<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Philip Morris Companies Inc.
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(Name of Registrant as Specified In Its Charter)
Philip Morris Companies Inc.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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[LOGO OF PHILIP MORRIS]
GEOFFREY C. BIBLE 120 PARK AVENUE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER NEW YORK, NY 10017
March 10, 2000
DEAR FELLOW STOCKHOLDER:
You are cordially invited to attend the 2000 Annual Meeting of Stockholders of
Philip Morris Companies Inc. The meeting will be held at 9:00 a.m. on
Thursday, April 27, 2000, at the Philip Morris Manufacturing Center, 3601
Commerce Road, Richmond, Virginia.
At the meeting, we will elect 13 directors and act upon two compensation plans
and the selection of independent accountants. We will also vote on six
stockholder proposals, if presented. There will also be a report on the
Company's business, and stockholders will have an opportunity to ask
questions.
We anticipate that a large number of stockholders will attend the meeting. As
seating is limited, we suggest you arrive by 8:30 a.m., when the auditorium
will be opened. If the auditorium is filled, there will be additional seating
outside the auditorium from which the proceedings may be viewed. Those needing
special assistance at the meeting are requested to write the Corporate
Secretary at 120 Park Avenue, New York, New York 10017. For your comfort, and
because of overcrowding, we ask that you not bring any packages, briefcases,
large pocketbooks or bags into the meeting. Also, cellular and digital phones,
audio tape recorders, and video and still cameras will not be permitted into
the meeting. If you are a registered stockholder and plan to attend the
meeting, please detach and retain the admission ticket that is attached to the
proxy card. If your shares are held in the name of a broker or other nominee
and you do not have an admission ticket, please bring proof of your share
ownership to the meeting.
The vote of each stockholder is important. You can vote by signing, dating and
returning the enclosed proxy card. Also, registered and most beneficial
stockholders may vote by telephone or over the Internet. Instructions for
using these convenient services are set forth on the enclosed proxy. I urge
you to vote your proxy as soon as possible. In this way, you can be sure your
shares will be voted at the meeting, and you will spare your Company the
expense of a follow-up mailing.
Sincerely,
/s/ Geoffrey C. Bible
For further information about the Annual Meeting,
Please call 1-800-367-5415
<PAGE>
PHILIP MORRIS COMPANIES INC.
120 Park Avenue
New York, New York 10017
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held Thursday, April 27, 2000
To the Stockholders of
PHILIP MORRIS COMPANIES INC.:
The Annual Meeting of Stockholders of Philip Morris Companies Inc. will be
held on Thursday, April 27, 2000, at the Philip Morris Manufacturing Center,
3601 Commerce Road, Richmond, Virginia, at 9:00 a.m.
The purpose of the meeting is to:
(1) Elect 13 directors;
(2) Ratify the selection of independent accountants for the fiscal year
ending December 31, 2000;
(3) Act upon the proposed 2000 Performance Incentive Plan;
(4) Act upon the proposed 2000 Stock Compensation Plan for Non-Employee
Directors;
(5) Vote on six stockholder proposals if presented by their proponents; and
(6) Transact such other business as may properly come before the meeting.
Only holders of record of Common Stock at the close of business on March 6,
2000, will be entitled to vote at the meeting.
G. Penn Holsenbeck
Vice President and Secretary
March 10, 2000
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Proxies and Voting Information............................................ 1
Solicitation of Proxies................................................. 1
Voting at the Meeting................................................... 1
Election of Directors..................................................... 2
General Information..................................................... 2
Committees of the Board................................................. 2
The Nominees............................................................ 3
Compensation of Directors............................................... 6
Certain Relationships................................................... 7
Executive Compensation.................................................... 8
Comparison of Five-Year Cumulative Total Return......................... 8
Compensation Committee Report on Executive Compensation................. 9
Summary Compensation Table.............................................. 13
1999 Option Grants...................................................... 14
1999 Option Exercises and Year-End Values............................... 15
Pension Plan Table--Philip Morris Retirement Plan....................... 16
Pension Plan Table--Kraft Foods Retirement Plan......................... 17
Employment Contracts, Termination of Employment and Change of Control
Arrangements........................................................... 18
Ownership of Equity Securities............................................ 19
Selection of Independent Accountants...................................... 20
2000 Performance Incentive Plan........................................... 21
Introduction............................................................ 21
Summary................................................................. 21
Federal Income Tax Consequences......................................... 23
Other Information....................................................... 24
2000 Stock Compensation Plan For Non-Employee Directors................... 25
Introduction............................................................ 25
Summary................................................................. 25
Federal Income Tax Consequences......................................... 26
Other Information....................................................... 26
Stockholder Proposals..................................................... 27
Other Matters............................................................. 37
2001 Annual Meeting....................................................... 37
Exhibit A--2000 Performance Incentive Plan................................ A-1
Exhibit B--2000 Stock Compensation Plan for Non-Employee Directors........ B-1
</TABLE>
<PAGE>
PROXIES AND VOTING INFORMATION
Solicitation of Proxies
This proxy statement is furnished by the Board of Directors (the "Board") of
Philip Morris Companies Inc., 120 Park Avenue, New York, New York 10017, in
connection with its solicitation of proxies for use at the Annual Meeting of
Stockholders to be held on Thursday, April 27, 2000, at 9:00 a.m., at the
Philip Morris Manufacturing Center, 3601 Commerce Road, Richmond, Virginia,
and at any and all adjournments thereof. Mailing of the proxy statement will
commence on or about March 10, 2000. Holders of record of the Company's Common
Stock (the "Common Stock") at the close of business on March 6, 2000, will be
entitled to one vote for each share held on all matters to come before the
meeting. On February 28, 2000, there were outstanding 2,313,425,646 shares of
Common Stock.
Stockholders are urged to sign and date the enclosed proxy and return it as
promptly as possible in the envelope enclosed for that purpose. Registered
stockholders can also deliver proxies by calling a toll-free telephone number
or by using the Internet. The telephone and Internet voting procedures are
designed to authenticate stockholders' identities, to allow stockholders to
give their voting instructions and to confirm that stockholders' instructions
have been recorded properly. Instructions for voting by telephone or over the
Internet are set forth on the enclosed proxy card. Most stockholders whose
shares are held by a broker or other nominee are also afforded the opportunity
to vote by telephone or over the Internet. Instructions are set forth on the
enclosed proxy.
A proxy may be revoked at any time before it has been voted at the meeting by
submitting a later dated proxy (including a proxy by telephone or over the
Internet) or by giving written notice to the Secretary of the Company. Unless
the proxy is revoked or there is a direction to abstain on one or more
proposals, it will be voted on each proposal and, if a choice is made with
respect to any matter to be acted upon, in accordance with such choice. If no
choice is specified, the proxy will be voted as recommended by the Board. The
proxy will also serve to instruct the administrator of the Company's dividend
reinvestment and voluntary cash payment plan and the trustee of each defined
contribution plan sponsored by the Company how to vote the plan shares of a
participating stockholder or employee. The trustee of each defined
contribution plan will vote the plan shares for which proxies are not received
in the same proportion as the shares for which proxies are received.
Voting at the Meeting
A majority of the votes entitled to be cast on matters to be considered at the
meeting constitutes a quorum. If a share is represented for any purpose at the
meeting, it is deemed to be present for all other matters. Abstentions and
shares held of record by a broker or its nominee ("Broker Shares") that are
voted on any matter are included in determining the number of votes present.
Broker Shares that are not voted on any matter at the meeting will not be
included in determining whether a quorum is present.
The election of each nominee for director requires a plurality of the votes
cast. In order to be approved, the votes cast for the two compensation plans,
the selection of independent accountants and for each stockholder proposal
must exceed the votes cast against such matters. Abstentions and Broker Shares
that are not voted on the matter will not be included in determining the
number of votes cast.
Stockholders' proxies are received by the Company's independent proxy
processing agent, and the vote is certified by independent inspectors of
election. Proxies and ballots that identify the vote of individual
stockholders will be kept confidential, except as necessary to meet legal
requirements, in cases where stockholders write comments on their proxy cards
or in a contested proxy solicitation. During the proxy solicitation period,
the Company will receive vote tallies from time to time from the inspectors,
but such tallies will provide aggregate figures rather than names of
stockholders. The independent inspectors will notify the Company if a
stockholder has failed to vote so that he or she may be reminded and requested
to do so.
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As used herein, the term "Company" or "Philip Morris" includes Philip Morris
Companies Inc. from July 1, 1985, and Philip Morris Incorporated prior to July
1, 1985, and, where appropriate, their subsidiaries.
1
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ELECTION OF DIRECTORS
General Information
The Board has responsibility for establishing broad corporate policies and for
the overall performance of the Company, although it is not involved in day-to-
day operations. Members of the Board are kept informed of the Company's
businesses by various reports and documents sent to them, as well as by
operating and financial reports made at Board and committee meetings by the
chairman of the board and other officers. In addition, the Board holds an
annual two- or three-day meeting to review the Company's Five-Year Plan.
Regular meetings of the Board are held each month, except February, May, July
and October, and special meetings are held when necessary. The organizational
meeting follows immediately after the Annual Meeting of Stockholders. The
Board held nine meetings in 1999.
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Committees of the Board
Various committees of the Board have been established to assist it in the
discharge of its responsibilities. Those committees are described below.
The Audit Committee, which consists entirely of non-employee directors, meets
with management, the Company's independent accountants and its internal
auditors to consider the adequacy of the Company's internal controls and other
financial reporting matters. The Audit Committee recommends to the Board the
engagement of the Company's independent accountants, discusses with the
independent accountants their audit procedures, including the proposed scope
of the audit, the audit results and the related management letters and, in
connection with determining their independence, reviews the services performed
by the independent accountants. This committee also monitors compliance with
the Company's Business Conduct Policy. The Audit Committee met four times in
1999. The members of the committee in 1999 were: Robert E. R. Huntley (chair);
Elizabeth E. Bailey; William H. Donaldson; Lucio A. Noto; Richard D. Parsons;
John S. Reed; and Stephen M. Wolf.
The Committee on Public Affairs and Social Responsibility reviews and monitors
the Company's policies, practices and programs with respect to public issues
of importance to stockholders, the Company and the general public, to the
extent those matters are not the responsibility of other committees of the
Board. This committee met four times in 1999. The members of the committee in
1999 were: Jane Evans (chair); Elizabeth E. Bailey; Murray H. Bring; Harold
Brown; J. Dudley Fishburn; Robert E. R. Huntley; Billie Jean King; John D.
Nichols; Richard D. Parsons; and Stephen M. Wolf.
The Compensation Committee, which consists entirely of non-employee directors,
is responsible for administering the Company's compensation programs and
remuneration arrangements for its highest-paid executives, including the chief
executive officer, and for reviewing the succession plans for the chief
executive officer and other senior executives. The committee's Report on
Executive Compensation appears elsewhere in this proxy statement. This
committee met four times in 1999. The members of the committee in 1999 were:
John S. Reed (chair); Harold Brown; Robert E. R. Huntley; Richard D. Parsons;
and Stephen M. Wolf.
The Corporate Employee Plans Investment Committee oversees the investment of
certain employee benefit plan assets. This committee met three times in 1999.
The members of the committee in 1999 were: William H. Donaldson (chair);
Harold Brown; Jane Evans; John D. Nichols; John S. Reed; Carlos Slim Helu; and
Louis C. Camilleri, the Company's chief financial officer.
The Executive Committee has authority to act for the Board on most matters
during intervals between Board meetings. The members of the committee in 1999
were: Geoffrey C. Bible (chair); Elizabeth E. Bailey; William H. Donaldson;
Rupert Murdoch; Richard D. Parsons; and John S. Reed. This committee did not
meet in 1999.
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The Finance Committee monitors the financial condition of the Company and
advises the Board with respect to financing needs, dividend policy, share
repurchase programs and other financial matters. This committee met four times
in 1999. The members of the committee in 1999 were: Geoffrey C. Bible (chair);
Harold Brown; William H. Donaldson; J. Dudley Fishburn; Robert E. R. Huntley;
John D. Nichols; Lucio A. Noto; John S. Reed; Carlos Slim Helu; and
Louis C. Camilleri, the Company's chief financial officer.
The Nominating and Corporate Governance Committee, which consists entirely of
non-employee directors, reviews the qualifications of candidates for director
suggested by Board members, management, stockholders and others, considers the
performance of incumbent directors in determining whether to nominate them for
reelection and recommends to the Board a slate of nominees for election as
directors. It advises the Board on all matters concerning corporate
governance, to the extent these matters are not the responsibility of other
committees, assesses the Board's performance, and makes recommendations to the
Board on retirement policies for non-employee directors, the functions and
duties of the committees of the Board, general Board practices and the
Company's relations with its stockholders. This committee met three times in
1999. The members of the committee in 1999 were: Harold Brown (chair);
Elizabeth E. Bailey; William H. Donaldson; Jane Evans; John D. Nichols;
Richard D. Parsons; John S. Reed; and Stephen M. Wolf.
----------------
The Nominees
It is proposed that 13 directors, 12 of whom are non-employee directors, be
elected to hold office until the next Annual Meeting of Stockholders and until
their successors have been elected. The Nominating and Corporate Governance
Committee has recommended to the Board and the Board has approved the persons
named below as management's nominees and, unless otherwise marked, a proxy
will be voted for such persons. Each of the nominees currently serves as a
director and was elected by the stockholders at the 1999 Annual Meeting,
except for Billie Jean King, who was elected to the Board in August 1999. All
nominees who served during 1999 attended at least 75% of the aggregate number
of meetings of the Board and all committees of the Board on which they served.
Although management does not anticipate that any of the persons named below
will be unable or unwilling to stand for election, a proxy, in the event of
such an occurrence, may be voted for a substitute designated by the Board.
However, in lieu of designating a substitute, the Board may amend the By-Laws
to reduce the number of directors.
Elizabeth E. Dr. Bailey assumed her present position in
Bailey July 1991, having served from July 1990 to
June 1991 as a professor of industrial
administration at Carnegie-Mellon
[PHOTO OF University and as a visiting scholar at the
ELIZABETH E. BAILEY] Yale School of Organization and Management.
From 1983 to 1990, she was dean of the
John C. Hower Graduate School of Industrial
Professor of Administration of Carnegie-Mellon
Public Policy & University. Dr. Bailey serves as a director
Management, The of the College Retirement Equities Fund and
Wharton School of CSX Corporation, and as a trustee of The
the University of Brookings Institution, the National Bureau
Pennsylvania, of Economic Research and Bancroft
Philadelphia, PA NeuroHealth. She is a member of the Audit,
Executive, Nominating and Corporate
Director since Governance, and Public Affairs and Social
1989 Responsibility Committees.
Age: 61
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Geoffrey C. Bible Employed by the Company continuously since
1976, Mr. Bible served Philip Morris
[PHOTO OF International Inc. in various executive
GEOFFREY C. BIBLE] capacities from 1976 to 1990, becoming its
President and Chief Executive Officer in
1987. He served as President and Chief
Chairman of the Administrative Officer of Kraft Foods,
Board and Chief Inc., from 1990 to 1991, Executive Vice
Executive Officer President, International, of the Company
from 1991 to April 1993 and Executive Vice
Director since President, Worldwide Tobacco, from April
1994 1993 to June 1994, when he became President
and Chief Executive Officer. He assumed his
Age: 62 present position in February 1995. He is a
director of The News Corporation Limited,
the New York Stock Exchange, Inc., Lincoln
Center for the Performing Arts, Inc., and
the International Tennis Hall of Fame. Mr.
Bible is chair of the Executive and Finance
Committees.
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3
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Harold Brown Dr. Brown has been a partner of Warburg
Pincus & Co. since 1990. Dr. Brown assumed
[PHOTO OF his present position at the Center for
HAROLD BROWN] Strategic and International Studies in July
1992. Previously and from 1984, he was
chairman of the Foreign Policy Institute of
Partner, Warburg the School of Advanced International
Pincus & Co., New Studies, The Johns Hopkins University.
York, NY, venture Dr. Brown is a director of Cummins Engine
capital firm; Company, Inc., Evergreen Holdings, Inc.,
Counselor, Center Mattel, Inc.; and a trustee of the Rand
for Strategic and Corporation, the Trilateral Commission and
International the California Institute of Technology. Dr.
Studies, Brown is chair of the Nominating and
Washington, DC Corporate Governance Committee and a member
of the Compensation, Corporate Employee
Director since Plans Investment, Finance, and Public
1983 Affairs and Social Responsibility
Committees.
Age: 72
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Jane Evans Employed by SmartTV since April 1995, Ms.
Evans assumed her present position in
January 1997. From 1991 to 1995 she served
[PHOTO OF as vice president and general manager, Home
JANE EVANS] & Personal Services Division of U.S. West
Communications, Inc. Previously and from
1989, she was president and chief executive
President and officer of the InterPacific Retail Group.
Chief Executive Ms. Evans serves as a director of Georgia-
Officer, SmartTV, Pacific Corporation, Kaufman and Broad Home
Burbank, CA, Corporation, Main St. and Main, and Pets
portable Mart, Inc. She also serves on the Board of
interactivity and Trustees of Vanderbilt University. She is
electronic chair of the Committee on Public Affairs and
commerce Social Responsibility and a member of the
Corporate Employee Plans Investment and
Director since Nominating and Corporate Governance
1981 Committees.
Age: 55
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J. Dudley Mr. Fishburn was a Conservative Member of
Fishburn Parliament from 1988 to 1997 and also served
as a Parliamentary private secretary in the
[PHOTO OF administrations of Prime Ministers Margaret
J. DUDLEY FISHBURN] Thatcher and John Major. Prior to entering
Parliament, Mr. Fishburn was executive
editor of The Economist for nine years. Mr.
Director of Fishburn serves as a director of Cordiant
Household Group Communication plc, Henderson Smaller
International Companies Investment Trust plc (UK), Murray
Corporation and Emerging Economies Trust plc (UK), and a
Chairman of its fund, backed by the World Bank, that makes
British investments in Russia. He is chairman of the
subsidiary, HFC trustees of the Open University in the
Bank; Treasurer United Kingdom, and a trustee of the Prison
of Britain's Reform Trust and the Liver Research Trust.
largest charity, Mr. Fishburn is a member of the Finance and
the National Public Affairs and Social Responsibility
Trust; and Committees.
Associate Editor
of The Economist,
United Kingdom
Director since
February 1999
Age: 53
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Robert E. R.
Huntley Mr. Huntley retired as counsel to the law
firm of Hunton & Williams in December 1995,
a position he had held since December 1988.
[PHOTO OF Previously, Mr. Huntley had served as
ROBERT E. R. HUNTLEY] chairman, president and chief executive
officer of Best Products Co., Inc.,
professor of law at Washington and Lee
Retired lawyer, School of Law and president of Washington
educator and and Lee University. He is chair of the Audit
businessman Committee and a member of the Compensation,
Finance, and Public Affairs and Social
Director since Responsibility Committees.
1976
Age: 70
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4
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Billie Jean King Ms. King is an international tennis
champion with a record 20 Wimbledon titles.
She founded the Women's Tennis Association
[PHOTO OF in 1973. In 1974, she founded the Women's
Billie Jean King] Sports Foundation and Women's Sports
magazine. She is the co-founder and current
director of WORLD TEAMTENNIS. She is on the
Director and board of directors for the Elton John AIDS
Official Foundation, Women's Sports Legends and
Spokesperson for LevelEdge.com. She is on the advisory board
WORLD TEAMTENNIS of Voxxy and is a spokesperson for
Pupulesports.com. She is a member of the
International Tennis Hall of Fame and the
Director since National Women's Hall of Fame. She is a
August 1999 member of the Public Affairs and Social
Responsibility Committee.
Age: 56
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Rupert Murdoch Mr. Murdoch became head of News Limited of
Australia in 1954 and in 1959 assumed the
[PHOTO OF position of chief executive of the
ROBERT MURDOCH] subsequently formed parent company, The
News Corporation Limited, the interests of
which include Fox Entertainment Group,
Chairman and Inc., Twentieth Century Fox Film
Chief Executive Corporation and Fox Broadcasting Company in
of The News the United States and The Times and Sunday
Corporation Times in the United Kingdom. He is a
Limited, New director of Fox Entertainment Group, Inc.
York, NY, and British Sky Broadcasting Group plc. Mr.
publishing, Murdoch is a member of the Executive
motion pictures Committee.
and television
Director since
1989
Age: 68
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John D. Nichols Mr. Nichols retired as chairman of Illinois
Tool Works Inc. in May 1996, a position he
[PHOTO OF had held since 1986. He had been chief
JOHN P. NICHOLS] executive officer from 1982 to September
1995. He serves as a director of Grand
Retired; formerly Eagle Companies Inc., Household
Chairman, International Corporation, Rockwell
Illinois Tool International Corporation, and Junior
Works Inc., Achievement of Chicago, as a trustee of the
Glenview, IL, Art Institute of Chicago, the Chicago
engineered Community Trust, the Lyric Opera of
components and Chicago, the Museum of Science and
industrial Industry, the Chicago Symphony Orchestra,
systems and and as a member of the Board of Overseers
consumables for Harvard University. He is a member of
the Corporate Employee Plans Investment,
Finance, Nominating and Corporate
Governance, and Public Affairs and Social
Responsibility Committees.
Director since
1992
Age: 69
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Lucio A. Noto Mr. Noto became vice chairman of Exxon
Mobil Corporation effective with the merger
[PHOTO of the Exxon and Mobil companies on
LUCIO A. NOTO] November 30, 1999. Before the merger, Mr.
Noto was chairman of the board and chief
executive officer of Mobil Corporation and
Vice Chairman of chairman of its executive committee. Mr.
Exxon Mobil Noto has been employed by Mobil
Corporation, continuously since 1962. Mr. Noto is a
Irving, TX, oil, director of International Business Machines
gas and Corporation and the American Petroleum
petrochemicals Institute. He is U.S. chair of The Council
for the United States and Italy and The
Singapore-United States Council and is a
member of the Urban Institute. He is a
Director since member of the Audit and Finance Committees.
1998
Age: 61
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5
<PAGE>
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John S. Reed Mr. Reed assumed his position with
Citigroup, Inc. in October 1998. He has
also been the Chairman of Citicorp and
[PHOTO OF Citibank, N.A. since 1984. Mr. Reed has
JOHN REED] announced that he will retire from his
positions with Citigroup on April 18, 2000.
Mr. Reed serves as a director of Monsanto
Chairman and Co- Company and Telefonica Internacional. He is
CEO, Citigroup, also a member of the Corporation of the
Inc., New York, Massachusetts Institute of Technology and a
NY trustee of the Memorial Sloan-Kettering
Cancer Center and the Center for Advanced
Director since Studies in Behavioral Sciences. He is chair
1975 of the Compensation Committee and a member
of the Audit, Corporate Employee Plans
Age: 61 Investment, Executive, Finance, and
Nominating and Corporate Governance
Committees.
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Carlos Slim Helu Mr. Slim assumed his present position with
Grupo Carso, S.A. de C.V. in October 1998.
Previously and from January 1991, he was
[PHOTO OF Chairman of the Board of Grupo Carso, S.A.
CARLOS SLIM HELU] de C.V. He also serves as a director of SBC
Communications Inc. He is a member of the
Finance Committee and the Corporate
Chairman Emeritus Employee Plans Investment Committee.
of Grupo Carso,
S.A. de C.V.;
Chairman of the
Board, Telefonos
de Mexico, S.A.
de C.V., Mexico
Director since
1997
Age: 60
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Stephen M. Wolf Mr. Wolf assumed his present position in
January 1996. He served as chief executive
officer of US Airways Group from January
[PHOTO OF 1996 until November 1998 and he served as
STEPHEN M. WOLF] chief executive officer of US Airways, Inc.
from January 1996 until May 1998.
Previously and from August 1994, he was
Chairman of US senior advisor in the investment banking
Airways Group, firm of Lazard Freres & Co. LLC. Previously
Inc. and US and from 1987, he was chairman and chief
Airways, Inc., executive officer of UAL Corporation and
Arlington, VA United Air Lines, Inc. He serves as a
director of R.R. Donnelley & Sons Company
Director since and as a trustee of Georgetown University
1993 and The Brookings Institution. He is a
member of the Audit, Compensation,
Age: 58 Nominating and Corporate Governance, and
Public Affairs and Social Responsibility
Committees.
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Compensation of Directors
Directors who are full-time employees of the Company receive no additional
compensation for services as a director. With respect to non-employee
directors, the Company's philosophy is to provide competitive compensation and
benefits necessary to attract and retain high quality non-employee directors,
to target director compensation at a level that is consistent with the
Company's compensation objectives that are applicable to executive officers,
and to encourage ownership of Company stock to further align their interests
with those of shareholders.
During 1999, non-employee directors received an annual retainer of $40,000 and
fees of $1,500 for each Board meeting attended, $1,000 ($2,500 for the chair)
for each meeting attended of the Audit, Compensation, Corporate Employee Plans
Investment, Executive, Finance, Nominating and Corporate Governance, and
Public Affairs and Social Responsibility Committees, and $500 ($1,000 for the
chair) for each other committee meeting attended. The chairs of the Audit and
Compensation Committees received $10,000 annual retainers for additional
services rendered in connection with committee chair responsibilities, while
the other Board committee chairs received annual retainers of $5,000.
Each non-employee director presently receives an annual share distribution
equal to the lesser of (i) 1,200 shares of Common Stock, or (ii) that number
of shares of Common Stock having an
6
<PAGE>
aggregate fair market value equal to the annual retainer paid during the
preceding 12 months. On May 1, 1999, each eligible director received 1,119
shares of Common Stock. If approved by the stockholders, this annual share
distribution will be replaced by the 2000 Stock Compensation Plan for Non-
Employee Directors. This new plan provides for the annual award to each non-
employee director of (i) shares of Common Stock having a fair market value of
$40,000 and (ii) options to purchase Common Stock having a Black-Scholes value
of $40,000. See pages 25-27 for a description of the new plan.
A non-employee director may elect to defer meeting fees and all or part of the
annual retainer. Deferred amounts are "credited" to an unfunded account and
may be "invested" in seven "investment choices," including a Common Stock
equivalent account. These "investment choices" parallel the investment options
offered to employees under the Philip Morris Deferred Profit-Sharing Plan and
determine the "earnings" that are credited for bookkeeping purposes to a
director's account. Subject to certain restrictions, a director is permitted
to take cash distributions, in whole or in part, from his or her account
either prior to or following termination of service.
Certain Relationships
A subsidiary of Philip Morris International Inc. participates in a Mexican
cigarette joint venture with a subsidiary of Grupo Carso, S.A. de C.V. Mr.
Slim is Chairman Emeritus of Grupo Carso.
7
<PAGE>
EXECUTIVE COMPENSATION
Comparison of Five-Year Cumulative Total Return
The following graph compares the cumulative total stockholder return on Philip
Morris Common Stock for the last five years with the cumulative total return
for the same period of the S&P 500 Index and the peer group index /(1)/. The
graph assumes the investment of $100 in Philip Morris Common Stock and each of
the indices on December 31, 1994, and reinvestment of all dividends.
The Company's executive compensation program is based on financial and
strategic results as discussed in the Compensation Committee Report on
Executive Compensation.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHICS
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Philip Morris Companies
Inc. ........................ $100.00 $164.44 $215.31 $268.64 $329.69 $150.19
Peer Group.................... 100.00 138.78 169.84 231.14 258.28 233.87
S&P 500....................... 100.00 137.45 168.93 225.21 289.43 349.92
</TABLE>
(1) The peer group consists of the following companies that are competitors of
the Company's operating subsidiaries or that have been selected on the basis
of size, international focus and industry leadership: Anheuser-Busch
Companies, Inc., B.A.T. Industries, Bestfoods, Campbell Soup Company, The
Coca-Cola Company, ConAgra, Inc., General Mills, Inc., Gillette Co.,
H.J. Heinz Company, Hershey Foods Corporation, Kellogg Company, Nabisco Group
Holdings Corp., Nestle, Inc., PepsiCo, Inc., Procter & Gamble Company, The
Quaker Oats Company, R.J. Reynolds Tobacco Holdings Inc., Sara Lee
Corporation, Unilever N.V., and UST, Inc.
8
<PAGE>
Compensation Committee Report on Executive Compensation
To Our Stockholders:
The Compensation Committee is responsible for administering total compensation
programs that are designed to:
. Support the Company's efforts to develop world-class leaders;
. Match the Company's compensation plans to its business strategies, as well
as the external environment;
. Maximize profitability through growth and efficiency, balancing
appropriately the short-term and long-term goals of the Company;
. Emphasize the relationship between pay and performance by placing a
significant portion of compensation at risk and subject to the achievement
of financial goals and other critical objectives; and
. Align the interests of managers with those of stockholders through the use
of equity-based incentive awards that link a significant portion of
compensation to stock performance.
For purposes of benchmarking market practice with respect to compensation paid
to its executive officers, the Company compares its practices to the
compensation practices of a "compensation survey group." Companies were
selected for this group primarily because they compete with the Company for
executive talent and have executive positions similar in breadth, complexity
and scope of responsibility to those of the Company. The compensation survey
group is a broader, more diverse group of companies than those included in the
peer group index in the graph on page 8.
1999 was an unusual year that presented challenges to the Committee's efforts
to achieve the objectives discussed above. It was a year in which all
participants in the incentive compensation program achieved or exceeded their
performance goals. It was a year in which the Company met its earnings-per-
share growth target. And yet it was a year in which, due to investor
perceptions of the current legal and societal challenges the Company faces,
the stock market price of the Common Stock declined significantly. As is well
known, the Company is confronting difficult and protracted legal and social
issues, as well as the usual business challenges. In this context, the
Committee recognized that it was important to have compensation programs and
to take actions that clearly underline our intention to meet our challenges
and to attract, retain and motivate the leadership necessary to do so and
simultaneously to pursue our business objectives.
The Committee considered the following matters in taking its 1999 actions
under the Company's compensation programs:
. the current legal and societal challenges;
. the hostile environment surrounding the tobacco industry;
. the financial performance of the Company compared with its annual goals, as
measured by earnings per share growth, return on equity, volume growth,
cost reductions and implementation of strategic initiatives, as well as
relevant financial comparisons to companies within the peer and
compensation survey groups, such as total shareholder return and net income
growth; and
. the size and complexity of the Company compared with companies in the peer
group.
Based on its evaluation of these factors, the Committee determined that it was
appropriate to target a total compensation pay objective within the top
quartile of the compensation survey group. Based on the most recent
information available, total compensation for the executive officer group
ranked within the top quartile relative to the compensation survey group. To
achieve a further correlation
9
<PAGE>
between executive compensation and performance, approximately three-fourths of
the compensation awarded to the executive officer group in 1999 was at-risk
incentive compensation directly related to the performance of the Company and
its business units. This includes annual cash bonuses and long-term stock
awards. By design, the majority of executive officers' at-risk compensation
consists of equity-based compensation.
Base Salary
Base salary is determined using a qualitative evaluation of a variety of
factors, including level of responsibility within the organization, time in
position, prior experience, individual performance, and a comparison to
salaries paid for comparable positions within the compensation survey group.
Annual Incentives
Annual incentive payments for 1999 were based upon a qualitative evaluation of
corporate or business unit performance and an assessment of individual
performance. Specific weights were not assigned to the factors considered. At
the corporate level, the performance factors included cash flow, net income,
and earnings per share as measured against the prior year, as well as against
the annual business plan. An evaluation of the Company's performance against
certain strategic measures, such as response to the business, regulatory and
litigation environment, portfolio management, diversity and leadership
development, was also considered. At the business unit level, the performance
factors included operating income, volume, cash flow, and strategic measures,
which were evaluated against the prior year and the annual business plan.
For the corporate participants, targeted goals were achieved and bonuses were
awarded accordingly. Performance varied across the business units, and bonuses
were awarded at or above target levels accordingly.
Given the Company's strong business performance in 1999 and in view of the
increased employee retention and motivational issues caused by the legal and
regulatory challenges facing the Company, both regular and special annual cash
bonus awards were granted to approximately 3,600 of the Company's employees,
including executive officers.
The special cash bonus awards will only become payable to employees who
continue employment with the Company or its affiliates (with exceptions for
death and disability) until specified dates. Specifically, one-half of the
award will become payable on June 30, 2000 and the remaining half will become
payable on January 31, 2001. To provide an additional retention incentive that
also reflects Company stock value, these special cash bonus awards were
supplemented with awards of restricted stock that will vest two years after
the award. The combined value of the special annual cash bonus and restricted
stock retention incentives ranged from 75% to 150% of the executive's regular
annual incentive award for 1999.
Long-Term Incentives
The Company's 1997 Performance Incentive Plan (the "1997 Plan"), approved by
shareholders at the 1997 Annual Meeting, provides for stock options, stock
appreciation rights ("SARs"), restricted stock, annual and long-term
performance awards, and other "stock-based" awards to be granted to key
executives who contribute to the management, growth, and profitability of the
Company.
. Stock Options. In 1999, the Committee targeted its annual stock option
award guidelines to approach the 55th percentile of the compensation survey
group. The size of actual stock option awards was adjusted upward or
downward based on a subjective evaluation of each participant's
contribution and potential.
10
<PAGE>
In considering the current litigation and regulatory environment, the impact
of that environment on all Company executives (including those executives in
non-tobacco areas of the business), the challenges the Company faces in
retaining its current pool of executive talent, and its need to address
leadership retention and development, the Committee decided to make an
additional stock option award in 1999 to approximately 125 of the Company's
most senior executives.
The awards ranged in size from 10% to 100% of the 1999 annual stock option
grant with vesting ranging from three to five years from the date of grant.
The number of additional options awarded to an individual was based on the
Committee's assessment of an individual's performance and potential
contribution to the future growth and success of the Company.
. Building Share Ownership. In 1999, the Committee added an Executive
Ownership Stock Option ("EOSO") feature to the options held by
approximately 125 of its most senior executives. The EOSO promotes the
earlier exercise of stock options and the retention of Company shares,
thereby encouraging executives to build their stock ownership in the
Company.
The EOSO feature works as follows: An EOSO is granted when an eligible
executive exercises an option at a time when the stock price has appreciated
at least 20% above the option price on the date of the original option grant,
and the executive pays the option price with shares that have been owned for
at least six months. The EOSO is granted for the number of shares used to pay
the exercise price of the underlying option, and related withholding taxes,
has an exercise price equal to the market value of the Common Stock on the
date of its grant, has a term limited to the remaining term of the original
option and vests six months from the date of grant. The executive is required
to hold the net new shares received upon the exercise of the option that
gives rise to the EOSO grant for a one-year period or else the related EOSO
grant is forfeited.
Compensation of the Chairman of the Board and Chief Executive Officer
Effective July 1, 1999, Mr. Bible's base salary was increased from $1,500,000
to $1,750,000, which ranks in the top quartile of base salaries paid to chief
executive officers in the compensation survey group. Mr. Bible's last salary
increase was in 1997.
The Committee awarded Mr. Bible an annual incentive cash award for 1999 in two
forms: a regular bonus portion of $2,750,000 payable immediately and a special
bonus portion of $1,650,000. The special bonus portion of the annual incentive
will only become payable to Mr. Bible if he continues his employment (with
exceptions for death and disability) until specified dates. Specifically, one-
half of the special bonus will become payable on June 30, 2000 and the
remaining half will become payable on January 31, 2001. Based on the most
recent data available, Mr. Bible's bonus ranks within the top quartile of
bonuses paid to the chief executive officers in the compensation survey group.
In 1999, the Committee awarded Mr. Bible the following long-term, stock-based
incentive awards: a non-qualified option for 500,000 shares, which vests one
year after grant; a non-qualified option for 250,000 shares, which vests upon
Mr. Bible's 65th birthday; and a 100,000 share restricted stock award, which
vests upon Mr. Bible's 65th birthday. In January 2000, the Committee awarded
Mr. Bible an additional restricted stock award of 115,960 shares which vest
two years from the date of grant.
The primary factors considered in determining Mr. Bible's regular bonus and
his stock option grant of 500,000 shares were Mr. Bible's performance with
respect to the achievement of key strategic, financial, and leadership
development objectives, including his efforts to ensure that top executive
succession plans are in place. In addition, the desire to maintain an
equitable position for Mr. Bible comparable to that of other chief executive
officers in the compensation survey group was also considered. The primary
factor considered in determining the special bonus portion of Mr. Bible's
11
<PAGE>
annual incentive award, Mr. Bible's stock option grant of 250,000 shares and
Mr. Bible's restricted stock awards totaling 215,960 shares was the
Committee's desire to ensure Mr. Bible's continued leadership and employment
with the Company.
According to the most recent data available, Mr. Bible's 1999 total
compensation ranks within the top quartile of total compensation paid to chief
executive officers in the compensation survey group.
Policy with Respect to Qualifying Compensation for Deductibility and Other
Matters
Section 162(m) of the Internal Revenue Code generally limits to $1,000,000 the
annual tax-deductible compensation paid to a covered officer. However, the
limitation does not apply to performance-based compensation, provided that
certain conditions are satisfied. Annual incentive awards to covered officers
for 1999 were subject to and made in accordance with performance-based
compensation arrangements previously implemented by the Company.
The Company's policy is generally to preserve the federal income tax
deductibility of compensation paid. Accordingly, the Company has taken
appropriate actions, to the extent it believes feasible, to preserve the
deductibility of annual incentive, long-term performance, restricted stock,
and stock option awards. However, notwithstanding the Company's general
policy, the Committee has authorized and will continue to retain the authority
to authorize payments that may not be deductible if it believes that it is in
the best interests of the Company and its stockholders. The Committee
determined, after an analysis of competitive practices and a thorough review
of alternatives, that it was appropriate to continue to pay Mr. Bible a base
salary in excess of $1,000,000. This action will cause a portion of his
compensation to exceed the $1,000,000 deductibility limit. Certain other
elements of annual compensation, such as perquisites, certain restricted stock
and dividends paid in cash thereon, payments related to reducing unfunded
retirement benefits, tax reimbursements and income resulting from payments
made pursuant to plans that do not discriminate in favor of executive
officers, may cause a portion of covered officers' income to exceed the
deductibility limit.
Compensation Committee:
John S. Reed, Chair
Harold Brown
Robert E. R. Huntley
Richard D. Parsons
Stephen M. Wolf
12
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
------------------------------------------- -------------------------- ---------
Restricted Securities
Other Annual Stock Underlying
Name and Principal Position Year Salary Bonus(/1/) Compensation(/2/) Value(/3/) Options LTIP
- --------------------------- ---- --------- ---------- ----------------- ---------- ---------- ---------
$ $ $ $ Shs. $
<S> <C> <C> <C> <C> <C> <C> <C>
Geoffrey C. Bible................. 1999 1,625,000 4,400,000 293,940 6,476,650 1,028,685(/5/) -0-
Chairman of the
Board and 1998 1,500,000 3,500,000 350,861 -0- 400,000 -0-
Chief Executive
Officer 1997 1,375,000 1,900,000 142,505 -0- 1,000,000 6,000,000
Murray H. Bring................... 1999 1,050,000 1,450,000 230,934 2,629,688(/6/) -0- -0-
Vice Chairman, External Affairs, 1998 925,000 2,185,000 268,093 -0- 250,000 -0-
and General
Counsel 1997 843,327 1,050,000 63,284 2,118,025 200,000 3,050,000
Louis C.
Camilleri........................ 1999 806,667 1,760,000 8,993 985,788 387,500 -0-
Senior Vice
President, 1998 705,000 1,000,000 16,872 2,452,788 171,100 -0-
Chief Financial
Officer 1997 661,667 725,000 6,466 1,477,963 118,600 2,450,000
Robert A. Eckert.................. 1999 686,923 1,360,000 17,993 761,813 314,454(/5/) -0-
President and 1998 603,019 650,000 30,039 3,249,251 131,600 -0-
Chief Executive
Officer, Kraft 1997 449,365 525,000 9,936 -0- 56,990 1,200,000
Foods, Inc.
Michael E.
Szymanczyk....................... 1999 688,333 1,368,000 14,048 766,275 300,000 -0-
President and
Chief Executive 1998 601,667 750,000 18,756 2,417,125 131,600 -0-
Officer, Philip
Morris
Incorporated 1997 492,500 525,000 11,290 -0- 66,100 1,550,000
William H. Webb................... 1999 875,000 1,760,000 132,927 985,788 303,750 -0-
Chief Operating
Officer 1998 808,333 1,000,000 205,314 -0- 197,400 -0-
1997 745,673 825,000 49,032 -0- 159,600 2,775,000
<CAPTION>
All Other
Name and Principal Position Compensation(/4/)
- --------------------------- -----------------
$
<S> <C>
Geoffrey C. Bible................. 243,750
Chairman of the
Board and 225,000
Chief Executive
Officer 206,250
Murray H. Bring................... 517,500(/7/)
Vice Chairman, External Affairs, 138,750
and General
Counsel 126,499
Louis C.
Camilleri........................ 121,000
Senior Vice
President, 105,750
Chief Financial
Officer 99,250
Robert A. Eckert.................. 48,129
President and 40,609
Chief Executive
Officer, Kraft 28,597
Foods, Inc.
Michael E.
Szymanczyk....................... 103,250
President and
Chief Executive 90,250
Officer, Philip
Morris
Incorporated 73,875
William H. Webb................... 131,250
Chief Operating
Officer 121,250
111,851
</TABLE>
- --------
(1) Includes the special annual cash bonus portion of the 1999 annual
incentive awards referred to on page 10 as follows: Mr. Bible, $1,650,000; Mr.
Camilleri, $660,000; Mr. Eckert, $510,000; Mr. Szymanczyk, $513,000; and Mr.
Webb, $660,000.
(2) Includes reimbursement for taxes on a portion of the earnings on assets
held in trust of individual officers. These trust assets offset amounts,
otherwise payable by the Company, for vested benefits under supplemental
retirement plans and are not intended to increase total promised benefits.
(3) Dollar values of restricted stock are based on the closing price of the
Common Stock on the date of grant. Includes restricted stock awards made on
January 26, 2000 as part of the retention incentive awards referred to on page
10, as follows: Mr. Bible, 115,960 shares; Mr. Camilleri, 46,390 shares; Mr.
Eckert, 35,850 shares; Mr. Szymanczyk, 36,060 shares; and Mr. Webb, 46,390
shares. These retention incentive restricted stock awards will vest two years
from the date of grant, unless otherwise determined by the Compensation
Committee. Other restricted stock awards reflected in the table, together with
shares resulting from the reinvestment of dividends thereon, will vest at the
sooner of 10 years or age 65, unless otherwise determined by the Compensation
Committee. During 1999, dividends on the restricted stock awards were paid in
cash to the covered officers. On December 31, 1999, each of the named
executive officers held shares of restricted stock, with a value at such date
as follows: Mr. Bible, 540,681 shares, $12,435,657; Mr. Bring, 302,677 shares
(includes 75,000 shares of deferred stock pursuant to a post-retirement
consulting agreement described on page 18), $6,961,560; Mr. Camilleri, 100,000
shares, $2,300,000; Mr. Eckert, 100,000 shares, $2,300,000; Mr. Szymanczyk,
100,000 shares, $2,300,000; and Mr. Webb, 140,449 shares, $3,230,327.
(4) The amounts in this column consist of allocations to defined contribution
plans.
The Company provides funding for individual trusts for covered officers and
certain other employees with vested accrued benefits under non-qualified
supplemental retirement plans. During 1999, the following amounts, less
applicable tax withholding, were deposited in individual trusts for the named
executive officers to provide funding for allocations to Philip Morris
supplemental defined contribution plans for prior years (previously reported
as All Other Compensation), and for earnings through May 31, 1999 on such
allocations: Mr. Bible, $267,489; Mr. Bring, (based on May 31, 1999 account
balance projected to February 1, 2000 and discounted back to July 1, 1999)
$144,320; Mr. Camilleri, $70,310; Mr. Eckert (Kraft Foods supplemental plan),
$87,544; Mr. Szymanczyk, $55,354; and Mr. Webb, $104,356. The funding of these
amounts is not intended to increase total promised benefits.
13
<PAGE>
(5) Includes Executive Ownership Stock Option grants (discussed in the
Compensation Committee Report and in footnote 5 to the 1999 Option Grants
table) for Mr. Bible of 278,685 shares and Mr. Eckert of 14,454 shares. The
Executive Ownership Stock Options do not become exercisable until six months
following their grant and are subject to forfeiture if the executive does not
hold the net option shares giving rise to the grants for a period of one year
following exercise of the underlying options.
(6) The 1999 stock award to Mr. Bring was for 75,000 shares of deferred stock,
subject to the terms of the post-retirement consulting agreement between Mr.
Bring and the Company referred to on page 18.
(7) Includes amounts to be paid in future years pursuant to a post-retirement
consulting agreement described on page 18.
1999 Option Grants
<TABLE>
<CAPTION>
Number of Percent of
Shares Total Options
Underlying Granted to Grant Date Value at
Options Employees in Exercise Expiration Present December 31,
Name Granted Fiscal Year Price Date(/1/) Value(/2/) 1999(/3/)
- ---- ---------- ------------- --------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey C. Bible....... 500,000(/4/) 2.28% $ 40.0000 June 29, 2009 $4,135,000 $ 0
250,000(/4/) 1.14 40.0000 June 29, 2009 2,067,500 0
198,188(/4/)(/5/) 0.91 35.8125 June 27, 2003 1,359,570 0
80,497(/4/)(/5/) 0.37 35.8125 June 25, 2004 552,209 0
Murray H. Bring......... None 0.00 -- --
Louis C. Camilleri...... 193,750 0.89 40.0000 June 29, 2009 1,602,313 0
193,750 0.89 40.0000 June 29, 2009 1,602,313 0
Robert A. Eckert........ 150,000 0.69 40.0000 June 29, 2009 1,240,500 0
150,000 0.69 40.0000 June 29, 2009 1,240,500 0
14,454(/5/) 0.07 36.65625 June 21, 2002 93,951 0
Michael E. Szymanczyk... 150,000 0.69 40.0000 June 29, 2009 1,240,500 0
150,000 0.69 40.0000 June 29, 2009 1,240,500 0
William H. Webb......... 225,000 1.03 40.0000 June 29, 2009 1,860,750 0
78,750 0.36 40.0000 June 29, 2009 651,263 0
</TABLE>
- --------
(1) Options that expire on June 29, 2009 are not exercisable until one year
after the date of grant unless noted as follows: options for 250,000 shares
granted to Mr. Bible become exercisable on August 12, 2002; options for 78,750
shares granted to Mr. Webb become exercisable on June 29, 2002; one-half of
the total options which expire on June 29, 2009 that were awarded to Mr.
Camilleri, Mr. Eckert and Mr. Szymanczyk become exercisable on June 29, 2004.
(2) In accordance with the Securities and Exchange Commission rules, grant
date present value is determined using the Black-Scholes Model. The Black-
Scholes Model is a complicated mathematical formula widely used to value
exchange-traded options. However, stock options granted by the Company are
long-term, non-transferable and subject to vesting restrictions, while
exchange-traded options are short-term and can be exercised or sold
immediately in a liquid market. The Black-Scholes Model relies on several key
assumptions to estimate the present value of options, including the volatility
of, and dividend yield on, the security underlying the option, the risk-free
rate of return on the date of grant and the estimated time period until
exercise of the option. In calculating the grant date present values set forth
in the table, the volatility was based on the monthly closing stock prices and
dividends for the time period (as shown in the table below and rounded to the
nearest whole year) preceding the grant dates, the dividend yield was based on
an annual dividend rate of $1.76 per share (the dividend rate in effect at the
time the options were granted), the risk-free rate of return was fixed at the
rate for a five-year U.S. Treasury Note for the month of grant as reported in
the Federal Reserve Statistic Release H.15(159), and an estimated time period
equal to the lesser of the option term or five years was used. The following
assumptions were used in the table:
14
<PAGE>
Black-Scholes Model Assumptions
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Risk-Free
Expiration Dividend Rate of Time
Date Volatility Yield Return Period
- ------------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C>
June 29, 2009 26.039% 4.40% 5.81% 5.00 years
June 27, 2003 28.324 4.91 5.77 3.87
June 25, 2004 26.034 4.91 5.84 4.86
June 21, 2002 28.956 4.80 5.76 2.84
</TABLE>
The use of different assumptions can produce significantly different estimates
of the present value of options. Consequently, the grant date present values
set forth in the table are only theoretical values and may not accurately
represent present value. The actual value, if any, an optionee will realize
will depend on the excess of market value of the Common Stock over the
exercise price on the date the option is exercised.
(3) Based on the closing price of the Common Stock of $23.00 on December 31,
1999.
(4) Stock option award granted in tandem with stock appreciation rights
payable only in shares of stock.
(5) Represents Executive Ownership Stock Options as discussed in the
Compensation Committee Report that do not become exercisable until six months
following their grant. EOSO grants are subject to forfeiture if the executive
does not hold the net option shares giving rise to the grants for a period of
one year following exercise of the underlying options.
1999 Option Exercises and Year-End Values
<TABLE>
<CAPTION>
Total Number of Shares
Number Underlying Unexercised Total Value of Unexercised In-
of Shares Options Held at the-Money Options Held at
Acquired December 31, 1999 December 31, 1999(/1/)
on Value ------------------------- ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable(/2/) Unexercisable
- ---- --------- ---------- ----------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey C. Bible....... 376,205 $6,783,520 3,818,955 1,028,685 $865,278 $ 0
Murray H. Bring......... 139,830 1,965,955 1,110,000 120,000 0 0
Louis C. Camilleri...... -0- -0- 611,840 459,500 266,275 0
Robert A. Eckert........ 49,513 769,186 373,347 356,454 205,556 0
Michael E. Szymanczyk... 31,350 421,919 436,290 336,000 0 0
William H. Webb......... 62,280 1,297,500 819,000 381,750 0 0
</TABLE>
- --------
(1) Based on the closing price of the Common Stock of $23.00 on December 31,
1999.
(2) Primarily due to the decline in the Company's stock price, the total value
of the shares underlying exercisable options has declined from the total value
of exercisable options held at year end 1998 as follows: Mr. Bible, more than
$87 million; Mr. Bring, more than $18 million; Mr. Camilleri, more than $7
million; Mr. Eckert, more than $5 million; Mr. Szymanczyk, more than $6
million; and Mr. Webb, more than $13 million.
15
<PAGE>
Pension Plan Table--Philip Morris Retirement Plan
<TABLE>
<CAPTION>
Five-Year
Average Years of Service(/1/)
Annual ----------------------------------------------------------------------
Compensation 15 20 25 30 35
- ------------ -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 500,000 $129,671 $ 172,894 $ 216,118 $ 259,341 $ 302,565
750,000 195,296 260,394 325,493 390,591 455,690
1,000,000 260,921 347,894 434,868 521,841 608,815
1,250,000 326,546 435,394 544,243 653,091 761,940
1,500,000 392,171 522,894 653,618 784,341 915,065
1,750,000 457,796 610,394 762,993 915,591 1,068,190
2,000,000 523,421 697,894 872,368 1,046,841 1,221,315
2,250,000 589,046 785,394 981,743 1,178,091 1,374,440
2,500,000 654,671 872,894 1,091,118 1,309,341 1,527,565
2,750,000 720,296 960,394 1,200,493 1,440,591 1,680,690
3,000,000 785,921 1,047,894 1,309,868 1,571,841 1,833,815
3,250,000 851,546 1,135,394 1,419,243 1,703,091 1,986,940
3,500,000 917,171 1,222,894 1,528,618 1,834,341 2,140,065
</TABLE>
- --------
(1) At February 1, 2000, Messrs. Bible, Bring, Camilleri, Szymanczyk, and Webb
had accredited service of 29, 35, 21, 9, and 34 years, respectively.
Messrs. Bible, Bring, Camilleri, Szymanczyk and Webb participate in the tax-
qualified Philip Morris Salaried Employees Retirement Plan and one or more
supplemental non-qualified pension plans (collectively, the "Retirement
Plan"). The Retirement Plan is a non-contributory plan maintained for the
benefit of certain employees of the Company. The Retirement Plan provides for
fixed retirement benefits in relation to the participant's years of accredited
service, five-year average annual compensation (the highest average annual
compensation during any period of five consecutive years out of ten years
preceding retirement) and applicable Social Security covered compensation
amount. Allowances are payable upon retirement at the normal retirement age of
65 and at earlier ages. Compensation includes the amount shown as annual
salary and bonus (excluding the special bonus for 1999) in the Summary
Compensation Table. At December 31, 1999, five-year average annual
compensation for Mr. Bible was $3,237,500; Mr. Bring, $1,802,665; Mr.
Camilleri, $1,220,056; Mr. Szymanczyk, $989,604; and Mr. Webb, $1,448,012.
However, a participant with more than 35 years of accredited service is
limited to the greater of a full retirement allowance based upon 35 years of
service and five-year average compensation, including annual bonus awards, or
a full retirement allowance based on all service and five-year average
compensation, excluding such awards.
Examples of annual retirement allowances payable under the Retirement Plan are
set forth in the above table. The examples, which assume retirement at the
normal retirement age of 65, are based upon the Social Security covered
compensation amount in effect for an employee attaining age 65 in calendar
year 2000. Mr. Szymanczyk is also eligible for benefits under the Kraft Foods
Retirement Plan. At his current annual salary, upon retirement at age 65, he
would receive, in addition to the retirement allowances payable to him under
the Retirement Plan, an annual benefit of $46,900. During 1999, Mr. Bible was
provided with a supplemental pension benefit based on the Retirement Plan's
pension formula for all his years of service with the Company. Mr. Bible
waived all rights to benefits previously provided under the retirement plan of
a Swiss subsidiary of the Company and under non-qualified supplemental plans
based on the Swiss pension plan formula. Messrs. Bible and Camilleri are also
eligible for benefits under one or more pension plans of other Company
subsidiaries. These benefits offset and are not in addition to benefits
provided under the Philip Morris Retirement Plan. The Company provides funding
for individual trusts for covered officers and certain other employees
16
<PAGE>
with vested accrued benefits under non-qualified supplemental retirement
plans. During 1999, the following amounts, less applicable tax withholding,
were deposited in individual trusts for the named executive officers with
respect to the present value of projected benefits expected to be earned
through July 1, 2000 under the Philip Morris supplemental pension plans: Mr.
Bible, $4,238,124; Mr. Bring (benefits expected to be earned as of February 1,
2000), $5,787,636; Mr. Camilleri, $100,216; Mr. Szymanczyk, $144,321 (includes
benefits payable under a Kraft Foods supplemental pension plan); and Mr. Webb,
$977,971. These amounts offset benefits previously accrued and do not increase
total promised benefits.
Pension Plan Table--Kraft Foods Retirement Plan
<TABLE>
<CAPTION>
Five-Year
Average Years of Service(/1/)
Annual ------------------------------------------------------------------
Compensation 15 20 25 30 35
- ------------ -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 500,000 $123,651 $ 164,868 $ 206,084 $ 247,301 $ 259,801
750,000 186,463 248,618 310,772 372,926 391,676
1,000,000 249,276 332,268 415,459 498,551 523,551
1,250,000 312,088 416,118 520,147 624,176 655,426
1,500,000 374,901 499,868 624,834 749,801 787,301
1,750,000 437,713 583,618 729,522 875,426 919,176
2,000,000 500,526 667,368 834,209 1,001,051 1,051,051
2,250,000 563,338 751,118 938,897 1,126,676 1,182,926
2,500,000 626,151 834,868 1,043,584 1,252,301 1,314,801
2,750,000 688,963 918,618 1,148,272 1,377,926 1,446,676
3,000,000 751,776 1,002,368 1,252,959 1,503,551 1,578,551
3,250,000 814,588 1,086,118 1,357,647 1,629,176 1,710,426
3,500,000 877,401 1,169,868 1,462,334 1,754,801 1,842,301
</TABLE>
- --------
(1) At February 1, 2000, Mr. Eckert had accredited service of 23 years.
Mr. Eckert participates in the tax-qualified Kraft Foods Retirement Plan and a
supplemental non-qualified pension plan (collectively, the "Kraft Foods
Retirement Plan"). The Kraft Foods Retirement Plan provides for fixed
retirement benefits in relation to the participant's years of accredited
service, five-year average annual compensation (the highest average annual
compensation during any period of five consecutive years out of ten years
preceding retirement) and applicable Social Security covered compensation
amount. The fixed retirement benefit is also dependent upon the periods of
service prior to January 1, 1989, in which the participant elected to make
contributions. Allowances are payable upon retirement at the normal retirement
age of 65 and at earlier ages. Compensation includes the amount shown as
annual salary and bonus (excluding the special bonus for 1999) in the Summary
Compensation table. At December 31, 1999, five-year average annual
compensation for Mr. Eckert was $859,815.
Examples of annual pension benefits payable under the Kraft Foods Retirement
Plan are set forth in the above table. The examples, which assume retirement
at the normal retirement age of 65, are based on the Social Security covered
compensation amount in effect for an employee attaining age 65 in calendar
year 2000. Since participant contributions could be substantial in individual
cases, the benefit amounts shown in the table may be attributed in certain
instances to participant contributions to a significant degree, depending upon
retirement date and years of service. The Company provides funding for
individual trusts for covered officers and certain other employees with vested
accrued benefits under non-qualified supplemental retirement plans. During
1999, $315,698, less applicable tax withholding, was deposited in an
individual trust for Mr. Eckert with respect to the present value of projected
benefits expected to be earned through July 1, 2000, under a Kraft Foods
supplemental pension plan. This amount offsets benefits previously accrued and
does not increase total promised benefits.
17
<PAGE>
Employment Contracts, Termination of Employment and Change of Control
Arrangements
The Company has entered into change of control employment agreements with each
of its executive officers, including those named in the Summary Compensation
Table. The agreements provide that, if the executive is terminated other than
for cause within three years after a change of control of the Company or if
the executive terminates his or her employment for good reason within such
three-year period or voluntarily during the thirty-day period following the
first anniversary of the change of control, the executive is entitled to
receive a lump-sum severance payment equal to two and one-half times the sum
of base salary and highest annual bonus, together with certain other payments
and benefits, including continuation of employee welfare benefits. An
additional payment is required to compensate the executive for excise taxes
imposed upon payments under the agreement.
Effective February 1, 2000, Murray H. Bring retired as Vice Chairman, External
Affairs, and General Counsel. The Company has entered into a post-retirement
consulting and non-competition agreement with Mr. Bring pursuant to which he
will provide consulting services on general business and legal and regulatory
matters. In return for consulting on general business matters for a three-year
term commencing May 8, 2000, Mr. Bring will receive an annual retainer of
$50,000, payable at the end of each term, an office, secretarial support,
security arrangements, and $10,000 for financial counseling for the year 2000.
The general business consulting provision may be renewed for an additional
three-year term by agreement of the parties. The legal consulting provision is
for a one-year period beginning May 8, 2000, and is renewable at Mr. Bring's
discretion for two successive one-year terms. This provision includes a
$50,000 quarterly retainer and a one-time deferred stock award of 75,000
shares that vest in annual increments of 25,000 shares per year beginning May
7, 2001, provided that Mr. Bring continues to provide the required consulting
services. Dividends are payable on the deferred shares during the consulting
period.
18
<PAGE>
OWNERSHIP OF EQUITY SECURITIES
The following table shows the number of shares of Common Stock beneficially
owned as of February 28, 2000, by each director, nominee for director, and
executive officer named in the Summary Compensation Table and by the directors
and executive officers of the Company as a group. Unless otherwise indicated,
each of the named individuals has sole voting and investment power with
respect to the shares shown. The beneficial ownership of each director and
executive officer and of the group is less than 1% of the outstanding shares.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial
Name Ownership(/1/)(/2/)
- ---- -------------------
<S> <C>
Elizabeth E. Bailey......................................... 18,317
Geoffrey C. Bible........................................... 5,018,099
Harold Brown................................................ 16,922
Louis C. Camilleri.......................................... 809,112
Robert A. Eckert............................................ 569,969
Jane Evans.................................................. 15,992
J. Dudley Fishburn.......................................... 1,119
Robert E. R. Huntley........................................ 30,222
Billie Jean King............................................ 5,000
Rupert Murdoch.............................................. 11,222
John D. Nichols............................................. 18,017
Lucio A. Noto............................................... 20,696
Richard D. Parsons.......................................... 11,119
John S. Reed................................................ 51,790
Carlos Slim Helu............................................ 3,913,187
Michael E. Szymanczyk....................................... 595,265
William H. Webb............................................. 1,094,283
Stephen M. Wolf............................................. 9,317
Group....................................................... 16,555,019
</TABLE>
- ---------------------
(1) Includes maximum number of shares subject to purchase before April 28,
2000, upon the exercise of stock options, as follows: Mr. Bible, 4,097,640;
Mr. Camilleri, 647,840; Mr. Eckert, 408,801; Mr. Szymanczyk, 454,290; Mr.
Webb, 858,000; and group, 9,606,133. Also includes shares of restricted Common
Stock as follows: Mr. Bible, 656,641; Mr. Camilleri, 146,390; Mr. Eckert,
135,850; Mr. Szymanczyk, 136,060; and Mr. Webb, 186,840; and group, 1,908,461.
(2) Includes 16,812 shares as to which beneficial ownership is disclaimed, as
follows: Mr. Nichols, 2,400 (shares held by children); Mr. Noto, 14,397
(shares held by spouse and daughter); and Mr. Szymanczyk, 15 (shares held by
son). Also includes 3,911,000 shares as to which Mr. Slim shares voting and/or
investment power with others and has disclaimed beneficial ownership except to
the extent of his pecuniary interest therein. Also includes 21,549 additional
shares as to which voting and/or investment power is shared with or controlled
by another person and as to which beneficial ownership is not disclaimed, as
follows: Dr. Brown, 15,803 (shares held in a trust); Mr. Camilleri, 225
(shares held by spouse); Mr. Huntley, 3,600 (shares held in joint tenancy);
Mr. Noto, 1,921 (shares held in joint tenancy); and others in group, 27,456
(shares held in joint tenancy).
19
<PAGE>
The following table sets forth information regarding persons or groups known
to the Company to be beneficial owners of more than 5% of the Company's
outstanding Common Stock.
<TABLE>
<CAPTION>
Percent of
Common Stock
Name and Address of Number of Shares Outstanding On
Beneficial Owner Beneficially Owned February 28, 2000
- ------------------- ------------------ -----------------
<S> <C> <C>
FMR Corp................................... 161,643,035 6.987%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- ---------------------
(1) According to Schedule 13G, dated February 14, 2000, filed with the
Securities and Exchange Commission jointly by FMR Corp., Edward C. Johnson 3d
and Abigail P. Johnson, Mr. Johnson is chairman and Ms. Johnson is a director
of FMR Corp. and may be deemed to be members of a controlling group with
respect to FMR Corp. The Schedule 13G indicates that at December 31, 1999, (i)
Fidelity Management & Research Company ("Fidelity"), a wholly-owned subsidiary
of FMR Corp., was the beneficial owner of 148,654,030 shares of Common Stock
in its capacity as investment adviser to various registered investment
companies (the "Fidelity Funds") (the power to vote such shares resides solely
with the boards of trustees of the Fidelity Funds, while the power to dispose
of such shares resides with Mr. Johnson, FMR Corp., Fidelity and the Fidelity
Funds); (ii) Fidelity Management Trust Company, a bank that is wholly-owned by
FMR Corp., was the beneficial owner of 10,259,935 shares of Common Stock; and
(iii) Fidelity International Limited, an investment adviser of which Mr.
Johnson is chairman but which is managed independently from FMR Corp., was the
beneficial owner of 2,693,190 shares of Common Stock. FMR Corp. and Fidelity
International Limited each disclaim beneficial ownership of Common Stock
beneficially owned by the other.
SELECTION OF INDEPENDENT ACCOUNTANTS
Upon the recommendation of the Audit Committee and subject to stockholder
approval, the Board has retained PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending December 31, 2000.
PricewaterhouseCoopers LLP was formed during 1998 as a result of the merger of
Price Waterhouse LLP and Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. had
been the independent accountants of the Company since 1933. A representative
of PricewaterhouseCoopers LLP will be present at the meeting. The
representative will be given an opportunity to make a statement if he or she
desires to do so.
The Board recommends a vote FOR the selection of PricewaterhouseCoopers LLP.
20
<PAGE>
2000 PERFORMANCE INCENTIVE PLAN
Introduction
On March 10, 2000, the Board adopted the 2000 Performance Incentive Plan (the
"2000 Plan"), subject to approval of the Company's stockholders. A copy of the
2000 Plan is attached as Exhibit A. The 2000 Plan is intended to replace the
Company's 1997 Performance Incentive Plan (the "1997 Plan") when all shares
available for issuance under the 1997 Plan have been issued or are subject to
outstanding awards. Presently, approximately 20 million shares are available
for future awards under the 1997 Plan. No shares will be issued under the 2000
Plan until these remaining shares under the 1997 Plan are used, which the
Company currently anticipates will occur in January 2001, depending upon
compensation decisions made at such time. If approved, the 2000 Plan will
permit the Company to grant to salaried employees awards of stock options,
stock appreciation rights, restricted stock, and other awards based on the
Common Stock, as well as performance-based annual and long-term incentive
awards. The 2000 Plan is similar in design to the 1997 Plan. Your Board
believes that the 2000 Plan, like the 1997 Plan, will form an important part
of the Company's overall compensation program. The 2000 Plan will support the
Company's ongoing efforts to develop and retain world-class leaders and will
give the Company the ability to provide those employees with incentives that
are directly linked to the profitability of the Company's businesses and
increases in stockholder value.
Summary of 2000 Plan
The following general description of certain features of the 2000 Plan is
qualified in its entirety by reference to the provisions of the 2000 Plan set
forth in Exhibit A.
Eligibility and Limits on Awards. Salaried employees of the Company, its
subsidiaries and its affiliates, who are responsible for or contribute to the
management, growth and profitability of the Company, its subsidiaries and
affiliates, will be eligible to receive awards under the 2000 Plan. No
determination has been made as to which of those eligible employees
(currently, approximately 9,000) will receive grants under the 2000 Plan and,
therefore, the benefits to be allocated to any individual or to any group of
employees are not presently determinable. However, the 2000 Plan places limits
on the maximum amount of awards that may be granted to any employee in any
plan year.
Under the 2000 Plan, no employee may receive awards of stock options and SARs
(other than awards of executive ownership stock options issued on the exercise
of an outstanding option) that cover in the aggregate more than ten million
shares in any Plan year. The value of an employee's annual incentive award may
not exceed $10,000,000; and individual long-term incentive awards are limited
to 300,000 shares times the number of years in the applicable performance
cycle and, in the case of awards expressed in U.S. currency, $6,000,000 times
the number of years in the applicable performance cycle.
Administration. The Compensation Committee will administer the 2000 Plan. This
Committee will select the eligible employees to whom awards will be granted
and will set the terms of such awards, including any performance goals
applicable to annual and long-term incentive awards. The Committee has the
authority to permit or require the deferral of payment of awards. The
Committee may delegate its authority under the 2000 Plan to officers of the
Company, subject to guidelines, with respect to employees who are not
"executive officers" of the Company.
Shares Reserved for Awards. The number of shares of Common Stock reserved and
available for awards under the 2000 Plan will be 110,000,000. If any award
under the 2000 Plan is exercised or cashed out or terminates or expires or is
forfeited without payment being made in the form of Common Stock, the shares
subject to such award will again be available for distribution under the 2000
Plan, as will shares that are used by an employee to pay withholding taxes or
as payment for the exercise price of an award. No more than 25% of the shares
issuable under the 2000 Plan may be awarded as restricted stock or pursuant to
incentive awards or "other stock-based awards" (as defined below). Stock
options may be exercised by tendering Common Stock to the Company in full or
partial payment of the exercise price.
21
<PAGE>
In the event of any transaction or event that affects the Common Stock,
including but not limited to a merger, share exchange, reorganization,
consolidation, recapitalization, reclassification, distribution, stock
dividend, stock split, reverse stock split, split-up, spin-off or issuance of
rights or warrants, then the Board is authorized, to the extent it deems
appropriate, to make substitutions or adjustments in the number and kind of
shares reserved for issuance under the 2000 Plan, in the number, kind and
price of shares subject to outstanding awards under the 2000 Plan and in the
limits on individual awards described above.
Annual and Long-Term Incentive Awards. Annual and long-term incentive awards
may be granted under the 2000 Plan. Such awards will be earned only if
corporate, business unit or individual performance objectives over performance
cycles established by or under the direction of the Committee are met. The
performance objectives may vary from participant to participant, group to
group and period to period. The performance objectives for awards that are
intended to constitute "qualified performance-based compensation" (see
discussion below under the heading Federal Income Tax Consequences) will be
based upon one or more of the following: earnings per share, total shareholder
return, operating income, net income, cash flow, return on equity, return on
capital or Economic Value Added (i.e., net after-tax operating profit less the
cost of capital). Awards may be paid in the form of cash, shares of Common
Stock or in any combination, as determined by the Committee.
Stock Options. The 2000 Plan will permit the granting to eligible employees of
incentive stock options ("ISOs"), which qualify for special tax treatment, and
nonqualified stock options. Such options may include executive ownership stock
options (see description on page 11) to an eligible employee who tenders
shares of Common Stock already owned by the employee for at least six months
to pay all or a portion of the exercise price of a stock option and/or to
cover any withholding tax (including Social Security and Medicare) liabilities
resulting from the exercise of the stock option. An executive ownership stock
option will entitle the employee to acquire shares of Common Stock equal to
the number of shares tendered to pay the exercise price and/or withholding tax
liabilities. The exercise price for any stock option will not be less than the
fair market value of Common Stock on the date of grant.
Stock Appreciation Rights ("SARs"). SARs may also be granted either singly or
in combination with underlying stock options. SARs entitle the holder upon
exercise to receive an amount in any combination of cash or shares of Common
Stock (as determined by the Committee) equal in value to the excess of the
fair market value of the shares covered by such right over the grant price.
The grant price for SARs will not be less than the fair market value of the
Common Stock on the date of grant.
Restricted Stock. Shares of restricted Common Stock may also be awarded. The
restricted stock will vest and become transferable upon the satisfaction of
conditions set forth in the restricted stock award agreement. Restricted stock
awards may be forfeited if, for example, the recipient's employment terminates
before the award vests. Except as specified in the restricted stock award
agreement, the holder of a restricted stock award will have all the rights of
a holder of Common Stock on his or her restricted shares.
Other Stock-Based Awards. The 2000 Plan also provides for awards that are
denominated in, valued by reference to, or otherwise based on or related to,
Common Stock. These awards may include, without limitation, performance shares
and restricted stock units that entitle the recipient to receive, upon
satisfaction of performance goals or other conditions, a specified number of
shares of Common Stock or the cash equivalent thereof. Where the value of such
stock-based award is based on the difference between the fair market value of
the shares covered by such award and the exercise price, the grant price for
such award will not be less than the fair market value on the date of grant.
Change in Control Provisions. The 2000 Plan provides that, in the event of a
"Change in Control" (as defined in the 2000 Plan), all stock options and SARs
will become fully vested and immediately
22
<PAGE>
exercisable, the restrictions applicable to outstanding restricted stock and
other stock-based awards will lapse, and, unless otherwise determined by the
Committee, the value of outstanding stock options, SARs, restricted stock and
other stock-based awards will be cashed out on the basis of the highest price
per share paid in any transaction reported on the New York Stock Exchange-
Composite Transactions or paid or offered in any bona fide transaction related
to a potential or actual change in control of the Company during the preceding
60-day period. In addition, outstanding incentive awards will be vested and
paid out on a prorated basis, based on the maximum award opportunity of such
awards and the number of months elapsed compared with the total number of
months in the performance cycle.
Federal Income Tax Consequences
Nonqualified Stock Options. Nonqualified stock options granted under the 2000
Plan will not be taxable to an employee at grant but generally will result in
taxation at exercise, at which time the employee will recognize ordinary
income in an amount equal to the difference between the option's exercise
price and the fair market value of the shares on the exercise date. The
Company will be entitled to deduct a corresponding amount as a business
expense in the year the employee recognizes this income.
Incentive Stock Options. An employee will generally not recognize ordinary
income on receipt or exercise of an ISO so long as he or she has been an
employee of the Company or its subsidiaries from the date the ISO was granted
until three months before the date of exercise; however, the amount by which
the fair market value of the shares on the exercise date exceeds the exercise
price is an adjustment in computing the employee's alternative minimum tax in
the year of exercise. If the employee holds the shares of Common Stock
received on exercise of the ISO for one year after the date of exercise (and
for two years from the date of grant of the ISO), any difference between the
amount realized upon the disposition of the shares and the amount paid for the
shares will be treated as long-term capital gain (or loss, if applicable) to
the employee. If the employee exercises an ISO and satisfies these holding
period requirements, the Company may not deduct any amount in connection with
the ISO.
If an employee exercises an ISO but engages in a "disqualifying disposition"
by selling the shares acquired on exercise before the expiration of the one
and two-year holding periods described above, the employee generally will
recognize ordinary income (for regular income tax purposes only) in the year
of the disqualifying disposition equal to the excess, if any, of the fair
market value of the shares on the date of exercise over the exercise price;
and any excess of the amount realized on the disposition over the fair market
value on the date of exercise will be taxed as long- or short-term capital
gain (as applicable). If, however, the fair market value of the shares on the
date of disqualifying disposition is less than on the date of exercise, the
employee will recognize ordinary income equal only to the difference between
the amount realized on the disqualifying disposition and the exercise price.
In either event, the Company will be entitled to deduct an amount equal to the
amount constituting ordinary income to the employee in the year of the
disqualifying disposition.
Stock Appreciation Rights. There are no immediate tax consequences to an
employee when an SAR is granted. When an employee exercises the right to the
appreciation in fair market value of shares represented by an SAR, payments
made, whether in cash or stock, are normally includable in the employee's
gross income for regular income tax purposes. The Company will be entitled to
deduct the same amount as a business expense in the same year. When payments
are made in shares of Common Stock, the includable amount and corresponding
deduction each equal the fair market value of the shares on the date of
exercise.
Restricted Stock. The recognition of income from an award of restricted stock
for federal income tax purposes depends on the restrictions imposed on the
shares. Generally, taxation will be deferred until the first taxable year the
shares are no longer subject to substantial risk of forfeiture. At the time
23
<PAGE>
the restrictions lapse, the employee will recognize ordinary income equal to
the then fair market value of the stock. The employee may, however, make an
election to include the value of the shares in gross income in the year of
award despite such restrictions. Generally, the Company will be entitled to
deduct the fair market value of the shares transferred to the employee as a
business expense in the year the employee includes the compensation in income.
Other Stock-Based Awards/Incentive Awards. Any cash payments or the fair
market value of any Common Stock or other property an employee receives in
connection with other stock-based awards, incentive awards, or as unrestricted
payments equivalent to dividends on unfunded awards or on restricted stock are
includable in income in the year received or made available to the employee
without substantial limitations or restrictions. Generally, the Company will
be entitled to deduct the amount the employee includes in income as a business
expense in the year of payment.
Section 162(m) of the Internal Revenue Code places a $1,000,000 annual limit
on the compensation deductible by the Company paid to certain of its
executives. The limit, however, does not apply to "qualified performance-based
compensation." The Company believes that awards of stock options, SARs and
certain other "performance-based compensation" awards under the 2000 Plan will
qualify for the performance-based compensation exception to the deductibility
limit. State tax consequences may in some cases differ from those described
above. Awards under the 2000 Plan will in some instances be made to employees
who are subject to tax in jurisdictions other than the United States and may
result in tax consequences differing from those described above.
Other Information
If approved by stockholders, the 2000 Plan will be effective on May 1, 2000,
and, except as otherwise provided by your Board, no awards will be made under
the 2000 Plan after May 1, 2005. Any awards granted before May 1, 2005 may
extend beyond the expiration or termination date. No awards will be issued
under the 2000 Plan until all shares under the 1997 Plan have been issued or
are subject to outstanding awards. The Board may amend the 2000 Plan at any
time, provided that no such amendment will be made without stockholder
approval if such approval is required under applicable law, or if such
amendment would: (i) decrease the grant or exercise price of any stock option,
SAR or other stock-based award to less than fair market value on the date of
grant; or (ii) increase the number of shares that may be distributed under the
2000 Plan. Without stockholder approval, an option may not be canceled and a
new option issued at a lower price as a substitute therefor, except as may be
necessary to comply with a change in law, regulations or accounting principles
of a foreign country applicable to participants subject to the laws of such
country.
The 2000 Plan provides that an award may not be transferred except in the
event of the employee's death or unless otherwise required by law. Other terms
and conditions of each award will be set forth in award agreements, which can
be amended by the Committee. Awards under the 2000 Plan may earn dividends or
dividend equivalents, as determined by the Committee.
It is presently intended that the 2000 Plan constitute an "unfunded" plan for
incentive and deferred compensation. The 2000 Plan authorizes the creation of
trusts and other arrangements to facilitate or ensure payment of the Company's
obligations.
On February 28, 2000, the closing price of the Common Stock as reported in The
Wall Street Journal on the New York Stock Exchange-Composite Transactions was
$19.9375.
Required Vote. If a quorum exists at the Annual Meeting of Stockholders, the
2000 Plan will be approved if the votes cast in favor of the plan exceed the
votes cast against.
The Board recommends a vote FOR the 2000 Performance Incentive Plan.
24
<PAGE>
2000 STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
Introduction
On March 10, 2000, the Board adopted the 2000 Stock Compensation Plan for Non-
Employee Directors (the "2000 Non-Employee Director Plan" or "Plan"), subject
to approval of the Company's stockholders. A copy of the 2000 Non-Employee
Director Plan is attached as Exhibit B.
The proposed 2000 Non-Employee Director Plan is intended to replace that
portion of the 1992 Compensation Plan for Non-Employee Directors (the "1992
Director Plan") that provided for a distribution of shares of Common Stock to
non-employee directors. The Deferred Fee Program under the 1992 Director Plan
will continue. If approved, the proposed 2000 Non-Employee Director Plan will
provide for the annual grant to non-employee directors of awards of stock and
stock options. Your Board believes that the 2000 Non-Employee Director Plan
will promote a greater identity of interest between the Company's non-employee
directors and its stockholders and assist the Company in continuing to attract
and retain highly qualified non-employee directors by affording them an
opportunity to share in the future successes of the Company.
Summary of 2000 Non-Employee Director Plan
The following general description of certain features of the 2000 Non-Employee
Director Plan is qualified in its entirety by reference to the provisions of
the 2000 Non-Employee Director Plan set forth in Exhibit B.
Eligibility. Only members of the Board who are not full-time employees of the
Company or its subsidiaries will be granted awards under the 2000 Non-Employee
Director Plan. At present 12 non-employee directors will be granted awards
under the 2000 Non-Employee Director Plan.
Administration. The Board will designate the Compensation Committee or a
subcommittee thereof to administer the 2000 Non-Employee Director Plan.
Shares Reserved for Awards. The number of shares of Common Stock reserved and
available for awards under the 2000 Non-Employee Director Plan will be
1,000,000. If any stock option under the 2000 Non-Employee Director Plan is
forfeited or expires without the delivery of Common Stock, the shares subject
to such stock option will again be available for distribution under the 2000
Non-Employee Director Plan, as will shares that are used by a non-employee
director to pay withholding taxes or as payment for the exercise price of a
stock option. Stock options may be exercised by tendering Common Stock to the
Company in full or partial payment of the exercise price.
In the event of any transaction or event that affects the Common Stock,
including but not limited to a merger, share exchange, reorganization,
consolidation, recapitalization, reclassification, distribution, stock
dividend, stock split, reverse stock split, split-up, spin-off or issuance of
rights or warrants, then the Board is authorized to the extent it deems
appropriate, to make substitutions or adjustments in the number and kind of
shares reserved for issuance under the 2000 Non-Employee Director Plan, in the
number, kind and price of shares subject to outstanding awards under the Plan,
and in the amounts of annual awards under the Plan.
Annual Awards. On the date of each annual meeting of the Company's
stockholders, each non-employee director will receive shares of Common Stock
having an aggregate fair market value on such date of $40,000, and
nonqualified stock options to purchase the number of shares of
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Common Stock calculated by dividing $40,000 by the Black-Scholes value of each
such option. In each case, fractional shares will be rounded up to the next
whole share. Non-employee directors may elect to defer the receipt of the
shares of Common Stock awarded by timely filing an election to establish a
notional deferred stock account. The term of each stock option will be 10
years and the exercise price of each option will be the fair market value of a
share of Common Stock on the date of grant.
Assuming that the fair market value of the Common Stock on April 27, 2000 is
$20.0625 per share and that the resulting Black-Scholes value is $2.785 per
option, each non-employee director who is elected at the 2000 Annual Meeting
of Stockholders would receive an award of 1,994 shares of Common Stock and
nonqualified options to purchase 14,363 shares of Common Stock at the exercise
price of $20.0625 per share. Accordingly, all non-employee directors as a
group would receive an aggregate of 23,928 shares of Common Stock and
nonqualified options to purchase 172,356 shares of Common Stock.
Federal Income Tax Consequences
Common Stock. Awards of shares of Common Stock are taxable to the non-employee
director in the year awarded unless he or she has timely filed an election to
defer receipt of the shares, in which case, taxation occurs in the year
received. The Company will be entitled to deduct a corresponding amount as a
business expense in the year the non-employee director recognizes this income.
Nonqualified Stock Options. Nonqualified stock options granted under the 2000
Non-Employee Director Plan will not be taxable to a non-employee director at
grant but will result in taxation at exercise, at which time the non-employee
director will recognize ordinary income in an amount equal to the difference
between the option's exercise price and the fair market value of the shares on
the exercise date. The Company will be entitled to deduct a corresponding
amount as a business expense in the year the non-employee director recognizes
this income.
Tax consequences for states and jurisdictions other than the United States may
differ from those described above.
Other Information
If approved by stockholders, the 2000 Non-Employee Director Plan will be
effective at the conclusion of the 2000 Annual Meeting of Stockholders, and
will expire after the awards made immediately following the 2005 Annual
Meeting of Stockholders, unless terminated earlier, or extended, by your
Board. Any awards granted before the 2000 Non-Employee Director Plan expires
or is terminated may extend beyond the expiration or termination date. The
Board may amend the 2000 Non-Employee Director Plan at any time, provided that
no such amendment will be made without stockholder approval if such approval
is required under applicable law, or if such amendment would: (i) decrease the
grant or exercise price for stock options to less than fair market value on
the date of grant; or (ii) increase the number of shares that may be
distributed under the 2000 Non-Employee Director Plan. Without stockholder
approval, an option may not be canceled and a new option issued at a lower
price as a substitute therefor, except as may be necessary to comply with a
change in law, regulations or accounting principles of a foreign country
applicable to participants subject to the laws of such country.
The 2000 Non-Employee Director Plan provides that an award may not be
transferred except in the event of a non-employee director's death or unless
otherwise required by law. Other terms and conditions of each award will be
set forth in award agreements, which can be amended.
It is presently intended that the 2000 Non-Employee Director Plan constitute
an "unfunded" plan for incentive and deferred compensation. The 2000 Non-
Employee Director Plan authorizes the creation of trusts or other arrangements
to facilitate or ensure payment of the Company's obligations.
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On February 28, 2000, the closing price of the Common Stock as reported in The
Wall Street Journal on the New York Stock Exchange-Composite Transactions was
$19.9375.
Required Vote. If a quorum exists at the Annual Meeting of Stockholders, the
2000 Director Plan will be approved if the votes cast in favor of the plan
exceed the votes cast against.
The Board recommends a vote FOR the 2000 Non-Employee Director Plan.
STOCKHOLDER PROPOSALS
PROPOSAL 1--Minimum Share Ownership for Nominees for Director
Thomas O. Moloney III, 10510 W. 131 Street, Overland Park, Kansas 66213,
claiming beneficial ownership of 770 shares of Common Stock, submitted the
proposal set forth below.
"WHEREAS senior management already has the power to hire competent,
insightful, and knowledgeable people to various positions within the
corporation;
WHEREAS in addition to those traits, a Director should also have a large
position of ownership--to ensure his/her actions will be in the best interests
of the corporation;
WHEREAS the Board of Directors are supposed to represent owners--not be the
"yes-men" of senior management;
RESOLVED: That the shareholders hereby request the Board of Directors to take
the steps necessary to assure that before a nominee can be considered for the
Board of Directors, he/she must be the beneficial owner of at least 700 shares
of the corporation."
The Board recommends a vote AGAINST this proposal.
The Board's policy is to encourage voluntary ownership of the Company's shares
by its directors. In fact, each of your directors currently owns more than 700
shares of Common Stock (see "Ownership of Equity Securities" on page 19), and
several directors have voluntarily purchased additional shares within the last
year. In addition, directors receive a substantial portion of their director
compensation in shares of stock (see "Compensation of Directors" on page 6),
and stockholders are being asked to approve a new Stock Compensation Plan for
Non-Employee Directors (see "2000 Stock Compensation Plan for Non-Employee
Directors" on page 25).
Nevertheless, the Board is opposed to a minimum share ownership requirement
for nominees for director. The Board believes that such a requirement may
impair the Company's ability to obtain qualified independent nominees with
diverse backgrounds and experience. Initial ownership of a fixed amount of
shares of the Company is no guarantee that an individual is qualified to serve
as a director of Philip Morris. Whether they own shares or not, Philip Morris
directors are required by Virginia law to discharge their duties in accordance
with their good faith business judgment of the best interests of the Company.
Therefore, your Board urges stockholders to vote AGAINST this proposal.
PROPOSAL 2--Genetic Engineering in Food Products
The Community of the Sisters of St. Dominic of Caldwell, NJ, 52 Old Swartswood
Station Road, Newton, N.J. 07860, claiming beneficial ownership of 100 shares
of Common Stock, submitted the proposal set forth below.
"WHEREAS, international markets for genetically engineered (GE) foods are
threatened by extensive resistance to gene protection technology, transgenic
technology and genetically altered foods;
- -- Several of Europe's largest food retailers, including Tesco, Sainsbury
Group, Carrefour, and Rewe, have committed to removing GE ingredients from
their store-brand products;
- -- In the UK, three fast-food giants--McDonald's, Burger King, and Kentucky
Fried Chicken--are eliminating GE soya and corn ingredients from their
menus;
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- -- Gerber Products Co. announced in July 1999 that they would not allow GE
corn or soybeans in any of their baby foods;
- -- Archer Daniels Midlands asked its grain suppliers in August 1999 to
segregate their genetically engineered crops from their conventional crops;
There is increasing scientific concern that genetically engineered
agricultural products may be harmful to humans, animals or the environment;
- -- The U.S. Department of Agriculture has acknowledged (July 13, 1999) the
need to develop a comprehensive approach to evaluating long-term and
secondary effects of GE products;
- -- As early as 1989, scientists reported that GE foods may pose risks to human
health;
- -- Some GE crops have been engineered to have higher levels of toxins, such as
Bacillus thuringiensis (Bt), to make them insect-resistant. When plants are
genetically engineered to resist predators, the plant defense systems may
involve the synthesis of natural carcinogens, and may pose a public health
risk;
- -- In 1998, research showed that Bt crops are building up Bt toxins in the
soil;
- -- In 1999, the European Union suspended approval of new genetically
engineered organisms until a new safety law for genetically engineered
organisms is implemented in 2002. This followed a new study that showed Bt
corn pollen may harm monarch butterflies.
In the U.S., we have a long tradition of citizens' "Right to Know;" an
expression of this includes the current laws requiring nutritional labeling of
foods;
- -- A January 1999 Time/CNN poll indicated that 81% of Americans said that GE
food should be labeled as such;
- -- GE crops may incorporate genes that are allergens or from animal species.
Individuals can not avoid them for health or religious reasons unless they
are labeled;
- -- The European Union requires labeling of GE foods, as will Japan, New
Zealand, and Australia.
RESOLVED: Shareholders request the Board of Directors to adopt a policy of
removing genetically engineered crops, organisms, or products thereof from all
products sold or manufactured by the company, where feasible, until long-term
safety testing has shown that they are not harmful to humans, animals, and the
environment; with the interim step of labeling and identifying these products
that may contain these ingredients, and reporting to the shareholders by
August 2000.
Supporting Statement
We believe that this technology involves significant social, economic, and
environmental risks. Our company should take a leadership position in delaying
market adoption of genetically engineered crops and foods. Failure to do so
could leave our company financially liable, should detrimental effects to
public health or the environment appear in the future."
The Board recommends a vote AGAINST this proposal.
Your Company produces and markets food products principally through its
subsidiary, Kraft Foods, Inc. ("Kraft"). Kraft believes that questions about
genetically modified foods should be entrusted to the United States Food and
Drug Administration (the "FDA"), and other government agencies that have the
knowledge, expertise, and legal authority needed to resolve any issues
uniformly on the basis of sound science.
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Kraft's highest priority is the safety of its food products. The FDA, which is
the primary federal agency responsible for ensuring the safety of commercial
food and food additives (except meat and poultry), has stated that "it is not
aware of any information showing that food derived by these new methods differ
from other foods in any meaningful or uniform way, or that, as a class, foods
developed by the new techniques present any different or greater safety
concerns than foods developed by traditional plant breeding." Where food
ingredients have been modified so that the composition of the final product
differs significantly from what is expected for that food, or where the final
product contains potential allergens, the FDA requires that the food be
appropriately labeled. Under the Federal Food, Drug and Cosmetic Act ("FD&C
Act") administered by the FDA, producers of all foods have an obligation to
ensure that the foods they offer are safe, and genetically modified foods and
food ingredients must adhere to the same standards of safety under the FD&C
Act that apply to conventional foods and food ingredients.
The products of modern agricultural biotechnology are regulated not only by
the FDA but also by the United States Department of Agriculture (the "USDA")
and Environmental Protection Agency (the "EPA"). As the U.S. Secretary of
Agriculture recently explained, the regulatory system is comprehensive and
rigorous:
The US regulatory path for testing and commercializing biotechnology
products as they move from lab to field to marketplace is over a decade
old. We base decisions on rigorous analysis and sound scientific
principles. Three federal agencies USDA, FDA, and EPA each play a role
in determining the use of biotechnology products in the United States:
USDA evaluates products for potential risk to other plants and animals.
FDA reviews biotechnology's effect on food safety. And the EPA examines
any products that can be classified as pesticides.
Kraft does not believe the Proposal can be implemented under the current
practices prevalent in the North American food production system. Kraft is the
largest packaged food products company in North America. Kraft produces and
markets thousands of products in dozens of different product categories, and
uses large volumes of numerous ingredients derived from a wide variety of
crops, as well as meat, poultry and dairy ingredients. Kraft does not produce
grains or oilseeds, genetically modified or otherwise, nor does it buy them
from farmers or other suppliers; rather, it buys processed food ingredients
such as high fructose corn syrup, refined vegetable oils, soy lecithin and
corn starch from intermediary refiners and processors based on price,
availability and quality. Kraft's business system for procuring these
ingredients is complex, involving a large and diverse mix of suppliers.
Consequently, Kraft's ingredient procurement involves a vast portion of the
entire food supply chain.
The food supply chain in the United States and Canada, from the farmer
forward, has not established a system to segregate conventionally grown from
genetically modified crops on a significant scale. While certain companies may
be able to obtain limited quantities of selective ingredients derived
exclusively from conventional crops, it would be unachievable at present for a
company of Kraft's size and complexity to do so. For future years, it is
unforeseeable whether, when and the extent to which a split supply chain might
emerge.
The Proposal's mandatory labeling requirements would impose substantial costs
that would be borne by all consumers of Kraft's products, whether or not they
wished to buy foods produced solely from conventional crops. In addition,
Kraft believes that piecemeal labeling by individual companies would result in
inconsistency and confusion, to the detriment of consumers. Without guidance
from the FDA, for example, there would be no uniform method of determining
whether an ingredient is derived from genetically modified organisms.
Kraft believes that issues about labeling, as well as other issues relating to
biotechnology, should be resolved uniformly by the FDA and other appropriate
governmental agencies, which can evaluate all aspects of the issue in a
balanced and fully informed manner, on the basis of sound science.
Therefore, your Board urges stockholders to vote AGAINST this proposal.
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PROPOSAL 3--Tobacco Executives' Compensation and Reduction of Teen Tobacco
The Retirement Plans for the Employees of the Sisters of Mercy Regional
Community of Detroit, 34605 Twelve Mile Road, Farmington Hills, Michigan
48331, claiming beneficial ownership of 107,900 shares of Common Stock,
submitted the proposal set forth below.
"WHEREAS our Company's executives consistently state they adamantly oppose
smoking by minors. They gave initial agreement to a set of goals to achieve
that end as outlined in the now-abandoned National Tobacco Settlement Proposal
("settlement").
- -- However, our Company is on record for linking economic penalties for the
company if teen smoking did not decrease. In the "settlement" our Company
agreed to the payment of fines if smoking by teenagers would not drop
drastically by specific dates. Under the penalty section of the proposed
"settlement," smoking by people younger than 18 must fall 30% within five
years, 50% within seven years and 60% within ten years. For each percentage
point representing failure to meet these targets, tobacco companies agreed
as a group to pay an $80 million fine, up to a maximum of $2 billion
annually.
- -- Our company's management agreed to the proposed "settlement" knowing the
evidence that has shown that the majority of those addicted to the nicotine
in cigarettes began smoking as minors. This would mean any consequent
decline in youth smoking could, in the long term, have serious economic
implications on future domestic sales of our company's tobacco products.
- -- While fines may adversely affect stock price and stockholder dividends,
they seemingly did not negatively affect executive compensation.
- -- We believe that managers, as those responsible for developing strategies to
achieve these goals, should share in the success or failure of their
strategies.
RESOLVED: shareholders request that the Board voluntarily create a formula
linking future executive compensation packages with achievement of specific
decreases in teen consumption of our company's brands, using the terms of the
now-defunct "settlement" as a guide. The formula should penalize executives
when the company is not found in compliance with the goals determined and
reward them for meeting these goals.
Supporting Statement
Many companies include social and environmental business goals in their
executive compensation packages. Companies like Proctor & Gamble, IBM, Bristol
Myers Squibb, and Eastman Kodak include issues like the environment and
progress in diversity in their evaluation of the compensation package for
their executives. Since management has made a commitment to decrease underage
smoking as a major goal for our company, we believe our managers' success or
failure should be so linked to their compensation.
Since our company has already indicated agreement with youth reduction goals
as outlined in the National Settlement, this request is not contingent on
approval of the "settlement." If you agree that all parties should bear
responsibility for reducing teen smoking, including the executives who agree
to and must oversee implementation of plans geared to insure such reductions,
please vote "yes" for this resolution."
The Board recommends a vote AGAINST this proposal.
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The Company agrees that it is important to reduce the incidence of youth
smoking in this country. In 1998, Philip Morris U.S.A., the Company's domestic
tobacco subsidiary, and other domestic tobacco manufacturers entered into a
master settlement agreement with 46 states, the District of Columbia and
several U.S. Commonwealths and territories, having already reached separate
agreements with four other states. Among other provisions, the master
settlement agreement prohibits the targeting of youth in the advertising,
promotion or marketing of tobacco products; bans most forms of outdoor
advertising, including billboards and tobacco advertising in transportation
facilities, vehicles, enclosed stadia and shopping malls; bans the use of
cartoon characters in all tobacco advertising and promotions; and requires
participating manufacturers to affirm corporate principles to comply with the
agreement and to reduce underage usage of tobacco products.
Above and beyond the actions required by the master settlement agreement,
Philip Morris U.S.A. has created a new department dedicated solely to youth
smoking prevention efforts. The department's budget in 1999 exceeded $100
million and a similar amount is budgeted for 2000. The department is charged
with taking proactive and long-term steps to develop and support
comprehensive, collaborative and measurable approaches to help reduce the
incidence of youth smoking. The department is applying a comprehensive four-
pronged approach to dealing with the youth smoking issue: Communication,
Education, Community Action and Access. The Communication strategy includes
television ads that air on top network, syndicated and cable youth programs
and are designed to convince kids that smoking is not cool and that they do
not need to smoke to establish their identity. Other ads are designed to
persuade parents that they have an important role to play in addressing these
issues with their kids. As part of the Education strategy, Philip Morris
U.S.A. has been working to inform educators and policy makers of and help
secure funding for effective curricula such as Life Skills Training, a 3-year
tobacco, alcohol and drug abuse prevention program for middle and high school
students. The Community Action strategy is to develop, support and evaluate
community-based programs designed to nurture protective factors that can be
effective in reducing youth smoking and other risky behaviors. The Access
strategy consists of support of and funding for the "We Card," retailer-
training programs designed to help prevent youth access to tobacco products.
The Company disagrees, however, with the proponents' view that tying executive
compensation to the youth smoking reduction goals of the now-defunct 1997
proposed federal tobacco resolution will be an effective tool in this
campaign. The youth smoking reduction goals in the defunct resolution were
dependent on the enactment of a comprehensive regulatory and enforcement
program and the satisfaction, not only by Philip Morris U.S.A., but also by
each other tobacco company and by retailers, distributors, the federal
government and the states, of their obligations under the proposed program.
The master settlement agreement that was subsequently entered into in 1998
with the states contained no such program. The Company believes that it would
not be in the best interests of stockholders, nor would it further the
important policy objectives set forth in the proposal, to tie compensation to
the goals of a non-existent program that cannot be achieved by Philip Morris
U.S.A. acting on its own.
The Company does believe that management decisions affecting stockholder value
should have a direct and meaningful impact on executive compensation. In fact,
the Company's compensation programs are already designed to achieve that
objective. The Compensation Committee Report on Executive Compensation, found
on pages 9-12 of this proxy statement, emphasizes the Company's objective of
aligning management's interests with those of stockholders through the use of
equity-based incentive awards. The Report notes that roughly three-fourths of
compensation awarded to executive officers in 1999 was at-risk incentive
compensation directly related to the performance of the Company and its
business units, and that the majority of executive officers' at-risk
compensation consists of equity-based compensation.
A similar proposal was defeated by stockholders at last year's Annual Meeting.
Therefore, your Board urges stockholders to vote AGAINST this proposal.
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PROPOSAL 4--Ensuring That Tobacco Ads Are not Youth-Friendly
The Minnesota State Board of Investment, Capitol Professional Office Building,
Suite 200, 590 Park Street, St. Paul, MN 55103, claiming beneficial ownership
of 3,041,204 shares of Common Stock, together with two co-proponents,
submitted the proposal set forth below. The names, addresses and shareholdings
of the co-proponents will be furnished upon request made to the Secretary of
the Company.
"WHEREAS our Company insists its tobacco ads and ad campaigns are not geared
to underage youth and has even taken some actions that might indicate its
seriousness about ensuring that youth do not use our tobacco products;
- -- Furthermore various studies independent of our company's own research have
shown that teens have not been influenced not to buy our company's
cigarettes by ad campaigns that have been run and/or supported by our
company.
- -- As concerned shareholders we are aware that the future viability of our
company's tobacco divisions is based on ensuring new users, most of whom
will continue to use our brands because they began as underage youth;
- -- A 1996 University of British Columbia study found that teenagers are three
times as likely as adults to respond to cigarette ads and, on average,
whenever a cigarette brand increased its advertising budget by 10%, its
share of the adult smoking market grew only 3% but its share of teen
smokers grew 9%.
- -- Cigarettes are the most heavily advertised product in the U.S.A. However,
unlike adults, whose consumption patterns do not reflect advertising
dollars, the three-most advertised cigarettes in the U.S. are the three
used most by underage youth.
- -- Further evidence presented in the New England Journal of Medicine, American
Journal of Public Health, and the Journal of Pediatrics, among other
publications, had demonstrated that tobacco advertising plays a significant
role in stimulating illegal consumption of tobacco by minors.
- -- Such data seems to undermine the stated stance of our company that it is
not advertising in ways that influence young people to use our products
verses[sic]. This leaves some shareholders confused as to how to be sure
they are not invested in a company whose activities may possibly be illegal
at the worst and immoral at the least.
RESOLVED: shareholders request the Board to implement the following, or a
similar policy for our Company: That, within six months of this annual
meeting, before any promotional, marketing, and/or advertising campaign
presently running is allowed to continue or is inaugurated in the future, it
must be submitted to independent and certifiable testing to ensure that it is
not equally or more appealing to the 12-to-17 age group than groups 18 and
over.
Supporting Statement
We suggest that, in creating this approach to testing, that the testing entity
be independent of the company and the tobacco industry, eliminating any
possible conflict of interest. Its task will be to determine the effectiveness
of the advertising campaign in making a positive impression on two age groups:
those under 18 and those spread evenly between 18 and 45. If the test results
on the young
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focus group show the campaign is equal to or exceeds the effectiveness on the
older group the (proposed) campaign shall be terminated.
If you agree for the need of independent data to show our company does not
advertise in ways that overly-impact underage minors vs. adults, please vote
"yes" for this resolution."
The Board recommends a vote AGAINST this proposal.
Your Board does not believe that it is necessary to take the actions requested
by the proponent. Both Philip Morris U.S.A., our domestic tobacco company, and
Philip Morris International, our international tobacco company, have programs
and policies in place, and are subject to legal restrictions, that help ensure
that marketing and advertising activities be directed only to adults who
choose to smoke.
In the United States, cigarette ads were removed from broadcast media in 1971.
In 1995, Philip Morris U.S.A. launched its "Action Against Access" initiative,
with the objective of helping to prevent youth access to cigarettes by
creating an environment in which minimum-age laws were enforced and cigarettes
could only be purchased through a face-to-face transaction with proof of age.
In 1998, Philip Morris U.S.A. and other domestic tobacco manufacturers entered
into a master settlement agreement with 46 states, the District of Columbia
and several U.S. Commonwealths and territories, having already reached
separate agreements with four other states. Among other provisions, the master
settlement agreement prohibits the targeting of youth in the advertising,
promotion or marketing of tobacco products; bans most forms of outdoor
advertising, including billboards and tobacco advertising in transportation
facilities, vehicles, enclosed stadia and shopping malls; bans the use of
cartoon characters in all tobacco advertising and promotions; and requires
participating manufacturers to affirm corporate principles to comply with the
agreement and to reduce underage usage of tobacco products. Philip Morris
U.S.A. is committed to complying with both the letter and the spirit of the
master settlement agreement.
Above and beyond the actions required by the master settlement agreement,
Philip Morris U.S.A. has created a new department dedicated solely to youth
smoking prevention efforts. The department's budget in 1999 exceeded $100
million and a similar amount is budgeted for 2000. The department is charged
with taking proactive and long-term steps to develop and support
comprehensive, collaborative and measurable approaches to help reduce the
incidence of youth smoking. The department is applying a comprehensive four-
pronged approach to dealing with the youth smoking issue: Communication,
Education, Community Action and Access. The Communication strategy includes
television ads that air on top networks, syndicated and cable youth programs
and are designed to convince kids that smoking is not cool and that they do
not need to smoke to establish their identity. Other ads are designed to
persuade parents that they have an important role to play in addressing these
issues with their kids. As part of the Education strategy, Philip Morris
U.S.A. has been working to inform educators and policy makers of and help
secure funding for effective curricula such as Life Skills Training, a 3-year
tobacco, alcohol and drug abuse prevention program for middle and high school
students. The Community Action strategy is to develop, support and evaluate
community-based programs designed to nurture protective factors that can be
effective in reducing youth smoking and other risky behaviors. The Access
strategy consists of support of and funding for the "We Card," retailer-
training programs designed to help prevent youth access to tobacco products.
Thus, Philip Morris U.S.A. has a long-standing commitment to direct its
advertising only to adults who choose to smoke; complies with an industry code
and company policy that help ensure that its marketing efforts are directed
only at adults who choose to smoke; is subject to comprehensive advertising
restrictions and monitoring provisions of the master settlement agreement that
prohibit the targeting of youth in the advertising, promotion or marketing of
tobacco products; and has launched
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its own comprehensive youth smoking prevention effort, including advertising
specifically designed to help prevent youth smoking.
Philip Morris International also has an extensive and growing series of youth
smoking prevention initiatives, which includes support of minimum age laws in
every country; support of youth access prevention programs; support of youth
anti-smoking programs, organized in concert with education and health
officials in every country, and placing the message "Underage Sales
Prohibited," or the equivalent message on every package of cigarettes where
legally feasible. Its advertising code prohibits the placement of
advertisements in media that are directed principally towards minors and
contains many other provisions that codify its commitment to ensuring that its
marketing activities around the world are directed only towards adults who
have chosen to smoke. In addition, as in the United States, there are existing
and proposed laws in many other countries that contain specific prohibitions
against youth-oriented tobacco advertising.
A similar proposal was defeated by stockholders at last year's Annual Meeting.
Therefore, your Board urges stockholders to vote AGAINST this proposal.
PROPOSAL 5--Spin off Tobacco Business From Rest of Corporation
The Congregation of the Sisters of Charity of the Incarnate Word, P.O. Box
230969, 6510 Lawndale, Houston, Texas 77223-0969, claiming beneficial
ownership of 1,000 shares of Common Stock, together with a co-proponent,
submitted the proposal set forth below. The name, address and shareholding of
the co-proponent will be furnished upon request made to the Secretary of the
Company.
"WHEREAS, in May, 1994 Philip Morris Companies, Inc.'s Board "decided not to
separate the Company's food and tobacco businesses and, further, that this
issue would not be placed before the Board again for the foreseeable future."
It reiterated this stance in response to a shareholder resolution in 1995
calling for a spinoff.
- -- At the time of the filing of this resolution calling for a spinoff
(November 1, 1999), the stock price of Philip Morris Companies, Inc.
decreased to $26.375--a 50% drop from the price one year previously. Much
of the drop resulted from the company's share in a $206 billion settlement
with 46 states for health-related claims and from a Florida appeals court
that ruled tobacco companies may be forced to pay multibillion-dollars in
damages in a class-action lawsuit related to tobacco-induced diseases and
deaths.
- -- This four-year low in the stock price has arisen mainly from the "liability
cloud" that hovers over the company, according to Christopher Grant, a
money manger which holds a stake in Philip Morris.
- -- This price reflects a huge discount, notes James Brucculeri, of Merrill
Lynch Global Securities. Brucculero figures Philip Morris is worth about
$52 a share, with Kraft accounting for about $23 a share, Miller for $3 a
share and tobacco accounting for the other half. "Clearly, the difference
[in the price] is the litigation." Brucculeri said.
- -- Brucculeri and others have said there's a possibility the low share price
for Philip Morris, coupled with the specter of huge damage awards by a
jury, might lead company Chairman and CEO Geoffrey Bible to consider the
possibility of a separation between the tobacco operations and Kraft/Miller
(Milwaukee Journal Sentinel, October 31, 1999).
- -- Peter Blain, a bankruptcy attorney, noted in the above article: "If there
was a deliberate attempt to put the stock of Miller and Kraft beyond reach
of Philip Morris creditors, that could be considered a fraudulent transfer
under the law. If Philip Morris became insolvent, its creditors could void
the transaction and reverse the spinoff in order to pull the assets back
in."
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- -- Blain also notes other reasons besides litigation fears that would lead
Philip Morris to spin-off its non-tobacco businesses from tobacco. These
could be to prepare one or the other entities for sale, to make it easier
for one of them to merge with another company, or to enhance the market
price for the stock of one and/or the other. Fear of litigation need not be
one of many reasons why Philip Morris might consider spinoff.
- -- We believe any inherent value identified with Miller and Kraft products is
undermined by their continued connection with Philip Morris.
RESOLVED: shareholders request the Board of Directors to take steps to
separate the Corporation's tobacco business from Philip Morris' other
businesses by January 1, 2001.
Supporting Statement
According to a BusinessWeek article on tobacco companies' spin-off (09/14/99):
"Despite the obstacles, though, spin-offs are probably still the companies'
best hope." If you agree, please vote "yes" for this resolution."
The Board recommends a vote AGAINST this proposal.
As noted by the proponents, in May 1994, your Company announced that its Board
of Directors had decided not to separate the Company's food and tobacco
businesses. This decision was made after months of management review and
deliberation, with the benefit of advice and counsel from leading investment
advisors and lawyers. Upon review, your Board concluded that it was not clear
that separation of the businesses would result in a meaningful, enduring
increase in stockholder value. It was clear, however, that such a decision
would have resulted in a prolonged, complicated and costly structural
transaction. The resulting uncertainties, including the possibility of
protracted litigation, posed a risk of disrupting the Company's businesses,
possibly causing stockholder value to diminish.
Despite the steep decline in the Company's stock price since early 1999, your
Board continues to believe that its decision in May 1994 was correct. In the
current environment, there continues to be no feasible means of separating the
Company's tobacco businesses from the food and beer businesses in the type of
transaction that would result in a meaningful, enduring increase in
stockholder value. The reaction of the financial markets to the 1999 tobacco
company spin-off by one of the Company's competitors supports this conclusion.
Similar proposals were overwhelmingly rejected by stockholders at the 1995 and
1996 Annual Meetings.
Therefore, your Board urges stockholders to vote AGAINST this proposal.
PROPOSAL 6--Report Addressing the Implication of the Company's Tobacco
Products
Gregory N. Connolly, D.M.D., M.P.H., 399 Common Street, Belmont, Massachusetts
02478, claiming beneficial ownership of 90 shares of Common Stock, submitted
the proposal set forth below.
"Whereas: Prior to October of 1999, our management told the public and
shareholders that cigarette smoking had not been shown to cause disease among
smokers (including lung cancer). It also would not recognize it as addictive.
In October 1999, our company admitted there is overwhelming medical and
scientific consensus that cigarette smoke can cause lung cancer, heart
disease, emphysema, and other serious diseases in smokers and that smokers are
far more likely to develop serious diseases like lung cancer than non-smokers.
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Our company also stated that cigarette smoking is addictive, as that term is
most commonly used today. It recognized that it can be very difficult to quit
smoking, but that this difficulty should not deter smokers who want to quit
from doing so.
Our company has stated that smokers should not assume that brand descriptors
such as "light" or "ultra light" indicate precisely either the amount of tar
or nicotine inhaled from any particular cigarette or the relative amount as
compared to competing cigarette brands. It also has stated that smokers should
not assume lower yield brands are safer than full flavored brands.
Our company has already developed a smokeless cigarette called "Accord." It
greatly reduces the toxins in smoke associated with lung cancer and other
smoking related diseases.
Our company has been sued by state attorney generals the federal government,
classes of smokers and individuals for illness caused by use of our products,
including lung cancer. It has agreed to pay billions of dollars over the next
25 years to States to settle the lawsuits.
When our company discovered that a contaminant, MITC, was present in our
cigarettes, causing respiratory irritation, it launched a massive recall of
cigarettes to remove MITC. It did so, it said, to protect the health of our
consumers.
Other manufacturers, such as the makers of Tylenol, who have found that their
products might cause death and disease have either corrected the defect in the
product or removed it from the market so as to protect the public health and
limit future liability.
Be it resolved that management develop a report within one year for
shareholders with the details of how the company intends to address what the
company now admits: that our products cause ill-health among humans. It should
also note how the company intends to correct the defects in the products that
cause such sickness, such as reducing or eliminating harmful constituents in
the product or its smoke or recall of brands that are suspected of causing
lung cancer."
The Board recommends a vote AGAINST this proposal.
In October 1999, the Company established a Web site that included the
following statements of its domestic tobacco subsidiary, Philip Morris U.S.A.
at www.philipmorrisusa.com:
Cigarette Smoking and Disease in Smokers: There is an overwhelming
medical and scientific consensus that cigarette smoking causes lung
cancer, heart disease, emphysema and other serious diseases in smokers.
Smokers are far more likely to develop serious diseases, like lung
cancer, than non-smokers. There is no "safe" cigarette. These are and
have been the messages of public health authorities worldwide. Smokers
and potential smokers should rely on these messages in making all
smoking-related decisions.
Cigarette Smoking and Addiction: Cigarette smoking is addictive, as that
term is most commonly used today. It can be very difficult to quit
smoking, but this should not deter smokers who want to quit from trying
to do so.
The purpose for including these statements on the Web site is set forth in the
Company's most recent annual report on Form 10-K:
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 [has] 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.
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The proponent mischaracterizes and selectively quotes the statements on the
Web site. Nevertheless, as noted in the referenced language from the Form 10-
K, the Company will refrain from debating these smoking and health issues in
order to ensure that there is a single, consistent public health message on
these issues. The statements on the Web site are consistent with that
position.
With respect to the report requested by the proponent, the Company's tobacco
subsidiaries have made substantial efforts and expended substantial funds
towards improving their tobacco products and attempting to reduce the risks
associated with their use. Nonetheless, no "safe" cigarette has been
developed, proposed or endorsed by the public health authorities. Accordingly,
the Company does not believe that the report requested by the proponent would
be appropriate.
Therefore, your Board urges stockholders to vote AGAINST this proposal.
OTHER MATTERS
Management knows of no other business that will be presented to the meeting
for a vote, except that it is possible that stockholder proposals not included
in this proxy statement may be presented. If other matters properly come
before the meeting, including proposals omitted from this proxy statement and
accompanying proxy pursuant to the rules of the Securities and Exchange
Commission, the persons named as proxies will vote on them in accordance with
their best judgment.
The cost of this solicitation of proxies will be borne by the Company. In
addition to the use of the mail, some of the officers and regular employees of
the Company may solicit proxies by telephone and will request brokerage
houses, banks and other custodians, nominees and fiduciaries to forward
soliciting material to the beneficial owners of Common Stock held of record by
such persons. The Company will reimburse such persons for expenses incurred in
forwarding such soliciting material. It is contemplated that additional
solicitation of proxies will be made in the same manner under the engagement
and direction of D.F. King & Co., Inc., 77 Water Street, New York, NY 10005,
at an anticipated cost of $22,000, plus reimbursement of out-of-pocket
expenses.
2001 ANNUAL MEETING
Stockholders wishing to suggest candidates to the Nominating and Corporate
Governance Committee for consideration as directors may submit names and
biographical data to the Secretary of the Company. The Company's By-Laws
prescribe the procedures a stockholder must follow to nominate directors or to
bring other business before stockholder meetings. For a stockholder to
nominate a candidate for director at the 2001 Annual Meeting, presently
anticipated to be held on April 26, 2001, notice of the nomination must be
received by the Company between October 12 and November 11, 2000. The notice
must describe various matters regarding the nominee, including name, address,
occupation and shares held. For a stockholder to bring other matters before
the 2001 Annual Meeting, and to include a matter in the Company's proxy
statement and proxy for that meeting, notice must be received by the Company
within the time limits described above. The notice must include a description
of the proposed business, the reasons therefor and other specified matters. In
each case, the notice must be given to the Secretary of the Company, whose
address is 120 Park Avenue, New York, NY 10017. Any stockholder desiring a
copy of the Company's By-Laws will be furnished one without charge upon
written request to the Secretary.
G. Penn Holsenbeck
March 10, 2000 Vice President and Secretary
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EXHIBIT A
2000 PERFORMANCE INCENTIVE PLAN
Section 1. Purpose; Definitions.
The purpose of the Plan is to support the Company's ongoing efforts to develop
and retain world-class leaders and to provide the Company with the ability to
provide incentives more directly linked to the profitability of the Company's
businesses and increases in stockholder value.
For purposes of the Plan, the following terms are defined as set forth below:
a. "Annual Incentive Award" means an Incentive Award made pursuant to
Section 5(a)(v) with a Performance Cycle of one year or less.
b. "Award" means the grant under the Plan of Incentive Awards, Stock
Options, Stock Appreciation Rights, Restricted Stock or Other Stock-Based
Awards.
c. "Board" means the Board of Directors of the Company.
d. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
e. "Commission" means the Securities and Exchange Commission or any
successor agency.
f. "Committee" means the Compensation Committee of the Board or a
subcommittee thereof, any successor thereto or such other committee or
subcommittee as may be designated by the Board to administer the Plan.
g. "Common Stock" or "Stock" means the Common Stock of the Company.
h. "Company" means Philip Morris Companies Inc., a corporation organized
under the laws of the Commonwealth of Virginia, or any successor thereto.
i. "Economic Value Added" means net after-tax operating profit less the
cost of capital.
j. "Exercise Period" means the 60-day period from and after a Change in
Control.
k. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
l. "Fair Market Value" means, as of any given date, the mean between the
highest and lowest reported sales prices of the Common Stock on the New
York Stock Exchange-Composite Transactions or, if no such sale of Common
Stock is reported on such date, the fair market value of the Stock as
determined by the Committee in good faith; provided, however, that the
Committee may in its discretion designate the actual sales price as Fair
Market Value in the case of dispositions of Common Stock under the Plan.
m. "Incentive Award" means any Award that is either an Annual Incentive
Award or a Long-Term Incentive Award.
n. "Incentive Stock Option" means any Stock Option that complies with
Section 422 (or any amended or successor provision) of the Code.
o. "Long-Term Incentive Award" means an Incentive Award made pursuant to
Section 5(a)(v) with a Performance Cycle of more than one year.
p. "Nonqualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
q. "Other Stock-Based Award" means an Award made pursuant to Section
5(a)(iii).
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r. "Performance Cycle" means the period selected by the Committee during
which the performance of the Company or any subsidiary, affiliate or unit
thereof or any individual is measured for the purpose of determining the
extent to which an Award subject to Performance Goals has been earned.
s. "Performance Goals" mean the objectives for the Company or any
subsidiary or affiliate or any unit thereof or any individual that may be
established by the Committee for a Performance Cycle with respect to any
performance-based Awards contingently awarded under the Plan. The
Performance Goals for Awards that are intended to constitute "performance-
based" compensation within the meaning of Section 162(m) (or any amended or
successor provision) of the Code shall be based on one or more of the
following criteria: earnings per share, total shareholder return, operating
income, net income, cash flow, return on equity, return on capital, or
Economic Value Added.
t. "Plan" means this 2000 Performance Incentive Plan, as amended from time
to time.
u. "Restricted Period" means the period during which an Award may not be
sold, assigned, transferred, pledged or otherwise encumbered.
v. "Restricted Stock" means an Award of shares of Common Stock pursuant to
Section 5(a)(iv).
w. "Spread Value" means, with respect to a share of Common Stock subject to
an Award, an amount equal to the excess of the Fair Market Value, on the
date such value is determined, over the Award's exercise or grant price, if
any.
x. "Stock Appreciation Right" or "SAR" means a right granted pursuant to
Section 5(a)(ii).
y. "Stock Option" means an Incentive Stock Option or a Nonqualified Stock
Option granted pursuant to Section 5(a)(i).
In addition, the terms "Business Combination," "Change in Control," "Change in
Control Price," "Incumbent Board," "Outstanding Company Stock," "Outstanding
Company Voting Securities" and "Person" have the meanings set forth in Section
6.
Section 2. Administration.
The Plan shall be administered by the Committee, which shall have the power to
interpret the Plan and to adopt such rules and guidelines for carrying out the
Plan as it may deem appropriate. The Committee shall have the authority to
adopt such modifications, procedures and subplans as may be necessary or
desirable to comply with the laws, regulations, compensation practices and tax
and accounting principles of the countries in which the Company, a subsidiary
or an affiliate may operate to assure the viability of the benefits of Awards
made to individuals employed in such countries and to meet the objectives of
the Plan.
Subject to the terms of the Plan, the Committee shall have the authority to
determine those employees eligible to receive Awards and the amount, type and
terms of each Award and to establish and administer any Performance Goals
applicable to such Awards. The Committee may delegate its authority and power
under the Plan to one or more officers of the Company, subject to guidelines
prescribed by the Committee, but only with respect to participants who are not
subject to either Section 16 of the Exchange Act or Section 162(m) (or any
amended or successor provision) of the Code.
Any determination made by the Committee or by one or more officers pursuant to
delegated authority in accordance with the provisions of the Plan with respect
to any Award shall be made in the sole discretion of the Committee or such
delegate, and all decisions made by the Committee or any appropriately
designated officer pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Company and Plan participants.
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Section 3. Eligibility.
Salaried employees of the Company, its subsidiaries and affiliates, who are
responsible for or contribute to the management, growth and profitability of
the business of the Company, its subsidiaries or its affiliates, are eligible
to be granted Awards under the Plan.
Section 4. Common Stock Subject to the Plan.
The total number of shares of Common Stock reserved and available for
distribution pursuant to the Plan shall be 110,000,000. If any Award under the
Plan is exercised or cashed out or terminates or expires or is forfeited
without a payment being made to the participant in the form of Common Stock,
the shares subject to such Award, if any, shall again be available for
distribution in connection with Awards under the Plan. Any shares of Common
Stock that are used by a participant as full or partial payment of withholding
or other taxes or as payment for the exercise or conversion price of an Award
under the Plan shall be available for distribution in connection with Awards
under the Plan.
In the event of any merger, share exchange, reorganization, consolidation,
recapitalization, reclassification, distribution, stock dividend, stock split,
reverse stock split, split-up, spin-off, issuance of rights or warrants or
other similar transaction or event affecting the Common Stock after adoption
of the Plan by the Board, the Board is authorized, to the extent it deems
appropriate, to make substitutions or adjustments in the aggregate number and
kind of shares of Common Stock reserved for issuance under the Plan, in the
number, kind and price of shares of Common Stock subject to outstanding Awards
and in the Award limits set forth in Section 5 (or to make provision for cash
payments to the holders of Awards).
Section 5. Awards.
(a) General. The types of Awards that may be granted under the Plan are set
forth below. Awards may be granted singly, in combination or in tandem with
other Awards.
(i) Stock Options. A Stock Option represents the right to purchase a share
of Stock at a predetermined grant price. Stock Options granted under the
Plan may be in the form of Incentive Stock Options or Nonqualified Stock
Options, as specified in the Award agreement. The term of each Stock Option
shall be set forth in the Award agreement, but no Stock Option shall be
exercisable more than ten years after the grant date. The grant price per
share of Common Stock purchasable under a Stock Option shall not be less
than 100% of the Fair Market Value on the date of grant. Subject to the
applicable Award agreement, Stock Options may be exercised, in whole or in
part, by giving written notice of exercise specifying the number of shares
to be purchased. Such notice shall be accompanied by payment in full of the
purchase price by certified or bank check or such other instrument as the
Company may accept (including a copy of instructions to a broker or bank
acceptable to the Company to deliver promptly to the Company an amount of
sale or loan proceeds sufficient to pay the purchase price). As determined
by the Committee, payment in full or in part may also be made in the form
of Common Stock already owned by the optionee valued at Fair Market Value;
provided, however, that such Common Stock shall not have been acquired by
the optionee within the preceding six months.
(ii) Stock Appreciation Rights. An SAR represents the right to receive a
payment, in cash, shares of Common Stock, or both (as determined by the
Committee), with a value equal to the Spread Value on the date the SAR is
exercised. The grant price of an SAR shall be set forth in the applicable
Award agreement and shall not be less than 100% of the Fair Market Value on
the date of grant. Subject to the terms of the applicable Award agreement,
an SAR shall be exercisable, in whole or in part, by giving written notice
of exercise.
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(iii) Other Stock-Based Awards. Other Stock-Based Awards are Awards, other
than Stock Options, SARs or Restricted Stock, that are denominated in,
valued in whole or in part by reference to, or otherwise based on or
related to, Common Stock. The grant, purchase, exercise, exchange or
conversion of Other Stock-Based Awards granted under this subsection (iii)
shall be on such terms and conditions and by such methods as shall be
specified by the Committee. Where the value of an Other Stock-Based Award
is based on the Spread Value, the grant price for such an Award will not be
less than 100% of the Fair Market Value on the date of grant.
(iv) Restricted Stock. Shares of Restricted Stock are shares of Common
Stock that are awarded to a participant and that during the Restricted
Period may be forfeitable to the Company upon such conditions as may be set
forth in the applicable Award agreement. Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered during the
Restricted Period. Except as provided in the applicable Award agreement, a
participant shall have with respect to such Restricted Stock all the rights
of a holder of Common Stock during the Restricted Period.
(v) Incentive Awards. Incentive Awards are performance-based Awards that
are expressed in U.S. currency or Common Stock or any combination thereof.
Incentive Awards shall either be Annual Incentive Awards or Long-Term
Incentive Awards.
(b) Maximum Awards. Subject to the exercise of the Board's authority pursuant
to Section 4:
(i) The total number of shares of Common Stock subject to Stock Options and
Stock Appreciation Rights awarded during any Plan year to any participant
shall not exceed ten million.
(ii) The total amount of any Annual Incentive Award awarded to any
participant with respect to any Performance Cycle shall not exceed
$10,000,000.
(iii) The total amount of any Long-Term Incentive Award expressed in U.S.
currency paid to any participant with respect to any Performance Cycle
shall not exceed $6,000,000 times the number of years in the Performance
Cycle. The total number of shares of Common Stock issuable under any Long-
Term Incentive Award to any participant with respect to any Performance
Cycle shall not exceed 300,000 times the number of years in the Performance
Cycle.
(iv) An amount not in excess of 25% of the total number of shares of Common
Stock reserved and available for distribution pursuant to the Plan as
determined pursuant to Section 4 may be issued pursuant to Restricted Stock
Awards, Other Stock-Based Awards, and Incentive Awards, except that Other
Stock-Based Awards with values based on Spread Values shall not be included
in this limitation.
(c) Performance-Based Awards. Any Awards granted pursuant to the Plan may be
in the form of performance-based Awards through the application of Performance
Goals and Performance Cycles.
Section 6. Change in Control Provisions.
(a) Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) All Stock Options and Stock Appreciation Rights outstanding as of the
date such Change in Control occurs shall become fully vested and
exercisable.
(ii) The restrictions and other conditions applicable to any Restricted
Stock or Other Stock-Based Awards, including vesting requirements, shall
lapse, and such Awards shall become free of all restrictions and fully
vested.
(iii) The value of all outstanding Stock Options, Stock Appreciation
Rights, Restricted Stock and Other Stock-Based Awards shall, unless
otherwise determined by the Committee at or after
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grant, be cashed out on the basis of the "Change in Control Price," as
defined in Section 6(c), as of the date such Change in Control occurs or
such other date as the Committee may determine prior to the Change in
Control.
(iv) Any Incentive Awards relating to Performance Cycles prior to the
Performance Cycle in which the Change in Control occurs that have been
earned but not paid shall become immediately payable in cash. In addition,
each participant who has been awarded an Incentive Award for the
Performance Cycle in which the Change in Control occurs shall be deemed to
have earned a pro rata Incentive Award equal to the product of (A) such
participant's maximum award opportunity for such Performance Cycle, and (B)
a fraction, the numerator of which is the number of full or partial months
that have elapsed since the beginning of such Performance Cycle to the date
on which the Change in Control occurs, and the denominator of which is the
total number of months in such Performance Cycle.
(b) Definition of Change in Control. A "Change in Control" means the happening
of any of the following events:
(i) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person")) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (A) the then outstanding shares
of Common Stock (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that the
following acquisitions shall not constitute a Change in Control: (1) any
acquisition directly from the Company, (2) any acquisition by the Company,
(3) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any entity controlled by the
Company or (4) any acquisition by any corporation pursuant to a transaction
described in clauses (A), (B) and (C) of paragraph (iii) of this Section
6(b); or
(ii) Individuals who, as of the effective date of the Plan, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to such effective date whose election, or nomination
for election by the stockholders of the Company, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(iii) Approval by the stockholders of the Company of a reorganization,
merger, share exchange or consolidation (a "Business Combination"), unless
in each case following such Business Combination, (A) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 80% of, respectively,
the then outstanding shares of common stock and the combined voting power
of the then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation that as a result of such transaction owns the Company through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (B) no Person (excluding any employee benefit plan (or
related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or
more of, respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting
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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 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 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 sale or disposition and (3) at least a majority of
the members of the board of directors of such corporation were members of
the Incumbent Board at the time of the execution of the initial agreement,
or of the action of the Board, providing for such sale or other disposition
of assets of the Company or were elected, appointed or nominated by the
Board.
(c) Change in Control Price. "Change in Control Price" means the highest price
per share paid in any transaction reported on the New York Stock Exchange-
Composite Transactions or paid or offered in any bona fide transaction related
to a potential or actual change in control of the Company at any time during
the preceding 60-day period as determined by the Committee, except that, in
the case of Incentive Stock Options, such price shall be based only on
transactions reported for the date on which such Incentive Stock Options are
cashed out.
(d) Notwithstanding any other provision of the Plan to the contrary, upon a
Change in Control, unless the Committee shall determine otherwise at grant, an
Award recipient shall have the right, by giving notice to the Company within
the Exercise Period, to elect to surrender all or part of the Stock Option,
SAR, Restricted Stock or Other Stock-Based Award to the Company and to receive
in cash, within 30 days of such notice, an amount equal to the amount by which
the "Change in Control Price" on the date of such notice shall exceed the
exercise or grant price under such Award, multiplied by the number of shares
of Stock as to which the right granted under this Section 6 shall have been
exercised.
Section 7. Plan Amendment and Termination.
The Board may amend or terminate the Plan at any time, provided that no such
amendment shall be made without stockholder approval if such approval is
required under applicable law, or if such amendment would: (i) decrease the
grant or exercise price of any Stock Option, SAR or Other Stock-Based Award to
less than the Fair Market Value on the date of grant; or (ii) increase the
total number of shares of Common Stock that may be distributed under the Plan.
Except as may be necessary to comply with a change in the laws, regulations or
accounting principles of a foreign country applicable
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to participants subject to the laws of such foreign country, the Committee may
not, without stockholder approval, cancel any option and substitute therefor a
new option with a lower option price. Except as set forth in any Award
agreement, no amendment or termination of the Plan may materially and
adversely affect any outstanding Award under the Plan without the Award
recipient's consent.
Section 8. Payments and Payment Deferrals.
Payment of Awards may be in the form of cash, Stock, other Awards or
combinations thereof as the Committee shall determine, and with such
restrictions as it may impose. The Committee, either at the time of grant or
by subsequent amendment, may require or permit deferral of the payment of
Awards under such rules and procedures as it may establish. It also may
provide that deferred settlements include the payment or crediting of interest
or other earnings on the deferred amounts, or the payment or crediting of
dividend equivalents where the deferred amounts are denominated in Common
Stock equivalents.
Section 9. Dividends and Dividend Equivalents.
The Committee may provide that any Awards under the Plan earn dividends or
dividend equivalents. Such dividends or dividend equivalents may be paid
currently or may be credited to a participant's Plan account. Any crediting of
dividends or dividend equivalents may be subject to such restrictions and
conditions as the Committee may establish, including reinvestment in
additional shares of Common Stock or Common Stock equivalents.
Section 10. Transferability.
Unless otherwise required by law, Awards shall not be transferable or
assignable other than by will or the laws of descent and distribution.
Section 11. Award Agreements.
Each Award under the Plan shall be evidenced by a written agreement (which
need not be signed by the recipient unless otherwise specified by the
Committee) that sets forth the terms, conditions and limitations for each
Award. Such terms may include, but are not limited to, the term of the Award,
vesting and forfeiture provisions, and the provisions applicable in the event
the recipient's employment terminates. The Committee may amend an Award
agreement, provided that no such amendment may materially and adversely affect
an Award without the Award recipient's consent.
Section 12. Unfunded Status Plan.
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation
of trusts or other arrangements to meet the obligations created under the Plan
to deliver Common Stock or make payments; provided, however, that, unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
Section 13. General Provisions.
(a) The Committee may require each person acquiring shares of Common Stock
pursuant to an Award to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to the distribution
thereof. The certificates for such shares may include any legend that the
Committee deems appropriate to reflect any restrictions on transfer.
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All certificates for shares of Common Stock or other securities delivered
under the Plan shall be subject to such stock transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Commission, any stock exchange upon which the
Common Stock is then listed, and any applicable Federal, state or foreign
securities law, and the Committee may cause a legend or legends to be put on
any such certificates to make appropriate reference to such restrictions.
(b) Nothing contained in the Plan shall prevent the Company, a subsidiary or
an affiliate from adopting other or additional compensation arrangements for
their respective employees.
(c) Neither the adoption of the Plan nor the granting of Awards under the Plan
shall confer upon any employee any right to continued employment nor shall
they interfere in any way with the right of the Company, a subsidiary or an
affiliate to terminate the employment of any employee at any time.
(d) No later than the date as of which an amount first becomes includable in
the gross income of the participant for 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 that are required by law or
applicable regulation to be withheld with respect to such amount. Unless
otherwise determined by the Committee, withholding obligations arising from an
Award may be settled with Common Stock, including Common Stock that is part
of, or is received upon exercise or conversion of, the Award that gives rise
to the withholding requirement. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements, and the Company, its
subsidiaries and its affiliates shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment otherwise due to the
participant. The Committee may establish such procedures as it deems
appropriate, including the making of irrevocable elections, for the settling
of withholding obligations with Common Stock.
(e) 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.
(f) If any provision of the Plan is held invalid or unenforceable, the
invalidity or unenforceability shall not affect the remaining parts of the
Plan, and the Plan shall be enforced and construed as if such provision had
not been included.
(g) If approved by stockholders, the Plan shall be effective on May 1, 2000.
Except as otherwise provided by the Board, no Awards shall be made after May
1, 2005, provided that any Awards granted prior to that date may extend beyond
it.
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EXHIBIT B
2000 STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
Section 1. Purpose; Definitions.
The purposes of the Plan are (i) to assist the Company in promoting a greater
identity of interest between the Company's Non-Employee Directors and the
Company's stockholders; and (ii) to assist the Company in attracting and
retaining Non-Employee Directors by affording them an opportunity to share in
the future successes of the Company.
For purposes of the Plan, the following terms are defined as set forth below:
a. "Award" means the grant under the Plan of Stock and Stock Options.
b. "Black-Scholes Value" means the value of a Stock Option granted under
the Plan to purchase one share of Common Stock determined pursuant to the
option pricing model commonly known as the Black-Scholes method. The Black-
Scholes Value shall be calculated as of the first day of the Plan Year,
based on the applicable assumptions used in calculating values of stock
options in the Company's then current annual meeting proxy statement and/or
annual report with such adjustments as may be necessary to reflect
different grant dates and terms.
c. "Board" means the Board of Directors of the Company.
d. "Committee" means the Compensation Committee of the Board or a
subcommittee thereof, any successor thereto or such other committee or
subcommittee as may be designated by the Board to administer the Plan.
e. "Common Stock" or "Stock" means the Common Stock of the Company.
f. "Company" means Philip Morris Companies Inc., a corporation organized
under the laws of the Commonwealth of Virginia, or any successor thereto.
g. "Deferred Stock" means an entry on the books and records of the Company
in an amount equal to the value of one notional unit in the Philip Morris
Stock Fund.
h. "Deferred Stock Account" means the unfunded deferred compensation
account established by the Company with respect to each participant who
elects to participate in the Deferred Stock Program in accordance with
Section 7 of the Plan.
i. "Deferred Stock Program" means the provisions of Section 7 of the Plan
that permit participants to defer all or part of any Award of Stock
pursuant to Section 5(a)(i) of the Plan.
j. "Fair Market Value" means, as of any given date, the mean between the
highest and lowest reported sales prices of the Common Stock on the New
York Stock Exchange-Composite Transactions or, if no such sale of Common
Stock is reported on such date, the fair market value of the Stock as
determined by the Committee in good faith; provided, however, that the
Committee may in its discretion designate the actual sales price as Fair
Market Value in the case of dispositions of Common Stock under the Plan.
k. "Non-Employee Director" means each member of the Board who is not a
full-time employee of the Company or of any corporation in which the
Company owns, directly or indirectly, stock possessing at least 50% of the
total combined voting power of all classes of stock entitled to vote in the
election of directors in such corporation.
l. "Philip Morris Stock Fund" means the Philip Morris Stock Fund of the
Philip Morris Deferred Profit-Sharing Plan, as amended from time to time.
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m. "Plan" means this 2000 Stock Compensation Plan for Non-Employee
Directors, as amended from time to time.
n. "Plan Year" means the period commencing at the opening of business on
the day on which the Company's annual meeting of stockholders is held and
ending on the day immediately preceding the day on which the Company's next
annual meeting of stockholders is held.
o. "Prior Directors Plan" shall mean the Philip Morris Companies Inc. 1992
Compensation Plan For Non-Employee Directors.
p. "Stock Option" means the right to purchase a share of Stock at a price
equal to Fair Market Value on the date of grant. All Stock Options granted
under the Plan shall be nonqualified stock options.
Section 2. Administration.
The Plan shall be administered by the Committee, which shall have the power to
interpret the Plan and to adopt such rules and guidelines for carrying out the
Plan as it may deem appropriate. The Committee shall have the authority to
adopt such modifications, procedures and subplans as may be necessary or
desirable to comply with the laws, regulations, compensation practices and tax
and accounting principles of the countries in which Non-Employee Directors
reside or are citizens of and to meet the objectives of the Plan.
Any determination made by the Committee in accordance with the provisions of
the Plan with respect to any Award shall be made in the sole discretion of the
Committee, and 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. Eligibility.
Only Non-Employee Directors shall be granted Awards under the Plan.
Section 4. Common Stock Subject to the Plan.
The total number of shares of Common Stock reserved and available for
distribution pursuant to the Plan shall be 1,000,000. If any Stock Option is
forfeited or expires without the delivery of Common Stock to a participant,
the shares subject to such Stock Option shall again be available for
distribution in connection with Awards under the Plan. Any shares of Common
Stock that are used by a participant as full or partial payment of withholding
or other taxes or as payment for the exercise price of a Stock Option shall be
available for distribution in connection with Awards under the Plan.
In the event of any merger, share exchange, reorganization, consolidation,
recapitalization, reclassification, distribution, stock dividend, stock split,
reverse stock split, split-up, spin-off, issuance of rights or warrants or
other similar transaction or event affecting the Common Stock after adoption
of the Plan by the Board, the Board is authorized, to the extent it deems
appropriate, to make substitutions or adjustments in the aggregate number and
kind of shares of Common Stock reserved for issuance under the Plan, in the
number, kind and price of shares of Common Stock subject to outstanding Awards
and in the Award amounts set forth in Section 5 (or to make provision for cash
payments to the holders of Awards).
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Section 5. Awards.
(a) Annual Awards. On the first day of each Plan Year, each Non-Employee
Director serving as such immediately after the annual meeting held on such day
shall be awarded the following:
(i) a grant of that number of shares of Stock having an aggregate Fair
Market Value on the date of grant equal to $40,000 (with any fractional
share being rounded up to the next whole share); and
(ii) a grant of Stock Options to purchase that number of shares of Stock
equal to the number derived from dividing $40,000 by the Black-Scholes
Value of each such Stock Option (with any fractional share being rounded up
to the next whole share).
(b) Terms of Awards.
(i) Awards pursuant to Section 5(a)(i) are eligible for participation in
the Deferred Stock Program described in Section 7.
(ii) The term of each Stock Option shall be ten years. Subject to the
applicable Award agreement, Stock Options may be exercised, in whole or in
part, by giving written notice of exercise specifying the number of shares
to be purchased. Such notice shall be accompanied by payment in full of the
purchase price by certified or bank check or such other instrument as the
Company may accept (including a copy of instructions to a broker or bank
acceptable to the Company to deliver promptly to the Company an amount of
sale or loan proceeds sufficient to pay the purchase price). As determined
by the Committee, payment in full or in part may also be made in the form
of Common Stock already owned by the Non-Employee Director valued at Fair
Market Value; provided, however, that such Common Stock shall not have been
acquired by the optionee within the preceding six months.
Section 6. Plan Amendment and Termination.
The Board may amend or terminate the Plan at any time, provided that no such
amendment shall be made without stockholder approval if such approval is
required under applicable law, or if such amendment would: (i) decrease the
grant or exercise price of any Stock Option to less than the Fair Market Value
on the date of grant; or (ii) increase the total number of shares of Common
Stock that may be distributed under the Plan. Except as may be necessary to
comply with a change in the laws, regulations or accounting principles of a
foreign country applicable to participants subject to the laws of such foreign
country, the Committee may not, without stockholder approval, cancel any
option and substitute therefor a new Stock Option with a lower option price.
Except as set forth in any Award agreement, no amendment or termination of the
Plan may materially and adversely affect any outstanding Award under the Plan
without the Award recipient's consent.
Section 7. Payments and Payment Deferrals.
The Committee, either at the time of grant or by subsequent amendment, may
require or permit deferral of the payment of Awards under such rules and
procedures as it may establish. It also may provide that deferred settlements
include the payment or crediting of interest or other earnings on the deferred
amounts, or the payment or crediting of dividend equivalents where the
deferred amounts are denominated in Common Stock equivalents.
Each participant may elect to participate in a Deferred Stock Program with
respect to Awards granted under Section 5(a)(i). Any election to have the
Company establish a Deferred Stock Account shall be made in terms of integral
multiples of 25% of the value of the Common Stock that the participant
otherwise would have received on each date of grant and any such election
(including an existing election to participate in the Deferred Stock Program
under the Prior Directors Plan) shall remain in effect for purposes of the
Plan until the participant executes a new election not to participate in the
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Deferred Stock Program for any future grants of Common Stock. The Deferred
Stock Account of a participant who elects to participate in the Deferred Stock
Program shall be credited with Deferred Stock equal to that resulting from a
theoretical investment in the Philip Morris Stock Fund on the date of grant of
an amount equal to the portion of the award of Common Stock that the
participant elected to receive as Deferred Stock. The Deferred Stock Account
shall be credited with earnings and charged with losses, if any, and subject
to other adjustments on the same basis as the Philip Morris Stock Fund. The
Deferred Stock Program shall otherwise be administered in a manner similar to
the deferred fee program under the Prior Directors Plan and under such rules
and procedures as the Committee may, from time to time establish, including
rules with respect to elections to defer, beneficiary designations and
distributions under the Deferred Stock Program.
Section 8. Transferability.
Unless otherwise required by law, Awards shall not be transferable or
assignable other than by will or the laws of descent and distribution.
Section 9. Award Agreements.
Each Award of a Stock Option under the Plan shall be evidenced by a written
agreement (which need not be signed by the Award recipient unless otherwise
specified by the Committee) that sets forth the terms, conditions and
limitations for each such Award. Each Stock Option shall vest in not less than
six months (or such longer period set forth in the Award agreement) and shall
be forfeited if the participant does not continue to be a Non-Employee
Director for the duration of the vesting period. The Committee may amend an
Award agreement, provided that no such amendment may materially and adversely
affect an Award without the Award recipient's consent.
Section 10. Unfunded Status Plan.
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation
of trusts or other arrangements to meet the obligations created under the Plan
to deliver Common Stock or make payments; provided, however, that, unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
Section 11. General Provisions.
(a) The Committee may require each person acquiring shares of Common Stock
pursuant to an Award to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to the distribution
thereof. The certificates for such shares may include any legend that the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Common Stock or other securities delivered
under the Plan shall be subject to such stock transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities and Exchange Commission (or any
successor agency), any stock exchange upon which the Common Stock is then
listed, and any applicable Federal, state or foreign securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
(b) Nothing contained in the Plan shall prevent the Company from adopting
other or additional compensation arrangements for Non-Employee Directors.
(c) No later than the date as of which an amount first becomes includable in
the gross income of the participant for 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 that are required by law or
applicable regulation to be withheld with respect to such amount. Unless
otherwise determined by the Committee, withholding obligations arising from an
Award may be settled with Common Stock, including Common Stock that is part
of, or is received upon exercise of the Award that gives rise to the
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withholding requirement. The obligations of the Company under the Plan shall
be conditional on such payment or arrangements, and the Company, shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment otherwise due to the participant. The Committee may establish such
procedures as it deems appropriate, including the making of irrevocable
elections, for the settling of withholding obligations with Common Stock.
(d) 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.
(e) If any provision of the Plan is held invalid or unenforceable, the
invalidity or unenforceability shall not affect the remaining parts of the
Plan, and the Plan shall be enforced and construed as if such provision had
not been included.
(f) If approved by stockholders, the Plan shall be effective at the conclusion
of the 2000 Annual Meeting of Stockholders. Except as otherwise provided by
the Board, no Awards shall be made after the Awards made immediately following
the 2005 Annual Meeting of Stockholders, provided that any Awards granted
prior to that date may extend beyond it.
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[LOGO OF PHILIP MORRIS COMPANIES INC. APPEARS HERE]
NOTICE OF
ANNUAL MEETING
OF STOCKHOLDERS
THURSDAY,
APRIL 27, 2000
AND PROXY
STATEMENT
