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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 1-8940
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PHILIP MORRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
VIRGINIA 13-3260245
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 PARK AVENUE,
NEW YORK, N.Y. 10017
(Address of principal executive offices) (Zip Code)
</TABLE>
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-880-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Common Stock, $0.33 1/3 par value New York Stock Exchange
</TABLE>
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock on February 26, 1998, was approximately $103.0 billion. At such date,
there were 2,427,925,717 shares of the registrant's Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to stockholders for the year
ended December 31, 1997, are incorporated in Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of stockholders to be held on April 30, 1998,
is incorporated in Part III hereof and made a part hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Philip Morris Companies Inc. is a holding company whose principal
wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods, Inc., and Miller Brewing Company, are engaged
in the manufacture and sale of various consumer products. A wholly-owned
subsidiary of the Company, Philip Morris Capital Corporation, engages in various
financing and investment activities. As used herein, unless the context
indicates otherwise, the term "Company" means Philip Morris Companies Inc. and
its subsidiaries. The Company is the largest consumer packaged goods company in
the world.*
Philip Morris Incorporated ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.," and its subsidiaries and affiliates are
engaged in the manufacture and sale of cigarettes. PM Inc. is the largest
cigarette company in the United States. Philip Morris International Inc.
("Philip Morris International") is a holding company whose subsidiaries and
affiliates and their licensees are engaged primarily in the manufacture and sale
of tobacco products (mainly cigarettes) internationally. A subsidiary of Philip
Morris International is the leading United States exporter of cigarettes.
MARLBORO, the principal cigarette brand of these companies, has been the world's
largest-selling cigarette brand since 1972. Certain subsidiaries and affiliates
of Philip Morris International manufacture and sell a wide variety of food
products in Latin America.
Kraft Foods, Inc. ("Kraft"), is the largest processor and marketer of retail
packaged foods in the United States. A wide variety of cheese, processed meat
products, coffee and grocery products are manufactured and marketed in the
United States and Canada by Kraft. Subsidiaries and affiliates of Kraft Foods
International, Inc. ("Kraft Foods International"), a subsidiary of Kraft,
manufacture and market coffee, confectionery, cheese, grocery and processed meat
products primarily in Europe and the Asia/ Pacific region.
Miller Brewing Company ("Miller") is the second largest brewing company in
the United States.
SOURCE OF FUNDS--DIVIDENDS
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
In 1997, the Company's significant industry segments were tobacco products
(principally cigarettes), food products, beer, and financial services and real
estate. Operating revenues, operating profit (together with a reconciliation to
operating income) and identifiable assets attributable to each such segment for
each of the last three years are set forth in Note 12 to the Company's
consolidated financial statements and are incorporated herein by reference to
the Company's annual report to stockholders for the year ended December 31, 1997
(the "1997 Annual Report").
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* References to the Company's competitive ranking in its various businesses
are based on sales data or, in the case of cigarettes and beer, shipments,
unless otherwise indicated.
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In 1997, operating profit from tobacco products was approximately 64% of the
Company's total operating profit, down from 67% in 1996. This decrease was due
primarily to charges recorded in 1997 in connection with tobacco litigation
settlements discussed below in Item 3. LEGAL PROCEEDINGS. PM Inc. and Philip
Morris International contributed 27% and 37%, respectively, to 1997 operating
profit (compared with 34% and 33%, respectively, in 1996). Food products, beer,
and financial services and real estate accounted for approximately 30%, 4% and
2%, respectively, of the Company's total operating profit in 1997 (compared with
27%, 4% and 2%, respectively, in 1996).
(C) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
PM Inc. manufactures, markets and sells cigarettes in the United States.
Subsidiaries and affiliates of Philip Morris International and their licensees
manufacture, market and sell tobacco products outside the United States and
export tobacco products from the United States.
DOMESTIC TOBACCO PRODUCTS
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments in the United States of 235.2 billion units in 1997, an
increase of 1.9% from 1996. PM Inc. accounted for 48.9% of the cigarette
industry's total shipments in the United States in 1997 (an increase of 1.2
share points from 1996). The industry's cigarette shipments in the United States
decreased by 0.6% in 1997. The following table+ sets forth the industry's
cigarette shipments in the United States, PM Inc.'s shipments and its share of
United States industry shipments:
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<CAPTION>
YEARS ENDED PM INC.
DECEMBER 31 INDUSTRY* PM INC. SHARE OF INDUSTRY
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<S> <C> <C> <C>
(IN BILLIONS OF UNITS) (%)
1997...................................................... 480.6 235.2 48.9
1996...................................................... 483.2 230.8 47.8
1995...................................................... 481.4 221.8 46.1
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PM Inc.'s major premium brands are MARLBORO, VIRGINIA SLIMS, MERIT, BENSON &
HEDGES and PARLIAMENT. Its principal discount brands are BASIC and CAMBRIDGE.
All of its brands are marketed to take into account differing preferences of
adult smokers. MARLBORO is the largest-selling cigarette brand in the United
States, with shipments of 164 billion units in 1997 (up 5.0% from 1996),
equating to 34.1% of the United States market (up from 32.3% in 1996).
In 1997, the premium and discount segments accounted for approximately 72.5%
and 27.5%, respectively, of domestic cigarette industry volume, versus 71.5% and
28.5%, respectively, in 1996.
In 1997, PM Inc.'s share of the premium segment was 57.8%, an increase of
1.5 share points over 1996. Shipments of premium cigarettes accounted for 85.7%
of PM Inc.'s 1997 volume, up from 84.4% in 1996. In 1997, United States industry
shipments within the discount segment declined 4.0% from 1996 levels; PM Inc.'s
1997 shipments within this category declined 6.4%, resulting in a share of 25.6%
of the discount segment (down 0.6 share points from 1996).
PM Inc. cannot predict future change or rates of change in the relative
sizes of the premium and discount segments or in PM Inc.'s shipments, shipment
market share or retail market share; however, it believes that implementation of
the proposed Resolution, discussed below under the heading "Proposed Resolution
of Certain Regulatory and Litigation Issues," would materially adversely affect
PM Inc.'s shipments.
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+ Data presented in this table differ in some cases from data discussed above
due to rounding differences.
* Source: Management Science Associates.
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INTERNATIONAL TOBACCO PRODUCTS
Philip Morris International's total cigarette shipments grew 7.8% in 1997,
to 711.5 billion units, including shipments of local Portuguese brands acquired
in 1997 (see discussion below). Philip Morris International estimates that its
share of the international cigarette market (excluding the United States) was
13.6% in 1997, up from 12.8% in 1996. Philip Morris International estimates that
international cigarette industry shipments (excluding the United States) were
approximately 5.2 trillion units in 1997, which represent an increase of 1.4%
over 1996. Philip Morris International unit shipments (including brands acquired
through acquisitions) have grown at a compounded annual growth rate of 11% over
the last five years versus compounded annual industry growth of approximately
1.5% over the same period. Philip Morris International's leading international
brands--MARLBORO, L&M, PHILIP MORRIS, BOND STREET, CHESTERFIELD, LARK,
PARLIAMENT, MERIT and VIRGINIA SLIMS--collectively accounted for approximately
49% of the international cigarette industry growth (excluding the United States)
in 1997. Unit sales of Philip Morris International's principal brand, MARLBORO,
increased 5.5% in 1997, to 319 billion units, representing more than 6% of the
international cigarette market (excluding the United States).
Philip Morris International has a cigarette market share of at least 15%,
and in a number of instances substantially more than 15%, in more than 40
markets, including Argentina, Australia, Belgium, the Czech Republic, Finland,
France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, the
Philippines, Poland, Portugal, Saudi Arabia, Singapore, Spain, Switzerland and
Turkey.
In 1997, Philip Morris International increased capacity and improved
productivity through various acquisitions and capital projects. Major capital
expenditures included modernization and expansion of facilities in Germany, the
Netherlands, Switzerland, Poland, Russia, Lithuania, the Ukraine, Turkey,
Malaysia and Brazil. In January 1997, Philip Morris International acquired a
controlling interest in Tabaqueira-Empresa Industrial de Tabacos, S.A.,
Portugal's formerly state-owned tobacco company, and later in the year
restructured its interests in the business of Cigarros La Tabacalera Mexicana
S.A. de C.V., a Mexican cigarette company, increasing its ownership in that
business from 28.8% to 50.0%.
TAXES, LEGISLATION, REGULATION AND OTHER MATTERS REGARDING TOBACCO AND SMOKING
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the volume,
operating revenues, cash flows, operating income and financial position of PM
Inc., Philip Morris International and the Company.
In the United States, these issues include proposed federal regulatory
controls (including, as discussed below, the issuance of final regulations by
the United States Food and Drug Administration (the "FDA") that regulate
cigarettes as "drugs" or "medical devices"); actual and proposed excise tax
increases; actual and proposed federal, state and local governmental and private
bans and restrictions on smoking (including in workplaces and in buildings
permitting public access); actual and proposed restrictions on tobacco
manufacturing, marketing, advertising (including decisions by certain companies
to limit or not accept tobacco advertising) and sales; proposed legislation and
regulations to require additional health warnings on cigarette packages and in
advertising, and to eliminate the tax deductibility of tobacco advertising and
promotional costs; actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information; actual and proposed
requirements regarding disclosure of the yields of "tar," nicotine and other
constituents found in cigarette smoke; increased assertions of adverse health
effects associated with both smoking and exposure to environmental tobacco smoke
("ETS"); legislation or other governmental action seeking to ascribe to the
industry responsibility and liability for the purported adverse health effects
associated with both smoking and exposure to ETS; the diminishing social
acceptance of smoking; increased pressure from anti-smoking groups; unfavorable
press reports; governmental and grand jury investigations; increased smoking and
health litigation, including private plaintiff class action litigation and
health care cost recovery actions brought by state and local governments, unions
and others seeking reimbursement for Medicaid and/or other health care
expenditures allegedly caused by cigarette smoking; and the proposed Resolution
discussed below.
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Cigarettes are subject to substantial excise taxes in the United States and
to similar taxes in most foreign markets. The United States federal excise tax
on cigarettes is currently $12 per 1,000 cigarettes ($0.24 per pack of 20
cigarettes). In August 1997, legislation was enacted that will raise the federal
excise tax to $17 per 1,000 cigarettes ($0.34 per pack of 20 cigarettes)
starting in the year 2000 and then to $19.50 per 1,000 cigarettes ($0.39 per
pack of 20 cigarettes) in 2002. In general, excise taxes and other cigarette-
related taxes levied by the federal government and by various states, counties
and municipalities have been increasing, and additional increases have been
proposed at the federal level and in a number of states. These taxes vary
considerably and, when combined with sales taxes and the current federal excise
tax, may be as high as $1.50 per pack in a given locality.
In the opinion of PM Inc. and Philip Morris International, past increases in
excise and similar taxes have had an adverse impact on sales of cigarettes. Any
future increases, the extent of which cannot be predicted, could result in
volume declines for the cigarette industry, including PM Inc. and Philip Morris
International, and might cause sales to shift from the premium segment to the
discount segment.
Reports with respect to the alleged harmful physical effects of cigarette
smoking have been publicized for many years, and the sale, promotion and use of
cigarettes continue to be subject to increasing governmental regulation. Since
1964, the Surgeon General of the United States and the Secretary of Health and
Human Services have released a number of reports linking cigarette smoking with
a broad range of health hazards, including various types of cancer, coronary
heart disease and chronic lung disease, and recommending various governmental
measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994
reports focus upon the "addictive" nature of cigarettes, the effects of smoking
cessation, the decrease in smoking in the United States, and the economic and
regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking
by adolescents, particularly the "addictive" nature of cigarette smoking in
adolescence.
Studies with respect to the alleged health risks of ETS to nonsmokers
(including lung cancer, respiratory and coronary illnesses, and other
conditions) have also received significant publicity. In 1986, the Surgeon
General of the United States and the National Academy of Sciences reported that
nonsmokers were at increased risk of lung cancer and respiratory illness due to
ETS. In January 1993, the United States Environmental Protection Agency (the
"EPA") issued a report concluding, among other things, that ETS is a human lung
carcinogen and that ETS increases certain health risks for young children. In
June 1993, PM Inc. joined five other representatives of the tobacco
manufacturing and related industries in a lawsuit against the EPA, seeking a
declaration that the EPA does not have the authority to regulate ETS, and that,
in view of the available scientific evidence and the EPA's failure to follow its
own guidelines in making the determination, the EPA's final risk assessment be
declared arbitrary and capricious and ordered withdrawn. The outcome of this
lawsuit cannot be predicted. The EPA report, together with adverse publicity on
ETS, has resulted in the adoption of governmental and privately imposed
limitations that restrict or ban cigarette smoking in certain public places and
places of employment.
The Comprehensive Smoking Education Act (the "Smoking Education Act"),
enacted in 1984, requires cigarette manufacturers and importers to include the
following warning statements in rotating sequence on cigarette packages and in
advertisements: "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, And May Complicate Pregnancy"; "SURGEON GENERAL'S WARNING:
Quitting Smoking Now Greatly Reduces Serious Risks to Your Health"; "SURGEON
GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal Injury,
Premature Birth, And Low Birth Weight"; and "SURGEON GENERAL'S WARNING:
Cigarette Smoke Contains Carbon Monoxide." The Smoking Education Act also covers
the size and format of warnings on cigarette packages and in cigarette
advertising, and prescribes a modified version of the warnings for outdoor
billboard advertisements.
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Most of the cigarettes sold by Philip Morris International are sold in
countries where warning statement requirements for cigarette packages have been
adopted. In markets where such statements are not legally required, Philip
Morris International's policy is to place the United States Surgeon General's
warnings on all cigarette packages.
In October 1997, at the request of the United States Senate Judiciary
Committee, the Company provided the Committee with a document setting forth the
Company's position on a number of issues. On the issues of the role played by
cigarette smoking in the development of lung cancer and other diseases in
smokers, and whether nicotine, as found in cigarette smoke, is "addictive," the
Company stated that despite the differences that may exist between its views and
those of the public health community, it would, in order to ensure that there
will be a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the alleged health effects of
exposure to ETS, the Company is prepared to defer to the judgment of public
health authorities as to what health warning messages will best serve the public
interest, as reflected in the proposed new health warnings set out in the
proposed Resolution.
In furtherance of the proposed Resolution, in late January 1998, the chief
executive officers of the four leading domestic tobacco companies or their
parent corporations, including the Company, pledged to Congress to publicly
release millions of pages of industry documents placed into the document
depository established in connection with Minnesota's health care cost recovery
action discussed below (see Item 3. LEGAL PROCEEDINGS.). The documents comprise
a wide range of smoking and health issues covered in scientific and marketing
research reports, memoranda, executive correspondence, handwritten notes and
other materials. They do not include highly sensitive trade secret information,
certain third-party and personnel information, or documents for which attorney
client privilege or work product doctrine claims have been asserted. On February
27, 1998, the first installment of these documents was made available via the
Internet, consisting of the vast majority of the documents selected from the
document depository by the attorney general of Minnesota in connection with
Minnesota's health care cost recovery action.
In August 1996, the FDA issued final regulations pursuant to which it
asserts jurisdiction over cigarettes as "drugs" or "medical devices" under the
provisions of the Food, Drug and Cosmetic Act. The final regulations include
severe restrictions on the distribution, marketing and advertising of
cigarettes, and would require the industry to comply with a wide range of
labeling, reporting, recordkeeping, manufacturing and other requirements
applicable to medical devices and their manufacturers. For the most part, the
regulations were scheduled to become effective on August 28, 1997. The FDA's
exercise of jurisdiction, if not reversed by judicial or legislative action,
could lead to more expansive FDA-imposed restrictions on cigarette operations
than those set forth in the final regulations, and could materially adversely
affect the volume, operating revenues, cash flows and operating income of PM
Inc. PM Inc. and others challenged in the courts the FDA's authority to regulate
cigarettes. In April 1997, a U.S. district court ruled that Congress has not
precluded the FDA from regulating cigarettes as "drugs" or "medical devices" and
that the FDA may regulate cigarettes if the facts asserted in support of the
FDA's assertion of jurisdiction are proven to be correct. The court also ruled,
however, that the section of the Food, Drug and Cosmetic Act relied upon by the
agency does not give the FDA authority to implement its regulations restricting
cigarette marketing, advertising and promotions. The court stayed implementation
of the FDA's regulations scheduled for August 1997. The court left in effect the
specific regulations that took effect in February 1997 establishing a federal
minimum age of 18 for the sale of tobacco products and requiring proof of age
for anyone under age 27. The tobacco company plaintiffs, including PM Inc., are
appealing that portion of the district court's order relating to the FDA's
assertion of jurisdiction. The FDA is appealing that portion of the order
enjoining the advertising and promotion restrictions. The respective appeals
were heard by the U.S. Court of Appeals for the Fourth Circuit in August 1997.
The outcome of this litigation cannot be predicted.
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In August 1996, the Commonwealth of Massachusetts enacted legislation to
require cigarette manufacturers to disclose to the Massachusetts Department of
Public Health ("DPH") the flavorings and other ingredients used in each brand of
cigarettes sold in the Commonwealth, and to provide "nicotine-yield ratings" for
their products based on standards to be established by the DPH. PM Inc. believes
that enforcement of the ingredient disclosure provisions of the statute could
permit the disclosure by DPH to the public of valuable proprietary information
concerning its brands. PM Inc. and three other domestic cigarette manufacturers
have filed suit in federal district court in Boston challenging the legislation.
In December 1997, the court granted a preliminary injunction to the tobacco
company plaintiffs and enjoined the Commonwealth from enforcing the ingredient
disclosure provisions of the legislation until further order of the court. The
ultimate outcome of this lawsuit cannot be predicted. The enactment of this
legislation has encouraged efforts to enact, and the enactment of, ingredient
disclosure legislation in other states, such as Texas and Minnesota.
In December 1997, PM Inc. disclosed to the DPH "tar" and nicotine deliveries
for its products sold in the Commonwealth based on standards established by the
DPH for determining "tar" and nicotine deliveries under average smoking
conditions. The "tar" and nicotine deliveries produced using the DPH test
parameters are higher than the yields produced using the test parameters
established by a 1970 voluntary agreement between the Federal Trade Commission
("FTC") and domestic cigarette manufacturers, including PM Inc., and which are
required to be disclosed in all cigarette advertising. In September 1997, the
FTC issued a request for public comments on its proposed revision of the "tar"
and nicotine testing and reporting standards established by the 1970 voluntary
agreement. The ultimate outcome of this proposal cannot be predicted.
On February 10, 1998, a regulation went into effect in Thailand that would
require manufacturers and importers of tobacco products, including a subsidiary
of Philip Morris International, to disclose to the Ministry of Public Health
("MPH") the ingredients of their products to be sold in Thailand on a by-brand
basis. Although this regulation does not require the MPH to make public the
submitted ingredient lists, there are no assurances that the confidentiality of
lists to be submitted will be maintained.
Cigarette manufacturers and importers are also required to provide annually
to the Secretary of Health and Human Services a composite list of ingredients
added to tobacco in the manufacture of cigarettes, and the Secretary is directed
to treat the list as trade secret information and report to Congress concerning
the health effects, if any, of such ingredients.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could, as a practical
matter, ultimately ban smoking in the workplace. Hearings on this proposed rule
were held from September 1994 through March 1995. The period for post-hearing
submissions on the proposed rule ended in February 1996. OSHA has not yet issued
either a final rule or a proposed revised rule.
Television and radio advertising of cigarettes is prohibited in the United
States, and prohibited or restricted in many other countries. In June 1995, PM
Inc. entered into a consent decree with the Department of Justice, pursuant to
which it agreed to reposition its brand advertising at professional football,
baseball, basketball and hockey arenas so as to minimize incidental television
coverage.
In June 1995, PM Inc. announced that it had voluntarily undertaken a program
to further limit minors' access to cigarettes. Elements of the program include
discontinuing free cigarette sampling to consumers in the United States,
discontinuing the distribution of cigarettes by mail to consumers in the United
States, placing a notice on cigarette cartons and packs for sale in the United
States stating "Underage Sale Prohibited," working with others in support of
state legislation to prevent youth access to tobacco products, taking measures
to encourage retailer compliance with minimum-age laws, and independent auditing
of the program.
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For several years, Congress has provided funds for the development of test
methodologies and standards aimed at measuring the propensity of cigarettes to
ignite upholstered furniture or mattresses. The Company cannot predict whether
these efforts will result in further legislation or regulation.
In recent years, various members of Congress have introduced legislation,
some of which has been the subject of hearings or floor debate, that would
subject cigarettes to various regulations under the Department of Health and
Human Services or regulation under the Consumer Products Safety Act, establish
anti-smoking educational campaigns or anti-smoking programs, or provide
additional funding for governmental anti-smoking activities, further restrict
the advertising of cigarettes, including requiring additional warnings on
packages and in advertising, provide that the Federal Cigarette Labeling and
Advertising Act and the Smoking Education Act could not be used as a defense
against liability under state statutory or common law, allow state and local
governments to restrict the sale and distribution of cigarettes, and further
restrict certain advertising of cigarettes and eliminate or reduce the tax
deductibility of tobacco advertising.
Some foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to require ingredient disclosure, to impose
maximum constituent levels, to increase taxes on cigarettes, to control prices,
to restrict imports, to ban or severely restrict smoking in workplaces and
public places, and otherwise to discourage cigarette smoking.
It is not possible to determine the outcome of the FDA regulatory initiative
or the related litigation discussed above, or to predict what, if any, other
foreign or domestic governmental legislation or regulations will be adopted
relating to the manufacturing, advertising, sale or use of cigarettes, or to the
tobacco industry generally. However, if any or all of the foregoing were to be
implemented, the volume, operating revenues, cash flows and operating income of
PM Inc., Philip Morris International and the Company could be adversely
affected, in amounts that cannot be determined.
PM Inc. has received requests for information (including grand jury
subpoenas) in connection with governmental investigations of the tobacco
industry, and is cooperating with respect to such requests. Certain present and
former employees of PM Inc. have testified or have been asked to testify in
connection with certain of these matters. The investigations are as follows:
PM Inc. has been informed that an investigation by the United States
Attorney for the Southern District of New York, which had been initiated
following the publication of an article in THE NEW YORK TIMES that made
allegations about PM Inc. documents and supposedly secret research relating to
nicotine, has been consolidated with the United States Department of Justice
investigation discussed immediately below.
PM Inc. has been informed of an investigation by the United States Attorney
for the Eastern District of New York relating to The Council for Tobacco
Research-U.S.A., Inc., a research organization of which PM Inc. is a sponsor;
and an investigation by the United States Department of Justice relating to
issues raised in testimony provided by tobacco industry executives before
Congress and other related matters.
PM Inc. has been advised that the staff of the FTC has commenced a
preliminary inquiry to determine whether PM Inc. unfairly restricts the
distribution of competing manufacturers' cigarette brands through its
merchandising practices at the wholesale and retail levels.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES
In June 1997, PM Inc. and other companies in the United States tobacco
industry entered into a Memorandum of Understanding (the "Resolution") to
support the adoption of federal legislation and ancillary undertakings that
would resolve many of the regulatory and litigation issues affecting the United
States tobacco industry and, thereby, reduce uncertainties facing the industry
and increase stability in
7
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business and capital markets. The complete text of the proposed Resolution is
filed as an Exhibit to this Form 10-K, and the discussion herein is qualified by
reference thereto.
There can be no assurance that federal legislation in the form of the
proposed Resolution will be enacted or that it will be enacted without
modification that is materially adverse to the Company or that any modification
would be acceptable to the Company or that, if enacted, the legislation would
not face legal challenges. Moreover, the negotiation and signing of the proposed
Resolution could affect other federal, state and local regulation of the United
States tobacco industry and regulation of the international tobacco industry.
The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access restrictions,
licensing of tobacco retailers, the adoption and enforcement of "no sales to
minors" laws by states, surcharges against the industry for failure to achieve
underage smoking reduction goals, regulation of tobacco products by the FDA,
public disclosure of industry documents and research, smoking cessation
programs, compliance programs by the industry, public smoking and smoking in the
workplace, enforcement of the proposed Resolution, industry payments and
litigation.
SURCHARGE FOR FAILURE TO ACHIEVE UNDERAGE SMOKING REDUCTION GOALS--The proposed
Resolution would require the FDA to impose annual surcharges on the industry if
targeted reductions in underage smoking incidence are not achieved in accordance
with a legislative timetable. The surcharge would be based upon an approximation
of the present value of the profit the companies would earn over the lives of
all underage consumers in excess of the target, and would be allocated among
participating manufacturers based on their market share of the United States
cigarette industry.
INDUSTRY PAYMENTS--The proposed Resolution would require participating
manufacturers to make substantial payments in the year of implementation and
thereafter ("Industry Payments"). Participating manufacturers would be required
to make an aggregate $10 billion initial Industry Payment on the date that
federal legislation implementing the terms of the proposed Resolution is signed.
This Industry Payment would be based on relative market capitalizations, and the
Company currently estimates that PM Inc.'s share of the initial Industry Payment
would be approximately $6.6 billion (to be adjusted downward for initial
payments made to Mississippi, Florida and Texas pursuant to settlements of
health care cost recovery actions described below in Item 3. LEGAL
PROCEEDINGS.). Thereafter, the companies would be required to make specified
annual Industry Payments determined and allocated among the companies based on
volume of domestic sales as long as the companies continue to sell tobacco
products in the United States. These Industry Payments, which would begin on
December 31 of the first full year after implementing federal legislation is
signed, would be in the following amounts (at 1996 volume levels)--year 1: $8.5
billion; year 2: $9.5 billion; year 3: $11.5 billion; year 4: $14 billion; and
each year thereafter: $15 billion. These Industry Payments would be increased by
the greater of 3% or the previous year's inflation rate, and would be adjusted
to reflect changes from 1996 domestic sales volume levels.
The Industry Payments would be separate from any surcharges discussed above.
The Industry Payments would receive priority and would not be dischargeable in
any bankruptcy or reorganization proceeding and would be the obligation only of
entities selling tobacco products in the United States (and not their affiliated
companies). The proposed Resolution provides that all payments by the industry
would be ordinary and necessary business expenses in the year of payment, and no
part thereof would be either in settlement of an actual or potential liability
for a fine or penalty (civil or criminal) or the cost of a tangible or
intangible asset. The proposed Resolution would provide for the pass-through to
consumers of the annual Industry Payments in order to promote the maximum
reduction in underage use.
EFFECTS ON LITIGATION--If enacted, the federal legislation provided for in the
proposed Resolution would settle present attorney general health care cost
recovery actions (or similar actions brought by or on behalf of any governmental
entity other than the federal government), PARENS PATRIAE and smoking and health
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class actions and all "addiction"/dependence claims, and would bar similar
actions from being maintained in the future. However, the proposed Resolution
provides that no stay applications will be made in pending governmental actions
without the mutual consent of the parties. In recent months, PM Inc. and other
companies in the domestic tobacco industry agreed to settle three health care
cost recovery actions in Mississippi, Florida and Texas, and a smoking and
health class action brought on behalf of flight attendants alleging injury
caused by exposure to ETS aboard aircraft. The Company may enter into
discussions to postpone or settle other actions, pending the enactment of the
legislation contemplated by the proposed Resolution. No assurance can be given
whether a postponement or settlement will be achieved or, if achieved, as to the
terms thereof. The proposed Resolution would not affect any smoking and health
class action or any health care cost recovery action that is reduced to final
judgment before implementing federal legislation is effective.
Under the proposed Resolution, the rights of individuals to sue the tobacco
industry would be preserved, as would existing legal doctrine regarding the
types of tort claims that can be brought under applicable statutory and case law
except as expressly changed by implementing federal legislation. Claims,
however, could not be maintained on a class or other aggregated basis, and could
be maintained only against tobacco manufacturing companies (and not their
retailers, distributors or affiliated companies). In addition, all punitive
damage claims based on past conduct would be resolved as part of the proposed
Resolution, and future claimants could seek punitive damages only with respect
to claims predicated upon conduct taking place after the effective date of
implementing federal legislation. Finally, except with respect to actions
pending as of June 9, 1997, third-party payor (and similar) claims could be
maintained only if based on subrogation of individual claims. Under subrogation
principles, a payor of medical costs can seek recovery from a third party only
by "standing in the shoes" of the injured party and being subject to all
defenses available against the injured party.
The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil liabilities
relating to past conduct. Judgments and settlements arising from tort actions
would be paid as follows. The proposed Resolution would set an annual aggregate
cap of up to 33% of the annual base Industry Payment (including any reductions
for volume declines). Any judgments or settlements exceeding the cap in a
particular year would roll over into the next year. While judgments and
settlements would run against the defendant, they would give rise to an
80-cents-on-the-dollar credit against the annual Industry Payment. Finally, any
individual judgments in excess of $1 million would be paid at the rate of $1
million per year unless every other judgment and settlement could first be
satisfied within the annual aggregate cap. In all circumstances, however, the
companies would remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs in the
litigation that would be settled by the proposed Resolution.
FINANCIAL EFFECTS--The Company anticipates that PM Inc.'s share of the
industry's $10 billion initial payment, which it currently estimates would be
approximately $6.6 billion (adjusted downward for initial payments made to
Mississippi, Florida and Texas pursuant to settlements of health care cost
recovery actions), would be charged to expense in the period in which federal
legislation implementing the terms of the proposed Resolution is enacted. In
addition, the Company currently anticipates that implementation of the proposed
Resolution would require a significant charge to expense in the period of
enactment to comply with the proposed Resolution's regulations on advertising,
marketing and production. The initial payment would be funded from a combination
of available cash, commercial paper issuances, bank borrowings and long-term
debt issuances in global markets. The initial payment would have a material
adverse effect on the Company's operating income and cash flows in the quarter
and year in which the proposed Resolution is enacted and on its financial
position. The initial payment would result in higher debt and higher interest
expense, the amounts of which would depend upon the final form of the proposed
Resolution, borrowing requirements and interest rates.
The Company anticipates that PM Inc.'s share of future annual Industry
Payments related to cigarette sales would be charged to expense as the related
sales occur, and would be funded through price increases.
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The Company anticipates that annual surcharges, if any, imposed by the FDA for
failure to meet required reduction levels in underage smoking incidence,
beginning in the fifth year after the proposed Resolution is implemented, would
be charged to expense in the year of assessment or in the year prior thereto if
it is then probable that such assessment will be made.
The Company believes that implementation of the proposed Resolution would
materially adversely affect the volume, operating revenues, cash flows and/or
operating income of the Company in future years. The degree of the adverse
impact would depend, among other things, on the rates of decline in United
States cigarette sales in the premium and discount segments, PM Inc.'s share of
the domestic premium and discount cigarette segments, interest rates and the
timing of principal payments on debt incurred to finance the initial payment due
under the proposed Resolution, and the effect of the proposed Resolution on
cigarette consumption and the regulatory and litigation environment outside the
United States.
In view of the foregoing, the Company may reevaluate its share repurchase
and dividend policies.
TOBACCO-RELATED LITIGATION
See Item 3. LEGAL PROCEEDINGS. below for a discussion of the tobacco-related
litigation pending against PM Inc. and, in some cases, the Company and its
subsidiaries and related entities.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, and the armed
services. Subsidiaries and affiliates of Philip Morris International and their
licensees market cigarettes and other tobacco products worldwide, directly or
through export sales organizations and other entities with which they have
contractual arrangements.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of competition. Promotional
activities include, in certain instances and where permitted by law, allowances,
the distribution of incentive items, price reductions and other discounts. The
tobacco products of the Company's subsidiaries, affiliates and their licensees
are advertised and promoted through various media, although television and radio
advertising of cigarettes is prohibited in the United States and is prohibited
or restricted in many other countries.
PM Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domestic burley and flue-cured leaf tobaccos of various
grades and types each year, primarily at domestic auction. In addition, oriental
tobacco and certain other tobaccos are purchased outside the United States. The
tobacco is then graded, cleaned, stemmed and redried prior to its storage for
aging up to three years. Large quantities of leaf tobacco inventory are
maintained to support cigarette manufacturing requirements. Tobacco is an
agricultural commodity subject to United States government controls, including
the tobacco price support (subject to Congressional review) and production
adjustment programs administered by the United States Department of Agriculture
(the "USDA"), either of which can substantially affect market prices. PM Inc.
and Philip Morris International believe there is an adequate supply of tobacco
in the world markets to satisfy their current production requirements.
FOOD PRODUCTS
Over the past three years, the Company's subsidiaries sold several domestic
and international food businesses. During 1997, Philip Morris International sold
its Brazilian ice cream businesses, Kraft sold North American maple-flavored
syrup businesses and Kraft Foods International sold a Scandinavian sugar
confectionery business. During 1996, Kraft sold its bagel business and Kraft
Foods International sold its margarine businesses in the U.K. and Italy. During
1995, Kraft sold its North American bakery, margarine, specialty oils,
marshmallows, caramels and Kraft Foodservice distribution businesses. Kraft and
Kraft
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Foods International also sold several smaller non-strategic businesses in 1997,
1996 and 1995. The sales of these businesses have not had and are not expected
to have a material effect on the Company's results of operations and have
improved the profit margins of its food operations. During the fourth quarter of
1997, the international food businesses recorded pretax realignment charges of
$630 million, related primarily to the downsizing or closure of manufacturing
and other facilities, as well as the discontinuance of certain low-margin
product lines. Included in the charges were provisions for incremental
postemployment benefits, primarily related to severance.
NORTH AMERICA
Kraft is the largest packaged food company in North America. Kraft's
principal products include cheese and cheese products, processed meat and
poultry products, coffee, ready-to-eat cereals, salad and other dressings,
powdered and ready-to-drink beverages, frozen pizza, packaged and ready-to-eat
desserts and snacks, packaged pasta dinners, lunch combinations, barbecue
sauces, frozen toppings and other cultured dairy and grocery products. Its
principal brands include KRAFT, VELVEETA and CRACKER BARREL cheese and cheese
products; PHILADELPHIA BRAND cream cheese; CHEEZ WHIZ cheese sauce; OSCAR MAYER
luncheon meats, hot dogs, bacon, ham and other meat products; LOUIS RICH
luncheon meats, poultry franks, turkey bacon and other poultry products;
LUNCHABLES lunch combinations; CLAUSSEN pickles; MAXWELL HOUSE, YUBAN and NABOB
coffees; GENERAL FOODS INTERNATIONAL COFFEES flavored coffees; POST ready-to-eat
cereals; MIRACLE WHIP salad dressing; KRAFT spoonable and pourable salad
dressings; KOOL-AID, TANG, CAPRI SUN, CRYSTAL LIGHT and COUNTRY TIME powdered
and ready-to-drink beverages; TOMBSTONE and JACK'S frozen pizzas and DI GIORNO
pastas, sauces, cheeses and frozen pizzas; JELL-O desserts; HANDI-SNACKS snack
combinations and desserts; KRAFT Macaroni & Cheese dinners; KRAFT and BULL'S-EYE
barbecue sauces; COOL WHIP whipped toppings; STOVE TOP stuffing mix; MINUTE
rice; SHAKE 'N BAKE coatings; LIGHT N' LIVELY and BREYERS cultured dairy
products; and TACO BELL grocery products.
INTERNATIONAL
Subsidiaries and affiliates of Kraft Foods International manufacture and
market a wide variety of coffee, confectionery, cheese, grocery and processed
meat products in Europe, with distribution to the Middle East and Africa. In the
Asia/Pacific region, select grocery products are produced in, and other Company
branded products are sourced from, Europe and the United States. In Latin
America, subsidiaries and affiliates of Philip Morris International manufacture
and market a wide variety of food products, including confectionery products,
various powdered soft drinks, and other grocery products sold by Kraft. In 1997,
approximately 80% of operating revenues for the international food businesses
were derived from sales made in Europe. International brands include JACOBS
CAFE, GEVALIA, CARTE NOIRE, JACQUES VABRE, KAFFE HAG, GRAND' MERE, KENCO,
SAIMAZA and SPLENDID coffees; MILKA, SUCHARD, COTE D'OR, MARABOU, TOBLERONE,
FREIA, TERRY'S, DAIM and CALLARD & BOWSER confectionery products; HOLLYWOOD
chewing gum; DAIRYLEA, EL CASERIO and INVERNIZZI cheeses; MIRACOLI pasta dinners
and sauces; VEGEMITE spread; ESTRELLA and MAARUD snacks; and SIMMENTHAL and
NEGRONI meats as well as a variety of products sold by Kraft in the United
States, including PHILADELPHIA BRAND cream cheese. In 1996, Philip Morris
International acquired nearly all of the remaining voting shares of Industrias
de Chocolate Lacta S.A., the leading confectionery company in Brazil.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Kraft's products in North America are generally sold to supermarket chains,
wholesalers, club stores, mass merchandisers, distributors, convenience stores,
individual stores and other retail food outlets. Products are distributed
through distribution centers, satellite warehouses, company-operated and public
cold-storage facilities, depots and other facilities. Selling efforts are
supported by national and regional advertising on television and radio and in
magazines and newspapers, as well as by sales promotions, product displays,
trade incentives, informative material offered to customers and other
promotional
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activities. Subsidiaries and affiliates of Kraft Foods International and Philip
Morris International sell their food products primarily in the same manner and
also engage the services of independent sales offices and agents. Advertising is
tailored by product and country to reach targeted audiences.
Kraft is subject to highly competitive conditions in all aspects of its
business. Competitors include large national and international companies and
numerous local and regional companies. Its food products also compete with
generic products and private-label products of food retailers, wholesalers and
cooperatives. Kraft competes primarily on the basis of product quality, service,
marketing, advertising and price.
Kraft is a major purchaser of milk, cheese, green coffee beans, cocoa, corn,
wheat, poultry, pork, beef, vegetable oil, and sugar and other sweeteners. Kraft
continuously monitors worldwide supply and cost trends of these commodities to
enable it to take appropriate action to obtain ingredients needed for
production.
Kraft purchases all of its milk requirements and a substantial portion of
its cheese requirements from independent sources, principally from cooperatives
and individual producers. The prices for United States milk and other dairy
product purchases are substantially influenced by government programs, as well
as market supply and demand.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products.
A significant cost item in confectionery products is cocoa, which is
purchased on world markets, and the price of which is affected by market supply
and demand and changes in the value of the British pound sterling relative to
certain other currencies.
The purchase price of poultry and meat cuts is the major factor in the cost
of Kraft's processed meat products. Poultry and meat prices are cyclical and are
affected by market supply and demand.
Kraft is also a major user of packaging materials purchased from many
suppliers.
The prices paid for raw materials used in food products generally reflect
external factors such as weather conditions, commodity market activities,
currency fluctuations, and the effects of governmental agricultural programs.
Although the prices of the principal raw materials can be expected to fluctuate
as a result of government actions and/or market forces (which would directly
affect the cost of products and value of inventories), Kraft and Philip Morris
International believe such raw materials to be in adequate supply and generally
available from numerous sources.
REGULATION
Almost all of Kraft's United States food products (and packaging materials
therefor) are subject to regulations administered by the FDA or, with respect to
products containing meat and poultry, the USDA. Among other things, these
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish ingredients and/or manufacturing procedures for certain
standard foods, establish standards of identity for food, determine the safety
of food substances, and establish labeling standards and nutrition labeling
requirements for food products.
In addition, various states regulate the business of Kraft's United States
operating units by licensing dairy plants, enforcing federal and state standards
of identity for food, grading food products, inspecting plants, regulating
certain trade practices in connection with the sale of dairy products and
imposing their own labeling requirements on food products.
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Many of the food commodities on which Kraft's United States businesses rely
are subject to governmental agricultural programs. These programs have
substantial effects on prices and supplies and are subject to Congressional
review.
Almost all of the activities of the Company's food operations outside of the
United States are subject to local and national regulations similar to those
applicable to Kraft's United States businesses and, in some cases, international
regulatory provisions (such as those of the European Community) relating to
labeling, packaging, food content, pricing, marketing and advertising, and
related areas.
BEER
PRODUCTS
Miller's brands include MILLER LITE, MILLER LITE ICE, MILLER GENUINE DRAFT,
MILLER GENUINE DRAFT LIGHT, MILLER BEER and ICEHOUSE in the premium segment; the
MILLER HIGH LIFE FAMILY, including MILLER HIGH LIFE, MILLER HIGH LIFE LIGHT and
MILLER HIGH LIFE ICE, and RED DOG in the near-premium segment; Lowenbrau, brewed
and sold in the United States under license from Lowenbrau Munchen AG in the
above-premium segment; MEISTER BRAU, MILWAUKEE'S BEST and MAGNUM MALT LIQUOR in
the below-premium segment; and SHARP'S non-alcohol brew. Miller's brands in the
specialty segment are LEINENKUGEL, CELIS and SHIPYARD. Miller also owns a
majority interest in Molson USA, LLC, one of the largest beer importers in the
United States, whose brands include MOLSON and FOSTER'S. Other brands in the
import segment include PRESIDENTE and ASAHI.
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract brewing
arrangements) of 43.7 million barrels for 1997 decreased 0.3% from 1996,
reflecting lower export shipments of premium-priced brands, partially offset by
increased domestic shipments. Miller's estimated market share of the U.S. malt
beverage industry (based on shipments) was 21.8% in 1997, the same as in the
prior year. Wholesalers' sales of Miller's products to retailers in 1997
increased slightly from 1996, reflecting higher sales of MILLER LITE, as
Miller's new advertising and promotional campaigns renewed focus on major
brands. Domestic shipments rose 0.8%, while export shipments decreased in 1997,
reflecting a shift toward international licensing and contract brewing
arrangements. International sales of Miller products under such arrangements
more than offset the 1997 decrease in export shipments. Total shipments of
premium-priced brands in 1997 decreased slightly to 81.9% of total shipments,
down from 82.5% in 1996.
The following table sets forth, based on shipments (including imports and
exports), the U.S. industry's sales of beer and brewed non-alcohol beverages, as
estimated by Miller; Miller's unit sales; and Miller's estimated share of
industry sales:
<TABLE>
<CAPTION>
YEARS ENDED MILLER'S
DECEMBER 31 INDUSTRY MILLER SHARE OF INDUSTRY
- --------------------------------------------------- ------------- ------------- -------------------
<S> <C> <C> <C>
(IN THOUSANDS OF BARRELS) (%)
1997............................................... 200,700 43,675 21.8
1996............................................... 200,707 43,799 21.8
1995............................................... 198,754 45,006 22.6
</TABLE>
During 1997, Miller sold its 20% interest in Molson Breweries of Canada, and
a minority ownership interest in Molson USA, LLC. During 1996, Miller initiated
a number of actions intended to restore growth, streamline its organization and
reduce costs, including a workforce reduction.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Beer is distributed primarily through independent wholesalers. The United
States malt beverage industry is highly competitive, with the principal methods
of competition being product quality, price, distribution, marketing and
advertising. Miller engages in a wide variety of advertising and sales promotion
activities. Barley malt, hops, corn grits and water represent the principal
ingredients used in manufacturing Miller's products, and are generally available
in the market. The production process, which includes fermentation and aging
periods, is conducted throughout the year. Containers (bottles, cans and kegs)
for beer are purchased from various suppliers.
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REGULATION
The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic beverages
manufactured for sale in the United States to include the following statement on
containers: "GOVERNMENT WARNING: (1) According to the Surgeon General, women
should not drink alcoholic beverages during pregnancy because of the risk of
birth defects; (2) Consumption of alcoholic beverages impairs your ability to
drive a car or operate machinery and may cause health problems." The statute
empowers the Bureau of Alcohol, Tobacco and Firearms to regulate the size and
format of the warning.
The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller, increases
in excise taxes have had, and could continue to have, an adverse effect on
shipments.
Advertising of alcoholic beverages, including beer, has come under increased
scrutiny by governmental agencies and others. The FTC's Division of Advertising
Practices conducted an investigation of advertising of alcoholic beverages.
Following discussions between representatives of the Beer Institute, of which
Miller is a member, and senior FTC officials, a number of revisions to the Beer
Institute Advertising and Marketing Code were made.
Key changes to the Code include the following: a revised introduction
clarifying that the Code applies to advertising and marketing in cyberspace,
including the Internet; an undertaking that the Beer Institute will make a list
of brewer web sites available to all major Internet service providers so they
can be included in parental control software; and an obligation for brewers to
include additional notices on their web sites reminding users of the legal
purchase age. Consistent with brewers' commitment to marketing their products
only to persons of legal purchase age, the revised Code requires that TV survey
data purchased by brewers reflect the proportion of viewers in the sample survey
who are over legal purchase age and also obligates brewers to review their ad
placements at least every six months to insure the majority of viewers of
brewer-sponsored TV programs are above the legal purchase age.
FINANCIAL SERVICES AND REAL ESTATE
Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions and third-party
financial instruments. During 1997, PMCC sold its wholly-owned subsidiary,
Mission Viejo Company, which was engaged in land planning, development and sales
activities in Southern California and in the Denver, Colorado area. Total assets
of PMCC were $5.9 billion at December 31, 1997, and 1996, reflecting an increase
in net finance assets, offset by the sale of real estate assets.
OTHER MATTERS
CUSTOMERS
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
EMPLOYEES
At December 31, 1997, the Company employed approximately 152,000 people
worldwide.
On February 25, 1998, the Company announced voluntary early retirement and
separation programs for salaried and hourly employees, primarily at PM Inc.'s
manufacturing facilities in Richmond, Virginia and Louisville, Kentucky. It is
estimated that approximately 1,900 employees are likely to be affected by the
programs, which do not apply to the Company's food or beer operations. The
Company estimates that the programs will result in pretax charges in the first
and second quarters of 1998 totalling approximately $290 million.
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TRADEMARKS
Trademarks are of material importance to all three of the Company's consumer
products businesses and are protected by registration or otherwise in the United
States and most other markets where the related products are sold.
ENVIRONMENTAL REGULATION
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations concerning the discharge of materials into the
environment, or otherwise related to environmental protection, including the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and Liability Act,
which imposes joint and several liability on each responsible party (commonly
known as "Superfund"). In 1997, subsidiaries (or former subsidiaries) of the
Company were involved in approximately 225 matters subjecting them to potential
remediation costs under Superfund or otherwise. The Company and its subsidiaries
expect to continue to make capital and other expenditures in connection with
environmental laws and regulations. Although it is not possible to predict
precise levels of environmental-related expenditures, compliance with such laws
and regulations, including the payment of any remediation costs and the making
of such expenditures, has not had and is not expected to have a material adverse
effect on the Company's results of operations, capital expenditures or financial
position.
SHARE REPURCHASE PROGRAM
During 1997, the Company repurchased 18.2 million shares of its Common
Stock. Of these purchases, 16.9 million shares were made pursuant to remaining
authority under the Company's repurchase program, announced in 1994, to purchase
up to $6.0 billion of its Common Stock in the open market. The remaining shares
were repurchased under an $8.0 billion share repurchase program approved by the
Board of Directors in the first quarter of 1997. In view of the uncertainty
surrounding the proposed Resolution discussed above in Item 1, the Company has
suspended its share repurchase program and has not repurchased any shares since
April 1997.
COMMON STOCK SPLIT
In February 1997, the Company declared a three-for-one split of its Common
Stock, effected by a distribution on April 10, 1997, of two shares for each
share held of record at the close of business on March 17, 1997. All share and
per-share data reported in the Company's consolidated financial statements,
incorporated herein by reference to the Company's 1997 Annual Report, have been
restated to reflect this stock split for all periods presented.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The tobacco industry continues to be subject to health concerns relating to
the use of tobacco products and exposure to ETS, legislation, including tax
increases, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations, litigation, and the effects of price
increases related to tobacco litigation settlements and, if implemented, of the
proposed Resolution discussed above. Each of the Company's operating
subsidiaries is subject to intense competition, changes
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in consumer preferences, the effects of changing prices for its raw materials
and local economic conditions. The performance of each of Philip Morris
International and Kraft Foods International is affected by foreign economies and
currency movements. Developments in any of these areas, which are more fully
described elsewhere in Part I hereof and in Management's Discussion and Analysis
of Financial Condition and Results of Operations ("MD&A") on pages 21-35 of the
Company's 1997 Annual Report, each of which is incorporated into this section by
reference, could cause the Company's results to differ materially from results
that have been or may be projected by or on behalf of the Company. The Company
cautions that the foregoing list of important factors is not exclusive. The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of operating revenues, operating profit and identifiable assets
attributable to each of the Company's geographic segments and the amount of
export sales from the United States for each of the last three fiscal years are
set forth in Note 12 to the Company's consolidated financial statements,
incorporated herein by reference to the Company's 1997 Annual Report.
Subsidiaries of the Company export tobacco and tobacco-related products,
coffee products, grocery products, cheese, processed meats and beer. In 1997,
the value of all exports from the United States by these subsidiaries amounted
to approximately $6.7 billion.
ITEM 2. DESCRIPTION OF PROPERTY.
TOBACCO PRODUCTS
PM Inc. owns nine tobacco manufacturing and processing facilities--six in
the Richmond, Virginia, area, two in Louisville, Kentucky, and one in Cabarrus
County, North Carolina. Subsidiaries and affiliates of Philip Morris
International own, lease or have an interest in 52 cigarette or component
manufacturing facilities in 29 countries outside the United States, including
cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands, and in
Berlin, Germany.
FOOD PRODUCTS
The Company's subsidiaries have 54 manufacturing and processing facilities
and 252 distribution centers and depots throughout the United States, as well as
103 foreign manufacturing and processing facilities in 35 countries, and various
distribution and other facilities outside the United States. All significant
plants and properties used for production of food products are owned, although
the majority of the domestic distribution centers and depots are leased.
BEER
Miller owns and operates eight breweries, located in Milwaukee, Wisconsin
(two); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller owns a majority
interest in the Celis Brewery in Austin, Texas, and the Shipyard Brewery in
Portland, Maine. Miller also owns a hops-processing facility in Wisconsin, and
owns or leases warehouses in several locations.
GENERAL
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs. In the fourth quarter of 1993, the Company provided for the
costs of restructuring its worldwide operations. The charge related primarily to
the downsizing or closure of approximately 40 manufacturing and other
facilities. Write-downs of such facilities included in the restructuring charge
were, on a pretax basis, $429 million, of which $141 million,
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$211 million and $77 million related to tobacco, food and beer facilities,
respectively. The 1993 restructuring and its impact on the Company's financial
statements are described in the MD&A, incorporated herein by reference to the
Company's 1997 Annual Report.
During 1997, the Company's international food businesses recorded a pretax
charge of $342 million, related primarily to the downsizing or closure of
manufacturing and other facilities, as well as the discontinuance of certain
low-margin product lines. Facility write-downs included in the charge totaled
$209 million.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings covering a wide range of matters are pending in various
U.S. and foreign jurisdictions against the Company, its subsidiaries, including
PM Inc., and their respective indemnitees. Various types of claims are raised in
these proceedings, including products liability, consumer protection, antitrust,
securities law, tax, patent infringement, employment matters and claims for
contribution.
OVERVIEW OF TOBACCO-RELATED LITIGATION
TYPES AND NUMBER OF CASES
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery cases, including class actions,
brought by state and local governments, unions, federal and state taxpayers,
native American tribes and others seeking reimbursement for Medicaid and/or
other health care expenditures allegedly caused by cigarette smoking. Damages
claimed in some of the smoking and health class actions and health care cost
recovery cases range into the billions of dollars.
In recent years there has been a substantial increase in the number of
smoking and health cases being filed in the United States, a trend that
accelerated in 1997.
As of February 27, 1998, there were approximately 390 smoking and health
cases filed and served on behalf of individual plaintiffs in the United States
against PM Inc. and, in some cases, the Company (excluding approximately 50
cases in Texas that were voluntarily dismissed but which may be refiled under
certain conditions), compared with approximately 375 such cases on December 31,
1997, and 185 such cases on December 31, 1996. Many of the new cases were filed
in Florida and New York. Seventeen of the individual cases involve allegations
of various personal injuries allegedly related to exposure to ETS.
In addition, as of February 27, 1998, there were approximately 50 purported
smoking and health class actions pending in the United States against PM Inc.
and, in some cases, the Company (including six that involve allegations of
various personal injuries related to exposure to ETS), compared with
approximately 50 such cases on December 31, 1997, and 20 such cases on December
31, 1996. Most of these actions purport to constitute statewide class actions
and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the
CASTANO case, reversed a federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products. As of February 27, 1998, there were three purported smoking
and health class actions pending overseas against affiliates and subsidiaries of
the Company, one each in Canada, Brazil and Nigeria.
The number of health care cost recovery actions also increased, with
approximately 105 such cases pending as of February 27, 1998, compared with
approximately 105 such cases on December 31, 1997, and 25 such cases on December
31, 1996.
17
<PAGE>
RECENT VERDICTS
In August 1996, a Florida jury awarded a former smoker and his spouse
$750,000 in a smoking and health case against another United States cigarette
manufacturer (CARTER V. AMERICAN TOBACCO CO., ET AL.), and that manufacturer was
subsequently ordered to pay approximately $1.8 million in attorneys' fees and
costs. Neither PM Inc. nor the Company was a party to that litigation. The
defendant in that action has appealed the verdict. Later that month, a jury
returned a verdict for defendants in a smoking and health case in Indiana
against United States cigarette manufacturers, including PM Inc. (ROGERS V. R.J.
REYNOLDS TOBACCO COMPANY, ET AL.). Plaintiff has filed a motion seeking a new
trial based on the alleged discovery of new evidence. In May and October 1997,
Florida juries also returned verdicts for defendants in smoking and health cases
involving another United States cigarette manufacturer (CONNOR V. R.J. REYNOLDS
TOBACCO COMPANY; KARBIWNYK V. R.J. REYNOLDS TOBACCO COMPANY). In September 1997,
a court in Brazil awarded plaintiffs in a smoking and health case the Brazilian
currency equivalent of $81,000, attorneys' fees (in an amount to be determined
by the court) and a monthly annuity for 35 years equal to two-thirds of the
deceased smoker's last monthly salary (ALVES V. SOUZA CRUZ). Defendant is
appealing the judgment. Neither the Company nor its affiliates were parties to
that action.
THE PROPOSED RESOLUTION AND RECENT SETTLEMENTS
In June 1997, PM Inc. and other companies in the United States tobacco
industry agreed to a proposed Resolution to support federal legislation and
ancillary undertakings that would resolve many of the regulatory and litigation
issues affecting the industry. (See "PROPOSED RESOLUTION OF CERTAIN REGULATORY
AND LITIGATION ISSUES" in Item 1 above.) In furtherance of the proposed
Resolution, PM Inc. and other companies in the United States tobacco industry
settled health care cost recovery actions brought by the States of Mississippi,
Florida and Texas, and a smoking and health class action brought on behalf of
airline flight attendants, all on terms consistent with the proposed Resolution.
These settlements are discussed below.
CURRENTLY PENDING TRIALS
In January 1998, trial began in the health care cost recovery action brought
by State of Minnesota and Blue Cross Blue Shield of Minnesota against PM Inc.,
other domestic tobacco manufacturers, and others, including the Company.
Plaintiffs seek $1.7 billion in compensatory damages, disgorgement of profits,
restitution, treble damages under Minnesota's antitrust statute, punitive
damages, funding of smoking cessation and public education programs, civil
penalties of $25,000 for each separate violation of various consumer protection
statutes, civil penalties of $50,000 for each separate violation of Minnesota's
antitrust statute, attorneys' fees and costs, various forms of non-monetary
relief and such other legal or equitable relief as the court deems just and
equitable. Under Minnesota law, joint and several liability applies. There have
been a number of significant rulings and developments in this case, many of
which have been adverse to defendants. Certain of these rulings and developments
are discussed below under the heading "Health Care Cost Recovery
Litigation--MINNESOTA TRIAL."
Trial in an individual ETS case began in February 1998 (DUNN V. RJR NABISCO
HOLDINGS CORP., ET AL.).
FUTURE TRIAL DATES
The following health care cost recovery actions are currently scheduled for
trial later in 1998: Washington (September), Arizona (October) and Oklahoma
(November). Approximately 25 individual smoking and health cases are currently
scheduled for trial in 1998 against PM Inc. and, in some cases, the Company, one
of which is scheduled to begin in Florida in May 1998, and approximately 15 of
which are scheduled to commence in Florida in June 1998. Trial in a New York
smoking and health class action, previously scheduled to begin in February, has
been delayed and may begin in the spring or summer of 1998 (FROSINA, ET AL. V.
PHILIP MORRIS, INC.). A Florida smoking and health class action, previously
scheduled
18
<PAGE>
for trial in February 1998, has also been delayed (ENGLE, ET AL. V. R.J.
REYNOLDS TOBACCO COMPANY, ET AL.). No new trial date has been set.
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases are based
on various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal Racketeer Influenced and Corrupt
Organization Act ("RICO") and state RICO statutes. Plaintiffs in these actions
seek various forms of relief, including compensatory and punitive damages,
treble/multiple damages and other statutory damages and penalties, creation of
medical monitoring funds, disgorgement of profits, and injunctive and equitable
relief. Defenses raised in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory negligence,
statutes of limitations, and preemption by the Federal Cigarette Labeling and
Advertising Act (the "Labeling Act"). In June 1992, the United States Supreme
Court held that the Labeling Act, as enacted in 1965, does not preempt common
law damage claims, but that the Labeling Act, as amended in 1969, preempts
claims arising after July 1969 against cigarette manufacturers "based on failure
to warn and the neutralization of federally mandated warnings to the extent that
those claims rely on omissions or inclusions in advertising or promotions." The
Court also held that the 1969 Labeling Act does not preempt claims based on
express warranty, fraudulent misrepresentation or conspiracy. The Court further
held that claims for fraudulent concealment were preempted except "insofar as
those claims relied on a duty to disclose...facts through channels of
communication other than advertising or promotion." (The Court did not consider
whether such common law damage claims were valid under state law.) The Court's
decision was announced by a plurality opinion. The effect of the decision on
pending and future cases will be the subject of further proceedings in the lower
federal and state courts. Additional similar litigation could be encouraged if
legislation to eliminate the federal preemption defense, proposed in Congress in
recent years, were enacted. It is not possible to predict whether any such
legislation will be enacted.
In May 1996, the Fifth Circuit Court of Appeals held that a purported class
consisting of all "addicted" smokers nationwide did not meet the standards and
requirements of the federal rules governing class actions (CASTANO, ET AL. V.
THE AMERICAN TOBACCO COMPANY, ET AL.). Since this class decertification, lawyers
for plaintiffs have filed numerous smoking and health class action suits in
various state and federal courts. In general, these cases purport to be brought
on behalf of residents of a particular state or states and raise "addiction"
claims similar to those raised in the CASTANO case and, in some cases, claims of
physical injury as well. As of February 27, 1998, smoking and health class
actions were pending in Alabama, Arkansas, California, the District of Columbia,
Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland,
Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York,
Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, South Dakota,
Tennessee, Texas, Utah, West Virginia and Wisconsin, as well as in Canada,
Brazil and Nigeria. As of February 27, 1998, classes had been certified in five
of these smoking and health class actions, in Florida, Louisiana, Maryland and
New York (2), and class certification had been denied or reversed in three cases
involving PM Inc., in Louisiana, the District of Columbia and Pennsylvania. A
number of these class certification decisions are under appeal. One smoking and
health class action was settled in 1997 as discussed below.
THE Broin SETTLEMENT
The BROIN, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL. class action was
settled in October 1997 by PM Inc. and other companies in the domestic tobacco
industry.
19
<PAGE>
The BROIN class consisted of "all non-smoking flight attendants who are or
have been employed by airlines based in the United States and are suffering from
various diseases and disorders caused by their exposure to second-hand smoke in
airline cabins." Under the settlement, the settling defendants will pay $300
million to establish a foundation to sponsor scientific research with respect to
diseases associated with cigarette smoking. These funds will be paid in three
equal annual installments, with interest. Settling defendants also agreed to pay
attorneys' fees of up to $46 million and costs of $3 million, subject to court
approval. PM Inc.'s share of all the foregoing payments (exclusive of interest)
is approximately $175 million and was charged to expense in the third quarter of
1997. Under the settlement, all defendants (and certain other entities and
persons) are released from liability for the claims asserted in the present
action. Each individual member of the class, however, may later bring an
individual action for diseases and conditions existing on or before January 15,
1997 ("retained claims"), based upon certain legal theories against the settling
defendants, but may only seek compensatory, and not punitive, damages.
The defendants expressly did not admit liability for injury of any member of
the settlement class or that ETS can cause any disease. In any individual
lawsuits brought by members of the settlement class for retained claims, the
settling defendants would assume the burden of proof as to whether ETS can cause
certain conditions, but the plaintiff would retain the burden of proving that
his or her condition was caused by exposure to ETS. The settling defendants have
also agreed not to raise a statute of limitations defense with respect to any
retained claims brought by a member of the settlement class within one year
after final court approval of the settlement. The settlement does not apply to,
nor does it have any effect on, "future" claims brought by members of the
settlement class for any new and unrelated diseases or conditions arising after
January 15, 1997.
Trial court approval of the BROIN settlement was granted in February 1998,
but this approval has been appealed by a number of individuals. No payments with
respect to either the research fund or attorneys' fees will be due until final
appellate court approval of the settlement. The ultimate outcome of the appeals
cannot be predicted.
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, foreign, state and local government
entities, unions, federal and state taxpayers, native American tribes and others
seek reimbursement for Medicaid and/or other health care expenditures allegedly
caused by tobacco products and, in some cases, for future expenditures and
damages as well. Certain of these cases purport to be brought on behalf of a
class of plaintiffs, and in some cases, the class has been certified by the
court. In one health care cost recovery case, private citizens seek recovery of
alleged tobacco-related health care expenditures incurred by the federal
Medicare program. In one purported class action, Blue Cross/Blue Shield
subscribers in the United States are seeking reimbursement of allegedly
increased medical insurance premiums caused by tobacco products. In the native
American cases, claims are also asserted for alleged lost productivity of tribal
government employees. Other relief sought by some but not all plaintiffs
includes punitive damages, treble/multiple damages and other statutory damages
and penalties, injunctions prohibiting alleged marketing and sales to minors,
disclosure of research, disgorgement of profits, funding of anti-smoking
programs, disclosure of nicotine yields, and payment of attorney and expert
witness fees.
The claims asserted in these health care cost recovery actions vary. In most
cases, plaintiffs assert the equitable claim that the tobacco industry was
"unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking, and seek reimbursement of those costs. Other claims
made by some but not all plaintiffs include the equitable claim of indemnity,
common law claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under federal and state
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under federal and state RICO statutes.
20
<PAGE>
Defenses raised include failure to state a valid claim, lack of benefit,
adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain
equitable relief because they participated in, and benefited from, the sale of
cigarettes), lack of antitrust injury, federal preemption, lack of proximate
cause and statute of limitations. In addition, defendants argue that they should
be entitled to "set-off" any alleged damages to the extent the plaintiff
benefits economically from the sale of cigarettes through the receipt of excise
taxes or otherwise. Defendants also argue that these cases are improper because
plaintiffs must proceed under principles of subrogation and assignment. Under
traditional theories of recovery, a payor of medical costs (such as an insurer
or a state) can seek recovery of health care costs from a third party solely by
"standing in the shoes" of the injured party. Defendants argue that plaintiffs
should be required to bring an action on behalf of each individual health care
recipient and should be subject to all defenses available against the injured
party. In certain of these cases, defendants have also challenged the ability of
the plaintiffs to use contingency fee counsel to prosecute these actions.
Further, certain cigarette companies, including PM Inc., have filed declaratory
judgment actions in a number of states seeking to block the state's health care
cost recovery action and/or to prevent the state from hiring contingency fee
counsel.
As of February 27, 1998, there were approximately 105 health care cost
recovery cases pending against PM Inc. and, in some cases, the Company,
including cases filed by states, through their attorneys general and/or other
state agencies, in Alaska, Arizona, Arkansas, California, Colorado, Connecticut,
Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine,
Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New
Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont,
Washington, West Virginia and Wisconsin. In addition, approximately 45 of the
pending health care cost recovery actions were filed by unions, eight by city
and county governments, six by federal and state taxpayers and four by native
American tribes. Health care cost recovery actions have also been brought by the
Republic of the Marshall Islands and the Commonwealth of Puerto Rico. Three
health care cost recovery cases were settled recently as discussed below.
THE MISSISSIPPI, FLORIDA AND TEXAS SETTLEMENTS
In June 1997, PM Inc. and other companies in the United States tobacco
industry agreed to a proposed Resolution to support federal legislation and
ancillary undertakings that would resolve much of the litigation facing the
United States tobacco industry. (See "PROPOSED RESOLUTION OF CERTAIN REGULATORY
AND LITIGATION ISSUES" in Item 1 above.) In furtherance of the proposed
Resolution, PM Inc. and other companies in the United States tobacco industry
settled health care cost recovery actions brought by the States of Mississippi,
Florida and Texas on terms consistent with the proposed Resolution. The
Mississippi action was settled in July 1997, Florida was settled in September
1997 and Texas was settled in January 1998. Copies of the settlement agreements
are filed as Exhibits to this Form 10-K, and the discussion herein is qualified
by reference thereto.
Under the Mississippi settlement agreement, the settling defendants paid
$170 million, representing Mississippi's estimated share of the $10 billion
initial payment under the proposed Resolution, and paid an additional $15
million to reimburse Mississippi and its private counsel for out-of-pocket
costs. The settling defendants also paid approximately $62 million to support a
pilot program aimed at reducing the use of tobacco products by persons under the
age of eighteen. PM Inc.'s share of all the foregoing payments, approximately
$153 million, was charged to expense in the third quarter of 1997.
Beginning December 31, 1998, the settling defendants will pay Mississippi
amounts based on its anticipated share of the annual industry payments under the
proposed Resolution. These payments, which (except for the payment with respect
to 1998) will be adjusted as provided in the proposed Resolution, are estimated
to be $68 million with respect to 1998 and will increase annually thereafter to
an estimated $136 million by 2003, continuing at that level thereafter, and will
be allocated among the settling defendants in accordance with their relative
unit volume of domestic tobacco product sales.
21
<PAGE>
Under the Florida settlement agreement, the settling defendants paid $550
million, representing Florida's estimated share of the $10 billion initial
payment under the proposed Resolution, and also reimbursed Florida's expenses
and those of its private counsel. The settling defendants also paid $200 million
to support a pilot program by Florida aimed at reducing the use of tobacco
products by persons under the age of eighteen. PM Inc.'s share of all the
foregoing payments, approximately $484 million, was charged to expense in the
third quarter of 1997.
On September 15, 1998, and annually thereafter on December 31, the settling
defendants will make ongoing payments to Florida in the following estimated
amounts--1998: $220 million; 1999: $247.5 million; 2000: $275 million; 2001:
$357.5 million; 2002: $357.5 million; and each year thereafter: $440 million.
These amounts are projected to approximate that portion of the annual industry
payments under the proposed Resolution that is contemplated to be paid to
Florida. These payments (except for the payment with respect to 1998) will be
adjusted as provided in the proposed Resolution and will be allocated among the
settling defendants in accordance with their relative unit volume of domestic
tobacco product sales.
Under the Texas settlement agreement, the settling defendants agreed to pay
Texas an up-front payment of $725 million in 1998, representing Texas's
estimated share of the $10 billion initial payment under the proposed
Resolution, and agreed to reimburse Texas and its private counsel for expenses
in the estimated amount of $45 million. The settling defendants also agreed to
pay Texas $264 million to support a pilot program aimed at reducing the use of
tobacco by persons under the age of eighteen. PM Inc.'s share of all of the
foregoing payments, approximately $645 million, was charged to expense in the
fourth quarter of 1997.
Beginning in November and December 1998, and on December 31 of each
subsequent year, the settling defendants will pay Texas 7.25% of the annual
industry payments contemplated to be paid to the states under the proposed
Resolution. These payments, which (except for the payments with respect to 1998)
will be adjusted as provided in the proposed Resolution, will be in the
following estimated amounts--1998: $290 million; 1999: $326 million; 2000: $363
million; 2001: $471 million; 2002: $471 million; and 2003 and each year
thereafter: $580 million. These payments will be allocated among the settling
defendants in accordance with their relative unit volume of domestic tobacco
product sales.
Several county hospitals, local governments and others in Texas have filed
motions challenging the applicability of the Texas settlement agreement to the
health care cost recovery claims of such entities. The effect and the ultimate
outcome of these challenges cannot be predicted.
The settling defendants have also agreed to pay reasonable attorneys' fees
of private contingency fee counsel of Mississippi, Florida and Texas as set by a
panel of independent arbitrators. Each of these payments would be allocated
among the settling defendants in accordance with their relative unit volume of
domestic tobacco product sales and will be subject to an aggregate national
annual cap of $500 million. Certain of Florida's private contingency fee counsel
have challenged the attorneys' fees provision set forth in the Florida
settlement agreement, arguing that the settlement agreement has no effect on
their rights under their contingency fee agreement with Florida. In November
1997, the court ordered all parties to comply with the provisions for obtaining
attorneys' fees, as set forth in the settlement agreement. Certain contingency
fee counsel are appealing this ruling. One of these contingency fee counsel has
filed suit against PM Inc. and others alleging, among other things, tortious
interference with such counsel's contingency fee agreement with the State.
If legislation implementing the proposed Resolution or its substantial
equivalent is enacted, the settlements will remain in place, but the terms of
the federal legislation will supersede the settlement agreements (except for the
terms of the pilot programs and payments thereunder, the initial payments and
the annual payments with respect to 1998), and the other payments described
above will be adjusted so that Mississippi, Florida and Texas will receive the
same payments as they would receive under such legislation.
22
<PAGE>
If the settling defendants enter into any future pre-verdict settlement
agreement with a non-federal governmental plaintiff on more favorable terms
(after due consideration of relevant differences in population or other
appropriate factors), Mississippi, Florida and Texas will obtain treatment at
least as relatively favorable as such governmental plaintiff.
If federal legislation implementing the proposed Resolution or its
substantial equivalent is enacted, the parties contemplate that Mississippi,
Florida and Texas and any other state that has made an exceptional contribution
to secure resolution of these matters may apply to a panel of independent
arbitrators for reasonable compensation for its efforts in securing the proposed
Resolution. The settling defendants have agreed not to oppose applications for
$75 million by Mississippi, $250 million by Florida and $329.5 million by Texas,
subject to a nationwide annual cap for all such payments of $100 million.
Finally, the settlement agreements provide that they are not an admission or
concession or evidence of any liability or wrongdoing on the part of any party,
and were entered into by the settling defendants solely to avoid the further
expense, inconvenience, burden and uncertainty of litigation.
MINNESOTA TRIAL
Trial in the Minnesota health care cost recovery action began in January
1998. Plaintiffs seek $1.7 billion in compensatory damages, disgorgement of
profits, restitution, treble damages under Minnesota's antitrust statute,
punitive damages, funding of smoking cessation and public education programs,
civil penalties of $25,000 for each separate violation of various consumer
protection statutes, civil penalties of $50,000 for each separate violation of
Minnesota's antitrust statute, attorneys' fees and costs, various forms of
non-monetary relief and such other relief as the court deems just and equitable.
Under Minnesota law, joint and several liability applies.
Prior to trial, in December 1997, the court imposed sanctions on certain
companies, other than PM Inc. and the Company, for alleged failure to produce
certain documents and to answer discovery questions properly. Sanctions included
fines and revocation of the privileged status of certain documents. The court
further stated that it would impose one or more of the following sanctions, or
any other sanction, that the court deems just in light of any prejudice to
plaintiffs' case as a result of the alleged discovery abuses: plaintiffs will be
permitted to present to the jury the failure to provide discovery and the court
will instruct the jury that it may draw a negative inference from such failure;
the court will order that plaintiffs' allegations against these companies that
rest upon the information ordered produced (smoking and health research and
marketing/advertising) be deemed established; and the court will enter default
judgment against these companies.
In January 1998, the court denied defendants' motion to strike the jury
panel. Defendants had argued that the process of selecting the jury was unfair
and had led to the selection of a jury that is inherently biased against
defendants.
In January and February 1998, the court issued a number of rulings on
summary judgment motions, denying defendants' motion based on statute of
limitations and federal preemption and plaintiffs' motion based on non-statutory
claims (special duty, unjust enrichment, and performance of a duty of another)
and antitrust claims. The court also denied defendants' motion seeking to
prohibit plaintiffs from recovering the federal government's share of Medicaid
expenses and denied a motion to prevent plaintiffs from seeking disgorgement of
profits under certain counts. The court also denied defendants' motion for
partial summary judgment based on plaintiffs' inability to prove causation or
damages and based on defendants' right to petition (I.E., lobby) the government.
In February 1998, the Special Master appointed by the court to review
defendants' assertions of privilege found that over 30,000 documents should be
produced on the grounds that they were either not privileged or, if privileged,
were discoverable under the crime-fraud exception to the privilege. The finding
is preliminary and is on appeal to the trial court. In an earlier ruling on the
discoverability of certain
23
<PAGE>
documents as to which defendants asserted a privilege, the trial court adopted a
report of the Special Master recommending release of over 800 documents as
either not being privileged or, if privileged, subject to the crime-fraud
exception.
The court has also issued the following rulings, among others: defendants
cannot argue that plaintiff Blue Cross/Blue Shield passed any increased health
care costs on to smokers through differential premiums, but defendants can
introduce evidence of differential premiums to the extent it is relevant in
apportioning fault and establishing the defense of unclean hands; defendants
cannot raise affirmative defenses based on conduct of individual smokers, but
can introduce evidence relating to individual smokers to the extent that
individual conduct is relevant to the causal chain between defendants' conduct
and plaintiffs' injury; defendants cannot argue that the State's statistical
model is flawed because it does not take into account the reduction in health
care costs occasioned by the premature deaths of smokers; defendants cannot
introduce certain research results; defendants can present evidence of the
State's distribution of cigarettes and failure to enforce youth smoking laws;
defendants can present evidence regarding the reasonableness of smoking-related
actions taken by the Minnesota legislature; plaintiffs may present evidence of
defendants' alleged discovery abuses; and plaintiffs can show the jury the
videotaped deposition of a former employee of PM Inc., who asserted his Fifth
Amendment right not to testify.
------------------------
Tax assessments alleging the nonpayment of taxes in Italy (value-added taxes
for the years 1988 to 1995 and income taxes for the years 1987 to 1995) have
been served upon certain affiliates of the Company. The aggregate amount of
unpaid taxes assessed to date is alleged to be the Italian lira equivalent of
$2.5 billion. In addition, the Italian lira equivalent of $6.0 billion in
interest and penalties has been assessed. The Company anticipates that
value-added and income tax assessments may also be received in respect of 1996
and 1997. In September 1997, in the first of several appeals filed by affiliates
of the Company, the Italian administrative tax court in Milan overturned one of
the assessments for value-added taxes. A hearing on a second appeal was held in
October 1997, and hearings on additional appeals were held in December 1997 and
January 1998. Additional hearings are anticipated over the course of 1998. In a
separate proceeding in Naples, in October 1997, a court dismissed charges of
criminal association against certain present and former officers and directors
of affiliates of the Company, but permitted charges of tax evasion to remain
pending. In February 1998, the tax evasion charges were dismissed by the
criminal court in Naples following a determination that jurisdiction was not
proper, and the case file was transmitted to a public prosecutor in Milan where
a preliminary investigations judge will make a new determination as to whether
there should be a trial on these charges. The Company, its affiliates and the
officers and directors who are subject to the proceedings believe they have
complied with applicable Italian tax laws and are vigorously contesting the
pending tax assessments and pending proceedings.
------------------------
On March 5, 1998, Kraft received a "Notice of Violation and Proposed
Settlement" from the San Joaquin Valley Unified Air Pollution Control District
(the "Pollution Control District") alleging that a subsidiary of Kraft had
violated the terms of its air emissions permit. The Pollution Control District
is seeking a civil penalty of $281,574 in settlement of this matter.
------------------------
It is not possible to predict the outcome of the litigation pending against
the Company and its subsidiaries. Litigation is subject to many uncertainties,
and it is possible that some of these actions could be decided unfavorably. An
unfavorable outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. There have also been a number of
adverse legislative, regulatory, political and other developments concerning
cigarette smoking and the tobacco industry that have received widespread media
attention, including a decision by a federal district court on a motion for
summary judgment not to preclude the FDA from asserting jurisdiction over
cigarettes as "drugs" or
24
<PAGE>
"medical devices," which decision is now under appeal. These developments, as
well as the widespread media attention given to the proposed Resolution
discussed in Item 1 above and the settlements of the Mississippi, Florida and
Texas health care cost recovery actions and the BROIN class action, may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. It is
possible that the Company's results of operations or cash flows in a particular
quarterly or annual period or its financial position could be materially
affected by an unfavorable outcome of certain pending litigation or by the
proposed Resolution discussed in Item 1 above or by settlement, if any, of
certain pending cases. However, implementation of the proposed Resolution should
resolve the most significant tobacco litigation against the Company and its
subsidiaries. Furthermore, the Company and each of its subsidiaries named as a
defendant believe, and each has been so advised by counsel handling the
respective cases, that it has a number of valid defenses to all litigation
pending against it. Except as described in Item 1 above, under the heading
"PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES--EFFECTS ON
LITIGATION," all such cases are, and will continue to be, vigorously defended.
Reference is made to Note 15, incorporated herein by reference to the
Company's 1997 Annual Report, for a description of certain pending legal
proceedings, and Exhibit 99 to this Form 10-K for a list of pending smoking and
health class actions, health care cost recovery actions, and certain other
actions, and for a description of certain developments in such proceedings.
Copies of Note 15 and Exhibit 99 are available upon written request to the
Corporate Secretary, Philip Morris Companies Inc., 120 Park Avenue, New York, NY
10017.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
25
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EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of March 1, 1998:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
<S> <C> <C>
Geoffrey C. Bible.................................... Chairman of the Board and Chief Executive Officer 60
John D. Bowlin....................................... President and Chief Executive Officer of Kraft Foods
International, Inc. 47
Murray H. Bring...................................... Vice Chairman, External Affairs, and General Counsel 63
Bruce S. Brown....................................... Vice President, Taxes 58
Louis C. Camilleri................................... Senior Vice President and Chief Financial Officer 43
Siw de Gysser........................................ Vice President, Corporate Planning 54
Nancy J. De Lisi..................................... Vice President and Treasurer 47
Robert A. Eckert..................................... President and Chief Executive Officer of Kraft Foods,
Inc. 43
Andreas Gembler...................................... President and Chief Executive Officer, Philip Morris
International Inc. 54
Marc S. Goldberg..................................... Senior Vice President, Worldwide Operations and
Technology 54
G. Penn Holsenbeck................................... Vice President, Associate General Counsel and
Corporate Secretary 51
John N. MacDonough................................... Chairman and Chief Executive Officer of Miller
Brewing Company 54
Steven C. Parrish.................................... Senior Vice President, Corporate Affairs 47
Timothy A. Sompolski................................. Senior Vice President, Human Resources and
Administration 45
Michael E. Szymanczyk................................ President and Chief Executive Officer of Philip
Morris Incorporated 49
Frank T. Toscano..................................... Vice President and Controller 46
William H. Webb...................................... Chief Operating Officer 58
</TABLE>
All of the above-mentioned officers, with the exception of Mr. Holsenbeck,
have been employed by the Company in various capacities during the past five
years. Mr. Holsenbeck was elected to his current position with the Company in
January 1995. Previously, Mr. Holsenbeck held various positions with Bethlehem
Steel Corporation, including Secretary and Deputy General Counsel from 1992 to
January 1995.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information called for by this Item is hereby incorporated by reference
to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 61 of
the Company's 1997 Annual Report and made a part hereof.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item is hereby incorporated by reference
to the information with respect to 1993-1997 appearing under the caption
"Selected Financial Data" on pages 36 and 37 of the Company's 1997 Annual Report
and made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 21-35 of the Company's 1997 Annual
Report and made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by this Item is hereby incorporated by reference
to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on
pages 34 and 35 of the Company's 1997 Annual Report and made a part hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is hereby incorporated by reference
to the Company's 1997 Annual Report as set forth under the caption "Quarterly
Financial Data (Unaudited)" on page 61 and in the Index to Consolidated
Financial Statements and Schedules (see Item 14) and made a part hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except for the information relating to the executive officers of the Company
set forth in Part I of this Report, the information called for by Items 10-13 is
hereby incorporated by reference to the Company's definitive proxy statement for
use in connection with its annual meeting of stockholders to be held on April
30, 1998, and made a part hereof.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements and Schedules
<TABLE>
<CAPTION>
REFERENCE
--------------------------------
<S> <C> <C>
FORM 10-K 1997 ANNUAL
ANNUAL REPORT REPORT
PAGE PAGE
----------------- -------------
Data incorporated by reference to the Company's 1997
Annual Report:
Consolidated Balance Sheets at December 31, 1997 and 1996.... -- 38-39
Consolidated Statements of Earnings for the years ended
December 31, 1997, 1996 and 1995........................... -- 40
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995..................... -- 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995........................... -- 40-41
Notes to Consolidated Financial Statements................... -- 43-61
Report of Independent Accountants............................ -- 62
Data submitted herewith:
Report of Independent Accountants............................ S-1 --
Financial Statement Schedule--Valuation and Qualifying
Accounts................................................... S-2 --
</TABLE>
Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed during
the last quarter of the period for which this Report is filed. Subsequent to the
last quarter of the period for which this Report is filed, the Company filed
Current Reports on Form 8-K dated January 16, 1998, and January 28, 1998, and a
Form 8-K/A dated February 17, 1998.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.16 are management contracts, compensatory plans or arrangements):
<TABLE>
<S> <C>
3.1. Restated Articles of Incorporation of the Company. (1)
3.2. By-Laws, as amended, of the Company.
4.1. Indenture dated as of August 1, 1990, between the Company and The Chase Manhattan
Bank (formerly known as Chemical Bank), Trustee. (2)
4.2. First Supplemental Indenture dated as of February 1, 1991, to Indenture dated as of
August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known
as Chemical Bank), Trustee. (3)
4.3. Second Supplemental Indenture dated as of January 21, 1992, to Indenture dated as of
August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known
as Chemical Bank), Trustee. (4)
4.4. 5-Year Revolving Credit Agreement dated as of October 14, 1997, among the Company,
and the Initial Lenders named therein and Citibank, N.A., and The Chase Manhattan
Bank, as Administrative Agents, and Credit Suisse First Boston, as Syndication
Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent. (5)
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
10.1. Financial Counseling Program.
10.2. Philip Morris Benefit Equalization Plan, as amended. (6)
10.3. Form of Employee Grantor Trust Enrollment Agreement. (7)
10.4. Automobile Policy.
10.5. Agreement, dated October 12, 1987, between the Company and Murray H. Bring,
as amended. (8)
10.6. Agreement, dated November 1, 1989, between the Company and Murray H. Bring. (9)
10.7. Form of Employment Agreement between the Company and its executive officers. (9)
10.8. Supplemental Management Employees' Retirement Plan of the Company, as amended.
10.9. The Philip Morris 1992 Incentive Compensation and Stock Option Plan.
10.10. 1992 Compensation Plan for Non-Employee Directors, as amended. (10)
10.11. Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996. (7)
10.12. The Philip Morris 1987 Long Term Incentive Plan.
10.13. Form of Executive Master Trust between the Company, The Chase Manhattan Bank
(formerly known as Chemical Bank) and Handy Associates. (9)
10.14. 1997 Performance Incentive Plan. (11)
10.15. Philip Morris Long-Term Disability Benefit Equalization Plan, as amended.
10.16. Philip Morris Survivor Income Benefit Equalization Plan, as amended.
10.17. Memorandum of Understanding related to proposed resolution of certain U.S.
litigation and regulation issues. (12)
10.18. Comprehensive Settlement Agreement and Release dated October 17, 1997, related to
settlement of Mississippi health care cost recovery action.
10.19. Settlement Agreement dated August 25, 1997, related to settlement of Florida health
care cost recovery action. (13)
10.20. Comprehensive Settlement Agreement and Release dated January 16, 1998, related to
settlement of Texas health care cost recovery action. (14)
12. Statements re computation of ratios. (15)
13. Pages 21-62 of the Company's 1997 Annual Report, but only to the extent set forth in
Items 1-3, 5-7, 7A, 8 and 14 hereof. With the exception of the aforementioned
information incorporated by reference in this Annual Report on Form 10-K, the
Company's 1997 Annual Report is not to be deemed "filed" as part of this Report.
21. Subsidiaries of the Company.
23. Consent of independent accountants.
24. Powers of attorney.
99. Certain Pending Litigation Matters and Recent Developments.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
29
<PAGE>
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-36450) dated August 22, 1990.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-39059) dated February 21, 1991.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-45210) dated January 22, 1992.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(11) Incorporated by reference to the Company's proxy statement dated March 10,
1997.
(12) Incorporated by reference to the Company's Current Report on Form 8-K dated
June 20, 1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 25, 1997.
(14) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 16, 1998.
(15) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 28, 1998, as amended by Form 8-K/A dated February 17, 1998.
30
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
<TABLE>
<S> <C> <C>
PHILIP MORRIS COMPANIES INC.
By: /s/ GEOFFREY C. BIBLE
-----------------------------------------
(Geoffrey C. Bible
Chairman of the Board and
Chief Executive Officer)
Date: March 5, 1998
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------- --------------
/s/ GEOFFREY C. BIBLE Director, Chairman of the
- ------------------------------------- Board and Chief March 5, 1998
(Geoffrey C. Bible) Executive Officer
/s/ LOUIS C. CAMILLERI
- ------------------------------------- Senior Vice President and March 5, 1998
(Louis C. Camilleri) Chief Financial Officer
/s/ FRANK T. TOSCANO
- ------------------------------------- Vice President and March 5, 1998
(Frank T. Toscano) Controller
* ELIZABETH E. BAILEY, MURRAY H.
BRING, HAROLD BROWN,
WILLIAM H. DONALDSON, JANE
EVANS, ROBERT E. R. HUNTLEY,
RUPERT MURDOCH, JOHN D.
NICHOLS, LUCIO A. NOTO,
RICHARD D. PARSONS,
ROGER S. PENSKE, JOHN S.
REED, CARLOS SLIM HELU,
STEPHEN M. WOLF, Directors
*BY: /S/ LOUIS C. CAMILLERI
- -------------------------------------
(Louis C. Camilleri
Attorney-in-fact) March 5, 1998
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on our audits of the consolidated financial statements of Philip
Morris Companies Inc. has been incorporated by reference in this Form 10-K from
the 1997 annual report to stockholders of Philip Morris Companies Inc. and
appears on page 62 therein. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in the index in Item 14(a) on page 28 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/S/ COOPERS & LYBRAND L.L.P.
New York, New York
January 26, 1998
S-1
<PAGE>
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
COL. C
----------------------------
COL. B ADDITIONS COL. E
----------- ---------------------------- -------------
COL. A BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE AT
- ---------------------------------------------------- BEGINNING COSTS AND OTHER ------------- END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------------------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(A) (B)
1997:
CONSUMER PRODUCTS:
Allowance for discounts........................... $ 5 $ 534 $ -- $ 531 $ 8
Allowance for doubtful accounts................... 167 35 (13) 32 157
Allowance for returned goods...................... 5 66 -- 65 6
----- ----- --- ----- -----
$ 177 $ 635 $ (13) $ 628 $ 171
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
Allowance for losses.............................. $ 101 $ -- $ -- $ -- $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
1996:
CONSUMER PRODUCTS:
Allowance for discounts........................... $ 12 $ 492 $ -- $ 499 $ 5
Allowance for doubtful accounts................... 163 27 16 39 167
Allowance for returned goods...................... 3 64 -- 62 5
----- ----- --- ----- -----
$ 178 $ 583 $ 16 $ 600 $ 177
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
Allowance for losses.............................. $ 101 $ -- $ -- $ -- $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
1995:
CONSUMER PRODUCTS:
Allowance for discounts........................... $ 15 $ 551 $ -- $ 554 $ 12
Allowance for doubtful accounts................... 168 35 (12) 28 163
Allowance for returned goods...................... 4 40 -- 41 3
----- ----- --- ----- -----
$ 187 $ 626 $ (12) $ 623 $ 178
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
Allowance for losses.............................. $ 104 $ -- $ -- $ 3 $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
</TABLE>
- ------------------------
Notes:
(a) Related to divestitures, acquisitions and currency translation.
(b) Represents charges for which allowances were created.
S-2
<PAGE>
Exhibit 3.2
BY-LAWS
of
PHILIP MORRIS COMPANIES INC.
ARTICLE I
Meetings of Stockholders
Section 1. Annual Meetings. - The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting, and any postponement or adjournment thereof,
shall be held on such date and at such time as the Board of Directors may in its
discretion determine.
Section 2. Special Meetings. - Unless otherwise provided by law, special
meetings of the stockholders may be called by the chairman of the Board of
Directors, or in the chairman's absence, the deputy chairman of the Board of
Directors (if any), the vice chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) or, in the
absence of all of the foregoing, an executive vice president or by order of the
Board of Directors, whenever deemed necessary.
Section 3. Place of Meetings. - All meetings of the stockholders shall be
held at such place in the Commonwealth of Virginia as from time to time may be
fixed by the Board of Directors.
Section 4. Notice of Meetings. - Notice, stating the place, day and hour
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting (except as a different time is specified herein
or by law), to each stockholder of record having voting power in respect of the
business to be transacted thereat.
Notice of a stockholders' meeting to act on an amendment of the Articles
of Incorporation, a plan of merger or share exchange, a proposed sale of all, or
substantially all of the Corporation's assets, otherwise than in the usual and
regular course of business, or the dissolution of the Corporation shall be given
not less than twenty-five nor more than sixty days before the date of the
meeting and shall be accompanied, as appropriate, by a copy of the proposed
amendment, plan of merger or share exchange or sale agreement.
February 25, 1998
-1-
<PAGE>
Notwithstanding the foregoing, a written waiver of notice signed by the
person or persons entitled to such notice, either before or after the time
stated therein, shall be equivalent to the giving of such notice. A stockholder
who attends a meeting shall be deemed to have (i) waived objection to lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he or she objects to holding the meeting or transacting business at the
meeting, and (ii) waived objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless he or she objects to considering the matter when it is presented.
Section 5. Quorum. - At all meetings of the stockholders, unless a greater
number or voting by classes is required by law, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the vote
of a greater number or voting by classes is required by law or the Articles of
Incorporation, and except that in elections of directors those receiving the
greatest number of votes shall be deemed elected even though not receiving a
majority. Less than a quorum may adjourn.
Section 6. Organization and Order of Business. - At all meetings of the
stockholders, the chairman of the Board of Directors or, in the chairman's
absence, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if one shall have
been elected by the Board of Directors) or, in the absence of all of the
foregoing, the most senior executive vice president, shall act as chairman. In
the absence of all of the foregoing officers or, if present, with their consent,
a majority of the shares entitled to vote at such meeting, may appoint any
person to act as chairman. The secretary of the Corporation or, in the
secretary's absence, an assistant secretary, shall act as secretary at all
meetings of the stockholders. In the event that neither the secretary nor any
assistant secretary is present, the chairman may appoint any person to act as
secretary of the meeting.
The chairman shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to vote at such meeting and who complies with
the notice
-2-
<PAGE>
procedures set forth in this Section 6. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the secretary of the Corporation. To be timely, a stockholder's notice must be
given, either by personal delivery or by United States certified mail, postage
prepaid, and received at the principal executive offices of the Corporation (i)
not less than 120 days nor more than 150 days before the first anniversary of
the date of the Corporation's proxy statement in connection with the last annual
meeting of stockholders or (ii) if no annual meeting was held in the previous
year or the date of the applicable annual meeting has been changed by more than
30 days from the date contemplated at the time of the previous year's proxy
statement, not less than 60 days before the date of the applicable annual
meeting. A stockholder's notice to the secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting,
including the complete text of any resolutions to be presented at the annual
meeting, and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's stock transfer books,
of such stockholder proposing such business, (c) a representation that such
stockholder is a stockholder of record and intends to appear in person or by
proxy at such meeting to bring the business before the meeting specified in the
notice, (d) the class and number of shares of stock of the Corporation
beneficially owned by the stockholder and (e) any material interest of the
stockholder in such business. Notwithstanding anything in the By-Laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 6. The chairman of an
annual meeting shall, if the facts warrant, determine that the business was not
brought before the meeting in accordance with the procedures prescribed by this
Section 6. If the chairman should so determine, he or she shall so declare to
the meeting and the business not properly brought before the meeting shall not
be transacted. Notwithstanding the foregoing provisions of this Section 6, a
stockholder seeking to have a proposal included in the Corporation's proxy
statement shall comply with the requirements of Regulation 14A under the
Securities Exchange Act of 1934, as amended (including, but not limited to, Rule
14a-8 or its successor provision). The secretary of the Corporation shall
deliver each such stockholder's notice that has been timely received to the
Board of Directors or a committee designated by the Board of Directors for
review.
Section 7. Voting. - A stockholder may vote his or her shares in person or
by proxy. Any proxy shall be delivered to the secretary of the meeting at or
prior to the time designated by the chairman or in the order of business for so
delivering such proxies. No proxy shall be valid after eleven months from its
date, unless otherwise provided in the proxy. Each holder of record of stock of
any class shall, as to all matters in respect of which stock of such class has
voting power, be entitled to such vote as is provided in the Articles of
Incorporation for each share of stock of
-3-
<PAGE>
such class standing in the holders's name on the books of the Corporation.
Unless required by statute or determined by the chairman to be advisable, the
vote on any question need not be by ballot. On a vote by ballot, each ballot
shall be signed by the stockholder voting or by such stockholder's proxy, if
there be such proxy.
Section 8. Written Authorization. - A stockholder or a stockholder's duly
authorized attorney-in-fact may execute a writing authorizing another person or
persons to act for him or her as proxy. Execution may be accomplished by the
stockholder or such stockholder's duly authorized attorney-in-fact or authorized
officer, director, employee or agent signing such writing or causing such
stockholder's signature to be affixed to such writing by any reasonable means
including, but not limited to, by facsimile signature.
Section 9. Electronic Authorization. - The secretary or any vice president
may approve procedures to enable a stockholder or a stockholder's duly
authorized attorney-in-fact to authorize another person or persons to act for
him or her as proxy by transmitting or authorizing the transmission of a
telegram, cablegram, internet transmission, telephone transmission or other
means of electronic transmission to the person who will be the holder of the
proxy or to a proxy solicitation firm, proxy support service organization or
like agent duly authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such transmission must either set
forth or be submitted with information from which the inspectors of election can
determine that the transmission was authorized by the stockholder or the
stockholder's duly authorized attorney-in-fact. If it is determined that such
transmissions are valid, the inspectors shall specify the information upon which
they relied. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section 9
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
Section 10. Inspectors. - At every meeting of the stockholders for
election of directors, the proxies shall be received and taken in charge, all
ballots shall be received and counted and all questions concerning the
qualifications of voters, the validity of proxies, and the acceptance or
rejection of votes shall be decided, by two or more inspectors. Such inspectors
shall be appointed by the chairman of the meeting. They shall be sworn
faithfully to perform their duties and shall in writing certify to the returns.
No candidate for election as director shall be appointed or act as inspector.
-4-
<PAGE>
ARTICLE II
Board of Directors
Section 1. General Powers. - The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors.
Section 2. Number. - The number of directors shall be fifteen (15).
Section 3. Term of Office and Qualification. - Each director shall serve
for the term for which he or she shall have been elected and until a successor
shall have been duly elected.
Section 4. Nomination and Election of Directors. - At each annual meeting
of stockholders, the stockholders entitled to vote shall elect the directors. No
person shall be eligible for election as a director unless nominated in
accordance with the procedures set forth in this Section 4. Nominations of
persons for election to the Board of Directors may be made by the Board of
Directors or any committee designated by the Board of Directors or by any
stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section 4. Such nominations, other than those made by the Board of
Directors or any committee designated by the Board of Directors, may be made
only if written notice of a stockholder's intent to nominate one or more persons
for election as directors at the applicable meeting of stockholders has been
given, either by personal delivery or by United States certified mail, postage
prepaid, to the secretary of the Corporation and received (i) not less than 120
days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders, or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than 60 days before the date of the applicable annual meeting, or (iii)
with respect to any special meeting of stockholders called for the election of
directors, not later than the close of business on the seventh day following the
date on which notice of such meeting is first given to stockholders. Each such
stockholder's notice shall set forth (a) as to the stockholder giving the
notice, (i) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder, (ii) a representation that such stockholder
is a stockholder of record and intends to appear in person or by proxy at such
meeting to nominate the person or persons specified in the notice, (iii) the
class and number of shares of stock of the Corporation beneficially owned by
such stockholder, and (iv) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder; and (b) as to each person whom
-5-
<PAGE>
the stockholder proposes to nominate for election as a director, (i) the name,
age, business address and, if known, residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of stock of the Corporation which are beneficially owned by such person,
(iv) any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors or is otherwise
required by the rules and regulations of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934, as amended, and (v) the
written consent of such person to be named in the proxy statement as a nominee
and to serve as a director if elected. The secretary of the Corporation shall
deliver each such stockholder's notice that has been timely received to the
Board of Directors or a committee designated by the Board of Directors for
review. Any person nominated for election as director by the Board of Directors
or any committee designated by the Board of Directors shall, upon the request of
the Board of Directors or such committee, furnish to the secretary of the
Corporation all such information pertaining to such person that is required to
be set forth in a stockholder's notice of nomination. The chairman of the
meeting of stockholders shall, if the facts warrant, determine that a nomination
was not made in accordance with the procedures prescribed by this Section 4. If
the chairman should so determine, he or she shall so declare to the meeting and
the defective nomination shall be disregarded.
Section 5. Organization. - At all meetings of the Board of Directors, the
chairman of the Board of Directors or, in the chairman's absence, the deputy
chairman of the Board of Directors (if any), the vice chairman of the Board of
Directors (if any), the president (if one shall have been elected by the Board
of Directors) or, in the absence of all of the foregoing, the senior most
executive vice president, shall act as chairman of the meeting. The secretary of
the Corporation or, in the secretary's absence, an assistant secretary, shall
act as secretary of meetings of the Board of Directors. In the event that
neither the secretary nor any assistant secretary shall be present at such
meeting, the chairman of the meeting shall appoint any person to act as
secretary of the meeting.
Section 6. Vacancies. - Any vacancy occurring in the Board of Directors,
including a vacancy resulting from amending these By-Laws to increase the number
of directors by thirty percent or less, may be filled by the affirmative vote of
a majority of the remaining directors though less than a quorum of the Board of
Directors.
Section 7. Place of Meeting. - Meetings of the Board of Directors, regular
or special, may be held either within or without the Commonwealth of Virginia.
Section 8. Organizational Meeting. - The annual organizational meeting of
the Board of Directors shall be held immediately following adjournment of the
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annual meeting of stockholders and at the same place, without the requirement of
any notice other than this provision of the By-Laws.
Section 9. Regular Meetings: Notice. - Regular meetings of the Board of
Directors shall be held at such times and places as it may from time to time
determine. Notice of such meetings need not be given if the time and place have
been fixed at a previous meeting.
Section 10. Special Meetings. - Special meetings of the Board of Directors
shall be held whenever called by order of the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if any) or two of
the directors. Notice of each such meeting, which need not specify the business
to be transacted thereat, shall be mailed to each director, addressed to his or
her residence or usual place of business, at least two days before the day on
which the meeting is to be held, or shall be sent to such place by telegraph,
telex or telecopy or be delivered personally or by telephone, not later than the
day before the day on which the meeting is to be held.
Section 11. Waiver of Notice. - Whenever any notice is required to be
given to a director of any meeting for any purpose under the provisions of law,
the Articles of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, either before or after
the time stated therein, shall be equivalent to the giving of such notice. A
director's attendance at or participation in a meeting waives any required
notice to him or her of the meeting unless at the beginning of the meeting or
promptly upon the director's arrival, he or she objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
Section 12. Quorum and Manner of Acting. - Except where otherwise provided
by law, a majority of the directors fixed by these By-Laws at the time of any
regular or special meeting shall constitute a quorum for the transaction of
business at such meeting, and the act of a majority of the directors present at
any such meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum, a majority of those present may adjourn
the meeting from time to time until a quorum be had. Notice of any such
adjourned meeting need not be given.
Section 13. Order of Business. - At all meetings of the Board of Directors
business may be transacted in such order as from time to time the Board of
Directors may determine.
Section 14. Committees. - In addition to the executive committee
authorized by Article III of these By-Laws, other committees, consisting of two
or more directors, may be designated by the Board of Directors by a resolution
adopted
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by the greater number of (i) a majority of all directors in office at the time
the action is being taken or (ii) the number of directors required to take
action under Article II, Section 12 hereof. Any such committee, to the extent
provided in the resolution of the Board of Directors designating the committee,
shall have and may exercise the powers and authority of the Board of Directors
in the management of the business and affairs of the Corporation, except as
limited by law.
ARTICLE III
Executive Committee
Section 1. How Constituted and Powers. - The Board of Directors, by
resolution adopted pursuant to Article II, Section 14 hereof, may designate, in
addition to the chairman of the Board of Directors, one or more directors to
constitute an executive committee, who shall serve during the pleasure of the
Board of Directors. The executive committee, to the extent provided in such
resolution and permitted by law, shall have and may exercise all of the
authority of the Board of Directors.
Section 2. Organization, Etc. - The executive committee may choose a
chairman and secretary. The executive committee shall keep a record of its acts
and proceedings and report the same from time to time to the Board of Directors.
Section 3. Meetings. - Meetings of the executive committee may be called
by any member of the committee. Notice of each such meeting, which need not
specify the business to be transacted thereat, shall be mailed to each member of
the committee, addressed to his or her residence or usual place of business, at
least two days before the day on which the meeting is to be held or shall be
sent to such place by telegraph, telex or telecopy or be delivered personally or
by telephone, not later than the day before the day on which the meeting is to
be held.
Section 4. Quorum and Manner of Acting. - A majority of the executive
committee shall constitute a quorum for transaction of business, and the act of
a majority of those present at a meeting at which a quorum is present shall be
the act of the executive committee. The members of the executive committee shall
act only as a committee, and the individual members shall have no powers as
such.
Section 5. Removal. - Any member of the executive committee may be
removed, with or without cause, at any time, by the Board of Directors.
Section 6. Vacancies. - Any vacancy in the executive committee shall be
filled by the Board of Directors.
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ARTICLE IV
Officers
Section 1. Number. - The officers of the Corporation shall be a chairman
of the Board of Directors, a deputy chairman of the Board of Directors (if
elected by the Board of Directors), a president (if elected by the Board of
Directors), one or more vice chairmen of the Board of Directors (if elected by
the Board of Directors), a chief operating officer (if elected by the Board of
Directors), one or more vice presidents (one or more of whom may be designated
executive vice president or senior vice president), a treasurer, a controller, a
secretary, one or more assistant treasurers, assistant controllers and assistant
secretaries and such other officers as may from time to time be chosen by the
Board of Directors. Any two or more offices may be held by the same person.
Section 2. Election, Term of Office and Qualifications. - All officers of
the Corporation shall be chosen annually by the Board of Directors, and each
officer shall hold office until a successor shall have been duly chosen and
qualified or until the officer resigns or is removed in the manner hereinafter
provided. The chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any) and the vice chairmen of the
Board of Directors (if any) shall be chosen from among the directors.
Section 3. Vacancies. - If any vacancy shall occur among the officers of
the Corporation, such vacancy shall be filled by the Board of Directors.
Section 4. Other Officers, Agents and Employees - Their Powers and Duties.
- - The Board of Directors may from time to time appoint such other officers as
the Board of Directors may deem necessary, to hold office for such time as may
be designated by it or during its pleasure, and the Board of Directors or the
chairman of the Board of Directors may appoint, from time to time, such agents
and employees of the Corporation as may be deemed proper, and may authorize any
officers to appoint and remove agents and employees. The Board of Directors or
the chairman of the Board of Directors may from time to time prescribe the
powers and duties of such other officers, agents and employees of the
Corporation.
Section 5. Removal. - Any officer, agent or employee of the Corporation
may be removed, either with or without cause, by a vote of a majority of the
Board of Directors or, in the case of any agent or employee not appointed by the
Board of Directors, by a superior officer upon whom such power of removal may be
conferred by the Board of Directors or the chairman of the Board of Directors.
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Section 6. Chairman of the Board of Directors and Chief Executive Officer.
- - The chairman of the Board of Directors shall preside at meetings of the
stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
Section 7. Deputy Chairman of the Board of Directors. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if elected by the Board of Directors) shall preside at meetings of
the stockholders and of the Board of Directors. The deputy chairman shall be
responsible to the chairman of the Board of Directors and shall perform such
duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman of
the Board of Directors on matters within the deputy chairman's knowledge which
the interests of the Corporation may require be brought to the chairman's
notice.
Section 8. President. - In the absence of the chairman of the Board of
Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business and affairs under the
basic policies set by the Board of Directors and the chairman of the Board of
Directors. He or she shall from, time to time, report to the chairman of the
Board of Directors on matters within the president's knowledge which the
interests of the Corporation may require be brought to the chairman's notice. In
the absence of the chairman of the Board of Directors and the deputy chairman of
the Board of Directors (if any), the president (if any) shall, except as
otherwise directed by the Board of Directors, have all of the powers and the
duties of the chairman of the Board of Directors. The president (if any) shall
do and perform such other duties as from time to time the Board of Directors or
the chairman of the Board of Directors may prescribe.
Section 9. Vice Chairmen of the Board of Directors. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice
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chairman of the Board of Directors shall be responsible to the chairman of the
Board of Directors. Each vice chairman of the Board of Directors shall from time
to time report to the chairman of the Board of Directors on matters within the
vice chairman's knowledge which the interests of the Corporation may require be
brought to the chairman's notice. In the absence or inability to act of the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), such vice chairman of the Board
of Directors as the chairman of the Board of Directors may designate for the
purpose shall have the powers and discharge the duties of the chairman of the
Board of Directors. In the event of the failure or inability of the chairman of
the Board of Directors to so designate a vice chairman of the Board of
Directors, the Board of Directors may designate a vice chairman of the Board of
Directors who shall have the powers and discharge the duties of the chairman of
the Board of Directors.
Section 10. Chief Operating Officer. - The chief operating officer (if
any) shall be responsible to the Chairman of the Board of Directors for the
principal operating businesses of the Corporation and shall perform those duties
which may from time to time be assigned.
Section 11. Vice Presidents. - The vice presidents of the Corporation
shall assist the chairman of the Board of Directors, the deputy chairman of the
Board of Directors, the president (if any) and the vice chairmen (if any) of the
Board of Directors in carrying out their respective duties and shall perform
those duties which may from time to time be assigned to them. The chief
financial officer shall be a vice president of the Corporation (or more senior)
and shall be responsible for the management and supervision of the financial
affairs of the Corporation.
Section 12. Treasurer. - The treasurer shall have charge of the funds,
securities, receipts and disbursements of the Corporation. He or she shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such banks or trust companies or with such bankers or other
depositaries as the Board of Directors may from time to time designate. The
treasurer shall render to the Board of Directors, the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), the vice chairmen of the Board of Directors (if any), and the chief
financial officer, whenever required by any of them, an account of all of his
transactions as treasurer. If required, the treasurer shall give a bond in such
sum as the Board of Directors may designate, conditioned upon the faithful
performance of the duties of the treasurer's office and the restoration to the
Corporation at the expiration of his or her term of office or in case of death,
resignation or removal from office, of all books, papers, vouchers, money or
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation. The treasurer shall perform such other
duties as from time to time may be assigned to him or her.
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Section 13. Assistant Treasurers. - In the absence or disability of the
treasurer, one or more assistant treasurers shall perform all the duties of the
treasurer and, when so acting, shall have all the powers of, and be subject to
all restrictions upon, the treasurer. Assistant treasurers shall also perform
such other duties as from time to time may be assigned to them.
Section 14. Secretary. - The secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in a book or books
kept for that purpose. He or she shall keep in safe custody the seal of the
Corporation, and shall affix such seal to any instrument requiring it. The
secretary shall have charge of such books and papers as the Board of Directors
may direct. He or she shall attend to the giving and serving of all notices of
the Corporation and shall also have such other powers and perform such other
duties as pertain to the secretary's office, or as the Board of Directors, the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), the president (if any) or any vice chairman of the Board of
Directors may from time to time prescribe.
Section 15. Assistant Secretaries. - In the absence or disability of the
secretary, one or more assistant secretaries shall perform all of the duties of
the secretary and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the secretary. Assistant secretaries shall
also perform such other duties as from time to time may be assigned to them.
Section 16. Controller. - The controller shall be administrative head of
the controller's department. He or she shall be in charge of all functions
relating to accounting and the preparation and analysis of budgets and
statistical reports and shall establish, through appropriate channels, recording
and reporting procedures and standards pertaining to such matters. The
controller shall report to the chief financial officer and shall aid in
developing internal corporate policies whereby the business of the Corporation
shall be conducted with the maximum safety, efficiency and economy. The
controller shall be available to all departments of the Corporation for advice
and guidance in the interpretation and application of policies which are within
the scope of his or her authority. The controller shall perform such other
duties as from time to time may be assigned to him or her.
Section 17. Assistant Controllers. - In the absence or disability of the
controller, one or more assistant controllers shall perform all of the duties of
the controller and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the controller. Assistant controllers
shall also perform such other duties as from time to time may be assigned to
them.
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ARTICLE V
Contracts, Checks, Drafts, Bank Accounts, Etc.
Section 1. Contracts. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the chairman of the Board of Directors may authorize
shall have the power to execute any contract or other instrument on behalf of
the Corporation; no other officer, agent or employee shall, unless otherwise in
these By-Laws provided, have any power or authority to bind the Corporation by
any contract or acknowledgement, or pledge its credit or render it liable
pecuniarily for any purpose or to any amount.
Section 2. Loans. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the Board of Directors may authorize shall have the
power to effect loans and advances at any time for the Corporation from any
bank, trust company or other institution, or from any corporation, firm or
individual, and for such loans and advances may make, execute and deliver
promissory notes or other evidences of indebtedness of the Corporation, and, as
security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may pledge, hypothecate or transfer any and all
stocks, securities and other personal property at any time held by the
Corporation, and to that end endorse, assign and deliver the same.
Section 3. Voting of Stock Held. - The chairman of the Board of Directors,
the deputy chairman of the Board of Directors (if any), the president (if any),
any vice chairman of the Board of Directors (if any), any vice president or the
secretary may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation to cast the votes that the Corporation may be entitled
to cast as a stockholder or otherwise in any other corporation, any of whose
stock or securities may be held by the Corporation, at meetings of the holders
of the stock or other securities of such other corporation, or to consent in
writing to any action by any other such corporation, and may instruct the person
or persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed on behalf of the Corporation
such written proxies, consents, waivers or other instruments as such officer may
deem necessary or proper in the premises; or the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), any vice chairman of the Board of Directors (if any), any vice
president or the secretary may attend in person any meeting of the holders of
stock or other securities of such other corporation and thereat vote or
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exercise any and all powers of the Corporation as the holder of such stock or
other securities of such other corporation.
ARTICLE VI
Certificates Representing Shares
Certificates representing shares of the Corporation shall be signed by the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), or the vice chairman of the Board of Directors (if any), or
the president of the Corporation (if any) and the secretary or an assistant
secretary. Any and all signatures on such certificates, including signatures of
officers, transfer agents and registrars, may be facsimile.
ARTICLE VII
Dividends
The Board of Directors may declare dividends from funds of the Corporation
legally available therefor.
ARTICLE VIII
Seal
The Board of Directors shall provide a suitable seal or seals, which shall
be in the form of a circle, and shall bear around the circumference the words
"Philip Morris Companies Inc." and in the center the word and figures "Virginia,
1985."
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall be the calendar year.
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ARTICLE X
Amendment
The power to alter, amend or repeal the By-Laws of the Corporation or to
adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by
the Board of Directors may be repealed or changed by the stockholders, or new
By-Laws may be adopted by the stockholders, and the stockholders may prescribe
that any By-Laws made by them shall not be altered, amended or repealed by the
directors.
ARTICLE XI
Emergency By-Laws
If a quorum of the Board of Directors cannot be readily assembled because
of some catastrophic event, and only in such event, these By-Laws shall, without
further action by the Board of Directors, be deemed to have been amended for the
duration of such emergency, as follows:
Section 1. Section 6 of Article II shall read as follows:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting of
the Board of Directors called in accordance with these By-Laws.
Section 2. The first sentence of Section 10 of Article II shall read as
follows:
Special meetings of the Board of Directors shall be held whenever called
by order of the chairman of the Board of Directors or a deputy chairman
(if any), or of the president (if any) or any vice chairman of the Board
of Directors (if any) or any director or of any person having the powers
and duties of the chairman of the Board of Directors, the deputy chairman,
the president or any vice chairman of the Board of Directors.
Section 3. Section 12 of Article II shall read as follows:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the
transaction of business at such meeting, and the action of a majority of
such directors shall be the act of the Board of Directors, provided,
however, that in the event that only one director is present at any such
meeting no action except the election of directors shall be taken until at
least two additional directors have been elected and are in attendance.
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EXHIBIT 10.1
PHILIP MORRIS COMPANIES INC.
Financial Counseling Program
Philip Morris has a program that has existed since January 1, 1980 to provide
for financial counseling for key executives. This program currently provides
for reimbursement to senior management for expenditures they incur in connection
with their personal financial and estate planning and preparation of their tax
returns, subject to the following annual limits:
1. $15,000 for the Chairman and Chief Executive Officer;
2. $10,000 for each member of the Corporate Management Committee;
3. $5,000 for Senior Vice Presidents and those Vice Presidents in salary bands
"E" and above.
Rather than limit individuals to specific advisors, each eligible executive may
seek his own reputable advisor to perform such services. Reimbursement shall be
limited to the services set forth above and will not include for example, fees
of brokers or investment managers. Also, it shall be necessary for invoices to
reflect in reasonable detail the nature and extent of the services performed.
Payments by Philip Morris in this program will be included in the compensation
of the individuals for whom they are paid; however, the individual is normally
entitled to a deduction in his or her income tax return for any expenses related
to financial advice, estate and tax planning, and income tax preparation.
<PAGE>
EXHIBIT 10.4
PHILIP MORRIS COMPANIES INC.
AUTOMOBILE POLICY
Since May 16, 1970, the Registrant has maintained a policy under which Company
owned or leased automobiles are provided to key executives for business use when
required and for personal use at other times. Such executives are required to
include the value of any personal use of the automobiles in their annual tax
returns.
<PAGE>
EXHIBIT 10.8
SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
OF
PHILIP MORRIS COMPANIES INC.
Effective October 1, 1987
(As amended and in effect as of January 1, 1997)
<PAGE>
SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
OF
PHILIP MORRIS COMPANIES INC.
The Supplemental Management Employees' Retirement Plan of Philip
Morris Companies Inc., as hereinafter set forth shall be effective with respect
to an Employee designated as a Participant (as defined herein) whose date of
retirement (as specified in an application for retirement in Article II, B of
the PM Retirement Plan) is on or after April 1, 1993, or who has filed an
application for an Optional Payment pursuant to Article II D(3) of the Plan
after March 1, 1992 and with respect to former Employees designated as
Participants on or after April 1, 1993. The rights of an Employee or former
Employee designated as a Participant who retired before such dates shall be
governed by the provisions of the Plan as in effect on the date of retirement
or, if later, the date of designation as a Participant, unless an application
for an Optional Payment was filed after March 1, 1992.
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ARTICLE I
DEFINITIONS
The following terms as used herein shall have the meanings set forth
below. Capitalized terms used herein and not defined below shall have the
meanings set forth in the PM Retirement Plan or the Profit-Sharing Plan, as the
context may require.
(a) "Accredited Service" shall have the same meaning as in the PM
Retirement Plan, provided, however, that Accredited Service shall also
include the additional periods of Accredited Service which may be credited
to a Participant under the provisions of Article II, A(1)(a) of the Plan.
(b) "Actuarial Equivalent" shall mean a benefit which is equivalent
in value to the benefit otherwise payable pursuant to the terms of the
Plan, based on the actuarial principles and assumptions set forth in
Exhibit "I" to the PM Retirement Plan; provided, however, that a Single
Sum Payment shall be the Actuarial Equivalent of the Supplemental
Retirement Allowance payable in equal monthly payments during a twelve
(12) month period for the life of the Retired Participant, using the
actuarial principles and assumptions set forth in Exhibit "A" to the Plan.
(c) "Administrator" shall mean the Senior Vice President, Human
Resources and Administration of Philip Morris Companies Inc. (or his
delegatee) designated by the Committee to carry out certain
responsibilities in connection with the administration of the Plan.
(d) "Allowances" shall mean a Supplemental Retirement Allowance and
a Supplemental Profit-Sharing Allowance.
(e) "Appointee" shall mean the person or entity who, pursuant to the
provisions of the Plan, is empowered, in his, her or its sole discretion,
to designate an Employee as a Participant and grant one or more Allowances
under the Plan. The Appointee for an Employee who is not a chief executive
officer of a Participating Company shall be the chief executive officer of
his Participating Company. The Appointee for a Retired Employee and an
Employee who is a chief executive officer of a Participating Company other
than the Company shall be the Chief Executive Officer. The Appointee of
the Chief Executive Officer shall be the Committee.
(f) "Benefit Equalization Plan" shall mean the Philip Morris Benefit
Equalization Plan, effective as of September 2, 1974 and as amended from
time to time, but only to the extent that benefits are payable pursuant to
Article II, A thereof.
(g) "Change in Circumstance" shall mean (1) the marriage of the
Participant or Retired Participant, (2) the divorce of the Participant or
Retired Participant from his Spouse, provided such Spouse was designated
as the beneficiary in the currently effective application to receive an
Optional Payment, or the
<PAGE>
Participant or Retired Participant elected to receive an Optional Payment
pursuant to clause (1) of Paragraph (u) hereof, (3) the death of the
beneficiary designated in the application to receive an Optional Payment,
or (4) a medical condition, based on medical evidence satisfactory to the
Administrator, which is expected to result in the death of the beneficiary
(including the Spouse) who is designated to receive a benefit after the
death of the Retired Employee in accordance with the application to
receive an Optional Payment originally filed with the Administrator,
within five (5) years of the filing of an application for change in
Optional Payment method pursuant to Article II, D(3) hereof.
(h) "Change of Control" shall mean the happening of any of the
following events:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (i) the
then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting
power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that
the following acquisitions shall not constitute a Change of Control:
(i) any acquisition directly from the Company, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (iv) any acquisition by any
corporation pursuant to a transaction described in clauses (i), (ii)
and (iii) of paragraph 3 of this subsection (h); or
(2) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) Approval by the shareholders of the Company of a
reorganization, merger, share exchange or consolidation (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial
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owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 80% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors,
as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the
extent that such ownership existed prior to the Business Combination
and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(4) Approval by the shareholders of the Company of (i) a
complete liquidation or dissolution of the Company or (ii) the sale
or other disposition of all or substantially all of the assets of
the Company, other than to a corporation, with respect to which
following such sale or other disposition, (A) more than 80% of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case
may be, (B) less than 20% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by any Person (excluding
any employee benefit plan (or related trust) of the Company or such
corporation), except to the extent that such Person owned 20% or
more of the Outstanding Company Common Stock or Outstanding Company
Voting
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Securities prior to the sale or disposition and (C) at least a
majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such sale or other disposition of assets of the
Company or were elected, appointed or nominated by the Board.
(i) "Chief Executive Officer" shall mean the chief executive officer
of the Company.
(j) "Committee" shall mean the Corporate Employee Benefit Committee
of the Company charged with the administration of the Plan as from time to
time constituted.
(k) "Company" shall mean Philip Morris Companies Inc.
(l) "Deceased Participant" shall mean any former Participant who
died while he was a Participant, provided that no Optional Payment
pursuant to clause (3) of Paragraph (u) hereof will be made under the Plan
after the death of the Deceased Participant.
(m) "Deceased Retired Participant" shall mean a Retired Participant
who has elected to receive an Optional Payment but who has died prior to
the date his Optional Payment commences to be paid.
(n) "Deferred Retirement Allowance" shall mean the Retirement
Allowance payable pursuant to Article II, A(2) of the PM Retirement Plan.
(o) "Early Retirement Allowance" shall mean the Retirement
Allowances payable pursuant to Article II, A(3) of the PM Retirement Plan.
(p) "Employee" shall mean any person who (1) is employed on a
salaried basis by a Participating Company, (2) is a member of a select
group of management or a highly compensated employee of his Participating
Company and (3) is eligible to receive a Retirement Allowance under the PM
Retirement Plan. An Employee shall cease to be such under the Plan upon
termination of his service for any cause whatsoever; provided, however,
that he shall be deemed to be an Employee during the periods of service
accredited to him pursuant to Article III of the PM Retirement Plan.
(q) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time, and any successor thereto.
(r) "Fiduciary" shall mean the Committee, the Management Committee
and the Administrator to the extent that such person or body (1) exercises
any
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discretionary authority or control respecting management of the Plan, or
(2) has discretionary authority or responsibility in the administration of
the Plan.
(s) "Full Retirement Allowance" shall mean the Retirement Allowance
payable pursuant to Article II, A(1) of the PM Retirement Plan.
(t) "Management Committee" shall mean the Philip Morris Management
Committee for Employee Benefits designated by the Committee to carry out
certain responsibilities in connection with the administration of the
Plan.
(u) "Optional Payment" shall mean the following forms in which a
Supplemental Retirement Allowance of a Participant who has made an
election pursuant to Article II, D(3) hereof may be paid: (1) in equal
monthly payments for the life of the Retired Participant, (2) as a
Supplemental Joint and Survivor Allowance, or (3) as a Supplemental
Optional Payment Allowance. Any election to receive an Optional Payment
with respect to a Retired Participant's Supplemental Retirement Allowance
under the Plan shall be independent of any election with respect to his
benefits under any Other Plan.
(v) "Other Plan" shall mean (1) the Retirement Plan, (2) the Benefit
Equalization Plan, (3) any other plan, except a defined contribution or
similar plan, maintained by the Company, or any domestic or foreign
subsidiary of the Company, which provides retirement income to one or more
employees on or after termination of employment and (4) any employment
contract or other agreement between an Employee and the Company or any
other member of the Controlled Group providing for retirement benefits or
benefits in the event of a termination of employment or a Change in
Control of the Company or of any other member of the Controlled Group.
(w) "Participant" shall mean an Employee or Retired Employee who is
designated as such by his Appointee pursuant to the terms of the Plan. The
designation of an Employee or Retired Employee as a Participant by a chief
executive officer of a Participating Company shall be communicated in
writing to the Committee. An Employee or Retired Employee shall become a
Participant as of the date designated in writing by his Appointee. Except
as otherwise specifically provided for in the Plan, a Participant shall
cease to be such whenever he ceases to be an Employee.
(x) "Participating Company" shall mean the Company and any other
corporation which is a member of the Controlled Group and which, with the
approval of the Committee determines to participate in the Plan for the
benefit of its Employees and executes such instruments of participation as
the Committee deems necessary.
(y) "Plan" shall mean this Supplemental Management Employees'
Retirement Plan of Philip Morris Companies Inc., as amended from time to
time.
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(z) "PM Retirement Plan" shall mean the Philip Morris Salaried
Employees' Retirement Plan, effective as of September 1, 1978 and as
amended from time to time.
(aa) "Profit-Sharing Plan" shall mean the Philip Morris Deferred
Profit-Sharing Plan, effective as of January 1, 1956 and as amended from
time to time.
(bb) "Retired Participant" shall mean a Participant who ceases to be
such but is eligible for, or who has retired and is receiving a
Supplemental Retirement Allowance from the Plan. A former Employee shall
cease to be a Retired Participant as of the date he receives a Single Sum
Payment.
(cc) "Retirement Plan" shall mean the PM Retirement Plan and each
other defined benefit plan qualified under Section 401(a) of the Code
maintained by a member of the Controlled Group in which a Participant has
an accrued benefit.
(dd) "Single Sum Payment" shall mean (1) in the case of a
Supplemental Retirement Allowance, the normal form of distribution to a
Retired Participant who is eligible for a Full, Deferred or Early
Retirement Allowance, which distribution shall be made in one payment to
the Retired Participant (or his designated beneficiary) at the time set
forth in Article II, D(2)(a) hereof and which is the Actuarial Equivalent
of the Supplemental Retirement Allowance payable in equal monthly payments
during a twelve (12) month period for the life of the Retired Participant
and (2) the sole form of distribution of the Retired Participant's
Supplemental Profit-Sharing Allowance.
(ee) "Supplemental Joint and Survivor Allowance" shall mean the
total amount payable during a twelve (12) month period as a reduced
Supplemental Retirement Allowance to a Retired Participant for life and
after his death the amount payable to his Spouse for life equal to
one-half of the reduced Supplemental Retirement Allowance payable to the
Retired Participant, which together shall be the Actuarial Equivalent of
the Supplemental Retirement Allowance of the Retired Participant.
(ff) "Supplemental Optional Payment Allowance" shall mean (1) the
total amount payable during a twelve (12) month period in accordance with
one of the payment methods described in Article II, A(4)(d) of the PM
Retirement Plan designated by the Participant in the application for an
Optional Payment under Article II, D(3) hereof pursuant to which the
Participant receives for life after his retirement a reduced Supplemental
Retirement Allowance and after his death after retirement his beneficiary
receives for life a benefit according to the option elected by the
Employee, which together shall be the Actuarial Equivalent of the
Supplemental Retirement Allowance payable in equal monthly payments for
the life of the Participant after his retirement, or (2) the total amount
payable during a twelve (12) month period in accordance with one of the
payment methods described in Article II,
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A(4)(d) of the PM Retirement Plan pursuant to an election described in
Article II, A(4)(c) of the PM Retirement Plan and designated by the
Participant in the application for an Optional Payment under Article II,
D(3) hereof pursuant to which the Participant receives for life after his
retirement a reduced Supplemental Retirement Allowance and after his death
his beneficiary receives for life a benefit according to the option
elected by the Participant, which together shall be the Actuarial
Equivalent of the Supplemental Retirement Allowance accrued to the date of
election.
(gg) "Supplemental Profit-Sharing Allowance" shall mean the benefit
determined and payable in a Single Sum Payment upon termination of a
Participant's service with the Controlled Group pursuant to Article III
hereof.
(hh) "Supplemental Retirement Allowance" shall mean the benefit
determined under Article II, A hereof and payable at the time and in the
manner set forth in Article II, D, provided, however, that, except as
otherwise required by Article II, A(1) or Article II, D(3) of the Plan,
payment to a Retired Participant in any form shall be the Actuarial
Equivalent of a Supplemental Retirement Allowance expressed as a benefit
payable in equal monthly payments during a twelve (12) month period for
the life of the Retired Participant commencing at the Retired
Participant's Normal Retirement Age.
(ii) "Supplemental Survivor Allowance" shall mean the total amount
payable during a twelve (12) month period in equal monthly payments for
the life of the Spouse of a Deceased Participant or Deceased Retired
Participant who has died after the date of his retirement and prior to the
date his Optional Payment under Paragraph (u)(1) or (2) hereof commences
to be paid in an amount equal to one-half of the reduced Supplemental
Retirement Allowance which would have been payable as a Supplemental Joint
and Survivor Allowance to the Deceased Participant or Deceased Retired
Participant. Payment of the Supplemental Survivor Allowance to the Spouse
of a Deceased Participant or Deceased Retired Participant who is eligible
for such benefit under Article II, B hereof shall be payable at the time
set forth in Article II, D(4) hereof.
(jj) "Supplemental Survivor Income Benefit Allowance" shall mean the
total amount payable during a twelve (12) month period to the Spouse of a
Deceased Participant or Deceased Retired Participant equal to one-half of
the reduced Supplemental Retirement Allowance which would have been
payable to the Deceased Participant or Deceased Retired Participant had he
elected to receive a Supplemental Joint and Survivor Allowance. Payment of
the Supplemental Survivor Income Benefit Allowance to the Spouse of a
Deceased Participant or Deceased Retired Participant who is eligible for
such benefit under Article II, B hereof shall be payable at the time set
forth in Article II, D(4) hereof.
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(kk) "Supplemental Survivor Income Benefit Plan" shall mean the
Philip Morris Survivor Income Benefit Equalization Plan, effective as of
January 1, 1985 and as amended from time to time.
(ll) "Survivor Income Benefit Plan" shall mean the Philip Morris
Survivor Income Benefit Plan, effective as of February 1, 1974 and as
amended from time to time.
(mm) "Vested Retirement Allowance" shall mean the Retirement
Allowance payable pursuant to Article II, A(6) of the PM Retirement Plan,
provided, however, that a Participant who is only eligible for a Vested
Retirement Allowance may be deemed to be eligible for an Early Retirement
Allowance for any and all purposes of this Plan if in accordance with his
designation as a Participant in the Plan.
As used in this Plan, the masculine pronoun shall include the feminine and the
feminine pronoun shall include the masculine unless otherwise specifically
indicated.
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ARTICLE II
SUPPLEMENTAL RETIREMENT ALLOWANCES
A. Supplemental Retirement Allowances payable under this Plan shall be as
follows:
(1) A Participant may be granted one or more of the following Supplemental
Retirement Allowances under the Plan:
(a) A Supplemental Retirement Allowance in an amount determined by
using the formula for calculating the Participant's Retirement Allowance under
the PM Retirement Plan, but, subject to the limitations of Subparagraph (2)
hereof, crediting Accredited Service in addition to that credited to the
Participant pursuant to the PM Retirement Plan in recognition of previous
service by the Participant deemed to be of special value to the Company or his
Participating Company;
(b) A Supplemental Retirement Allowance in an amount equal to (i) a
stated dollar amount per year, or (ii) a stated percentage of not more than
sixty (60) percent of the Participant's Five-Year Average Compensation, or (iii)
the Participant's Retirement Allowance under the PM Retirement Plan, which
Supplemental Retirement Allowance accrues at a rate as a percentage of the
Participant's Five-Year Average Compensation which is greater than the rate of
accrual under the PM Retirement Plan, such Supplemental Retirement Allowances to
be calculated in individual instances on the basis of specific instructions
which may depart only for such purpose from the terms, conditions and
requirements of the PM Retirement Plan; or
(c) A Supplemental Retirement Allowance in an amount determined by
using the formula for calculating the Participant's Retirement Allowance under
the PM Retirement Plan, such Supplemental Retirement Allowance to be payable on
and after the Participant's retirement in an amount which is greater than the
Retirement Allowance otherwise payable to the Participant at such age.
(2) If a Supplemental Retirement Allowance under Subparagraph (1) hereof
is determined pursuant to a formula in the PM Retirement Plan using the
Participant's Compensation (including awards under incentive compensation plans
of the Company), the aggregate number of years of Accredited Service used in
calculating the amount of the Participant's Supplemental Retirement Allowance
under this Plan shall not exceed thirty-five (35) years.
(3) The name of each Participant and the Supplemental Retirement Allowance
awarded to him pursuant to Subparagraph (1) above shall be set forth in Appendix
I to the Plan.
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<PAGE>
B. Supplemental Survivor Allowances, Supplemental Survivor Income Benefit
Allowances and Supplemental Optional Payment Allowances payable to the
Spouse or beneficiary of certain Deceased Participants and Deceased
Retired Participants shall be as follows:
(1) (a) If a Deceased Participant has died prior to date he would have
attained the age of sixty-five (65) years, his Spouse shall be eligible to
receive a Supplemental Survivor Allowance determined in accordance with the
applicable provisions of Article II, A(1) of this Plan.
(b) If a Deceased Participant who is eligible for a Supplemental
Retirement Allowance under Subparagraphs (a), (b)(iii) or (c) of Article II,
A(1) has died prior to date he would have attained the age of sixty-five (65)
years and has (or is deemed to have) completed five (5) or more years of
Accredited Service, his Spouse shall be eligible to receive a Supplemental
Survivor Income Benefit Allowance determined in accordance with Subparagraphs
(a), (b)(iii) or (c) of Article II, A(1) as applicable to such Deceased
Participant, assuming such Deceased Participant had continued in the employ of
his Participating Company until the age of sixty-five (65) years, that his
compensation (as defined in the Survivor Income Benefit Plan) for all periods of
time subsequent to his death and until age sixty-five (65) had been his
compensation as in effect immediately prior to his death and that the Deceased
Participant died the day after attaining the age of sixty-five (65) years,
reduced by the amount of any Supplemental Survivor Allowance payable pursuant to
Subparagraph (a) hereof.
(2) If a Deceased Participant has died after attaining the age of
sixty-five (65) years his Spouse shall be eligible to receive a Supplemental
Survivor Allowance determined in accordance with the applicable provisions of
Article II, A(1) hereof.
(3) (a) The Spouse of a Deceased Retired Participant (other than a
Deceased Retired Participant who is only eligible for a Vested Retirement
Allowance) whose request for an Optional Payment pursuant to Article I(u)(1)
hereof has been granted by the Management Committee, but who has died prior to
the date his Optional Payment commences to be paid shall be eligible to receive
a Supplemental Survivor Allowance determined in accordance with the applicable
provisions of Article II, A(1) of this Plan.
(b) The Spouse of a Deceased Retired Participant (other than a
Deceased Retired Participant who is only eligible for a Vested Retirement
Allowance) who prior to his death commenced to receive an Optional Payment
pursuant to Article I(u)(1) hereof shall be eligible to receive a Supplemental
Survivor Income Benefit Allowance.
(4) The Spouse of a Deceased Retired Participant who is only eligible for
a Vested Retirement Allowance under the PM Retirement Plan but who has died
prior to his Benefit Commencement Date shall be eligible to receive a
Supplemental Survivor Allowance determined in accordance with the applicable
provisions of Article II, A(1) of this Plan.
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(5) The beneficiary of a Retired Participant whose request for a
Supplemental Optional Payment Allowance in accordance with Article I(ff)(1)
hereof has been granted by the Management Committee but who has died after the
date of his retirement and prior to the date his Optional Payment commences to
be paid shall be eligible to receive that portion of the Supplemental Optional
Payment Allowance elected by the Retired Participant which is payable after the
death of the Retired Participant.
(6) The beneficiary of a Deceased Participant or Deceased Retired
Participant whose request for a Supplemental Optional Payment Allowance
described in Article I(ff)(2) hereof has been granted by the Management
Committee shall be eligible to receive that portion of the Supplemental Optional
Payment Allowance elected by the Deceased Participant or Deceased Retired
Participant which is payable after the death of the Deceased Participant or
Deceased Retired Participant.
C. Reduction of benefits under the Plan
(1) (a) The Supplemental Retirement Allowance payable to a Retired
Participant pursuant to Article II, A hereof shall be reduced by the greater of
(i) the Actuarial Equivalent of the benefits payable pursuant to any Other Plan
to the extent that service used to determine the amount of benefits payable from
such Other Plan is also used to calculate the amount of a Retired Participant's
Supplemental Retirement Allowance under this Plan, or (ii) the amount set forth
in, or determined in accordance with, the Participant's designation as such
pursuant to Article I(w) hereof, assuming in each case that the Participant
elected to receive such benefits in equal monthly payments for his life;
provided, however, that (1) in the event the Supplemental Retirement Allowance
is paid to the Retired Participant (or his beneficiary) in a Single Sum Payment
prior to the Retired Participant's Benefit Commencement Date, such Supplemental
Retirement Allowance shall be computed in accordance with the applicable
provisions of Paragraph A(1) hereof, as reasonably estimated by the
Administrator, reduced by the Actuarial Equivalent of the projected annual
amount of benefits payable pursuant to any Other Plan assuming that such
benefits are payable to the Retired Participant in equal monthly payments for
life and (2) in the event the benefit equalization retirement allowance under
the Benefit Equalization Plan is paid to the Retired Participant (or his Spouse
or other beneficiary) in a single sum payment (as defined in the Benefit
Equalization Plan) prior to the Retired Participant's Benefit Commencement Date,
the amount of the reduction to the Participant's Supplemental Retirement
Allowance shall be determined in good faith by the Administrator.
(b) Any Supplemental Survivor Allowance or Supplemental Survivor
Income Benefit Allowance payable to the Spouse of a Deceased Participant or
Deceased Retired Participant pursuant to Article II, B hereof shall be reduced
by the Actuarial Equivalent of the maximum benefits for which the Spouse was
actually eligible under the Retirement Plan, the Benefit Equalization Plan, the
Survivor Income Benefit Plan and the Supplemental Survivor Income Benefit Plan
assuming that the Participant elected to receive a
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Retirement Allowance under the Retirement Plan and a benefit equalization
retirement allowance under the Benefit Equalization Plan in equal monthly
payments for the life of the Retired Participant.
(c) Any Supplemental Optional Payment Allowance payable to the
beneficiary of a Deceased Participant or Deceased Retired Participant pursuant
to Article II, B hereof shall be reduced by the Actuarial Equivalent of the
benefits payable pursuant to the Retirement Plan and the Benefit Equalization
Plan assuming that the Participant had elected to receive such benefits in equal
monthly payments for life.
(2) The Supplemental Retirement Allowance of a Participant, who as a
result of employment outside of the United States has benefits accrued to him
under the social security, or similar laws, of a country other than the United
States may, in the discretion of the Administrator, be reduced by the Actuarial
Equivalent of such benefits, assuming that such Participant elected to receive
such benefits in equal monthly payments for life.
(3) No benefits shall be payable to the Spouse or other beneficiary of a
Deceased Retired Participant pursuant to Article II, B hereof, if prior to his
death the Deceased Retired Participant received a Single Sum Payment from this
Plan or the Single Sum Payment is made after his death to his Spouse or a
beneficiary.
D. Notification for Supplemental Retirement Allowances; Commencement and
termination of Supplemental Retirement Allowances
(1) An application for a Retirement Allowance, Survivor Allowance or
optional form of benefit under the PM Retirement Plan shall be deemed
notification to the Administrator that payment of a Supplemental Retirement
Allowance or other benefit is to be made or commence to be made to the Retired
Participant, Spouse or other beneficiary in accordance with the terms of the
Plan. In the event the Participant shall not have elected an Optional Payment
method with respect to his Supplemental Retirement Allowance, any such
notification shall specify the beneficiary to whom payment of the Single Sum
Payment shall be made in the event the Participant dies after the date of
retirement and prior to the date the Single Sum Payment is made, provided, that
if the Participant shall fail to designate a beneficiary or if the beneficiary
shall predecease the Participant, the Administrator shall distribute the Single
Sum Payment to the duly authorized representative of the former Participant's
estate.
(2) (a) A Retired Participant who is eligible for a Full, Deferred or
Early Retirement Allowance shall receive his Supplemental Retirement Allowance
in a Single Sum Payment no later than sixty (60) days following the Retired
Participant's date of retirement (or, if the Retired Participant dies after the
date of retirement and before distribution of his Single Sum Payment is made, to
his beneficiary as determined pursuant to Subparagraph (1) hereof, in a Single
Sum Payment within sixty (60) days following the date of the Retired
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Participant's death) unless the Participant has elected to have distribution of
his Supplemental Retirement Allowance made in accordance with Subparagraph (3)
hereof.
(b) The Supplemental Retirement Allowance with respect to an
Employee who is only eligible for a Vested Retirement Allowance shall be
distributed as an Optional Payment under clauses (1) or (2) of Article I(u)
hereof (which Optional Payment shall be in the same form which the Retired
Participant's benefits are paid from the PM Retirement Plan) and shall commence
on the Participant's Benefit Commencement Date.
(3) A Participant who is eligible to retire on a Full, Deferred or Early
Retirement Allowance and whose Supplemental Retirement Allowance is otherwise
payable in a Single Sum Payment pursuant to Paragraph D(1) hereof may make
application to the Administrator to receive an Optional Payment. The application
may be filed prior to the date the Participant is eligible for an Early
Retirement Allowance and shall specify the form of Optional Payment, the
beneficiary and the date on which the Optional Payment is to commence to be
made, which date shall be on or before the first day of the month coincident
with or next preceding the Participant's Required Benefit Commencement Date, but
in no event shall the Participant's Optional Payment commence to be paid prior
to the later of the first day of the month following the first anniversary of
the date of the filing of his application with the Administrator or the
Participant's Benefit Commencement Date; provided, however, that in the event
the Participant incurs a Change in Circumstance on or after the date of the
filing of the application and prior to the date his Optional Payment commences
to be paid, the Participant may file an application with the Administrator
within ninety (90) days of the Change in Circumstance, but in no event later
than the date his Optional Payment is to commence, to change the form of
Optional Payment or to change the beneficiary who is designated to receive a
benefit after the death of the Retired Participant in accordance with the
Optional Payment method originally filed with the Administrator; provided,
further, that any election to change the form of Optional Payment filed after
the date of his retirement and prior to the date his Optional Payment is to
commence may only change the form of Optional Payment to one of the forms
specified in Article I(u)(1) or (2) hereof. In the case of a Participant who
eighteen (18) months prior to attaining the age of sixty-five (65) years could
be compulsorily retired by his Participating Company upon attaining the age of
sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in
Employment Act, any application to receive an Optional Payment must be filed
with the Administrator more than one (1) year preceding the date the Participant
attains the age of sixty-five (65) years. The Administrator shall notify the
Management Committee of all applications for an Optional Payment. The Management
Committee may grant or deny any such application in its sole and absolute
discretion. Any such application shall be of no force and effect if (i) the
Participant does not retire on a Full, Deferred or Early Retirement Allowance,
(ii) the Participant incurs a disability at any time before the date his
Optional Payment commences to be paid which causes him to be eligible for
benefits under the Philip Morris Long-Term Disability Plan, or (iii) the
Participant is retired for ill health, disability or hardship under Article II,
A(3)(a) of the PM Retirement Plan, provided that in the event the application is
of no force and effect under clauses (ii) or (iii) hereof, payment of the
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Participant's Supplemental Retirement Allowance shall be made in a Single Sum
Payment pursuant to Paragraph D (2)(a) hereof within sixty (60) days of the date
of his retirement, but otherwise such application shall be irrevocable and
effective on the Participant's retirement on a Full, Deferred or Early
Retirement Allowance and the Participant's benefits shall commence on the date
specified in the application; provided, however, that (A) if within the one (1)
year period following the date of the filing of the application with the
Administrator the Participant's service with any member of the Controlled Group
is involuntarily terminated other than by reason of the Participant's death,
disability or misconduct (as determined by the Management Committee), such
Participant's Optional Payment shall commence to be paid on the Participant's
Benefit Commencement Date, or (B) if within the one (1) year period following
the date of the filing of the application with the Administrator the Participant
voluntarily retires or his employment is terminated for misconduct (as
determined by the Management Committee) by any member of the Controlled Group,
the Optional Payment shall be reduced as specified in Subparagraph (6) hereof.
(4) The Supplemental Survivor Allowance payable to the Spouse of a
Deceased Participant pursuant to Paragraphs B(1)(a) or B(2) hereof or to the
Spouse of a Deceased Retired Participant pursuant to Paragraphs B(3)(a) and B(4)
above shall commence to be paid on the later of (a) the first day of the
calendar month coincident with or next following the date the Deceased
Participant or Deceased Retired Participant would have attained the age of
fifty-five (55) years, or (b) the first day of the calendar month in which the
Deceased Participant or Deceased Retired Participant died, provided that the
Spouse may elect in accordance with the provisions of Article II, A(5)(c) or (f)
of the PM Retirement Plan, as applicable to the Spouse, that the Supplemental
Survivor Allowance shall commence on the first day of any month thereafter, but
not later than the first day of the calendar month in which the Deceased
Participant or Deceased Retired Participant would have attained his Normal
Retirement Age and any such Supplemental Survivor Allowance shall terminate on
the first day of the month in which the Spouse dies. The Supplemental Survivor
Income Benefit Allowance payable to the Spouse of a Deceased Participant
pursuant to Paragraph B(1)(b) above or to the Spouse of a Deceased Retired
Participant pursuant to Paragraph B(3)(b) above shall commence and terminate
simultaneously with the date on which a survivor income benefit allowance would
have been payable to the Spouse pursuant to Article II, A(2)(b) or A(4), as
applicable, of the Survivor Income Benefit Plan. The Supplemental Optional
Payment Allowance payable to the beneficiary of a Deceased Retired Participant
pursuant to Paragraph B(5) hereof or to the beneficiary of a Deceased
Participant or Deceased Retired Participant pursuant to Paragraph B(6) above
shall commence on the first day of the calendar month following the month in
which the Deceased Participant or Deceased Retired Participant died.
(5) (a) Notwithstanding the previous provisions of this Paragraph, the
Committee may cause the distribution of the Supplemental Retirement Allowance or
other benefit to any group of similarly situated Retired Participants, or
Spouses or beneficiaries in a Single Sum Payment or as an Optional Payment.
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(b) Notwithstanding the preceding provisions of this Paragraph, the
Administrator shall distribute a Participant's Supplemental Retirement Allowance
in a Single Sum Payment if the Supplemental Retirement Allowance payable in
equal monthly payments is not more than $250.
(6) (a) The Supplemental Retirement Allowance payable to a Retired
Participant pursuant to clause (B) of Subparagraph (3) hereof shall be further
reduced by one percent (1%) for each month (or portion of a month) by which the
month in which the Retired Participant's termination of employment precedes the
first anniversary of the filing of the application with the Administrator.
(b) The Supplemental Survivor Allowance of a Spouse of a Deceased
Participant or Deceased Retired Participant commencing at an age other than the
Deceased Participant's or Deceased Retired Participant's Normal Retirement Age
shall be the Actuarial Equivalent of the Supplemental Retirement Allowance
payable as a Joint and Survivor Supplemental Allowance at the Deceased
Participant's or Deceased Retired Participant's Normal Retirement Age unless
otherwise required by Article II, A(1) of the Plan. The Supplemental Optional
Payment Allowance payable to the beneficiary of a Deceased Participant or
Deceased Retired Participant commencing at an age other than the Deceased
Participant's or Deceased Retired Participant's Normal Retirement Age shall be
the Actuarial Equivalent of the Supplemental Retirement Allowance payable as a
Supplemental Optional Payment Allowance at the Deceased Participant's or
Deceased Retired Participant's Normal Retirement Age unless otherwise required
by Article II, A(1) of the Plan.
E. Cessation of accruals of Supplemental Retirement Allowance
Any right or claim to any Supplemental Retirement Allowance or other
benefit under the Plan which any Participant, Spouse or designated beneficiary
may have shall terminate if the Committee shall find that such Participant has
been guilty of fraud or dishonesty towards a Participating Company, or has
willfully damaged the property of a Participating Company, or has wrongfully
disclosed any secret process or imparted any confidential information, or has
done any other act materially inimical to the interest of a Participating
Company.
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ARTICLE III
SUPPLEMENTAL PROFIT-SHARING ALLOWANCES
A Participant may be granted a Supplemental Profit-Sharing Allowance equal
to the amount, if any, by which the sum of the Contribution which would have
been made to the Profit-Sharing Plan and the amount which would have been
credited to his account under the Benefit Equalization Plan had such Participant
been eligible to participate in such plans for a plan year, exceeds the amount,
if any, of employer contributions (excluding any contributions which the
Participant has elected to have an employer make on his behalf pursuant to a
cash or deferred arrangement) actually made or credited for the plan year on
behalf of such Participant under a defined contribution plan qualified under
Section 401(a) of the Code, an excess benefit plan (as defined in ERISA) and a
plan maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees maintained by any
other member of the Controlled Group.
Any amounts credited to a Participant's account pursuant to the provisions
of this Article III shall be deemed to have been invested in Part C of the Fund
under the Profit-Sharing Plan and shall be valued in accordance with the
provisions of the Profit-Sharing Plan.
A Retired Participant shall receive his Supplemental Profit-Sharing
Allowance in a Single Sum Payment no later than sixty (60) days following the
Participant's date of retirement or other termination of employment with the
Controlled Group.
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ARTICLE IV
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE
An individual account shall be established for the benefit of each
Participant (and Spouse or designated beneficiary) under the Plan. The Plan
shall be unfunded. All benefits intended to be provided under the Plan shall be
paid from time to time from the general assets the Participant's Participating
Company and paid in accordance with the provisions of the Plan; provided,
however, that the Participating Companies reserve the right to meet the
obligations created under the Plan through one or more trusts or other
arrangements. The contributions by each Participating Company on behalf of its
Participants to the individual accounts established under the Plan, whether in
trust or otherwise, shall be in an amount which such Participating Company and
the Management Committee, with the advice of an actuary, determines to be
sufficient to provide for the payment of the benefits under the Plan. No
Participant, Spouse or designated beneficiary shall, unless the Plan expressly
provides otherwise, have any right or claim whatsoever to any specific assets of
a Participating Company or of any trust.
Each Participating Company shall maintain such reserves on its books with
respect to Participants who are employed by such Participating Company as
determined by the actuary for the Plan.
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ARTICLE V
APPLICABILITY OF PROVISIONS OF PM RETIREMENT
PLAN AND SURVIVOR INCOME BENEFIT PLAN
Except as expressly provided to the contrary, all of the provisions,
conditions and requirements set forth in the PM Retirement Plan and where
applicable, the Survivor Income Benefit Plan, with respect to eligibility for
and payment of benefits thereunder shall be equally applicable to the granting
of Supplemental Retirement Allowances and other benefits to Participants and
Beneficiaries pursuant to this Plan and the payment thereof pursuant to the
provisions of Article III hereof. Whenever a Participant's rights under this
Plan are to be determined, appropriate reference shall be made to the PM
Retirement Plan.
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ARTICLE VI
ADMINISTRATION
The Committee, the Management Committee and the Administrator shall be
responsible for the general administration of the Plan. The appropriate
Fiduciary shall have full authority to determine all questions arising in
connection with the Plan; provided, however, that any Fiduciary who makes a
request for payment of a Supplemental Retirement Allowance in accordance with a
form of distribution authorized under the Retirement Plan shall excuse himself
from any and all deliberations and decisions in connection with such request.
Decisions of the appropriate Fiduciary shall be conclusive and binding on all
persons.
The Fiduciaries may employ and rely on actuaries, legal counsel,
accountants and agents as they deem advisable.
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ARTICLE VII
CERTAIN RIGHTS AND LIMITATIONS
A. No benefit under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge,
and any attempt to do so shall be void; nor shall any benefit be in any
manner liable for or subject to the debts, contracts, liabilities,
engagements, or torts of the person entitled to such benefit. In the event
that the Administrator shall find that any Participant, Retired
Participant or Spouse or other beneficiary under the Plan has become
bankrupt or that any attempt has been made to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge any of his benefits under
the Plan, then such benefits shall cease and determine, and in that event,
the Administrator shall hold or apply the same to or for the benefit of
such Participant, Retired Participant, Spouse or other beneficiary or
apply the same to or for the benefit of such Participant, Retired
Participant, Spouse or other beneficiary, in such manner as the
Administrator may deem proper.
B. Except as otherwise expressly provided in the Plan, Supplemental
Retirement Allowances and other benefits shall be payable only if the
Participant meets all of the requirements for benefits under the Plan.
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ARTICLE VIII
AMENDMENT AND TERMINATION OF THE PLAN
A. The Board may, by resolution, from time to time and at any time, amend or
modify, in whole or in part, any and all of the provisions of the Plan;
provided, however, that authority to amend the Plan is delegated to the
following Fiduciaries where approval of the Plan amendment (or amendments)
by the shareholders of Philip Morris Companies Inc. is not required: (1)
to the Committee, if the amendment (or amendments) will not increase the
annual cost of the Plan by $10,000,000, (2) to the Management Committee,
if the amendment (or amendments) will not increase the annual cost of the
Plan by $4,000,000, and (3) to the Administrator, if the amendment (or
amendments) will not increase the annual cost of the Plan by $500,000;
provided, further, that no such amendment or modification shall adversely
affect the rights of any Participant, Retired Participant, Spouse or
beneficiary to benefits accrued at the time such amendment or modification
is adopted or becomes effective, whichever is later.
B. (1) The Board may terminate the Plan for any reason at any time, provided
that such termination shall not adversely affect the rights of any
Participant, Retired Participant, Spouse or beneficiary to benefits
accrued to the date of termination.
(2) In the event the Plan is terminated, each Participant, whether or not
such Participant is eligible to receive benefits under this Plan, shall be
immediately and fully vested in the benefits set forth in Article II
accrued to the date of termination of the Plan. Payment of any such
benefits shall be made or commence to be made at the time such Participant
(or his Spouse or designated beneficiary) meets, under the terms of the
Plan at the time of its termination, the requirement for payment of
benefits under the Plan.
C. Notwithstanding any other provision of the Plan to the contrary, in the
event of a Change of Control of the Company, each Participant shall
immediately be fully vested in the benefits set forth in Article II which
have accrued through the date of the Change of Control and, upon the
Change of Control, each Participant (or his Spouse or designated
beneficiary) shall be entitled to a Single Sum Payment in an amount which
is the Actuarial Equivalent of such accrued benefits, which amount shall
be paid within 30 days of the Change of Control.
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EXHIBIT A
SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
OF PHILIP MORRIS COMPANIES INC.
ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT
INTEREST RATE: Average of the interest rates established by the Pension
Benefit Guaranty Corporation to value immediate annuities in the case of a plan
termination for the 24 months preceding the Participant's date of retirement,
less 1/2 of 1%.
MORTALITY ASSUMPTION: UP-1984 Unisex Mortality Table
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EXHIBIT 10.9
THE PHILIP MORRIS
1992 INCENTIVE COMPENSATION
AND STOCK OPTION PLAN
SECTION 1. Purpose; Definitions.
The purpose of the Plan is to give the Company a significant advantage in
attracting, retaining and motivating key employees 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 award made by the Committee pursuant
to Section 4.
b. "Annual Incentive Award Reserve" means the reserve established for any
fiscal year of the Company pursuant to Section 4.
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 Committee referred to in Section 2.
g. "Company" means Philip Morris Companies Inc., a corporation organized
under the laws of the Commonwealth of Virginia, or any successor corporation.
h. "Disability" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
i. "Disinterested Person" means a member of the Board who qualifies as a
disinterested person as defined in Rule 16b-3.
j. "Exercise Period" means the 60-day period from and after a Change in
Control (as defined in Section 10(b)).
k. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
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l. "Fair Market Value" means, as of any given date, the mean between the
highest and lowest reported sales prices of the Stock on the New York Stock
Exchange or, if no such sale of Stock occurs on the New York Stock Exchange on
such date, the fair market value of the Stock as determined by the Committee in
good faith.
m. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
n. "Long Term Performance Award" means an award made by the Committee
pursuant to Section 5.
o. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
p. "Performance Period" means the two-year or greater period during which
a Long Term Performance Award can be earned as determined by the Committee
pursuant to Section 5(a).
q. "Plan" means The Philip Morris 1992 Incentive Compensation and Stock
Option Plan, as set forth herein and as hereinafter amended from time to time.
r. "Pretax Earnings" means, for any fiscal year of the Company, the amount
reported as earnings from continuing operations before income taxes in the
Company's consolidated statements of earnings included in its audited
consolidated financial statements for such fiscal year (adjusted to exclude the
effects of any unusual or non-recurring items that would not arise in the normal
course of business, as determined by the Board).
s. "Restricted Stock" means an award made by the Committee pursuant to
Section 9.
t. "Restriction Period" means the period set by the Committee pursuant to
Section 9(c)(i) during which the recipient of a Restricted Stock Award may not
sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock.
u. "Retirement" means retirement from active employment under a pension
plan of the Company, any subsidiary or affiliate or under an employment contract
with any of them or termination of employment at or after age 55 under
circumstances which the Committee, in its sole discretion, deems equivalent to
retirement.
v. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
w. "Spread Value" means with respect to a share of Stock subject to a
Stock Option an amount equal to the excess of the Fair Market Value over the
option price.
x. "Stock" means the Common Stock, $1 par value, of the Company.
y. "Stock Appreciation Right" means a right granted by the Committee
pursuant to Section 8.
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z. "Stock Option" means an option granted by the Committee pursuant to
Section 7.
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
10.
SECTION 2. Administration.
The Plan shall be administered by the Compensation Committee of the Board or
such other committee of the Board, composed of not less than two Disinterested
Persons, who shall be appointed by the Board and who shall serve at the pleasure
of the Board. If at any time no Committee shall be in office, the functions of
the Committee specified in the Plan shall be exercised by those members of the
Board who qualify as Disinterested Persons.
The Committee shall have plenary authority to grant to employees, pursuant to
the terms of the Plan, Annual Incentive Awards, Long Term Performance Awards,
Stock Options, Stock Appreciation Rights and Restricted Stock. In particular,
the Committee shall have the authority, subject to the terms of the Plan:
(a) to select the employees to whom Annual Incentive Awards, Long Term
Performance Awards, Stock Options, Stock Appreciation Rights and Restricted
Stock may from time to time be granted;
(b) to determine whether and to what extent Annual Incentive Awards, Long
Term Performance Awards, Incentive Stock Options, Non-Qualified Stock Options,
Stock Appreciation Rights and Restricted Stock or any combination are to be
granted hereunder;
(c) to determine and adjust the performance goals and measurements
applicable to Long Term Performance Awards granted pursuant to the Plan;
(d) to determine the extent to which Long Term Performance Awards have
been earned and by whom;
(e) to determine to what extent and under what circumstances amounts
earned with respect to a Long Term Performance Award shall be deferred;
(f) to determine the number of shares to be covered by each award of Stock
Options, Stock Appreciation Rights and Restricted Stock;
(g) to determine the terms and conditions of any Stock Options granted
pursuant to the Plan, including, but not limited to, the option price (subject
to Section 7(a)), any restriction or limitation and any vesting acceleration or
forfeiture waiver regarding any Stock Option, based on such factors as the
Committee shall determine;
(h) to determine under what circumstances a Stock Option may be settled in
cash pursuant to the first paragraph of Section 7(k); and
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(i) to determine the terms and conditions of vesting of Restricted Stock
awards.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines, practices, and procedures governing the Plan
as it shall, from time to time, deem advisable, to interpret the terms and
provisions of the Plan and any award issued under the Plan (and any agreement
relating thereto) and to otherwise supervise the administration of the Plan. The
Committee may also adopt sub-plans, consistent with the Plan, to conform to
applicable state or foreign securities or tax laws.
The Committee may act only by a majority of its members then in office, except
that the members thereof may delegate to the Chief Executive Officer of the
Company or such other officer as may be designated by the Committee, the
authority to make decisions pursuant to Sections 1(u), 7(c), (f), (g), (h) and
(i) and 9(c)(i) and (iv), the authority, subject to guidelines prescribed by the
Committee and approved by the Board, to grant Stock Options and Stock
Appreciation Rights to employees who are not then subject to the provisions of
Section 16 of the Exchange Act and to determine the number of shares to be
covered by any such Stock Option and the terms and conditions thereof in
accordance with the provisions of clause (g) of this Section 2 and may authorize
any one or more of their number or any officer of the Company to execute and
deliver documents on behalf of the Committee, provided that no such delegation
may be made that would cause grants, awards or other transactions under the Plan
to cease to be exempt from Section 16(b) 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 at the time of the
grant of the award or, unless in contravention of any express term of the Plan,
at any time thereafter. 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.
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 affiliates are eligible to be granted awards
under the Plan.
SECTION 4. Annual Incentive Awards.
(a) Establishment of Annual Incentive Award Reserve. The Board may at any
time and from time to time, in respect of each fiscal year of the Company,
establish an Annual Incentive Award Reserve which shall not exceed four percent
of Pretax Earnings for such fiscal year; provided, however, that the Annual
Incentive Award Reserve established for any fiscal year shall not exceed 16% of
the aggregate amount of cash dividends declared on the Stock during said fiscal
year; provided, however, that in the event of the acquisition by the Company of
a significant subsidiary (as such term is defined in Regulation S-X under the
Exchange Act), the foregoing percentage shall be increased with respect to the
fiscal year in which such acquisition was consummated and all subsequent years
by 4%. Such increase shall apply with respect to each such acquisition.
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As soon as practicable after the end of each fiscal year of the Company, the
independent auditors who audited the Company's books and accounts for such
fiscal year shall report to the Board the maximum amount that can be credited to
the Annual Incentive Award Reserve for such fiscal year under the provisions of
the Plan, after giving effect to any determination made by the Board pursuant to
the provisions of the Plan with respect thereto. Such report shall be final,
binding and conclusive upon the Company and all other persons. Amounts credited
to the Annual Incentive Award Reserve with respect to any fiscal year which are
not made the subject of Annual Incentive Awards by the Committee shall not be
carried over to any other fiscal year.
(b) Selection of Recipients and Amounts of Awards. The Committee shall
select the employees to whom Annual Incentive Awards shall be made and the
amount thereof; provided, however, that no employee may receive an Annual
Incentive Award which would exceed 125% of his or her highest annual base salary
rate during the fiscal year for which the Annual Incentive Award is granted.
Annual Incentive Awards may be awarded alone or in addition to other awards
granted under the Plan.
(c) Payment of Awards. All Annual Incentive Awards shall be expressed in
U.S. currency and paid in cash by the Company or the subsidiary or affiliate
that employs the recipient of the award as soon as practicable after the close
of the fiscal year for which awarded or at such earlier time as the Committee
shall determine.
SECTION 5. Long Term Performance Awards.
(a) Awards and Administration. Long Term Performance Awards may be awarded
either alone or in addition to other awards granted under the Plan. The
Committee shall determine the nature, length, and starting date of the
Performance Period for each Long Term Performance Award, which, subject to
Section 10, shall be at least two years, and shall determine the performance
objectives to be used in valuing Long Term Performance Awards and determining
the extent to which such Long Term Performance Awards have been earned.
Performance objectives may vary from participant to participant and between
groups of participants and shall be based upon such Company, business unit or
individual performance factors or criteria as the Committee may deem
appropriate, including, but not limited to, earnings per share or return on
equity. Performance Periods may overlap and participants may participate
simultaneously with respect to Long Term Performance Awards that are subject to
different Performance Periods and different performance factors and criteria.
Long Term Performance Awards shall be confirmed by, and be subject to the terms
of, a Long Term Performance Award Agreement. The terms of such awards need not
be the same with respect to each participant.
On or before the beginning of each Performance Period, the Committee shall
determine for each Long Term Performance Award subject to such Performance
Period the range of dollar values to be paid to the participant at the end of
the Performance Period if and to the extent that the relevant measures of
performance for such Long Term Performance Award are met. Such dollar values may
be fixed or may vary in accordance with such performance or other criteria as
may be determined by the Committee.
(b) Maximum Aggregate Amount Payable for Any Performance Period. The
aggregate amount of Long Term Performance Awards payable with respect to any
Performance Period (determined without regard to any interest credited with
respect to deferred awards) shall not exceed (y) the sum of the maximum
aggregate amount
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that could have been credited to the Annual Incentive Award Reserve in respect
of each fiscal year of the applicable Performance Period less (z) the sum of all
Annual Incentive Awards earned with respect to each fiscal year of the
Performance Period and the amount of Long Term Performance Awards earned with
respect to any such fiscal year because of an overlapping Performance Period.
(c) Adjustment of Awards. The Committee may adjust the performance goals
and measurements applicable to Long Term Performance Awards to take into account
changes in law and accounting and tax rules and to make such adjustments as the
Committee deems necessary or appropriate to reflect the impact of the inclusion
or exclusion of extraordinary or unusual items, events or circumstances in order
to avoid windfalls or unintended disadvantages.
(d) Termination of Employment. Subject to Section 9 and unless otherwise
provided in the applicable Long Term Performance Award Agreement, if a
participant terminates employment during a Performance Period because of death,
Disability or Retirement, such participant shall be entitled to a payment with
respect to each outstanding Long Term Performance Award at the end of the
applicable Performance Period:
i) based, to the extent relevant under the terms of the Long Term
Performance Award, upon the participant's performance for the portion of
such Performance Period ending on the date of termination and the
performance of the Company or any applicable business unit for the entire
Performance Period, and
ii) prorated for the portion of the Performance Period during which
the participant was employed by the Company, a subsidiary or affiliate,
all as determined by the Committee. The Committee may provide for an earlier
payment in settlement of such award in such amount and under such terms and
conditions as the Committee deems appropriate.
Subject to Section 10 and except as otherwise provided in the applicable Long
Term Performance Award Agreement, if a participant terminates employment during
a Performance Period for any other reason, then such participant shall not be
entitled to any payment with respect to a Long Term Performance Award awarded
for such Performance Period, unless the Committee shall otherwise determine.
(e) Form of Payment. The earned portion of a Long Term Performance Award
shall be paid in cash currently or on a deferred basis with such interest as may
be determined by the Committee.
SECTION 6. Stock Subject to Plan.
The total number of shares of Stock reserved and available for distribution
pursuant to Stock Options, Stock Appreciation Rights and (subject to Section
9(a)) Restricted Stock awarded under the Plan shall be 37,000,000 shares.
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Subject to Section 8(b)(iv), if any Stock Option or Stock Appreciation Right
terminates without a payment being made to the participant in the form of Stock,
the shares subject to such Stock Option or Stock Appreciation Right shall again
be available for distribution in connection with awards under the Plan.
In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend, stock split or other change in corporate structure affecting the
Stock, such substitution or adjustments shall be made in the aggregate number
and kind of shares reserved for issuance under the Plan, in the number, kind and
option price of shares subject to outstanding Stock Options and any related
Stock Appreciation Rights and in the number and kind of shares of Restricted
Stock outstanding or available for awards as may be determined to be appropriate
by the Board, in its sole discretion; provided, however, that the number of
shares subject to any award shall always be a whole number.
SECTION 7. Stock Options.
Stock Options may be granted alone or in addition to other awards granted under
the Plan and may be of two types: Incentive Stock Options and Non-Qualified
Stock Options (in each case with or without Stock Appreciation Rights). Any
Stock Option granted under the Plan shall be in such form as the Committee may
from time to time approve.
The Committee shall have the authority to grant any optionee Incentive Stock
Options, Non-Qualified Stock Options or both types of Stock Options. Incentive
Stock Options may be granted only to employees of the Company and its
subsidiaries (within the meaning of Section 424(f) of the Code). To the extent
that any Stock Option does not qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and provisions
of which may differ. An option agreement shall indicate on its face whether it
is an Incentive Stock Option or a Non-Qualified Stock Option. The grant of a
Stock Option shall occur on the date the Committee by resolution, or a duly
authorized officer, selects an employee as a participant in any grant of Stock
Options, determines the number of shares to be subject to the Stock Option
granted to such employee and specifies the terms and provisions of the Stock
Option. The Company shall notify a participant of a grant of a Stock Option, and
a written option certificate shall be duly executed and delivered by the
Company.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code or, without the consent of the
optionee affected, to disqualify any Incentive Stock Option under such Section
422.
Stock Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions as the
Committee shall deem desirable:
(a) Option Price. The option price per share of Stock purchasable under a
Stock Option shall be equal to the Fair Market Value of the Stock at the date of
grant or such higher price as shall be determined by the
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Committee at grant; provided, however, that, in connection with the issuance of
a Stock Option in a transaction to which Section 424(a) of the Code applies, the
option price may be determined pursuant to said Section 424(a).
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten years after
the date the Stock Option is granted.
(c) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee; provided, however, that, except as provided in Sections 7(f), (g),
(h) and (i) and 10 or, unless otherwise determined by the Committee, no Stock
Option shall be exercisable prior to the first anniversary date of the granting
of the Stock Option. The Committee may waive, reduce or eliminate provisions
that Stock Options are exercisable only in installments and provisions that
Stock Options are not exercisable for a specified period of time, in whole or in
part, based on such factors as the Committee may determine.
(d) Method of Exercise. Subject to the provisions of this Section 7, Stock
Options may be exercised, in whole or in part, at any time during the option
term 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. As determined by the Committee, payment in full or in part
may also be made in the form of unrestricted Stock already owned by the optionee
based on the Fair Market Value on the date the Stock Option is exercised;
provided, however, that such unrestricted Stock shall not have been acquired
within the preceding six months upon the exercise of a Stock Option or any 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.
No shares of Stock shall be issued until full payment therefor has been made. An
optionee shall have all of the rights of a stockholder of the Company, including
the right to vote the shares and the right to receive dividends, with respect to
shares subject to the Stock Option when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 12(a).
(e) Non-transferability of Options. No Stock Option shall be transferable
by the optionee other than by will or by the laws of descent and distribution or
(in the case of a Non-Qualified Stock Option) pursuant to a "qualified domestic
relations order" (as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder), and all Stock
Options shall be exercisable, during the optionee's lifetime, only by the
optionee, by the guardian or legal representative of the optionee or (in the
case of a NonQualified Stock Option) its alternate payee pursuant to such
qualified domestic relations order, it being understood that the terms "holder"
and "optionee" include the guardian and legal representative of the optionee
named in the option agreement and any person to whom an option is transferred by
will, the laws of descent and distribution or (in the case of a Non-Qualified
Stock Option) such qualified domestic relations order.
(f) Termination by Death. If an optionee's employment terminates by reason
of death, any Stock Option held by such optionee may thereafter be exercised, to
the extent then exercisable or on such accelerated basis
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as the Committee may determine, for such period as the Committee may specify at
grant from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter.
(g) Termination by Reason of Disability. If an optionee's employment
terminates by reason of Disability, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable at the
time of termination or on such accelerated basis as the Committee may determine,
for such period as the Committee may specify at grant from the date of such
termination of employment or until the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided, however, that, if the
optionee dies within such period, any unexercised Stock Option held by such
optionee shall, notwithstanding the expiration of such period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of twelve months from the date of such death or until the expiration of
the stated term of such Stock Option, whichever period is the shorter. In the
event of termination of employment by reason of Disability, if an Incentive
Stock Option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, such Stock Option will thereafter
be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. If an optionee's employment
terminates by reason of Retirement, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable at the
time of such Retirement or on such accelerated basis as the Committee may
determine, for such period as the Committee may specify at grant from the date
of such termination of employment or until the expiration of the stated term of
such Stock Option, whichever period is the shorter; provided, however, that, if
the optionee dies within such period, any unexercised Stock Option held by such
optionee shall, notwithstanding the expiration of such period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of twelve months from the date of such death or until the expiration of
the stated term of such Stock Option, whichever period is the shorter. In the
event of termination of employment by reason of Retirement, if an Incentive
Stock Option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, such Stock Option will thereafter
be treated as a Non-Qualified Stock Option.
(i) Other Termination. Unless otherwise determined by the Committee, if an
optionee's employment terminates for any reason other than death, Disability or
Retirement, the Stock Option shall thereupon terminate, except that such Stock
Option, to the extent then exercisable or on such accelerated basis as the
Committee may determine, may be exercised for the lesser of one year from
termination of employment or the balance of such Stock Option's term; provided,
however, that if the optionee dies within such one-year period, any unexercised
Stock Option held by such optionee shall, notwithstanding the expiration of such
one-year period, continue to be exercisable to the extent to which it was
exercisable at the time of death for a period of twelve months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of termination of employment, if
an Incentive Stock Option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422 of the Code, such Stock Option
will thereafter be treated as a NonQualified Stock Option.
(j) Incentive Stock Options. The Committee is authorized to provide at the
time of grant, that, to the extent permitted under Section 422 of the Code, if a
participant's employment with the Company and its subsidiaries is terminated and
the portion of any Incentive Stock Option that is otherwise exercisable during
the post-termination
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period specified under Sections 7(f), (g), (h) or (i), applied without regard to
this Section 7(j), is greater than the portion of such option that is
exercisable as an "incentive stock option" during such post-termination period
under Section 422, such post-termination period shall automatically be extended
(but not beyond the original option term) to the extent necessary to permit the
optionee to exercise such Incentive Stock Option (either as an Incentive Stock
Option or, if exercised after the expiration periods that apply for the purposes
of Section 422, as a Non-Qualified Stock Option).
(k) Cashing Out of Option; Settlement of Spread Value in Stock. On receipt
of written notice of exercise, the Committee may elect to cash out all or a
portion of the shares of Stock for which a Stock Option is being exercised by
paying the optionee an amount, in cash or Stock, equal to the Spread Value of
such shares on the effective date of such cash out.
Notwithstanding any other provision of this Plan, upon a Change in Control,
unless the Committee shall determine otherwise at grant, an optionee 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 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
price under the Stock Option multiplied by the number of shares of Stock as to
which the right granted under this Section 7(k) shall have been exercised.
SECTION 8. Stock Appreciation Rights.
(a) Grant and Exercise. Stock Appreciation Rights may be granted only in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of grant. In the case of an Incentive Stock Option, such rights
may be granted only at the time of grant.
A Stock Appreciation Right or applicable portion thereof granted with respect to
a given Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option, except that, unless
otherwise determined by the Committee at the time of grant, a Stock Appreciation
Right granted with respect to less than the full number of shares, covered by a
related Stock Option shall not be reduced until the number of shares covered by
an exercise or termination of the related Stock Option exceeds the number of
shares not covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee in accordance with
Section 8(b) by surrendering the applicable portion of the related Stock Option
in accordance with procedures established by the Committee. Upon such exercise
and surrender, the optionee shall be entitled to receive an amount determined in
the manner prescribed in Section 8(b). Stock Options which have been so
surrendered shall no longer be exercisable to the extent the related Stock
Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
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i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 7 and this
Section 8.
ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash, shares of Stock or both
equal in value to the excess of the Fair Market Value of one share of
Stock over the option price per share specified in the related Stock
Option multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee having
the right to determine the form of payment.
iii) Stock Appreciation Rights shall be transferable only when and
to the extent that the underlying Stock Option would be transferable under
Section 7(e) and only to the transferee of the underlying Stock Option.
iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is related
shall be deemed to have been exercised for the purpose of the limitation
set forth in Section 6 on the number of shares of Stock to be issued under
the Plan but only to the extent of the number of shares issued under the
Stock Appreciation Right at the time of exercise.
v) The Committee may provide, at the time of grant, that a Stock
Appreciation Right can be exercised only in the event of a Change in
Control, subject to such terms and conditions as the Committee may specify
at grant.
SECTION 9. Restricted Stock.
(a) Administration. Not in excess of 9,000,000 shares (subject to
adjustment pursuant to Section 6) of Restricted Stock may be issued either alone
or in addition to other awards granted under the Plan. The Committee shall
determine the employees to whom and the time or times at which grants of
Restricted Stock will be made, the number of shares to be awarded, the time or
times within which such awards may be subject to forfeiture and any other terms
and conditions of the awards, in addition to those contained in Section 9(c).
The Committee may condition the grant of Restricted Stock upon the attainment of
specified performance goals or such other factors or criteria as the Committee
shall determine.
The provisions of Restricted Stock awards need not be the same with respect to
each recipient.
(b) Awards and Certificates. Shares of Restricted Stock may be evidenced
in such manner as the Committee may deem appropriate, including book-entry
registration or issuance of a stock certificate or certificates. Any certificate
issued in respect of shares of Restricted Stock shall be registered in the name
of the participant and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, substantially in the
following form:
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The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of The Philip Morris 1992 Incentive Compensation and Stock
Option Plan and a Restricted Stock Agreement. Copies of such Plan and
Agreement are on file at the offices of Philip Morris Companies Inc., 120
Park Avenue, New York, New York 10017.
The Committee may require that the certificates evidencing such shares be held
in custody by the Company until the restrictions thereon shall have lapsed and
that, as a condition of any Restricted Stock award, the participant shall have
delivered a stock power, endorsed in blank, relating to the Stock covered by
such award.
(c) Terms and Conditions. Shares of Restricted Stock shall be subject to
the following terms and conditions:
i) During a period set by the Committee (the "Restriction Period"),
commencing with the date of such award, the participant shall not be
permitted to sell, assign, transfer, pledge or otherwise encumber shares
of Restricted Stock. The Committee may provide for the lapse of such
restrictions in installments and may accelerate or waive such
restrictions, in whole or in part, based on service, performance and such
other factors or criteria as the Committee may determine.
ii) Except as otherwise provided in the applicable Restricted Stock
Agreement and Section 9(c)(i), the participant shall have, with respect to
the shares of Restricted Stock, all of the rights of a stockholder of the
Company, including the right to vote the shares and the right to receive
any cash dividends. Dividends payable in Stock shall be paid in the form
of Restricted Stock.
iii) Except as otherwise provided in the applicable Restricted Stock
Agreement and Sections 9(c)(i) and (iv), upon termination of a
participant's employment for any reason during the Restriction Period, all
shares still subject to restriction shall be forfeited by the participant.
iv) In the event of hardship or other special circumstances of a
participant whose employment is terminated for any reason, the Committee
may waive in whole or in part any or all remaining restrictions with
respect to such participant's shares of Restricted Stock.
v) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
unlegended certificates for such shares shall be delivered to the
participant.
vi) Each award shall be confirmed by, and be subject to the terms
of, a Restricted Stock Agreement.
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SECTION 10. 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) Any Stock Options and Stock Appreciation Rights outstanding as of
the date such Change in Control occurs and not then exercisable shall
become fully exercisable.
ii) The restrictions applicable to any Restricted Stock shall lapse,
and such Restricted Stock shall become free of all restrictions and fully
vested to the full extent of the original grant.
iii) Subject to the provisions of Section 7(k), the value of all
outstanding Stock Options, Stock Appreciation Rights and Restricted Stock
which, in the case of holders who are then subject to the provisions of
Section 16 of the Exchange Act, shall have been granted at least six
months before the date of cash-out occurring pursuant to this Section
10(a)(iii), 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 10(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 Long Term Performance Awards relating to Performance Periods
prior to the Performance Period in which the Change in Control occurs
which have been earned but not paid shall become immediately payable in
cash. In addition, subject to the provisions of Section 5(b), each
participant who has been awarded a Long Term Performance Award, shall be
deemed to have earned a pro rata Long Term Performance Award equal to the
product of (y) such participant's maximum award opportunity for such
Performance Period, and (z) a fraction, the numerator of which is the
number of full or partial months which have elapsed since the beginning of
such Performance Period to the date on which the Change in Control occurs,
and the denominator of which is the total number of months in such Period
or, in the case of a completed Performance Period, equal to the maximum
award opportunity.
(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 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 10(b); or
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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 which as a result of such transaction owns the
Company through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (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 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
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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 Index 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.
SECTION 11. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of an
optionee under a Stock Option or a recipient of a Long Term Performance Award,
Stock Appreciation Right or Restricted Stock Award theretofore granted without
the optionee's or recipient's consent or which, without the approval of the
Company's stockholders, would:
(a) materially increase the benefits accruing to participants under the
Plan;
(b) except as expressly provided in the Plan, increase the total number of
shares of Stock which may be issued under the Plan;
(c) modify the requirements as to eligibility for participation in the
Plan;
(d) except as expressly provided in the Plan, decrease the option price of
any Stock Option to less than the Fair Market Value on the date of grant;
(e) extend the maximum option period under Section 7(b).
The Committee may amend the terms of any Stock Option, Stock Appreciation Right,
Restricted Stock Agreement or other award theretofore granted, prospectively or
retroactively, but no such amendment shall impair the rights of any holder
without the holder's consent.
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules, as well
as other developments.
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SECTION 12. Unfunded Status of Plan.
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation, including specifically the Annual Incentive
Award Reserve. The Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver 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 purchasing shares pursuant to a
Stock Option to represent to and agree with the Company in writing that the
optionee or participant is acquiring the shares without a view to the
distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of 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 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.
(b) Nothing contained in this Plan shall prevent the Company, a subsidiary
or 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 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 the award or vesting of
Restricted Stock or the exercise of Stock Options may be settled with
unrestricted Stock, including Stock that is part of, or is received upon
exercise 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 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 Stock.
(e) At the time of grant, the Committee may provide in connection with any
grant made under this Plan that the shares of Stock received as a result of such
grant shall be subject to a right of first refusal pursuant to which the
participant shall be required to offer to the Company any shares that the
participant wishes to sell at the then
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Fair Market Value of the Stock, subject to such other terms and conditions as
the Committee may specify at the time of grant.
(f) The reinvestment of dividends in additional Restricted Stock at the
time of any dividend payment shall only be permissible if sufficient shares of
Stock are available under Section 6 for such reinvestment (taking into account
then outstanding Stock Options, Stock Appreciation Rights and other Plan
awards).
(g) The Committee may establish such procedures as it deems appropriate
for a participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid.
(h) 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.
SECTION 14. Effective Date of Plan.
The Plan shall be effective on May 1, 1992.
SECTION 15. Term of Plan.
No Stock Option or Stock Appreciation Right shall be granted or award of
Restricted Stock made on or after the fifth anniversary of the effective date of
the Plan, but any such awards granted prior to such fifth anniversary may extend
beyond that date. There shall be no time limitation with respect to the granting
of Annual Incentive Awards or Long Term Performance Awards.
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Exhibit 10.12
THE PHILIP MORRIS
1987 LONG TERM INCENTIVE PLAN
SECTION 1. Purpose; Definitions.
The purpose of the Plan is to enable key employees of the Company, its
subsidiaries and affiliates to participate in the Company's future by offering
them long term performance-based incentives and proprietary interests in the
Company. The Plan also provides a means through which the Company can attract
and retain key employees of merit.
For purposes of the Plan, the following are defined as set forth below:
a. "Board" means the Board of Directors of the Company.
b. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
c. "Commission" means the Securities and Exchange Commission or any
successor agency.
d. "Committee" means the Committee referred to in Section 2.
e. "Company" means Philip Morris Companies Inc., a corporation organized
under the laws of the Commonwealth of Virginia, or any successor corporation.
f. "Deferred Stock" means an award made pursuant to Section 8.
g. "Disability" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
h. "Disinterested Person" shall have the meaning set forth in Rule
16b-3(d)(3), as promulgated by the Commission under the Exchange Act, or any
successor definition adopted by the Commission.
i. "Early Retirement" means retirement, with the consent for purposes of
the Plan of the Vice President-Administration and Human Resources of the Company
or such other officer as may be designated by the Committee, from active
employment with the Company, a subsidiary or affiliate pursuant to the early
retirement provisions of the applicable pension plan of such employer.
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j. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
k. "Fair Market Value" means, except as provided in Section 5(k) and
6(b)(ii), the mean, as of any given date, between the highest and lowest
reported sales prices of the Stock on the New York Stock Exchange or, if no such
sale of Stock occurs on the New York Stock Exchange on such date, the fair
market value of the Stock as determined by the Committee in good faith.
l. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422A of
the Code.
m. "Long Term Performance Award" or "Long Term Award" means an award under
Section 10.
n. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
o. "Normal Retirement" means retirement from active employment with the
Company, a subsidiary or affiliate at or after age 65.
p. "Plan" means The Philip Morris 1987 Long Term Incentive Plan, as set
forth herein and as hereinafter amended from time to time.
q. "Restricted Stock" means an award under Section 7.
r. "Retirement" means Normal or Early Retirement.
s. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
t. "Stock" means the Common Stock, $1 par value, of the Company.
u. "Stock Appreciation Right" means a right granted under Section 6.
v. "Stock Option" or "Option" means an option granted under Section 5.
w. "Stock Purchase Right" means a purchase right granted under Section 9.
In addition, the terms "Change in Control", "Potential Change in Control" and
"Change in Control Price" have the meanings set forth in Sections 11(b), (c) and
(d), respectively.
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SECTION 2. Administration.
The Plan shall be administered by the Compensation Committee of the Board or
such other committee of the Board, composed of not less than three Disinterested
Persons, who shall be appointed by the Board and who shall serve at the pleasure
of the Board. If at any time no Committee shall be in office, the functions of
the Committee specified in the Plan shall be exercised by the Board.
The Committee shall have plenary authority to grant to eligible employees,
pursuant to the terms of the Plan, Stock Options, Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Stock Purchase Rights and Long Term
Performance Awards.
In particular, the Committee shall have the authority, subject to the terms of
the Plan:
(a) to select the officers and other key employees to whom Stock Options,
Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase
Rights and Long Term Performance Awards may from time to time be granted;
(b) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock, Stock Purchase Rights, Long Term Performance Awards or any
combination thereof are to be granted hereunder;
(c) to determine the number of shares to be covered by each award granted
hereunder;
(d) to determine the terms and conditions of any award granted hereunder
(including, but not limited to, the share price, any restriction or limitation
and any vesting acceleration or forfeiture waiver regarding any Stock Option or
other award and the shares of Stock relating thereto, based on such factors as
the Committee shall determine);
(e) to adjust the performance goals and measurements applicable to
performance-based awards pursuant to the terms of the Plan;
(f) to determine under what circumstances a Stock Option may be settled in
cash, Deferred Stock or Restricted Stock under Section 5(k);
(g) to determine to what extent and under what circumstances Stock and
other amounts payable with respect to an award shall be deferred; and
(h) to determine the terms and conditions of Stock Purchase Rights, the
Stock purchased by exercising such Rights and any loans to be made by the
Company with respect thereto.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to
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interpret the terms and provisions of the Plan and any award issued under the
Plan (and any agreement relating thereto) and to otherwise supervise the
administration of the Plan.
The Committee may act only by a majority of its members then in office, except
that the members thereof may authorize any one or more of their number or any
officer of the Company to execute and deliver documents on behalf of the
Committee.
Any determination made by the Committee pursuant to the provisions of the Plan
with respect to any award shall be made in its sole discretion at the time of
the grant of the award or, unless in contravention of any express term of the
Plan, at any time thereafter. All decisions made by the Committee pursuant to
the provisions of the Plan shall be final and binding on all persons, including
the Company and Plan participants.
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for distribution
pursuant to Stock Options or other awards under the Plan shall be 8,000,000
shares. Such shares may consist, in whole or in part, of authorized and unissued
shares or treasury shares.
Subject to Section 6(b)(iv), if any shares of Stock that have been optioned
cease to be subject to a Stock Option, if any shares of Stock that are subject
to any Restricted or Deferred Stock award, Stock Purchase Right or Long Term
Performance Award are forfeited or if any Stock Option or other award otherwise
terminates without a payment being made to the participant in the form of Stock,
such shares shall again be available for distribution in connection with awards
under the Plan.
In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend, stock split or other change in corporate structure affecting the
Stock, such substitution or adjustments shall be made in the aggregate number of
shares reserved for issuance under the Plan, in the number and option price of
shares subject to outstanding Stock Options, in the number and purchase price of
shares subject to outstanding Stock Purchase Rights and in the number of shares
subject to other outstanding awards granted under the Plan as may be determined
to be appropriately by the Board, in its sole discretion; provided, however,
that the number of shares subject to any award shall always be a whole number.
Such adjusted option price shall also be used to determine the amount payable by
the Company upon the exercise of any Stock Appreciation Right associated with
any Stock Option.
SECTION 4. Eligibility.
Officers and other key employees of the Company, its subsidiaries and affiliates
(but excluding members of the Committee and any person who serves only as a
director) who are responsible for or contribute to the management, growth and
profitability of the business of the Company, its subsidiaries or affiliates are
eligible to be granted awards under the Plan.
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SECTION 5. Stock Options.
Stock Options may be granted alone or in addition to other awards granted under
the Plan and may be of two types: Incentive Stock Options and Non-Qualified
Stock Options. Any Stock Option granted under the Plan shall be in such form as
the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive Stock
Options, Non-Qualified Stock Options or both types of Stock Options (in each
case with or without Stock Appreciation Rights). Incentive Stock Options may be
granted only to employees of the Company and its subsidiaries (within the
meaning of Section 425(f) of the Code). To the extent that any Stock Option does
not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and provisions
of which may differ. An option agreement shall indicate on its face whether it
is an agreement for Incentive Stock Options or Non-Qualified Stock Options. The
grant of a Stock Option shall occur on the date the Committee by resolution
selects an employee as a participant in any grant of Stock Options, determines
the number of Stock Options to be granted to such employee and specifies the
terms and provisions of the option agreement. The Company shall notify a
participant of any grant of Stock Options, and a written option agreement or
agreements shall be duly executed and delivered by the Company.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422A of the Code or, without the consent of
the optionee affected, to disqualify any Incentive Stock Option under such
Section 422A.
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions as the
Committee shall deem desirable:
(a) Option Price. The option price per share of Stock purchasable under a
Stock Option shall be equal to the Fair Market Value of the Stock at time of
grant or such higher price as shall be determined by the Committee at grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than 10 years
after the date the Option is granted, and no Non-Qualified Stock Option shall be
exercisable more than 10 years and one day after the date the Option is granted.
(c) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee; provided, however, that, except as provided in Sections 5(f), (g),
(h) and 11, unless otherwise determined by the
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Committee, no Stock Option shall be exercisable prior to the first anniversary
date of the granting of the Stock Option. If the Committee provides that any
Stock Option is exercisable only in installments, the Committee may at any time
waive such installment exercise provisions, in whole or in part, based on such
factors as the Committee may determine.
(d) Method of Exercise. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
period 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. As
determined by the Committee, payment in full or in part may also be made in the
form of unrestricted Stock already owned by the optionee or, in the case of the
exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock
subject to an award hereunder (based, in each case, on the Fair Market Value of
the Stock on the date the Stock Option is exercised); provided, however, that,
in the case of an Incentive Stock Option, the right to make a payment in the
form of already owned shares may be authorized only at the time the Stock Option
is granted.
If payment of the option exercised price of a Non-Qualified Stock Option is made
in whole or in part in the form of Restricted Stock or Deferred Stock, such
Restricted Stock or Deferred Stock (and any replacement shares relating thereto)
shall remain (or be) restricted or deferred, as the case may be, in accordance
with the original terms of the Restricted Stock award or Deferred Stock award in
question, and any additional Stock received upon the exercise shall be subject
to the same forfeiture restrictions or deferral limitations, unless otherwise
determined by the Committee.
No shares of Stock shall be issued until full payment therefor has been made.
Subject to any forfeiture restrictions or deferral limitations that may apply if
a Stock Option is exercised using Restricted Stock or Deferred Stock, an
optionee shall have all of the rights of a stockholder of the Company, including
the right to vote the shares and the right to receive dividends, with respect to
shares subject to the Stock Option when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 14(a).
(e) Non-transferability of Options. No Stock Option shall be transferable
by the optionee other than by will or by the laws of descent and distribution,
and all Stock Options shall be exercisable, during the optionee's lifetime, only
by the optionee or by the guardian or legal representative of the optionee, it
being understood that the terms "holder" and "optionee" include the guardian and
legal representative of the optionee named in the option agreement and any
person to whom an option is transferred by will or the laws of descent and
distribution.
(f) Termination by Death. Subject to Section 5(j), if any optionee's
employment terminates by reason of death, any Stock Option held by such optionee
may thereafter be exercised, to the extent then exercisable or on such
accelerated basis as the Committee may
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determine, for a period of one year (or such other period as the Committee may
specify) from the date of such death or until the expiration of the stated term
of such Stock Option, whichever period is the shorter.
(g) Termination by Reason of Disability. Subject to Section 5(j), if an
optionee's employment terminates by reason of Disability, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination or on such accelerated basis as the
Committee may determine, for a period of three years (or such shorter period as
the Committee may specify at grant) from the date of such termination of
employment or until the expiration of the stated term of such Stock Option,
whichever period is the shorter; provided, however, that, if the optionee dies
within such three-year period (or such shorter period), any unexercised Stock
Option held by such optionee shall, notwithstanding the expiration of such
three-year (or such shorter) period, continue to be exercisable to the extent to
which it was exercisable at the time of death for a period of 12 months from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter. In the event of termination of
employment by reason of Disability, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422A of the Code, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. Subject to Section 5(j), if an
optionee's employment terminates by reason of Retirement, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of such Retirement or on such accelerated basis as
the Committee may determine, for a period of three years (or such shorter period
as the Committee may specify at grant) from the date of such termination of
employment or until the expiration of the stated term of such Stock Option,
whichever period is the shorter; provided, however, that, if the optionee dies
within such three-year (or such shorter) period any unexercised Stock Option
held by such optionee shall, notwithstanding the expiration of such three-year
(or such shorter) period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of 12 months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of termination of employment by
reason of Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422A of
the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
(i) Other Termination. Unless otherwise determined by the Committee, if an
optionee's employment terminates for any reason other than death, Disability or
Retirement, the Stock Option shall thereupon terminate, except that such Stock
Option, to the extent then exercisable, may be exercised for the lesser of three
months or the balance of such Stock Option's term if the optionee is
involuntarily terminated by the Company, a subsidiary or affiliate without
cause.
(j) Incentive Stock Option Limitations. To the extent required for
"incentive stock option" status under Section 422A of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Stock with respect
to which Incentive Stock Options granted after
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1986 are exercisable for the first time by the optionee during any calendar year
under the Plan and any other stock option plan of any subsidiary or parent
corporation (within the meaning of Section 425 of the Code) after 1986 shall not
exceed $100,000.
The Committee is authorized to provide at grant that, to the extent permitted
under Section 422A of the Code, if a participant's employment with the Company
and its subsidiaries is terminated by reason of death, Disability or Retirement
and the portion of any Incentive Stock Option that is otherwise exercisable
during the post-termination period specified under Sections 5(f), (g) or (h),
applied without regard to this Section 5(j), is greater than the portion of such
option that is exercisable as an "incentive stock option" during such
post-termination period under Section 422A, such post-termination period shall
automatically be extended (but not beyond the original option term) to the
extent necessary to permit the optionee to exercise such Incentive Stock Option
(either as an Incentive Stock Option or, if exercised after the expiration
periods that apply for the purposes of Section 422A, as a Non-Qualified Stock
Option). The Committee is also authorized to provide at grant for a similar
extension of the post-termination exercise period in the event of a Change in
Control or a Potential Change in Control.
Notwithstanding the foregoing, except with respect to Incentive Stock Options
granted prior to October 25, 1989, if an optionee's employment terminates at or
after a Change in Control (as defined in Section 11(b)), other than by reason of
death, Disability or Retirement, any Stock Option held by such optionee shall be
exercisable for the lesser of (x) six months and one day, and (y) the balance of
such Stock Option's term pursuant to Section 5(b).
(k) Cashing Out of Option; Settlement of Spread Value in Deferred or
Restricted Stock. On receipt of written notice to exercise, the Committee may
elect to cash out all or part of the portion of any Stock Option to be exercised
by paying the optionee an amount, in cash or Stock, equal to the excess of the
Fair Market Value of the Stock over the option price (the "Spread Value") on the
effective date of such cash out.
Cash outs relating to options held by the optionees who are actually or
potentially subject to Section 16(b) of the Exchange Act shall comply with the
"window period" provisions of Rule 16b-3, to the extent applicable, and, in the
case of cash outs, of Non-Qualified Stock Options held by such optionees, the
Committee may determine Fair Market Value under the pricing rule set forth in
Section 6(b)(ii)(B).
In addition, if the option agreement so provides at grant or is amended after
grant and prior to exercise to so provide (with the optionee's consent), the
Committee may require that all or part of the shares to be issued with respect
to the Spread Value payable in the event of a cash out of an unexercised Stock
Option or the Spread Value portion of an exercised Stock Option take the form of
Deferred or Restricted Stock, which shall be valued on the date of exercise on
the basis of the Fair Market Value of such Deferred or Restricted Stock,
determined without regard to the deferral limitations or forfeiture restrictions
involved.
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Notwithstanding any other provision of this Plan, upon a Change in Control (as
defined in Section 11(b)) other than a Change in Control specified in clause (i)
of Section 11(b) arising as a result of beneficial ownership (as defined
therein) by the Participant of Outstanding Company Common Stock or Outstanding
Company Voting Securities (as such terms are defined below), in the case of
Stock Options other than (x) Stock Options held by an officer or director of the
Company (within the meaning of Section 16 of the Exchange Act) which were
granted less than six months prior to the Change in Control and (y) Incentive
Stock Options granted prior to October 25, 1989, during the 60-day period from
and after a Change in Control (the "Exercise Period"), unless the Committee
shall determine otherwise at the time of grant, an optionee shall have the
right, in lieu of the payment of the exercise price of the shares of Stock being
purchased under the Stock Option and by giving notice to the Company, to elect
(within the Exercise Period) to surrender all or part of the Stock Option 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" (as defined in Section
11(c)) per share of common stock on the date of such election shall exceed the
exercise price per share of Stock under the Stock Option multiplied by the
number of shares of common stock granted under the Stock Option as to which the
right granted under this Section 5(k) shall have been exercised.
SECTION 6. Stock Appreciation Rights.
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option.
A Stock Appreciation Right or applicable portion thereof granted with respect to
a given Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option, except that, unless
otherwise determined by the Committee at the time of grant, a Stock Appreciation
Right granted with respect to less than the full number of shares covered by a
related Stock Option shall not be reduced until the number of shares covered by
an exercise or termination of the related Stock Option exceeds the number of
shares not covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee in accordance with
Section 6(b) by surrendering the applicable portion of the related Stock Option
in accordance with procedures established by the Committee. Upon such exercise
and surrender, the optionee shall be entitled to receive an amount determined in
the manner prescribed in Section 6(b). Stock Options which have been so
surrendered shall no longer be exercisable to the extent the related Stock
Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
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(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this
Section 6; provided, however, that a Stock Appreciation Right shall not be
exercisable during the first six months of its terms by an optionee who is
actually or potentially subject to Section 16(b) of the Exchange Act,
except that this limitation shall not apply in the event of death or
Disability of the optionee prior to the expiration of the six-month
period.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash, shares of Stock or both
equal in value to the excess of the Fair Market Value of one share of
Stock over the option price per share specified in the related Stock
Option multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee having
the right to determine the form of payment.
In the case of Stock Appreciation Rights relating to Stock Options held by
optionees who are actually or potentially subject to Section 16(b) of the
Exchange Act, the Committee:
(A) may require that such Stock Appreciation Rights be
exercised only in accordance with the applicable "window period"
provisions of Rule 16b-3; and
(B) in the case of Stock Appreciation Rights relating to
Non-Qualified Stock Options, may provide that the amount to be paid
upon exercise of such Stock Appreciation Rights during a Rule 16b-3
"window period" shall be based on the highest mean sales price of
the Stock on the New York Stock Exchange on any day during such
"window period".
(iii) Stock Appreciation Rights shall be transferable only when and
to the extent that the underlying Stock Option would be transferable under
Section 5(e).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is related
shall be deemed to have been exercised for the purpose of the limitation
set forth in Section 3 on the number of shares of Stock to be issued under
the Plan, but only to the extent of the number of shares issued under the
Stock Appreciation Right at the time of exercise based on the value of the
Stock Appreciation Right at such time.
(v) The Committee may provide, at the time of grant, that a Stock
Appreciation Right can be exercised only in the event of a Change in
Control or a Potential Change in Control, subject to such terms and
conditions as the Committee may specify at grant.
(vi) The Committee may also provide that, in the event of a Change
in Control or a Potential Change in Control, the amount to be paid upon
the exercise of a Stock
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Appreciation Right shall be based on the Change in Control Price, subject
to such terms and conditions as the Committee may specify at grant.
SECTION 7. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued either alone
or in addition to other awards granted under the Plan. The Committee shall
determine the officers and key employees to whom and the time or times at which
grants of Restricted Stock will be made, the number of shares to be awarded, the
time or times within which such awards may be subject to forfeiture and any
other terms and conditions of the awards, in addition to those contained in
Section 7(c).
The Committee may condition the grant of Restricted Stock upon the attainment of
specified performance goals or such other factors or criteria as the Committee
shall determine.
The provisions of Restricted Stock awards need not be the same with respect to
each recipient.
(b) Awards and Certificates. Each participant receiving a Restricted Stock
award shall be issued a certificate in respect of such shares of Restricted
Stock. Such certificate shall be registered in the name of such participant and
shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to such award, substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of The Philip Morris 1987 Long Term Incentive Plan and a
Restricted Stock Agreement. Copies of such Plan and Agreement are on file
at the offices of Philip Morris Companies Inc., 120 Park Avenue, New York,
New York 10017."
The Committee may require that the certificates evidencing such shares be held
in custody by the Company until the restrictions thereon shall have lapsed and
that, as a condition of any Restricted Stock award, the participant shall have
delivered a stock power, endorsed in blank, relating to the Stock covered by
such award.
(c) Terms and Conditions. Shares of Restricted Stock shall be subject to
the following terms and conditions:
(i) Subject to the provisions of the Plan and the Restricted Stock
Agreement referred to in Section 7(c)(vi), during a period set by the
Committee, commencing with the date of such award (the "Restriction
Period"), the participant shall not be permitted to sell, assign,
transfer, pledge or otherwise encumber shares of Restricted Stock. Within
these limits, the Committee may provide for the lapse of such restrictions
in installments and may accelerate or waive such restrictions, in whole or
in part, based on service, performance and such other factors or criteria
as the Committee may determine.
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(ii) Except as provided in this paragraph (ii) and Section 7(c)(i),
the participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a stockholder of the Company, including the
right to vote the shares and the right to receive any cash dividends.
Unless otherwise determined by the Committee, cash dividends shall be
automatically deferred and reinvested in additional Restricted Stock and
dividends payable in Stock shall be paid in the form of Restricted Stock.
(iii) Except to the extent otherwise provided in the applicable
Restricted Stock Agreement and Sections 7(c)(i) and (iv), upon termination
of a participant's employment for any reason during the Restriction
Period, all shares still subject to restriction shall be forfeited by the
participant.
(iv) In the event of hardship or other special circumstances of a
participant whose employment is involuntarily terminated (other than for
cause), the Committee may waive in whole or in part any or all remaining
restrictions with respect to such participant's shares of Restricted
Stock.
(v) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
unlegended certificates for such shares shall be delivered to the
participant.
(vi) Each award shall be confirmed by, and be subject to the terms
of, a Restricted Stock Agreement.
SECTION 8. Deferred Stock.
(a) Administration. Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the officers and key employees to whom and the time or times at which Deferred
Stock shall be awarded, the number of shares of Deferred Stock to be awarded to
any participant, the duration of the period (the "Deferral Period") during
which, and the conditions under which, receipt of the Stock will be deferred and
any other terms and conditions of the award, in addition to those contained in
Section 8(b).
The Committee may condition the grant of Deferred Stock upon the attainment of
specified performance goals or such other factors or criteria as the Committee
shall determine.
The provisions of Deferred Stock awards need not be the same with respect to
each recipient.
(b) Terms and Conditions. Deferred Stock awards shall be subject to the
following terms and conditions:
(i) Subject to the provisions of the Plan and the Deferred Stock
Agreement referred to in Section 8(b)(vii), Deferred Stock awards may not
be sold, assigned, transferred, pledged or otherwise encumbered during the
Deferral Period. At the
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expiration of the Deferral Period (or Elective Deferral Period as defined
in Section 8(b)(vi), where applicable), share certificates shall be
delivered to the participant for the shares covered by the Deferred Stock
award.
(ii) Unless otherwise determined by the Committee, amounts equal to
any dividends declared during the Deferral Period with respect to the
number of shares covered by a Deferred Stock award will be awarded,
automatically deferred and deemed to be reinvested in additional Deferred
Stock.
(iii) Except to the extent otherwise provided in the applicable
Deferred Stock Agreement and Sections 8(b)(iv) and (v), upon termination
of a participant's employment for any reason during the Deferral Period,
the rights to the shares still covered by the Deferred Stock award shall
be forfeited.
(iv) Based on service, performance and such other factors or
criteria as the Committee may determine, the Committee may provide for the
lapse of deferral limitations in installments and may accelerate the
vesting of all or any part of any Deferred Stock award and waive the
deferral limitations for all or any part of such award.
(v) In the event of hardship or other special circumstances of a
participant whose employment is involuntarily terminated (other than for
cause), the Committee may waive in whole or in part any or all remaining
deferral limitations with respect to any or all of such participant's
Deferred Stock.
(vi) A participant may elect to further defer receipt of the
Deferred Stock payable under an award (or an installment of an award) for
a specified period or until a specified event (the "Elective Deferral
Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee. Subject to any exceptions
adopted by the Committee, such election must generally be made at least 12
months prior to completion of the Deferral Period for the award (or for
such installment of an award).
(vii) Each award shall be confirmed by, and be subject to the terms
of, a Deferred Stock Agreement.
SECTION 9. Stock Purchase Rights.
(a) Awards and Administration. The Committee may grant Stock Purchase
Rights which shall enable the recipients to purchase Stock:
(i) at its Fair Market Value on the date of grant;
(ii) at 50% of such Fair Market Value on such date; or
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(iii) at an amount equal to the par value of such Stock on such
date.
The Committee may impose such terms and conditions as it shall determine on such
Stock Purchase Rights or the exercise thereof and may also provide for deferral
limitations or forfeiture restrictions with respect to the Stock purchased.
Each Stock Purchase Right award shall be confirmed by, and be subject to the
terms of, a Stock Purchase Rights Agreement. The terms of such awards need not
be the same with respect to each participant.
(b) Stock Exercisability. Stock Purchase Rights shall be exercisable for
such period after grant as is determined by the Committee, not to exceed 30
days. However, the Committee may provide that Stock Purchase Rights granted to
persons who are actually or potentially subject to Section 16(b) of the Exchange
Act shall not become exercisable until six months and one day after the grant
date and shall then be exercisable for 10 trading days at the purchase price
specified by the Committee in accordance with Section 9(a).
(c) Loans. If the Committee so determines, the Company shall make or
arrange for a loan to an employee with respect to the exercise of Stock Purchase
Rights. The Committee shall have full authority to decide whether such a loan
should be made and to determine the amount, term and other provisions of any
such loan, including the interest rate to be charged, whether the loan is to be
with or without recourse against the borrower, the security, if any, therefor,
the terms on which the loan is to be repaid and the conditions, if any, under
which it may be forgiven. However, no loan hereunder shall have a term
(including extensions) exceeding 10 years in duration or be in an amount
exceeding 90% of the total purchase price paid by the borrower.
SECTION 10. Long Term Performance Awards.
(a) Awards and Administration. Long Term Performance Awards may be awarded
either alone or in addition to other awards granted under the Plan. The
Committee shall determine the nature, length and starting date of the
performance period (the "Performance Period") for each Long Term Performance
Award, which shall be at least two years (subject to Section 11), and shall
determine the performance objectives to be used in valuing Long Term Performance
Awards and determining the extent to which such Long Term Performance Awards
have been earned. Performance objectives may vary from participant to
participant and between groups of participants and shall be based upon such
Company, business unit or individual performance factors or criteria as the
Committee may deem appropriate, including, but not limited to, earnings per
share or return on equity. Performance Periods may overlap and participants may
participate simultaneously with respect to Long Term Performance Awards that are
subject to different Performance Periods and different performance factors and
criteria. Long Term Performance Awards shall be confirmed by, and be subject to
the terms of, a Long Term Performance Award Agreement. The terms of such awards
need not be the same with respect to each participant.
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At the beginning of each Performance Period, the Committee shall determine for
each Long Term Performance Award subject to such Performance Period the range of
dollar values or number of shares of Stock (including Deferred or Restricted
Stock) to be awarded to the participant at the end of the Performance Period if
and to the extent that the relevant measures of performance for such Long Term
Performance Award are met. Such dollar values or number of shares of Stock may
be fixed or may vary in accordance with such performance or other criteria as
may be determined by the Committee.
(b) Maximum Aggregate Amount Payable for Any Performance Period. The
aggregate amount of Long Term Performance Awards payable in cash with respect to
any Performance Period (determined without regard to any interest or earnings
equivalent credited with respect to deferred Awards) cannot exceed the maximum
aggregate amount that could have been credited to the Reserve under the Philip
Morris Companies Inc. Incentive Compensation Plan during the period commencing
January 1, 1986 and ending on the last day of such Performance Period (the
"Calculation Period") less the sum of the amount payable out of such Reserve
with respect to the Calculation Period and the amount of Long Term Performance
Awards paid in cash with respect to any prior Performance Period.
(c) Adjustment of Awards. The Committee may adjust the performance goals
and measurements applicable to Long Term Performance Awards to take into account
changes in law and accounting and tax rules and to make such adjustments as the
Committee deems necessary or appropriate to reflect the inclusion or exclusion
of the impact of extraordinary or unusual items, events or circumstances in
order to avoid windfalls or hardships.
(d) Termination of Employment. Subject to Section 11 and unless otherwise
provided in the applicable Long Term Performance Award Agreement, if a
participant terminates employment during a Performance Period because of death,
Disability or Retirement, such participant shall be entitled to a payment with
respect to each outstanding Long Term Performance Award at the end of the
applicable Performance Period:
(i) based, to the extent relevant under the terms of the award, upon
the participant's performance for the portion of such Performance Period
ending on the date of termination and the performance of the Company or
any applicable business unit for the entire Performance Period and
(ii) prorated for the portion of the Performance Period during which
the participant was employed by the Company, a subsidiary or affiliate,
all as determined by the Committee. The Committee may provide for an earlier
payment in settlement of such award in such amount and under such terms and
conditions as the Committee deems appropriate.
Subject to Section 11 and except as otherwise provided in the applicable Long
Term Performance Award Agreement, if a participant terminates employment during
a Performance
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Period for any other reason, then such participant shall not be entitled to any
payment with respect to the Long Term Performance Awards subject to such
Performance Period, unless the Committee shall otherwise determine.
(e) Form of Payment. The earned portion of a Long Term Performance Award
may be paid currently or on a deferred basis with such interest or earnings
equivalent as may be determined by the Committee. Payment shall be made in the
form of cash or whole shares of Stock, including Restricted Stock or Deferred
Stock, or a combination thereof, either in a lump sum payment or in annual
installments, all as the Committee shall determine. If and to the extent a Long
Term Performance Award is payable in Stock and the full amount thereof is not
paid in Stock, then the shares of Stock representing the portion of the value of
the Long Term Performance Award not paid in Stock shall again become available
for award under the Plan.
SECTION 11. 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 (as defined in Section 11(b)):
(i) Any Stock Appreciation Rights and Stock Options outstanding as
of the date such Change in Control is determined to have occurred and not
then exercisable and vested shall become fully exercisable and vested to
the full extent of the original grant; provided, however, that, in the
case of the holder of Stock Appreciation Rights who is actually subject to
Section 16(b) of the Exchange Act, such Stock Appreciation Rights shall
have been outstanding for at least six months at the date such Change in
Control is determined to have occurred.
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock, Deferred Stock and Stock Purchase Rights shall lapse,
and such Restricted Stock and Deferred Stock shall become free of all
restrictions and fully vested to the full extent of the original grant.
(iii) Subject to the rights of participants pursuant to Section
5(k), the value of all outstanding Stock Options, Restricted Stock,
Deferred Stock and Stock Purchase Rights 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 11(c), as of the
date such Change of Control is determined to have occurred or such other
date as the Committee may determine prior to the Change in Control.
(iv) Any Long Term Performance Awards relating to Performance
Periods prior to the Performance Period in which the Change in Control
occurs which are outstanding but not vested shall become immediately
vested and payable in cash to participants. In addition, subject to the
provisions of Section 10(b) of the Plan, with respect to the Performance
Period in which the Change in Control occurs (the "Change in Control
Period"), each participant in the Long Term Performance Award Plan, other
than a
16
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participant who is a party to an employment agreement with the Company
which is effective upon the Change in Control, shall be entitled to a pro
rata Long Term Performance Award in cash equal to the product of (x) such
participant's maximum award opportunity for the Change in Control Period,
and (y) a fraction, the numerator of which is the number of full or
partial months which have elapsed since the beginning of such Period on
the date on which the Change in Control occurs, and the denominator of
which is the total number of months in such Period.
(b) Definition of Change in Control. For purposes of the Plan, a "Change
in Control" shall mean 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 Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (A) the then outstanding shares of
Stock of the Company (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: (A) any
acquisition directly from the Company, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by
the Company or (D) any acquisition by any corporation pursuant to a
transaction described in clauses (A), (B) and (C) of paragraph (iii) of
this subsection (b) of this Section 11; or
(ii) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(iii) Approval by the shareholders of the Company of a
reorganization, merger, share exchange or consolidation (a "Business
Combination"), in each case, unless, following such Business Combination,
(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
17
<PAGE>
power of the then outstanding voting securities entitled to vote generally
in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (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 ownership existed 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 shareholders 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 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. For purposes of the Plan, "Change in Control
Price" means the highest price per share paid in any transaction reported on the
New York Stock Exchange Composite Index or paid or offered in any bona fide
transaction related to a potential
18
<PAGE>
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 and Stock Appreciation Rights relating to Incentive
Stock Options, such price shall be based only on transactions reported for the
date on which the Committee decides to cash out such options.
SECTION 12. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of an
optionee under a Stock Option or a recipient of a Stock Appreciation Right,
Restricted Stock Award, Deferred Stock Award, Stock Purchase Right or Long Term
Performance Award theretofore granted without the optionee's or recipient's
consent or which, without the approval of the Company's stockholders, would:
(a) except as expressly provided in the Plan, increase the total number of
shares reserved for the purpose of the Plan;
(b) except as expressly provided in the Plan, decrease the option price of
(i) any Stock Option to less than the Fair Market Value on the date of grant or
(ii) change the minimum price terms of Section 9(a);
(c) change the class of employees eligible to participate in the Plan; or
(d) extend the maximum option period under Section 5(b) or the maximum
exercise period under Section 9(b).
The Committee may amend the terms of any Stock Option or other award theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any holder without the holder's consent. The Committee may also
substitute new Stock Options for previously granted Stock Options, including
previously granted Stock Options having higher option prices.
Subject to the above provisions, the Board shall have the authority to amend the
Plan to take into account changes in law and tax and accounting rules, as well
as other developments.
SECTION 13. 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 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.
19
<PAGE>
SECTION 14. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to a
Stock Option or a Stock Purchase Right to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to the distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
All certificates for shares of 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 Stock is then
listed and any applicable Federal or state 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.
(b) Nothing contained in this Plan shall prevent the Company, a subsidiary
or 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 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
Company, withholding obligations may be settled with Stock, including Stock that
is part 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 affiliates shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment otherwise due to the participant.
(e) At the time of grant, the Committee may provide in connection with any
grant made under this Plan that the shares of Stock received as a result of such
grant shall be subject to a right of first refusal pursuant to which the
participant shall be required to offer to the Company any shares that the
participant wishes to sell at the then Fair Market Value of the Stock, subject
to such other terms and conditions as the Committee may specify at the time of
grant.
(f) The reinvestment of dividends in additional Deferred or Restricted
Stock at the time of any dividend payment shall only be permissible if
sufficient shares of Stock are available under Section 3 for such reinvestment
(taking into account then outstanding Stock Options, Stock Purchase Rights and
other Plan awards).
20
<PAGE>
(g) The Committee shall establish such procedures as it deems appropriate
for a participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid.
(h) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 15. Effective Date of Plan.
The Plan shall be effective on the date it is approved by the stockholders of
the Company.
SECTION 16. Term of Plan.
No Stock Option, Stock Appreciation Right, Restricted Stock Award, Deferred
Stock Award, Stock Purchase Right or Long Term Performance Award shall be
granted on or after the fifth anniversary of the effective date of the Plan, but
awards granted prior to such fifth anniversary (including, without limitation,
Long Term Performance Awards for Performance Periods commencing prior to such
fifth anniversary) may extend beyond that date.
21
<PAGE>
EXHIBIT 10.15
PHILIP MORRIS
LONG-TERM DISABILITY BENEFIT EQUALIZATION PLAN
Effective January 1, 1989
(As amended and in effect as of January 1, 1996)
<PAGE>
TABLE OF CONTENTS
Page No.
--------
PHILIP MORRIS LONG-TERM DISABILITY BENEFIT
EQUALIZATION PLAN - Preamble..................................... 1
ARTICLE I........................................................ 2
DEFINITIONS................................................. 2
(a) Committee......................................... 2
(b) Compensation Limitation........................... 2
(c) Disability Benefit Equalization Allowance or
Allowance......................................... 2
(d) Long-Term Disability Plan......................... 2
(e) Plan.............................................. 2
(f) Retirement Allowance.............................. 2
ARTICLE II....................................................... 3
DISABILITY BENEFIT EQUALIZATION ALLOWANCES.................. 3
A. Disability Benefit Equalization Allowances
payable under this Plan........................... 3
B. Commencement and termination of Disability
Benefit Equalization Allowances................... 3
ARTICLE III...................................................... 4
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE..................... 4
ARTICLE IV....................................................... 5
THE CORPORATE EMPLOYEE BENEFIT COMMITTEE AND ITS
DELEGATEES............................................. 5
ARTICLE V........................................................ 6
AMENDMENT AND DISCONTINUANCE OF THE PLAN.................... 6
ARTICLE VI....................................................... 7
CHANGE IN CONTROL PROVISIONS................................ 7
A. In the event of a Change of Control............... 7
B. Definition of Change of Control................... 7
<PAGE>
PHILIP MORRIS
LONG-TERM DISABILITY BENEFIT EQUALIZATION PLAN
The Philip Morris Long-Term Disability Benefit Equalization Plan as
hereinafter set forth shall govern the rights of an Employee or Disabled
Employee who is eligible for benefits on or after January 1, 1996 under the
Long-Term Disability Plan and whose benefits under the Long-Term Disability
Plan are or will in the future be limited by reason of Section 505 of the
Internal Revenue Code of 1986, as amended from time to time.
1
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ARTICLE I
DEFINITIONS
The following terms as used herein shall have the meanings set forth
below. All capitalized terms not defined below shall have the same meaning
as in the Long-Term Disability Plan.
(a) "Committee" shall mean the Corporate Employee Benefit Committee of
Philip Morris Companies Inc. charged with the administration of the
Plan as from time to time constituted.
(b) "Compensation Limitation" shall mean the limitation of Section
505(b)(7) of the Code on the annual compensation of an Employee
which may be taken into account under the Long-Term Disability Plan.
(c) "Disability Benefit Equalization Allowance" or "Allowance" shall
mean the amount payable under the Plan to a former Employee in equal
monthly payments during a twelve (12) month period.
(d) "Long-Term Disability Plan" shall mean the Philip Morris Long-Term
Disability Plan, effective February 1, 1974, as amended from time
to time.
(e) "Plan" shall mean the Philip Morris Long-Term Disability Benefit
Equalization Plan described herein and in any amendments hereto.
(f) "Retirement Allowance" shall mean the total amount payable under the
Retirement Plan and Benefit Equalization Plan during a twelve (12)
month period to a former Employee for life. Any benefit payable to
the Employee in any other form shall be converted to a Retirement
Allowance in such manner as the Administrator deems fair and
equitable.
2
<PAGE>
ARTICLE II
DISABILITY BENEFIT EQUALIZATION ALLOWANCES
A. Disability Benefit Equalization Allowances payable under this Plan shall be
as follows:
(1) The Disability Benefit Equalization Allowance payable to a
Disabled Employee who is eligible for a Disability Allowance under Article
II, A(1)(b) or A(1)(c)(i) of the Long-Term Disability Plan shall equal the
amount by which a Disability Allowance under such provisions of the Long-Term
Disability Plan, if computed without regard to the Compensation Limitation,
exceeds the amount of the Disability Allowance actually payable to the
Disabled Employee under the Long-Term Disability Plan.
(2) The Disability Benefit Equalization Allowance payable to a
Disabled Employee who is eligible for a Disability Allowance under any other
provision of the Long-Term Disability Plan shall be computed in the same
manner as under the applicable provision of the Long-Term Disability Plan,
provided, however, that (a) in computing such Disability Benefit Equalization
Allowance under Article II, A(1)(c)(ii) of the Long-Term Disability Plan, the
Retirement Allowance referred to in said Article II, A(1)(c)(ii) shall be
computed without regard to the Compensation Limitation with respect to the
compensation (as such term is defined in the Retirement Plan) of the Disabled
Employee, (b) in computing such Disability Benefit Equalization Allowance
under Article II, A(2)(c)(i) or (ii) of the Long-Term Disability Plan, the
Retirement Allowance referred to in said Article II, A(2)(c)(i) and (ii) such
Disabled Employee would have received shall be computed based on the
assumptions set forth in said Article II, A(2)(c)(i) or (ii), but without
regard to the Compensation Limitation and (c) the Disabled Employee's Pension
Offset computed under Article I(v)(i)(A) and I(v)(ii)(A) of the Long-Term
Disability Plan shall only be determined with respect to any Retirement
Allowance payable under the Benefit Equalization Plan. The amount of the
Disability Benefit Equalization Allowance shall be reduced by the amount of
the Disability Allowance actually payable to the Disabled Employee under the
Long-Term Disability Plan.
B. Commencement and termination of Disability Benefit Equalization Allowances:
A Disability Benefit Equalization Allowance payable to a Disabled
Employee shall commence and terminate simultaneously with, and be paid in
accordance with the terms of the Long-Term Disability Plan. An application
for a Disability Allowance under the Long-Term Disability Plan shall be
deemed an application for payment of a Disability Benefit Equalization
Allowance under this Plan.
3
<PAGE>
ARTICLE III
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE
The Company's obligations under this Plan shall not be funded.
Payments of Allowances shall be made out of the general funds of the Company.
4
<PAGE>
ARTICLE IV
THE CORPORATE EMPLOYEE BENEFIT COMMITTEE AND ITS DELEGATEES
The general administration of the Plan shall be vested in the
Committee and the Administrator.
All powers, rights, duties and responsibilities assigned to the
Committee and the Administrator under the Long-Term Disability Plan
applicable to this Plan shall be the powers, rights, duties and
responsibilities of the Committee and the Administrator under the terms of
this Plan.
5
<PAGE>
ARTICLE V
AMENDMENT AND DISCONTINUANCE OF THE PLAN
The Board may, by resolution, from time to time, and at any time,
amend the Plan; provided, however, that authority to amend the Plan is
delegated to the following committees or individuals where approval of the
Plan amendment or amendments by the shareholders of Philip Morris Companies
Inc. is not required: (1) to the Committee, if the amendment (or amendments)
will not increase the annual cost of the Plan by $10,000,000, (2) to a
management committee for employee benefits, if the amendment (or amendments)
will not increase the annual cost of the Plan by $4,000,000, and (3) to the
Administrator, if the amendment (or amendments) will not increase the annual
cost of the Plan by $500,000.
Any amendment to the Plan may effect a substantial change in the
Plan, and may include (but shall not be limited to) any change deemed by the
Philip Morris Companies Inc. to be necessary or desirable to obtain tax
benefits under any existing or future laws or rules or regulations
thereunder; provided, however, that no such amendment shall deprive any
Disabled Employee of the Disability Benefit Equalization Allowance accrued to
the time of such amendment.
The Plan may be discontinued at any time by the Board; provided,
however, that such discontinuance shall not deprive any Disabled Employee of
his Disability Benefit Equalization Allowance accrued to the time of such
discontinuance.
6
<PAGE>
ARTICLE VI
CHANGE IN CONTROL PROVISIONS
A. In the event of a Change of Control, each Disabled Employee (including,
for purposes of this Article VI, an Employee who incurs a disability prior to
the Change in Control during the periods specified in Article II, A(1)(a) of
the Long-Term Disability Plan, irrespective of his eligibility at the time of
the Change in Control for disability benefits under the Social Security Act;
provided, however, such Disabled Employee subsequently becomes eligible for
disability benefits under the Social Security Act or becomes eligible for a
Disability Allowance pursuant to Article II, A(1)(i) of the Long-Term
Disability Plan, shall, upon the Change of Control, be entitled to a lump sum
in cash, payable within 30 days of the Change of Control, equal to the
actuarial equivalent of his Disability Benefit Equalization Allowance,
determined using actuarial assumptions no less favorable than those used
under the Philip Morris Salaried Employees' Retirement Plan immediately prior
to the Change of Control.
B. Definition of Change of Control
"Change of Control" shall mean the happening of any of the following
events:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, and amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares of
common stock of Philip Morris Companies Inc. (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of Philip Morris Companies Inc. entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that the following acquisitions shall
not constitute a Change of Control: (i) any acquisition directly from
Philip Morris Companies Inc., (ii) any acquisition by Philip Morris
Companies Inc., (iii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Philip Morris Companies Inc. or
any corporation controlled by Philip Morris Companies Inc. or (iv) any
acquisition by any corporation pursuant to a transaction described in
clauses (i), (ii) and (iii) of paragraph (3) of this Section B; or
(2) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the shareholders of Philip Morris Companies Inc., was
approved by a vote of at least a majority of the
7
<PAGE>
directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption
of office occurs as a result of an actual or threatened election contest
with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) Approval by the shareholders of Philip Morris Companies Inc. of
a reorganization, merger, share exchange or consolidation (a "Business
Combination"), in each case, unless, following such Business Combination,
(i) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than
80% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns Philip Morris Companies Inc. through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior
to such Business Combination of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (ii) no Person
(excluding any employee benefit plan (or related trust) of Philip Morris
Companies Inc. or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(4) Approval by the shareholders of Philip Morris Companies Inc. of
(i) a complete liquidation or dissolution of Philip Morris Companies Inc.
or (ii) the sale or other disposition of all or substantially all of the
assets of Philip Morris Companies Inc., other than to a corporation, with
respect to which following such sale or other disposition, (A) more than
80% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such sale
or other disposition in substantially
8
<PAGE>
the same proportion as their ownership, immediately prior to such sale or
other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) less than
20% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by any
Person (excluding any employee benefit plan (or related trust) of Philip
Morris Companies Inc. or such corporation), except to the extent that
such Person owned 20% or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities prior to the sale or disposition
and (C) at least a majority of the members of the board of directors of
such corporation were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such sale or other disposition of assets of Philip Morris
Companies Inc. or were elected, appointed or nominated by the Board.
9
<PAGE>
EXHIBIT 10.16
PHILIP MORRIS
SURVIVOR INCOME BENEFIT EQUALIZATION PLAN
Effective January 1, 1985
(As amended and in effect as of April 1, 1992)
<PAGE>
TABLE OF CONTENTS
Page No.
--------
PHILIP MORRIS SURVIVOR INCOME BENEFIT
EQUALIZATION PLAN - Preamble......................................... 1
ARTICLE I............................................................ 2
DEFINITIONS...................................................... 2
(a) Committee.............................................. 2
(b) Compensation Limitation................................ 2
(c) Plan................................................... 2
(d) Survivor Income Benefit Equalization Allowance or
Allowance.............................................. 2
(e) Survivor Income Benefit Plan........................... 2
ARTICLE II........................................................... 3
SURVIVOR INCOME BENEFIT EQUALIZATION ALLOWANCES.................. 3
A. Survivor Income Benefit Equalization Allowances and
other benefits payable under this Plan................. 3
B. Commencement and termination of Survivor Income
Benefit Equalization Allowances and other benefits
under the Plan......................................... 3
C. Reduction of Survivor Income Benefit Equalization
Retirement Allowances.................................. 3
ARTICLE III.......................................................... 5
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE.......................... 5
ARTICLE IV........................................................... 6
THE COMMITTEE AND ITS DELEGATEES................................. 6
ARTICLE V............................................................ 7
AMENDMENT AND DISCONTINUANCE OF THE PLAN......................... 7
ARTICLE VI........................................................... 8
CHANGE IN CONTROL PROVISIONS..................................... 8
<PAGE>
PHILIP MORRIS
SURVIVOR INCOME BENEFIT EQUALIZATION PLAN
The Philip Morris Survivor Income Benefit Equalization Plan as
hereinafter set forth shall govern the rights of a Plan Beneficiary of a
Deceased, Disabled or Retired Employee whose Plan Beneficiary becomes
eligible for a Survivor Income Benefit Allowance on or after April 1, 1992
and whose benefits under the Philip Morris Survivor Income Benefit Plan are
or will in the future be limited by reason of Section 505 of the Internal
Revenue Code of 1986, as amended from time to time.
1
<PAGE>
ARTICLE I
DEFINITIONS
The following terms as used herein shall have the meanings set forth
below. All capitalized terms not defined below shall have the same meaning
as in the Survivor Income Benefit Plan.
(a) "Committee" shall mean the Corporate Employee Benefit Committee of
Philip Morris Companies Inc. charged with the administration of the
Plan as from time to time constituted.
(b) "Compensation Limitation" shall mean the limitation of Section
505(b)(7) of the Code on the annual compensation of a Deceased,
Disabled or Retired Employee which may be taken into account under
the Survivor Income Benefit Plan.
(c) "Plan" shall mean the Philip Morris Survivor Income Benefit
Equalization Plan described herein and in any amendments hereto.
(d) "Survivor Income Benefit Equalization Allowance" or "Allowance"
shall mean the amount payable under the Plan to a Plan Beneficiary
in equal monthly payments during a twelve (12) month period.
(e) "Survivor Income Benefit Plan" shall mean the Philip Morris Survivor
Income Benefit Plan, effective February 1, 1974, as amended from
time to time.
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ARTICLE II
SURVIVOR INCOME BENEFIT EQUALIZATION ALLOWANCES
A. Survivor Income Benefit Equalization Allowances and other benefits
payable under this Plan shall be as follows:
(1) The Survivor Income Benefit Equalization Allowance payable to a
Plan Beneficiary who is eligible for a Survivor Income Benefit Allowance
under Article II, A(1)(b) or Article II, B(3) or (4) of the Survivor Income
Benefit Plan, or a benefit payable pursuant to Article II, C of the Survivor
Income Benefit Plan shall equal the amount by which a Survivor Income Benefit
Allowance or benefit payable under Article II,C of the Survivor Income
Benefit Plan, as applicable to the Plan Beneficiary, if computed without
regard to the Compensation Limitation, exceeds the amount of the Survivor
Income Benefit Allowance or benefit under Article II, C of the Survivor
Income Benefit Plan actually payable to the Plan Beneficiary under the
Survivor Income Benefit Plan.
(2) The Survivor Income Benefit Equalization Allowance payable to a
Plan Beneficiary who is eligible for a Survivor Income Benefit Allowance
under Article II, A(2)(b), Article II, A(3)(b) and Article II, A(4)(b) of the
Survivor Income Benefit Plan shall equal the amount by which a Survivor
Income Benefit Allowance payable pursuant to said provisions of Article II,
as applicable to the Plan Beneficiary, if computed without regard to the
Compensation Limitation, exceeds the amount of the Survivor Income Benefit
Allowance actually payable to the Plan Beneficiary under the Survivor Income
Benefit Plan.
B. Commencement and termination of Survivor Income Benefit Equalization
Allowances and other benefits under the Plan:
A Survivor Income Benefit Equalization Allowance or other benefit
payable to a Plan Beneficiary shall commence and terminate simultaneously
with, and be paid in accordance with the terms of the Survivor Income Benefit
Plan. An application for a Survivor Income Benefit Allowance under the
Survivor Income Benefit Plan shall be deemed an application for payment of a
Survivor Income Benefit Equalization Allowance under this Plan.
C. Reduction of Survivor Income Benefit Equalization Retirement Allowances:
(1) A Survivor Income Benefit Equalization Allowance shall be
reduced in accordance with the terms of Article II, F(1)(a) and (b) of the
Survivor Income Benefit Plan, but only to the extent that the reduction is
not taken into account in determining the Survivor Income Benefit Allowance
payable under the Survivor Income Benefit Plan.
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(2) No Survivor Income Benefit Equalization Allowance shall be
payable to a Plan Beneficiary to the extent attributable to benefits under
the Benefit Equalization Plan which are paid to the Deceased, Disabled or
Retired Employee other than in the form of a benefit equalization retirement
allowance (as defined in the Philip Morris Benefit Equalization Plan.
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ARTICLE III
FUNDS FROM WHICH ALLOWANCES ARE PAYABLE
The Company's obligations under this Plan shall not be funded. Payments
of Allowances shall be made out of the general funds of the Company.
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ARTICLE IV
THE COMMITTEE AND ITS DELEGATEES
The general administration of the Plan shall be vested in the Committee
and the Administrator.
All powers, rights, duties and responsibilities assigned to the Committee
and the Administrator under the Survivor Income Benefit Plan applicable to
this Plan shall be the powers, rights, duties and responsibilities of the
Committee and the Administrator under the terms of this Plan.
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ARTICLE V
AMENDMENT AND DISCONTINUANCE OF THE PLAN
The Board may, by resolution, from time to time, and at any time, amend
the Plan; provided, however, that authority to amend the Plan is delegated to
the following committees or individuals where approval of the Plan amendment
or amendments by the shareholders of Philip Morris Companies Inc. is not
required: (1) to the Committee, if the amendment (or amendments) will not
increase the annual costs of the Plan by $10,000,000, (2) to the Management
Committee, if the amendment (or amendments) will not increase the annual cost
of the Plan by $4,000,000, and (3) to the Administrator, if the amendment (or
amendments) will not increase the annual cost of the Plan by $500,000.
Any amendment to the Plan may effect a substantial change in the Plan,
and may include (but shall not be limited to) any change deemed by the Philip
Morris Companies Inc. to be necessary or desirable to obtain tax benefits
under any existing or future laws or rules or regulations thereunder;
provided, however, that no such amendment shall deprive any Plan Beneficiary
of the Survivor Income Benefit Equalization Allowance or other benefit
accrued to the time of such amendment.
The Plan may be discontinued at any time by the Board; provided, however,
that such discontinuance shall not deprive any Plan Beneficiary of his
Survivor Income Benefit Equalization Allowance or other benefit accrued to
the time of such discontinuance.
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ARTICLE VI
CHANGE IN CONTROL PROVISIONS
A. In the event of a Change of Control, each Plan Beneficiary shall, upon
the Change of Control, be entitled to a lump sum in cash, payable within 30
days of the Change of Control, equal to the actuarial equivalent of his
Survivor Income Benefit Equalization Allowance, determined using actuarial
assumptions no less favorable than those used under the Philip Morris
Salaried Employees' Retirement Plan immediately prior to the Change of
Control.
B. Definition of Change of Control.
"Change of Control" shall mean the happening of any of the following
events:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, and amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares of
common stock of Philip Morris Companies Inc. (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of Philip Morris Companies Inc. entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that the following acquisitions shall
not constitute a Change of Control: (i) any acquisition directly from
Philip Morris Companies Inc., (ii) any acquisition by Philip Morris
Companies Inc., (iii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Philip Morris Companies Inc. or
any corporation controlled by Philip Morris Companies Inc. or (iv) any
acquisition by any corporation pursuant to a transaction described in
clauses (i), (ii) and (iii) of paragraph (3) of this Section B; or
(2) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the shareholders of Philip Morris Companies Inc., 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
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(3) Approval by the shareholders of Philip Morris Companies Inc. of
a reorganization, merger, share exchange or consolidation (a "Business
Combination"), in each case, unless, following such Business Combination,
(i) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than
80% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns Philip Morris Companies Inc. through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior
to such Business Combination of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (ii) no Person
(excluding any employee benefit plan (or related trust) of Philip Morris
Companies Inc. or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
business Combination and (iii) at least a majority of the members of
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(4) Approval by the shareholders of Philip Morris Companies Inc. of
(i) a complete liquidation or dissolution of Philip Morris Companies Inc.
or (ii) the sale or other disposition of all or substantially all of the
assets of Philip Morris Companies Inc., other than to a corporation, with
respect to which following such sale or other disposition, (A) more than
80% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who where the
beneficial owners, respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such sale
or other disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other disposition, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) less than 20% of, respectively, the
then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote
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generally in the election of directors is then beneficially owned,
directly or indirectly, by any Person (excluding any employee benefit
plan (or related trust) of Philip Morris Companies Inc. or such
corporation), except to the extent that such Person owned 20% or more of
the Outstanding Company Common Stock or Outstanding Company Voting
Securities prior to the sale or disposition and (C) at least a majority
of the members of the board of directors of such corporation were members
of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such sale or
other disposition of assets of Philip Morris Companies Inc. or were
elected, appointed or nominated by the Board.
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Exhibit 10.18
IN THE CHANCERY COURT OF JACKSON COUNTY,
STATE OF MISSISSIPPI
)
IN RE MIKE MOORE, ATTORNEY GENERAL, ex rel. ) CAUSE No. 94-1429
STATE OF MISSISSIPPI TOBACCO LITIGATION )
)
COMPREHENSIVE SETTLEMENT AGREEMENT
AND RELEASE
THIS COMPREHENSIVE SETTLEMENT AGREEMENT AND RELEASE is made as of this
17th day of October, 1997, by and among the undersigned, to settle and resolve
with finality all present and future civil claims against all parties to this
action relating to the subject matter of this litigation which have been or
could have been asserted by any of the parties to this action.
WHEREAS, the State of Mississippi, through its Attorney General, Michael
C. Moore, commenced this action in May 1994, asserting various claims for
monetary and injunctive relief on behalf of the State of Mississippi against
certain tobacco manufacturers and others as Defendants;
WHEREAS, Defendants deny each and every one of the State of Mississippi's
allegations of unlawful conduct and have asserted a number of defenses to the
State of Mississippi's claims, all of which defenses have been contested by the
State of Mississippi;
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WHEREAS, the State of Mississippi, through its Attorney General, the
Honorable Michael C. Moore, has had a significant leadership role among the
various states in maintaining civil litigation against the tobacco industry and
in seeking to forge an unprecedented national resolution of the principal issues
and controversies associated with the manufacture, marketing and sale of tobacco
products in the United States;
WHEREAS, through the efforts of the State of Mississippi, Attorney General
Moore and others, a June 20, 1997 Memorandum of Understanding and Proposed
Resolution (the "Proposed Resolution") have been agreed to by members of the
tobacco industry, state attorneys general, private litigants and representatives
of public health groups, which Proposed Resolution would provide for
unprecedented and comprehensive regulation of the tobacco industry while
preserving the right of individuals to assert claims for compensation;
WHEREAS, the Proposed Resolution contemplates action by the United States
Congress and the President to enact and sign a new federal law with respect to
the tobacco industry, which action the tobacco industry has agreed to support
and which will require study and analysis by Congress and the President;
WHEREAS, trial of this action was scheduled to commence on July 7, 1997
and a continuance of such trial could have prejudiced the State of Mississippi,
the State of Mississippi and the undersigned defendants ("Settling Defendants")
agreed to settle independently the litigation commenced by Attorney General
Moore pursuant to financial terms comparable to those contained in the
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Proposed Resolution, which terms will achieve for Mississippi immediately the
financial benefits it would receive pursuant to the national Proposed
Resolution, should it become law; and
WHEREAS, counsel for the State of Mississippi and the undersigned
defendants entered into a Memorandum of Understanding as of July 2, 1997 (the
"MOU"), setting forth the principal terms and conditions of an agreement in
principle, and such MOU contemplated that the parties thereto would draft and
execute a comprehensive Settlement Agreement incorporating the terms of the MOU
as well as other customary terms and conditions, including releases, acceptable
to such parties;
NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the payments to be
made by Settling Defendants, the dismissal and release of claims by the State of
Mississippi and such other consideration as described herein, the sufficiency of
which is acknowledged, the State of Mississippi, acting by and through its duly
elected and authorized Attorney General, Michael C. Moore, and the Settling
Defendants, acting by and through their authorized agents, memorialize and agree
as follows:
1. Jurisdiction. Settling Defendants and the State of Mississippi
acknowledge that this Court has jurisdiction over the subject matter of this
action and over each of the parties to this Settlement Agreement. Jurisdiction
is retained by the Court for the purposes of enabling any party to this
Settlement Agreement to apply to the Court at any time for further orders and
directions as may be
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necessary and appropriate to implement or enforce this Settlement Agreement, and
the parties agree to present any disputes under this Settlement Agreement to
this Court.
2. Applicability. This Settlement Agreement shall be binding upon all
Settling Defendants and their successors and assigns in the manner expressly
provided for herein and shall inure to their benefit and to that of their
respective directors, officers, employees, attorneys, representatives, insurers,
suppliers, distributors and agents, and to that of any of their present or
former parents, subsidiaries, affiliates, divisions or other organizational
units of any kind. This Settlement Agreement shall be binding on and inure to
the benefit of the State of Mississippi, its administrators, representatives,
employees, officers, agents and legal representatives; all agencies,
departments, commissions and divisions of the State; all subdivisions, public
entities, public corporations, instrumentalities and educational institutions
over which the State has control; and their predecessors, successors and
assigns. None of the rights granted or obligations assumed under this Agreement
may be assigned or otherwise conveyed without the express prior written consent
of all of the parties hereto.
3. Voluntary Agreement of Parties. The State of Mississippi and the
Settling Defendants acknowledge and agree that this Settlement Agreement is
voluntarily entered into by all parties hereto as the result of arms length
negotiations during which all such parties were represented by counsel. Settling
Defendants understand and acknowledge that certain provisions of this Settlement
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Agreement impose specific requirements on them that could give rise to
challenges under various federal and State constitutional provisions if the
State of Mississippi unilaterally imposed such requirements. None of the parties
hereto will seek to challenge this Settlement Agreement based on any such
constitutional challenge to the provisions contained herein.
4. Definitions. For the purposes of this Settlement Agreement, the
following terms shall have the meanings set forth below:
(a) "State" or "State of Mississippi" means the State of
Mississippi, all of its officers acting in their official capacities and
any department, subdivision or agency of the State, regardless of whether
a named plaintiff;
(b) "Settling Defendants" means those Defendants in this Action that
are signatories to this Settlement Agreement;
(c) "Non-Settling Defendants" means those Defendants in this Action
that are not signatories to this Settlement Agreement;
(d) "Market Share" means, for each year, a Settling Defendant's
respective share of sales of cigarettes for consumption in the United
States;
(e) "Tobacco Products" shall be defined in the same manner as in the
Food and Drug Administration Rule and shall include Roll-Your-Own, Little
Cigars and Fine Cut;
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(f) "Billboards" includes billboards, as well as all signs and
placards in arenas and stadia, whether open-air or enclosed; "Billboards"
does not include: (1) any advertisements placed on or outside the premises
of retail establishments licensed to sell Tobacco Products or any retail
point-of-sale; and (2) billboards or advertisements in connection with the
sponsorship by Settling Defendants of any entertainment, sporting or
similar event, such as NASCAR, that appears in the State of Mississippi as
part of a national or multi-state tour;
(g) "Transit Advertisements" means advertising on private or public
vehicles and all advertisements placed at, on or within any bus stop, taxi
stand, waiting area, train station, airport or any similar location;
"Transit Advertisements" does not include any advertisements placed on or
outside the premises of retail establishments licensed to sell Tobacco
Products or any retail point-of-sale;
(h) "Final Approval" means the date on which all of the following
shall have occurred:
(1) The Settlement Agreement is approved by the Court;
(2) Entry is made of an order of dismissal of claims or a
final judgment as provided herein; and
(3) The time for appeal or to seek permission to appeal from
the Court's approval as described in (1) hereof and entry of such
final judgment or order of dismissal as described in (2) hereof
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has expired or, in the event of an appeal, the appeal has been
dismissed or the approval described in (1) hereof and order or
judgment described in (2) hereof have been affirmed in their
entirety by the court of last resort to which such appeal has
been taken and such affirmance has become no longer subject to
further appeal or review.
5. Elimination of Billboards and Transit Advertisements. Settling
Defendants agree to discontinue all Billboards and Transit Advertisements of
Tobacco Products in the State of Mississippi. Settling Defendants agree to
exercise their best efforts in cooperation with the State of Mississippi to
identify all Billboards that are located within 1000 feet of any public or
private school or playground in the State of Mississippi. Settling Defendants
will remove such Tobacco Product advertisements (leaving the space unused or
used for advertising unrelated to Tobacco Products) or, at the option of the
State of Mississippi, will allow the State of Mississippi, at its expense, to
substitute for the remaining term of the contract alternative advertising
intended to discourage the use of Tobacco Products by children under the age of
18. Settling Defendants agree to provide the State of Mississippi with
preliminary lists of the locations of all Billboards and stationary Transit
Advertisements within 30 days from the date of execution of this Settlement
Agreement, such lists to be finalized within an additional 15 days, and to
remove all Billboards and Transit Advertisements for Tobacco Products within the
State of Mississippi at the earlier of the expiration of
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applicable contracts or 4 months from the date the final lists are supplied to
the State of Mississippi. The parties hereto also agree to cooperate to secure
the expedited removal of up to 50 Billboards or stationary Transit
Advertisements designated by the State of Mississippi, within 30 days after
their designation.
Each Settling Defendant shall provide the Court and the Attorney General,
or his designee, with the name of a contact person to whom the State of
Mississippi may direct inquiries during the time such Billboards and Transit
Advertisements are being eliminated, from whom the State of Mississippi may
obtain periodic reports as to the progress of their elimination and who will be
responsible for ensuring that appropriate action is taken to remove any
Billboards or Transit Advertisements that have not been eliminated in a timely
manner.
6. Support of Legislation and Rules. Following Final Approval of this
Settlement Agreement, Settling Defendants agree to support legislative
initiatives to enact new laws and administrative initiatives to promulgate new
rules intended to effectuate the following:
(a) The prohibition of the sale of cigarettes in vending machines,
except in adult-only locations and facilities;
(b) The strengthening of civil penalties for sales of Tobacco
Products to children under the age of 18 years, including the suspension
or revocation of retail licenses; and
(c) The strengthening of civil penalties for possession of Tobacco
Products by children under the age of 18 years.
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7. Initial Payment. The parties hereto acknowledge that, on July 15, 1997,
Settling Defendants, in accordance with the terms of the MOU and pursuant to a
mutually acceptable escrow agreement, paid into a special escrow account (the
"Escrow Account"), for the benefit of the State of Mississippi, to be held in
escrow pending Final Approval, the sum of $170 million; that being the State of
Mississippi's good faith estimate of the portion the State of Mississippi would
receive of the $10 billion payment provided for in Paragraph A on page 34 of the
Proposed Resolution.
8. Pilot Program Payment. In support of the State of Mississippi's
demonstrated commitment to the meaningful and immediate reduction of the use of
Tobacco Products by children under the age of 18 years, Settling Defendants
agree to support a pilot program (the "Mississippi Tobacco Pilot Program"), the
terms of which shall be submitted to the Court by the Attorney General of the
State of Mississippi, and the elements of which shall be aimed specifically at
the reduction of the use of Tobacco Products by children under the age of 18
years. Accordingly, on or before October 20, 1997, Settling Defendants shall,
pursuant to a mutually acceptable escrow agreement attached hereto as Exhibit A,
cause to be paid into a second special escrow account (the "Mississippi Tobacco
Pilot Program Escrow Account"), for the benefit of the State of Mississippi, to
be held in escrow pending Final Approval of this Settlement Agreement, the sum
of $61,818,000. The Mississippi Tobacco Pilot Program shall commence within a
reasonable period after Final Approval of this Settlement Agreement, and shall
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last for a 24-month period. The $61,818,000 amount payable by Settling
Defendants in support of the Mississippi Tobacco Pilot Program (the "Pilot
Program Amount") shall be used only after Court approval of the specific terms
of the Mississippi Tobacco Pilot Program for general enforcement, media,
educational and other programs directed to the underage users or potential
underage users of Tobacco Products, but shall not be directed against any
particular tobacco company or companies or any particular brand of Tobacco
Products. No expenditure from the Pilot Program Amount shall be made except upon
application to the Court by the Attorney General and approval of such
application by the Court.
9. Annual Payments. Each of the Settling Defendants agrees, severally and
not jointly, that on December 31, 1998 and annually thereafter (subject to final
adjustment within 30 days), it shall cause to be paid into a special account for
the benefit of the State of Mississippi (the "Account"), pro rata in proportion
equal to its respective Market Share, its share of 1.7% of the following amounts
(in billions):
<TABLE>
<CAPTION>
Year 1 2 3 4 5 6 thereafter
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Amount $4B $4.5B $5B $6.5B $6.5B $8B $8B
- ------
</TABLE>
The above amounts represent the amounts contemplated under the Proposed
Resolution to be paid to the several States, without regard to the possibility
of any claims for reimbursement or credit by any other person or entity
including any federal government agency. The payments made to the Account by
Settling
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Defendants pursuant to the calculation set forth in this paragraph shall be
adjusted upward by the greater of 3% or the Consumer Price Index applied each
year on the previous year, beginning with the first annual payment. Such
payments will also be decreased or increased, as the case may be, in accordance
with decreases or increases in volume of domestic tobacco product volume sales
as provided in Paragraph B.5 on pages 34-35 of the Proposed Resolution. In the
absence of any of the foregoing adjustments, Settling Defendants would be
obligated to pay to the State of Mississippi pursuant to this paragraph the
following approximate amounts (in millions), which are set forth for
illustrative purposes only:
<TABLE>
<CAPTION>
Year 1998 1999 2000 2001 2002 2003 thereafter
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Amount $68M $76.5M $85M $110.5M $110.5M $136M $136M
- ------
</TABLE>
Any payment pursuant to this paragraph that is due to be paid before Final
Approval of this Settlement Agreement shall be paid into the Escrow Account and
shall be disbursed only as provided by the terms of the Escrow Agreement.
Settling Defendants shall make their first annual payment to the State of
Mississippi pursuant to this paragraph 9 of this Agreement on December 31, 1998,
without adjustment and without regard to any first annual payment date provided
for under any legislation implementing the Proposed Resolution or a
substantially equivalent federal program, such payment to be credited against
any first annual payment due under such legislation before February 28, 1999.
10. Adjustments in Event of Federal Resolution. In the event that
legislation implementing the Proposed Resolution or a substantially equivalent
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federal program is enacted into law, the settlement provided herein shall remain
in place, but the terms of such legislation shall supersede the provisions of
this Settlement Agreement, except such provisions as relate to the Mississippi
Tobacco Pilot Program and except to the extent that the parties hereto have
otherwise expressly agreed. In order to provide Settling Defendants with a full
credit for all payments made hereunder pursuant to paragraphs 7 and 9 of this
Settlement Agreement in the event of the enactment of legislation implementing
the Proposed Resolution or a substantially equivalent federal program, and to
the extent that the payments made pursuant to paragraphs 7 and 9 of this
Settlement Agreement shall differ from the amounts to be received by the State
of Mississippi pursuant to such legislation implementing the Proposed Resolution
or a substantially equivalent federal program, the parties hereto shall take
whatever steps are necessary to ensure that the principal amount of payments
received by the State of Mississippi will be the same as the amounts it would
receive pursuant to the Proposed Resolution or a substantially equivalent
federal program.
11. Use of Funds. The monies received under this Settlement Agreement
constitute reimbursement for public health expenditures made by the State of
Mississippi and various political subdivisions and agencies of the State of
Mississippi including the Mississippi State Employees Health Insurance Plan,
University Medical Center and charity hospitals, as well as for Medicaid
expenditures of the State of Mississippi, and are in satisfaction of all of the
State of Mississippi's claims, including those for punitive damages. In
consonance
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with the relief sought by this Action and the Proposed Resolution, the parties
hereto anticipate that funds provided hereunder, other than funds dedicated
hereunder to the Mississippi Tobacco Pilot Program and legal expense
reimbursement, will be used for health-related expenses of the State of
Mississippi.
12. Dismissal of the State of Mississippi's Claims. Upon approval of this
Settlement Agreement by the Court, the State of Mississippi shall dismiss, with
prejudice as to Settling Defendants (including their parents and affiliates),
and without prejudice as to Non-Settling Defendants, all claims in this Action.
In the event any Non-Settling Defendants agree to comply with the non-economic
terms contained in this Settlement Agreement, the State of Mississippi shall
dismiss with prejudice all claims against any such Non-Settling Defendants.
13. State of Mississippi's Waiver and Release. Upon Final Approval, the
State of Mississippi shall release and forever discharge all Defendants and
their present and former parents, subsidiaries, divisions, affiliates, officers,
directors, employees, representatives, insurers, suppliers, agents, attorneys
and distributors (and the predecessors, heirs, executors, administrators,
successors and assigns of each of the foregoing) (the "Released Parties"), from
any and all manner of civil claims, demands, actions, suits and causes of
action, damages whenever incurred, liabilities of any nature whatsoever,
including civil penalties, as well as costs, expenses and attorneys' fees
(except as to Settling Defendants' obligations under paragraph 16 of this
Settlement Agreement), known or unknown, suspected or
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<PAGE>
unsuspected, accrued or unaccrued, whether legal, equitable or statutory
("Claims") that the State of Mississippi (including any of its past, present or
future agents, officials acting in their official capacities, legal
representatives, agencies, departments, commissions, divisions, subdivisions
(political and otherwise), public entities, corporations, instrumentalities and
educational institutions, and whether or not any such person or entity
participates in the settlement), whether directly, indirectly, representatively,
derivatively or in any other capacity, ever had, now has or hereafter can, shall
or may have, as follows:
(1) for the past, as to any Claims that were or could have been made in
this action or any comparable federal action; and
(2) for the future, only as to Claims directly or indirectly based on,
arising out of or in any way related to, in whole or in part, the use of or
exposure to Tobacco Products manufactured in the ordinary course of business,
including without limitation any future claims for reimbursement for heath care
costs allegedly associated with smoking (such past and future Claims hereinafter
referred to, collectively, as the "Released Claims").
The State of Mississippi hereby covenants and agrees that it shall not
hereafter sue or seek to establish civil liability against any Released Party
based, in whole or in part, upon any of the Released Claims, and the State of
Mississippi agrees that this covenant and agreement shall be a complete defense
to any such civil action or proceeding, provided, however, that those
Non-Settling Defendants
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which are not parents or affiliates of the Settling Defendants shall be entitled
to the foregoing release and covenant not to sue only upon their assent to
comply with the non-economic provisions of this Settlement Agreement, including
waiver of claims, if any.
14. Settling Defendants' Waiver and Dismissal of Claims. Upon Final
Approval, Settling Defendants shall waive any and all claims against the State
of Mississippi and any of its officers, employees, agents, counsel, witnesses
(fact or expert), whistle-blowers or contractors, relating to or in connection
with this litigation and shall dismiss, with prejudice, any pending claims or
actions against such persons or entities.
15. Most-Favored Nation. Settling Defendants agree that if they enter into
any future pre-verdict settlement agreement of other litigation brought by a
non-federal governmental plaintiff on terms more favorable to such governmental
plaintiff than the terms of this Settlement Agreement (after due consideration
of relevant differences in population or other appropriate factors), the terms
of this Settlement Agreement will be revised so that the State of Mississippi
will obtain treatment at least as relatively favorable as any such non-federal
governmental entity. In addition, Settling Defendants agree that, in the event
of any future settlement or final judgment with respect to the claims for
non-economic injunctive relief pending in the lawsuit entitled State of Florida,
et al. v. American Tobacco Company, et al., Civ. Action No. 95-1466 AH
(Fifteenth Judicial Circuit, Palm Beach County, Fla.), the terms of this
Settlement Agreement will be revised
15
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so that the State of Mississippi will receive benefits comparable to the terms
of any such settlement or final judgment (after due consideration of relevant
differences in population or other appropriate factors).
16. Costs and Expenses. Settling Defendants have agreed to reimburse the
reasonable costs and expenses incurred by the office of the Attorney General and
other appropriate state agencies and the State of Mississippi's private counsel
in connection with this litigation, provided that such costs and expenses are of
the same nature as costs and expenses for which Settling Defendants would
reimburse to their own counsel or agents. The parties hereto acknowledge that,
pursuant to this agreement, on July 30, 1997, Settling Defendants paid to the
Attorney General of Mississippi $2.5 million for the Attorney General's best
estimate of costs and expenses attributable to his office and other appropriate
state agencies or persons in connection with this litigation (cost for public
employees shall be at prevailing market rates); and further acknowledge that, on
July 30, 1997, Settling Defendants paid $12.5 million to private counsel for the
State of Mississippi for private counsel's best estimate of their costs and
expenses. The Attorney General's Office, for itself and for other appropriate
state entities, and Mississippi's private counsel shall provide Settling
Defendants with an appropriately documented statement of their costs and
expenses. Settling Defendants shall promptly pay the amount of such costs and
expenses in excess of the above $15 million, or shall receive a refund if the
total of such costs and expenses shall be less than $15 million. Any dispute as
to the nature or amount of
16
<PAGE>
reimbursable costs and expenses shall be decided with finality by the persons
selected to award fees, as provided below.
Settling Defendants agree to pay, separately and apart from the above,
reasonable attorneys' fees to private counsel. If the Proposed Resolution or a
substantially equivalent federal program is enacted, the amount of such fees
will be set by a panel of independent arbitrators with finality, subject to an
appropriate annual cap on all such payments and other conditions. In the absence
of any such legislation enacting the Proposed Resolution or a substantially
equivalent federal program, attorneys' fees in connection with this litigation
will be awarded in the same manner (subject to the appropriate annual cap and
other conditions) by three independent arbitrators selected by the parties
hereto.
In addition to the foregoing, in the event of the enactment of the
Proposed Resolution or a substantially equivalent federal program, the parties
hereto contemplate that the State of Mississippi and any other similar State
which has made an exceptional contribution to secure the resolution of these
matters may apply to the panel of independent arbitrators for reasonable
compensation for its efforts in securing the Proposed Resolution, subject to an
appropriate separate annual cap on all such payments.
17. Representations of Parties. The parties hereto hereby represent that
this Settlement Agreement has been duly authorized and, upon execution, will
constitute a valid and binding contractual obligation of each of the parties
hereto enforceable in accordance with its terms.
17
<PAGE>
18. Court Approval. If the Court refuses to approve this Settlement
Agreement or any material part hereof, or if such approval is modified as to any
material provision or set aside on appeal, or if the Court does not enter an
order of dismissal of claims or final judgment as provided for in paragraph 12
of this Agreement, or if the Court enters the order of dismissal of claims or
final judgment and appellate review is sought, and on such review such order of
dismissal or final judgment is not affirmed in its entirety as to all material
aspects of such order or final judgment, then this Settlement Agreement shall be
cancelled and terminated and it and all orders issued pursuant hereto shall
become null and void and of no effect.
19. Headings. The headings of the paragraphs of this Settlement Agreement
are not binding and are for reference only and do not limit, expand or otherwise
affect the contents of this Settlement Agreement.
20. No Determination or Admission. This Settlement Agreement having being
executed prior to the taking of any testimony, no final determination of
violation of any provision of law has been made in this Action. This Settlement
Agreement and any proceedings taken hereunder are not intended to be and shall
not in any event be construed as, or deemed to be, an admission or concession or
evidence of any liability or any wrongdoing whatsoever on the part of any party
hereto or any Released Party. The parties hereto and Released Parties
specifically disclaim and deny any liability or wrongdoing whatsoever with
respect to the allegations and claims asserted against them in this action, and
the parties hereto
18
<PAGE>
enter into this Settlement Agreement solely to avoid the further expense,
inconvenience, burden and uncertainty of litigation.
21. Non-Admissibility. The settlement negotiations resulting in this
Settlement Agreement have been undertaken by the parties in good faith and for
settlement purposes only, and neither this Settlement Agreement nor any evidence
of negotiations hereunder, shall be offered or received in evidence in this
Action, or any other action or proceeding, for any purpose other than in an
action or proceeding arising under this Settlement Agreement.
22. Amendment. This Settlement Agreement may be amended only by a writing
executed by all signatories hereto, and any provision hereof may be waived only
by an instrument in writing executed by the waiving party. The waiver by any
party of any breach of this Settlement Agreement shall not be deemed to be or
construed as a waiver of any other breach, whether prior, subsequent or
contemporaneous, of this Settlement Agreement.
23. Notices. All notices or other communications to any party to this
Settlement Agreement shall be in writing (including telex, telecopy or similar
writing) and shall be given to the respective parties hereto at the following
addresses. Any party hereto may change the name and address of the person
designated to receive notice on behalf of such party by notice given as provided
in this paragraph.
19
<PAGE>
State of Mississippi:
Michael C. Moore
Attorney General
450 High Street
Post Office Box 220
Jackson, MS 39205
Fax: 601.359.3441
with copies to:
Richard Scruggs
Scruggs, Millette, Lawson, Bozeman & Dent, P.A.
734 Delmas Avenue
Post Office Drawer 1425
Pascagoula, Mississippi 39568-1425
Fax: 228.762.1207
and:
Joseph F. Rice
Ness, Motley, Loadholt, Richardson & Poole
151 Meeting Street, Suite 600
Charleston, SC 29402
Fax: 803.720.9290
and:
David O. McCormick
707 Watts Avenue
P.O. Box 865
Pascagoula, MS 39568-0865
Fax: 228.762.4864
For Philip Morris Incorporated:
Denise F. Keane
Philip Morris Incorporated
120 Park Avenue
New York, NY 10017-5592
Fax: 212.907.5399
With a copy to:
Meyer G. Koplow
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
20
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New York, NY 10019
Fax: 212.403.2000
For R.J. Reynolds Tobacco Company:
Charles A. Blixt
General Counsel
R.J. Reynolds Tobacco Company
401 North Main Street
Winston-Salem, NC 27102
Fax: 910.741.2998
With a copy to:
Arthur F. Golden
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Fax: 212.450.4800
For Brown & Williamson Tobacco Corporation:
F. Anthony Burke
Brown & Williamson Tobacco Corporation
200 Brown & Williamson Tower
401 South Fourth Avenue
Louisville, KY 40202
Fax: 502.568.7297
With a copy to:
Stephen R. Patton
Kirkland & Ellis
200 East Randolph Dr.
Chicago, IL 60601
Fax: 312.861.2200
For Lorillard Tobacco Company:
Arthur J. Stevens
Lorillard Tobacco Company
714 Green Valley Road
Greensboro, NC 27408
Fax: 910.335.7707
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24. Cooperation. The parties to this Settlement Agreement and their
attorneys agree to use their best efforts and to cooperate with each other to
cause this Settlement Agreement to become effective, to obtain all necessary
approvals, consents and authorizations, if any, and to execute all documents and
to take such other action as may be appropriate in connection therewith.
Consistent with the foregoing, the parties hereto agree that they will not
directly or indirectly challenge the Attorney General's authority to enter into
this Settlement Agreement and that they will not in any way assist or encourage
any challenge to this Settlement Agreement by any other person. The parties
hereto may agree, without further order of the Court, to reasonable extensions
of time to carry out any of the provisions of this Settlement Agreement.
25. Governing Law. This Settlement Agreement shall be governed by the law
of the State of Mississippi.
26. Construction. None of the parties hereto shall be considered to be the
drafter of this Settlement Agreement or any provision hereof for the purpose of
any statute, case law or rule of interpretation or construction that would or
might cause any provision to be construed against the drafter hereof.
27. Severability. In the event that any non-material provision of this
Settlement Agreement is found to be invalid, the remainder of this Settlement
Agreement shall be fully enforceable.
28. Intended Beneficiaries. This Action was brought by the State of
Mississippi, through its Attorney General, to recover certain monies and to
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<PAGE>
promote the health and welfare of the people of Mississippi. No portion of this
Settlement Agreement shall provide any rights to, or be enforceable by, any
person or entity that is not a party hereto or a Released Party and no portion
of this Settlement Agreement shall bind any non-party (other than a Released
Party) or determine, limit or prejudice the rights of any such person or entity.
29. Counterparts. This Settlement Agreement may be executed in
counterparts. Facsimile or photocopied signatures shall be considered as valid
signatures as of the date hereof, although the original signature pages shall
thereafter be appended to this Settlement Agreement.
IN WITNESS WHEREOF, the undersigned parties, through their fully
authorized representatives, have agreed to this Comprehensive Settlement
Agreement and Release as of this 17th day of OCTOBER, 1997.
JACKSON, MISSISSIPPI
STATE OF MISSISSIPPI, acting by and
through MICHAEL C. MOORE, its duly
elected and authorized Attorney General
By: /s/ Michael C. Moore
-----------------------------------
Michael C. Moore,
Attorney General
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<PAGE>
PHILIP MORRIS INCORPORATED
By: /s/ Jeffrey M. Wintner
-------------------------
Jeffrey M. Wintner,
Counsel
By: /s/ Denise F. Keane
------------------------
Denise F. Keane,
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By: /s/ Arthur F. Golden
------------------------
Arthur F. Golden,
Counsel
By: /s/ Charles A. Blixt
------------------------
Charles A. Blixt,
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By: /s/ Stephen R. Patton
------------------------
Stephen R. Patton,
Counsel
By: /s/ F. Anthony Burke
------------------------
F. Anthony Burke,
Vice President-Law & General Counsel
24
<PAGE>
Annual Report to Security Holders
Management's Discussion and Analysis of EXHIBIT 13
Financial Condition and Results of Operations
================================================================================
Consolidated Operating Results
Operating Revenues
(in millions) 1997 1996 1995
================================================================================
Tobacco $ 39,824 $ 36,549 $ 32,316
Food 27,690 27,950 29,074
Beer 4,201 4,327 4,304
Financial services and
real estate 340 378 377
- --------------------------------------------------------------------------------
Operating revenues $ 72,055 $ 69,204 $ 66,071
================================================================================
Operating Income
(in millions) 1997 1996 1995
================================================================================
Tobacco $ 7,830 $ 8,263 $ 7,177
Food 3,647 3,362 3,188
Beer 456 437 444
Financial services and
real estate 296 192 164
- --------------------------------------------------------------------------------
Operating profit $ 12,229 $ 12,254 $ 10,973
General corporate expenses (479) (442) (411)
Minority interest in earnings of
consolidated subsidiaries (87) (43) (36)
- --------------------------------------------------------------------------------
Operating income $ 11,663 $ 11,769 $ 10,526
================================================================================
1997 Compared with 1996
Operating revenues for 1997 increased $2.9 billion (4.1%) and operating profit
decreased $25 million (0.2%) from 1996. Operating profit, as defined for segment
reporting purposes, is operating income before general corporate expenses and
minority interest in earnings of consolidated subsidiaries. Operating revenues
were higher due primarily to increases in domestic and international tobacco and
North American food operations.
Operating profit was reduced as a result of pretax charges of $1.5 billion
taken by Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco
subsidiary, reflecting up-front charges related to settling health care cost
recovery litigation in Mississippi, Florida and Texas and a one-time charge for
settling the Broin case, a Florida class action brought on behalf of airline
flight attendants. Operating profit was further reduced by pretax charges of
$630 million to realign the international food operations. Operating profit was
increased by a $774 million pretax gain on the sale of ice cream businesses in
Brazil and a $103 million pretax gain on the sale of real estate operations.
Excluding the settlement charges, international food realignment charges, gains
on divestitures noted above and results of operations sold, operating profit
increased 11.5%, reflecting favorable results of operations in domestic tobacco,
international tobacco, North American food and beer operations.
Currency movements, primarily the strengthening of the U.S. dollar versus
European, Japanese and other Asian currencies, decreased operating revenues by
$3.2 billion ($1.9 billion, excluding excise taxes) and operating profit by $470
million in 1997 versus 1996. Although the Company cannot predict future
movements in currency rates or economic developments, it anticipates that the
continued global strength of the U.S. dollar will also have a significant
adverse impact on operating revenues and operating profit in 1998 and that
economic instability in Asia will temporarily slow the Company's businesses in
that region.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
establishes standards for computing and presenting earnings per share ("EPS")
and requires the presentation of both basic and diluted EPS. Prior years' EPS
have been restated to conform with the standards established by SFAS No. 128.
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<PAGE>
Basic EPS of $2.61 in 1997 increased by 1.6% over 1996, due primarily to
fewer shares outstanding. Similarly, diluted EPS increased 1.6% to $2.58 from
$2.54 in 1996. Net earnings, basic EPS and diluted EPS in 1997 were affected by
the after-tax effects of the settlement charges, international food realignment
charges and gains on divestitures noted above. Excluding the impact of these
items, net earnings increased 12.6% to $7.1 billion, basic EPS increased 14.0%
to $2.93 and diluted EPS increased 14.6% to $2.91, respectively, in 1997 from
$6.3 billion, $2.57 and $2.54, respectively, in 1996. As a result of share
repurchases, the weighted average number of shares outstanding for basic and
diluted EPS decreased to 2,420 million and 2,442 million shares, respectively,
in 1997 from 2,456 million and 2,482 million shares, respectively, in 1996.
The Company has evaluated the costs to implement century date change
compliant systems conversions and is in the process of executing a planned
conversion of its systems prior to the year 2000. Although such costs may be a
factor in describing changes in operating profit for one or more of the
Company's business segments in any given reporting period, the Company currently
does not believe that the anticipated costs of year 2000 systems conversions
will have a material impact on its future consolidated results of operations.
However, due to the interdependent nature of computer systems, the Company may
be adversely impacted in the year 2000 depending on whether it or entities not
affiliated with the Company have addressed this issue successfully.
1996 Compared with 1995
Operating revenues for 1996 increased $3.1 billion (4.7%) and operating profit
increased $1.3 billion (11.7%) over 1995. Operating revenues increased in 1996
over 1995 due primarily to increases in tobacco revenues, partially offset by
the impact of divestitures of food businesses. Operating profit increased in
1996 over 1995 due primarily to increases in the tobacco and food segments.
Excluding the results of divested North American food businesses
(discussed below in Food--Business Environment), operating revenues and
operating profit in 1996 increased $5.2 billion (8.1%) and $1.4 billion (12.9%),
respectively, over 1995.
Currency movements, primarily the strengthening of the U.S. dollar versus
the Japanese yen, decreased operating profit by $116 million in 1996.
Interest and other debt expense, net, decreased $93 million (7.9%)
compared to 1995, due primarily to a lower average interest rate on outstanding
debt and higher interest income in 1996.
Excluding the cumulative effect of accounting changes discussed below,
basic EPS of $2.57 in 1996 increased by 17.9% over 1995, and diluted EPS of
$2.54 increased by 17.6% over 1995, both due to higher net earnings and lower
shares outstanding. As a result of the Company's share repurchase program, the
weighted average number of shares outstanding for basic and diluted EPS
decreased to 2,456 million and 2,482 million shares, respectively, in 1996 from
2,517 million and 2,538 million shares, respectively, in 1995.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its non-U.S.
retiree health care plans. The Company also adopted SFAS No. 116, "Accounting
for Contributions Received and Contributions Made." The cumulative effect at
January 1, 1995 of adopting SFAS No. 106, for the non-U.S. plans, and SFAS No.
116 reduced 1995 net earnings by $28 million and basic EPS and diluted EPS each
by $.01. The application of SFAS No. 106, for non-U.S. plans, and SFAS No. 116
did not materially reduce 1995 earnings before cumulative effect of accounting
changes.
1993 Restructuring
In the fourth quarter of 1993, the Company provided for the restructuring of its
worldwide operations to reduce its cost structure and to improve its future
growth, profitability and cash flow. The charge related primarily to the
downsizing or closure of approximately 40 manufacturing and other facilities.
This restructuring charge reduced 1993 earnings before income taxes and net
earnings by $741 million and $457 million, respectively. Included in this charge
were asset write-downs of $429 million, with the remainder of the charge
representing anticipated cash expenditures to be funded with cash provided by
operating activities. The liability established upon adoption of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," was sufficient to provide
for costs associated with workforce reductions contemplated by the 1993
restructuring. At December 31, 1997, the 1993 restructuring program was
substantially complete, with estimated annual after-tax savings of $500 million.
Operating Results by Business Segment
Tobacco
Business Environment
The tobacco industry, including PM Inc., the Company's domestic tobacco
subsidiary, and Philip Morris International Inc. ("PMI"), the Company's
international tobacco subsidiary, has faced, and continues to face, a number of
issues that may adversely affect volume, operating revenues, cash flows,
operating income and financial position.
In the United States, these issues include proposed federal regulatory
controls (including, as discussed below, the issuance of final regulations by
the United States Food and Drug Administration (the "FDA") that regulate
cigarettes as "drugs" or "medical devices"); actual and proposed excise tax
increases; actual and proposed federal, state and local governmental and private
bans and restrictions on smoking (including in workplaces and in buildings
permitting public access); actual and proposed restrictions on tobacco
manufacturing, marketing,
22
<PAGE>
advertising (including decisions by certain companies to limit or not accept
tobacco advertising) and sales; actual and proposed legislation and regulations
to require substantial additional health warnings on cigarette packages and in
advertising, and to eliminate the tax deductibility of tobacco advertising and
promotional costs; actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information; actual and proposed
requirements regarding disclosure of the yields of "tar," nicotine and other
constituents found in cigarette smoke; increased assertions of adverse health
effects associated with both smoking and exposure to environmental tobacco smoke
("ETS"); legislation or other governmental action seeking to ascribe to the
industry responsibility and liability for the purported adverse health effects
associated with both smoking and exposure to ETS; the diminishing social
acceptance of smoking; increased pressure from anti-smoking groups; unfavorable
press reports; governmental and grand jury investigations; increased smoking and
health litigation, including private plaintiff class action litigation and
health care cost recovery actions brought by state and local governments, unions
and others seeking reimbursement for Medicaid and/or other health care
expenditures allegedly caused by cigarette smoking; and the proposed legislative
resolution of certain regulatory and litigation issues affecting the United
States tobacco industry discussed below.
Cigarettes are subject to substantial excise taxes in the United States
and to similar taxes in most foreign markets. The United States federal excise
tax on cigarettes is currently $12 per 1,000 cigarettes ($0.24 per pack of 20
cigarettes). In August 1997, legislation was enacted that will raise the federal
excise tax to $17 per 1,000 cigarettes ($0.34 per pack of 20 cigarettes)
starting in the year 2000 and then to $19.50 per 1,000 cigarettes ($0.39 per
pack of 20 cigarettes) in 2002. In general, excise taxes, sales taxes and other
cigarette-related taxes levied by the federal government and by various states,
counties and municipalities have been increasing, and additional increases have
been proposed at the federal level and in a number of states. These taxes vary
considerably and, when combined with the recently enacted federal excise tax,
may be as high as $1.50 per pack in a given locality.
In the opinion of PM Inc. and PMI, past increases in excise and similar
taxes have had an adverse impact on sales of cigarettes. Any future increases,
the extent of which cannot be predicted, could result in volume declines for the
cigarette industry, including PM Inc. and PMI, and might cause sales to shift
from the premium segment to the discount segment.
In August 1996, the FDA issued final regulations pursuant to which it
asserts jurisdiction over cigarettes as "drugs" or "medical devices" under the
provisions of the Food, Drug and Cosmetic Act. The final regulations include
severe restrictions on the distribution, marketing and advertising of
cigarettes, and would require the industry to comply with a wide range of
labeling, reporting, recordkeeping, manufacturing and other requirements
applicable to medical devices and their manufacturers. For the most part, the
regulations were scheduled to become effective on August 28, 1997. The FDA's
exercise of jurisdiction, if not reversed by judicial or legislative action,
could lead to more expansive FDA-imposed restrictions on cigarette operations
than those set forth in the final regulations, and could materially adversely
affect the volume, operating revenues, cash flows and operating income of PM
Inc. PM Inc. and others challenged in the courts the FDA's authority to regulate
cigarettes. In April 1997, a U.S. district court ruled that Congress has not
precluded the FDA from regulating cigarettes as "drugs" or "medical devices" and
that the FDA may regulate cigarettes if the facts asserted in support of the
FDA's assertion of jurisdiction are proven to be correct. The court also ruled,
however, that the section of the Food, Drug and Cosmetic Act relied upon by the
agency does not give the FDA authority to implement its regulations restricting
cigarette advertising and promotions. The court stayed implementation of the
FDA's regulations scheduled for August 1997. The court left in effect the
specific regulations that took effect in February 1997 establishing a federal
minimum age of 18 for the sale of tobacco products and requiring proof of age
for anyone under age 27. The tobacco company plaintiffs, including PM Inc., are
appealing that portion of the district court's order relating to the FDA's
assertion of jurisdiction. The FDA is appealing that portion of the order
enjoining the advertising and promotion restrictions. The respective appeals
were heard by the U.S. Court of Appeals for the Fourth Circuit in August 1997.
The outcome of this litigation cannot be predicted.
In August 1996, the Commonwealth of Massachusetts enacted legislation to
require cigarette manufacturers to disclose to the Massachusetts Department of
Public Health ("DPH") the flavorings and other ingredients used in each brand of
cigarettes sold in the Commonwealth, and to provide "nicotine-yield ratings" for
their products based on standards to be established by the DPH. PM Inc. believes
that enforcement of the ingredient disclosure provisions of the statute could
permit the disclosure by DPH to the public of valuable proprietary information
concerning its brands. PM Inc. and three other domestic cigarette manufacturers
have filed suit in federal district court in Boston challenging the legislation.
In December 1997, the court granted a preliminary injunction to the tobacco
company plaintiffs and enjoined the Commonwealth from enforcing the ingredient
disclosure provisions of the legislation until further order of the court. The
ultimate outcome of this lawsuit cannot be predicted. The enactment of this
legislation has encouraged efforts to enact, and the enactment of, ingredient
disclosure legislation in other states, such as Texas and Minnesota.
In December 1997, PM Inc. disclosed to the DPH "nicotine-yield ratings"
for its products sold in the Commonwealth based on standards established by the
DPH for determining "nicotine delivery under average smoking conditions." The
"nicotine-yield ratings" produced using the DPH standards are higher than the
23
<PAGE>
yields produced using the standards established by a 1970 voluntary agreement
between the Federal Trade Commission ("FTC") and domestic cigarette
manufacturers, including PM Inc., and which are required to be included in all
cigarette advertising. In September 1997, the FTC issued a request for public
comments on its proposed revision of the "tar" and nicotine testing and
reporting standards established by the 1970 voluntary agreement.
In June 1995, PM Inc. announced that it had voluntarily undertaken a
program to limit minors' access to cigarettes. Elements of the program include
discontinuing free cigarette sampling to consumers in the United States,
discontinuing the distribution of cigarettes by mail to consumers in the United
States, placing a notice on cigarette cartons and packs for sale in the United
States stating "Underage Sale Prohibited," working with others in support of
state legislation to prevent youth access to tobacco products, taking measures
to encourage retailer compliance with minimum-age laws, and independent auditing
of the program.
In October 1997, at the request of the United States Senate Judiciary
Committee, PM Inc. provided the Committee with a document setting forth the
Company's position on a number of issues. On the issues of the role played by
cigarette smoking in the development of lung cancer and other diseases in
smokers, and whether nicotine, as found in cigarette smoke, is "addictive," the
Company stated that despite the differences that may exist between its views and
those of the public health community, it would, in order to ensure that there
will be a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the alleged health effects of
exposure to ETS, the Company is prepared to defer to the judgment of public
health authorities as to what health warning messages will best serve the public
interest, as reflected in the proposed new health warnings set out in the
proposed Resolution.
Some foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to require ingredient disclosure, to impose
maximum constituent levels, to increase taxes on cigarettes, to control prices,
to restrict imports, to ban or severely restrict smoking in workplaces and
public places, and otherwise to discourage cigarette smoking. It is not possible
to predict what, if any, other foreign governmental legislation or regulations
will be adopted relating to the manufacturing, advertising, sale or use of
cigarettes or to the tobacco industry generally.
On February 10, 1998, a regulation went into effect in Thailand that would
require manufacturers and importers of tobacco products, including a subsidiary
of PMI, to disclose to the Ministry of Public Health ("MPH") the ingredients of
their products to be sold in Thailand on a by-brand basis. Although this
regulation does not require the MPH to make public the submitted ingredients
lists, there are no assurances that the confidentiality of lists to be submitted
will be maintained.
PM Inc. has received requests for information (including grand jury
subpoenas) in connection with governmental investigations of the tobacco
industry, and is cooperating with respect to such requests. Certain present and
former employees of PM Inc. have testified or have been asked to testify in
connection with certain of these matters. The investigations are as follows:
PM Inc. has been informed that an investigation by the United States
Attorney for the Southern District of New York, which had been initiated
following the publication of an article in The New York Times that made
allegations about PM Inc. documents and supposedly secret research relating to
nicotine, has been consolidated with the United States Department of Justice
investigation discussed immediately below.
PM Inc. has been informed of an investigation by the United States
Attorney for the Eastern District of New York relating to The Council for
Tobacco Research-U.S.A., Inc., a research organization of which PM Inc. is a
sponsor; and an investigation by the United States Department of Justice
relating to issues raised in testimony provided by tobacco industry executives
before Congress and other related matters.
PM Inc. has been advised that the FTC has commenced an investigation to
determine whether PM Inc. unfairly restricts the distribution of competing
manufacturers' cigarette brands through its merchandising practices at the
wholesale and retail levels.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
As further discussed in Note 15 to the Consolidated Financial Statements
("Note 15"), there is litigation pending in various jurisdictions related to
tobacco products. These cases generally fall within three categories: (i)
smoking and health cases alleging personal injury brought on behalf of
individual plaintiffs, (ii) smoking and health cases alleging personal injury
and purporting to be brought on behalf of a class of individual plaintiffs, and
(iii) health care cost recovery cases, including class actions, brought by state
and local governments, unions, federal and state taxpayers, native American
tribes and others seeking reimbursement for Medicaid and/or other health care
expenditures allegedly caused by cigarette smoking. Damages claimed in some of
the smoking and health class actions and health care cost recovery cases range
into the billions of dollars.
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<PAGE>
In recent years there has been a substantial increase in the number of
smoking and health cases being filed in the United States, a trend that
accelerated in 1997.
As of December 31, 1997, there were approximately 375 smoking and health
cases filed and served on behalf of individual plaintiffs in the United States
against PM Inc. and, in some cases, the Company (excluding approximately 50
cases in Texas that were voluntarily dismissed but which may be refiled under
certain conditions), compared with approximately 185 such cases as of December
31, 1996. Many of the new cases were filed in Florida and New York. Seventeen of
the individual cases involve allegations of various personal injuries allegedly
related to exposure to ETS.
In addition, as of December 31, 1997, there were approximately 50
purported smoking and health class actions pending in the United States against
PM Inc. and, in some cases, the Company (including six that involve allegations
of various personal injuries related to exposure to ETS), compared with
approximately 20 such cases on December 31, 1996. Most of these actions purport
to constitute statewide class actions and were filed after May 1996 when the
Fifth Circuit Court of Appeals, in the Castano case, reversed a federal district
court's certification of a purported nationwide class action on behalf of
persons who were allegedly "addicted" to tobacco products. As of December 31,
1997, there were three purported smoking and health class actions pending
overseas against affiliates and subsidiaries of the Company, one each in Canada,
Brazil and Nigeria.
The number of health care cost recovery actions also increased during
1997, with approximately 105 such cases pending as of December 31, 1997,
compared with approximately 25 such cases on December 31, 1996. Other foreign,
state, and local government entities and others, including unions, have
announced that they are considering filing health care cost recovery actions.
In June 1997, PM Inc. and other companies in the United States tobacco
industry agreed to a proposed Resolution to support federal legislation and
ancillary undertakings that would resolve many of the regulatory and litigation
issues affecting the United States industry. (See "Proposed Resolution of
Certain Regulatory and Litigation Issues" below.) In furtherance of the proposed
Resolution, PM Inc. and other companies in the United States tobacco industry
settled health care cost recovery actions brought by the States of Mississippi,
Florida and Texas, and a smoking and health class action brought on behalf of
airline flight attendants, all on terms consistent with the proposed Resolution.
These settlements are discussed in Note 15.
It is not possible to predict the outcome of the litigation pending
against the Company and its subsidiaries. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. There have also
been a number of adverse legislative, regulatory, political and other
developments concerning cigarette smoking and the tobacco industry that have
received widespread media attention, including a decision by a federal district
court on a motion for summary judgment not to preclude the FDA from asserting
jurisdiction over cigarettes as "drugs" or "medical devices," which decision is
now under appeal. These developments, as well as the widespread media attention
given to the proposed Resolution discussed below and the settlements of the
Mississippi, Florida and Texas health care cost recovery actions and a smoking
and health class action brought on behalf of airline flight attendants, may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an unfavorable outcome of certain pending litigation or
by the proposed Resolution discussed below or by settlement, if any, of certain
pending cases. However, implementation of the proposed Resolution should resolve
the most significant tobacco litigation against the Company and its
subsidiaries. Furthermore, the Company and each of its subsidiaries named as a
defendant believe, and each has been so advised by counsel handling the
respective cases, that it has a number of valid defenses to all litigation
pending against it. Except as described below under the heading "Proposed
Resolution of Certain Regulatory and Litigation Issues--Effects on Litigation,"
all such cases are, and will continue to be, vigorously defended.
Proposed Resolution of Certain Regulatory and Litigation Issues
In June 1997, PM Inc. and other companies in the United States tobacco industry
entered into a Memorandum of Understanding (the "Resolution") to support the
adoption of federal legislation and ancillary undertakings that would resolve
many of the regulatory and litigation issues affecting the United States tobacco
industry and, thereby, reduce uncertainties facing the industry
25
<PAGE>
and increase stability in business and capital markets. The complete text of the
proposed Resolution has been filed with the Securities and Exchange Commission
as Exhibit 10 to the Company's Current Report on Form 8-K dated June 20, 1997,
and the discussion herein is qualified by reference thereto.
There can be no assurance that federal legislation in the form of the
proposed Resolution will be enacted or that it will be enacted without
modification that is materially adverse to the Company or that any modification
would be acceptable to the Company or that, if enacted, the legislation would
not face legal challenges. Moreover, the negotiation and signing of the proposed
Resolution could affect other federal, state and local regulation of the United
States tobacco industry and regulation of the international tobacco industry.
The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access restrictions,
licensing of tobacco retailers, the adoption and enforcement of "no sales to
minors" laws by states, surcharges against the industry for failure to achieve
underage smoking reduction goals, regulation of tobacco products by the FDA,
public disclosure of industry documents and research, smoking cessation
programs, compliance programs by the industry, public smoking and smoking in the
workplace, enforcement of the proposed Resolution, industry payments and
litigation.
Surcharge for Failure to Achieve Underage
Smoking Reduction Goals
The proposed Resolution would require the FDA to impose annual surcharges on the
industry if targeted reductions in underage smoking are not achieved in
accordance with a legislative timetable. The surcharge would be based upon an
approximation of the present value of the profit the companies would earn over
the lives of all underage consumers in excess of the target, and would be
allocated among participating manufacturers based on their market share of the
United States cigarette industry.
Industry Payments
The proposed Resolution would require participating manufacturers to make
substantial payments in the year of implementation and thereafter ("Industry
Payments"). Participating manufacturers would be required to make an aggregate
$10 billion initial Industry Payment on the date that federal legislation
implementing the terms of the proposed Resolution is signed. This Industry
Payment would be based on relative market capitalizations, and the Company
currently estimates that PM Inc.'s share of the initial Industry Payment would
be approximately $6.6 billion (to be adjusted downward for initial payments made
to Mississippi, Florida and Texas pursuant to settlements of health care cost
recovery actions discussed in Note 15). Thereafter, the companies would be
required to make specified annual Industry Payments determined and allocated
among the companies based on volume of domestic sales as long as the companies
continue to sell tobacco products in the United States. These Industry Payments,
which would begin on December 31 of the first full year after implementing
federal legislation is signed, would be in the following amounts (at 1996 volume
levels)--year 1: $8.5 billion; year 2: $9.5 billion; year 3: $11.5 billion; year
4: $14 billion; and each year thereafter: $15 billion. These Industry Payments
would be increased by the greater of 3% or the previous year's inflation rate,
and would be adjusted to reflect changes from 1996 domestic sales volume levels.
The Industry Payments would be separate from any surcharges discussed
above. The Industry Payments would receive priority and would not be
dischargeable in any bankruptcy or reorganization proceeding and would be the
obligation only of entities selling tobacco products in the United States (and
not their affiliated companies). The proposed Resolution provides that all
payments by the industry would be ordinary and necessary business expenses in
the year of payment, and no part thereof would be either in settlement of an
actual or potential liability for a fine or penalty (civil or criminal) or the
cost of a tangible or intangible asset. The proposed Resolution would provide
for the pass-through to consumers of the annual Industry Payments in order to
promote the maximum reduction in underage use.
Effects on Litigation
If enacted, the federal legislation provided for in the proposed Resolution
would settle present attorney general health care cost recovery actions (or
similar actions brought by or on behalf of any governmental entity other than
the federal government), parens patriae and smoking and health class actions and
all "addiction"/dependence claims, and would bar similar actions from being
maintained in the future. However, the proposed Resolution provides that no stay
applications will be made in pending governmental actions without the mutual
consent of the parties. In recent months, PM Inc. and other companies in the
domestic tobacco industry agreed to settle three health care cost recovery
actions in Mississippi, Florida and Texas, and a smoking and health class action
brought on behalf of flight attendants alleging injury caused by exposure to ETS
aboard aircraft. The Company may enter into discussions to postpone or settle
other actions, pending the enactment of the legislation contemplated by the
proposed Resolution. No assurance can be given whether a postponement or
settlement will be achieved or, if achieved, as to the terms thereof. The
proposed Resolution would not affect any smoking and health class action or any
health care cost recovery action that is reduced to final judgment before
implementing federal legislation is effective.
Under the proposed Resolution, the rights of individuals to sue the
tobacco industry would be preserved, as would existing legal doctrine regarding
the types of tort claims that can be brought under applicable statutory and case
law except as
26
<PAGE>
expressly changed by implementing federal legislation. Claims, however, could
not be maintained on a class or other aggregated basis and could be maintained
only against tobacco manufacturing companies (and not their retailers,
distributors or affiliated companies). In addition, all punitive damage claims
based on past conduct would be resolved as part of the proposed Resolution, and
future claimants could seek punitive damages only with respect to claims
predicated upon conduct taking place after the effective date of implementing
federal legislation. Finally, except with respect to actions pending as of June
9, 1997, third-party payor (and similar) claims could be maintained only if
based on subrogation of individual claims. Under subrogation principles, a payor
of medical costs can seek recovery from a third party only by "standing in the
shoes" of the injured party and being subject to all defenses available against
the injured party.
The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil liabilities
relating to past conduct. Judgments and settlements arising from tort actions
would be paid as follows. The proposed Resolution would set an annual aggregate
cap of up to 33% of the annual base Industry Payment (including any reductions
for volume declines). Any judgments or settlements exceeding the cap in a
particular year would roll over into the next year. While judgments and
settlements would run against the defendant, they would give rise to an
80-cents-on-the-dollar credit against the annual Industry Payment. Finally, any
individual judgments in excess of $1 million would be paid at the rate of $1
million per year unless every other judgment and settlement could first be
satisfied within the annual aggregate cap. In all circumstances, however, the
companies would remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs in the
litigation that would be settled by the proposed Resolution.
Financial Effects
The Company anticipates that PM Inc.'s share of the industry's $10 billion
initial payment, which it currently estimates would be approximately $6.6
billion (adjusted downward for initial payments made to Mississippi, Florida and
Texas pursuant to settlements of health care cost recovery actions), would be
charged to expense in the period in which federal legislation implementing the
terms of the proposed Resolution is enacted. In addition, the Company currently
anticipates that implementation of the proposed Resolution would require a
significant charge to expense in the period of enactment to comply with the
proposed Resolution's regulations on advertising, marketing and production. The
initial payment would be funded from a combination of available cash, commercial
paper issuances, bank borrowings and long-term debt issuances in global markets.
The initial payment would have a material adverse effect on the Company's
operating income and cash flows in the quarter and year in which the proposed
Resolution is enacted and on its financial position. The initial payment would
result in higher debt and higher interest expense, the amounts of which would
depend upon the final form of the proposed Resolution, borrowing requirements
and interest rates.
The Company anticipates that PM Inc.'s share of future annual Industry
Payments related to cigarette sales would be charged to expense as the related
sales occur, and would be funded through price increases. The Company
anticipates that annual surcharges, if any, imposed by the FDA for failure to
meet required reduction levels in underage smoking, beginning in the fifth year
after the proposed Resolution is implemented, would be charged to expense in the
year of assessment or in the year prior thereto if it is then probable that such
assessment will be made.
The Company believes that implementation of the proposed Resolution would
materially adversely affect the volume, operating revenues, cash flows and/or
operating income of the Company in future years. The degree of the adverse
impact would depend, among other things, on the rates of decline in United
States cigarette sales in the premium and discount segments, PM Inc.'s share of
the domestic premium and discount cigarette segments, interest rates and the
timing of principal payments on debt incurred to finance the initial payment due
under the proposed Resolution, and the effect of the proposed Resolution on
cigarette consumption and the regulatory and litigation environment outside the
United States.
In view of the foregoing, the Company may reevaluate its share repurchase
and dividend policies.
Operating Results
Operating Revenues Operating Profit
(in millions) 1997 1996 1995 1997 1996 1995
================================================================================
Domestic tobacco $ 13,485 $ 12,462 $ 11,493 $3,267 $4,206 $3,740
International tobacco 26,339 24,087 20,823 4,592 4,078 3,453
Amortization of
goodwill (29) (21) (16)
- --------------------------------------------------------------------------------
Total $ 39,824 $ 36,549 $ 32,316 $7,830 $8,263 $7,177
================================================================================
1997 Compared with 1996
Domestic tobacco. During 1997, PM Inc.'s operating revenues increased 8.2% over
1996, due primarily to pricing ($783 million), higher volume ($222 million,
including excise taxes) and improved product mix.
As discussed in Note 15, "Contingencies," of the Notes to Consolidated
Financial Statements, in the third and fourth quarters of 1997, PM Inc. recorded
charges totaling $1.5 billion as PM Inc. and other companies in the United
States tobacco industry entered into agreements to settle health care cost
recovery
27
<PAGE>
actions in Mississippi, Florida and Texas, and an agreement to settle a class
action lawsuit in Florida.
Operating profit for 1997 decreased 22.3% from 1996, due primarily to
these litigation settlement charges ($1.5 billion), higher marketing,
administration and research costs ($195 million, primarily higher marketing
expense) and higher fixed manufacturing costs ($79 million), partially offset by
pricing ($625 million), higher volume ($142 million) and improved product mix.
Excluding the impact of litigation settlement charges, PM Inc.'s operating
profit for 1997 increased 12.3% over 1996.
PM Inc.'s shipment volume for 1997 was 235.2 billion units, an increase of
1.9% over 1996 on higher Marlboro volume and increased wholesaler purchases,
which PM Inc. believes was partially in anticipation of price increases.
Marlboro shipment volume increased 7.8 billion units (5.0%) to 164.0 billion
units for a 34.1% share of the total industry, an increase of 1.8 share points
over 1996. Domestic tobacco industry volume declined 0.6%; however, PM Inc.
estimates that, excluding the effects of increased wholesaler buying mentioned
above and one less shipping day in 1997, the industry's volume declined by more
than 2% from 1996. While PM Inc. cannot predict future rates of decline, it
believes that, over the long term, industry shipments will continue to decline
in line with historical trends, subject to the effects of price increases
related to tobacco litigation settlements and the proposed Resolution, if
implemented, discussed under "Tobacco--Business Environment" above.
PM Inc.'s 1997 shipment market share was 48.9%, an increase of 1.2 share
points over 1996. Based on shipments, the premium segment accounted for
approximately 72.5% of the domestic cigarette industry volume in 1997, an
increase of 1.0 share point over 1996. This reflects a continued shift to the
higher-margin premium segment, which began in the second half of 1993.
In the premium segment, PM Inc.'s volume increased 3.4%, compared with a
0.8% increase for the industry, resulting in a premium segment share of 57.8%,
an increase of 1.5 share points over 1996, reflecting higher Marlboro volume.
In the discount segment, PM Inc.'s shipments decreased 6.4% to 33.7
billion units in 1997, compared with an industry decline of 4.0%, resulting in a
discount segment share of 25.6%, a decrease of 0.6 share points from 1996. Basic
shipment volume increased 355 million units to 23.5 billion units, for a 17.8%
share of the discount segment, an increase of 1.0 share point over 1996.
Retail sales data (compiled by the ACNielsen Company) indicate PM Inc. and
Marlboro market shares of 51.0% and 35.2%, respectively, during 1997, compared
with 49.4% and 33.3%, respectively, in 1996.
PM Inc. cannot predict future change or rates of change in the relative
sizes of the premium and discount segments or in PM Inc.'s shipments, shipment
market share or retail market share; however, it believes that implementation of
the proposed Resolution discussed above would materially adversely affect PM
Inc.'s shipments.
In January 1998, PM Inc. announced a price increase of $1.25 per thousand
cigarettes on its domestic premium and discount brands. This announcement
followed similar announcements of price increases of $3.50 per thousand
cigarettes in September 1997, $2.50 per thousand cigarettes in March 1997 and
$2.00 per thousand cigarettes in the second quarter of 1996. Each $1.00 per
thousand increase by PM Inc. equates to a $.02 increase to the wholesale price
of each pack of twenty cigarettes.
In October 1997, PM Inc. announced that it would commence limited consumer
preference testing on a new cigarette smoking system. The new cigarette smoking
system consists of a cigarette specially designed to be smoked while partially
inside an electronic Puff Activated Lighter so that the cigarette burns only
when puffed. The limited consumer preference testing is expected to take
approximately 12 months to complete.
1997 Compared with 1996
International tobacco. During 1997, tobacco operating revenues of PMI increased
$2.2 billion over 1996, including a $1.2 billion increase in excise taxes
(primarily reflecting the consolidation of previously unconsolidated and newly
acquired subsidiaries). Excluding excise taxes, operating revenues increased
$1.0 billion due primarily to price increases ($679 million), favorable
volume/mix ($618 million) and the consolidation of previously unconsolidated and
newly acquired subsidiaries ($577 million), partially offset by unfavorable
currency movements ($961 million). Operating profit for 1997 increased 12.6%
over 1996, due primarily to price increases, net of cost increases ($550
million), favorable volume/mix ($371 million) and the consolidation of
previously unconsolidated and newly acquired subsidiaries ($114 million),
partially offset by unfavorable currency movements ($408 million) and higher
marketing, administration and research costs.
PMI's volume grew 51.3 billion units (7.8%) in 1997 over 1996 to 711.5
billion units, including local brands manufactured by Tabaqueira-Empresa
Industrial de Tabacos, S.A., Portugal's leading tobacco company in which PMI
acquired a controlling interest in January 1997. Volume advanced in most major
markets, including Germany, Italy, the Benelux countries, Spain, Central and
Eastern Europe, the Middle East, Turkey, the Asia/Pacific region, Argentina and
Mexico. In addition, PMI recorded market share gains in most major markets. In
France, industry and PMI volumes were down, and in Brazil and Australia, PMI
lost volume and share. However, volume and market share for Marlboro increased
in France and Brazil. Overall volume growth was driven by PMI's portfolio of
international brands, including Marlboro, which increased 5.5% over 1996, and
Bond Street, Parliament, Chesterfield and Virginia Slims, each of which recorded
double-digit volume increases.
28
<PAGE>
1996 Compared with 1995
Domestic tobacco. PM Inc.'s 1996 operating revenues increased 8.4% over 1995,
due to higher volume ($465 million, including excise taxes), pricing ($414
million) and improved product mix ($90 million). 1996 operating profit increased
12.5% over 1995, due primarily to price increases, net of product cost increases
($362 million), higher volume ($289 million), improved product mix ($75 million)
and lower fixed manufacturing costs ($82 million, due primarily to the costs of
a product recall in 1995), partially offset by higher marketing, administration
and research expense ($342 million).
PM Inc.'s 1996 shipment volume was 230.8 billion units, an increase of
4.1% over 1995, compared with an industry increase of 0.4%. Industry volume
increased due to two extra shipping days in 1996 and distributor buying
patterns.
Based on shipments, the premium and discount segments accounted for 71.5%
and 28.5%, respectively, of domestic cigarette industry volume in 1996, versus
approximately 70.0% and 30.0%, respectively, in 1995, reflecting a continued
shift to the higher-margin premium segment, which began in the second half of
1993.
PM Inc.'s 1996 shipment market share was 47.7%, an increase of 1.7 share
points from 1995. In the premium segment, PM Inc.'s volume increased 6.3%,
compared with a 2.7% increase for the industry, resulting in a premium segment
share of 56.3%, an increase of 1.9 share points from 1995. Marlboro volume
increased 11.3 billion units (7.8%) for a 32.3% share of the total industry, an
increase of 2.2 share points from 1995. In the discount segment, PM Inc.'s
shipments decreased 6.3%, to 36.0 billion units in 1996 compared with an
industry decline of 4.9%, resulting in a discount segment share of 26.2%, a
decrease of 0.4 share points from 1995.
Retail sales data (compiled by the ACNielsen Company) indicate PM Inc. and
Marlboro market shares of 49.4% and 33.3%, respectively, in 1996, compared with
47.3% and 30.7%, respectively, in 1995.
PM Inc. cannot predict future change or rates of change in the relative
sizes of the premium and discount segments or in PM Inc.'s shipments, shipment
market share or retail market share; however, it believes that implementation of
the proposed Resolution discussed above would materially adversely affect PM
Inc.'s shipments.
1996 Compared with 1995
International tobacco. PMI's 1996 operating revenues increased 15.7%, due
primarily to higher foreign excise taxes ($1.6 billion, including those for
previously unconsolidated and newly acquired subsidiaries), favorable volume/mix
($1.1 billion), pricing ($469 million) and the impact of previously
unconsolidated and newly acquired subsidiaries ($390 million), partially offset
by unfavorable currency movements ($287 million). Operating profit increased
18.1%, due primarily to favorable volume/mix ($506 million) and price increases,
net of cost increases ($297 million) and the impact of previously unconsolidated
and newly acquired subsidiaries ($22 million), partially offset by unfavorable
currency movements ($128 million) and higher marketing, administration and
research costs.
PMI's volume grew 67.1 billion units (11.3%) in 1996 over 1995 to 660.2
billion units, including local brands manufactured by Zaklady Przemyslu
Tytoniowego w Krakowie S.A., a Polish cigarette manufacturer in which PMI
acquired a controlling interest in February 1996. Excluding this acquisition,
PMI's overall volume grew 8.4%.
Volume advanced in most major markets, including Germany, Italy, the
Netherlands, Belgium, Spain, Central and Eastern Europe, Turkey, the Middle
East, Japan, Korea, Singapore, the Philippines and Argentina. In Australia,
PMI's volume was lower, following the unusually high levels reached during the
1995 price war. Volume and share declined in Mexico, due to economic conditions
and retail price increases. In Brazil, PMI lost volume and share due to intense
competition. PMI's market shares rose in most major markets.
Food
Business Environment
Kraft Foods, Inc. ("Kraft"), the largest processor and marketer of retail
packaged food in the United States, and its subsidiary Kraft Foods
International, Inc. ("KFI"), which markets coffee, confectionery and grocery
products in Europe and the Asia/Pacific region, are subject to fluctuating
commodity costs and competitive challenges in various product categories and
markets. Certain subsidiaries and affiliates of PMI that manufacture and sell
food products in Latin America are also subject to competitive challenges in
various product categories and markets. In addition, the results of KFI, as well
as PMI's food operations in Latin America, are subject to the impact of currency
fluctuations.
Kraft, KFI and PMI continue to take steps to build the value of premium
brands with new product and marketing initiatives, to reduce costs and to
improve their food business portfolios.
During 1997, PMI sold its Brazilian ice cream businesses, Kraft sold North
American maple-flavored syrup businesses and KFI sold a Scandinavian sugar
confectionery business. During 1996, Kraft sold its bagel business and KFI sold
margarine businesses in the U.K. and Italy. During 1995, Kraft sold its North
American bakery, margarine, specialty oils, marshmallows, caramels and Kraft
Foodservice distribution businesses. Kraft and KFI have also sold several
smaller non-strategic businesses in 1997, 1996 and 1995.
In the fourth quarter of 1997, KFI and the food operations of PMI recorded
realignment charges related primarily to the downsizing or closure of
manufacturing and other facilities, as well as the discontinuance of certain
low-margin product lines. Included
29
<PAGE>
in the charges were provisions for incremental postemployment benefits,
primarily related to severance.
Kraft acquired the Taco Bell grocery and Del Monte shelf-stable pudding
businesses during 1996 and 1995, respectively. In Latin America, PMI acquired
nearly all of the remaining voting shares of Industrias de Chocolate Lacta S.A.
("Lacta"), a Brazilian confectionery company, in the second quarter of 1996.
The North American and international food businesses are affected by
fluctuating commodity costs, particularly coffee bean, cocoa and dairy prices.
Increases in commodity costs can influence consumer and trade buying patterns,
and affect retail price volatility, leading to price competition in some
markets. Coffee bean prices reached a twenty-year high in May 1997 after price
volatility in 1995 and lower prices in 1996. Higher coffee bean prices led to
price increases by Kraft, KFI and their competitors. Coffee volume declined in
1997 from 1996 as customers reacted to these commodity-driven price increases.
Kraft and KFI estimate that softness in coffee consumption may continue in 1998,
as long as higher than average coffee bean prices persist. KFI was affected by
higher sterling-denominated cocoa costs, which lowered profit margins on
confectionery products. Kraft was affected by record high cheese commodity costs
in the third quarter of 1996, as well as other higher dairy commodity costs,
arising from low U.S. milk production. Cheese and dairy commodity costs have
since moderated and remained stable.
Kraft's cereal business continues to be affected by intense price
competition, particularly from value brands. In the second quarter of 1996,
Kraft implemented a price rollback and simplified couponing of its cereal
products. Several competitors followed with similar pricing strategies. The
reduction of cereal prices in 1996 lowered operating revenues and operating
profit in 1996 and the first quarter of 1997 in relation to prior period
results.
Operating Results
Operating Revenues Operating Profit
(in millions) 1997 1996 1995 1997 1996 1995
================================================================================
North American food $ 16,838 $ 16,447 $ 17,891 $2,873 $2,628 $2,542
International food 10,852 11,503 11,183 1,326 1,303 1,218
Amortization of
goodwill (552) (569) (572)
- --------------------------------------------------------------------------------
Total $ 27,690 $ 27,950 $ 29,074 $3,647 $3,362 $3,188
================================================================================
1997 Compared with 1996
North American food. During 1997, operating revenues increased 2.4% over 1996,
due to volume increases in ongoing operations ($576 million), pricing ($275
million, primarily due to commodity-driven cost increases) and the impact of
acquisitions ($93 million), partially offset by the impact of divestitures ($372
million), unfavorable product mix ($155 million) and unfavorable currency
movements ($26 million). Operating profit for 1997 increased 9.3% over 1996, due
primarily to price increases and net cost decreases (aggregating $377 million,
aided by productivity-driven cost savings and lower cheese commodity costs) and
volume increases in ongoing operations ($335 million), partially offset by
unfavorable product mix ($97 million), the impact of divestitures ($61 million),
and higher marketing, administration and research costs ($304 million, due
primarily to higher marketing expense, which included additional marketing
activities for new products). Included in marketing, administration and research
costs was a gain of $159 million on the sale of maple-flavored syrup businesses,
as well as charges of $64 million related to the discontinuation of several
small operations, year 2000 systems conversion costs of $38 million and the
above mentioned additional marketing expense for new product initiatives.
Excluding operating results of the divested North American food businesses
discussed above, ongoing operating revenues and ongoing operating profit
increased 4.8% and 12.0%, respectively, in 1997 over 1996.
Strong ongoing volume gains were driven by frozen pizza, resulting from
geographic expansion and new products that have increased United States frozen
pizza volume; beverages, from the strength of ready-to-drink products; meals,
due to the acquisition and subsequent growth of Taco Bell grocery products as
well as strength in macaroni and cheese dinners; cereals, aided by new product
introductions; and desserts and snacks, due to new product introductions and
strength in refrigerated ready-to-eat desserts, shelf-stable puddings and dry
packaged desserts. Cheese volume also increased, benefiting from lower prices
due to lower commodity costs, new products and marketing initiatives. Volume
gains were also realized in processed meats, driven by continued growth of lunch
combinations (including new product introductions) and growth in hot dogs and
cold cuts. Coffee volume in 1997 declined from 1996 as customers reacted to
commodity-driven price increases. Volume for pourable salad dressings increased
despite intense competition. In Canada, volume decreased due to a planned exit
of lower-margin foodservice product lines; however, retail volume increased.
1997 Compared with 1996
International food. Operating revenues for 1997 decreased 5.7% from 1996, due to
unfavorable currency movements ($955 million), lower volume/mix ($70 million)
and the impact of divestitures ($295 million), partially offset by pricing,
($397 million) and the impact of newly acquired and previously unconsolidated
subsidiaries ($272 million). Operating profit for 1997 increased 1.8% over 1996,
due primarily to lower marketing, administration and research costs ($52
million), the impact of newly acquired and previously unconsolidated
subsidiaries ($41 million) and the gain on the sale of PMI's Brazilian ice cream
businesses ($774
30
<PAGE>
million), partially offset by unfavorable currency movements ($62 million), cost
increases, net of price increases (aggregating $59 million, primarily related to
higher coffee and cocoa costs), the impact of divestitures ($108 million) and
charges recorded during 1997 for the realignment of international food
operations ($630 million). Marketing, administration and research costs include
a $774 million gain on the divestiture of the Brazilian ice cream businesses and
charges totaling $630 million for the previously discussed realignment of
international food operations and related incremental postemployment costs.
Excluding the operating results of the divested international food
businesses, the gain on the sale of the Brazilian ice cream businesses and the
charges for realignment of international food operations, discussed above,
underlying operating revenues decreased 3.3% and underlying operating profit
decreased 1.1% in 1997 from 1996.
KFI's coffee volume decreased during 1997, reflecting customers' reactions
to commodity-driven price increases. KFI's confectionery volume, excluding the
impact of divestitures, increased slightly due to volume increases in the
Ukraine and the former Yugoslavia, partially offset by lower Scandinavian
volume, due to an exceptionally warm summer, and lower volume in Romania and
Bulgaria, reflecting poor economic environments. KFI's cheese and grocery
volumes, excluding the impact of divestitures, increased due primarily to gains
in KFI's Asia/Pacific region, principally China, the Philippines and Australia.
PMI's food volume in Latin America for 1997 increased over 1996, due primarily
to the acquisition of Lacta and higher beverage volume.
1996 Compared with 1995
North American food. During 1996, operating revenues decreased 8.1% from 1995,
due primarily to the impact of divestitures ($2.0 billion), product mix ($95
million) and pricing ($82 million), partially offset by volume increases in
ongoing operations ($662 million), the impact of acquisitions ($63 million) and
favorable currency movements ($39 million). Operating profit increased 3.4% over
1995 due primarily to volume increases in ongoing operations ($405 million) and
lower marketing, administration and research costs ($46 million), partially
offset by net price reductions and net cost increases ($158 million), the impact
of divestitures ($116 million), and product mix ($101 million). Kraft had net
gains from sales of businesses of $250 million in 1996. Kraft initiated
cost-saving actions in 1996 and provided $250 million for the downsizing and
closure of facilities. The effect of pricing on 1996 operating revenues was due
primarily to price reductions in coffee and cereals, partially offset by price
increases in cheese. The effect of net price reductions on 1996 operating profit
was due primarily to price reductions in cereals. The effect of net cost
increases on 1996 operating profit was due primarily to higher cheese commodity
costs.
Excluding operating results of the divested businesses discussed above,
1996 North American food ongoing operating revenues and ongoing operating profit
increased 3.8% and 8.5%, respectively, over 1995.
Significant volume gains were achieved in beverages, on the strength of
ready-to-drink and powdered products, and in frozen pizza, helped by new product
introductions and geographic market expansion. Volume also increased in
desserts, due to strength in packaged and refrigerated products, as well as the
acquisition of a shelf-stable pudding product line in the fourth quarter of
1995; coffee, aided by sales of premium-priced line extensions; processed meats,
with growth in lunch combinations, driven by product introductions, and cold
cuts; and meals, due to strength in dinners and stuffing. Volume increased in
cereals in 1996, due primarily to product introductions and the implementation
of price reductions and simplified couponing in the second quarter of 1996.
Despite lower consumption in the process cheese category as prices rose, total
cheese volume grew slightly due to new product introductions.
1996 Compared with 1995
International food. Operating revenues for 1996 increased 2.9% over 1995, due
primarily to higher volume ($44 million), the consolidation of previously
unconsolidated operations ($612 million) and the impact of acquisitions ($105
million), partially offset by pricing ($255 million, primarily coffee), the
impact of divestitures ($137 million) and unfavorable currency movements ($49
million). Operating profit during 1996 increased 7.0% over 1995, reflecting
higher volume ($23 million), cost decreases, net of price reductions ($81
million), the consolidation of previously unconsolidated operations ($66
million) and favorable currency movements ($7 million), partially offset by
higher marketing, administration and research costs ($101 million, primarily
higher marketing costs) and the impact of divestitures ($7 million). KFI had net
gains of $70 million from sales of businesses in 1996 as discussed previously.
Steps were taken during 1996 to lower KFI's overhead costs and strengthen the
marketing of KFI brands in the price competitive environments of Europe. KFI
provided $70 million for cost-saving actions that included increased severance
for workforce reductions.
Higher international food volume was due primarily to the consolidation of
previously unconsolidated businesses, the acquisition of Lacta and growth in
coffee. KFI's coffee volume increased in all regions during 1996, particularly
in several key markets such as Germany and France, KFI's largest coffee markets.
The gains were a result of increased marketing and several premium product
introductions. KFI's confectionery volume increased, due primarily to the
emerging markets of Central and Eastern Europe, but declined in Western Europe
where competition remained intense. KFI's cheese and grocery volumes decreased,
due to divestitures of businesses, lower consumption of beef in Italy, and the
effects of a peanut butter recall in Australia, partially offset by increased
sales of snacks in Scandinavia. Latin America volume was higher as a result of
the
31
<PAGE>
acquisition of Lacta and strong sales of powdered soft drinks throughout the
region.
Beer
1997 Compared with 1996
Operating revenues of the Miller Brewing Company ("Miller") for 1997 decreased
$126 million (2.9%) from 1996, due to unfavorable price/mix ($114 million) and
lower volume ($12 million). Operating profit for 1997 increased $19 million
(4.3%) over 1996, due primarily to lower marketing, administration and research
costs ($67 million) and lower manufacturing costs ($25 million), partially
offset by unfavorable price/mix ($71 million) and lower volume ($5 million).
Included in marketing, administration and research costs is a $12 million gain
on the sale of Miller's 20% equity interest in Molson Breweries of Canada
("Molson Canada"), a Canadian beer operation, and a 49% interest in Molson USA,
LLC, a beer import operation. Operating revenues, manufacturing costs and
marketing, administration and research costs in 1997 were impacted by actions
taken by Miller in 1996 to restore growth, streamline its organization and
reduce future costs.
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract brewing
arrangements) of 43.7 million barrels for 1997 decreased 0.3% from 1996,
reflecting lower export shipments of premium-priced brands, partially offset by
increased domestic shipments. Miller's estimated market share of the U.S. malt
beverage industry (based on shipments) was 21.8%, the same as in the prior year.
Wholesalers' sales to retailers in 1997 increased slightly from 1996, reflecting
higher sales of Miller Lite, as Miller's new advertising and promotional
campaigns renewed focus on major brands. Domestic shipments rose 0.8%, while
export shipments decreased in 1997, reflecting a shift toward international
licensing and contract brewing arrangements. International sales of Miller
products under such arrangements more than offset the 1997 decrease in export
shipments.
1996 Compared with 1995
Operating revenues of Miller for 1996 increased $23 million (0.5%) from 1995,
due to price/mix improvements ($136 million) and the impact of acquisitions ($7
million), partially offset by lower volume ($119 million). Operating profit
decreased $7 million (1.6%) from 1995, due to lower volume ($49 million) and
unfavorable fixed manufacturing costs ($18 million), partially offset by
price/mix improvements, net of higher material costs ($25 million) and lower
marketing, administration and research costs ($36 million, primarily marketing).
During 1996, Miller recorded its share of a restructuring charge at then
20%-owned Molson Canada and realized the benefit of lower than anticipated costs
for integrating Molson USA's operations. Also, in 1996, Miller took several
actions to restore growth, streamline its organization and reduce future costs.
These included a workforce reduction, the costs of which were charged against
the existing postemployment liability. The impact of these items was not
material to Miller's operating profit for 1996.
Miller's 1996 total shipment volume of 43.8 million barrels decreased 2.7%
from 1995. Despite higher shipments of Miller Lite in 1996, shipments of
premium-priced brands decreased, as did shipments of budget-priced brands. Lower
volume was due to softness in most of Miller's brands and intense competition.
Miller's market share of the U.S. malt industry (based on shipments) was 21.8%,
down 0.8 share points from 1995. Despite lower overall volume, Miller's premium
shipments increased to 82.5% from 81.8% of Miller's total shipments.
Financial Services and Real Estate
During 1997, Philip Morris Capital Corp. ("PMCC") sold its real estate
subsidiary, Mission Viejo Company, for a pretax gain of $103 million. Operating
revenues and operating profit from PMCC's financial services business increased
in 1997 and 1996 over the prior years due to the continued growth of its leasing
and structured finance portfolio.
Financial Review
Net Cash Provided by Operating Activities
During 1997, net cash provided by operating activities was $8.3 billion compared
with $7.6 billion in 1996. The increase was due primarily to the increase in net
earnings excluding the litigation settlement charges. Unpaid tobacco litigation
settlement accruals increased other working capital. During 1996, cash provided
by operating activities was $947 million higher than in 1995 due primarily to
higher net earnings.
Net Cash Used in Investing Activities
During 1997, net cash used in investing activities was $619 million, compared
with $2.1 billion used during 1996. The change was due primarily to higher cash
provided by divestitures of $2.2 billion in 1997 compared with $612 million in
1996, partially offset by slight increases in cash used for capital expenditures
and acquisitions. During 1997, $2.2 billion was provided by the sales of PMI's
Brazilian ice cream businesses, Mission Viejo Company's real estate operations
and several other food and beer businesses. During 1997, PMI acquired a
controlling interest in a Portuguese tobacco company and increased its ownership
interest in a Mexican cigarette business. During 1996, PMI acquired a
controlling interest in a Polish tobacco company and nearly all of the remaining
voting shares of a Brazilian confectionery company in 1996.
During 1996, net cash used in investing activities was $2.1 billion,
compared with $109 million during 1995. The change was due primarily to cash
used in 1996 for acquisitions, discussed
32
<PAGE>
above, compared with cash received in 1995 from the sales of food businesses.
During 1995, Kraft sold its North American bakery, margarine, specialty oils,
marshmallows, caramels and Kraft Foodservice distribution businesses. In
addition, several smaller international food businesses were sold in 1995. Total
proceeds from the sales of these businesses were $2.1 billion. In 1996, the
Company sold several domestic and international food businesses, including the
North American bagel business, for proceeds of $612 million.
Capital expenditures for 1997 increased 5.2%, to $1.9 billion, of which
50% related to tobacco operations and 39% related to food operations, primarily
for modernization and consolidation of manufacturing facilities and expansion of
certain production capacity. Capital expenditures are expected to be
approximately the same amount in 1998. Estimated future capital expenditures are
subject to the availability of funding if the legislation implementing the
proposed Resolution or its substantial equivalent is enacted.
Net Cash Used in Financing Activities
During 1997, the Company's net cash used in financing activities decreased to
$5.5 billion, compared to $6.4 billion used in 1996, due primarily to lower
stock repurchases, partially offset by higher dividends paid and an increase in
net repayments of short-term borrowings and long-term debt.
During 1996, the Company's net cash used in financing activities increased
to $6.4 billion, from $5.6 billion in 1995, due primarily to increases in stock
repurchases and dividends paid, partially offset by lower net repayments of
short-term borrowings and long-term debt.
Debt
The Company's total debt (consumer products and financial services) was $14.1
billion, $15.2 billion and $15.8 billion at December 31, 1997, 1996 and 1995,
respectively. Total consumer products debt was $13.3 billion, $13.9 billion and
$14.4 billion at December 31, 1997, 1996 and 1995, respectively. At December 31,
1997 and December 31, 1996, the Company's ratio of consumer products debt to
total equity was 0.89 and 0.98, respectively. The ratio of total debt to total
equity was 0.95 and 1.07 at December 31, 1997 and December 31, 1996,
respectively.
As discussed above in "Tobacco--Business Environment," PM Inc. estimates
that the proposed Resolution in its current form would result in an initial
payment by PM Inc. of approximately $6.6 billion upon enactment (to be adjusted
downward for initial payments made to Mississippi, Florida and Texas pursuant to
settlements of health care cost recovery actions). The Company anticipates that
the payment would be funded from a combination of available cash, commercial
paper issuances, bank borrowings and long-term debt issuances in global markets.
The Company further anticipates that the payment will result in significant
increases in its consumer products debt to total equity ratio, total debt to
total equity ratio and total debt outstanding.
Fixed rate debt constituted approximately 98% and 86% of total consumer
products debt at December 31, 1997 and 1996, respectively. The increase reflects
the Company's use of cash to repay commercial paper borrowings in 1997. The
average interest rate on total consumer products debt, including the impact of
currency swap agreements discussed below, was approximately 7.6% and 7.5% at
December 31, 1997 and 1996, respectively.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $12.0 billion at December
31, 1997. Approximately $11.8 billion of these facilities were unused at
December 31, 1997. These include revolving bank credit agreements totaling $10.0
billion. These facilities may be used to support any commercial paper borrowings
by the Company and are available for acquisitions and other corporate purposes.
An agreement for $2.0 billion expires in October 1998. An agreement for $8.0
billion expires in 2002, enabling the Company to refinance short-term debt on a
long-term basis. Based upon the Company's intent and ability to refinance such
debt, consumer products short-term borrowings of $37 million and $1.4 billion
were reclassified as long-term debt at December 31, 1997 and 1996, respectively.
The Company expects to continue to refinance long-term and short-term debt from
time to time. The nature and amount of the Company's long-term and short-term
debt and the proportionate amount of each can be expected to vary as a result of
future business requirements, market conditions and other factors.
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world. The Company continually
evaluates its foreign currency net asset exposure (primarily the Swiss franc,
German mark, Netherlands guilder, Swedish krona and Canadian dollar) based on
current market conditions and business strategies, and it acts to manage such
exposure, when deemed prudent, through various hedging transactions. The Company
has entered into currency and related interest rate swap agreements to manage
exposure to currency movements. The U.S. dollar value of aggregate notional
principal amounts for these agreements outstanding was equivalent to $1.4
billion and $2.2 billion at December 31, 1997 and 1996, respectively. Of these
amounts, $736 million and $1.5 billion related to consumer products debt at
December 31, 1997 and 1996, respectively.
The Company enters into forward exchange and option contracts, for
purposes other than trading, to reduce the effects of fluctuating foreign
currency on foreign currency denominated current assets, liabilities,
commitments and short-term intercompany transactions. At December 31, 1997 and
1996, the Company had entered into contracts with maturities of less than one
year and U.S. dollar equivalents of $2.5 billion (including $1.1 billion in
option contracts) and $1.7 billion, respectively.
33
<PAGE>
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at December 31, 1997 and
1996 or the Company's results of operations for the years ended December 31,
1997, 1996 and 1995.
The Company enters into commodity futures and forward contracts to procure
raw materials, primarily coffee, cocoa, sugar, wheat and corn. Commodity futures
and options are also used to hedge the price of certain commodities, primarily
coffee and cocoa. At December 31, 1997 and 1996, the Company had net long
commodity positions of $266 million and $197 million, respectively. Unrealized
losses on net commodity positions were immaterial at December 31, 1997 and 1996.
The Company's credit ratings by Moody's at December 31, 1997 and 1996 were
"P-1" in the commercial paper market and "A2" for long-term debt obligations.
The Company's credit ratings by Standard & Poor's ("S&P") at December 31, 1997
and 1996 were "A-1" in the commercial paper market and "A" for long-term debt
obligations. In April 1997, S&P placed the debt ratings of the Company on its
CreditWatch list with the intent of monitoring tobacco litigation developments.
Equity and Dividends
On February 26, 1997, the Company's Board of Directors declared a three-for-one
split of the Company's common stock, effected by a distribution on April 10,
1997, of two shares for each share held of record at the close of business on
March 17, 1997. All share and per share data have been restated to reflect this
stock split for all periods presented.
During 1997, the Company repurchased 18.2 million shares of its common
stock at an aggregate cost of $743 million. Of these purchases, 16.9 million
shares ($692 million) were made pursuant to the Company's repurchase program,
announced in 1994, to purchase up to $6.0 billion of its common stock in the
open market, and the remainder were made under an $8.0 billion share repurchase
program approved by the Board of Directors in the first quarter of 1997. These
1997 repurchases, net of 12.3 million shares issued under the Company's stock
award plans during 1997, resulted in lower weighted average shares outstanding
for 1997 as compared to 1996.
Dividends paid in 1997 were 12.2% higher than in 1996, reflecting a higher
dividend rate in 1997, partially offset by fewer shares outstanding. The Board
of Directors increased the Company's quarterly dividend rate to $0.40 per share
in the third quarter of 1996, resulting in an annualized dividend rate of $1.60
per share.
As discussed above in the last paragraph of "Tobacco--Business
Environment--Proposed Resolution of Certain Regulatory and Litigation Issues,"
the Company may reevaluate its share repurchase and dividend policies.
During 1997, currency translation adjustments reduced equity by $1.3
billion due to the strengthening of the U.S. dollar versus European currencies,
primarily the Swiss franc, German mark, Netherlands guilder and Swedish krona.
Return on average stockholders' equity decreased to 43.3% in 1997 from
44.7% in 1996. The decrease from 1996 primarily reflects higher average
stockholders' equity and the effect of litigation settlements in 1997.
Cash and Cash Equivalents
Cash and cash equivalents increased to $2.3 billion at December 31, 1997 from
$240 million at December 31, 1996. The increase primarily reflects cash provided
by divestitures and lower repurchases of common stock, partially offset by
tobacco litigation settlement payments and higher dividend payments.
Market Risk
The Company is exposed to the impact of changes in interest rates, foreign
exchange rates and commodity prices. In the normal course of business, the
Company manages such exposures through the use of a variety of financial and
derivative financial instruments when deemed prudent. The Company's objective in
managing these exposures is to reduce fluctuations in earnings and cash flows
associated with changes in interest rates, foreign currency rates and commodity
prices.
The Company manages its exposure to interest rate risk through the
proportion of fixed rate and variable rate debt in its total debt portfolio.
The Company enters into various contracts, which change in value as
foreign exchange rates change, to preserve the carrying value of foreign
currency assets, liabilities, commitments and anticipated foreign currency
transactions. The Company uses foreign currency option contracts to hedge
certain anticipated foreign currency revenues and raw materials purchases. The
Company also enters into short-term currency forward contracts, primarily to
hedge intercompany transactions denominated in foreign currencies and commodity
purchases. In addition, the Company seeks to protect the carrying value of
certain of its net investments in foreign subsidiaries generally through the use
of foreign currency-denominated debt or currency swap agreements.
Raw materials used by the Company's food businesses are exposed to the
impact of changing commodity prices. Accordingly, the Company enters into
commodity future, forward and option contracts to manage fluctuations in prices
of anticipated purchases of certain commodities, primarily coffee, cocoa, sugar,
wheat and corn.
It is the Company's policy and practice to use foreign currency and
commodity derivative financial instruments only to the extent necessary to
manage exposures as stated above. The Company does not enter into foreign
currency or commodity derivative transactions for speculative purposes.
34
<PAGE>
Value at Risk
The Company uses a value at risk ("VAR") computation to estimate the maximum
potential one-day loss in the fair value of its interest rate-sensitive
financial instruments and to estimate the maximum one-day loss in pretax
earnings of its foreign currency and commodity price-sensitive derivative
financial instruments. The VAR computation includes the Company's debt;
short-term investments; foreign currency forwards, swaps and options; and
commodity futures, forwards and options. Anticipated transactions, foreign
currency payables and receivables, and net investments in foreign subsidiaries,
which the foregoing instruments are intended to hedge, were excluded from the
computation. Since the Company uses currency rate-sensitive and commodity
price-sensitive instruments to hedge a certain portion of its existing and
anticipated transactions, the Company expects that any loss in value for those
instruments generally would be offset by increases in the value of those hedged
transactions.
The VAR estimates were made assuming normal market conditions, using a 95%
confidence interval. The Company used a "variance/co-variance" model to
determine the observed interrelationships between movements in interest rates
and various currencies. These interrelationships were determined by observing
interest rate and forward currency rate movements over the preceding quarter for
the calculation of VAR amounts at December 31, 1997 and over each of the four
preceding quarters for the calculation of average VAR amounts during the year.
The values of foreign currency and commodity options do not change on a
one-to-one basis with the underlying currency or commodity and were valued
accordingly in the VAR computation.
The estimated maximum potential one-day loss in fair value of the
Company's interest rate-sensitive instruments, primarily debt, under normal
market conditions and the estimated maximum potential one-day loss in pretax
earnings from foreign currency and commodity instruments under normal market
conditions, as calculated in the previously discussed VAR model, follow:
Earnings Impact Fair Value Impact
----------------- -----------------
At 1997 At 1997
(in millions) 12/31/97 Average 12/31/97 Average
================================================================================
Instruments sensitive to:
Interest rates $37 $40
Foreign currency rates $5 $7
Commodity prices $7 $8
================================================================================
The VAR computation is a risk analysis tool designed to statistically
estimate the maximum probable daily loss from adverse movements in interest
rates, foreign currency rates and commodity prices under normal market
conditions. The computation does not purport to represent actual losses in fair
value or earnings to be incurred by the Company, nor does it consider the effect
of favorable changes in market rates. The Company cannot predict actual future
movements in such market rates and does not present these VAR results to be
indicative of future movements in such market rates or to be representative of
any actual impact that future changes in market rates may have on its future
results of operations or financial position.
Contingencies
See Note 15 to the Consolidated Financial Statements for a discussion of
contingencies.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The tobacco industry continues to be subject to health concerns relating
to the use of tobacco products and exposure to ETS, legislation, including tax
increases, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations, litigation, and the effects of price
increases related to tobacco litigation settlements and, if implemented, of the
proposed Resolution discussed above. Each of the Company's operating
subsidiaries is subject to intense competition, changes in consumer preferences,
the effects of changing prices for its raw materials and local economic
conditions. The performance of each of PMI and KFI is affected by foreign
economies and currency movements. Developments in any of these areas, which are
more fully described above and which descriptions are incorporated into this
section by reference, could cause the Company's results to differ materially
from results that have been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
35
<PAGE>
Selected Financial Data--Eleven-Year Review (in millions of dollars, except per
share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 72,055 $ 69,204 $ 66,071 $ 65,125 $ 60,901
United States export sales 6,705 6,476 5,920 4,942 4,105
Cost of sales 26,689 26,560 26,685 28,351 26,771
Federal excise taxes on products 3,596 3,544 3,446 3,431 3,081
Foreign excise taxes on products 12,345 11,107 9,486 7,918 7,199
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 11,663 11,769 10,526 9,449 7,587
Interest and other debt expense, net 1,052 1,086 1,179 1,233 1,391
Earnings before income taxes and cumulative effect
of accounting changes 10,611 10,683 9,347 8,216 6,196
Pretax profit margin 14.7% 15.4% 14.1% 12.6% 10.2%
Provision for income taxes 4,301 4,380 3,869 3,491 2,628
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 6,310 6,303 5,478 4,725 3,568
Cumulative effect of accounting changes (28) (477)
Net earnings 6,310 6,303 5,450 4,725 3,091
Basic EPS before cumulative effect
of accounting changes 2.61 2.57 2.18 1.82 1.35
Per share cumulative effect of accounting changes (0.01) (0.18)
- -----------------------------------------------------------------------------------------------------------------------------
Basic EPS 2.61 2.57 2.17 1.82 1.17
Diluted EPS before cumulative effect
of accounting changes 2.58 2.54 2.16 1.81 1.35
Per share cumulative effect of accounting changes (0.01) (0.18)
Diluted EPS 2.58 2.54 2.15 1.81 1.17
Dividends declared per share 1.60 1.47 1.22 1.01 0.87
Weighted average shares (millions)--Basic 2,420 2,456 2,517 2,597 2,633
Weighted average shares (millions)--Diluted 2,442 2,482 2,538 2,610 2,645
- -----------------------------------------------------------------------------------------------------------------------------
Capital expenditures 1,874 1,782 1,621 1,726 1,592
Depreciation 1,045 1,038 1,023 1,025 1,042
Property, plant and equipment, net (consumer products) 11,621 11,751 11,116 11,171 10,463
Inventories (consumer products) 9,039 9,002 7,862 7,897 7,358
Total assets 55,947 54,871 53,811 52,649 51,205
Total long-term debt 12,430 12,961 13,107 14,975 15,221
Total debt--consumer products 13,258 13,933 14,372 14,978 16,364
--financial services and real estate 845 1,307 1,454 1,494 1,792
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 3,382 3,336 2,827 2,496 2,168
Stockholders' equity 14,920 14,218 13,985 12,786 11,627
Common dividends declared as a % of Basic EPS 61.3% 57.2% 56.2% 55.5% 74.4%
Common dividends declared as a % of Diluted EPS 62.0% 57.9% 56.7% 55.8% 74.4%
Book value per common share outstanding 6.15 5.85 5.61 5.00 4.42
Market price per common share--high/low 48.13-36.00 39.67-28.54 31.46-18.58 21.50-15.75 25.88-15.00
- -----------------------------------------------------------------------------------------------------------------------------
Closing price of common share at year end 45.25 37.67 30.08 19.17 18.54
Price/earnings ratio at year end--Basic 17 15 14 11 16
Price/earnings ratio at year end--Diluted 18 15 14 11 16
Number of common shares outstanding at
year end (millions) 2,425 2,430 2,493 2,559 2,631
Number of employees 152,000 154,000 151,000 165,000 173,000
=============================================================================================================================
<CAPTION>
1992 1991 1990 1989
<S> <C> <C> <C> <C>
===========================================================================================================
Summary of Operations:
Operating revenues $ 59,131 $ 56,458 $ 51,169 $ 44,080
United States export sales 3,797 3,061 2,928 2,288
Cost of sales 26,082 25,612 24,430 21,868
Federal excise taxes on products 2,879 2,978 2,159 2,140
Foreign excise taxes on products 6,157 5,416 4,687 3,608
- -----------------------------------------------------------------------------------------------------------
Operating income 10,059 8,622 7,946 6,789
Interest and other debt expense, net 1,451 1,651 1,635 1,731
Earnings before income taxes and cumulative effect
of accounting changes 8,608 6,971 6,311 5,058
Pretax profit margin 14.6% 12.3% 12.3% 11.5%
Provision for income taxes 3,669 3,044 2,771 2,112
- -----------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 4,939 3,927 3,540 2,946
Cumulative effect of accounting changes (921)
Net earnings 4,939 3,006 3,540 2,946
Basic EPS before cumulative effect
of accounting changes 1.82 1.41 1.28 1.06
Per share cumulative effect of accounting changes (0.33)
- -----------------------------------------------------------------------------------------------------------
Basic EPS 1.82 1.08 1.28 1.06
Diluted EPS before cumulative effect
of accounting changes 1.80 1.40 1.27 1.05
Per share cumulative effect of accounting changes (0.33)
Diluted EPS 1.80 1.07 1.27 1.05
Dividends declared per share 0.78 0.64 0.52 0.42
Weighted average shares (millions)--Basic 2,717 2,773 2,774 2,778
Weighted average shares (millions)--Diluted 2,741 2,798 2,792 2,797
- -----------------------------------------------------------------------------------------------------------
Capital expenditures 1,573 1,562 1,355 1,246
Depreciation 963 938 876 755
Property, plant and equipment, net (consumer products) 10,530 9,946 9,604 8,457
Inventories (consumer products) 7,785 7,445 7,153 5,751
Total assets 50,014 47,384 46,569 38,528
Total long-term debt 14,583 14,213 16,121 14,551
Total debt--consumer products 16,269 15,289 17,182 14,887
--financial services and real estate 1,934 1,611 1,560 1,538
- -----------------------------------------------------------------------------------------------------------
Total deferred income taxes 2,248 1,803 2,083 1,732
Stockholders' equity 12,563 12,512 11,947 9,571
Common dividends declared as a % of Basic EPS 42.9% 59.3% 40.6% 39.6%
Common dividends declared as a % of Diluted EPS 43.3% 59.8% 40.9% 40.0%
Book value per common share outstanding 4.69 4.53 4.30 3.43
Market price per common share--high/low 28.88-23.17 27.25-16.08 17.33-12.00 15.17-8.33
- -----------------------------------------------------------------------------------------------------------
Closing price of common share at year end 25.71 26.75 17.25 13.88
Price/earnings ratio at year end--Basic 14 25 13 13
Price/earnings ratio at year end--Diluted 14 25 14 13
Number of common shares outstanding at
year end (millions) 2,679 2,760 2,778 2,787
Number of employees 161,000 166,000 168,000 157,000
===========================================================================================================
</TABLE>
1988 1987
================================================================================
Summary of Operations:
Operating revenues $ 31,273 $ 27,650
United States export sales 1,863 1,592
Cost of sales 13,565 12,183
Federal excise taxes on products 2,127 2,085
Foreign excise taxes on products 3,755 3,331
- --------------------------------------------------------------------------------
Operating income 4,397 3,990
Interest and other debt expense, net 670 646
Earnings before income taxes and cumulative effect
of accounting changes 3,727 3,344
Pretax profit margin 11.9% 12.1%
Provision for income taxes 1,663 1,502
- --------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 2,064 1,842
Cumulative effect of accounting changes 273
Net earnings 2,337 1,842
Basic EPS before cumulative effect
of accounting changes 0.74 0.65
Per share cumulative effect of accounting changes 0.10
- --------------------------------------------------------------------------------
Basic EPS 0.84 0.65
Diluted EPS before cumulative effect
of accounting changes 0.73 0.64
Per share cumulative effect of accounting changes 0.10
Diluted EPS 0.83 0.64
Dividends declared per share 0.34 0.26
Weighted average shares (millions)--Basic 2,796 2,854
Weighted average shares (millions)--Diluted 2,805 2,868
- --------------------------------------------------------------------------------
Capital expenditures 1,024 718
Depreciation 608 564
Property, plant and equipment, net (consumer products) 8,648 6,582
Inventories (consumer products) 5,384 4,154
Total assets 36,960 21,437
Total long-term debt 16,812 5,983
Total debt--consumer products 16,442 6,355
--financial services and real estate 1,504 1,378
- --------------------------------------------------------------------------------
Total deferred income taxes 1,559 2,044
Stockholders' equity 7,679 6,823
Common dividends declared as a % of Basic EPS 40.5% 40.0%
Common dividends declared as a % of Diluted EPS 41.0% 40.6%
Book value per common share outstanding 2.77 2.40
Market price per common share--high/low 8.50-6.71 10.38-6.04
- --------------------------------------------------------------------------------
Closing price of common share at year end 8.50 7.13
Price/earnings ratio at year end--Basic 10 11
Price/earnings ratio at year end--Diluted 10 11
Number of common shares outstanding at
year end (millions) 2,772 2,841
Number of employees 155,000 113,000
================================================================================
During 1997, the Company's Board of Directors declared a three-for-one split of
the Company's common stock. In addition, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." All prior
year share and per share data have been restated to reflect the impact of the
stock split and adoption of SFAS No. 128.
See notes to the consolidated financial statements regarding acquisitions and
divestitures in 1997, 1996 and 1995; the adoption of SFAS No. 116 and SFAS No.
106 for non-U.S. benefit plans in 1993; the international food realignment in
1997; and tobacco litigation settlement charges in 1997.
36 & 37
<PAGE>
Consolidated Balance Sheets (in millions of dollars, except per share data)
at December 31, 1997 1996
================================================================================
Assets
Consumer products
Cash and cash equivalents $ 2,282 $ 240
Receivables, net 4,294 4,466
Inventories:
Leaf tobacco 4,348 4,143
Other raw materials 1,689 1,854
Finished product 3,002 3,005
- --------------------------------------------------------------------------------
9,039 9,002
Other current assets 1,825 1,482
- --------------------------------------------------------------------------------
Total current assets 17,440 15,190
Property, plant and equipment, at cost:
Land and land improvements 666 664
Buildings and building equipment 5,114 5,168
Machinery and equipment 12,667 12,481
Construction in progress 1,555 1,659
- --------------------------------------------------------------------------------
20,002 19,972
Less accumulated depreciation 8,381 8,221
- --------------------------------------------------------------------------------
11,621 11,751
Goodwill and other intangible assets
(less accumulated amortization of $4,814 and $4,391) 17,789 18,998
Other assets 3,211 3,015
- --------------------------------------------------------------------------------
Total consumer products assets 50,061 48,954
Financial services and real estate
Finance assets, net 5,712 5,345
Other assets 174 572
- --------------------------------------------------------------------------------
Total financial services and real estate assets 5,886 5,917
- --------------------------------------------------------------------------------
Total Assets $55,947 $54,871
================================================================================
See notes to consolidated financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
1997 1996
=================================================================================================
<S> <C> <C>
Liabilities
Consumer products
Short-term borrowings $ 157 $ 260
Current portion of long-term debt 1,516 1,846
Accounts payable 3,318 3,409
Accrued liabilities:
Marketing 2,149 2,106
Taxes, except income taxes 1,234 1,331
Employment costs 1,083 942
Other 3,780 2,726
Income taxes 862 1,269
Dividends payable 972 978
- -------------------------------------------------------------------------------------------------
Total current liabilities 15,071 14,867
Long-term debt 11,585 11,827
Deferred income taxes 889 731
Accrued postretirement health care costs 2,432 2,372
Other liabilities 6,218 5,773
- -------------------------------------------------------------------------------------------------
Total consumer products liabilities 36,195 35,570
Financial services and real estate
Short-term borrowings 173
Long-term debt 845 1,134
Deferred income taxes 3,877 3,636
Other liabilities 110 140
- -------------------------------------------------------------------------------------------------
Total financial services and real estate liabilities 4,832 5,083
- -------------------------------------------------------------------------------------------------
Total liabilities 41,027 40,653
Contingencies (Note 15)
Stockholders' Equity
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) 935 935
Earnings reinvested in the business 24,924 22,478
Currency translation adjustments (1,109) 192
- -------------------------------------------------------------------------------------------------
24,750 23,605
Less cost of repurchased stock (380,474,028 and 374,615,043 shares) 9,830 9,387
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 14,920 14,218
- -------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 55,947 $54,871
=================================================================================================
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
Consolidated Statements of Earnings (in millions of dollars, except per share
data)
<TABLE>
<CAPTION>
for the years ended December 31, 1997 1996 1995
=========================================================================================================
<S> <C> <C> <C>
Operating revenues $ 72,055 $69,204 $66,071
Cost of sales 26,689 26,560 26,685
Excise taxes on products 15,941 14,651 12,932
- ---------------------------------------------------------------------------------------------------------
Gross profit 29,425 27,993 26,454
Marketing, administration and research costs 15,720 15,630 15,337
Settlement charges (Note 15) 1,457
Amortization of goodwill 585 594 591
- ---------------------------------------------------------------------------------------------------------
Operating income 11,663 11,769 10,526
Interest and other debt expense, net 1,052 1,086 1,179
- ---------------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative
effect of accounting changes 10,611 10,683 9,347
Provision for income taxes 4,301 4,380 3,869
- ---------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 6,310 6,303 5,478
Cumulative effect of accounting changes (28)
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 6,310 $ 6,303 $ 5,450
=========================================================================================================
Per share data:
Basic earnings per share before cumulative effect of accounting changes $ 2.61 $ 2.57 $ 2.18
Cumulative effect of accounting changes (.01)
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.61 $ 2.57 $ 2.17
=========================================================================================================
Diluted earnings per share before cumulative effect of accounting changes $ 2.58 $ 2.54 $ 2.16
Cumulative effect of accounting changes (.01)
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.58 $ 2.54 $ 2.15
=========================================================================================================
</TABLE>
Consolidated Statements of Cash Flows (in millions of dollars)
<TABLE>
<CAPTION>
for the years ended December 31, 1997 1996 1995
=================================================================================================================
<S> <C> <C> <C>
Cash Provided By (Used In) Operating Activities
Net earnings--Consumer products $ 6,152 $ 6,180 $ 5,345
--Financial services and real estate 158 123 105
- -----------------------------------------------------------------------------------------------------------------
Net earnings 6,310 6,303 5,450
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization 1,700 1,691 1,671
International food realignment 630
Deferred income tax (benefit) provision (188) 163 15
Gain on sale of Brazilian ice cream businesses (774)
Gains on sales of other businesses (196) (320) (275)
Cumulative effect of accounting changes 46
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net (168) 35 (466)
Inventories (531) (952) (5)
Accounts payable 37 60 (260)
Income taxes 48 373 266
Other working capital items 726 (448) (482)
Other 582 467 354
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
for the years ended December 31, 1997 1996 1995
=========================================================================================
<S> <C> <C> <C>
Financial services and real estate
Deferred income tax provision $ 257 $ 224 $ 299
Gain on sale of business (103)
Other 10 38 74
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 8,340 7,634 6,687
- -----------------------------------------------------------------------------------------
Cash Provided By (Used In) Investing Activities
Consumer products
Capital expenditures (1,874) (1,782) (1,621)
Purchase of businesses, net of acquired cash (630) (616) (217)
Proceeds from sales of businesses 1,784 612 2,202
Other 42 (47) 17
Financial services and real estate
Investments in finance assets (652) (439) (613)
Proceeds from finance assets 287 217 123
Proceeds from sale of business 424
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (619) (2,055) (109)
- -----------------------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities
Consumer products
Net repayment of short-term borrowings (1,482) (1,119) (21)
Long-term debt proceeds 2,893 2,699 564
Long-term debt repaid (1,987) (1,979) (1,302)
Financial services and real estate
Net (repayment) issuance of short-term borrowings (173) (498) 67
Long-term debt proceeds 174 363
Long-term debt repaid (387) (139)
Repurchase of outstanding stock (805) (2,770) (2,111)
Dividends paid (3,885) (3,462) (2,939)
Issuance of shares 205 448 291
Stock rights redemption (9)
Other (74) (88) (28)
- -----------------------------------------------------------------------------------------
Net cash used in financing activities (5,521) (6,406) (5,627)
- -----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (158) (71) 3
- -----------------------------------------------------------------------------------------
Cash and cash equivalents:
Increase (decrease) 2,042 (898) 954
Balance at beginning of year 240 1,138 184
- -----------------------------------------------------------------------------------------
Balance at end of year $ 2,282 $ 240 $ 1,138
=========================================================================================
Cash paid: Interest--Consumer products $ 1,219 $ 1,244 $ 1,293
=========================================================================================
--Financial services and real estate $ 79 $ 95 $ 89
=========================================================================================
Income taxes $ 3,794 $ 3,424 $ 3,067
=========================================================================================
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
Consolidated Statements of Stockholders' Equity (in millions of dollars,
except per share data)
<TABLE>
<CAPTION>
Earnings Currency Cost of Total
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Stock Equity
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 $935 $17,489 $ (47) $(5,591) $12,786
Net earnings 5,450 5,450
Exercise of stock options and issuance
of other stock awards (77) 470 393
Cash dividends declared ($1.22 per share) (3,065) (3,065)
Redemption of stock rights (9) (9)
Currency translation adjustments 514 514
Stock repurchased (2,075) (2,075)
Net unrealized depreciation on securities (9) (9)
- --------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 935 19,779 467 (7,196) 13,985
Net earnings 6,303 6,303
Exercise of stock options and issuance
of other stock awards (28) 609 581
Cash dividends declared ($1.47 per share) (3,606) (3,606)
Currency translation adjustments (275) (275)
Stock repurchased (2,800) (2,800)
Net unrealized appreciation on securities 30 30
- --------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 935 22,478 192 (9,387) 14,218
Net earnings 6,310 6,310
Exercise of stock options and issuance
of other stock awards 14 300 314
Cash dividends declared ($1.60 per share) (3,880) (3,880)
Currency translation adjustments (1,301) (1,301)
Stock repurchased (743) (743)
Net unrealized appreciation on securities 2 2
- --------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 $935 $24,924 $(1,109) $(9,830) $14,920
==============================================================================================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies:
Basis of presentation:
The consolidated financial statements include all significant subsidiaries. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of operating revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Balance sheet accounts are segregated by two broad types of business.
Consumer products assets and liabilities are classified as either current or
non-current, whereas financial services and real estate assets and liabilities
are unclassified, in accordance with respective industry practices.
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
Cash and cash equivalents:
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Inventories:
Inventories are stated at the lower of cost or market. The last-in, first-out
("LIFO") method is used to cost substantially all domestic inventories. The cost
of other inventories is determined by the average cost or first-in, first-out
methods. It is a generally recognized industry practice to classify the total
amount of leaf tobacco inventory as a current asset although part of such
inventory, because of the duration of the aging process, ordinarily would not be
utilized within one year.
Impairment of long-lived assets:
The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable. The Company performs undiscounted cash flow analyses
to determine if an impairment exists. If an impairment is determined to exist,
any related impairment loss is calculated based on fair value. Impairment losses
on assets to be disposed, if any, are based on the estimated proceeds to be
received, less costs of disposal.
Depreciation, amortization and goodwill valuation:
Depreciation is recorded by the straight-line method. Goodwill and other
intangible assets is substantially comprised of brand names, purchased through
acquisitions, which are amortized on the straight-line method over 40 years. The
Company periodically evaluates the recoverability of its intangible assets and
measures any impairment by comparison to estimated undiscounted cash flows from
future operations.
Advertising costs:
Advertising costs are expensed generally as incurred.
Revenue recognition:
The Company recognizes operating revenues generally upon shipment of goods to
customers.
Financial instruments:
Derivative financial instruments are used by the Company to manage its foreign
currency and interest rate exposures. Realized and unrealized gains and losses
on foreign currency swaps that are effective as hedges of net assets in foreign
subsidiaries are offset against currency translation adjustments as a component
of stockholders' equity. The interest differential to be paid or received under
the currency and related interest rate swap agreements is recognized over the
life of the related debt and is included in interest and other debt expense,
net. Unrealized gains and losses on forward currency contracts that are
effective as hedges of assets, liabilities and commitments are deferred and
recognized in income as the related transaction is realized. Commodity futures
and forward contracts are used by the Company to procure raw materials,
primarily coffee, cocoa, sugar, wheat and corn. Commodity futures and options
are also used to hedge the price of certain commodities, primarily coffee and
cocoa. Realized gains and losses on commodity futures, forward contracts and
options are deferred as a component of raw materials and are recognized when
related materials costs are charged to cost of sales.
Accounting changes:
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
establishes standards for computing and presenting earnings per share ("EPS")
and requires the presentation of both basic and diluted EPS. Prior years' EPS
have been restated to conform with the standards established by SFAS No. 128.
The calculation of basic and diluted EPS is presented in Note 10.
Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accountants' Accounting Standards Executive Committee's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities."
The adoption of SOP No. 96-1 at January 1, 1997 and its application during 1997
had no material effect on the Company's 1997 financial position or results of
operations.
Effective December 31, 1997, the Company adopted Emerging Issues Task
Force ("EITF") Issue No. 97-13, "Accounting for Costs Incurred in Connection
with a Consulting Contract or an Internal Project That Combines Business Process
Reengineering and
43
<PAGE>
Information Technology Transformation." EITF Issue No. 97-13 requires companies
to expense rather than capitalize certain costs related to contracts or internal
projects that combine business process reengineering and information technology
transformation. The adoption of EITF Issue No. 97-13 during the fourth quarter
of 1997 had no material effect on the Company's 1997 financial position or
results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This Statement requires that certain assets be reviewed for impairment and,
if impaired, remeasured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 at January 1, 1996 and its application
during 1996 had no material effect on the Company's financial position or
results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which allows companies either to measure
compensation cost in connection with the employee stock compensation plans using
a fair value based method or to continue to use an intrinsic value based method.
The Company continues to use the intrinsic value based method, which generally
does not result in compensation cost. The Company's stock compensation plans are
discussed in Note 9.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for non-U.S.
postretirement benefits other than pensions. The Company also adopted SFAS No.
116, "Accounting for Contributions Received and Contributions Made." The
cumulative effect at January 1, 1995 of adopting SFAS No. 106, for the non-U.S.
plans, and SFAS No. 116 reduced 1995 net earnings and basic EPS by $28 million
and $.01, respectively. The application of SFAS No. 106, for non-U.S. plans, and
SFAS No. 116 did not materially reduce 1995 earnings before cumulative effect of
accounting changes.
Note 2. Divestitures:
During 1997, the Company sold several domestic and international food
businesses, including its Brazilian ice cream businesses and its North American
maple-flavored syrup businesses, for total proceeds of $1.5 billion and net
pretax gains of $958 million. In addition, the Company sold its equity interest
in a Canadian beer operation and sold a minority interest in a beer import
operation for proceeds of $306 million and a pretax gain of $12 million. The
Company also sold its real estate operations for total proceeds of $424 million
and a pretax gain of $103 million. The operating results of businesses divested
in 1997 were not material to the Company's consolidated operating results in any
of the periods presented.
During 1996, the Company sold several domestic and international food
businesses, including its North American bagel business, for total proceeds of
$612 million and net pretax gains of $320 million. The operating results of
businesses divested in 1996 were not material to the Company's consolidated
operating results in any of the periods presented.
During 1995, the Company sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses. In addition, several smaller international food
businesses were sold. Operating revenues and operating income of these
businesses for the period owned in 1995 were $2.0 billion and $107 million,
respectively. Net assets of the businesses sold were $1.8 billion. Total
proceeds and net pretax gains from the sales of these businesses were $2.1
billion and $275 million, respectively.
Note 3. Acquisitions:
During 1997, the Company acquired a controlling interest in a Portuguese tobacco
company at a cost of $217 million and increased its ownership interest in a
Mexican cigarette business from 28.8% to 50.0% at a cost of $403 million.
During 1996, the Company acquired a controlling interest in a Polish
tobacco company, at a cost of $285 million and nearly all of the remaining
voting shares of a Brazilian confectionery company, at a cost of $314 million.
The effects of these and other smaller acquisitions were not material to
the Company's financial position or results of operations in any of the periods
presented.
Note 4. Food Realignment Charges:
In the fourth quarter of 1997, the Company recorded a charge of $342 million
related primarily to the downsizing or closure of manufacturing and other
facilities, as well as the discontinuance of certain low-margin product lines of
its international food operations. The Company also recorded a charge of $288
million for incremental postemployment benefits, primarily related to severance.
These charges, which were recorded to marketing, administration and research
costs, reduced 1997 earnings before income taxes by $630 million.
In 1996 and 1995, the Company recorded to marketing, administration and
research costs, charges of $320 million and $275 million, respectively, related
primarily to the downsizing and closure of certain food manufacturing
facilities, related incremental postemployment costs, primarily severance, and
an early retirement program.
44
<PAGE>
Note 5. Inventories:
The cost of approximately 50% of inventories in 1997 and 1996 was determined
using the LIFO method. The stated LIFO values of inventories were approximately
$1.0 billion lower than the current cost of inventories at December 31, 1997 and
1996, respectively.
Note 6. Short-Term Borrowings and Borrowing Arrangements:
At December 31, the Company's short-term borrowings and related average interest
rates consisted of the following:
1997 1996
================================================================================
Average Average
Amount Year-End Amount Year-End
(in millions) Outstanding Rate Outstanding Rate
================================================================================
Consumer products:
Bank loans $ 194 8.8% $ 295 8.1%
Commercial paper 1,373 5.7%
Amount reclassified
as long-term debt (37) (1,408)
- --------------------------------------------------------------------------------
$ 157 $ 260
================================================================================
Financial services
and real estate:
Commercial paper $ -- $ 173 6.0%
================================================================================
The fair values of the Company's short-term borrowings at December 31, 1997 and
1996, based upon market rates, approximate the amounts disclosed above.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $12.0 billion at December
31, 1997. Approximately $11.8 billion of these facilities were unused at
December 31, 1997. Certain of these facilities are used to support commercial
paper borrowings, are available for acquisitions and other corporate purposes
and require the maintenance of a fixed charges coverage ratio.
The Company's credit facilities include revolving bank credit agreements
totaling $10.0 billion. An agreement for $2.0 billion expires in October 1998.
An agreement for $8.0 billion, expiring in 2002, enables the Company to
refinance short-term debt on a long-term basis. Accordingly, short-term
borrowings intended to be refinanced were reclassified as long-term debt.
Note 7. Long-Term Debt:
At December 31, the Company's long-term debt consisted of the following:
(in millions) 1997 1996
================================================================================
Consumer products:
Short-term borrowings, reclassified $ 37 $ 1,408
Notes, 6.15% to 9.25% (average effective
rate 7.53%), due through 2008 9,735 9,550
Debentures, 6.00% to 8.50% (average
effective rate 9.66%), $2.0 billion
face amount, due through 2027 1,830 1,046
Foreign currency obligations:
Swiss franc, 1.72% to 6.88%
(average effective rate 5.77%),
due through 2000 857 957
German mark, 5.63% and 6.38%
(average effective rate 6.0%),
due through 2002 341 411
Other foreign 61 49
Other 240 252
- --------------------------------------------------------------------------------
13,101 13,673
Less current portion of long-term debt (1,516) (1,846)
- --------------------------------------------------------------------------------
$ 11,585 $ 11,827
================================================================================
Financial services and real estate:
Eurodollar note, 6.63%, due 1999 $ 200 $ 400
Foreign currency obligations:
ECU note, 8.50%, due 1998 165 372
German mark, 6.50% and 5.38%,
(average effective rate 5.88%)
due 2003 and 2004 311 166
French franc, 6.88%, due 2006 169 196
- --------------------------------------------------------------------------------
$ 845 $ 1,134
================================================================================
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
Financial
Consumer Services and
(in millions) Products Real Estate
================================================================================
1998 $1,516 $165
1999 1,756 200
2000 797
2001 1,722
2002 1,337
2003-2007 4,467 480
2008-2012 670
Thereafter 981
================================================================================
The revolving credit facility under which the consumer products short-term debt
was reclassified as long-term debt expires in 2002 and any amounts then
outstanding mature.
45
<PAGE>
Based on market quotes, where available, or interest rates currently
available to the Company for issuance of debt with similar terms and remaining
maturities, the aggregate fair value of consumer products and financial services
and real estate long-term debt, including current portion of long-term debt, at
December 31, 1997 and 1996 was $14.6 billion and $15.3 billion, respectively.
Note 8. Capital Stock:
In February 1997, the Company's Board of Directors declared a three-for-one
split of the Company's common stock, effected by a distribution on April 10,
1997, of two shares for each share held of record at the close of business on
March 17, 1997. In addition, the par value of the Company's common stock was
changed from $1.00 to $0.33 1/3 per share and authorized shares of common stock
were increased from 4 billion to 12 billion shares. All references in the
consolidated financial statements to shares and related prices, weighted average
number of shares, per share amounts and stock plan data have been adjusted to
reflect the split.
Shares of common stock issued, repurchased and outstanding were as
follows:
Shares Shares Net Shares
Issued Repurchased Outstanding
================================================================================
Balances,
January 1,
1995 2,805,961,317 (247,384,122) 2,558,577,195
Exercise of stock
options and
issuance of other
stock awards 19,410,786 19,410,786
Repurchased (84,477,963) (84,477,963)
- --------------------------------------------------------------------------------
Balances,
December 31,
1995 2,805,961,317 (312,451,299) 2,493,510,018
Exercise of stock
options and
issuance of other
stock awards 23,672,505 23,672,505
Repurchased (85,836,249) (85,836,249)
- --------------------------------------------------------------------------------
Balances,
December 31,
1996 2,805,961,317 (374,615,043) 2,431,346,274
Exercise of stock
options and
issuance of other
stock awards 12,345,228 12,345,228
Repurchased (18,204,213) (18,204,213)
- --------------------------------------------------------------------------------
Balances,
December 31,
1997 2,805,961,317 (380,474,028) 2,425,487,289
================================================================================
At December 31, 1997, 188,254,449 shares of common stock were reserved for stock
options and other stock awards under the Company's stock plans and 10 million
shares of Serial Preferred Stock, $1.00 par value, were authorized, none of
which have been issued.
Note 9. Stock Plans:
Under the Philip Morris 1997 Performance Incentive Plan (the "Plan"), the
Company may grant to eligible employees stock options, stock appreciation
rights, restricted stock, and other stock-based awards, as well as cash-based
annual and long-term incentive awards. Up to 120 million shares of common stock
may be issued under the Plan, of which no more than 36 million shares may be
awarded as restricted stock. Shares available to be granted at December 31, 1997
were 104,181,840.
Stock options are granted at an exercise price of not less than fair value
on the date of the grant. Stock options granted under the Plan generally become
exercisable on the first anniversary of the grant date and have a maximum term
of ten years.
The Company applies the intrinsic value-based methodology permitted by
SFAS No. 123 in accounting for the Plan. Accordingly, no compensation expense
has been recognized other than for restricted stock awards. Had compensation
cost for stock option awards under the Plan been determined on the fair value at
the grant date, the Company's net earnings, basic EPS and diluted EPS would have
been $6,218 million, $2.57 and $2.55, respectively, for the year ended December
31, 1997; $6,235 million, $2.54 and $2.51, respectively, for the year ended
December 31, 1996; and $5,422 million, $2.15 and $2.14, respectively, for the
year ended December 31, 1995. The foregoing impact of compensation cost,
calculated in accordance with the fair value method prescribed by SFAS No. 123,
was determined under the modified Black-Scholes method using the following
assumptions:
Weighted
Average Expected
Risk-Free Expected Expected Dividend Fair Value at
Interest Rate Life Volatility Yield Grant Date
===============================================================================
1997 6.38% 5 27.86% 3.65% $10.83
1996 6.70% 5 23.80% 3.83% $ 7.73
1995 5.98% 5 21.18% 4.89% $ 4.07
===============================================================================
46
<PAGE>
Option activity was as follows for the years ended December 31, 1995, 1996 and
1997:
Weighted
Shares Subject Options Average
to Option Exercisable Exercise Price
================================================================================
Balance at
January 1, 1995 83,295,471 81,760,641 $17.58
Options granted 23,949,600 24.93
Options exercised (20,250,336) 15.23
Options cancelled (1,770,363) 22.82
- --------------------------------------------------------------------------------
Balance at
December 31, 1995 85,224,372 62,102,802 20.09
Options granted 22,627,215 36.08
Options exercised (25,310,940) 18.94
Options cancelled (1,327,266) 26.21
- --------------------------------------------------------------------------------
Balance at
December 31, 1996 81,213,381 58,949,796 24.81
Options granted 16,105,390 43.88
Options exercised (12,782,568) 19.86
Options cancelled (890,644) 34.75
- --------------------------------------------------------------------------------
Balance at
December 31, 1997 83,645,559 67,827,399 $29.13
================================================================================
The weighted average exercise prices of options exercisable at December 31,
1997, 1996 and 1995 were $25.69, $20.56 and $18.28, respectively.
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1997, by range of exercise price:
Options Outstanding Options Exercisable
===================================== =======================
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
================================================================================
$ 6.97-$15.66 6,234,769 2 years $13.31 6,234,769 $13.31
$15.67-$24.99 39,874,474 6 years 22.17 39,874,474 22.17
$25.00-$45.16 37,536,316 8 years 39.15 21,718,156 35.70
- --------------------------------------------------------------------------------
83,645,559 67,827,399
========== ==========
The Company may grant shares of restricted stock and rights to receive shares of
stock to eligible employees, giving them in most instances all of the rights of
stockholders, except that they may not sell, assign, pledge or otherwise
encumber such shares and rights. Such shares and rights are subject to
forfeiture if certain employment conditions are not met. During 1997, 1996 and
1995 the Company granted 692,100, 180,000 and 636,000 shares, respectively, of
restricted stock to eligible U.S. based employees and also issued to eligible
non-U.S. employees rights to receive 392,400 and 144,000 like shares,
respectively, in 1997 and 1995. At December 31, 1997, restrictions on the stock,
net of forfeitures, lapse as follows: 1998-150,000 shares; 1999-60,000 shares;
2000-774,600 shares; 2002-1,407,750 shares; and 2003 and thereafter-159,000
shares.
The fair value of the restricted shares and rights at the date of grant is
amortized to expense ratably over the restriction period. The Company recorded
compensation expense related to restricted stock of $29 million, $37 million and
$54 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The unamortized portion is reported as a reduction of earnings reinvested in the
business and was $49 million on December 31, 1997.
Note 10. Earnings per Share:
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Prior years' earnings per share have been restated. Basic and diluted
earnings per share were calculated using the following:
(in millions) 1997 1996 1995
================================================================================
Net earnings $6,310 $6,303 $5,450
================================================================================
Weighted average shares for
basic EPS 2,420 2,456 2,517
Plus incremental shares from conversions:
Restricted stock and stock rights 1 8 7
Stock options 21 18 14
- --------------------------------------------------------------------------------
Weighted average shares for
diluted EPS 2,442 2,482 2,538
================================================================================
In 1997, 1996, and 1995, options on 11,988,118, 18,737,224 and 19,971,870 shares
of common stock, respectively, were not included in the calculation of weighted
average shares for diluted EPS because their effects were antidilutive.
47
<PAGE>
Note 11. Pretax Earnings and Provision for Income Taxes:
Pretax earnings and provision for income taxes consisted of the following:
(in millions) 1997 1996 1995
================================================================================
Pretax earnings:
United States $ 7,515 $ 7,399 $6,622
Outside United States 3,096 3,284 2,725
- --------------------------------------------------------------------------------
Total pretax earnings $10,611 $ 10,683 $9,347
================================================================================
Provision for income taxes:
United States federal:
Current $ 2,027 $ 1,836 $1,946
Deferred 12 438 97
- --------------------------------------------------------------------------------
2,039 2,274 2,043
State and local 354 430 434
- --------------------------------------------------------------------------------
Total United States 2,393 2,704 2,477
- --------------------------------------------------------------------------------
Outside United States:
Current 1,851 1,727 1,175
Deferred 57 (51) 217
- --------------------------------------------------------------------------------
Total outside
United States 1,908 1,676 1,392
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 4,301 $ 4,380 $3,869
================================================================================
At December 31, 1997, applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $3.0 billion of
accumulated earnings of foreign subsidiaries that are expected to be permanently
reinvested abroad. If these amounts were not considered permanently reinvested,
additional deferred income taxes of approximately $167 million would have been
provided.
The Company and its subsidiaries are subject to tax examinations in
various U.S. and foreign jurisdictions. The Company believes that adequate tax
payments have been made and accruals recorded for all years.
The effective income tax rate on pretax earnings differed from the U.S.
federal statutory rate for the following reasons:
1997 1996 1995
================================================================================
Provision computed at
U.S. federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes,
net of federal tax benefit 2.2 2.6 3.0
Rate differences--foreign operations 3.7 3.3 1.9
Goodwill amortization 1.7 1.8 2.1
Other (2.1) (1.7) (0.6)
- --------------------------------------------------------------------------------
Provision for income taxes 40.5% 41.0% 41.4%
================================================================================
The tax effects of temporary differences which gave rise to consumer products
deferred income tax assets and liabilities consisted of the following:
December 31,
(in millions) 1997 1996
================================================================================
Deferred income tax assets:
Accrued postretirement and
postemployment benefits $ 1,084 $ 1,070
Accrued liabilities 577 588
Restructuring, strategic and other reserves 427 315
Settlement charges 261
Other 249 399
- --------------------------------------------------------------------------------
Gross deferred income tax assets 2,598 2,372
Valuation allowance (82) (87)
- --------------------------------------------------------------------------------
Total deferred income tax assets 2,516 2,285
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment (1,695) (1,699)
Prepaid pension costs (326) (286)
- --------------------------------------------------------------------------------
Total deferred income tax liabilities (2,021) (1,985)
- --------------------------------------------------------------------------------
Net deferred income tax assets $ 495 $ 300
================================================================================
Financial services and real estate deferred income tax liabilities are primarily
attributable to temporary differences from investments in finance leases.
Note 12. Segment Reporting:
Tobacco, food, beer, and financial services and real estate are the major
segments of the Company's operations. The Company's major products are
cigarettes, coffee, cheese, chocolate confections, processed meat products,
various packaged grocery products and beer. The Company's consolidated
operations outside the United States, which are principally in the tobacco and
food businesses, are organized into geographic regions by segment, with Europe
the most significant. Intersegment transactions are not reported separately
since they are not material.
For purposes of segment reporting, operating profit is operating income
exclusive of general corporate expenses. Substantially all goodwill amortization
is attributable to the food segment. Identifiable assets are those assets
applicable to the respective industry segments.
See Notes 2, 3 and 4 regarding divestitures, acquisitions and the
realignment of international food operations. Additionally, operating profit for
the year ended December 31, 1997 for the tobacco segment included charges of
$1,457 million for the settlement of certain domestic tobacco litigation.
48
<PAGE>
Reportable segment data were as follows:
Data by Segment for the
years ended December 31,
(in millions) 1997 1996 1995
================================================================================
Operating revenues:
Tobacco $39,824 $36,549 $32,316
Food 27,690 27,950 29,074
Beer 4,201 4,327 4,304
Financial services and real estate 340 378 377
- --------------------------------------------------------------------------------
Total operating revenues $72,055 $69,204 $66,071
================================================================================
Operating profit:
Tobacco $ 7,830 $ 8,263 $ 7,177
Food 3,647 3,362 3,188
Beer 456 437 444
Financial services and real estate 296 192 164
- --------------------------------------------------------------------------------
Total operating profit 12,229 12,254 10,973
General corporate expenses 566 485 447
- --------------------------------------------------------------------------------
Operating income $11,663 $11,769 $10,526
================================================================================
Identifiable assets:
Tobacco $14,820 $13,314 $11,196
Food 30,926 32,934 33,447
Beer 1,455 1,707 1,751
Financial services and real estate 5,886 5,917 5,632
- --------------------------------------------------------------------------------
53,087 53,872 52,026
Other assets 2,860 999 1,785
- --------------------------------------------------------------------------------
Total assets $55,947 $54,871 $53,811
================================================================================
Depreciation expense:
Tobacco $ 407 $ 378 $ 350
Food 514 538 556
Beer 104 104 101
Capital expenditures:
Tobacco $ 937 $ 829 $ 525
Food 738 812 948
Beer 115 122 115
================================================================================
Data by Geographic Region for the
years ended December 31,
(in millions) 1997 1996 1995
================================================================================
Operating revenues:
United States--domestic $33,208 $31,993 $32,479
--export 6,705 6,476 5,920
Europe 24,796 24,232 23,076
Other 7,346 6,503 4,596
- --------------------------------------------------------------------------------
Total operating revenues $72,055 $69,204 $66,071
================================================================================
Operating profit:
United States $ 8,149 $ 8,762 $ 8,031
Europe 2,560 2,635 2,366
Other 1,520 857 576
- --------------------------------------------------------------------------------
Total operating profit 12,229 12,254 10,973
General corporate expenses 566 485 447
- --------------------------------------------------------------------------------
Operating income $11,663 $11,769 $10,526
================================================================================
Identifiable assets:
United States $33,734 $33,314 $32,521
Europe 15,209 15,836 15,981
Other 4,144 4,722 3,524
- --------------------------------------------------------------------------------
53,087 53,872 52,026
Other assets 2,860 999 1,785
- --------------------------------------------------------------------------------
Total assets $55,947 $54,871 $53,811
================================================================================
Note 13. Pension Plans:
The Company and its subsidiaries sponsor noncontributory defined benefit pension
plans covering substantially all U.S. employees. The plans provide retirement
benefits for salaried employees based generally on years of service and
compensation during the last years of employment. Retirement benefits for hourly
employees generally are a flat dollar amount for each year of service. The
Company funds these plans in amounts consistent with the funding requirements of
federal laws and regulations.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. The plans provide pension
benefits that are based primarily on years of service and employees' salaries
near retirement. The Company provides for obligations under such plans by
depositing funds with trustees or purchasing insurance policies. The Company
records liabilities for unfunded foreign plans.
49
<PAGE>
U.S. Plans
Net pension (income) cost consisted of the following:
(in millions) 1997 1996 1995
================================================================================
Service cost--benefits earned
during the year $ 137 $ 143 $ 110
Interest cost on projected
benefit obligation 382 373 367
Return on assets
--actual (1,308) (980) (1,344)
--deferred gain 744 447 848
Amortization of net gain upon
adoption of SFAS No. 87 (24) (25) (26)
Amortization of unrecognized net loss
(gain) from experience differences 9 (13)
Amortization of prior service cost 14 14 13
Other (income) cost (22) (35) 75
- --------------------------------------------------------------------------------
Net pension (income) cost $ (77) $ (54) $ 30
================================================================================
During 1997, 1996 and 1995, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in settlement gains of $22
million in 1997, settlement gains of $69 million and additional pension cost of
$34 million in 1996, and additional pension cost of $103 million and curtailment
gains of $28 million in 1995.
The funded status of U.S. plans at December 31 was as follows:
(in millions) 1997 1996
================================================================================
Actuarial present value of accumulated
benefit obligation--vested $ 4,221 $ 3,871
--nonvested 458 359
- --------------------------------------------------------------------------------
4,679 4,230
Benefits attributable to projected salaries 844 650
- --------------------------------------------------------------------------------
Projected benefit obligation 5,523 4,880
Plan assets at fair value 8,085 7,101
- --------------------------------------------------------------------------------
Excess of assets over projected benefit obligation 2,562 2,221
Unamortized net gain upon adoption of
SFAS No. 87 (83) (108)
Unrecognized prior service cost 121 124
Unrecognized net gain from experience differences (1,659) (1,404)
- --------------------------------------------------------------------------------
Prepaid pension cost $ 941 $ 833
================================================================================
The projected benefit obligation at December 31, 1997, 1996 and 1995 was
determined using an assumed discount rate of 7.25%, 7.75% and 7.25%,
respectively, and assumed compensation increases of 4.5% at December 31, 1997,
1996 and 1995. The assumed long-term rate of return on plan assets was 9% at
December 31, 1997, 1996 and 1995. Plan assets consist principally of common
stock and fixed income securities.
The Company and certain of its subsidiaries sponsor deferred
profit-sharing plans covering certain salaried, nonunion and union employees.
Contributions and costs are determined generally as a percentage of pretax
earnings, as defined by the plans. Certain other subsidiaries of the Company
also maintain defined contribution plans. Amounts charged to expense for defined
contribution plans totaled $200 million, $199 million and $191 million in 1997,
1996 and 1995, respectively.
In addition, certain of the Company's subsidiaries participate in
multiemployer defined benefit plans. Contributions to these plans were
immaterial in 1997, 1996 and 1995.
Non-U.S. Plans
Net pension cost consisted of the following:
(in millions) 1997 1996 1995
================================================================================
Service cost--benefits earned
during the year $ 83 $ 80 $ 80
Interest cost on projected
benefit obligation 163 166 160
Return on assets
--actual (269) (201) (195)
--deferred gain 134 70 74
Amortization of net deferred charges 5 3 1
- --------------------------------------------------------------------------------
Net pension cost $ 116 $ 118 $ 120
================================================================================
The funded status of the non-U.S. plans at December 31 was as follows:
Assets Exceed Accumulated
Accumulated Benefits Exceed
Benefits Assets
================================================================================
(in millions) 1997 1996 1997 1996
================================================================================
Actuarial present value of
accumulated benefit
obligation
--vested $ 1,387 $ 1,336 $ 731 $ 721
--nonvested 38 39 83 77
- --------------------------------------------------------------------------------
1,425 1,375 814 798
Benefits attributable to
projected salaries 341 342 121 127
- --------------------------------------------------------------------------------
Projected benefit obligation 1,766 1,717 935 925
Plan assets at fair value 2,074 1,891 115 36
- --------------------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation 308 174 (820) (889)
Unamortized net (gain)
loss upon adoption of
SFAS No. 87 (11) (14) 22 13
Unrecognized net (gain) loss
from experience differences (156) (22) 9 (5)
- --------------------------------------------------------------------------------
Prepaid (accrued)
pension cost $ 141 $ 138 $(789) $(881)
================================================================================
50
<PAGE>
The assumptions used in 1997, 1996 and 1995 were as follows:
1997 1996 1995
================================================================================
Discount rates 3.5% to 12.0% 4.0% to 12.0% 4.5% to 10.0%
Compensation
increases 3.0% to 10.0% 3.0% to 10.5% 3.5% to 9.0%
Long-term rates
of return on
plan assets 4.0% to 13.0% 4.0% to 13.0% 4.5% to 11.0%
================================================================================
Plan assets consist primarily of common stock and fixed income securities.
Note 14. Postretirement Benefits Other Than Pensions:
The Company and its subsidiaries have accrued the estimated cost of retiree
health care benefits during the active service periods of employees in the
United States and Canada. Health care benefits for retirees outside the United
States and Canada are generally covered through local government plans. The
Company and its U.S. and Canadian subsidiaries provide health care and other
benefits to substantially all retired employees, their covered dependents and
beneficiaries. Generally, employees who have attained age 55 and who have
rendered at least 5 to 10 years of service are eligible for these benefits.
Certain health care plans are contributory; others are noncontributory.
Net postretirement health care costs consisted of the following:
(in millions) 1997 1996 1995
================================================================================
Service cost--benefits earned during
the period $ 54 $ 59 $ 46
Interest cost on accumulated
postretirement benefit obligation 182 180 179
Amortization of unrecognized net (gain)
loss from experience differences (3) 4 (2)
Amortization of unrecognized prior
service cost (12) (12) (13)
Other income (8) (13)
- --------------------------------------------------------------------------------
Net postretirement health care costs $ 221 $ 223 $ 197
================================================================================
During 1996 and 1995, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in curtailment gains
included above in other income.
The Company's postretirement health care plans currently are not funded.
The status of the plans at December 31 was as follows:
(in millions) 1997 1996
================================================================================
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ 1,522 $ 1,289
Fully eligible active plan participants 222 278
Other active plan participants 883 859
- --------------------------------------------------------------------------------
2,627 2,426
Unrecognized net loss from
experience differences (173) (75)
Unrecognized prior service cost 109 127
- --------------------------------------------------------------------------------
Accrued postretirement health care costs $ 2,563 $ 2,478
================================================================================
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 8.5% in 1996, 8.0% in 1997
and 7.5% in 1998, gradually declining to 5.0% by the year 2003 and remaining at
that level thereafter. For Canadian plans, the assumed health care cost trend
rate was 14.0% in 1996, 13.0% in 1997 and 12.0% in 1998, gradually declining to
4.0% by the year 2005 and remaining at that level thereafter. A
one-percentage-point increase in the assumed health care cost trend rates for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1997 and net postretirement health care cost for the year then
ended by approximately 15.0% and 10.0%, respectively.
The accumulated postretirement benefit obligations for U.S. plans at
December 31, 1997, 1996 and 1995 were determined using assumed discount rates of
7.25%, 7.75% and 7.25%, respectively. The accumulated postretirement benefit
obligation at December 31, 1997, 1996 and 1995 for Canadian plans was determined
using an assumed discount rate of 6.50%, 7.50% and 8.25%, respectively.
Note 15. Contingencies:
Legal proceedings covering a wide range of matters are pending in various U.S.
and foreign jurisdictions against the Company, its subsidiaries, including
Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco
subsidiary, and their respective indemnitees. Various types of claims are raised
in these proceedings, including products liability, consumer protection,
antitrust, securities law, tax, patent infringement, employment matters and
claims for contribution.
Overview of Tobacco-Related Litigation
Types and Number of Cases
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and
51
<PAGE>
health cases alleging personal injury and purporting to be brought on behalf of
a class of individual plaintiffs, and (iii) health care cost recovery cases,
including class actions, brought by state and local governments, unions, federal
and state taxpayers, native American tribes and others seeking reimbursement for
Medicaid and/or other health care expenditures allegedly caused by cigarette
smoking. Damages claimed in some of the smoking and health class actions and
health care cost recovery cases range into the billions of dollars.
In recent years there has been a substantial increase in the number of
smoking and health cases being filed in the United States, a trend which
accelerated in 1997.
As of December 31, 1997, there were approximately 375 smoking and health
cases filed and served on behalf of individual plaintiffs in the United States
against PM Inc. and, in some cases, the Company (excluding approximately 50
cases in Texas that were voluntarily dismissed but which may be refiled under
certain conditions), compared with approximately 185 such cases as of December
31, 1996. Many of the new cases were filed in Florida and New York. Seventeen of
the individual cases involve allegations of various personal injuries allegedly
related to exposure to environmental tobacco smoke ("ETS").
In addition, as of December 31, 1997, there were approximately 50
purported smoking and health class actions pending in the United States against
PM Inc. and, in some cases, the Company (including six that involve allegations
of various personal injuries related to exposure to ETS), compared with
approximately 20 such cases on December 31, 1996. Most of these actions purport
to constitute statewide class actions and were filed after May 1996 when the
Fifth Circuit Court of Appeals, in the Castano case, reversed a federal district
court's certification of a purported nationwide class action on behalf of
persons who were allegedly "addicted" to tobacco products. As of December 31,
1997, there were three purported smoking and health class actions pending
overseas against affiliates and subsidiaries of the Company, in Canada, Brazil
and Nigeria.
The number of health care cost recovery actions also increased during
1997, with approximately 105 such cases pending as of December 31, 1997,
compared with approximately 25 such cases on December 31, 1996.
Recent Verdicts
In August 1996, a Florida jury awarded a former smoker and his spouse $750,000
in a smoking and health case against another United States cigarette
manufacturer (Carter v. American Tobacco Co., et al.), and that manufacturer was
subsequently ordered to pay approximately $1.8 million in attorneys' fees and
costs. Neither PM Inc. nor the Company was a party to that litigation. The
defendant in that action has appealed the verdict. Later that month, a jury
returned a verdict for defendants in a smoking and health case in Indiana
against United States cigarette manufacturers, including PM Inc. (Rogers v. R.J.
Reynolds Tobacco Company, et al.). Plaintiff has filed a motion seeking a new
trial based on the alleged discovery of new evidence. In May and October 1997,
Florida juries also returned verdicts for defendants in smoking and health cases
involving another United States cigarette manufacturer (Connor v. R.J. Reynolds
Tobacco Company; Karbiwnyk v. R.J. Reynolds Tobacco Company). In September 1997,
a court in Brazil awarded plaintiffs in a smoking and health case the Brazilian
currency equivalent of $81,000, attorneys' fees (in an amount to be determined
by the court) and a monthly annuity for 35 years equal to two-thirds of the
deceased smoker's last monthly salary (Alves v. Souza Cruz). Defendant is
appealing the judgment. Neither the Company nor its affiliates were parties to
that action.
Recent Settlements
In June 1997, PM Inc. and other companies in the United States tobacco industry
agreed to a proposed Resolution to support federal legislation and ancillary
undertakings that would resolve many of the regulatory and litigation issues
affecting the industry. (See "Proposed Resolution of Certain Regulatory and
Litigation Issues" below.) In furtherance of the proposed Resolution, PM Inc.
and other companies in the United States tobacco industry settled health care
cost recovery actions brought by the States of Mississippi, Florida and Texas
and a smoking and health class action brought on behalf of airline flight
attendants, all on terms consistent with the proposed Resolution. These
settlements are discussed below.
Trial Dates
Trial in a health care cost recovery case brought by the State of Minnesota
began in January 1998. A number of other health care cost recovery and smoking
and health cases pending against PM Inc. and, in some cases, the Company, are
scheduled for trial during 1998. The following health care cost recovery actions
are currently scheduled for trial later in 1998: Washington (September), Arizona
(October) and Oklahoma (November). Approximately 25 individual cases are
currently scheduled for trial in 1998 against PM Inc. and, in some cases, the
Company, of which approximately 20 are set for trial in Florida commencing in
June 1998. Trials in New York and Florida class actions, previously scheduled to
begin in February, have been delayed (Frosina, et al. v. Philip Morris, Inc., et
al.; and Engle, et al. v. R.J. Reynolds Tobacco Company, et al.).
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
Smoking and Health Litigation
Plaintiffs' allegations of liability in smoking and health cases are based on
various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design
52
<PAGE>
defect, failure to warn, breach of express and implied warranties, breach of
special duty, conspiracy, concert of action, violations of deceptive trade
practice laws and consumer protection statutes, and claims under the federal
Racketeer Influenced and Corrupt Organization Act ("RICO") and state RICO
statutes. Plaintiffs in these actions seek various forms of relief, including
compensatory and punitive damages, treble/multiple damages and other statutory
damages and penalties, creation of medical monitoring funds, disgorgement of
profits, and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations, and preemption by the
Federal Cigarette Labeling and Advertising Act (the "Labeling Act"). In June
1992, the United States Supreme Court held that the Labeling Act, as enacted in
1965, does not preempt common law damage claims, but that the Labeling Act, as
amended in 1969, preempts claims arising after July 1969 against cigarette
manufacturers "based on failure to warn and the neutralization of federally
mandated warnings to the extent that those claims rely on omissions or
inclusions in advertising or promotions." The Court also held that the 1969
Labeling Act does not preempt claims based on express warranty, fraudulent
misrepresentation or conspiracy. The Court further held that claims for
fraudulent concealment were preempted except "insofar as those claims relied on
a duty to disclose...facts through channels of communication other than
advertising or promotion." (The Court did not consider whether such common law
damage claims were valid under state law.) The Court's decision was announced by
a plurality opinion. The effect of the decision on pending and future cases will
be the subject of further proceedings in the lower federal and state courts.
Additional similar litigation could be encouraged if legislation to eliminate
the federal preemption defense, proposed in Congress in recent years, were
enacted. It is not possible to predict whether any such legislation will be
enacted.
In May 1996, the Fifth Circuit Court of Appeals held that a purported
class consisting of all "addicted" smokers nationwide did not meet the standards
and requirements of the federal rules governing class actions (Castano, et al.
v. The American Tobacco Company, et al.). Since this class decertification,
lawyers for plaintiffs have filed numerous smoking and health class action suits
in various state and federal courts. In general, these cases purport to be
brought on behalf of residents of a particular state or states and raise
"addiction" claims similar to those raised in the Castano case and, in some
cases, claims of physical injury as well. As of December 31, 1997, smoking and
health class actions were pending in Alabama, Arkansas, California, the District
of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas,
Louisiana, Maryland, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New
Mexico, New York, Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina,
South Dakota, Tennessee, Texas, West Virginia and Wisconsin, as well as in
Canada, Brazil and Nigeria. Classes have been certified in four of these smoking
and health class actions, in Florida, Louisiana and New York (2). Class
certification has been denied or reversed in three cases involving PM Inc., in
Louisiana, the District of Columbia and Pennsylvania. One smoking and health
class action was settled in 1997 as discussed below.
The Broin Settlement
The Broin, et al. v. Philip Morris Incorporated, et al. class action was settled
in October 1997 by PM Inc. and other companies in the domestic tobacco industry,
subject to final approval by the Florida state court. A number of third parties
have filed objections to the settlement.
The Broin class consisted of "all non-smoking flight attendants who are or
have been employed by airlines based in the United States and are suffering from
various diseases and disorders caused by their exposure to second-hand smoke in
airline cabins." Under the settlement, the settling defendants will pay $300
million to establish a foundation to sponsor scientific research with respect to
diseases associated with cigarette smoking. These funds will be paid in three
equal annual installments, with interest, commencing in April 1998. Settling
defendants also agreed to pay attorneys' fees of up to $46 million and costs of
$3 million, subject to court approval. PM Inc.'s share of all the foregoing
payments (exclusive of interest) is approximately $175 million and was charged
to expense in the third quarter of 1997. Under the settlement, all defendants
(and certain other entities and persons) are released from liability for the
claims asserted in the present action. Each individual member of the class,
however, may later bring an individual action for diseases and conditions
existing on or before January 15, 1997 ("retained claims"), based upon certain
legal theories against the settling defendants, but may only seek compensatory,
and not punitive, damages.
The defendants expressly did not admit liability for injury of any member
of the settlement class or that ETS can cause any disease. In any individual
lawsuits brought by members of the settlement class for retained claims, the
settling defendants would assume the burden of proof as to whether ETS can cause
certain conditions, but the plaintiff would retain the burden of proving that
his or her condition was caused by exposure to ETS. The settling defendants have
also agreed not to raise a statute of limitations defense with respect to any
retained claims brought by a member of the settlement class within one year
after final court approval of the settlement. The settlement does not apply to,
nor does it have any effect on, "future" claims brought by members of the
settlement class for any new and unrelated diseases or conditions arising after
January 15, 1997.
Health Care Cost Recovery Litigation
In certain of the pending proceedings, foreign, state and local government
entities, unions, federal and state taxpayers, native
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American tribes and others seek reimbursement for Medicaid and/or other health
care expenditures allegedly caused by tobacco products and, in some cases, for
future expenditures and damages as well. Certain of these cases purport to be
brought on behalf of a class of plaintiffs, and in some cases, the class has
been certified by the court. In two health care cost recovery cases, private
citizens seek recovery of alleged tobacco-related health care expenditures
incurred by the federal Medicare and/or Medicaid programs and, in another case,
seek recovery of such expenditures by the Department of Defense and the
Department of Veterans Administration. In one purported class action, Blue
Cross/Blue Shield subscribers in the United States are seeking reimbursement of
allegedly increased medical insurance premiums caused by tobacco products. In
the native American cases, claims are also asserted for alleged lost
productivity of tribal government employees. Other relief sought by some but not
all plaintiffs includes punitive damages, treble/ multiple damages and other
statutory damages and penalties, injunctions prohibiting alleged marketing and
sales to minors, disclosure of research, disgorgement of profits, funding of
anti-smoking programs, disclosure of nicotine yields and payment of attorney and
expert witness fees.
The claims asserted in these health care cost recovery actions vary. In
most cases, plaintiffs assert the equitable claim that the tobacco industry was
"unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking, and seek reimbursement of those costs. Other claims
made by some but not all plaintiffs include the equitable claim of indemnity,
common law claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under federal and state
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under federal and state RICO statutes.
Defenses raised include failure to state a valid claim, lack of benefit,
adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot recover
because they participated in, and benefited from, the sale of cigarettes), lack
of antitrust injury, federal preemption, lack of proximate cause and statute of
limitations. In addition, defendants argue that they should be entitled to
"set-off" any alleged damages to the extent the plaintiff benefits economically
from the sale of cigarettes through the receipt of excise taxes or otherwise.
Defendants also argue that these cases are improper because plaintiffs must
proceed under principles of subrogation and assignment. Under traditional
theories of recovery, a payor of medical costs (such as an insurer or a state)
can seek recovery of health care costs from a third party solely by "standing in
the shoes" of the injured party. Defendants argue that plaintiffs should be
required to bring an action on behalf of each individual health care recipient
and should be subject to all defenses available against the injured party. In
certain of these cases, defendants have also challenged the ability of the
plaintiffs to use contingency fee counsel to prosecute these actions. Further,
certain cigarette companies, including PM Inc., have filed declaratory judgment
actions in a number of states seeking to block the state's health care cost
recovery action and/or to prevent the state from hiring contingency fee counsel.
As of December 31, 1997, there were approximately 105 health care cost
recovery cases pending against PM Inc. and, in some cases, the Company,
including cases filed by states, through their attorneys general and/or other
state agencies, in Alaska, Arizona, Arkansas, California, Colorado, Connecticut,
Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine,
Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New
Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Washington, West
Virginia and Wisconsin. In addition, approximately 45 of the pending health care
cost recovery actions were filed by unions, eight by city and county
governments, six by federal and state taxpayers and four by native American
tribes. Health care cost recovery actions have also been brought by the Republic
of the Marshall Islands and the Commonwealth of Puerto Rico. Three health care
cost recovery cases were settled recently as discussed below.
The Mississippi, Florida and Texas Settlements
In June 1997, PM Inc. and other companies in the United States tobacco industry
agreed to a proposed Resolution to support federal legislation and ancillary
undertakings that would resolve much of the litigation facing the United States
tobacco industry. (See "Proposed Resolution of Certain Regulatory and Litigation
Issues" below.) In furtherance of the proposed Resolution, PM Inc. and other
companies in the United States tobacco industry settled health care cost
recovery actions brought by the States of Mississippi, Florida and Texas on
terms consistent with the proposed Resolution. The Mississippi action was
settled in July 1997, Florida was settled in September 1997 and Texas was
settled in January 1998.
Under the Mississippi settlement agreement, the settling defendants paid
$170 million, representing Mississippi's estimated share of the $10 billion
initial payment under the proposed Resolution, and paid an additional $15
million to reimburse Mississippi and its private counsel for out-of-pocket
costs. The settling defendants also paid approximately $62 million to support a
pilot program aimed at reducing the use of tobacco products by persons under the
age of eighteen. PM Inc.'s share of all the foregoing payments, approximately
$153 million, was charged to expense in the third quarter of 1997.
Beginning December 31, 1998, the settling defendants will pay Mississippi
amounts based on its anticipated share of the annual industry payments under the
proposed Resolution. These payments, which (except for the payment with respect
to 1998) will
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be adjusted as provided in the proposed Resolution, are estimated to be $68
million with respect to 1998 and will increase annually thereafter to an
estimated $136 million by 2003, continuing at that level thereafter, and will be
allocated among the settling defendants in accordance with their relative unit
volume of domestic tobacco product sales.
Under the Florida settlement agreement, the settling defendants paid $550
million, representing Florida's estimated share of the $10 billion initial
payment under the proposed Resolution, and also reimbursed Florida's expenses
and those of its private counsel. The settling defendants also paid $200 million
to support a pilot program by Florida aimed at reducing the use of tobacco
products by persons under the age of eighteen. PM Inc.'s share of all the
foregoing payments, approximately $484 million, was charged to expense in the
third quarter of 1997.
On September 15, 1998, and annually thereafter on December 31, the
settling defendants will make ongoing payments to Florida in the following
estimated amounts--1998: $220 million; 1999: $247.5 million; 2000: $275 million;
2001: $357.5 million; 2002: $357.5 million; and each year thereafter: $440
million. These amounts are projected to approximate that portion of the annual
industry payments under the proposed Resolution which is contemplated to be paid
to Florida. These payments (except for the payment with respect to 1998) will be
adjusted as provided in the proposed Resolution and will be allocated among the
settling defendants in accordance with their relative unit volume of domestic
tobacco product sales.
Under the Texas settlement agreement, the settling defendants agreed to
pay Texas an up-front payment of $725 million in 1998, representing Texas's
estimated share of the $10 billion initial payment under the proposed
Resolution, and agreed to reimburse Texas and its private counsel for expenses
in the estimated amount of $45 million. The settling defendants also agreed to
pay Texas $264 million to support a pilot program aimed at reducing the use of
tobacco by persons under the age of eighteen. PM Inc.'s share of all of the
foregoing payments, approximately $645 million, was charged to expense in the
fourth quarter of 1997.
Beginning in November and December 1998, and on December 31 of each
subsequent year, the settling defendants will pay Texas 7.25% of the annual
industry payments contemplated to be paid to the states under the proposed
Resolution. These payments, which (except for the payments with respect to 1998)
will be adjusted as provided in the proposed Resolution, will be in the
following estimated amounts--1998: $290 million; 1999: $326 million; 2000: $363
million; 2001: $471 million; 2002: $471 million; and 2003 and each year
thereafter: $580 million. These payments will be allocated among the settling
defendants in accordance with their relative unit volume of domestic tobacco
product sales.
The settling defendants have also agreed to pay reasonable attorneys' fees
of private contingency fee counsel of Mississippi, Florida and Texas as set by a
panel of independent arbitrators. Each of these payments would be allocated
among the settling defendants in accordance with their relative unit volume of
domestic tobacco product sales and will be subject to an aggregate national
annual cap of $500 million. Certain of Florida's private contingency fee counsel
have challenged the attorneys' fees provision set forth in the Florida
settlement agreement, arguing that the settlement agreement has no effect on
their rights under their contingency fee agreement with Florida. In November
1997, the court ordered all parties to comply with the provisions for obtaining
attorneys' fees, as set forth in the settlement agreement. Certain contingency
fee counsel are appealing this ruling. One of these contingency fee counsel has
filed suit against PM Inc. and others alleging, among other things, tortious
interference with such counsel's contingency fee agreement with the State.
If legislation implementing the proposed Resolution or its substantial
equivalent is enacted, the settlements will remain in place, but the terms of
the federal legislation will supersede the settlement agreements (except for the
terms of the pilot programs and payments thereunder, the initial payments and
the annual payments with respect to 1998), and the other payments described
above will be adjusted so that Mississippi, Florida and Texas will receive the
same payments as they would receive under such legislation.
If the settling defendants enter into any future pre-verdict settlement
agreement with a non-federal governmental plaintiff on more favorable terms
(after due consideration of relevant differences in population or other
appropriate factors), Mississippi, Florida and Texas will obtain treatment at
least as relatively favorable as such governmental plaintiff.
If federal legislation implementing the proposed Resolution or its
substantial equivalent is enacted, the parties contemplate that Mississippi,
Florida and Texas and any other state that has made an exceptional contribution
to secure resolution of these matters may apply to a panel of independent
arbitrators for reasonable compensation for its efforts in securing the proposed
Resolution. The settling defendants have agreed not to oppose applications for
$75 million by Mississippi, $250 million by Florida and $329.5 million by Texas,
subject to a nationwide annual cap for all such payments of $100 million.
Finally, the settlement agreements provide that they are not an admission
or concession or evidence of any liability or wrongdoing on the part of any
party, and were entered into by the settling defendants solely to avoid the
further expense, inconvenience, burden and uncertainty of litigation.
Certain Other Tobacco-Related Litigation
In June 1995, an action was filed in federal court in Maryland against PM Inc.
seeking certification of a purported class consisting of "all persons and
estates injured as a result of the defendant's alleged failure to manufacture a
fire safe cigarette since
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1987" (Sacks, et al. v. Philip Morris Inc.). Plaintiffs alleged in their
complaint that PM Inc. intentionally withheld and suppressed material
information relating to technology to produce a cigarette less likely to cause
fires, and failed to design and sell its cigarettes using the alleged
technology. Compensatory and punitive damages were sought. In September 1996, an
order was entered granting defendant's motion to dismiss. Plaintiffs have
appealed the order.
In September 1997, a purported class action was commenced by private
plaintiffs in Alabama state court alleging that the U.S. tobacco companies and
others conspired to fix cigarette prices in Alabama, that agreements leading to
price increases were reached during the negotiations leading to the proposed
Resolution discussed below, and that prices were increased pursuant to the
alleged conspiracy in 1997 (Mosley, et al. v. Philip Morris Companies Inc., et
al.). The purported class consists of Alabama residents who purchased cigarettes
in 1997. Plaintiffs seek actual damages of no more than $500 per class member
and statutory damages of $500 for each instance of injury or damages, and costs
and interest. In September 1997, the state court conditionally certified the
class. Defendants subsequently removed the case to federal court, and the
federal court then vacated the state court's conditional class certification.
Since September 1997, six suits have been filed by former asbestos
manufacturers and asbestos manufacturers' personal injury settlement trusts
against domestic tobacco manufacturers, including PM Inc., and others (Raymark
Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al.; Raymark
Industries, Inc. v. R.J. Reynolds Tobacco Company, et al.; Fibreboard
Corporation and Owens Corning v. The American Tobacco Company, et al.; Robert A.
Falise, et al., Trustees of the Manville Personal Injury Settlement Trust v. The
American Tobacco Company, et al.; Keene Creditors Trust v. Brown & Williamson
Tobacco Corporation, et al.; and H.K. Porter Company, Inc. v. B.A.T. Industries,
PLC, et al.). These cases seek, among other things, contribution or
reimbursement for amounts expended for the defense and payment of asbestos
claims that were allegedly caused in whole or in part by cigarette smoking.
Plaintiffs in most of these cases also seek punitive damages.
Certain Other Actions
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in a complaint filed as a purported class action in federal
court in New York (Lawrence, et al. v. Philip Morris Companies Inc., et al.).
Plaintiffs allege that defendants violated the federal securities laws by
maintaining artificially high levels of profitability through an inventory
management practice pursuant to which defendants allegedly shipped more
inventory to customers than was necessary to satisfy market demand. In August
1995, the court granted plaintiffs' motion for class certification, certifying a
class of all persons who purchased common stock of the Company between July 10,
1991 and April 1, 1993, and who held such stock at the close of business on
April 1, 1993.
In April 1994, the Company, PM Inc. and certain officers and directors
were named as defendants in several purported class actions that were later
consolidated in the United States District Court in the Southern District of New
York (Kurzweil, et al. v. Philip Morris Companies Inc., et al. and State Board
of Administration of Florida, et al. v. Philip Morris Companies Inc., et al.).
In those cases, plaintiffs asserted that defendants violated federal securities
laws by making allegedly false and misleading statements regarding the allegedly
"addictive" qualities of cigarettes. In September 1995, the court granted
defendants' motion to dismiss the two complaints in their entirety. The court
then granted plaintiffs in the State Board action leave to replead one of their
claims. The court dismissed the State Board claims in April 1996 and the
Kurzweil claims in August 1996. In April 1997, the court granted a motion filed
by the Kurzweil plaintiffs to vacate the judgment and for leave to amend their
complaint.
Since April 1996, five purported class action suits have been filed in
Wisconsin alleging that Kraft Foods, Inc. ("Kraft") and others engaged in a
conspiracy to fix and depress the prices of bulk cheese and milk through their
trading activity on the National Cheese Exchange (Stuart, et al. v. Kraft Foods,
Inc., et al.; Sheeks, et al. v. Kraft Foods, Inc., et al.; Servais, et al. v.
Kraft Foods, Inc. and the National Cheese Exchange, Inc.; Dodson, et al. v.
Kraft Foods, Inc., et al.; and Noll, et al. v. Kraft Foods, Inc., et al.).
Plaintiffs seek injunctive and equitable relief and treble damages. The court
has granted the Sheeks and Stuart plaintiffs' motions for voluntary dismissal
without prejudice. Plaintiffs in the three remaining cases have filed a
consolidated class action complaint in Wisconsin seeking certification of a
class consisting of all milk producers in the U.S. In October 1997, a purported
class action suit was filed in Illinois against Kraft only (Vincent, et al. v.
Kraft Foods, Inc.). This suit contains allegations similar to those in the
consolidated Wisconsin class action, but only seeks a class comprising Kraft's
milk suppliers.
Tax assessments alleging the nonpayment of taxes in Italy (value-added
taxes for the years 1988 to 1995 and income taxes for the years 1987 to 1995)
have been served upon certain affiliates of the Company. The aggregate amount of
unpaid taxes assessed to date is alleged to be the Italian lira equivalent of
$2.5 billion. In addition, the Italian lira equivalent of $6.0 billion in
interest and penalties has been assessed. The Company anticipates that
value-added and income tax assessments may also be received in respect of 1996.
In September 1997, in the first of several appeals filed by an affiliate of the
Company, the Italian administrative tax court in Milan overturned one of the
assessments for value-added taxes. A hearing on a second appeal was held in
October 1997, and hearings on additional appeals were held in December 1997 and
January 1998. Additional hearings are anticipated over the course of 1998. In a
separate proceeding in Naples, a court has dismissed charges of criminal
association
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against certain present and former officers and directors of affiliates of the
Company, but permitted charges of tax evasion to proceed to trial. The Company,
its affiliates and the officers and directors who are subject to the proceedings
believe they have complied with applicable Italian tax laws and are vigorously
contesting the pending tax assessments and the pending proceedings in Naples.
It is not possible to predict the outcome of the litigation pending
against the Company and its subsidiaries. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. There have also
been a number of adverse legislative, regulatory, political and other
developments concerning cigarette smoking and the tobacco industry that have
received widespread media attention, including a decision by a federal district
court on a motion for summary judgment not to preclude the United States Food
and Drug Administration (the "FDA") from asserting jurisdiction over cigarettes
as "drugs" or "medical devices," which decision is now under appeal. These
developments, as well as the widespread media attention given to the proposed
Resolution discussed below and the settlements of the Mississippi, Florida and
Texas health care cost recovery actions and the Broin class action, may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an unfavorable outcome of certain pending litigation or
by the proposed Resolution discussed below or by settlement, if any, of certain
pending cases. However, implementation of the proposed Resolution should resolve
the most significant tobacco litigation against the Company and its
subsidiaries. Furthermore, the Company and each of its subsidiaries named as a
defendant believe, and each has been so advised by counsel handling the
respective cases, that it has a number of valid defenses to all litigation
pending against it. Except as described below under the heading "Proposed
Resolution of Certain Regulatory and Litigation Issues--Effects on Litigation,"
all such cases are, and will continue to be, vigorously defended.
Proposed Resolution of Certain Regulatory and Litigation Issues
On June 20, 1997, PM Inc. and other companies in the United States tobacco
industry entered into a Memorandum of Understanding (the "Resolution") to
support the adoption of federal legislation and ancillary undertakings that
would resolve many of the regulatory and litigation issues affecting the United
States tobacco industry and, thereby, reduce uncertainties facing the industry
and increase stability in business and capital markets.
There can be no assurance that federal legislation in the form of the
proposed Resolution will be enacted or that it will be enacted without
modification that is materially adverse to the Company or that any modification
would be acceptable to the Company or that, if enacted, the legislation would
not face legal challenges. Moreover, the negotiation and signing of the proposed
Resolution could affect other federal, state and local regulation of the United
States tobacco industry and regulation of the international tobacco industry.
The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access restrictions,
licensing of tobacco retailers, the adoption and enforcement of "no sales to
minors" laws by states, surcharges against the industry for failure to achieve
underage smoking reduction goals, regulation of tobacco products by the FDA,
public disclosure of industry documents and research, smoking cessation
programs, compliance programs by the industry, public smoking and smoking in the
workplace, enforcement of the proposed Resolution, industry payments and
litigation.
Surcharge for Failure to Achieve Underage Smoking Reduction Goals
The proposed Resolution would require the FDA to impose annual surcharges on the
industry if targeted reductions in underage smoking are not achieved in
accordance with a legislative timetable. The surcharge would be based upon an
approximation of the present value of the profit the companies would earn over
the lives of all underage consumers in excess of the target and would be
allocated among participating manufacturers based on their market share of the
United States cigarette industry.
Industry Payments
The proposed Resolution would require participating manufacturers to make
substantial payments in the year of implementation and thereafter ("Industry
Payments"). Participating manufacturers would be required to make an aggregate
$10 billion initial Industry Payment on the date that federal legislation
implementing the terms of the proposed Resolution is signed. This Industry
Payment would be based on relative market capitalizations, and the Company
currently estimates that PM Inc.'s share of the initial Industry Payment would
be approximately $6.6 billion (to be adjusted downward for initial payments made
to Mississippi, Florida and Texas pursuant to settlements of health care cost
recovery actions described above). Thereafter, the companies would be required
to make specified annual Industry Payments determined and allocated among the
companies based on volume of domestic sales as long as the companies continue to
sell tobacco products in the United States. These Industry Payments, which would
begin on December 31
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of the first full year after implementing federal legislation is signed, would
be in the following amounts (at 1996 volume levels)--year 1: $8.5 billion; year
2: $9.5 billion; year 3: $11.5 billion; year 4: $14 billion; and each year
thereafter: $15 billion. These Industry Payments would be increased by the
greater of 3% or the previous year's inflation rate, and would be adjusted to
reflect changes from 1996 domestic sales volume levels.
The Industry Payments would be separate from any surcharges discussed
above. The Industry Payments would receive priority and would not be
dischargeable in any bankruptcy or reorganization proceeding and would be the
obligation only of entities selling tobacco products in the United States (and
not their affiliated companies). The proposed Resolution provides that all
payments by the industry would be ordinary and necessary business expenses in
the year of payment, and no part thereof would be either in settlement of an
actual or potential liability for a fine or penalty (civil or criminal) or the
cost of a tangible or intangible asset. The proposed Resolution would provide
for the pass-through to consumers of the annual Industry Payments in order to
promote the maximum reduction in underage use.
Effects on Litigation
If enacted, the federal legislation provided for in the proposed Resolution
would settle present attorney general health care cost recovery actions (or
similar actions brought by or on behalf of any governmental entity other than
the federal government), parens patriae and smoking and health class actions and
all "addiction"/dependence claims, and would bar similar actions from being
maintained in the future. However, the proposed Resolution provides that no stay
applications will be made in pending governmental actions without the mutual
consent of the parties. In recent months, PM Inc. and other companies in the
domestic tobacco industry agreed to settle three health care cost recovery
actions in Mississippi, Florida and Texas, and a smoking and health class action
brought on behalf of flight attendants alleging injury caused by exposure to ETS
aboard aircraft. The Company may enter into discussions to postpone or settle
other actions, pending the enactment of the legislation contemplated by the
proposed Resolution. No assurance can be given whether a postponement or
settlement will be achieved or, if achieved, as to the terms thereof. The
proposed Resolution would not affect any smoking and health class action or any
health care cost recovery action that is reduced to final judgment before
implementing federal legislation is effective.
Under the proposed Resolution, the rights of individuals to sue the
tobacco industry would be preserved, as would existing legal doctrine regarding
the types of tort claims that can be brought under applicable statutory and case
law except as expressly changed by implementing federal legislation. Claims,
however, could not be maintained on a class or other aggregated basis and could
be maintained only against tobacco manufacturing companies (and not their
retailers, distributors or affiliated companies). In addition, all punitive
damage claims based on past conduct would be resolved as part of the proposed
Resolution, and future claimants could seek punitive damages only with respect
to claims predicated upon conduct taking place after the effective date of
implementing federal legislation. Finally, except with respect to actions
pending as of June 9, 1997, third-party payor (and similar) claims could be
maintained only if based on subrogation of individual claims. Under subrogation
principles, a payor of medical costs can seek recovery from a third party only
by "standing in the shoes" of the injured party and being subject to all
defenses available against the injured party.
The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil liabilities
relating to past conduct. Judgments and settlements arising from tort actions
would be paid as follows. The proposed Resolution would set an annual aggregate
cap of up to 33% of the annual base Industry Payment (including any reductions
for volume declines). Any judgments or settlements exceeding the cap in a
particular year would roll over into the next year. While judgments and
settlements would run against the defendant, they would give rise to an
80-cents-on-the-dollar credit against the annual Industry Payment. Finally, any
individual judgments in excess of $1 million would be paid at the rate of $1
million per year unless every other judgment and settlement could first be
satisfied within the annual aggregate cap. In all circumstances, however, the
companies would remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs in the
litigation that would be settled by the proposed Resolution.
Financial Effects
The Company anticipates that PM Inc.'s share of the industry's $10 billion
initial payment, which it currently estimates would be approximately $6.6
billion (adjusted downward for initial payments made to Mississippi, Florida and
Texas pursuant to settlements of health care cost recovery actions), would be
charged to expense in the period in which federal legislation implementing the
terms of the proposed Resolution is enacted. In addition, the Company currently
anticipates that implementation of the proposed Resolution would require a
significant charge to expense in the period of enactment to comply with the
proposed Resolution's regulations on advertising, marketing and production. The
initial payment would be funded from a combination of available cash, commercial
paper issuances, bank borrowings and long-term debt issuances in global markets.
The initial payment would have a material adverse effect on the Company's
operating income and cash flows in the quarter and year in which the proposed
Resolution is enacted and on its financial position.
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The initial payment would result in higher debt and higher interest expense, the
amounts of which would depend upon the final form of the proposed Resolution,
borrowing requirements and interest rates.
The Company anticipates that PM Inc.'s share of future annual Industry
Payments related to cigarette sales would be charged to expense as the related
sales occur, and would be funded through price increases. The Company
anticipates that annual surcharges, if any, imposed by the FDA for failure to
meet required reduction levels in underage smoking, beginning in the fifth year
after the proposed Resolution is implemented, would be charged to expense in the
year of assessment or in the year prior thereto if it is then probable that such
assessment will be made.
The Company believes that implementation of the proposed Resolution would
materially adversely affect the volume, operating revenues, cash flows and/or
operating income of the Company in future years. The degree of the adverse
impact would depend, among other things, on the rates of decline in United
States cigarette sales in the premium and discount segments, PM Inc.'s share of
the domestic premium and discount cigarette segments, interest rates and the
timing of principal payments on debt incurred to finance the initial payment due
under the proposed Resolution, and the effect of the proposed Resolution on
cigarette consumption and the regulatory and litigation environment outside the
United States.
Note 16. Additional Information:
(in millions) 1997 1996 1995
================================================================================
Years ended December 31:
Depreciation expense $ 1,045 $ 1,038 $ 1,024
================================================================================
Research and
development expense $ 533 $ 515 $ 481
================================================================================
Advertising expense $ 3,451 $ 3,633 $ 3,724
================================================================================
Interest and other debt
expense, net:
Interest expense $ 1,180 $ 1,183 $ 1,259
Interest income (133) (97) (80)
- --------------------------------------------------------------------------------
$ 1,047 $ 1,086 $ 1,179
================================================================================
Interest expense of financial
services and real estate
operations included in
cost of sales $ 67 $ 80 $ 84
================================================================================
Rent expense $ 443 $ 430 $ 390
================================================================================
Note 17. Financial Services and Real Estate Operations:
Philip Morris Capital Corporation ("PMCC") is a wholly-owned subsidiary of the
Company. PMCC invests in leveraged and direct finance leases, other tax-oriented
financing transactions and third party financial instruments. During 1997, PMCC
sold its wholly-owned subsidiary, Mission Viejo Company, which was engaged in
land planning, development and sales activities in California and Colorado.
Pursuant to a support agreement, the Company has agreed to retain
ownership of 100% of the voting stock of PMCC and make periodic payments to PMCC
to the extent necessary to ensure that earnings available for fixed charges
equal at least 1.25 times its fixed charges. No payments were required in 1997,
1996 or 1995.
Condensed balance sheet data at December 31, follows:
(in millions) 1997 1996
================================================================================
Assets
Finance leases $8,561 $7,554
Other investments 214 474
- --------------------------------------------------------------------------------
8,775 8,028
Less unearned income and allowances 3,063 2,682
- --------------------------------------------------------------------------------
Finance assets, net 5,712 5,346
Other assets 175 572
- --------------------------------------------------------------------------------
Total assets $5,887 $5,918
================================================================================
Liabilities and stockholder's equity
Intercompany payables $ 550 $ 5
Short-term borrowings 173
Long-term debt 845 1,134
Deferred income taxes 3,877 3,636
Other liabilities 110 140
Stockholder's equity 505 830
- --------------------------------------------------------------------------------
Total liabilities and stockholder's equity $5,887 $5,918
================================================================================
The amounts shown above include receivables and payables with the Company and
its other subsidiaries. These amounts were eliminated in the Company's
consolidated balance sheets.
Finance leases consist of a portfolio of investments in transportation,
manufacturing facilities, power generation and real estate. Rentals receivable
for finance leases represent unpaid rentals, less principal and interest on
third-party nonrecourse debt, if any.
PMCC's investment securities, included in other investments, are
classified as available for sale and are recorded at fair value, with unrealized
gains and losses included as a component of stockholder's equity, net of related
deferred income taxes. The total estimated fair value of other investments,
which principally includes commercial receivables at December 31, 1997 and 1996,
approximated their carrying values. Fair values were estimated by discounting
projected cash flows using the current rates for similar loans to borrowers with
similar credit ratings and maturities.
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Condensed income statement data follow for the years ended December 31,
(in millions) 1997 1996 1995
================================================================================
Revenues:
Financial services $241 $222 $197
Real estate 99 157 184
- --------------------------------------------------------------------------------
Total revenues 340 379 381
Expenses:
Financial services 104 107 107
Real estate 66 98 129
- --------------------------------------------------------------------------------
Total expenses 170 205 236
Gain on disposal of real estate
subsidiary 103
Equity in earnings of limited
partnership investments 17 15 15
- --------------------------------------------------------------------------------
Earnings before income taxes 290 189 160
Provision for income taxes 132 66 55
- --------------------------------------------------------------------------------
Net earnings $158 $123 $105
================================================================================
Note 18. Financial Instruments:
Derivative financial instruments
The Company operates internationally, with manufacturing and sales facilities in
various locations around the world. Derivative financial instruments are used by
the Company for purposes other than trading, principally to reduce exposures to
market risks resulting from fluctuations in interest rates and foreign exchange
rates by creating offsetting exposures. The Company is not a party to leveraged
derivatives.
The Company has foreign currency and related interest rate swap agreements
which were executed to reduce the Company's borrowing costs and serve as hedges
of the Company's net assets in foreign subsidiaries, principally those
denominated in Swiss francs. At December 31, 1997 and 1996, the notional
principal amounts of these agreements were $1.4 billion and $2.2 billion,
respectively. Aggregate maturities at December 31, 1997 were as follows (in
millions): 1998-$166; 1999-$350; 2000-$215; 2002-$171; and 2003 and
thereafter-$492. The notional amount is the amount used for the calculation of
interest payments which are exchanged over the life of the swap transaction and
is equal to the amount of foreign currency or dollar principal exchanged at
maturity.
Forward exchange contracts and foreign currency options are used by the
Company to reduce the effect of fluctuating foreign currencies on short-term
foreign currency denominated intercompany and third party transactions. At
December 31, 1997, the Company had forward exchange and option contracts, all
maturing within one year, with U.S. dollar equivalent values of $1.4 billion and
$1.1 billion, respectively. At December 31, 1996, the Company had foreign
exchange contracts, all maturing within one year, with U.S. dollar equivalent
values of $1.7 billion.
Credit exposure and credit risk
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the swap agreements. However, such exposure was not material
at December 31, 1997, and the Company does not anticipate nonperformance.
Further, the Company does not have a significant credit exposure to an
individual counterparty.
Fair value
The aggregate fair value, based on market quotes, of the Company's total debt at
December 31, 1997 was $14.7 billion as compared to its carrying value of $14.1
billion. The aggregate fair value of the Company's total debt at December 31,
1996 was $15.7 billion as compared to its carrying value of $15.2 billion. The
estimated fair value of financial services' other investments and receivables
approximated their carrying values at December 31, 1997 and 1996.
The carrying values of the foreign currency and related interest rate swap
agreements, the forward currency contracts and the currency option contracts,
which did not differ materially from their fair values, were not material.
See Notes 6, 7 and 17 for additional disclosures of fair value for
short-term borrowings, long-term debt and financial instruments within the
financial services and real estate operations, respectively.
60
<PAGE>
Note 19. Quarterly Financial Data (Unaudited):
1997 Quarters
(in millions,
except per share data) 1st 2nd 3rd 4th
================================================================================
Operating revenues $18,217 $18,413 $18,092 $17,333
================================================================================
Gross profit $ 7,376 $ 7,600 $ 7,420 $ 7,029
================================================================================
Net earnings $ 1,773 $ 1,836 $ 1,406 $ 1,295
================================================================================
Per share data:
Basic EPS $ 0.73 $ 0.76 $ 0.58 $ 0.54
================================================================================
Diluted EPS $ 0.72 $ 0.75 $ 0.58 $ 0.53
================================================================================
Dividends declared $ 0.40 $ 0.40 $ 0.40 $ 0.40
================================================================================
Market price--high $ 46 37/64 $ 48 1/8 $ 46 9/16 $ 45 7/8
--low $ 36 $ 37 1/4 $ 39 15/16 $ 36 15/16
================================================================================
During the fourth quarter of 1997, the Company sold several international food
businesses, including its Brazilian ice cream businesses, for total proceeds of
$1.1 billion and net pretax gains of $775 million. In addition, the Company sold
its equity interest in a Canadian beer operation and sold a minority interest in
a beer import operation for proceeds of $306 million and a pretax gain of $12
million.
During the fourth quarter of 1997, the Company recorded a charge of $342
million related primarily to the downsizing or closure of manufacturing and
other facilities, as well as the discontinuance of certain low-margin product
lines of its international food operations. The Company also recorded a charge
of $288 million for incremental postemployment benefits, primarily related to
severance.
During the third and fourth quarters of 1997, the Company recorded
litigation settlement charges of $812 million and $645 million, respectively.
1996 Quarters
(in millions,
except per share data) 1st 2nd 3rd 4th
================================================================================
Operating revenues $17,491 $17,509 $17,414 $16,790
================================================================================
Gross profit $ 6,989 $ 7,100 $ 7,092 $ 6,812
================================================================================
Net earnings $ 1,565 $ 1,621 $ 1,646 $ 1,471
================================================================================
Per share data:
Basic EPS $ 0.63 $ 0.66 $ 0.67 $ 0.61
================================================================================
Diluted EPS $ 0.62 $ 0.65 $ 0.67 $ 0.60
================================================================================
Dividends declared $ 0.33 1/3 $ 0.33 1/3 $ 0.40 $ 0.40
================================================================================
Market price--high $ 34 7/8 $ 35 3/4 $ 35 53/64 $ 39 43/64
--low $ 28 35/64 $ 28 35/64 $ 28 35/64 $ 29 59/64
================================================================================
During 1996, the Company sold several domestic and international food businesses
at net pretax gains of $320 million, most of which were reflected in fourth
quarter earnings.
During 1996, the Company initiated cost saving programs that included the
downsizing and closure of certain food manufacturing facilities, with related
workforce reductions, which resulted in a charge to pretax earnings of $320
million.
==========================
The principal stock exchange, on which the Company's common stock (par value
$0.33 1/3 per share) is listed, is the New York Stock Exchange. At January 31,
1998, there were approximately 149,900 holders of record of the Company's common
stock.
61
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Philip Morris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Philip Morris
Companies Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Philip Morris
Companies Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
New York, New York
January 26, 1998
Company Report on Financial Statements
The consolidated financial statements and all related financial
information herein are the responsibility of the Company. The financial
statements, which include amounts based on judgments, have been prepared in
accordance with generally accepted accounting principles. Other financial
information in the annual report is consistent with that in the financial
statements.
The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in accordance with
management's authorization and properly recorded, that assets are safeguarded,
and that accountability for assets is maintained. The system of internal
controls is characterized by a control-oriented environment within the Company,
which includes written policies and procedures, careful selection and training
of personnel, and audits by a professional staff of internal auditors.
Coopers & Lybrand L.L.P., independent accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed of six
non-management directors, meets periodically with Coopers & Lybrand L.L.P., the
Company's internal auditors and management representatives to review internal
accounting control, auditing and financial reporting matters. Both Coopers &
Lybrand L.L.P. and the internal auditors have unrestricted access to the Audit
Committee and may meet with it without management representatives being present.
62
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Certain active subsidiaries of the Company and their subsidiaries as of
December 31, 1997, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
State or
Country of
Name Organization
---- -------------------
AB Estrella ................................................... Sweden
AB Kraft Jacobs Suchard Lietuva ............................... Lithuania
AGF SP, Inc. .................................................. Japan
Ajinomoto General Foods, Inc. ................................. Japan
Aktieselskabet F.C. Af 11. juni 1971 .......................... Denmark
Aktieselskabet FMD af 11. juni 1920 ........................... Denmark
Aktieselskabet M Af 2. januar 1992 ............................ Denmark
A/O Almaty Tobacco Company .................................... Kazakhstan
A/O Krasnadortabakprom ........................................ Russia
A/O Philip Morris NEVA ........................................ Russia
A/S Freia ..................................................... Norway
A/S Maarud .................................................... Norway
Beijing Kraft Food Corporation Limited ........................ China
Branded Restaurant Group Inc. ................................. Delaware
Burlington Foods, Inc. ........................................ Delaware
C.A. Tabacalera Nacional ...................................... Venezuela
Cafe GRAND'MERE S.A. .......................................... France
Cafe HAG S.A. ................................................. France
Callard & Bowser-Suchard, Inc. ................................ Delaware
Capri Sun, Inc. ............................................... Delaware
Celis Brewery, Inc. ........................................... Texas
Churny Company, Inc. .......................................... Delaware
Comptoir De La Confiserie ..................................... France
Cote d'Or Italia S.p.A. ....................................... Italy
Dart & Kraft Finance N.V. ..................................... Netherlands
Antilles
Dart Resorts Inc. ............................................. Delaware
Dong Suh Foods Corporation .................................... Korea
Dong Suh Oil & Fats Co., Ltd. ................................. Korea
Egri Dohanygyar kft. .......................................... Hungary
El Gallito Industrial, S.A. ................................... Costa Rica
Estrella A/S .................................................. Denmark
Fabriques de Tabac Reunies S.A. ............................... Switzerland
Fattorie Osella S.p.A. ........................................ Italy
Franklin Baker Company of the Philippines ..................... Philippines
FTR Holding S.A. .............................................. Switzerland
Gardner's Good Foods, Inc. .................................... New Jersey
General Foods Credit Corporation .............................. Delaware
General Foods Credit Investors No. 1 Corporation .............. Delaware
General Foods Credit Investors No. 2 Corporation .............. Delaware
<PAGE>
State or
Country of
Name Organization
---- -------------------
General Foods Credit Investors No. 3 Corporation ............... Delaware
General Foods Foreign Sales Corporation ........................ Virgin
Islands (U.S.)
Gevaliarosteriet AB ............................................ Sweden
Grant Holdings, Inc. ........................................... Pennsylvania
Grant Transit Co. .............................................. Delaware
Grundstucksgemeinschaft Kraft Jacobs Suchard GbR ............... Germany
HAG-Coffex ..................................................... France
HAG GF AG ...................................................... Germany
HNB Investment Corp. ........................................... Delaware
International Pet Foods Ltd. ................................... New Zealand
Jacob Leinenkugel Brewing Company, Inc. ........................ Wisconsin
Jacobs Suchard do Brasil Alimentos LTDA ........................ Brazil
Jacobs Suchard Figaro A.S. ..................................... Czechoslovakia
Jacobs Suchard Pavlides SA ..................................... Greece
The Kenco Coffee Company Limited ............................... United Kingdom
Kharkiv Tobacco Factory ........................................ Ukraine
Kraft Canada Inc. .............................................. Canada
Kraft Chorzele Sp. z o.o. ...................................... Poland
Kraft Food Ingredients Corp. ................................... Delaware
Kraft Foods AS ................................................. Norway
Kraft Foods (Australia) Limited ................................ Australia
Kraft Foods de Mexico S.A. de C.V. ............................. Mexico
Kraft Foods Egypt LLC .......................................... Egypt
Kraft Foods Holdings Norway, Inc. .............................. Delaware
Kraft Foods, Inc. .............................................. Delaware
Kraft Foods International, Inc. ................................ Delaware
Kraft Foods International Services, Inc. ....................... Delaware
Kraft Foods Limited ............................................ Australia
Kraft Foods Limited (Asia) ..................................... Hong Kong
Kraft Foods Manufacturing Corporation .......................... Delaware
Kraft Foods (New Zealand) Limited .............................. New Zealand
Kraft Foods (Philippines), Inc. ................................ Philippines
Kraft Foods (Puerto Rico), Inc. ................................ Puerto Rico
Kraft Foods (Singapore) Pte Ltd ................................ Singapore
Kraft Foods (Thailand) Limited ................................. Thailand
Kraft Freia Marabou AB ......................................... Sweden
Kraft Freia Marabou ApS ........................................ Denmark
Kraft Freia Marabou Danmark A/S ................................ Denmark
Kraft Guangtong Food Company, Limited .......................... China
Kraft Hellas SA ................................................ Greece
Kraft Jacobs Suchard AG ........................................ Switzerland
Kraft Jacobs Suchard (Australia) Pty. Ltd. ..................... Australia
Kraft Jacobs Suchard BV ........................................ Netherlands
Kraft Jacobs Suchard Bulgaria AD ............................... Bulgaria
Kraft Jacobs Suchard Central & Eastern Europe
Service BV .................................................. Netherlands
Kraft Jacobs Suchard Erzeugnisse GmbH & Co. KG ................. Germany
Kraft Jacobs Suchard France .................................... France
Kraft Jacobs Suchard GmbH (Bremen) ............................. Germany
Kraft Jacobs Suchard (Holdings) Limited (United
Kingdom) ................................................... United Kingdom
Kraft Jacobs Suchard Hungaria KFT .............................. Hungary
2
<PAGE>
State or
Country of
Name Organization
---- -------------------
Kraft Jacobs Suchard Iberia, S.A. .............................. Spain
Kraft Jacobs Suchard Ireland Ltd. .............................. Ireland
Kraft Jacobs Suchard Laverune .................................. France
KJS Limited .................................................... Hong Kong
Kraft Jacobs Suchard Limited ................................... United Kingdom
Kraft Jacobs Suchard Management & Consulting AG ................ Switzerland
Kraft Jacobs Suchard Manufacturing GmbH & Co KG ................ Germany
KJS Namur SA ................................................... Belgium
Kraft Jacobs Suchard Oesterreich Gesellschaft MBH .............. Austria
Kraft Jacobs Suchard Polska Sp. z o.o. ......................... Poland
Kraft Jacobs Suchard Portugal Productos
Alimentares Lda. ........................................... Portugal
Kraft Jacobs Suchard Produktion GmbH ........................... Germany
Kraft Jacobs Suchard R & D, Inc. ............................... Delaware
Kraft Jacobs Suchard Reims ..................................... France
Kraft Jacobs Suchard Romania SA ................................ Romania
Kraft Jacobs Suchard S.A. ...................................... Belgium
Kraft Jacobs Suchard (Schweiz) AG .............................. Switzerland
Kraft Jacobs Suchard Service AG (Switzerland) .................. Switzerland
Kraft Jacobs Suchard S.p.A. .................................... Italy
Kraft Jacobs Suchard spol. s r.o. .............................. Czech Republic
Kraft Jacobs Suchard Strasbourg ................................ France
Kraft Jacobs Suchard Ukraina Open Joint Stock
Company .................................................... Ukraine
Kraft Japan, K.K. .............................................. Japan
Kraft Korea Inc. ............................................... Korea,
Republic of
Kraft Lacta Suchard Brasil, S.A. ............................... Brazil
Kraft Pizza Company ............................................ Delaware
Kraft Suchard Argentina, S.A. .................................. Argentina
Kraft Tianmei Food (Tianjin) Co., Ltd. ......................... China
Krema Limited .................................................. Ireland
La Loire Investment Corp. ...................................... Delaware
La Seine Investment Corp. ...................................... Delaware
Le Rhone Investment Corp. ...................................... Delaware
MBC Holdings, Inc. ............................................. Wisconsin
Marsa Kraft Jacobs Suchard Sabanci
Gida Sanayi ve Ticaret A.S. .................................. Turkey
Martlet Importing Co. Inc. ..................................... New York
Massalin Particulares S.A. ..................................... Argentina
Maxpax France SA ............................................... France
Michigan Investment Corp. ...................................... Delaware
Miller Brewing Company ......................................... Wisconsin
Miller Brewing do Brasil, Ltda. ................................ Brazil
Miller Brewing 1855, Inc. ...................................... Delaware
Miller Brewing of Europe, Ltd. ................................. United Kingdom
Mirabell Salzburger Confiserie-und
Bisquit GmbH ............................................... German
Democratic Rep.
Molson Breweries U.S. Holdings Inc. ............................ Delaware
Molson USA, LLC ................................................ Delaware
Oy Estrella AB ................................................. Finland
Oy Kraft Freia Marabou Finland AB .............................. Finland
Packaged Food & Beverage Co., Inc. ............................. Delaware
Perdue Trademark Subsidiary, Inc. .............................. Delaware
Phenix Leasing Corporation ..................................... Delaware
3
<PAGE>
State or
Country of
Name Organization
---- -------------------
Phenix Management Corporation .................................. Delaware
Philip Morris Asia Incorporated ................................ Delaware
Philip Morris Belgium S.A. ..................................... Belgium
P.M. Beverage Holdings, Inc. ................................... Delaware
Philip Morris Brasil S.A. ...................................... Delaware
Philip Morris Capital Corporation .............................. Delaware
Philip Morris Capital (Dublin) Limited ......................... Ireland
Philip Morris Capital (Ireland) Limited ........................ Ireland
Philip Morris Corporate Services Inc. .......................... Delaware
Philip Morris Europe S.A. ...................................... Delaware
Philip Morris Finance Europe B.V. .............................. Netherlands
Philip Morris G.m.b.H. ......................................... Germany
Philip Morris Holland B.V. ..................................... Netherlands
Philip Morris Hong Kong Limited ................................ Hong Kong
Philip Morris Incorporated ..................................... Virginia
Philip Morris International Finance Corporation ................ Delaware
Philip Morris International Inc. ............................... Delaware
Philip Morris Izhora ........................................... Russia
Philip Morris Kabushiki Kaisha ................................. Japan
Philip Morris Korea C.H. ....................................... Korea
Philip Morris Latin America Inc. ............................... Delaware
Philip Morris Limited .......................................... Australia
Philip Morris (Malaysia) Sdn. Bhd. ............................. Malaysia
Philip Morris Management Corp. ................................. New York
Philip Morris Mexico S.A. de C.V. .............................. Mexico
Philip Morris Products Inc. .................................... Virginia
Philip Morris Romania S.R.L. ................................... Romania
Philip Morris SA, Philip Morris Sabanci Pazarlama
ve Satis A.S.................................................. Turkey
Philip Morris Sales Inc. ....................................... Delaware
Philip Morris Sdn. Bhd. ........................................ Brunei
Philip Morris Services India Inc. .............................. Delaware
Philip Morris Singapore Pte. Ltd. .............................. Singapore
PHILSA Philip Morris Sabanci Sigara ve Tutunculuk
Sanayi ve Ticaret, A.S. ...................................... Turkey
Pietro Negroni Limited ......................................... United Kingdom
Pietro Negroni S.A. ............................................ Switzerland
PMCC Investors No. 1 Corporation ............................... Delaware
PMCC Investors No. 2 Corporation ............................... Delaware
PMCC Investors No. 3 Corporation ............................... Delaware
PMCC Investors No. 4 Corporation ............................... Delaware
PMCC Leasing Corporation ....................................... Delaware
Porta Pack Corporation ......................................... Delaware
Premierfoods Corporation ....................................... Taiwan
P.T. Kraft Ultrajaya Indonesia ................................. Indonesia
Riespri, S.A. .................................................. Spain
Roskill Cartage and Storage Limited ............................ New Zealand
Rye Ventures, Inc. ............................................. Delaware
San Dionisio Realty Corporation ................................ Philippines
SB Leasing Inc. ................................................ Delaware
Seven Seas Foods, Inc. ......................................... Delaware
Shipyard Brewing Company LLC ................................... Maine
Societa Immobiliare Modenese S.p.A. ............................ Italy
4
<PAGE>
State or
Country of
Name Organization
---- -------------------
Suchard Limited ................................................ United Kingdom
Suchard Schokolade Ges. mbH Bludenz (Austria) .................. Austria
Superior AgResource, Inc. ...................................... Delaware
Tabacalera Centroamericana S.A. ................................ Guatemala
Tabacalera Costarricense S.A. .................................. Costa Rica
Tabak A.S. ..................................................... Czech Republic
Tabaqueira - Empresa Industrial de Tabacos, S.A. ............... Portugal
Taloca AG ...................................................... Switzerland
Taloca Ltda. ................................................... Brazil
UAB Philip Morris Lietuva ...................................... Lithuania
Vict. Th. Engwall & Co., Inc. .................................. Delaware
Votesor BV ..................................................... Netherlands
Wolverine Investment Corp. ..................................... Delaware
Zaklady Przemyslu Tytoniowego w Krakowie S.A. .................. Poland
5
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 13
to the registration statement of Philip Morris Companies Inc. (the "Company") on
Form S-14 (File No. 2-96149) and in the Company's registration statements on
Form S-3 (File Nos. 333-16955 and 333-35143) and Form S-8 (File Nos. 333-28631,
333-20747, 333-16127, 33-1479, 33-1480, 33-10218, 33-13210, 33-14561, 33-17870,
33-37115, 33-38781, 33-39162, 33-40110, 33-48781, 33-59109, 33-63975 and
33-63977) of our reports dated January 26, 1998, on our audits of the
consolidated financial statements and financial statement schedule of the
Company as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, which reports are included or incorporated by
reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
New York, New York
March 5, 1998
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Elizabeth E. Bailey
---------------------------------
Elizabeth E. Bailey
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Murray H. Bring
---------------------------------
Murray H. Bring
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Harold Brown
---------------------------------
Harold Brown
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ William H. Donaldson
---------------------------------
William H. Donaldson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Jane Evans
---------------------------------
Jane Evans
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Robert E.R. Huntley
---------------------------------
Robert E.R. Huntley
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Rupert Murdoch
---------------------------------
Rupert Murdoch
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ John D. Nichols
---------------------------------
John D. Nichols
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Lucio A. Noto
---------------------------------
Lucio A. Noto
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Richard D. Parsons
---------------------------------
Richard D. Parsons
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Roger S. Penske
---------------------------------
Roger S. Penske
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ John S. Reed
---------------------------------
John S. Reed
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Carlos Slim Helu
---------------------------------
Carlos Slim Helu
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 25th day of February, 1998.
/s/ Stephen M. Wolf
---------------------------------
Stephen M. Wolf
<PAGE>
EXHIBIT 99
CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS
As described in Item 3 of this Annual Report on Form 10-K and Note 15 to the
Company's consolidated financial statements included as Exhibit 13 hereto, there
are legal proceedings covering a wide range of matters pending in various U.S.
and foreign jurisdictions against the Company, its subsidiaries, including PM
Inc., and their respective indemnitees. Various types of claims are raised in
these proceedings, including products liability, consumer protection, antitrust,
securities law, tax, patent infringement, employment matters and claims for
contribution. Pending claims related to tobacco products generally fall within
three categories: (i) smoking and health cases alleging personal injury brought
on behalf of individual plaintiffs, (ii) smoking and health cases alleging
personal injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery cases, including class actions,
brought by state and local governments, unions, federal and state taxpayers,
native American tribes and others seeking reimbursement for Medicaid and/or
other health care expenditures allegedly caused by cigarette smoking. The
following lists the pending claims included in the latter two of these
categories and also certain other pending claims. Certain developments in these
cases since January 1, 1997 are also described.
SMOKING AND HEALTH LITIGATION
The following lists the smoking and health class actions pending against PM Inc.
and, in some cases, the Company and/or its other subsidiaries as of February 27,
1998, and describes certain developments since January 1, 1997.
BROIN, ET AL. V. PHILIP MORRIS COMPANIES, INC., ET AL., CIRCUIT COURT, DADE
COUNTY, FLORIDA, FILED OCTOBER 31, 1991. This case was settled in October 1997
(see Item 3. LEGAL PROCEEDINGS).
CASTANO, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, LOUISIANA, FILED MARCH 29, 1994. In January 1998, PM
Inc. and certain other members of the United States tobacco industry agreed with
plaintiffs to dismiss this action without prejudice and to toll the statute of
limitations. In connection with that agreement, PM Inc. paid $5.9 million to
reimburse costs and expenses of plaintiffs' counsel, such reimbursement to be
credited against any award of costs and expenses incurred in connection with
this action that such counsel may obtain in the future resulting from federal
legislation implementing the proposed Resolution or against any judgment or
settlement such counsel may obtain in the future in similar actions.
ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO CO., ET AL., CIRCUIT COURT, DADE COUNTY,
FLORIDA, FILED MAY 5, 1994. The class, as certified by the court, consists of
all Florida citizens and residents and their survivors who have suffered injury
"caused by their addiction to cigarettes that contain nicotine." In May 1997,
the court agreed to reconsider its earlier order granting partial summary
judgment on the grounds that certain of plaintiffs' claims were preempted by the
Federal Cigarette Labeling and Advertising Act. Plaintiffs' claim for medical
monitoring was dismissed by the court in July 1997. In January 1998, the court
denied a motion to decertify the class, but expressed reservations and concerns
about the manageability of the class action and postponed the trial date to
permit an appeal of that decision.
GRANIER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, LOUISIANA, FILED SEPTEMBER 26, 1994.
CAPUTO (FORMERLY LETOURNEAU) V. IMPERIAL TOBACCO LIMITED, ET AL., ONTARIO COURT
OF JUSTICE, TORONTO, CANADA, FILED JANUARY 13, 1995.
<PAGE>
THE SMOKER HEALTH DEFENSE ASSOCIATION, ET AL. V. SOUZA CRUZ, S.A. AND PHILIP
MORRIS MARKETING, S.A., 19TH LOWER CIVIL COURT OF THE CENTRAL COURTS OF THE
JUDICIARY DISTRICT OF SAN PAULO, BRAZIL, FILED JULY 25, 1995.
NORTON, ET AL. V. RJR NABISCO HOLDINGS CORPORATION, ET AL., SUPERIOR COURT,
MADISON COUNTY, INDIANA, FILED MAY 3, 1996.
RICHARDSON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT,
BALTIMORE CITY, MARYLAND, FILED MAY 24, 1996. In January 1998, the court
certified a class consisting of certain persons in Maryland who are nicotine-
dependent and certain Maryland residents who have suffered injury as a result of
using tobacco products. Trial is scheduled for September 1999.
SCOTT, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., DISTRICT COURT, ORLEANS
PARISH, LOUISIANA, FILED MAY 24, 1996. In April 1997, the court certified a
class consisting of certain Louisiana residents who are or were smokers and who
desire to participate in smoking cessation and/or medical monitoring programs.
FROSINA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPREME COURT, NEW YORK
COUNTY, NEW YORK, FILED JUNE 19, 1996. In October 1997, the court certified a
class consisting of certain New York residents who smoked cigarettes
manufactured by PM Inc. Trial may commence during the spring or summer of 1998.
REED, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, DISTRICT OF
COLUMBIA, FILED JUNE 21, 1996. In August 1997, the court denied plaintiffs'
motion for class certification.
BARNES (FORMERLY ARCH), ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, EASTERN DISTRICT, PENNSYLVANIA, FILED AUGUST 8, 1996. In
October 1997, the court decertified the class and granted defendants' motion for
summary judgment.
LYONS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, ALABAMA, FILED AUGUST 8, 1996.
CHAMBERLAIN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, OHIO, FILED AUGUST 14, 1996.
THOMPSON, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, MINNESOTA, FILED SEPTEMBER 4, 1996.
CONNOR, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SECOND JUDICIAL DISTRICT
COURT, BERNALILLO COUNTY, NEW MEXICO, FILED OCTOBER 10, 1996.
RUIZ, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, PUERTO RICO, FILED OCTOBER 23, 1996.
HANSEN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, ARKANSAS, FILED NOVEMBER 4, 1996.
MCCUNE, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT OF KANAWHA
COUNTY, WEST VIRGINIA, FILED JANUARY 31, 1997.
BAKER, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, WAYNE COUNTY,
MICHIGAN, FILED FEBRUARY 4, 1997.
WOODS (formerly INGLE), ET AL. V. PHILIP MORRIS INCORPORATED, ET AL.,
CIRCUIT COURT, MCDOWELL COUNTY, WEST VIRGINIA, FILED FEBRUARY 4, 1997.
2
<PAGE>
EMIG, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT,
KANSAS, FILED FEBRUARY 6, 1997.
PETERSON, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, HAWAII, FILED FEBRUARY 6, 1997.
WALLS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, OKLAHOMA, FILED FEBRUARY 6, 1997 .
SELCER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NEVADA, FILED MARCH 3, 1997.
INSOLIA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT, ROCK
COUNTY, WISCONSIN, FILED APRIL 21, 1997. Trial is scheduled for February 1999.
GEIGER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPREME COURT, QUEENS
COUNTY, NEW YORK, FILED APRIL 30, 1997. In July 1997, the court denied
defendants' motion to dismiss and granted interim certification of a class
consisting of certain New York residents.
COLE, ET AL. V. THE TOBACCO INSTITUTE, INC., ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, TEXAS, TEXARKANA DIVISION, FILED MAY 5, 1997.
CLAY, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, ILLINOIS, BENTON DIVISION, FILED MAY 22,
1997.
ANDERSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, TENNESSEE, FILED MAY 23, 1997.
TAYLOR, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., CIRCUIT COURT,
WAYNE COUNTY, MICHIGAN, FILED MAY 23, 1997.
LYONS, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED MAY 27, 1997.
COSENTINO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED MAY 28, 1997.
ENRIGHT, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT,
CAMDEN COUNTY, NEW JERSEY, FILED MAY 28, 1997.
TEPPER, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, BERGEN
COUNTY, NEW JERSEY, FILED MAY 28, 1997.
BROWN, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT, SAN
DIEGO COUNTY, CALIFORNIA, FILED JUNE 10, 1997.
LIPPINCOTT, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT,
CAMDEN COUNTY, NEW JERSEY, FILED JUNE 13, 1997.
BRAMMER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, IOWA, FILED JUNE 20, 1997.
KNOWLES, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, LOUISIANA, FILED JUNE 30, 1997.
3
<PAGE>
DALEY, ET AL. V. AMERICAN BRANDS, INC., ET AL., CIRCUIT COURT, COOK COUNTY,
ILLINOIS, FILED JULY 7, 1997.
PISCITELLO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED JULY 28, 1997.
MCCAULEY, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED
STATES DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED AUGUST 15, 1997.
DASILVA, ET AL. V. NIGERIAN TOBACCO COMPANY, ET AL., HIGH COURT OF LAGOS STATE,
NIGERIA, FILED SEPTEMBER 8, 1997.
BUSH, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, TEXAS, FILED SEPTEMBER 10, 1997.
NWANZE, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, NEW YORK, FILED SEPTEMBER 29, 1997.
BADILLO, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NEVADA, FILED OCTOBER 8, 1997.
NEWBORN, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, WESTERN DISTRICT, TENNESSEE, FILED OCTOBER 9, 1997.
YOUNG, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIVIL DISTRICT COURT,
ORLEANS PARISH, STATE OF LOUISIANA, FILED NOVEMBER 12, 1997.
AKSAMIT, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, SOUTH CAROLINA, FILED NOVEMBER 20, 1997.
LANGDEAU, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT, LOWER
BRULE SIOUX TRIBE, FILED ON AN UNKNOWN DATE. In October 1997, this case was
dismissed without prejudice by the tribal court on the grounds that
plaintiffs failed to effect proper service of process and otherwise failed to
follow tribal court rules. In November 1997, the complaint was refiled.
HERRERA, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., FOURTH JUDICIAL
DISTRICT COURT, UTAH COUNTY, UTAH, FILED JANUARY 28, 1998.
JACKSON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., THIRD JUDICIAL DISTRICT
COURT, SALT LAKE COUNTY, UTAH, FILED FEBRUARY 13, 1998.
HEALTH CARE COST RECOVERY LITIGATION
The following lists the health care cost recovery actions pending against PM
Inc. and, in some cases, the Company and/or its other subsidiaries as of
February 27, 1998, and describes certain developments since January 1, 1997.
MOORE V. THE AMERICAN TOBACCO COMPANY, ET AL., CHANCERY COURT, JACKSON COUNTY,
MISSISSIPPI, FILED MAY 23, 1994. This case was settled in July 1997 (see Item 3.
LEGAL PROCEEDINGS).
STATE OF MINNESOTA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., DISTRICT
COURT, RAMSEY COUNTY, MINNESOTA, FILED AUGUST 17, 1994. Trial began in January
1998 (see Item 3. LEGAL PROCEEDINGS).
4
<PAGE>
MCGRAW V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, KANAWHA COUNTY,
WEST VIRGINIA, FILED SEPTEMBER 20, 1994. In February 1997, the court granted
defendants' motion to dismiss plaintiffs' common law and equitable claims and
thereafter denied defendants' motion to dismiss plaintiffs' statutory claims.
THE STATE OF FLORIDA, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT
COURT, PALM BEACH COUNTY, FLORIDA, FILED FEBRUARY 21, 1995. This case was
settled in September 1997 (see Item 3. LEGAL PROCEEDINGS).
COMMONWEALTH OF MASSACHUSETTS V. PHILIP MORRIS INC., ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, MASSACHUSETTS, FILED DECEMBER 19, 1995. In October 1997, the
court denied in part defendants' motion to dismiss the complaint, but reserved
ruling on plaintiff's claims of special duty and a portion of plaintiff's
deceptive trade practices claim. Trial is set for February 1999.
IEYOUB V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT,
WESTERN DISTRICT, LOUISIANA, FILED MARCH 13, 1996. In January 1997, the court
denied defendants' motion to dismiss which argued that the attorney general
lacked the procedural capacity to bring this action. A similar motion
challenging the attorney general's authority to bring this action is also
pending. In March 1997, the attorney general amended his complaint to join over
100 insurance companies, alleged to have issued insurance policies to defendants
covering all or some of the damages asserted in the complaint.
THE STATE OF TEXAS V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, TEXAS, FILED MARCH 28, 1996. This case was
settled in January 1998 (see Item 3. LEGAL PROCEEDINGS).
STATE OF MARYLAND V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT,
BALTIMORE CITY, MARYLAND, FILED MAY 1, 1996. In May 1997, the court dismissed
all of plaintiff's claims other than those based on antitrust and consumer
protection theories and held that plaintiff is limited to its statutory remedy
of subrogation. Trial is scheduled for January 1999.
STATE OF WASHINGTON V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPERIOR COURT,
KING COUNTY, WASHINGTON, FILED JUNE 5, 1996. In June 1997, the court dismissed
claims of special duty and unjust enrichment and a claim for disgorgement of
profits. In August 1997, the court reinstated plaintiff's previously dismissed
consumer protection statute claims for damages solely to the extent such claims
are confined to relief sought for individual consumers, but not for the State
itself. Trial is scheduled for September 1998.
CITY AND COUNTY OF SAN FRANCISCO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL.,
UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED JUNE 6, 1996.
In February 1997, the court dismissed the complaint with leave to amend. In
March 1997, plaintiffs filed an amended complaint. On March 4, 1998, the
court denied defendants' motion to dismiss the negligent breach of special
duty and fraud counts of the amended complaint, but granted the motion to
dismiss the claim for intentional breach of special duty.
STATE OF CONNECTICUT V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
LITCHFIELD DISTRICT, CONNECTICUT, FILED JULY 18, 1996.
COUNTY OF LOS ANGELES V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT,
SAN DIEGO COUNTY, CALIFORNIA, FILED AUGUST 5, 1996. In April 1997, the court
dismissed plaintiffs' fraud claims without leave to amend, and denied
defendants' motion to dismiss plaintiffs' claim for breach of express warranty.
In December 1997, the court dismissed certain other causes of action, holding
that there was no common-law basis for plaintiffs' recoupment claims and that
the California Civil Code, which bars claims for injury or death caused by
certain consumer products, barred all of plaintiff's statutory claims for
recoupment, with the exception of a claim for breach of express warranty. The
court further held that plaintiffs could state statutory recoupment causes of
action if they could base their claims exclusively on defendants' conduct
occurring after June 12, 1997 (the date the California Legislature amended the
California Civil Code to no longer bar public entities from suing to recover
health care costs for treating smoking-related illnesses), and granted
plaintiffs leave to amend to try to state such causes of action. Finally, the
court dismissed, without
5
<PAGE>
leave to amend, a cause of action for violation of a penal code provision
prohibiting sales of tobacco products to minors.
The court had consolidated for trial beginning in February 1999, the claims
under the California Unfair Competition Act and False Advertising Law with
similar claims brought in two other cases pending in California. The court
indicated that it would consider the health care cost recovery portion of the
COUNTY OF LOS ANGELES case at a feasible date after the conclusion of the trial
of the claims under the California Unfair Competition Act and False Advertising
Law.
CROZIER V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, MONTGOMERY
COUNTY, ALABAMA, FILED AUGUST 8, 1996. This health care cost recovery action was
brought as a class action on behalf of Alabama taxpayers. In September 1997,
the court dismissed plaintiffs' claims that were asserted on behalf of the State
of Alabama, but denied defense motions to dismiss claims insofar as they related
to plaintiffs' individual claims or those asserted on behalf of children.
STATE OF ARIZONA V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPERIOR COURT,
MARICOPA COUNTY, ARIZONA, FILED AUGUST 20, 1996. In May 1997, the court granted
defendants' motion to dismiss plaintiffs' claims of breach of assumed duty and
performance of another's duty to the public, negligence PER SE, public nuisance,
and unjust enrichment and restitution and denied defendants' dismissal motion
with respect to plaintiffs' claims for antitrust violations, fraud and
violations of a deceptive trade practices statute. In July 1997, the court
granted defendants' motion to dismiss plaintiffs' RICO claim without prejudice.
In December 1997, the attorney general amended the complaint to include claims
for Medicaid reimbursement, which had been dropped from the original complaint
on instructions of the State's previous governor. Trial is scheduled for
October 1998.
STATE OF KANSAS V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., DISTRICT COURT,
SHAWNEE COUNTY, KANSAS, FILED AUGUST 20, 1996.
KELLEY V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT, INGHAM COUNTY,
MICHIGAN, FILED AUGUST 21, 1996, BY THE ATTORNEY GENERAL OF MICHIGAN. In May
1997, the court granted plaintiff's motion contending that statutory subrogation
is not the exclusive remedy to be pursued by the State (although the court
appeared to hold that statutory and common law subrogation were the only
theories available to the State to recover damages). In addition, the court
dismissed certain of defendants' affirmative defenses under Michigan's consumer
protection statute, dismissed plaintiff's antitrust claim, dismissed, with leave
to amend, plaintiff's claims of breach of special duty and injunctive relief,
and dismissed plaintiff's claims for punitive damages.
STATE OF OKLAHOMA, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., DISTRICT
COURT, CLEVELAND COUNTY, OKLAHOMA, FILED AUGUST 22, 1996. In January 1998, the
court denied motions by the Company and other defendant parent companies to
dismiss plaintiff's complaint based on the court's lack of personal
jurisdiction. Trial is scheduled to begin in November 1998.
PEOPLE OF THE STATE OF CALIFORNIA V. PHILIP MORRIS INCORPORATED, ET AL.,
SUPERIOR COURT, SAN FRANCISCO COUNTY, CALIFORNIA, FILED SEPTEMBER 5, 1996. In
October 1997, the court struck several of defendants' affirmative defenses
including comparative fault, assumption of risk, failure to mitigate, improper
class action, federal preemption (in part), lack of standing, separation of
powers doctrine, lack of authority to retain contingency counsel, improper
accumulation of actions and "antitrust-related defenses." Trial is scheduled
for March 1999.
STATE OF NEW JERSEY V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED SEPTEMBER 10, 1996.
COYNE, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, OHIO, FILED SEPTEMBER 17, 1996. In February 1998, the
court granted defendants' motion to dismiss this
6
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action due to plaintiffs' lack of standing. This case had been filed by private
citizens in Ohio purportedly on behalf of the State of Ohio and all Ohio
taxpayers.
PERRY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, COFFEE
COUNTY, TENNESSEE, FILED SEPTEMBER 30, 1996.
STATE OF UTAH V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, CENTRAL DIVISION, UTAH, FILED SEPTEMBER 30, 1996.
CITY OF NEW YORK, ET AL. V. THE TOBACCO INSTITUTE, ET AL., SUPREME COURT, NEW
YORK COUNTY, NEW YORK, FILED OCTOBER 17, 1996.
PEOPLE OF THE STATE OF ILLINOIS V. PHILIP MORRIS, INC., ET AL., CIRCUIT COURT,
COOK COUNTY, ILLINOIS, FILED NOVEMBER 12, 1996. In November 1997, the court
denied defendants' motions to dismiss the antitrust, negligence and conspiracy
claims and granted defendants' motions to dismiss the special duty, restitution,
nuisance and unjust enrichment claims.
STATE OF IOWA V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., DISTRICT COURT, FIFTH
JUDICIAL DISTRICT, POLK COUNTY, IOWA, FILED NOVEMBER 27, 1996. In August 1997,
the court dismissed plaintiff's claims for deception, breach of assumed duty,
disgorgement of profits, and indemnity. The court also denied defendants' motion
to dismiss plaintiff's claims for violation of the Iowa Consumer Fraud Act,
civil conspiracy, aiding and abetting, nuisance, and injunctive relief.
COUNTY OF ERIE V. THE TOBACCO INSTITUTE, INC., ET AL., SUPREME COURT, ERIE
COUNTY, NEW YORK, FILED JANUARY 14, 1997.
STATE OF NEW YORK V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPREME COURT, NEW
YORK COUNTY, NEW YORK, FILED JANUARY 21, 1997.
STATE OF HAWAII V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., CIRCUIT
COURT, FIRST CIRCUIT, HAWAII, FILED JANUARY 31, 1997.
STATE OF WISCONSIN V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT, DANE
COUNTY, WISCONSIN, FILED FEBRUARY 5, 1997. Trial is scheduled for September
1999.
STATE OF INDIANA V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, MARION
COUNTY, INDIANA, FILED FEBRUARY 19, 1997.
STATE OF ALASKA V. PHILIP MORRIS, INCORPORATED, ET AL., SUPERIOR COURT, FIRST
JUDICIAL DISTRICT, ALASKA, FILED APRIL 14, 1997.
COUNTY OF COOK V. PHILIP MORRIS, INCORPORATED, ET AL., CIRCUIT COURT, COOK
COUNTY, ILLINOIS, FILED APRIL 18, 1997.
WHITE, ET AL. V. PHILIP MORRIS, INC., ET AL., CHANCERY COURT, JEFFERSON COUNTY,
MISSISSIPPI, FILED APRIL 18, 1997.
COMMONWEALTH OF PENNSYLVANIA V. PHILIP MORRIS, INC., ET AL., COURT OF COMMON
PLEAS, PHILADELPHIA COUNTY, PENNSYLVANIA, FILED APRIL 23, 1997.
STATIONARY ENGINEERS LOCAL 39 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED
APRIL 25, 1997.
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STATE OF ARKANSAS V. THE AMERICAN TOBACCO COMPANY, ET AL., CHANCERY COURT, SIXTH
DIVISION, PULASKI COUNTY, ARKANSAS, FILED MAY 5, 1997.
STATE OF MONTANA V. PHILIP MORRIS, INCORPORATED, ET AL., FIRST JUDICIAL COURT,
LEWIS AND CLARK COUNTY, MONTANA, FILED MAY 5, 1997.
STATE OF OHIO V. PHILIP MORRIS, INCORPORATED, ET AL., COURT OF COMMON PLEAS,
FRANKLIN COUNTY, OHIO, FILED MAY 8, 1997.
BECKOM, ET AL., EX. REL. STATE OF TENNESSEE AND TENNESSEE TAXPAYERS V. THE
AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN
DISTRICT, TENNESSEE, FILED MAY 8, 1997.
STATE OF MISSOURI V. AMERICAN TOBACCO COMPANY, INC., ET AL., CIRCUIT COURT, CITY
OF ST. LOUIS, MISSOURI, FILED MAY 12, 1997.
STATE OF SOUTH CAROLINA V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., COURT
OF COMMON PLEAS, RICHLAND COUNTY, SOUTH CAROLINA, FILED MAY 12, 1997.
IRON WORKERS LOCAL UNION NO. 17 INSURANCE FUND, ET AL. V. PHILIP MORRIS, INC.,
ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, OHIO, EASTERN DIVISION,
FILED MAY 20, 1997. Trial is scheduled for February 1999.
NORTHWEST LABORERS-EMPLOYERS HEALTH AND SECURITY TRUST FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT,
WASHINGTON, FILED MAY 21, 1997. In December 1997, the court certified a class
consisting of "all existing jointly-administrating collectively bargained-for
health and welfare trusts in Washington, and/or the trustees of such entities,
that have provided or paid for health care and/or addiction treatment costs or
services for employees or other beneficiaries." In February 1998, the court
denied defendants' motion to certify the court's class certification decision
for appeal. Trial is scheduled for September 1999.
STATE OF NEVADA V. PHILIP MORRIS, INCORPORATED, ET AL., SECOND JUDICIAL
DISTRICT, WASHOE COUNTY, NEVADA, FILED MAY 21, 1997.
UNIVERSITY OF SOUTH ALABAMA V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, ALABAMA, FILED MAY 23, 1997. In August
1997, the court granted the attorney general's motion to dismiss the action on
the ground that the university, as an instrumentality of the State, did not have
authority to bring this action on its own behalf.
STATE OF NEW MEXICO V. THE AMERICAN TOBACCO COMPANY, ET AL., FIRST JUDICIAL
DISTRICT COURT, SANTA FE COUNTY, NEW MEXICO, FILED MAY 27, 1997.
CITY OF BIRMINGHAM, ALABAMA, AND THE GREENE COUNTY RACING COMMISSION V. THE
AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, NORTHERN
DISTRICT, ALABAMA, FILED MAY 28, 1997.
THE LOWER BRULE SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL
COURT, LOWER BRULE SIOUX TRIBE, FILED ON AN UNKNOWN DATE; FIRST AMENDED
COMPLAINT FILED MAY 28, 1997. In October 1997, this case was dismissed without
prejudice by the tribal court on the grounds that plaintiffs failed to effect
proper service of process and otherwise failed to follow tribal court rules. A
new complaint was filed in January 1998.
STATE OF VERMONT V. PHILIP MORRIS, INCORPORATED, ET AL., SUPERIOR COURT,
CHITTENDEN COUNTY, VERMONT, FILED MAY 29, 1997. Trial is scheduled for November
1999.
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UNPINGCO, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, AGANA, GUAM, FILED MAY 29, 1997. In January 1998, plaintiffs
dismissed the complaint, voluntarily and without prejudice, in return for a
tolling agreement.
CENTRAL ILLINOIS CARPENTERS HEALTH & WELFARE TRUST FUND, ET AL. V. PHILIP MORRIS
INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF ILLINOIS, FILED
MAY 30, 1997.
MASSACHUSETTS LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS INC., ET AL.,
UNITED STATES DISTRICT COURT, MASSACHUSETTS, FILED JUNE 2, 1997.
STATE OF NEW HAMPSHIRE V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT,
MERRIMACK COUNTY, NEW HAMPSHIRE, FILED JUNE 4, 1997.
STATE OF COLORADO V. R.J. REYNOLDS TOBACCO CO., ET AL., DISTRICT COURT, CITY AND
COUNTY OF DENVER, COLORADO, FILED JUNE 5, 1997.
STATE OF OREGON V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT,
MULTNOMAH COUNTY, OREGON, FILED JUNE 9, 1997. In February 1998, the court
dismissed the special duty and conspiracy counts, dismissed (with leave to
replead) the public nuisance and unjust enrichment counts, and reserved decision
on the antitrust count. The court also granted defendants' motion dismissing
the damages and restitution remedy for the statutory consumer protection and
RICO counts. Trial is scheduled for April 1999.
THE CROW TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT, CROW
TRIBE, FILED JUNE 10, 1997.
STATE OF IDAHO V. PHILIP MORRIS, INC., ET AL., DISTRICT COURT, FOURTH JUDICIAL
DISTRICT, ADA COUNTY, IDAHO, FILED JUNE 11, 1997.
PEOPLE OF THE STATE OF CALIFORNIA V. PHILIP MORRIS, INC., ET AL., SUPERIOR
COURT, SACRAMENTO COUNTY, CALIFORNIA, FILED JUNE 12, 1997.
HAWAII HEALTH AND WELFARE TRUST FUND FOR OPERATING ENGINEERS V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, HAWAII, FILED JUNE 13, 1997.
STATE OF MAINE V. PHILIP MORRIS, INCORPORATED, ET AL., SUPERIOR COURT, KENNEBEC
COUNTY, MAINE, FILED JUNE 17, 1997.
ROSSELLO, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED
STATES DISTRICT COURT, PUERTO RICO, FILED JUNE 17, 1997.
STATE OF RHODE ISLAND V. AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT,
PROVIDENCE, RHODE ISLAND, FILED JUNE 17, 1997.
LABORERS LOCAL 17 HEALTH AND BENEFIT FUND AND THE TRANSPORT WORKERS UNION NEW
YORK CITY PRIVATE BUS LINES HEALTH BENEFIT TRUST V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE 19, 1997.
THE IOWA LABORERS DISTRICT COUNCIL HEALTH AND WELFARE FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF IOWA,
FILED JUNE 20, 1997. This case was voluntarily dismissed by plaintiffs, without
prejudice, in September 1997.
MUSCOGEE CREEK NATION V. THE AMERICAN TOBACCO COMPANY, ET AL., DISTRICT COURT,
MUSCOGEE CREEK NATION, OKMULGEE DISTRICT, FILED JUNE 20, 1997. In February
1998, defendants' motion to dismiss on jurisdictional grounds was denied by the
court.
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ARK-LA-MISS LABORERS WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED JUNE 20, 1997. In September
1997, this case was consolidated with ASBESTOS WORKERS LOCAL 53 HEALTH & WELFARE
FUND referenced below.
KENTUCKY LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND V. HILL &
KNOWLTON, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT,
KENTUCKY, LOUISVILLE DIVISION, FILED JUNE 20, 1997.
OREGON LABORERS -- EMPLOYERS HEALTH AND WELFARE TRUST FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, OREGON, FILED JUNE 20, 1997.
Trial is scheduled for January 1999.
CHEHALIS TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., CHEHALIS TRIBAL COURT,
CHEHALIS INDIAN RESERVATION, OAKVILLE, WASHINGTON, FILED JUNE 23, 1997. In
October 1997, plaintiffs voluntarily dismissed this case without prejudice.
UNITED FEDERATION OF TEACHERS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE 25,
1997.
CONNECTICUT PIPE TRADES HEALTH FUND AND INTERNATIONAL BROTHERHOOD OF ELECTRICAL
WORKERS LOCAL 90 BENEFIT PLAN V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, CONNECTICUT, FILED JULY 1, 1997.
SEAFARERS WELFARE PLAN AND UNITED INDUSTRIAL WORKERS WELFARE PLAN V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, MARYLAND, SOUTHERN DIVISION,
FILED JULY 2, 1997.
LABORERS AND OPERATING ENGINEERS UTILITY AGREEMENT HEALTH AND WELFARE TRUST FUND
FOR ARIZONA V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT,
ARIZONA, FILED JULY 7, 1997.
WOODS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPERIOR COURT, WAKE
COUNTY, NORTH CAROLINA, FILED JULY 10, 1997. This case was voluntarily
dismissed by plaintiffs, without prejudice, in February 1998.
WEST VIRGINIA LABORERS PENSION FUND V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, WEST VIRGINIA, HUNTINGTON DIVISION,
FILED JULY 11, 1997.
RHODE ISLAND LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, RHODE ISLAND, FILED JULY 20, 1997.
EASTERN STATES HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JULY 28, 1997.
ASBESTOS WORKERS LOCAL 53 HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED
AUGUST 15, 1997. In September 1997, this case was consolidated with the case of
ARK-LA-MISS LABORERS WELFARE FUND referenced above.
STEAMFITTERS LOCAL UNION NO. 420 WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, PENNSYLVANIA, FILED AUGUST
21, 1997.
STATE OF GEORGIA V. PHILIP MORRIS, INC., ET AL., SUPERIOR COURT, FULTON COUNTY,
GEORGIA, FILED AUGUST 29, 1997.
CONSTRUCTION LABORERS OF GREATER ST. LOUIS WELFARE FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MISSOURI,
FILED SEPTEMBER 2, 1997.
ARKANSAS CARPENTERS HEALTH & WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, EASTERN DISTRICT, ARKANSAS, FILED SEPTEMBER 4, 1997.
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SOUTHEAST FLORIDA LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND V.
PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
FLORIDA, FILED SEPTEMBER 11, 1997.
WEST VIRGINIA--OHIO VALLEY AREA INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS
WELFARE FUND V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, WEST VIRGINIA, FILED SEPTEMBER 11, 1997.
TEAMSTERS UNION NO. 142, HEALTH AND WELFARE TRUST FUND AND SHEET METAL WORKERS
LOCAL UNION NO. 20 WELFARE AND BENEFIT FUND V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, INDIANA, FILED SEPTEMBER
12, 1997.
CROW CREEK SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT,
CROW CREEK SIOUX TRIBE, FILED SEPTEMBER 14, 1997.
OPERATING ENGINEERS LOCAL 12 HEALTH AND WELFARE TRUST V. AMERICAN TOBACCO
COMPANY, ET AL., UNITED STATES DISTRICT COURT, CENTRAL DISTRICT, CALIFORNIA,
FILED SEPTEMBER 16, 1997.
PUERTO RICAN ILGWU HEALTH & WELFARE FUND V. PHILIP MORRIS INC., ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED SEPTEMBER 17, 1997.
NEW JERSEY CARPENTERS HEALTH FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, NEW JERSEY, FILED SEPTEMBER 25, 1997.
ASBESTOS WORKERS LOCAL NO. 25 WELFARE FUND AND ITS TRUSTEES, ET AL. V. PHILIP
MORRIS, INC., ET AL., CIRCUIT COURT, WAYNE COUNTY, MICHIGAN, FILED OCTOBER 2,
1997. This case was dismissed without prejudice by the court for want of
prosecution (I.E., plaintiffs' failure to timely serve the summons and
complaint) in January 1998.
NEW MEXICO AND WEST TEXAS MULTI-CRAFT HEALTH AND WELFARE TRUST FUND, ET AL. V.
PHILIP MORRIS, INC., ET AL., SECOND JUDICIAL DISTRICT COURT, BERNALILLO COUNTY,
NEW MEXICO, FILED OCTOBER 10, 1997.
GOODPASTURE, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, KANSAS, FILED OCTOBER 15, 1997. This case was voluntarily
dismissed by plaintiffs, without prejudice, in February 1998.
MOORE, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT,
KANSAS, FILED OCTOBER 15, 1997. This case was voluntarily dismissed by
plaintiffs, without prejudice, in February 1998.
REPUBLIC OF THE MARSHALL ISLANDS V. THE AMERICAN TOBACCO COMPANY, ET AL., HIGH
COURT, REPUBLIC OF THE MARSHALL ISLANDS, FILED OCTOBER 20, 1997. This case,
originally filed in June 1997, was voluntarily dismissed by plaintiffs, without
prejudice, in July 1997. A new health care cost recovery action was filed
thereafter. Plaintiff's motion for default judgment was denied in January 1998.
CENTRAL STATES JOINT BOARD V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER 20, 1997.
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, LOCAL 734 V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER
20, 1997.
TEXAS CARPENTERS HEALTH BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TEXAS, BEAUMONT DIVISION, FILED
OCTOBER 31, 1997.
UNITED FOOD AND COMMERCIAL WORKERS UNIONS AND EMPLOYERS HEALTH AND WELFARE FUND,
ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN
DISTRICT, ALABAMA, FILED NOVEMBER 13, 1997. In December 1997, the court entered
an EX PARTE order granting conditional certification for a class of all United
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Food and Commercial Workers Union Health and Welfare Funds in the United States,
noting that the order was conditional for the purpose of protecting the court's
jurisdiction and that plaintiffs would have to bear the burden of proof on all
elements of class certification as the case proceeds.
B.A.C. LOCAL 32 INSURANCE TRUST FUND, ET AL. V. PHILIP MORRIS, INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MICHIGAN, FILED NOVEMBER
14, 1997.
SCREEN ACTORS GUILD-PRODUCERS HEALTH PLAN, ET AL. V. PHILIP MORRIS, INC., ET
AL., SUPERIOR COURT, LOS ANGELES COUNTY, CALIFORNIA, FILED NOVEMBER 20, 1997.
IBEW LOCAL 25 HEALTH AND BENEFIT FUND V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED NOVEMBER 25, 1997.
IBEW LOCAL 363 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED NOVEMBER 25, 1997.
LOCAL 138, 138A AND 138B INTERNATIONAL UNION OF OPERATING ENGINEERS WELFARE FUND
V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
NEW YORK, FILED NOVEMBER 25, 1997.
LOCAL 840, INTERNATIONAL BROTHERHOOD OF TEAMSTERS HEALTH AND INSURANCE FUND V.
PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
NEW YORK, FILED NOVEMBER 25, 1997.
LONG ISLAND COUNCIL OF REGIONAL CARPENTERS WELFARE FUND V. PHILIP MORRIS, INC.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED NOVEMBER 25,
1997.
DAY CARE COUNCIL - LOCAL 205 D.C. 1707 WELFARE FUND V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED DECEMBER
8, 1997.
LOCAL 1199 HOME CARE INDUSTRY BENEFIT FUND V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED DECEMBER 8,
1997.
LOCAL 1199 NATIONAL BENEFIT FUND FOR HEALTH AND HUMAN SERVICES EMPLOYEES V.
PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
NEW YORK, FILED DECEMBER 8, 1997.
MASON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, TEXAS, FILED DECEMBER 23, 1997.
OPERATING ENGINEERS LOCAL 324 HEALTH CARE FUND, ET AL. V. PHILIP MORRIS, INC.,
ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MICHIGAN, FILED DECEMBER
30, 1997.
CARPENTERS & JOINERS WELFARE FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL.,
UNITED STATES DISTRICT COURT, MINNESOTA, FILED DECEMBER 31, 1997.
STEAMFITTERS LOCAL UNION NO. 614 HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS,
INC., ET AL., CIRCUIT COURT, THIRTEENTH JUDICIAL DISTRICT, TENNESSEE, FILED
JANUARY 7, 1998.
WOODS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, MIDDLE DISTRICT, NORTH CAROLINA, FILED FEBRUARY 13, 1998.
STATE OF SOUTH DAKOTA, ET AL. V. PHILIP MORRIS, INC., ET AL., CIRCUIT COURT,
HUGHES COUNTY, SOUTH DAKOTA, FILED FEBRUARY 19, 1998.
BELK, ET AL. V. PHILIP MORRIS, INC., ET AL., CIRCUIT COURT OF MOBILE COUNTY,
ALABAMA, FILED FEBRUARY 20, 1998.
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In addition to the foregoing actions, other foreign, state and local government
entities and others, including unions, have announced they are considering
filing health care cost recovery actions.
CERTAIN OTHER ACTIONS
The following lists certain other actions pending against the Company and/or
various subsidiaries and others as of February 27, 1998. These cases are
described in Note 15 to the Company's consolidated financial statements; the
following describes certain developments in these cases since January 1, 1997.
LAWRENCE, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT OF NEW YORK, FILED MARCH 31, 1994.
KURZWEIL, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FILED APRIL 4, 1994. In April
1997, the district court granted a motion filed by plaintiffs to vacate the
court's earlier dismissal of this action and for leave to amend their complaint.
Defendants' appeal of this ruling was dismissed by the Court of Appeals in
August 1997, for lack of appellate jurisdiction.
SACKS, ET AL. V. PHILIP MORRIS INC., UNITED STATES DISTRICT COURT, DISTRICT OF
MARYLAND, FILED JUNE 21, 1995.
STUART, ET AL. V. KRAFT FOODS, INC., ET AL., UNITED STATES DISTRICT COURT,
EASTERN DISTRICT OF WISCONSIN, FILED APRIL 4, 1996. This case was voluntarily
dismissed in September 1997 without prejudice.
SHEEKS, ET AL. V. KRAFT FOODS, INC., ET AL., UNITED STATES DISTRICT COURT,
EASTERN DISTRICT OF WISCONSIN, FILED SEPTEMBER 24, 1996. This case was
voluntarily dismissed in May 1997 without prejudice.
SERVAIS, ET AL. V. KRAFT FOODS, INC. AND THE NATIONAL CHEESE EXCHANGE, INC.,
CIRCUIT COURT OF DANE COUNTY, WISCONSIN, FILED MAY 5, 1997. This case has been
consolidated with the DODSON and NOLL cases referenced herein.
DODSON, ET AL. V. KRAFT FOODS, INC., ET AL., CIRCUIT COURT OF DANE COUNTY,
WISCONSIN, FILED JULY 1, 1997. This case has been consolidated with the SERVAIS
and NOLL cases referenced herein.
NOLL, ET AL. V. KRAFT FOODS, INC., ET AL., CIRCUIT COURT OF DANE COUNTY,
WISCONSIN, FILED JULY 11, 1997. This case has been consolidated with the DODSON
and SERVAIS cases referenced herein.
RAYMARK INDUSTRIES, INC. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL.,
UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED SEPTEMBER 15,
1997.
RAYMARK INDUSTRIES, INC. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, FLORIDA, FILED SEPTEMBER 15, 1997.
MOSLEY, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT OF ALABAMA, FILED SEPTEMBER 24, 1997.
VINCENT, ET AL. V. KRAFT FOODS, INC., CIRCUIT COURT OF COOK COUNTY, ILLINOIS,
FILED OCTOBER 27, 1997.
FIBREBOARD CORPORATION AND OWENS CORNING V. THE AMERICAN TOBACCO COMPANY, ET
AL., SUPERIOR COURT, ALAMEDA COUNTY, CALIFORNIA, FILED NOVEMBER 6, 1997.
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KEENE CREDITORS TRUST V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., SUPREME
COURT, NEW YORK COUNTY, NEW YORK, FILED DECEMBER 19, 1997.
ROBERT A. FALISE, ET AL., TRUSTEES OF THE MANVILLE PERSONAL INJURY SETTLEMENT
TRUST V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT, NEW YORK, FILED DECEMBER 31, 1997.
H.K. PORTER COMPANY, INC. V. B.A.T. INDUSTRIES, PLC, ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED DECEMBER 31, 1997.
14
