Draft of 10/31/94
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
<TABLE>
<S> <C> <C> <C>
RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware 1-10215 13-3490602
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-6388 56-0950247
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1301 Avenue of the Americas
New York, New York 10019-6013
(212) 258-5600
(Address, including zip code, and telephone number,
including area code, of the principal executive offices of
RJR Nabisco Holdings Corp.
and RJR Nabisco, Inc.)
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrants were required to file such
reports), and (2) have been subject to such filing requirements for
the past 90 days. YES X , NO .
-- ---
Indicate the number of shares outstanding of each of the Registrants'
classes of common stock as of the latest practicable date: September
30, 1994:
RJR Nabisco Holdings Corp.: 1,147,648,192 shares of common
stock, par value $.01 per share
RJR Nabisco, Inc.: 3,021.86513 shares of common stock, par
value $1,000 per share
RJR Nabisco, Inc. meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing
this form with the reduced disclosure format.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Statements of Income - Three Months
Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Condensed Statements of Income - Nine Months
Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Condensed Statements of Cash Flows - Nine Months
Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Balance Sheets - September 30, 1994
and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . 5-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-28
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
<PAGE>
PART I
------
Item 1. Financial Statements.
RJR Nabisco Holdings Corp.
RJR Nabisco, Inc.
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
Three Months Three Months
Ended Ended
September 30, 1994 September 30, 1993
------------------- -------------------
Holdings RJRN Holdings RJRN
---------- ---- --------- ----
<S> <C> <C> <C> <C>
Net sales* $ 3,966 $ 3,966 $ 3,598 $ 3,598
---------- --------- --------- ---------
Costs and expenses (Note 1) *:
Cost of products sold 1,815 1,815 1,649 1,649
Selling, advertising, administrative and general expenses 1,316 1,313 1,362 1,359
Amortization of trademarks and goodwill 157 157 156 156
---------- --------- --------- ---------
Operating income 678 681 431 434
Interest and debt expense (Note 5) (240) (240) (290) (290)
Other income (expense), net (38) (39) (8) (9)
---------- --------- --------- ---------
Income before income taxes 400 402 133 135
Provision for income taxes 184 185 59 60
---------- --------- --------- ---------
Income before extraordinary item 216 217 74 75
Extraordinary item - gain on early extinguishments of
debt, net of income taxes (Note 4) - - 2 2
---------- --------- --------- ---------
Net income 216 217 76 77
Less preferred stock dividends 33 - 20 -
---------- --------- --------- ---------
Net income applicable to common stock $ 183 $ 217 $ 56 $ 77
========== ========= ========= =========
Net income per common and common equivalent share:
Income before extraordinary item $ .11 $ .04
Extraordinary item - -
---------- --------
Net income $ .11 $ .04
========== ========
Dividends per share of Series A Preferred Stock (Note 8) $ .835 $ .835
========== ========
Dividends per share of Series C Preferred Stock (Note 8) $ 1.503 $ -
========== ========
Average number of common and common equivalent
shares outstanding (in thousands) (Note 2) 1,632,590 1,350,485
========== =========
_____________________
* Excludes excise taxes of $931 million and $914 million for the three months ended
September 30, 1994 and 1993, respectively.
</TABLE>
See Notes to Consolidated Condensed Financial Statements
- 1 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
Nine Months Nine Months
Ended Ended
September 30, 1994 September 30, 1993
------------------- ----------------------
Holdings RJRN Holdings RJRN
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Net sales* . . . . . . . . . . . . . . . . . . . . . . . . $ 11,322 $ 11,322 $ 11,053 $ 11,053
-------- -------- -------- --------
Costs and expenses (Note 1)*:
Cost of products sold . . . . . . . . . . . . . . . . . 5,079 5,079 4,709 4,709
Selling, advertising, administrative and general expenses 3,789 3,780 4,182 4,173
Amortization of trademarks and goodwill . . . . . . . . 469 469 466 466
---------- ---------- --------- ----------
Operating income . . . . . . . . . . . . . . . . . . 1,985 1,994 1,696 1,705
Interest and debt expense (Note 5) . . . . . . . . . . . . (828) (828) (910) (887)
Other income (expense), net . . . . . . . . . . . . . . . . (81) (92) (4) (27)
---------- ---------- --------- ----------
Income before income taxes . . . . . . . . . . . . . 1,076 1,074 782 791
Provision for income taxes . . . . . . . . . . . . . . . . 474 474 356 360
---------- ---------- --------- ----------
Income before extraordinary item . . . . . . . . . . 602 600 426 431
Extraordinary item - loss on early extinguishments of
debt, net of income taxes (Note 4) . . . . . . . . . . . (145) (145) (110) (103)
---------- ---------- --------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . 457 455 316 328
Less preferred stock dividends . . . . . . . . . . . . . . 98 - 33 -
---------- ---------- --------- -----------
Net income applicable to common stock . . . . . . . . $ 359 $ 455 $ 283 $ 328
=========== ========== ========== ==========
Net income (loss) per common and common equivalent share:
Income before extraordinary item . . . . . . . . . . . . $ .33 $ .29
Extraordinary item . . . . . . . . . . . . . . . . . . . (.10) ( .08)
----------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . $ .23 $ .21
=========== ==========
Dividends per share of Series A Preferred Stock (Note 8) . $ 2.505 $ 2.505
=========== ==========
Dividends per share of Series C Preferred Stock (Note 8) . $ 2.438 $ -
=========== ==========
Average number of common and common equivalent
shares outstanding (in thousands) (Note 2) . . . . . . . 1,505,837 1,353,638
--------- ---------
____________________
*Excludes excise taxes of $2.670 billion and $2.695 billion for the nine months ended September 30, 1994 and
1993, respectively.
</TABLE>
See Notes to Consolidated Condensed Financial Statements
- 2 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Nine Months Nine Months
Ended Ended
September 30, 1994 September 30, 1993
------------------- ----------------------
Holdings RJRN Holdings RJRN
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Net cash flows from operating activities (Note 6) . . . . . $ 1,410 $ 1,533 $ 887 $ 676
---------- --------- ---------- ---------
Cash flows from (used in) investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . (441) (441) (392) (392)
Proceeds from dispositions of businesses . . . . . . . . - - 451 451
Acquisition of businesses . . . . . . . . . . . . . . .
(418) (418) (159) (159)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 14 14 21 21
---------- --------- ---------- ---------
Net cash flows used in investing activities . . . . . (845) (845) (79) (79)
---------- --------- ---------- ---------
Cash flows from (used in) financing activities:
Net borrowings (repayments) under the Credit Agreements 1,141 1,141 (2,386) (2,386)
Net proceeds from the issuance (repayments) of
commercial paper . . . . . . . . . . . . . . . . . . (155) (155) 651 651
Proceeds from issuance of other long-term debt . . . . . 15 15 1,966 1,966
Repayments of other long-term debt . . . . . . . . . . . (2,526) (2,526) (1,825) (1,277)
Financing and advisory fees paid . . . . . . . . . . . . (57) (3) (48) (9)
Increase (decrease) in notes payable . . . . . . . . . . (63) (63) 73 73
Proceeds from issuance of common stock . . . . . . . . . 29 - 8 -
Proceeds from issuance of Series B Preferred Stock . . . - - 1,250 -
Proceeds from issuance of Series C Preferred Stock . . . 1,734 - - -
Issuance of common stock to parent . . . . . . . . . . . - 1,680 - -
Dividends paid on Series A and Series C Preferred Stock. (176) - (132) -
Dividends paid on Series B Preferred Stock . . . . . . . (87) - - -
Other dividends paid . . . . . . . .. . . . . . . . . . (19) - (28) -
Dividends paid to parent . . . . . . . . . . . . . . . . - (39) - (47)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 34 (297) 61 371
---------- --------- ---------- ---------
Net cash flows used in financing activities . . . . . (130) (247) (410) (658)
---------- --------- ---------- ---------
Effect of exchange rate changes on cash and cash equivalents (3) (3) (7) (7)
---------- --------- ---------- ---------
Net change in cash and cash equivalents . . . . . . . 432 438 391 (68)
Cash and cash equivalents at beginning of period . . . . . 215 205 99 96
---------- --------- ---------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 647 $ 643 $ 490 $ 28
========== ========= ========== =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
- 3 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
September 30, 1994 December 31, 1993
------------------- ----------------------
Holdings RJRN Holdings RJRN
-------- ---- -------- ----
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . .$ 647 $ 643 $ 215 $ 205
Accounts and notes receivable, net . . . . . . . . . 1,107 1,107 856 847
Inventories (Note 3) . . . . . . . . . . . . . . . . 2,504 2,504 2,700 2,700
Prepaid expenses and excise taxes . . . . . . . . . 414 414 374 374
------------ ---------- ----------- -----------
Total current assets . . . . . . . . . . . . . . . 4,672 4,668 4,145 4,126
------------ ---------- ----------- -----------
Property, plant and equipment - at cost . . . . . . . . 7,710 7,710 7,166 7,166
Less accumulated depreciation . . . . . . . . . . . . . (2,281) (2,281) (1,998) (1,998)
------------ --------- ---------- ----------
Net property, plant and equipment . . . . . . . . . 5,429 5,429 5,168 5,168
Trademarks, net . . . . . . . . . . . . . . . . . . . . 8,573 8,573 8,727 8,727
Goodwill, net . . . . . . . . . . . . . . . . . . . . . 12,761 12,761 12,851 12,851
Other assets and deferred charges . . . . . . . . . . . 416 415 404 400
------------ ---------- ---------- -----------
$ 31,851 $ 31,846 $ 31,295 $ 31,272
============ ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . .$ 229 $ 229 $ 301 $ 301
Accounts payable . . . . . . . . . . . . . . . . . . 469 469 515 515
Accrued liabilities . . . . . . . . . . . . . . . . 2,646 2,588 2,751 2,705
Current maturities of long-term debt (Notes 5) . . . 613 613 142 142
Income taxes accrued . . . . . . . . . . . . . . . . 357 357 234 234
---------- ---------- ---------- ----------
Total current liabilities . . . . . . . . . . . . 4,314 4,256 3,943 3,897
------------ ---------- ---------- ----------
Long-term debt (less current maturities) (Notes 5 and 9) 10,363 10,363 12,005 12,005
Other noncurrent liabilities . . . . . . . . . . . . . 2,534 2,218 2,503 2,353
Deferred income taxes . . . . . . . . . . . . . . . . . 3,683 3,610 3,774 3,701
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 8 and 9):
ESOP convertible preferred stock (15,412,250 shares
issued and outstanding at September 30, 1994) . . 247 - 249 -
Series A convertible preferred stock (52,500,000
shares issued and outstanding at September 30,
1994) . . . . . . . . . . . . . . . . . . . . . . 2 - 2 -
Series B preferred stock (50,000 shares issued and
outstanding at September 30, 1994) . . . . . . . . 1,250 - 1,250 -
Series C convertible preferred stock (26,675,000
shares issued and outstanding at September 30,
1994) . . . . . . . . . . . . . . . . . . . . . 3 - - -
Common stock (1,147,648,192 shares issued and
outstanding at September 30, 1994) . . . . . . . . 11 - 11 -
Paid-in capital . . . . . . . . . . . . . . . . . . 10,214 11,519 8,778 9,877
Retained earnings (accumulated deficit) . . . . . . (427) (4) (883) (459)
Receivable from ESOP . . . . . . . . . . . . . . . . (190) - (211) -
Other stockholders' equity . . . . . . . . . . . . . (153) (116) (126) (102)
------------ ---------- ---------- ----------
Total stockholders' equity . . . . . . . . . . . . 10,957 11,399 9,070 9,316
------------ ---------- ---------- ----------
$ 31,851 $ 31,846 $ 31,295 $ 31,272
============ ========== ========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
- 4 -
<PAGE>
RJR Nabisco Holdings Corp.
RJR Nabisco, Inc.
Notes to Consolidated Condensed Financial Statements
Note 1 - Interim Reporting and Results of Operations
For interim reporting purposes, certain costs and expenses are
charged to operations in proportion to the estimated total annual amount
expected to be incurred.
Certain prior year amounts have been reclassified to conform to the
1994 presentation.
In management's opinion, the accompanying unaudited consolidated
condensed financial statements (the "Consolidated Condensed Financial
Statements") of RJR Nabisco Holdings Corp. ("Holdings") and RJR Nabisco,
Inc. ("RJRN" and collectively with Holdings, the "Registrants") contain
all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods
presented.
During the first quarter of 1994, Holdings' net income was increased
by a $20 million after-tax net benefit consisting of a pre-tax credit of
$43 million ($41 million after-tax) related to the return of excess
assets held in a trust established to fund certain payments related to
employee compensation arrangements and a pre-tax charge of $32 million
($21 million after-tax) related to the settlement of certain benefits
under a Supplemental Executive Retirement Plan maintained by Holdings.
Note 2 - Earnings Per Share
Earnings per share is based on the weighted average number of shares
of Holdings' common stock, par value $.01 per share, ("Common Stock"),
$.835 Depositary Shares ("Series A Depositary Shares") and Series C
Depositary Shares ("Series C Depositary Shares") outstanding during the
period and Common Stock assumed to be outstanding to reflect the effect
of dilutive options. Holdings' other potentially dilutive securities are
not included in the earnings per share calculation because the effect of
excluding interest and dividends on such securities for the period would
exceed the earnings allocable to the Common Stock into which such
securities would be converted. Accordingly, Holdings' earnings per share
and fully diluted earnings per share are the same.
Note 3 - Inventories
The major classes of inventory are shown in the table below:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------ -----------------
<S> <C> <C>
Finished products . . . . . . . . $ 835 $ 771
Leaf tobacco . . . . . . . . . . 1,152 1,458
Raw materials . . . . . . . . . . 197 208
Other . . . . . . . . . . . . . . 320 263
----------- -----------
$ 2,504 $ 2,700
========= ===========
</TABLE>
- 5 -
<PAGE>
Note 4 - Extraordinary Item
The early extinguishments of debt of Holdings and RJRN resulted in
the following extraordinary losses (gain):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- ----------------------------------------
1994 1993 1994 1993
------------------- -------------------- -------------------- --------------------
Holdings RJRN Holdings RJRN Holdings RJRN Holdings RJRN
-------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash paid in excess of the net
carrying amount (book value)
of debt extinguished $ - $ - $ - $ - $ 206 $ 206 $ 160 $ 150
Write-off of debt issuance
costs - - - - 17 17 9 9
-------- -------- --------- ------ ----- ----- ----- -----
Extraordinary item - loss on
early extinguishments
of debt before income
taxes - - - - 223 223 169 159
Benefit for income taxes* - - (2) (2) (78) (78) (59) (56)
-------- -------- --------- ------ ----- ----- ----- -----
Extraordinary item - loss
(gain) on early
extinguishments
of debt,
net of income taxes $ - $ - $ (2) $ (2) $ 145 $ 145 $ 110 $ 103
======== ======== ========= ====== ===== ===== ===== =====
__________________
*The benefit for income taxes for the three months ended September 30, 1993 reflects the increase in federal
corporate income tax rates to 35% from 34% on the year-to-date extraordinary losses.
</TABLE>
Note 5 - Long-term Debt and Interest and Debt Expense
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------ -----------------
<S> <C> <C>
Debentures and notes $ 8,056 $ 8,095
Foreign currency debt 510 595
Revolving credit facility 950 328
Commercial paper 758 913
Other indebtedness 602 266
Subordinated debentures and notes:
Subordinated debentures - 280
Subordinated discount debentures - 1,393
Other subordinated indebtedness 100 277
Less current maturities (613) (142)
------------ ----------
$ 10,363 $ 12,005
=========== ==========
</TABLE>
Consolidated interest and debt expense for Holdings consisted
of the following:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash interest . . . . . . . . . . . . . . . . . . . $ 233 $ 225 $ 715 $ 679
Non-cash interest and debt expense . . . . . . . . 7 65 113 231
----- ----- ----- -----
$ 240 $ 290 $ 828 $ 910
===== ===== ===== =====
</TABLE>
- 6 -
<PAGE>
Note 5 - Long-term Debt and Interest and Debt Expense (continued)
Based on RJRN's intention and ability to continue to refinance, for
more than one year, the amount of its domestic commercial paper
borrowings outstanding either in the commercial paper market or with
additional borrowings under RJRN's $6.5 billion revolving credit
facility (as amended from time to time, the "1991 Credit Agreement"),
commercial paper borrowings of $758 million have been included in "Long-
term debt" as of September 30, 1994.
On May 15, 1994, RJRN redeemed substantially all of its approximately
$2 billion in outstanding subordinated debentures. The subordinated
debentures redeemed consisted of the Subordinated Discount Debentures
due May 15, 2001 (the "Subordinated Discount Debentures"), the 15%
Payment-in-Kind Subordinated Debentures due May 15, 2001 (the "15%
Subordinated Debentures") and the 13 1/2% Subordinated Debentures due
May 15, 2001 (the "13 1/2% Subordinated Debentures") at redemption
prices of 107 1/2%, 107 1/2% and 106 3/4%, respectively. Approximately
$1.2 billion principal or accreted amount of such debentures was
refinanced with proceeds of debt securities maturing after 1998 that
were issued during 1993. Such proceeds had been used to temporarily
reduce indebtedness under the 1991 Credit Agreement. In addition, the
redemption of such debentures was funded with approximately $900
million of net proceeds from the sale of 266,750,000 Series C
Depositary Shares completed on May 6, 1994 in connection with the
issuance of 26,675,000 shares of Series C Conversion Preferred Stock,
par value $.01 per share ("Series C Preferred Stock").
Certain financing agreements to which Holdings is a party and debt
instruments of RJRN directly or indirectly restrict the payment of
dividends by Holdings. The 1991 Credit Agreement, together with RJRN's
$1 billion revolving credit facility (as amended from time to time, the
"1993 Credit Agreement" and together with the 1991 Credit Agreement, the
"Credit Agreements"), which contain restrictions on the payment of cash
dividends or other distributions by Holdings in excess of certain
specified amounts, and the indentures relating to certain of RJRN's debt
securities, which contain restrictions on the payment of cash dividends
or other distributions by RJRN to Holdings in excess of certain
specified amounts or for certain specified purposes, effectively limit
the payment of dividends on the Common Stock and preferred stock of
Holdings. In addition, the declaration and payment of dividends is
subject to the discretion of the board of directors of Holdings and to
certain limitations under Delaware law. The Credit Agreements and the
indentures under which certain debt securities of RJRN have been issued
also impose certain operating and financial restrictions on Holdings and
its subsidiaries. These restrictions limit the ability of Holdings and
its subsidiaries to incur indebtedness, engage in transactions with
stockholders and affiliates, create liens, sell certain assets and
certain subsidiaries' stock, engage in certain mergers or consolidations
and make investments in unrestricted subsidiaries. See Note 9 to the
Consolidated Condensed Financial Statements for information on certain
issues of debt securities that RJRN has called for redemption or plans
to redeem.
- 7 -
<PAGE>
Note 6 - Supplemental Cash Flows Information
A reconciliation of net income to net cash flows from operating
activities follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1994 September 30, 1993
------------------- ----------------------
Holdings RJRN Holdings RJRN
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 457 $ 455 $ 316 $ 328
--------- --------- --------- ---------
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation of property, plant and equipment . . . . 332 332 327 327
Amortization (principally intangibles) . . . . . . . 521 521 524 524
Deferred income tax benefit . . . . . . . . . . . . . (53) (117) (162) (165)
Non-cash interest and debt expense . . . . . . . . . 113 113 231 208
Extraordinary item - loss on early
extinguishments of debt before income taxes . . . . . 223 223 169 159
Changes in working capital items, net . . . . . . . . (127) 67 (374) (593)
Other, net . . . . . . . . . . . . . . . . . . . . . (56) (61) (144) (112)
--------- --------- --------- ---------
Total adjustments . . . . . . . . . . . . . . . 953 1,078 571 348
--------- --------- --------- ---------
Net cash flows from operating activities $ 1,410 $ 1,533 $ 887 $ 676
========= ========= ========= =========
</TABLE>
Note 7 - Contingencies
Tobacco - Related Litigation
Various legal actions, proceedings and claims are pending or may be
instituted against R.J. Reynolds Tobacco Company ("RJRT") or its
affiliates or indemnitees, including those claiming that lung cancer and
other diseases have resulted from the use of or exposure to RJRT's
tobacco products. During 1993, 16 new actions were filed or served
against RJRT and/or its affiliates or indemnitees and 18 such actions
were dismissed or otherwise resolved in favor of RJRT and/or its
affiliates or indemnitees. A total of 35 such actions in the United
States, one in Puerto Rico and one against RJRT's Canadian subsidiary
were pending on December 31, 1993. As of October 31, 1994, 50 active
cases were pending against RJRT and/or its affiliates or indemnitees, 49
in the United States and one in Canada. Four of the 49 active cases in
the United States involve alleged non-smokers claiming injuries
resulting from exposure to environmental tobacco smoke. Seven of the
active cases, which are described more specifically below, purport to be
class actions on behalf of thousands of individuals. Purported classes
include individuals claiming to be addicted to cigarettes, flight
attendants alleging personal injury from exposure to environmental tobacco
smoke in their workplace and parents claiming that the Joe Camel
advertising constitutes an unfair trade practice.
The plaintiffs in these actions seek recovery on a variety of legal
theories, including strict liability in tort, design defect, negligence,
breach of warranty, failure to warn, fraud, misrepresentation, unfair
trade practices, conspiracy, unjust enrichment, indemnity and common law
public nuisance. Punitive damages, often in amounts totaling many
millions of dollars, are specifically pleaded in 23 cases in addition to
compensatory and other damages. The defenses raised by RJRT and/or its
affiliates, where applicable, include preemption by the Federal
Cigarette Labeling and Advertising Act, as amended (the "Cigarette Act"),
of some or all such claims arising after 1969; the lack of any defect in
the product; assumption of the risk; comparative fault; lack of
proximate cause; and statutes of limitations or repose. Juries have
found for plaintiffs in two smoking and health cases in which RJRT was
not a defendant, but in one such case, which has been appealed by both
parties, no damages were awarded. The jury awarded plaintiffs $400,000
in the other such case, Cipollone v. Liggett Group, Inc., et. al., which
-----------------------------------------
award was overturned on appeal and the case was subsequently dismissed.
- 8 -
<PAGE>
Note 7 - Contingencies (continued)
On June 24, 1992, the United States Supreme Court in Cipollone held
---------
that claims that tobacco companies failed to adequately warn of the
risks of smoking after 1969 and claims that their advertising and
promotional practices undermined the effect of warnings after that date
were preempted by the Cigarette Act. The Court also held that claims of
breach of express warranty, fraud, misrepresentation and conspiracy were
not preempted. The Supreme Court's decision was announced through a
plurality opinion, and further definition of how Cipollone will apply to
---------
other cases must await rulings in those cases.
Certain legislation proposed in recent years in Congress, among other
things, would eliminate any such preemptive effect on common law damage
actions for personal injuries. RJRT is unable to predict whether such
legislation will be enacted and, if so, in what form, or whether such
legislation would be intended by Congress to apply retroactively. The
passage of such legislation could increase the number of cases filed
against cigarette manufacturers, including RJRT.
RJRT understands that a grand jury investigation being conducted in
the Eastern District of New York is examining possible violations of
criminal law in connection with activities relating to the Council for
Tobacco Research-USA, Inc., of which RJRT is a sponsor. RJRT is unable
to predict the outcome of this investigation.
RJRT has received a civil investigative demand from the U.S.
Department of Justice requesting broad documentary information from
RJRT. Although the request appears to focus on tobacco industry
activities in connection with product development efforts, it also
requests general information concerning contacts with competitors. RJRT
is unable to predict the outcome of this investigation.
In March 1994, in Broin v. Philip Morris Companies Inc., et al., a
---------------------------------------------
purported class action against certain tobacco industry defendants,
including RJRT, in which flight attendants, claiming to represent a
class of 60,000 individuals allege personal injury caused by exposure to
environmental tobacco smoke in their workplace, a Florida state
intermediate appellate court reversed a lower court ruling and
reinstated plaintiffs' class action allegations. The appellate court
also ordered the trial court to hold further hearings on the class
allegations. The defendants' request for review of this ruling by a
full panel of judges was denied and the defendants are seeking review by
the Florida Supreme Court.
In March 1994, Lacey v. Lorillard Tobacco Company, Inc., et al., a
------------------------------------------------
purported class action, was filed in Circuit Court, Fayette County,
Alabama against three cigarette manufacturers, including RJRT.
Plaintiff, who claims to represent all smokers who have smoked or are
smoking cigarettes manufactured and sold by defendants in the state of
Alabama, seeks compensatory and punitive damages not to exceed $48,500
per each class member and injunctive relief arising from defendants'
alleged failure to disclose additives used in their cigarettes. In
April 1994, defendants removed the case to the United States District
Court for the Northern District of Alabama.
In March 1994, Castano v. The American Tobacco Company, et al., a
-----------------------------------------------
purported class action, was filed in the United States District Court
for the Eastern District of Louisiana against tobacco industry
defendants, including RJRT, seeking certification of a class action on
behalf of all United States residents who allegedly are or claim to be
addicted, or are the legal survivors of persons who allegedly were
addicted, to tobacco products manufactured by defendants. The complaint
alleges that cigarette manufacturers manipulated the levels of nicotine
in their tobacco products to induce addiction in smokers. Plaintiffs'
motion for certification of the class will be argued on November 16,
1994.
In March 1994, Allman v. Philip Morris, Inc., et al. and Higley v.
------------------------------------- ---------
Philip Morris, Inc., et al. were filed in the United States District
---------------------------
Court for the Southern District of California against industry members
and others, including RJRT, on behalf of a purported class of persons
claiming to be addicted to cigarettes who had been prescribed treatment
using the nicotine transdermal system. Plaintiffs assert a violation of
the Racketeer Influenced and Corrupt Organizations Act and claim
unspecified actual and treble damages. In April 1994, the two cases
were combined into
- 9 -
<PAGE>
a single amended complaint and plaintiffs' counsel agreed to dismiss the
Higley case. On September 28, 1994, the court granted the defendants'
------
motion to dismiss the remaining case with prejudice. Plaintiffs have
filed a notice of appeal.
In April 1994, Sparks v. R.J. Reynolds Tobacco Company, et al. was
-----------------------------------------------
brought in Washington state court on behalf of a purported class of
"parents with a conscience" alleging that an RJRT advertising campaign
targets minors and constitutes an unfair trade practice under Washington
state law. In May 1994, the case was removed to the United States
District Court for the Western District of Washington. Defendants'
motion to dismiss the case on preemption grounds is scheduled for
November 3, 1994.
In May 1994, Engle v. R.J. Reynolds Tobacco Company, et al. was filed
----------------------------------------------
in Circuit Court, Eleventh Judicial District, Dade County, Florida
against tobacco manufacturers, including RJRT, and other members of the
industry, by plaintiffs who allege injury and purport to represent a
class of all United States citizens and residents who claim to be
addicted, or who claim to be legal survivors of persons who allegedly
were addicted, to tobacco products. Plaintiffs cite the Florida
appellate court reversal in Broin in support of their allegations of
-----
class action status. On October 28, 1994, a state court judge in
Miami granted plaintiffs' motion to certify the class. The
defendants will appeal that ruling to the Florida District Court of
Appeals.
In June 1994, in Moore v. The American Tobacco Company, et al., RJRN
---------------------------------------------
and RJRT were named along with other industry members as defendants in
an action brought by the Mississippi state attorney general on behalf of
the state to recover state funds paid for health care and medical and
other assistance to state citizens suffering from diseases and
conditions allegedly related to tobacco use. This suit, which was
brought in Chancery (equity) Court, Jackson County, Mississippi also
seeks an injunction from "promoting" or "aiding and abetting" the sale
of cigarettes to minors. Both actual and punitive damages are sought in
unspecified amounts. Motions by the defendants to dismiss the case or to
transfer it to circuit (jury) court and plaintiff's motion to strike
certain defenses are scheduled for December 19, 1994.
In June 1994, in Mangini v. R.J. Reynolds Tobacco Company, et al., a
------------------------------------------------
lawsuit similar to Sparks pending in California, which is not a class
------
action but which is a suit brought by plaintiffs acting as private
attorneys general alleging that an RJRT advertising campaign constitutes
unfair competition under the California Business and Professions Code,
the California Supreme Court ruled that plaintiffs' claim was not
preempted by the Cigarette Act. This opinion allows plaintiffs to
pursue their lawsuit which had been dismissed at the trial court level.
On September 28, 1994, the defendants in this case filed a Petition for
Certiorari to the United States Supreme Court.
In August 1994, RJRT and other U.S. cigarette manufacturers were
named as defendants in an action instituted on behalf of the state of
Minnesota and on behalf of Blue Cross and Blue Shield of Minnesota to
recover the costs of medical expenses paid by the state and by Blue
Cross/Blue Shield incurred in the treatment of diseases allegedly caused
by cigarette smoking. The suit, Minnesota v. Philip Morris, et al.,
----------------------------------
alleges consumer fraud, unlawful and deceptive trade practices, false
advertising and restraint of trade, and seeks injunctive relief and
money damages, trebled for violations of the state antitrust law.
In September 1994, the Attorney General of West Virginia filed suit
against RJRT, RJRN, and twenty-one additional defendants in state court
in West Virginia. The lawsuit, McGraw v. American Tobacco Company,
-----------------------------------
et al., is similar to those previously filed in Mississippi and
------
Minnesota. It seeks recovery for medical expenses incurred by the
state in the treatment of diseases statistically associated with
cigarette smoking and requests an injunction against the promotion
and sale of cigarettes and tobacco products to minors. The lawsuit
also seeks a declaration that the state of West Virginia, as plaintiff,
is not subject to the defenses of statute of repose, statute of
limitations, contributory negligence, comparative negligence, or
assumption of the risk. As of October 31, 1994, RJRT and RJRN had not
yet been served with a copy of the complaint.
In September 1994, Granier v. American Tobacco Company, et al., a
-------------------------------------------
purported class action apparently patterned after the Castano case, was
-------
filed in the United States District Court for the Eastern District of
Louisiana against tobacco industry defendants, including RJRT.
Plaintiffs seek certification of a class action on behalf of all
residents of the United States who have used and purportedly became
addicted to tobacco products manufactured by
- 10 -
<PAGE>
defendants. The complaint alleges that cigarette manufacturers
manipulated the levels of nicotine in tobacco products for the purpose
of addicting consumers.
Litigation is subject to many uncertainties, and it is possible that
some of the legal actions, proceedings or claims could be decided against
RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants
in similar actions, even if such rulings are not final, could adversely
affect the litigation against RJRT and its affiliates or indemnitees and
increase the number of such claims. Although it is impossible to predict
the outcome of such events or their effect on RJRT, a significant increase
in litigation activities could have an adverse effect on RJRT. RJRT
believes that it has a number of valid defenses to any such actions,
including but not limited to those defenses based on preemption under the
Cipollone decision, and RJRT intends to defend vigorously all such actions.
---------
Other Litigation
In September 1994, six putative class and derivative actions were filed
by purported Holdings' stockholders in the Court of Chancery of the State
of Delaware in and for New Castle County against members of Holdings'
Board of Directors, KKR and Holdings, as nominal defendant, challenging
the proposed acquisition by Holdings of an interest in Borden, Inc.
("Borden"). These actions, entitled Mushala v. Greeniaus, et al., C.A.
----------------------------
No. 13738; Leffler v. Greeniaus, et al., C.A. No. 13751; Schreiber
---------------------------- ---------
v. Greeniaus, et al., C.A. No. 13749; Malloy v. Greeniaus, et al.,
-------------------- ---------------------------
C.A. No. 13748; Alessi v. Greeniaus, et al., C.A. No. 13750; and
---------------------------
Schwartz v. Greeniaus, et al., C.A. No. 13758 (collectively, the
-----------------------------
"Class and Derivative Complaints"), allege, among other things, that
the agreement in principle for Holdings to purchase a 20% stake in Borden
constitutes a breach of fiduciary duty and waste of corporate assets in
that the price paid by Holdings for its Borden stake is inflated because it
includes a control premium and that the issuance of new Holdings'
Common Stock will substantially dilute the cash value and shareholdings
of the noncontrolling public stockholders of Holdings. The Class and
Derivative Complaints seek preliminary and permanent relief, including
declaratory relief, a preliminary injunction, rescission, damages and
attorneys' fees and costs. The plaintiff in the Mushala case has filed
-------
a First Request for Production of Documents.
On or about September 20, 1994, an additional putative class and
derivative action, entitled Debora v. Greeniaus, et al., C.A. No.
---------------------------
13755, was brought in the Court of Chancery of the State of Delaware
in and for New Castle County by a purported holder of Series A Depositary
Shares of Holdings. The Debora action names the same defendants and
------
contains the same allegations and prayers for relief as the Class and
Derivative Complaints.
On or about September 13, 1994, a putative shareholder's derivative
complaint, entitled Shingala v. Harper, et al., C.A. No. 13739, was filed
--------------------------
in the Court of Chancery of the State of Delaware in and for New Castle
County by a putative Holdings shareholder against Borden, Holdings and
members of the Board of Directors of Holdings alleging, among other things,
that the proposed acquisition by Holdings of a stake in Borden constitutes
a breach of the fiduciary duty of loyalty of Holdings' Board of Directors
and waste of corporate assets because the purpose of the Borden transaction
is solely to benefit KKR and serves no legitimate business purpose of
Holdings, and that Holdings has been required to participate in the
trasaction due to KKR's domination and effective control of the
Holdings' Board. The Shingala complaint seeks an injunction of the Borden
--------
transaction, damages, and attorneys' fees.
On or about September 26, 1994, an additional putative shareholder's
derivative complaint, entitled Kahn v. Kohlberg Kravis Roberts & Co.,
--------------------------------------
et al., C.A. No. 13767, was filed in the Court of Chancery for the State
------
of Delaware in and for New Castle County by a purported holder of Common
Stock and Series A Depositary Shares of Holdings. This action is against
KKR, KKR Associates, Holdings and members of the Holdings Board of
Directors who are also partners or associates of KKR and alleges, among
other things, breach of an investment banking services contract between
KKR and Holdings, breach of fiduciary duty based on a violation of the
corporate opportunity doctrine and waste of corporate assets. The
complaint seeks declaratory relief, damages, expenses and attorneys' fees.
On October 24, 1994, counsel for plaintiffs in the nine actions
described above submitted a proposed order to the Court of Chancery that,
if approved, would consolidate the actions.
See Note 9 to the Consolidated Condensed Financial Statements for
information concerning the termination of the agreement in principle
between Holdings and KKR relating to a proposed investment in Borden.
---------------------
- 11 -
<PAGE>
The Registrants believe that the ultimate outcome of all pending
litigation matters should not have a material adverse effect on either
of the Registrant's financial position; however, it is possible that the
results of operations or cash flows of the Registrants in particular
quarterly or annual periods or the financial condition of the
Registrants could be materially affected by the ultimate outcome of
certain pending litigation matters. Management is unable to derive a
meaningful estimate of the amount or range of any possible loss in any
particular quarterly or annual period or in the aggregate.
Note 8 - Stockholders' Equity
Retained earnings (accumulated deficit) at September 30, 1994 includes
non-cash expenses related to accumulated trademark and goodwill
amortization of approximately $3.485 billion.
Dividends per Series A Depositary Share are equal to one-fourth of the
amount of dividends per share of Series A Conversion Preferred Stock,
par value $.01 per share, ("Series A Preferred Stock") of Holdings.
Dividends per Series C Depositary Share are equal to one-tenth of the
amount of dividends per share of Series C Preferred Stock of Holdings.
Because Series A Preferred Stock and Series C Preferred Stock
mandatorily convert into Common Stock of Holdings, dividends on shares
of Series A Preferred Stock and Series C Preferred Stock are reported
similar to common equity dividends.
On May 6, 1994, Holdings completed the issuance of 26,675,000 shares
of Series C Preferred Stock in connection with the sale of 266,750,000
Series C Depositary Shares at $6.50 per depositary share. Approximately
$900 million of the net proceeds from the sale of the Series C
Depositary Shares was applied to the redemption of RJRN's subordinated
debentures on May 15, 1994 discussed in Note 5 to the Consolidated
Condensed Financial Statements. The remaining net proceeds are expected
to be used to fund the redemption of certain debt issues as discussed in Note 9
to the Consolidated Condensed Financial Statements. Pending such use,
proceeds are being used to repay indebtedness under the 1991 Credit
Agreement and for short-term liquid investments.
Note 9 - Subsequent Events
On October 5, 1994, Holdings filed a registration statement on Form
S-4 with the Securities and Exchange Commission (the "Comission") with
respect to 353,680,264 shares of Common Stock held by certain partnerships
affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR"), pursuant to
the terms of a Registration Rights Agreement between Holdings and one of
such partnerships dated as of July 15, 1990 and a Registration Rights
Agreement among Holdings, certain affiliates of KKR and others dated as of
February 9, 1989. The registration statement relates to a proposed offer to
exchange shares of Holdings Common Stock for all of the outstanding shares
of Borden.
On October 28, 1994, Nabisco Holdings Corp. (hereinafter referred to in
this Note 9 as "Nabisco") filed a registration statement with the Commission
for the initial public offering of 45 million shares of its Class A Common
Stock (51.75 million shares if the underwriters' over-allotment options are
exercised in full). For purposes of the filing, the initial offering price
was estimated to be between $23 and $26 per share. Upon completion of the
proposed public offering, Holdings would beneficially own 100% of Nabisco's
outstanding Class B Common Stock, which would represent approximately 82.6%
of the economic interest in Nabisco (80.5% if the underwriters'
over-allotment options are exercised in full). Holders of Class A Common
Stock of Nabisco generally would have identical rights to holders of Class B
Common Stock except that holders of Class A Common Stock would be entitled to
one vote per share while holders of Class B Common Stock would be entitled to
ten votes per share on all matters submitted to a vote of stockholders. The
registration statement has not become effective and there can be no
assurance that such offering will be consummated.
The initial public offering of shares of Nabisco is part of a broader
proposed initiative of Holdings designed to reduce consolidated debt of
Holdings by approximately $1 billion and establish a separately traded
common stock for Nabisco. After completion of the proposed public offering,
Holdings would anticipate commencing a quarterly cash dividend on its common
stock of $.075 per share or $.30 per share on an annualized basis. The
proposed transactions are subject to the approval of lenders under RJRN's
bank credit facilities.
At the time of the proposed public offering, Nabisco is expected to have
approximately $4.2 billion of intercompany debt and approximately $1.3
billion of borrowings under a short-term bank credit agreement. The net
proceeds of the proposed public offering will be used by Nabisco to repay a
portion of the borrowings under its bank facility.
- 12 -
<PAGE>
As part of the initiative, RJRN has called for redemption four issues of
debt securities. The securities are $1.5 billion of 10 1/2% Senior Notes due
1998; $373.5 million of 8 3/8% Sinking Fund Debentures due 2017; approximately
$24.8 million of 7 3/8% Sinking Fund Debentures due 2001; and $100 million
of 13 1/2% Subordinated Debentures. The redemption date for the 10 1/2%
Senior Notes due 1998, the 8 3/8 % Sinking Fund Debentures due 2017 and
the 7 3/8% Sinking Fund Debentures due 2001 is November 30, 1994. The
redemption date for the 13 1/2% Subordinated Debentures is December 2, 1994.
The redemption price for the 10 1/2% Senior Notes due 1998 is 100 percent of
the principal amount of each note, plus accrued interest and an applicable
premium. The premium is equal to the excess of the present value of the
required interest and principal payments due on each note, computed using a
discount rate equal to a defined treasury rate plus 50 basis points, over the
outstanding principal amount of such note. The amount of the premium will be
set no later than November 28, 1994. The redemption price for the 8 3/8%
Sinking Fund Debentures due 2017 is equal to $1,054.44 plus accrued interest
for each $1,000 principal amount of debentures. The redemption price for the
7 3/8% Sinking Fund Debentures due 2001 is equal to $1,005.60 plus accrued
interest for each $1,000 principal amount of debentures. The redemption price
for the 13 1/2% Subordinated Debentures is equal to $1,067.50 plus accrued
interest for each $1,000 principal amount of debentures. RJRN expects to fund
these redemptions with borrowings under its existing credit facilities,
proceeds from Holdings' Series C Preferred Stock offering completed on May 6,
1994 and internally generated cash flow.
Upon completion of the proposed public offering of Nabisco, RJRN may seek
to restructure approximately $6 billion of its domestic publicly held debt
which currently limits the ability of Nabisco to incur long-term debt other
than intercompany debt. The restructuring, which would require consent of
public debtholders and lenders under bank facilities, may include one or
more offers to exchange Nabisco debt securities for a portion of such debt.
The goal of the exchange offers would be to permit Nabisco to establish
long-term borrowing capacity independent of its parent and to reduce
intercompany debt. No assurance can be given that RJRN will seek to
restructure its debt or that any such restructuring will be consummated.
The Board of Directors of Holdings has adopted, or is expected to adopt,
certain polices which would become effective upon the closing of the Nabisco
initial public offering. One policy would provide that Holdings would limit,
until December 31, 1998, the aggregate amount of cash dividends on its capital
stock. Under this policy, during that period Holdings would not pay any
extraordinary cash dividends and would limit the amount of its cash dividends,
cash distributions and repurchases for cash of capital stock and subordinated
debt to an amount equal to the sum of $500 million plus (i) 65% of Holdings'
cumulative consolidated net income before extraordinary gains or losses and
restructuring charges and (ii) net cash proceeds from the sale of capital
stock of Holdings or its subsidiaries (other than proceeds from the Nabisco
initial public offering) to the extent used to repay, purchase or redeem debt
or preferred stock. The Board is expected to adopt a policy limiting the amount
by which such net cash proceeds from sales of capital stock may increase
the amount available for cash dividends by Holdings to up to $250 million in
any year. Another policy would provide that Holdings would not declare a
dividend or distribution to its stockholders of the shares of capital stock of
a subsidiary before December 31, 1996. The Board of Directors of Holdings is
also expected to adopt a policy that it would not make such a distribution
prior to December 31, 1998 if that distribution would cause the ratings of the
senior indebtedness of RJRN to be reduced from investment grade to
non-investment grade or if, after giving effect to such distribution, any
publicly held senior indebtedness of the distributed company would not be
rated investment grade. There is no assurance that any such distribution will
take place. The Board of Directors of Holdings is also expected to adopt
policies providing that an amount equal to the net cash proceeds from any
issuance and sale of equity by Holdings or from any sale outside the ordinary
course of business of material assets owned or used by subsidiaries in the
tobacco business, in each case before December 31, 1998, will be used either to
repay, purchase or redeem consolidated indebtedness or to acquire properties,
assets or businesses to be used in existing or new lines of business. In
addition, the Board of Directors of Holdings is expected to adopt a policy
that an amount equal to the net cash proceeds of any secondary sale of shares
of Nabisco before December 31, 1998 will be used to repay, purchase or
redeem consolidated debt. No assurance can be given that Holdings will issue
or sell any equity or sell any material assets outside the ordinary course
of business.
Holdings has been unable to reach a definitive agreement for the
transaction contemplated by its agreement in principle with KKR to acquire
a minority interest in Borden, as announced on September 12, 1994. That
announcement indicated that, following KKR's successful acquisition of
Borden, Holdings would issue to Borden approximately $500 million of newly
issued common shares of Holdings for newly issued Borden shares representing
a 20% pro forma interest in Borden and a warrant to acquire an additional
10% pro forma interest in Borden. The inability to reach agreement resulted
from various complexities affecting the transaction, including certain
accounting issues. Holdings may in the future explore a basis on which it
or its Nabisco subsidiary may acquire a minority equity interest in Borden
in exchange for common stock of Holdings. However, Holdings is not currently
engaged in any such negotiations, and there is no assurance that Holdings
will seek to pursue any such negotiations or that any such negotiations
will be successful.
- 13 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of Holdings' financial
condition and results of operations should be read in conjunction with
the historical financial information included in the Consolidated
Condensed Financial Statements.
Results of Operations
Summarized financial data for Holdings is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------------- ----------------------------------
(Dollars in Millions) 1994 1993 % Change 1994 1993 % Change
---- ---- -------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
RJRT . . . . . . . . . . . . . . . $ 1,179 $ 1,122 5% $ 3,495 $ 3,858 (9)%
Tobacco International . . . . . . . 836 748 12 2,275 2,146 6
------- ------- ------- --------
Total Tobacco . . . . . . . . . . . 2,015 1,870 8 5,770 6,004 (4)
Total Food . . . . . . . . . . . . 1,951 1,728 13 5,552 5,049 10
------- ------- ------- --------
$ 3,966 $ 3,598 10 $11,322 $ 11,053 2
======= ======= ======= ========
Operating Company Contribution*:
RJRT . . . . . . . . . . . . . . . $ 382 $ 201 90% $ 1,175 $ 1,070 10%
Tobacco International . . . . . . . 205 181 14 557 486 15
------- ------- ------- --------
Total Tobacco . . . . . . . . . . . 587 382 54 1,732 1,556 11
Total Food . . . . . . . . . . . . 285 230 24 797 687 16
Headquarters . . . . . . . . . . . (37) (25) (48) (75) (81) 7
------- ------- ------- --------
$ 835 $ 587 42 $ 2,454 $ 2,162 14
======= ======= ======= ========
Operating Income:
RJRT . . . . . . . . . . . . . . . $ 291 $ 110 165% $ 901 $ 796 13%
Tobacco International . . . . . . . 195 171 14 528 457 16
------- ------- ------- --------
Total Tobacco . . . . . . . . . . . 486 281 73 1,429 1,253 14
Total Food . . . . . . . . . . . . 229 175 31 631 524 20
Headquarters . . . . . . . . . . . (37) (25) (48) (75) (81) 7
------- ------- ------- --------
$ 678 $ 431 57 $ 1,985 $ 1,696 17
======= ======= ======= ========
</TABLE>
____________________
* Operating income before amortization of trademarks and goodwill.
- 14 -
<PAGE>
- Tobacco
The tobacco line of business is conducted by RJRT and R.J. Reynolds
Tobacco International, Inc. ("Tobacco International").
The worldwide tobacco business experienced continued net sales
growth in its international business conducted by Tobacco
International for both the third quarter of 1994 and the first nine
months of 1994. The domestic side of the worldwide tobacco
business conducted by RJRT experienced net sales growth for the third
quarter of 1994 and a net sales decline for the first nine months of
1994. Net sales from the worldwide tobacco business amounted to $2.02
billion in the third quarter of 1994, an increase of 8% from the third
quarter of 1993 level of $1.87 billion, and $5.77 billion in the first
nine months of 1994, a decline of 4% from the first nine months of
1993 level of $6.00 billion. Worldwide volume increased by 6% for both
the third quarter of 1994 and the first nine months of 1994 compared
to the corresponding periods of the prior year. Operating company
contribution for the worldwide tobacco business amounted to $587
million in the third quarter of 1994, an increase of 54% from the
third quarter of 1993 level of $382 million, as a result of gains in
both the domestic and international businesses. Operating company
contribution for the worldwide tobacco business amounted to $1.73
billion in the first nine months of 1994, an increase of 11% from the
first nine months of 1993 level of $1.56 billion, also as a result of
gains in both the domestic and international businesses. Operating
income for the worldwide tobacco business amounted to $486 million in
the third quarter of 1994, an increase of 73% from the third quarter
of 1993 level of $281 million, and $1.43 billion in the first nine
months of 1994, an increase of 14% from the first nine months of 1993
level of $1.25 billion, reflecting the change in operating company
contribution.
Net sales for RJRT amounted to $1.18 billion in the third quarter
of 1994, an increase of 5% from the third quarter of 1993 level of
$1.12 billion, and $3.50 billion in the first nine months of 1994, a
decline of 9% from the first nine months of 1993 level of $3.86
billion. The third quarter increase is due to higher volume in the
full price segment (excluding the impact on volume from a special
promotion in 1993 which had no impact on net sales for the third
quarter of 1993), a higher proportion of sales from full price brands
and higher pricing in the savings segment of approximately $17
million, offset in part by lower volume in the savings segment
primarily due to RJRT's decision to be more selective in its
participation in that segment. The nine month decrease reflects the
impact of industry-wide price reductions on full price brands
(approximately $500 million) which went into effect during the second
half of 1993 and lower volume in the savings segment primarily due to
RJRT's decision to be more selective in its participation in that
segment that more than offset the impact of a higher proportion of
sales from full price brands, higher volume in the full price segment
and higher selling prices in the savings segment. RJRT's operating
company contribution was $382 million in the third quarter of 1994, a
90% increase from the third quarter of 1993 level of $201 million, as
a result of the increase in net sales, including the increased
proportion of sales from the higher margin full price segment, as well
as reduced promotional and selling expenses. RJRT's operating company
contribution was $1.18 billion in the first nine months of 1994, a 10%
increase from the first nine months of 1993 level of $1.07 billion, as
reduced promotional and selling expenses more than offset the decline
in net sales. RJRT's operating income was $291 million in the third
quarter of 1994, an increase of 165% from the third quarter of 1993
level of $110 million, and $901 million in the first nine months of
1994, an increase of 13% from the first nine months of 1993 level of
$796 million. The change in operating income for the third quarter of
1994 and the first nine months of 1994 from the corresponding periods
of the prior year reflect the changes in RJRT's operating company
contribution as discussed above.
- 15 -
<PAGE>
- Tobacco (continued)
During recent years, the lower price segment of the domestic
cigarette market has grown significantly and the full price segment
has declined. This overall trend was mitigated by the reduction in
price in the full price segment and the increased list prices on lower
priced brands during the second half of 1993 but consumers remain
sensitive to price changes. Although not the case in the first three
quarters of 1994, RJRT has experienced substantial increased volume in
recent years in the lower price segment, but the earnings attributable
to these sales have not been sufficient to offset decreased earnings
resulting from declining sales of RJRT's full price brands. During the
third quarter of 1994 and the first nine months of 1994, RJRT's
margins improved compared to the fourth quarter of 1993 due to more
efficient marketing and cost savings achieved from the previously
established restructuring programs. RJRT's domestic cigarette volume
of non-full price brands as a percentage of its total domestic volume
was 41% in the third quarter of 1994 versus 32% for the domestic
cigarette market, and 41% in the first nine months of 1994 versus 33%
for the domestic cigarette market. For the full year, RJRT's domestic
cigarette volume of non-full price brands as a percentage of its total
domestic volume was 44% in 1993, 35% in 1992 and 25% in 1991 versus
37%, 30% and 25%, respectively, for the domestic cigarette market.
In March 1994, the U.S. Occupational Safety and Health
Administration ("OSHA") announced proposed regulations that would
restrict smoking in the workplace to designated smoking rooms that are
separately exhausted to the outside. Although RJRT cannot predict the
form of any regulations that may be finally adopted by OSHA, if the
proposed regulations are adopted, RJRT expects that many employers who
have not already done so would prohibit smoking in the workplace
rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. Because many employers currently
do not permit smoking in the workplace, RJRT cannot predict the effect
of any regulations that may be adopted, but incremental restrictions
on smokers could have an adverse effect on cigarette sales and RJRT.
In February 1994, the Commissioner of the U.S. Food and Drug
Administration (the "FDA"), which historically has refrained from
asserting jurisdiction over most cigarette products, stated that he
intended to cause the FDA to work with the U.S. Congress to resolve
the regulatory status of cigarettes under the Food, Drug and Cosmetic
Act. During the second quarter of 1994, hearings were held in this
regard and RJRT, along with other members of the U.S. cigarette
industry, were asked to provide voluntarily certain documents and
other information to Congress and the FDA. RJRT is unable to predict
the outcome of any Congressional deliberations or the likelihood that
the FDA will assert jurisdiction over cigarettes in some manner. Were
the FDA to assert jurisdiction in a manner that materially restricts
the availability of cigarettes to consumers, it would likely have a
significant adverse effect on RJRT.
In July 1994, an amendment to a Florida statute became effective,
which allows the state of Florida to bring an action in its own name
against the tobacco industry to recover amounts paid by the state
under its Medicaid program to treat illnesses statistically associated
with cigarette smoking. The amended statute does not require the
state to identify the individual who received medical care and permits
a lawsuit to be filed as a class action. The statute, which has been
challenged on state and federal constitutional grounds in a lawsuit
brought by Philip Morris Companies Inc., Associated Industries of
Florida, Publix Supermarkets, and National Association of Convenience
Stores on June 30, 1994, eliminates the comparative negligence and
assumption of risk defenses. RJRT is unable to predict whether a
lawsuit will be filed under the Florida statute, or if filed, the
outcome thereof.
In addition, in June 1994, legislation was introduced in the U.S.
Senate which would authorize the Attorney General of the United States
to seek to recover from tobacco product manufacturers funds paid out
in the form of Medicaid and Medicare payments to treat illnesses
allegedly related to the use of tobacco products. It is not possible
to predict whether such legislation will be enacted or any resulting
effect thereof on RJRT.
- 16 -
<PAGE>
- Tobacco (continued)
It is not possible to determine what additional federal, state or
local legislation or regulations relating to smoking or cigarettes
will be enacted or to predict any resulting effect thereof on RJRT,
Tobacco International or the cigarette industry generally but such
legislation or regulations could have an adverse effect on RJRT,
Tobacco International or the cigarette industry generally.
For a description of certain litigation affecting RJRT and its
affiliates, see Note 7 to the Consolidated Condensed Financial
Statements.
Tobacco International recorded net sales of $836 million in the
third quarter of 1994, an increase of 12% from the third quarter of
1993 level of $748 million, and $2.28 billion in the first nine months
of 1994, an increase of 6% from the first nine months of 1993 level of
$2.15 billion. The net sales increase for the third quarter of 1994
was due to volume gains in the former Soviet Union, Eastern and
Central Europe (particularly Poland and Turkey), Malaysia and Spain
which more than offset the unfavorable impact of product mix
differences across markets. The net sales increase for the first nine
months of 1994 resulted from volume gains in the former Soviet Union,
Poland, Turkey, Malaysia and Spain and increased pricing which more than
offset the unfavorable product mix differences across markets and
unfavorable foreign exchange developments. Tobacco International's
operating company contribution rose to $205 million in the third quarter
of 1994, an increase of 14% compared to the third quarter of 1993 level
of $181 million, and $557 million in the first nine months of 1994, an
increase of 15% from the first nine months of 1993 level of $486 million.
The increase in operating company contribution for the third quarter of
1994 was due to the increase in net sales which more than offset the
unfavorable product mix differences across markets and higher support
costs directed at start-up operations in the former Soviet Union and
Eastern and Central Europe (particularly Turkey, Poland and Hungary).
The increase in operating company contribution for the first nine months
of 1994 was due to the volume gains, pricing gains and reduced promotional
spending which more than offset unfavorable product mix differences across
markets, and the higher support costs directed at the start-up operations
and unfavorable foreign exchange developments. Tobacco International's
operating income was $195 million in the third quarter of 1994, an
increase of 14% from the third quarter of 1993 level of $171 million,
and $528 million in the first nine months of 1994, an increase of 16%
from the first nine months of 1993 level of $457 million. The
increases in operating income reflect the increase in Tobacco
International's operating company contribution, as discussed above.
- 17 -
<PAGE>
- Food
The food business is conducted by Nabisco, Inc. ("Nabisco"), which
is comprised of the Nabisco Biscuit Company, the Specialty Products
Company, the LifeSavers Company, the Planters Company, the Food
Service Company, the Fleischmann's Company, and Nabisco Brands Ltd
(collectively the "North American Group") and by Nabisco
International.
Nabisco reported net sales of $1.95 billion in the third quarter of
1994, an increase of 13% from the third quarter of 1993 level of $1.73
billion, and $5.55 billion in the first nine months of 1994, an
increase of 10% from the first nine months of 1993 level of $5.05
billion, with the North American Group up 3% and 4%, respectively, and
Nabisco International up 80% and 47%, respectively. The North American
Group increases are primarily attributable to significant volume gains
at the Nabisco Biscuit Company reflecting the success of new product
introductions and product line extensions in the U.S. biscuit market
and volume increases from the Specialty Products Company. The Nabisco
International increases were primarily the result of the favorable
impact of recent acquisitions and continued strong results in Spain
which more than offset unfavorable business conditions in Mexico.
Nabisco's operating company contribution was $285 million in the
third quarter of 1994, an increase of 24% from the third quarter of
1993 level of $230 million, and $797 million in the first nine months
of 1994, an increase of 16% from the first nine months of 1993 level
of $687 million, with the North American Group up 16% and 15%,
respectively, and Nabisco International up 91% and 23%,
respectively. The North American Group increases for the third quarter
of 1994 and the first nine months of 1994 were primarily due to the
increases in net sales and savings from productivity programs,
including previously established restructuring programs. The Nabisco
International increases in operating company contribution for the
third quarter of 1994 and first nine months of 1994 were primarily due
to the profit contribution from recent acquisitions and strong results
in Spain, partially offset by declines in volume resulting from
unfavorable business conditions in Mexico in both periods and
unfavorable business conditions in Brazil with respect to only the
first six months of 1994.
Nabisco's operating income was $229 million in the third quarter of
1994, an increase of 31% from the third quarter of 1993 level of $175
million, and $631 million in the first nine months of 1994, an
increase of 20% from the first nine months of 1993 level of $524
million, as a result of the increases in operating company
contribution as compared to the corresponding periods of the prior
year.
During April 1994, Nabisco International acquired 71% of
Establecimiento Modelo Terrabusi S.A., an Argentine biscuit and pasta
company. In October 1994, Nabisco International commenced a tender
offer to acquire the remaining 29%. During May 1994, Nabisco
International acquired the remaining 50% interest in each of Royal
Brands S.A. in Spain and Royal Brands Portugal.
- 18 -
<PAGE>
Interest and Debt Expense
Consolidated interest and debt expense of $240 million in the third
quarter of 1994 and $828 million in the first nine months of 1994
decreased 17% and 9%, respectively, from the corresponding 1993
periods, primarily as a result of refinancings of debt during 1993 and
1994, lower debt levels from the application of proceeds from the
issuances of preferred stock and lower effective interest rates which
more than offset the impact of higher market interest rates in 1994.
Net Income
Holdings' net income of $457 million in the first nine months of
1994 includes an after-tax extraordinary loss of $145 million, related
to the repurchase of debt during such period. Excluding the
extraordinary loss in the first nine months of 1994, as well as a
similar extraordinary item which resulted in a $110 million after-tax
loss in the first nine months of 1993, Holdings would have reported
net income of $602 million for the first nine months of 1994, an
increase of $176 million, from the comparable period last year.
Holdings reported net income of $216 million for the third quarter of
1994, an increase of $142 million (excluding the $2 million after-tax
extraordinary gain in the third quarter of 1993) from the comparable
period last year. Such increases result primarily from higher
consolidated operating income and the impact of lower interest expense
for both periods, offset in part by unfavorable foreign currency
developments and, with respect to the nine-month period of 1994, a $20
million after-tax net benefit reported in the first quarter of 1994
(primarily reflected at Headquarters) related to certain employee
compensation arrangements.
- 19 -
<PAGE>
Liquidity and Financial Condition
- September 30, 1994
Free cash flow, which represents cash available for the repayment
of debt and certain other corporate purposes before the consideration
of any debt and equity financing transactions, acquisition
expenditures and divestiture proceeds, for the first nine months of
1994 and 1993 was $735 million and $465 million, respectively.
The components of free cash flow are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
------------------
1994 1993
---- ----
(In Millions)
<S> <C> <C>
Operating income . . . . . . . . . . . . . . . . . . . . . . . $ 1,985 $ 1,696
Amortization of intangibles . . . . . . . . . . . . . . . . 469 466
---------- ---------
Operating company contributions . . . . . . . . . . . . . . . . 2,454 2,162
Depreciation and other amortization . . . . . . . . . . . . 383 385
Increase in operating working capital . . . . . . . . . . . (227) (522)
Capital expenditures . . . . . . . . . . . . . . . . . . . (441) (392)
Change in other assets and liabilities . . . . . . . . . . 21 (113)
-------- ---------
Operating cash flow* . . . . . . . . . . . . . . . . . . . . . 2,190 1,520
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . (372) (277)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . (704) (640)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . (282) (160)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . (97) 22
----------- --------
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . $ 735 $ 465
========== ========
</TABLE>
____________________
* Operating cash flow, which is used as an internal measurement for
evaluating business performance, includes, in addition to net cash
flows from operating activities as recorded in the Consolidated
Condensed Statements of Cash Flows, proceeds from the sale of capital
assets less capital expenditures, and is adjusted to exclude income
taxes paid and items of a financial nature (such as interest paid,
interest income, and other miscellaneous financial income or expense
items).
____________________
- 20 -
<PAGE>
Liquidity and Financial Condition (continued)
At September 30, 1994, Holdings had an outstanding total debt level
(notes payable and long-term debt, including current maturities) of
approximately $11.2 billion and a total capital level (total debt and
total stockholders' equity) of approximately $22.2 billion, a decrease
of $1.2 billion and an increase of $644 million respectively, when
compared to the corresponding amounts at December 31, 1993. The
decrease in the outstanding debt level is primarily due to the
application of approximately $900 million of net proceeds from the
sale of the Series C Depositary Shares to redeem a portion of RJRN's
subordinated debentures as discussed below. The increase in the total
capital level is primarily due to the sale of the Series C Depositary
Shares, offset in part by the use of a portion of the funds provided
therefrom for the redemption of a portion of RJRN's subordinated
debentures. Holdings' ratio of total debt to total stockholders'
equity improved to 1.0-to-1 at September 30, 1994 versus 1.4-to-1 at
December 31, 1993. RJRN's ratio of total debt to common equity
improved to 1.0-to-1 at September 30, 1994 versus 1.3-to-1 at December
31, 1993. In addition, total current liabilities and long-term debt of
RJRN's subsidiaries as of September 30, 1994 was approximately $3.5
billion.
Holdings' effective interest rate on its consolidated long-term
debt decreased from 8.4% at December 31, 1993 to 7.8% at September 30,
1994 primarily as a result of the redemption of RJRN's subordinated
debentures described below. Future effective interest rates may vary
as a result of RJRN's ongoing management of interest rate exposure and
changing market interest rates as well as refinancing activities and
changes in the ratings assigned to RJRN's debt securities by
independent rating agencies.
Management expects to consider opportunities to improve Holdings'
and its subsidiaries' capital and/or cost structure as they arise.
Such opportunities, if pursued, could involve further acquisitions
from time to time of substantial amounts of securities of Holdings or
its subsidiaries through open market purchases, redemptions, privately
negotiated transactions, tender or exchange offers or otherwise and/or
the issuance from time to time of additional securities by Holdings or
its subsidiaries. Acquisitions of securities at prices above their
book value, together with the accelerated amortization of deferred
financing fees attributable to the acquired securities, as applicable,
would reduce reported net income and/or stockholders' equity,
depending upon the extent of such acquisitions. Nonetheless, Holdings'
and its subsidiaries' ability to take advantage of such opportunities
is subject to restrictions in the Credit Agreements and in certain of
their debt indentures. See "Subsequent Events" below for information
on certain issues of debt securities that RJRN has called for redemption
or plans to redeem. In addition to the transactions described in
"Subsequent Events" below, management expects to continue to review
various corporate transactions, including, but not limited to, joint
ventures, mergers, acquisitions, divestitures, asset swaps, spin-offs
and recapitalizations. It is possible that the tobacco and food
businesses would be separated should certain of the foregoing
transactions be consummated.
On May 6, 1994, Holdings completed the issuance of 26,675,000
shares of Series C Preferred Stock in connection with the sale of
266,750,000 Series C Depositary Shares at $6.50 per depositary share.
Approximately $900 million of the net proceeds from the sale of the
Series C Depositary Shares was applied to the redemption of RJRN's
subordinated debentures discussed below. The remaining net proceeds
- 21 -
<PAGE>
Liquidity and Financial Condition (continued)
will be used to fund the redemption of certain debt issues. See
"Subsequent Events" below for information on certain issues of debt
securities that RJRN has called for redemption or plans to redeem.
Pending such use, proceeds are being used to repay indebtedness
under the 1991 Credit Agreement and for short-term liquid investments.
The 1991 Credit Agreement is a $6.5 billion revolving bank credit
facility that provides for the issuance of up to $800 million of
irrevocable letters of credit. Availability under the 1991 Credit
Agreement is reduced by an amount equal to the stated amount of such
letters of credit outstanding, by commercial paper borrowings in
excess of $1 billion and by amounts borrowed under such facility. At
September 30, 1994, approximately $373 million stated amount of
letters of credit was outstanding and $950 million was borrowed under
the 1991 Credit Agreement. Accordingly, the amount available under the
1991 Credit Agreement at September 30, 1994 was $5.18 billion.
Availability under the 1993 Credit Agreement, which matures on
April 3, 1995 and provides a back-up line of credit to support
domestic commercial paper issuances of up to $1 billion, is reduced by
an amount equal to the aggregate amount of domestic commercial paper
outstanding. At September 30, 1994, approximately $758 million of
domestic commercial paper was outstanding. Accordingly, $242 million
was available under the 1993 Credit Agreement at September 30, 1994.
The aggregate of consolidated indebtedness and interest rate
arrangements subject to fluctuating interest rates approximated $3.5
billion at September 30, 1994. This represents a decrease of $2.0
billion from the year-end 1993 level of $5.5 billion, primarily due to
Holdings' on-going management of its interest rate exposure.
On May 15, 1994, RJRN redeemed substantially all of its
approximately $2 billion in outstanding subordinated debentures. The
subordinated debentures redeemed consisted of the Subordinated
Discount Debentures, the 15% Subordinated Debentures and the 13 1/2%
Subordinated Debentures at redemption prices of 107 1/2%, 107 1/2%, and
106 3/4%, respectively. Approximately $1.2 billion principal or
accreted amount of such debentures was refinanced with proceeds of
debt securities maturing after 1998 that were issued during 1993.
Such proceeds had been used to temporarily reduce indebtedness under
the 1991 Credit Agreement. In addition, the redemption of such
debentures was funded with approximately $900 million of net proceeds
from the sale of the Series C Depositary Shares completed on May 6,
1994 in connection with the issuance of the Series C Preferred Stock.
The redemption resulted in an after-tax extraordinary loss in the
second quarter of 1994 of approximately $146 million.
Certain financing agreements to which Holdings is a party and debt
instruments of RJRN directly or indirectly restrict the payment of
dividends by Holdings. The Credit Agreements, which contain
restrictions on the payment of cash dividends or other distributions
by Holdings in excess of certain specified amounts, and the indentures
relating to certain of RJRN's debt securities, which contain
restrictions on the payment of cash dividends or other distributions
by RJRN to Holdings in excess of certain specified amounts or for
certain specified purposes, effectively limit the payment of dividends
on the Common Stock and preferred stock of Holdings. In addition, the
declaration and payment of dividends is subject to the discretion of
the board of directors of Holdings and to certain limitations under
Delaware law. The Credit Agreements and the indentures under which
certain debt securities of RJRN have been issued also impose certain
operating and financial restrictions on Holdings and its subsidiaries.
These restrictions limit the ability of Holdings and its subsidiaries
to incur indebtedness, engage in transactions with stockholders and
affiliates, create liens, sell certain assets and certain
subsidiaries' stock, engage in certain mergers or consolidations and
make investments in unrestricted subsidiaries. The Registrants believe
that they are currently in compliance with all covenants and
provisions in the Credit Agreements and their other indebtedness. See
"Subsequent Events" below for information on certain issues of debt
securities that RJRN has called for redemption or plans to redeem.
Capital expenditures were $441 million for the first nine months of
1994. The current level of expenditures planned for 1994 is expected
to be in the range of approximately $600 million to $650 million
(approximately 60% Food and 40% Tobacco), which will be funded
primarily by cash flows from operating activities. Management expects
that its capital expenditure program will continue at a level
sufficient to support the strategic and operating needs of the
Registrants' businesses.
- 22 -
<PAGE>
Liquidity and Financial Condition (continued)
The amount of cash outlays incurred during the first nine months of
1994 in connection with the restructuring program announced in 1993
was primarily offset by the after-tax cash savings realized from the
restructuring program during such period.
Subsequent Events
On October 5, 1994, Holdings filed a registration statement on Form S-4 with
the Commission with respect to 353,680,264 shares of Common Stock held by
certain partnerships affiliated with KKR pursuant to the terms of a Registration
Rights Agreement between Holdings and one of such partnerships dated as of
July 15, 1990 and a Registration Rights Agreement among Holdings, certain
affiliates of KKR and others dated as of February 9, 1989. The registration
statement relates to a proposed offer to exchange shares of Holdings Common
Stock for all of the outstanding shares of Borden.
On October 28, 1994, Nabisco Holdings Corp. (hereinafter referred to in this
"Subsequent Events" section as "Nabisco") filed a registration statement with
the Commission for the initial public offering of 45 million shares of its
Class A Common Stock (51.75 million shares if the underwriters' over-allotment
options are exercised in full). For purposes of the filing, the initial
offering price was estimated to be between $23 and $26 per share. Upon
completion of the proposed public offering, Holdings would beneficially own
100% of Nabisco's outstanding Class B Common Stock, which would represent
approximately 82.6% of the economic interest in Nabisco (80.5% if the
underwriters' over-allotment options are exercised in full). Holders of
Class A Common Stock of Nabisco generally would have identical rights to
holders of Class B Common Stock except that holders of Class A Common Stock
would be entitled to one vote per share while holders of Class B Common Stock
would be entitled to ten votes per share on all matters submitted to a vote of
stockholders. The registration statement has not become effective and there
can be no assurance that such offering will be consummated.
The initial public offering of shares of Nabisco is part of a broader
proposed initiative of Holdings designed to reduce consolidated debt of Holdings
by approximately $1 billion and establish a separately traded common stock for
Nabisco. After completion of the proposed public offering, Holdings would
anticipate commencing a quarterly cash dividend on its common stock of $.075 per
share or $.30 per share on an annualized basis. The proposed transactions are
subject to the approval of lenders under RJRN's bank credit facilities.
At the time of the proposed public offering, Nabisco is expected to have
approximately $4.2 billion of intercompany debt and approximately $1.3 billion
of borrowings under a short-term bank credit agreement. The net proceeds of the
proposed public offering will be used by Nabisco to repay a portion of the
borrowings under its bank facility.
As part of the initiative, RJRN has called for redemption four issues of
debt securities. The securities are $1.5 billion of 10 1/2% Senior Notes due
1998; $373.5 million of 8 3/8% Sinking Fund Debentures due 2017;
approximately $24.8 million of 7 3/8% Sinking Fund Debentures due 2001; and $100
million of 13 1/2% Subordinated Debentures. The redemption date for the 10 1/2%
Senior Notes due 1998, the 8 3/8% Sinking Fund Debentures due 2017 and the
7 3/8% Sinking Fund Debentures due 2001 is November 30, 1994. The redemption
date for the 13 1/2% Subordinated Debentures is December 2, 1994. The redemption
price for the 10 1/2% Senior Notes due 1998 is 100 percent of the principal
amount of each note, plus accrued interest and an applicable premium. The
premium is equal to the excess of the present value of the required interest
and principal payments due on each note, computed using a discount rate
equal to a defined treasury rate plus 50 basis points, over the outstanding
principal amount of such note. The amount of the premium will be set no later
than November 28, 1994. The redemption price for the 8 3/8% Sinking Fund
Debentures due 2017 is equal to $1,054.44 plus accrued interest for each
$1,000 principal amount of debentures. The redemption price for the 7 3/8%
Sinking Fund Debentures due 2001 is equal to $1,005.60 plus accrued interest
for each $1,000 principal amount of debentures. The redemption price for the
13 1/2% Subordinated Debentures is equal to $1,067.50 plus accrued interest
for each $1,000 principal amount of debentures. RJRN expects to fund these
redemptions with borrowings under its existing credit facilities, proceeds
from Holdings' Series C Preferred Stock offering completed on May 6, 1994 and
internally generated cash flow.
- 23 -
<PAGE>
Upon completion of the proposed public offering of Nabisco, RJRN may seek to
restructure approximately $6 billion of its domestic publicly held debt which
currently limits the ability of Nabisco to incur long-term debt other than
intercompany debt. The restructuring, which would require consent of public
debtholders and lenders under bank facilities, may include one or more offers to
exchange Nabisco debt securities for a portion of such debt. The goal of the
exchange offers would be to permit Nabisco to establish long-term borrowing
capacity independent of its parent and to reduce intercompany debt. No
assurance can be given that RJRN will seek to restructure its debt or that any
such restructuring will be consummated.
The Board of Directors of Holdings has adopted, or is expected to adopt,
certain policies which would become effective upon the closing of the Nabisco
initial public offering. One policy would provide that Holdings would limit,
until December 31, 1998, the aggregate amount of cash dividends on its capital
stock. Under this policy, during that period Holdings would not pay any
extraordinary cash dividends and would limit the amount of its cash dividends,
cash distributions and repurchases for cash of capital stock and subordinated
debt to an amount equal to the sum of $500 million plus (i) 65% of Holdings'
cumulative consolidated net income before extraordinary gains or losses and
restructuring charges and (ii) net cash proceeds from the sale of capital stock
of Holdings or its subsidiaries (other than proceeds from the Nabisco initial
public offering) to the extent used to repay, purchase or redeem debt or
preferred stock. The Board is expected to adopt a policy limiting the amount
by which such net cash proceeds from sales of capital stock may increase
the amount available for cash dividends by Holdings to up to $250 million in
any year. Another policy would provide that Holdings would not declare a
dividend or distribution to its stockholders of the shares of capital stock of
a subsidiary before December 31, 1996. The Board of Directors of Holdings is
also expected to adopt a policy that it would not make such a distribution
prior to December 31, 1998 if that distribution would cause the ratings of the
senior indebtedness of RJRN to be reduced from investment grade to
non-investment grade or if, after giving effect to such distribution, any
publicly held senior indebtedness of the distributed company would not be
rated investment grade. There is no assurance that any such distribution will
take place. The Board of Directors of Holdings is also expected to adopt
policies providing that an amount equal to the net cash proceeds from any
issuance and sale of equity by Holdings or from any sale outside the ordinary
course of business of material assets owned or used by subsidiaries in the
tobacco business, in each case before December 31, 1998, will be used either to
repay, purchase or redeem consolidated indebtedness or to acquire properties,
assets or businesses to be used in existing or new lines of business. In
addition, the Board of Directors of Holdings is expected to adopt a policy
that an amount equal to the net cash proceeds of any secondary sale of shares
of Nabisco before December 31, 1998 will be used to repay, purchase or redeem
consolidated debt. No assurance can be given that Holdings will issue or sell
any equity or sell any material assets outside the ordinary course of business.
Holdings has been unable to reach a definitive agreement for the transaction
contemplated by its agreement in principle with KKR to acquire a minority
interest in Borden, as announced on September 12, 1994. That announcement
indicated that, following KKR's successful acquisition of Borden, Holdings
would issue to Borden approximately $500 million of newly issued common shares
of Holdings for newly issued Borden shares representing a 20% pro forma
interest in Borden and a warrant to acquire an additional 10% pro forma
interest in Borden. The inability to reach agreement resulted from various
complexities affecting the transaction, including certain accounting issues.
Holdings may in the future explore a basis on which it or its Nabisco
subsidiary may acquire a minority equity interest in Borden in exchange for
common stock of Holdings. However, Holdings is not currently engaged in any
such negotiations, and there is no assurance that Holdings will seek to pursue
any such negotiations or that any such negotiations will be successful.
- 24 -
<PAGE>
PART II
-------
Item 1. Legal Proceedings.
Tobacco-Related Litigation
As of October 31, 1994, 24 new actions have been filed or served
against RJRT and/or its affiliates or indemnitees, including 6 actions
purporting to be class actions, and 11 actions were dismissed or otherwise
resolved in favor of RJRT and/or its affiliates or indemnitees without
trial since December 31, 1993. As of October 31, 1994, 50 active cases
were pending against RJRT and/or its affiliates or indemnitees, 49 in
the United States and one in Canada. The United States cases are in
19 states and are distributed as follows: 14 in Louisiana, 7 in
Texas, 4 in California, 3 in Mississippi, 3 in Indiana, 2 in Alabama,
2 in Florida, 2 in Minnesota, 2 in New Jersey, and one each in
Illinois, Kansas, Massachusetts, Nevada, New York, Ohio, South Carolina,
Tennessee, Washington and West Virginia. Of the 49 active cases in
the United States, 29 are pending in state court and 20 in federal
court.
In March 1994, in Broin v. Philip Morris Companies Inc., et al., a
---------------------------------------------
purported class action against certain tobacco industry defendants,
including RJRT, in which flight attendants, claiming to represent a
class of 60,000 individuals allege personal injury caused by exposure
to environmental tobacco smoke in their workplace, a Florida state
intermediate appellate court reversed a lower court ruling and
reinstated plaintiffs' class action allegations. The appellate court
also ordered the trial court to hold further hearings on the class
allegations. The defendants' request for review of this ruling by a
full panel of judges was denied and the defendants are seeking review
by the Florida Supreme Court.
In March 1994, Lacey v. Lorillard Tobacco Company, Inc., et al., a
------------------------------------------------
purported class action, was filed in Circuit Court, Fayette County,
Alabama against three cigarette manufacturers, including RJRT.
Plaintiff, who claims to represent all smokers who have smoked or are
smoking cigarettes manufactured and sold by defendants in the state of
Alabama, seeks compensatory and punitive damages not to exceed $48,500
per each class member and injunctive relief arising from defendants'
alleged failure to disclose additives used in their cigarettes. In
April 1994, defendants removed the case to the United States District
Court for the Northern District of Alabama.
In March 1994, Castano v. The American Tobacco Company, et al., a
-----------------------------------------------
purported class action, was filed in the United States District Court
for the Eastern District of Louisiana against tobacco industry
defendants, including RJRT, seeking certification of a class action on
behalf of all United States residents who allegedly are or claim to be
addicted, or are the legal survivors of persons who allegedly were
addicted, to tobacco products manufactured by defendants. The
complaint alleges that cigarette manufacturers manipulated the levels
of nicotine in their tobacco products to induce addiction in smokers.
Plaintiffs' motion for certification of the class will be argued on
November 16, 1994.
In March 1994, Allman v. Philip Morris, Inc., et al. and Higley v.
------------------------------------- ---------
Philip Morris, Inc., et al. were filed in the United States District
---------------------------
Court for the Southern District of California against industry members
and others, including RJRT, on behalf of a purported class of persons
claiming to be addicted to cigarettes who had been prescribed
treatment using the nicotine transdermal system. Plaintiffs assert a
violation of the Racketeer Influenced and Corrupt Organizations Act
and claim unspecified actual and treble damages. In April 1994, the
two cases were combined into a single amended complaint and
plaintiffs' counsel agreed to dismiss the Higley case. On September
------
28, 1994, the court granted the defendants' motion to dismiss the
remaining case with prejudice. Plaintiffs have filed a notice of appeal.
- 25 -
<PAGE>
In April 1994, Sparks v. R.J. Reynolds Tobacco Company, et al. was
-----------------------------------------------
brought in Washington state court on behalf of a purported class of
"parents with a conscience" alleging that an RJRT advertising campaign
targets minors and constitutes an unfair trade practice under
Washington state law. In May 1994, the case was removed to the United
States District Court for the Western District of Washington.
Defendants' motion to dismiss the case on preemption grounds is
scheduled for November 3, 1994.
In May 1994, Engle v. R.J. Reynolds Tobacco Company, et al. was
----------------------------------------------
filed in Circuit Court, Eleventh Judicial District, Dade County,
Florida against tobacco manufacturers, including RJRT, and other
members of the industry, by plaintiffs who allege injury and purport
to represent a class of all United States citizens and residents who
claim to be addicted, or who claim to be legal survivors of persons
who allegedly were addicted, to tobacco products. Plaintiffs cite the
Florida appellate court reversal in Broin in support of their
-----
allegations of class action status. On October 28, 1994, a state court
judge in Miami granted plaintiffs' motion to certify the class.
The defendents will appeal that ruling to the Florida District Court
of Appeals.
In June 1994, in Moore v. The American Tobacco Company, et al.,
---------------------------------------------
RJRN and RJRT were named along with other industry members as
defendants in an action brought by the Mississippi state attorney
general on behalf of the state to recover state funds paid for health
care and medical and other assistance to state citizens suffering from
diseases and conditions allegedly related to tobacco use. This suit,
which was brought in Chancery (equity) Court, Jackson County,
Mississippi also seeks an injunction from "promoting" or "aiding and
abetting" the sale of cigarettes to minors. Both actual and punitive
damages are sought in unspecified amounts. Motions by the defendants
to dismiss the case or to transfer it to circuit (jury) court and
plaintiff's motion to strike certain defenses are scheduled for
December 19, 1994.
In June 1994, in Mangini v. R.J. Reynolds Tobacco Company, et al.,
------------------------------------------------
a lawsuit similar to Sparks pending in California, which is not a
------
class action but which is a suit brought by plaintiffs acting as
private attorneys general alleging that an RJRT advertising campaign
constitutes unfair competition under the California Business and
Professions Code, the California Supreme Court ruled that plaintiffs'
claim was not preempted by the Cigarette Act. This opinion allows
plaintiffs to pursue their lawsuit which had been dismissed at the
trial court level. On September 28, 1994, the defendants in this case
filed a Petition for Certiorari to the United States Supreme Court.
In August 1994, RJRT and other U.S. cigarette manufacturers were
named as defendants in an action instituted on behalf of the state of
Minnesota and on behalf of Blue Cross and Blue Shield of Minnesota to
recover the costs of medical expenses paid by the state and by Blue
Cross/Blue Shield incurred in the treatment of diseases allegedly
caused by cigarette smoking. The suit, Minnesota v. Philip Morris, et
------------------------------
al., alleges consumer fraud, unlawful and deceptive trade practices,
---
false advertising and restraint of trade, and seeks injunctive relief
and money damages, trebled for violations of the state antitrust law.
In September 1994, the Attorney General of West Virginia filed suit
against RJRT, RJRN, and twenty-one additional defendants in state
court in West Virginia. The lawsuit, McGraw v. American Tobacco
--------------------------
Company, et al., is similar to those previously filed in Mississippi
---------------
and Minnesota. It seeks recovery for medical expenses incurred by the
state in the treatment of diseases statistically associated with
cigarette smoking and requests an injunction against the promotion and
sale of cigarettes and tobacco products to minors. The lawsuit also
seeks a declaration that the state of West Virginia, as plaintiff, is
not subject to the defenses of statute of repose, statute of
limitations, contributory negligence, comparative negligence, or
assumption of the risk. As of October 31, 1994, RJRT and RJRN had not
yet been served with a copy of the complaint.
In September 1994, Granier v. American Tobacco Company, et al.,
-------------------------------------------
a purported class action apparently patterned after the Castano
-------
case, was filed in the United States District Court for the
Eastern District of Louisiana against tobacco industy defendants,
including RJRT. Plaintiffs seek certification of a class action
on behalf of all residents of the United States who have used and
purportedly became addicted to tobacco products manufactured by
defendants. The complaint alleges that cigarette manufacturers
manipulated the levels of nicotine in tobacco products for the
purpose of addicting consumers.
- 26 -
<PAGE>
Litigation is subject to many uncertainties, and it is possible that
some of the legal actions, proceedings or claims could be decided against
RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants
in similar actions, even if such rulings are not final, could adversely
affect the litigation against RJRT and its affiliates or indemnitees and
increase the number of such claims. Although it is impossible to predict
the outcome of such events or their effect on RJRT, a significant increase
in litigation activities could have an adverse effect on RJRT. RJRT
believes that it has a number of valid defenses to any such actions
and it intends to defend vigorously all such actions.
- ---------
Other Litigation
In September 1994, six putative class and derivative actions were
filed by purported Holdings' stockholders in the Court of Chancery of the
State of Delaware in and for New Castle County against members of the
Holdings' Board of Directors, KKR and Holdings, as nominal defendant,
challenging the proposed acquisition by Holdings of an interest in Borden.
These actions, entitled Mushala v. Greeniaus, et al., C.A. No. 13738;
-----------------------------
Leffler v. Greeniaus, et al., C.A. No. 13751; Schreiber
- ---------------------------- ---------
v. Greeniaus, et al., C.A. No. 13749; Malloy v. Greeniaus, et al.,
- -------------------- ---------------------------
C.A. No. 13748; Alessi v. Greeniaus, et al., C.A. No. 13750; and
---------------------------
Schwartz v. Greeniaus, et al., C.A. No. 13758 (collectively, the
- -----------------------------
"Class and Derivative Complaints"), allege, among other things, that the
agreement in principle for Holdings to purchase a 20% stake in Borden
constitutes a breach of fiduciary duty and waste of corporate assets in that
the price paid by Holdings for its Borden stake is inflated because it
includes a control premium and that the issuance of new Holdings'
Common Stock will substantially dilute the cash value and shareholdings
of the noncontrolling public stockholders of Holdings. The Class and
Derivative Complaints seek preliminary and permanent relief, including
declaratory relief, a preliminary injunction, rescission, damages and
attorneys' fees and costs. The plaintiff in the Mushala case has filed
-------
a First Request for Production of Documents.
On or about September 20, 1994, an additional putative class and
derivative action, entitled Debora v. Greeniaus, et al., C.A. No.
---------------------------
13755, was brought in the Court of Chancery of the State of Delaware
in and for New Castle County by a purported holder of Series A Depositary
Shares of Holdings. The Debora action names the same defendants and
------
contains the same allegations and prayers for relief as the Class and
Derivative Complaints.
On or about September 13, 1994, a putative shareholder's derivative
complaint, entitled Shingala v. Harper, et al., C.A. No. 13739, was filed
--------------------------
in the Court of Chancery of the State of Delaware in and for New Castle
County by a putative Holdings shareholder against Borden, Holdings and
members of the Board of Directors of Holdings alleging, among other things,
that the proposed acquisition by Holdings of a stake in Borden constitutes
a breach of the fiduciary duty of loyalty of Holdings' Board of Directors
and waste of corporate assets because the purpose of the Borden transaction
is solely to benefit KKR and serves no legitimate business purpose of
Holdings and that Holdings has been required to participate in the
trasaction due to KKR's domination and effective control of the
Holdings' Board. The Shingala complaint seeks an injunction of the Borden
--------
transaction, damages, and attorneys' fees.
On or about September 26, 1994, an additional putative shareholder's
derivative complaint, entitled Kahn v. Kohlberg Kravis Roberts & Co.,
--------------------------------------
et al., C.A. No. 13767, was filed in the Court of Chancery for the State
- ------
of Delaware in and for New Castle County by a purported holder of Common
Stock and Series A Depositary Shares of Holdings. This action is against
KKR, KKR Associates, Holdings and members of the Holdings Board of
Directors who are also partners or associates of KKR and alleges, among other
things, breach of an investment banking services contract between KKR and
Holdings, breach of fiduciary duty based on a violation of the corporate
opportunity doctrine and waste of corporate assets. The complaint seeks
declaratory relief, damages, expenses and attorneys' fees.
On October 24, 1994, counsel for the plaintiffs in the nine actions
described above submitted a proposed order to the Court of Chancery that, if
approved, would consolidate the actions.
- 27 -
<PAGE>
See "Subsequent Events" herein for information concerning the
termination of the agreement in principle between Holdings and KKR
relating to a proposed investment in Borden.
-----------------------------
The Registrants believe that the ultimate outcome of all pending
litigation matters should not have a material adverse effect on either
of the Registrant's financial position; however, it is possible that
the results of operations or cash flows of the Registrants in
particular quarterly or annual periods or the financial condition of
the Registrants could be materially affected by the ultimate outcome
of certain pending litigation matters. Management is unable to derive
a meaningful estimate of the amount or range of any possible loss in
any particular quarterly or annual period or in the aggregate.
-----------------------------
- 28 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
4.1 Registrants agree to furnish copies of any instruments
defining the rights of holders of long-term debt of the
Registrants and their consolidated subsidiaries that does
not exceed 10 percent of the total assets of the
Registrants and their consolidated subsidiaries to the
Securities and Exchange Commission upon request.
*11.1 RJR Nabisco Holdings Corp. Computation of Earnings Per Share
for the three months ended September 30, 1994 and 1993.
*11.2 RJR Nabisco Holdings Corp. Computation of Earnings Per Share
for the nine months ended September 30, 1994 and 1993.
*12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed
Charges for the nine months ended September 30, 1994.
*27.1 RJR Nabisco Holdings Corp. Financial Data Schedule as of and
for the nine months ended September 30, 1994.
*27.2 RJR Nabisco, Inc. Financial Data Schedule as of and for the
nine months ended September 30, 1994.
____________________
*Filed herewith.
(b) Reports on Form 8-K
-------------------
None.
- 29 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
(Registrants)
Date: November 2, 1994 /s/ Stephen R. Wilson
-----------------------------------
Stephen R. Wilson,
Executive Vice President and
Chief Financial Officer
/s/ Robert S. Roath
-----------------------------------
Robert S. Roath,
Senior Vice President and Controller
- 30 -
<PAGE>
EXHIBIT INDEX
Exhibit No. Page
----------- ----
4.1 Registrants agree to furnish copies of any
instruments defining the rights of holders of long-
term debt of the Registrants and their consolidated
subsidiaries that does not exceed 10 percent of the
total assets of the Registrants and their
consolidated subsidiaries to the Securities and
Exchange Commission upon request.
11.1 RJR Nabisco Holdings Corp. Computation of Earnings
Per Share for the three months ended September 30,
1994 and 1993.
11.2 RJR Nabisco Holdings Corp. Computation of Earnings
Per Share for the nine months ended September 30,
1994 and 1993.
12.1 RJR Nabisco, Inc. Computation of Ratio of
Earnings to Fixed Charges for the nine months ended
September 30, 1994.
27.1 RJR Nabisco Holdings Corp. Financial Data Schedule
as of and for the nine months ended September 30,
1994.
27.2 RJR Nabisco, Inc. Financial Data Schedule as of and for the
nine months ended September 30, 1994.
<TABLE>
<CAPTION>
EXHIBIT 11.1
RJR NABISCO HOLDINGS CORP.
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Millions Except Per Share Amounts)
Three Months Three Months
Ended Ended
September 30, 1994 September 30, 1993
------------------------- -------------------------
Fully Fully
Primary Diluted(A) Primary Diluted(A)
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Average number of common and common equivalent shares
outstanding during the period (in thousands):
Common Stock, Series A Depositary Shares and Series C
Depositary Shares issued and outstanding at beginning of
period...................................................... 1,618,604 1,618,604 1,348,268 1,348,268
Average number of shares of Common Stock issued during the
period (including shares of Common Stock issued during the
period through the exercise of options)..................... 1,152 1,152 579 579
Average number of shares related to value of restricted stock
earned during the period................................... 1,218 1,218 1,343 1,343
Average number of stock options outstanding during
the period and shares issuable under performance shares grant 11,616 15,245 295 295
Shares issuable upon conversion of redeemable convertible
preferred stock............................................. - - - 11,201
Shares issuable upon conversion of ESOP convertible preferred
stock....................................................... - 15,448 - 15,608
------------ ------------- ------------- ------------
Average number of common and common equivalent shares
outstanding during the period.............................. 1,632,590 1,651,667 1,350,485 1,377,294
============ ============= ============= ============
Income (loss) applicable to common stock:
Income before extraordinary item................................ $ 216 $ 216 $ 74 $ 74
Preferred stock dividends........................................ (33) (29) (20) (14)
Income tax benefit on ESOP preferred stock dividends............. - - - (1)
------------ ------------- ------------- ------------
Income before extraordinary item applicable to common stock...... 183 187 54 59
Extraordinary item............................................... - - 2 2
------------ ------------- ------------- ------------
Net income applicable to common stock. .......................... $ 183 $ 187 $ 56 $ 61
============ ============= ============= ============
Income per common and common equivalent share:
Income before extraordinary item................................. $ .11 $ .11 $ .04 $ .04
Extraordinary item............................................... - - - -
------------ ------------- ------------- ------------
Net income....................................................... $ .11 $ .11 $ .04 $ .04
============ ============= ============= ============
(A) For purposes of this Exhibit, the calculations of fully diluted earnings per share include common stock equivalents and
other potentially dilutive securities that produce an anti-dilutive result.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11.2
RJR NABISCO HOLDINGS CORP.
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Millions Except Per Share Amounts)
Nine Months Nine Months
Ended Ended
September 30, 1994 September 30, 1993
------------------------- -------------------------
Fully Fully
Primary Diluted(A) Primary Diluted(A)
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Average number of common and common equivalent shares
outstanding during the period (in thousands):
Common Stock and Series A Depositary Shares issued and
outstanding at beginning of period..................... 1,348,011 1,348,011 1,344,649 1,344,649
Average number of shares of Common Stock and Series C
Depositary Shares issued during the period (including
shares of common stock issued during the period through
the exercise of options and/or conversion of redeemable
convertible preferred stock)............................ 144,836 144,836 3,180 3,180
Average number of shares related to value of restricted stock
earned during the period................................ 406 406 876 876
Average number of stock options outstanding during
the period and shares issuable under performance
shares granted.......................................... 12,584 14,206 4,933 4,933
Shares issuable upon conversion of redeemable convertible
preferred stock......................................... - - - 11,202
Shares issuable upon conversion of ESOP convertible preferred
stock................................................... - 15,504 - 15,619
Shares issuable upon conversion of senior converting
debentures.............................................. - - - 7,397
------------ ------------- -------------- ------------
Average number of common and common equivalent shares
outstanding during the period.......................... 1,505,837 1,522,963 1,353,638 1,387,856
============ ============= ============== ============
Income (loss) applicable to common stock:
Income before extraordinary item............................. $ 602 $ 602 $ 426 $ 426
Interest on senior converting debentures (net of income
taxes).................................................. - - - 17
Preferred stock dividends.................................... (98) (87) (33) (14)
Income tax benefit on ESOP preferred stock dividends......... - (1) - (1)
------------ ------------- -------------- ------------
Income before extraordinary item applicable to common stock.. 504 514 393 428
Extraordinary item........................................... (145) (145) (110) (110)
------------ ------------- -------------- ------------
Net income applicable to common stock....................... $ 359 $ 369 $ 283 $ 318
============ ============= ============== ============
Income (loss) per common and common equivalent share:
Income before extraordinary item............................. $ .33 $ .34 $ .29 $ .31
Extraordinary item........................................... (.10) (.10) (.08) (.08)
------------ ------------- -------------- ------------
Net income................................................... $ .23 $ .24 $ .21 $ .23
============ ============= ============== ============
(A) For purposes of this Exhibit, the calculations of fully diluted earnings per share include common stock equivalents and
other potentially dilutive securities that produce an anti-dilutive result.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12.1
RJR NABISCO, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Nine Months
Ended
September 30, 1994
------------------
<S> <C>
Earnings before fixed charges:
Income before extraordinary item . . . . . . . . . . . . . $ 600
Provision for income taxes . . . . . . . . . . . . . . . . 474
-------
Income before income taxes . . . . . . . . . . . . . . . . 1,074
Interest and debt expense . . . . . . . . . . . . . . . . . 828
Interest portion of rental expense . . . . . . . . . . . . 39
-------
Earnings before fixed charges . . . . . . . . . . . . . . . . .
$ 1,941
=======
Fixed charges:
Interest and debt expense . . . . . . . . . . . . . . . . . $ 828
Interest portion of rental expense . . . . . . . . . . . . 39
Capitalized interest . . . . . . . . . . . . . . . . . . . 7
-------
Total fixed charges . . . . . . . . . . . . . . . . . .
$ 874
=======
Ratio of earnings to fixed charges . . . . . . . . . . . . . . 2.2
=======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM HOLDINGS' CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK>847903
<NAME>RJR NABISCO HOLDINGS CORP.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 647
<SECURITIES> 0
<RECEIVABLES> 1,107
<ALLOWANCES> 0
<INVENTORY> 2,504
<CURRENT-ASSETS> 4,672
<PP&E> 7,710
<DEPRECIATION> (2,281)
<TOTAL-ASSETS> 31,851
<CURRENT-LIABILITIES> 4,314
<BONDS> 10,363
5
1,307
<COMMON> 11
<OTHER-SE> 9,634
<TOTAL-LIABILITY-AND-EQUITY> 31,851
<SALES> 11,322
<TOTAL-REVENUES> 11,322
<CGS> 5,079
<TOTAL-COSTS> 9,337
<OTHER-EXPENSES> (81)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (828)
<INCOME-PRETAX> 1,076
<INCOME-TAX> 474
<INCOME-CONTINUING> 602
<DISCONTINUED> 0
<EXTRAORDINARY> (145)
<CHANGES> 0
<NET-INCOME> 457
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM RJRN'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK>83612
<NAME>RJR NABISCO, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 643
<SECURITIES> 0
<RECEIVABLES> 1,107
<ALLOWANCES> 0
<INVENTORY> 2,504
<CURRENT-ASSETS> 4,668
<PP&E> 7,710
<DEPRECIATION> (2,281)
<TOTAL-ASSETS> 31,846
<CURRENT-LIABILITIES> 4,256
<BONDS> 10,363
0
0
<COMMON> 0
<OTHER-SE> 11,399
<TOTAL-LIABILITY-AND-EQUITY> 31,846
<SALES> 11,322
<TOTAL-REVENUES> 11,322
<CGS> 5,079
<TOTAL-COSTS> 9,328
<OTHER-EXPENSES> (92)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (828)
<INCOME-PRETAX> 1,074
<INCOME-TAX> 474
<INCOME-CONTINUING> 600
<DISCONTINUED> 0
<EXTRAORDINARY> (145)
<CHANGES> 0
<NET-INCOME> 455
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
