEREFORE, YOUR BOARD URGES STOCKHOLDERS TO VOTE AGAINST THIS PROPOSAL.
PROPOSAL 3--MEMBERSHIP OF COMPENSATION COMMITTEE
The International Brotherhood of Teamsters General Fund, 25 Louisiana Avenue,
N.W., Washington, D.C. 20001, claiming beneficial ownership of 40 shares of
Common Stock, has submitted the proposal set forth below.
"Proposal:
Shareholders urge that the board of directors adopt a policy that no board
member shall serve on the compensation committee if his or her place of
employment has done more than $500,000 worth of business with Philip Morris in
the previous fiscal year.
Supporting statement:
This is a challenging time for Philip Morris and other tobacco and food
companies. Over a quarter of all states have sued tobacco companies; the
Clinton administration has suggested it may pursue having the FDA administer
tobacco; and cigarette executives are routinely vilified in the press. It is
crucial during these times that executives and board members, and their
motives, remain free of any potential conflict, or even the appearance of such
conflict. Shareholders must be assured that board members exclusively serve
those who elected them, not the executives they are charges with overseeing.
According to the most recent Philip Morris Proxy, dated March 11, 1996:
"During 1995, Mr. Huntley (who is a member of the Compensation Committee) was
counsel to Hunton & Williams, which firm acts as counsel to the Company. In
1995, the Company paid Hunton & Williams fees of approximately $9,300,000. Mr.
Huntley retired as counsel to Hunton & Williams in December, 1995."
Does this sum influence his decisions in any way as he serves on the
compensation committee, in effect setting the salaries of the individuals who
may have sent his firm business? Although it may not constitute a significant
portion of Philip Morris' legal fees--a fact that in and of itself is quite
alarming--nine million dollars is a substantial sum of money.
According to Murray Weidenbaum, writing in the March-April issue of Society,
Corporate directors often are criticized for conflicts of interest and for
showing greater concern for the welfare of other companies. Many outside
directors of corporations do business with the companies on whose board
they serve. The literature contains a number of cases of apparent
wrongdoing on the part of outside directors who were also officers of
companies that supplied services to the corporation or who benefited
unfairly from company operations.
In this time when tobacco companies are often accused of misusing their
influence to censor the media or sway Congress, Philip Morris can ill afford
an accusation that the very board members who set executive compensation
levels are beholden to the company.
For the above reasons we urge you to vote FOR this proposal."
THE BOARD RECOMMENDS A VOTE AGAINST THIS PROPOSAL.
26
<PAGE>
Your Board agrees that decisions concerning the compensation of executive
officers should be made by a committee of independent directors. Your Board
believes that each of the members of its Compensation Committee is, in fact,
independent, and a valuable member of the Committee. Your Board further
believes that the arbitrary standard suggested by the proposal is unworkable
when applied to a large multinational business such as the Company's and would
in fact deprive the Committee of expert independent judgment.
Each member of the Compensation Committee meets the definition of independence
adopted by the New York Stock Exchange (NYSE), which excludes any director who
has "any relationship that, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgment."
The principal difference between the arbitrary requirement being proposed and
the NYSE standard followed by your Board is that the NYSE standard would not
disqualify a director from independent status due to customary commercial
transactions undertaken at arm's-length in the ordinary course of business, if
those transactions are not material to the director's company and thus would
not interfere with his or her ability to exercise independent judgment. Under
the Company's current practice, no director can serve on the Compensation
Committee if his or her employer derives more than 5% of its annual revenues
from your Company.
The arbitrary requirement being proposed will not work for a large global
company like Philip Morris. Philip Morris is the world's largest consumer
packaged goods company, with annual revenues in excess of $68 billion and with
operations in over 180 countries. Because of its size and scope, Philip Morris
annually has arm's-length business dealings in excess of $500,000 in the
ordinary course of its business with many companies in the United States and
abroad, including the majority of Fortune 100 companies. $500,000 worth of
business, to put the matter in perspective, is less than one one-thousandth of
1% of the revenues of a company the size of Philip Morris. Clearly, an
arbitrary threshold set that low would exclude individuals whose independent
judgment is unquestioned.
If the Company were to adopt the proposal, it could be precluded from
appointing to the Compensation Committee executive officers from other major
companies that do business with your Company in the ordinary course in amounts
that are not material to either company. It is these executives who are often
the most knowledgeable about the compensation requirements of a large
international company such as Philip Morris, and, as a result, are in the best
position to evaluate compensation programs independently and make prudent,
informed decisions that are in the best interests of the Company and its
stockholders.
Your Board takes strong exception to the proposal's description of Mr.
Huntley. Mr. Huntley retired as counsel to Hunton & Williams in December 1995,
as noted in the proponent's statement, and no longer receives compensation
from that firm. Mr. Huntley never participated in the profits of Hunton &
Williams when he served as counsel to that firm, and his compensation as
counsel was not based on or affected by the amount of fees that Hunton &
Williams earned from its work for the Company. The Board also feels strongly
that in his years of service on the Board, Mr. Huntley has demonstrated his
independence from management and has always acted in the best interest of
Philip Morris stockholders.
THEREFORE, YOUR BOARD URGES STOCKHOLDERS TO VOTE AGAINST THIS PROPOSAL.
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OTHER MATTERS
Management knows of no other business that will be presented to the meeting
for a vote, except that it has been advised that stockholder proposals not
included in this proxy statement may be presented. If other matters properly
come before the meeting, including proposals omitted from this proxy statement
and accompanying proxy pursuant to the rules of the Securities and Exchange
Commission, the persons named as proxies will vote on them in accordance with
their best judgment.
The cost of this solicitation of proxies will be borne by the Company. In
addition to the use of the mails, some of the officers and regular employees
of the Company may solicit proxies by telephone and will request brokerage
houses, banks and other custodians, nominees and fiduciaries to forward
soliciting material to the beneficial owners of Common Stock held of record by
such persons. The Company will reimburse such persons for expenses incurred in
forwarding such soliciting material. It is contemplated that additional
solicitation of proxies will be made in the same manner under the engagement
and direction of D.F. King & Co., Inc., 77 Water Street, New York, NY 10005,
at an anticipated cost of $21,000, plus reimbursement of out-of-pocket
expenses.
1998 ANNUAL MEETING
Stockholders wishing to suggest candidates to the Nominating and Corporate
Governance Committee for consideration as directors may submit names and
biographical data to the Secretary of the Company.
The Company's By-Laws prescribe the procedures a stockholder must follow to
nominate directors or to bring other business before stockholder meetings. For
a stockholder to nominate a candidate for director at the 1998 Annual Meeting,
presently anticipated to be held April 30, 1998, notice of the nomination must
be received by the Company between October 11 and November 10, 1997. The
notice must describe various matters regarding the nominee, including name,
address, occupation and shares held. For a stockholder to bring other matters
before the 1998 Annual Meeting, notice must be received by the Company within
the time limits described above. The notice must include a description of the
proposed business, the reasons therefor and other specified matters. For a
matter to be included in the Company's proxy statement and proxy for the 1998
Annual Meeting, notice must be received by the Company on or before November
10, 1997. In each case, the notice must be given to the Secretary of the
Company, whose address is 120 Park Avenue, New York, NY 10017. Any stockholder
desiring a copy of the Company's By-Laws will be furnished one without charge
upon written request to the Secretary.
G. Penn Holsenbeck
Vice President and Secretary
March 10, 1997
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EXHIBIT A
1997 PERFORMANCE INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the Plan is to support the Company's ongoing efforts to develop
and retain world-class leaders and to provide the Company with the ability to
provide incentives more directly linked to the profitability of the Company's
businesses and increases in stockholder value.
For purposes of the Plan, the following terms are defined as set forth below:
a."Annual Incentive Award" means an Incentive Award made pursuant to
Section 5(a)(v) with a Performance Cycle of one year or less.
b."Awards" mean grants under this Plan of Incentive Awards, Stock Options,
Stock Appreciation Rights, Restricted Stock or Other Stock-Based Awards.
c."Board" means the Board of Directors of the Company.
d."Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
e."Commission" means the Securities and Exchange Commission or any
successor agency.
f."Committee" means the Compensation Committee of the Board or a
subcommittee thereof, any successor thereto or such other committee or
subcommittee as may be designated by the Board to administer the Plan.
g."Common Stock" or "Stock" means the Common Stock of the Company.
h."Company" means Philip Morris Companies Inc., a corporation organized
under the laws of the Commonwealth of Virginia, or any successor thereto.
i."Economic Value Added(TM)" means net after-tax operating profit less the
cost of capital.
j."Exercise Period" means the 60-day period from and after a Change in
Control.
k."Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor thereto.
l."Fair Market Value" means, as of any given date, the mean between the
highest and lowest reported sales prices of the Common Stock on the New
York Stock Exchange--Composite Transactions or, if no such sale of Common
Stock is reported on such date, the fair market value of the Stock as
determined by the Committee in good faith.
m."Incentive Award" means any Award that is either an Annual Incentive
Award or a Long-Term Incentive Award.
n."Incentive Stock Option" means any Stock Option that complies with
Section 422 of the Code.
o."Long-Term Incentive Award" means an Incentive Award made pursuant to
Section 5(a)(v) with a Performance Cycle of more than one year.
p."Nonqualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
q."Other Stock-Based Award" means an Award made pursuant to Section
5(a)(iv).
r."Performance Cycle" means the period selected by the Committee during
which the performance of the Company or any subsidiary, affiliate or unit
thereof or any individual is measured for the purpose of determining the
extent to which an Award subject to Performance Goals has been earned.
s."Performance Goals" mean the objectives for the Company or any subsidiary
or affiliate or any unit thereof or any individual that may be established
by the Committee for a Performance Cycle with respect to any performance-
based Awards contingently awarded under the Plan. The Performance Goals for
Awards that are intended to constitute "performance-based" compensation
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within the meaning of Section 162(m) of the Code shall be based on one or
more of the following criteria: earnings per share, total shareholder
return, operating income, net income, cash flow, return on equity, return
on capital and Economic Value Added(TM).
t."Plan" means this 1997 Performance Incentive Plan, as amended from time
to time.
u."Restricted Period" means the period during which an Award may not be
sold, assigned, transferred, pledged or otherwise encumbered.
v."Restricted Stock" means an Award of shares of Common Stock pursuant to
Section 5(a)(iii).
w."Spread Value" means, with respect to a share of Common Stock subject to
an Award, an amount equal to the excess of the Fair Market Value, on the
date such value is determined, over the Award's exercise or grant price, if
any.
x."Stock Appreciation Right" or "SAR" means a right granted pursuant to
Section 5(a)(ii).
y."Stock Option" means an option granted pursuant to Section 5(a)(i).
In addition, the terms "Business Combination," "Change in Control," "Change in
Control Price," "Incumbent Board," "Outstanding Company Stock," "Outstanding
Company Voting Securities" and "Person" have the meanings set forth in Section
6.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Committee, which shall have the power to
interpret the Plan and to adopt such rules and guidelines for carrying out the
Plan as it may deem appropriate. The Committee shall have the authority to
adopt such modifications, procedures and subplans as may be necessary or
desirable to comply with the laws, regulations, compensation practices and tax
and accounting principles of the countries in which the Company, a subsidiary
or an affiliate may operate to assure the viability of the benefits of Awards
made to individuals employed in such countries and to meet the objectives of
the Plan.
Subject to the terms of the Plan, the Committee shall have the authority to
determine those employees eligible to receive Awards and the amount, type and
terms of each Award and to establish and administer any Performance Goals
applicable to such Awards.
The Committee may delegate its authority and power under the Plan to one or
more officers of the Company, subject to guidelines prescribed by the
Committee and approved by the Board, with respect to participants who are not
subject to Section 16 of the Exchange Act.
Any determination made by the Committee or pursuant to delegated authority in
accordance with the provisions of the Plan with respect to any Award shall be
made in the sole discretion of the Committee or such delegate, and all
decisions made by the Committee or any appropriately designated officer
pursuant to the provisions of the Plan shall be final and binding on all
persons, including the Company and Plan participants.
SECTION 3. ELIGIBILITY.
Key salaried employees of the Company, its subsidiaries and affiliates who are
responsible for or contribute to the management, growth and profitability of
the business of the Company, its subsidiaries or its affiliates are eligible
to be granted Awards under the Plan.
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SECTION 4. COMMON STOCK SUBJECT TO PLAN.
The total number of shares of Common Stock reserved and available for
distribution pursuant to the Plan shall be 120,000,000 shares (after giving
effect to the three-for-one stock split approved by the Board on February 26,
1997), all of which may be issued pursuant to the exercise of Stock Options
awarded under the Plan. If any Award is exercised, cashed out or terminates or
expires without a payment being made to the participant in the form of Common
Stock, the shares subject to such Award, if any, shall again be available for
distribution in connection with Awards under the Plan. Any shares of Common
Stock that are used by a participant as full or partial payment of withholding
or other taxes or as payment for the exercise or conversion price of an Award
shall be available for distribution in connection with Awards under the Plan.
In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend, stock split, split-up or other change in corporate structure
affecting the Common Stock after adoption of the Plan by the Board, the Board
is authorized to make substitutions or adjustments in the aggregate number and
kind of shares reserved for issuance under the Plan, in the number, kind and
price of shares subject to outstanding Awards and in the Award limits set
forth in Section 5; provided, however, that any such substitutions or
adjustments shall be, to the extent deemed appropriate by the Board,
consistent with the treatment of shares of Common Stock not subject to the
Plan, and that the number of shares subject to any Award shall always be a
whole number.
SECTION 5. AWARDS.
(a) General. The types of Awards that may be granted under the Plan are set
forth below. Awards may be granted singly, in combination or in tandem with
other Awards.
(i) STOCK OPTIONS. A Stock Option represents the right to purchase a share
of Stock at a predetermined grant price. Stock Options granted under this
Plan may be in the form of Incentive Stock Options or Nonqualified Stock
Options, as specified in the Award agreement. The term of each Stock Option
shall be set forth in the Award agreement, but no Incentive Stock Option
shall be exercisable more than ten years after the grant date. The grant
price per share of Common Stock purchasable under a Stock Option shall not
be less than 100% of the Fair Market Value on the date of grant. Subject to
the applicable Award agreement, Stock Options may be exercised, in whole or
in part, by giving written notice of exercise to the Company specifying the
number of shares to be purchased. Such notice shall be accompanied by
payment in full of the purchase price by certified or bank check or such
other instrument as the Company may accept (including a copy of
instructions to a broker or bank acceptable to the Company to deliver
promptly to the Company an amount of sale or loan proceeds sufficient to
pay the purchase price). As determined by the Committee, payment in full or
in part may also be made in the form of Common Stock already owned by the
optionee valued at the Fair Market Value on the date the Stock Option is
exercised; provided, however, that such Common Stock shall not have been
acquired within the preceding six months upon the exercise of a Stock
Option or stock unit or similar Award granted under the Plan or any other
plan maintained at any time by the Company or any subsidiary.
(ii) STOCK APPRECIATION RIGHTS. An SAR represents the right to receive a
payment, in cash, shares of Common Stock or both (as determined by the
Committee), equal to the Spread Value on the date the SAR is exercised. The
grant price of an SAR shall be set forth in the applicable Award agreement
and shall not be less than 100% of the Fair Market Value on the date of
grant. Subject to the terms of the applicable Award agreement, an SAR shall
be exercisable, in whole or in part, by giving written notice of exercise
to the Company.
(iii) RESTRICTED STOCK. Shares of Restricted Stock are shares of Common
Stock that are awarded to a participant and that during the Restricted
Period may be forfeitable to the Company upon such conditions as may be set
forth in the applicable Award agreement. Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered during the
Restricted Period. The
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Restricted Period shall be no less than one year. Except as provided in
this subsection (iii) and in the applicable Award agreement, a participant
shall have all the rights of a holder of Common Stock, including the rights
to receive dividends and to vote during the Restricted Period. Dividends
with respect to Restricted Stock that are payable in Common Stock shall be
paid in the form of Restricted Stock.
(iv) OTHER STOCK-BASED AWARDS. Other Stock-Based Awards are Awards, other
than Stock Options, SARs or Restricted Stock, that are denominated in,
valued in whole or in part by reference to, or otherwise based on or
related to, Common Stock. The purchase, exercise, exchange or conversion of
Other Stock-Based Awards granted under this subsection (iv) shall be on
such terms and conditions and by such methods as shall be specified by the
Committee. Where the value of an Other Stock-Based Award is based on the
Spread Value, the grant price for such an Award will not be less than 100%
of the Fair Market Value on the date of grant.
(v) INCENTIVE AWARDS. Incentive Awards are performance-based Awards that
are expressed in U.S. currency. Incentive Awards shall either be Annual
Incentive Awards or Long-Term Incentive Awards.
(b) Maximum Awards. The total number of shares of Restricted Stock and other
shares of Common Stock subject to or underlying Stock Options, SARs and Other
Stock-Based Awards awarded to any participant during the term of this Plan
shall not exceed 10% of the shares of Common Stock reserved for distribution
pursuant to the Plan. An Annual Incentive Award paid to a participant with
respect to any Performance Cycle shall not exceed $5,000,000. A Long-Term
Incentive Award paid to a participant with respect to any Performance Cycle
shall not exceed $3,000,000 times the number of years in the Performance
Cycle. An amount not in excess of 30% of the shares of Common Stock reserved
for distribution pursuant to the Plan may be issued pursuant to Restricted
Stock Awards and Other Stock-Based Awards, except that Other Stock-Based
Awards with values based on Spread Values shall not be included in this
limitation.
(c) Performance-Based Awards. Any Awards granted pursuant to the Plan may be
in the form of performance-based Awards through the application of Performance
Goals and Performance Cycles.
SECTION. 6. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) All Stock Options and Stock Appreciation Rights outstanding as of the
date such Change in Control occurs shall become fully vested and
exercisable.
(ii) The restrictions and other conditions applicable to any Restricted
Stock or Other Stock-Based Awards, including vesting requirements, shall
lapse, and such Awards shall become free of all restrictions and fully
vested.
(iii) The value of all outstanding Stock Options, Stock Appreciation
Rights, Restricted Stock and Other Stock-Based Awards shall, unless
otherwise determined by the Committee at or after grant, be cashed out on
the basis of the Change in "Control Price," as defined in Section 6(c), as
of the date such Change in Control occurs or such other date as the
Committee may determine prior to the Change in Control.
(iv) Any Incentive Awards relating to Performance Cycles prior to the
Performance Cycle in which the Change in Control occurs that have been
earned but not paid shall become immediately payable in cash. In addition,
each participant who has been awarded an Incentive Award shall be deemed to
have earned a pro rata Incentive Award equal to the product of (y) such
participant's maximum award opportunity for such Performance Cycle, and (z)
a fraction, the numerator of which is the number of full or partial months
that have elapsed since the beginning of such
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Performance Cycle to the date on which the Change in Control occurs, and
the denominator of which is the total number of months in such Performance
Cycle.
(b) Definition of Change in Control. A "Change in Control" means the happening
of any of the following events:
(i) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of 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 (A) the then outstanding shares
of Common Stock (the "Outstanding Company Common Stock") or (B) 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 in Control: (1) any
acquisition directly from the Company, (2) any acquisition by the Company,
(3) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company or (4) any acquisition by any corporation pursuant to a transaction
described in clauses (A), (B) and (C) of paragraph (iii) of this Section
6(b); or
(ii) Individuals who, as of the effective date of the Plan, 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 such effective date whose election, or nomination
for election by the stockholders of the Company, 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
(iii) Approval by the stockholders of the Company of a reorganization,
merger, share exchange or consolidation (a "Business Combination"), unless,
in each case following such Business Combination, (A) 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 that 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, (B) 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 Person owned 20% or more of the Outstanding Company
Common Stock or Outstanding Company Voting Securities prior to the Business
Combination and (C) 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
(iv) Approval by the stockholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) 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
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disposition, (1) 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, (2) 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 (3) 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.
(c) Change in Control Price. "Change in Control Price" means the highest price
per share paid in any transaction reported on the New York Stock Exchange-
Composite Transactions or paid or offered in any bona fide transaction related
to a potential or actual change in control of the Company at any time during
the preceding 60-day period as determined by the Committee, except that, in
the case of Incentive Stock Options, such price shall be based only on
transactions reported for the date on which such Incentive Stock Options are
cashed out.
(d) Notwithstanding any other provision of this Plan, upon a Change in
Control, unless the Committee shall determine otherwise at grant, an Award
recipient shall have the right, by giving notice to the Company within the
Exercise Period, to elect to surrender all or part of the Stock Option, SAR or
Other Stock-Based Award to the Company and to receive in cash, within 30 days
of such notice, an amount equal to the amount by which the "Change in Control
Price" on the date of such notice shall exceed the exercise or grant price
under such Award, multiplied by the number of shares of Stock as to which the
right granted under this Section 6 shall have been exercised.
(e) Notwithstanding the foregoing, if any right granted pursuant to this
Section 6 would make a Change in Control transaction ineligible for pooling of
interests accounting under generally accepted accounting principles that but
for this Section 6 would otherwise be eligible for such accounting treatment,
the Committee shall have the ability to substitute the cash payable pursuant
to this Section 6 with Common Stock with a Fair Market Value equal to the cash
that would otherwise be payable hereunder.
SECTION 7. PLAN AMENDMENT AND TERMINATION.
The Board may amend or terminate the Plan at any time, provided that no such
amendment shall be made without stockholder approval if such approval is
required under applicable law, or if such amendment would: (i) decrease the
grant or exercise price of any Stock Option, SAR or Other Stock-Based Award to
less than the Fair Market Value on the date of grant; or (ii) increase the
total number of shares of Common Stock that may be distributed under the Plan.
Except as set forth in any Award agreement, no amendment or termination of the
Plan may materially and adversely affect any outstanding Award under the Plan
without the Award recipient's consent.
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SECTION 8. PAYMENTS AND PAYMENT DEFERRALS.
Payment of Awards may be in the form of cash, Stock, other Awards or
combinations thereof as the Committee shall determine, and with such
restrictions as it may impose. The Committee, either at the time of grant or
by subsequent amendment, may require or permit deferral of the payment of
Awards under such rules and procedures as it may establish. It also may
provide that deferred settlements include the payment or crediting of interest
or other earnings on the deferred amounts, or the payment or crediting of
dividend equivalents where the deferred amounts are denominated in Common
Stock equivalents.
SECTION 9. DIVIDENDS AND DIVIDEND EQUIVALENTS.
The Committee may provide that any Awards under the Plan earn dividends or
dividend equivalents. Such dividends or dividend equivalents may be paid
currently or may be credited to a participant's Plan account. Any crediting of
dividends or dividend equivalents may be subject to such restrictions and
conditions as the Committee may establish, including reinvestment in
additional shares of Common Stock or Common Stock equivalents.
SECTION 10. TRANSFERABILITY.
Unless otherwise required by law, Awards shall not be transferable or
assignable other than by will or the laws of descent and distribution.
SECTION 11. AWARD AGREEMENTS.
Each Award under the Plan shall be evidenced by a written agreement (which
need not be signed by the recipient unless otherwise specified by the
Committee) that sets forth the terms, conditions and limitations for each
Award. Such terms may include, but are not limited to, the term of the Award,
vesting and forfeiture provisions, and the provisions applicable in the event
the recipient's employment terminates. The Committee may amend an Award
agreement, provided that no such amendment may materially and adversely affect
an Award without the Award recipient's consent.
SECTION 12. UNFUNDED STATUS OF PLAN.
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation
of trusts or other arrangements to meet the obligations created under the Plan
to deliver Common Stock or make payments; provided, however, that, unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 13. GENERAL PROVISIONS.
(a) The Committee may require each person acquiring shares of Common Stock
pursuant to an Award to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to the distribution
thereof. The certificates for such shares may include any legend that the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Common Stock or other securities delivered
under the Plan shall be subject to such stock transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Commission, any stock exchange upon which the
Common Stock is then listed and any applicable Federal, state or foreign
securities law, and the Committee may cause a legend or legends to be put on
any such certificates to make appropriate reference to such restrictions.
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(b) Nothing contained in this Plan shall prevent the Company, a subsidiary or
an affiliate from adopting other or additional compensation arrangements for
its employees.
(c) The adoption of the Plan shall not confer upon any employee any right to
continued employment nor shall it interfere in any way with the right of the
Company, a subsidiary or an affiliate to terminate the employment of any
employee at any time.
(d) No later than the date as of which an amount first becomes includible in
the gross income of the participant for Federal income tax purposes with
respect to any Award under the Plan, the participant shall pay to the Company,
or make arrangements satisfactory to the Company regarding the payment of, any
Federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations arising from an Award may be settled with
Common Stock, including Common Stock that is part of, or is received upon
exercise or conversion of, the Award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company, its subsidiaries
and its affiliates shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the participant. The
Committee may establish such procedures as it deems appropriate, including the
making of irrevocable elections, for the settling of withholding obligations
with Common Stock.
(e) On receipt of written notice of exercise, the Committee may elect to cash
out all or a portion of the shares of Common Stock for which a Stock Option is
being exercised by paying the optionee an amount, in cash or Common Stock,
equal to the Spread Value of such shares on the date such notice of exercise
is received.
(f) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the Commonwealth of
Virginia.
(g) If any provision of the Plan is held invalid or unenforceable, the
invalidity or unenforceability shall not affect the remaining parts of the
Plan, and the Plan shall be enforced and construed as if such provision had
not been included.
(h) If approved by stockholders, the Plan shall be effective on May 1, 1997.
Except as otherwise provided by the Board, no Awards shall be granted after
April 30, 2002, but any Awards granted theretofore may extend beyond that
date.
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[LOGO OF PHILIP MORRIS COMPANIES INC.]
PHILIP MORRIS
COMPANIES INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS THURSDAY, APRIL 24, 1997 AND PROXY
STATEMENT
<PAGE>
PHILIP MORRIS COMPANIES INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Annual Meeting April 24, 1997
PROXY
Geoffrey C. Bible and Murray H. Bring, and each of them, are appointed
attorneys, with power of substitution, to vote, as indicated on the matters set
forth on the reverse hereof and in their discretion upon such other business as
may properly come before the meeting, all shares of the undersigned in Philip
Morris Companies Inc. (the "Company") at the annual meeting of stockholders to
be held at the Philip Morris Manufacturing Center, Richmond, Virginia, April 24,
1997, at 9:00 a.m., and at all adjournments thereof.
Election of Directors, Nominees:
Elizabeth E. Bailey, Geoffrey C. Bible, 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 and
Stephen M. Wolf.
This card also serves to instruct the administrator of the Company's dividend
reinvestment and voluntary cash payment plan and the trustee of each defined
contribution plan sponsored by the Company or any of its subsidiaries how to
vote shares held for a stockholder or employee participating in any such plan.
SEE REVERSE. If you wish to vote in accordance with the Board of Directors'
recommendations, just sign on the reverse. You need not mark any boxes.
-----------
SEE REVERSE
SIDE
-----------
<PAGE>
[X] Please mark your
votes as in this
example
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS,
FOR THE 1997 PERFORMANCE INCENTIVE PLAN, FOR THE SELECTION OF AUDITORS AND
AGAINST EACH OF THE STOCKHOLDER PROPOSALS.
- -------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR:
- -------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [_] [_] 2. 1997 Performance [_] [_] [_]
Directors Incentive Plan
(see reverse)
For except vote withheld from the following nominee(s):
-----------------------------------------------------
3. Selection of Auditors FOR AGAINST ABSTAIN
[_] [_] [_]
-----------------------------------------------------
--------------------------------------------------------
The Board of Directors recommends a vote AGAINST
--------------------------------------------------------
FOR AGAINST ABSTAIN
Stockholder Proposal No. 1 [_] [_] [_]
Stockholder Proposal No. 2 [_] [_] [_]
Stockholder Proposal No. 3 [_] [_] [_]
--------------------------------------------------------
The signer hereby revokes all proxies heretofore given
by the signer to vote at said meeting or any adjournments
thereof.
NOTE: Please sign exactly as name appears hereon. Joint
owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian,
please give full title as such.
--------------------------------------------------------
--------------------------------------------------------
SIGNATURE(S) DATE
