<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
------------------------
RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-10215 13-3490602
(State or other jurisdiction (Commission file number) (I.R.S. Employer
of Identification No.)
incorporation or
organization)
</TABLE>
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-6388 56-0950247
(State or other jurisdiction (Commission file number) (I.R.S. Employer
of 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: JUNE 30, 1997:
RJR NABISCO HOLDINGS CORP.: 323,717,664 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>
PAGE
---------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three Months Ended 1
June 30, 1997 and 1996...................................................................
Consolidated Condensed Statements of Income--Six Months Ended 2
June 30, 1997 and 1996...................................................................
Consolidated Condensed Statements of Cash Flows--Six Months 3
Ended June 30, 1997 and 1996.............................................................
Consolidated Condensed Balance Sheets--June 30, 1997 4
and December 31, 1996....................................................................
Notes to Consolidated Condensed Financial Statements....................................... 5-13
Item 2. Management's Discussion and Analysis of Financial Condition and 14-20
Results of Operations....................................................................
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 21-22
Item 6. Exhibits and Reports on Form 8-K........................................................... 23
Signatures............................................................................................. 24
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
-------------------- ---------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- ---------- ---------
NET SALES*............................................................ $ 4,286 $ 4,286 $ 4,203 $ 4,203
--------- --------- ---------- ---------
Costs and expenses:
Cost of products sold*.............................................. 1,954 1,954 1,941 1,941
Selling, advertising, administrative and general expenses........... 1,456 1,455 1,437 1,441
Amortization of trademarks and goodwill............................. 160 160 160 160
Restructuring expense............................................... -- -- 428 428
--------- --------- ---------- ---------
OPERATING INCOME.................................................. 716 717 237 233
Interest and debt expense............................................. (231) (206) (230) (207)
Other income (expense), net........................................... (47) (47) (23) (23)
--------- --------- ---------- ---------
Income (loss) before income taxes................................. 438 464 (16) 3
Provision for income taxes............................................ 175 184 53 63
--------- --------- ---------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME (LOSS) OF NABISCO
HOLDINGS.......................................................... 263 280 (69) (60)
Less minority interest in income (loss) of Nabisco Holdings........... 20 20 (42) (42)
--------- --------- ---------- ---------
NET INCOME (LOSS)................................................. 243 260 (27) (18)
Less preferred stock dividends........................................ 11 -- 10 --
--------- --------- ---------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK...................... $ 232 $ 260 $ (37) $ (18)
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net income (loss) per common and common equivalent share.............. $ 0.71 $ (0.11)
--------- ----------
--------- ----------
Dividends per share of Series C preferred stock....................... $ 0.751 $ 1.503
--------- ----------
--------- ----------
Dividends per share of common stock................................... $ 0.5125 $ 0.4625
--------- ----------
--------- ----------
Weighted average number of common and common equivalent shares
outstanding (in thousands).......................................... 325,607 325,879
--------- ----------
--------- ----------
</TABLE>
- ------------------------
* Excludes excise taxes of $879 million and $960 million for the three months
ended June 30, 1997 and 1996, respectively.
See Notes to Consolidated Condensed Financial Statements
1
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
NET SALES*............................................................. $ 8,065 $ 8,065 $ 8,089 $ 8,089
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold*............................................... 3,674 3,674 3,742 3,742
Selling, advertising, administrative and general expenses............ 2,704 2,704 2,724 2,728
Amortization of trademarks and goodwill.............................. 318 318 318 318
Restructuring expense................................................ -- -- 428 428
--------- --------- --------- ---------
OPERATING INCOME................................................... 1,369 1,369 877 873
Interest and debt expense.............................................. (463) (415) (464) (417)
Other income (expense), net............................................ (76) (76) (58) (58)
--------- --------- --------- ---------
Income before income taxes......................................... 830 878 355 398
Provision for income taxes............................................. 341 360 216 234
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST IN INCOME (LOSS) OF NABISCO
HOLDINGS....................................................... 489 518 139 164
Less minority interest in income (loss) of Nabisco Holdings............ 33 33 (32) (32)
--------- --------- --------- ---------
NET INCOME......................................................... 456 485 171 196
Less preferred stock dividends......................................... 22 -- 21 --
--------- --------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCK.............................. $ 434 $ 485 $ 150 $ 196
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and common equivalent share...................... $ 1.33 $ 0.46
--------- ---------
--------- ---------
Dividends per share of Series C preferred stock........................ $ 2.254 $ 3.006
--------- ---------
--------- ---------
Dividends per share of common stock.................................... $ 1.025 $ 0.925
--------- ---------
--------- ---------
Weighted average number of common and common equivalent shares
outstanding (in thousands)........................................... 325,998 328,224
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* Excludes excise taxes of $1.731 billion and $1.855 billion for the six
months ended June 30, 1997 and 1996, respectively.
See Notes to Consolidated Condense Financial Statements
2
<PAGE>
NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
----------- ----------- ----------- -----------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income................................................................ $ 456 $ 485 $ 171 $ 196
----- ----- ----- -----
Adjustments to reconcile net income to net cash flows from (used in)
operating activities:
Depreciation and amortization........................................... 579 579 577 577
Deferred income tax benefit............................................. (1) (1) (163) (162)
Changes in working capital items, net................................... (608) (452) (321) (238)
Restructuring and restructuring related expense, net of cash payments... (146) (146) 361 361
Other, net.............................................................. (7) (14) (40) (42)
----- ----- ----- -----
Total adjustments..................................................... (183) (34) 414 496
----- ----- ----- -----
Net cash flows from operating activities.................................. 273 451 585 692
----- ----- ----- -----
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures...................................................... (308) (308) (332) (332)
Acquisition of businesses................................................. -- -- (129) (129)
Disposition of businesses and certain assets.............................. 100 100 126 126
----- ----- ----- -----
Net cash flows used in investing activities............................. (208) (208) (335) (335)
----- ----- ----- -----
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings (repayments) of long-term debt............................. 68 68 (139) (139)
Increase in short-term borrowings......................................... 239 239 374 374
Dividends paid on common stock and preferred stock, including dividends
paid to Nabisco Holdings' minority common shareholders.................. (383) (16) (347) (14)
Other, net -- including intercompany transfers and payments............... 20 (524) (4) (442)
----- ----- ----- -----
Net cash flows used in financing activities............................. (56) (233) (116) (221)
----- ----- ----- -----
Effect of exchange rate changes on cash and cash equivalents................ (10) (10) (7) (7)
----- ----- ----- -----
Net change in cash and cash equivalents................................. (1) -- 127 129
Cash and cash equivalents at beginning of period............................ 252 251 234 232
----- ----- ----- -----
Cash and cash equivalents at end of period.................................. $ 251 $ 251 $ 361 $ 361
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 251 $ 251 $ 252 $ 251
Accounts and notes receivable, net.................................. 1,489 1,485 1,418 1,413
Inventories......................................................... 2,847 2,847 2,636 2,636
Prepaid expenses and excise taxes................................... 593 593 445 445
--------- --------- --------- ---------
TOTAL CURRENT ASSETS............................................ 5,180 5,176 4,751 4,745
--------- --------- --------- ---------
Property, plant and equipment, net.................................. 5,771 5,771 5,835 5,835
Trademarks, net..................................................... 7,890 7,890 8,030 8,030
Goodwill, net....................................................... 12,080 12,080 12,268 12,268
Other assets and deferred charges................................... 380 359 405 382
--------- --------- --------- ---------
$ 31,301 $ 31,276 $ 31,289 $ 31,260
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................... $ 741 $ 741 $ 609 $ 609
Accounts payable and accrued liabilities............................ 3,124 2,947 3,375 3,217
Current maturities of long-term debt................................ 39 39 63 63
Income taxes accrued................................................ 282 407 259 235
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES......................................... 4,186 4,134 4,306 4,124
--------- --------- --------- ---------
Long-term debt (less current maturities).............................. 9,409 9,409 9,256 9,256
Minority interest in Nabisco Holdings................................. 806 806 797 797
Other noncurrent liabilities.......................................... 2,202 1,623 2,223 1,872
Deferred income taxes................................................. 3,577 3,514 3,605 3,542
Contingencies (Note 3)
RJRN Holdings' obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated
debentures*......................................................... 954 -- 954 --
Stockholders' equity:
Series C convertible preferred stock................................ -- -- 3 --
Other preferred stock............................................... 528 -- 534 --
Common stock (327,094,964 shares issued at June 30, 1997)........... 3 -- 3 --
Paid-in capital..................................................... 10,042 11,886 10,038 11,890
Retained earnings................................................... 68 190 -- --
Cumulative translation adjustments.................................. (286) (286) (221) (221)
Other stockholders' equity.......................................... (188) -- (209) --
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY........................................ 10,167 11,790 10,148 11,669
--------- --------- --------- ---------
$ 31,301 $ 31,276 $ 31,289 $ 31,260
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
* The sole asset of the subsidiary trust is the junior subordinated debentures
of RJRN Holdings. Upon redemption of the junior subordinated debentures,
which have a final maturity of December 31, 2044, the preferred securities
will be mandatorily redeemed. The outstanding junior subordinated debentures
have an aggregate principal amount of approximately $978 million and an
annual interest rate of 10%.
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
GENERAL
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 1997
presentation.
In management's opinion, the accompanying unaudited consolidated condensed
financial statements (the "Consolidated Condensed Financial Statements") of RJR
Nabisco Holdings Corp. ("RJRN Holdings") and RJR Nabisco, Inc. ("RJRN" and
together with RJRN 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. The Consolidated Condensed
Financial Statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K of
RJRN Holdings and RJRN for the year ended December 31, 1996.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share, which establishes
new standards for computing and presenting net income per share. As a result,
RJRN Holdings will begin reporting in the fourth quarter of 1997 both a basic
and diluted net income per share amount for each period presented. It is
anticipated that basic net income per share, which excludes any dilution, and
diluted net income per share will not be significantly different than net income
per share calculated under current accounting standards.
RESTRUCTURING EXPENSE
In the second quarter of 1996, Nabisco Holdings Corp. ("Nabisco Holdings")
recorded a $428 million ($241 million after-tax, net of minority interest)
restructuring expense related to a program undertaken to streamline operations
and improve profitability.
As of June 30, 1997, approximately $260 million of the restructuring
accruals were utilized as follows: $146 million for severance and related
benefits, $82 million for product line rationalizations, $26 million for
contract terminations and $6 million for plant closures.
NOTE 2--INVENTORIES
The major classes of inventory are shown in the table below:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
<S> <C> <C>
Finished products.................................................... $ 876 $ 830
Leaf tobacco......................................................... 1,290 1,161
Raw materials........................................................ 248 234
Other................................................................ 433 411
----------- ------
$ 2,847 $ 2,636
----------- ------
----------- ------
</TABLE>
5
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONTINGENCIES
TOBACCO-RELATED LITIGATION
OVERVIEW. Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including, with increasing frequency, RJRN) or indemnitees, including those
claiming that lung cancer and other diseases as well as addiction have resulted
from the use of or exposure to RJRT's tobacco products. During the second
quarter of 1997, 124 new actions were filed or served against RJRT and/or its
affiliates or indemnitees (as against only 44 in the second quarter of 1996) and
57 such actions were dismissed or otherwise resolved in favor of RJRT and/or its
affiliates or indemnitees without trial. Since the close of the second quarter,
through August 7, 1997, an additional 117 suits have been filed or served, and
14 dismissed. There have also been noteworthy increases in the number of these
cases pending. On August 7, 1997, there were 448 active cases pending against
RJRT and/or its affiliates or indemnitees, as compared with 203 cases in July
1996 and 68 in July 1995. Of these cases, 443 are in the United States, one in
Canada, three in Puerto Rico, and one in Guam.
The United States cases are in 44 states and are distributed as follows: 179
in Florida, 61 in New York, 36 in Texas, 18 in Louisiana, 11 in each of New
Jersey and Pennsylvania, ten in each of Alabama, California, and Ohio, eight in
each of Tennessee and Mississippi, six in West Virginia, five in each of Indiana
and Massachusetts, four in each of Kansas, Michigan, and Oklahoma, three in each
of Arizona, Colorado, District of Columbia, Hawaii, Minnesota, New Mexico,
Oregon, and Washington, two in each of Connecticut, Georgia, Illinois, Iowa,
Maryland, Missouri, Montana, New Hampshire, South Dakota, and Wisconsin, and one
in each of Alaska, Arkansas, Idaho, Kentucky, Nevada, North Carolina, South
Carolina, Utah, and Vermont. Of the 443 active cases in the United States, 331
are pending in state court and 112 in federal court.
THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, anti-trust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity and common law
public nuisance. Punitive damages, often in amounts ranging into the hundreds of
millions or even billions of dollars, are specifically pleaded in a number of
cases in addition to compensatory and other damages. Eight of the 443 active
cases in the United States involve alleged non-smokers claiming injuries
resulting from exposure to environmental tobacco smoke. Thirty-six cases purport
to be class actions on behalf of thousands of individuals. Purported classes
include individuals claiming to be addicted to cigarettes, individuals and their
estates claiming illness and death from cigarette smoking, flight attendants
alleging personal injury from exposure to environmental tobacco smoke in their
workplace and Blue Cross/Blue Shield subscribers claiming reimbursement for
premiums paid. Sixty-six of the active cases seek, INTER ALIA, recovery of the
cost of Medicaid funds or other health related costs paid for treatment of
individuals suffering from diseases or conditions allegedly related to tobacco.
DEFENSES. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act ("the Cigarette Act") of some or all such claims arising after 1969; the
lack of any defect in the product; assumption of the risk; contributory or
comparative fault; lack of proximate cause; and statutes of limitations or
repose; and, in the attorneys general cases (discussed below), additional
equitable and constitutional defenses. RJRN has asserted additional defenses,
including
6
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONTINGENCIES (CONTINUED)
jurisdictional defenses, in many of the cases in which it is named. Juries have
found for plaintiffs in three smoking and health cases in which RJRT was not a
defendant, but in one such case, no damages were awarded and the judgment was
affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case,
CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on appeal and the
case was subsequently dismissed. In the third such case, on August 9, 1996, a
Florida jury awarded damages of $750,000 to an individual plaintiff. The
defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking to reverse the
judgment on appeal. On May 5, 1997, in an individual case filed against RJRT,
brought by the same attorney who represented plaintiffs in the CARTER case, a
Florida state court jury found no RJRT liability.
On June 24, 1992, the United States Supreme Court in CIPOLLONE held INTER
ALIA that claims that tobacco companies failed adequately to 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 Supreme Court also held that certain claims sounding in
breach of express warranty, fraud, misrepresentation and conspiracy were not
preempted.
CERTAIN CLASS ACTION SUITS. In May 1996, there was an important ruling in
one of the purported class action cases, CASTANO V. THE AMERICAN TOBACCO
COMPANY, originally filed in March 1994 in the United States District Court for
the Eastern District of Louisiana against tobacco industry defendants, including
RJRT and RJRN. Plaintiffs sought to obtain 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 alleged that cigarette
manufacturers manipulated the levels of nicotine in their tobacco products to
induce addiction in smokers. Plaintiffs' motion for certification of the class
was granted in part on February 17, 1995 but, on May 23, 1996, the Fifth Circuit
Court of Appeals overturned the certification and ordered the case remanded to
the district court for decertification of the class on the grounds that a class
consisting of all "addicted" smokers failed to meet the standards and
requirements of Federal Rule 23 governing class actions. The class has been
decertified and the case is proceeding as an individual suit. Another purported
class action, filed shortly after CASTANO, remains stayed in federal district
court in Louisiana.
Since the federal appeals court decision in CASTANO, class action suits
based on similar claims have been brought in state courts in Alabama, Arkansas,
the District of Columbia (D.C. court), Georgia, Hawaii, Iowa, Kansas, Louisiana,
Maryland, Michigan, Minnesota, New Mexico, Ohio, Oklahoma, New Jersey, New York,
Pennsylvania, South Dakota, Tennessee, Texas, West Virginia and Wisconsin. A
similar suit had previously been filed in Indiana. Similar suits are also
expected to be filed in additional jurisdictions and there are additional class
action suits pending in Canada and Puerto Rico. Each such suit asserts claims on
behalf of residents of the particular jurisdiction who allegedly are or claim to
be addicted, injured, or at greater risk of injury by the use of tobacco, or are
the legal survivors of such persons. In addition, two earlier class action suits
are still pending in Florida. In one case, BROIN V. PHILIP MORRIS COMPANY, a
class consisting of all non-smoking flight attendants who work or have worked
for U.S. airlines has been certified, and the first phase of the case is
currently being tried. In a second case, ENGLE V. R.J. REYNOLDS TOBACCO COMPANY,
a class consisting of Florida residents or their survivors who claim to have
diseases or medical conditions caused by their "addiction" to cigarettes has
been certified, and the case, previously scheduled for trial in September 1997,
will be rescheduled based on when the BROIN trial is completed. A class was
certified in another purported class action suit, SCOTT V. AMERICAN TOBACCO
7
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONTINGENCIES (CONTINUED)
COMPANY, on April 11, 1997. Defendants have removed the case to federal court
and are seeking reconsideration of the certification. Another suit, GEIGER V.
AMERICAN TOBACCO COMPANY, was certified as a class action by a New York State
court on July 24, 1997 and defendants have filed a notice of appeal. A class
action filed in Tennessee seeks reimbursement of Blue Cross/Blue Shield premiums
paid by subscribers throughout the United States. During the second quarter of
1997, class certification was denied in two other cases: one, ARCH V. AMERICAN
TOBACCO COMPANY, pending in the United States District Court for the Eastern
District of Pennsylvania, on June 3, 1997 and another, SMITH V. BROWN &
WILLIAMSON, pending in the United States District court for the Western District
of Missouri, in which RJRT is not a defendant, on May 22, 1997.
THE ATTORNEYS GENERAL AND RELATED CASES. In June 1994, the Mississippi
attorney general brought an action, MOORE V. THE AMERICAN TOBACCO COMPANY,
against various industry members including RJRT. This case was brought 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 (non-jury)
Court, Jackson County, Mississippi, also sought an injunction against
"promoting" or "aiding and abetting" the sale of cigarettes to minors. Both
actual and punitive damages were sought in unspecified amounts. The case was
scheduled for trial on July 7, 1997, but on July 2, 1997, the parties arrived at
an agreement in principle settling the claims relating to the subject matter of
the litigation, subject to the drafting and execution of a comprehensive
settlement agreement. See "Proposed Resolutions" below.
Following the filing of the MOORE case referred to above, other states,
through their attorneys general and/or other state agencies, have sued RJRT and
other U.S. cigarette manufacturers as well as, in some instances, their parent
companies, in actions to recover the costs of medical expenses incurred by the
state or its agencies in the treatment of diseases allegedly caused by cigarette
smoking. Some of these cases also seek injunctive relief and treble damages for
state and/or federal antitrust law and RICO violations. Certain of the actions
also seek statutory penalties and other forms of relief under state consumer
protection statutes. On August 7, 1997, there were 36 such cases pending in the
following states or territories: Alaska, Arizona, California, Colorado,
Connecticut, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana,
Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon,
Pennsylvania, Puerto Rico, South Carolina, Texas, Utah, Vermont, Washington,
West Virginia and Wisconsin. Jury selection has begun in the Florida attorney
general's case and the Texas case is scheduled for September 29, 1997.
The suit by the State of Florida raises special issues because it was
brought under a July 1994 amendment to a Florida statute which allows the state
to bring an action in its own name against the tobacco industry to recover the
state's Medicaid payments for the treatment of illnesses statistically
associated with cigarette smoking. The amendment did not require the state to
identify the individuals who received medical care, permitted claims to be filed
in the aggregate and eliminated the comparative negligence and assumption of
risk defenses. The amendment was challenged on state and federal constitutional
grounds in a lawsuit brought by Philip Morris Companies Inc., Associated
Industries of Florida and others in June 1994. The trial court ruling in this
case was appealed to the Florida Supreme Court which, on June 27, 1996, issued
its opinion limiting the amendment in several respects. Among other things, the
court ruled: that provisions abrogating affirmative defenses available to
tobacco companies if sued by individuals could only be applied to claims brought
by the state arising out of payments made after
8
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONTINGENCIES (CONTINUED)
July 1, 1994, the effective date of the amendment; that the state must identify
individual recipients of Medicaid payments; and that claims previously barred by
the statute of repose could not be revived. The Florida Supreme Court, in a 4-3
decision, expressly stated that although it found provisions of the statute to
be "facially" constitutional, it was specifically leaving open the right to
challenge those provisions as applied in any specific lawsuit. The plaintiffs in
that lawsuit were unsuccessful in their request to obtain United States Supreme
Court review of the Florida Supreme Court's decision.
In an order dated September 16, 1996, the Florida trial court hearing the
attorney general's case applied the Florida Supreme Court decision to that case.
The order dismissed fifteen of plaintiff's eighteen causes of action, but left
standing the claims of negligence and/or products liability and one count of the
complaint which seeks to enjoin certain acts, including the sale of cigarettes
to minors. It also required the attorney general to identify the individual
Medicaid recipients for whom the state is seeking recovery within 30 days and
precluded recovery by the state on payments made prior to July 1994, except by
subrogation and assignment. Following this ruling, the State of Florida filed an
amended complaint that restated the counts of the prior complaint left standing
by the September order and added five additional counts. One of these counts
alleged various statutory and criminal violations arising under the Florida Drug
and Cosmetic Act, based on alleged wrongful and illegal targeting of minors,
fraudulent practices, public nuisance and deceptive and unfair trade practices.
The other four new counts alleged violations of various sections of the Florida
RICO Act. Defendants' motion to dismiss the RICO counts was denied.
In response to certain pretrial motions filed by the defendants, the Court
has ruled INTER ALIA that: (1) all claims for punitive damages under Counts One
(negligence) and Two (strict liability) of the complaint are dismissed; and (2)
the state's cause of action does not accrue until such time as it has paid
Medicaid benefits and that the state's action must be limited to its past
damages and may not include a claim for future damages. In addition, in ruling
on certain procedural motions, the judge in this case has severely limited the
affirmative evidence that defendants may present at trial, which could have a
significant adverse impact on the course and outcome of this trial.
In addition to the 36 actions brought by the various state attorneys
general, 30 actions advancing similar theories have been brought by private
attorneys and/or local officials purportedly on behalf of the citizens of
certain states, counties and/or cities, union health and welfare funds, a
university and four native American tribes.
Although RJRT and most other cigarette manufacturers have agreed to the
Memorandum described below, the uncertainty of its enactment into law requires
that they continue to defend these attorneys general and related cases
vigorously and they continue to do so (as does RJRN in the cases where it is a
named defendant). In addition, these tobacco company defendants filed for
declaratory judgment in several of the states in which attorneys general cases
are now pending including Massachusetts (federal court), Texas (state court),
Maryland (state court), Connecticut (federal court), Utah (state court), New
Jersey (state court), Alaska (federal court) and Hawaii (federal court). Motions
to dismiss on behalf of the state government defendants in three of the
declaratory judgment actions (Maryland, New Jersey and Connecticut) have been
granted. RJRT and the other cigarette manufacturers involved in those cases have
noticed appeals seeking to overturn these rulings.
PROPOSED RESOLUTIONS. Following several months of negotiations among
tobacco companies, state attorneys general, representatives of the public health
community and plaintiffs' lawyers, on June 20, 1997,
9
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONTINGENCIES (CONTINUED)
counsel representing RJRT and certain other parties signed a Memorandum of
Understanding and Resolution (the "Memorandum") that sets forth concepts for
federal legislation and a contractual protocol to resolve a variety of
litigation and regulatory issues concerning tobacco. The Memorandum is subject
to any necessary approvals by the various states and the Boards of Directors of
RJRT and the other participating tobacco companies. For the complete terms of
the Memorandum, see the Companies' Report on Form 8-K, filed with the Securities
and Exchange Commission on June 20, 1997, which includes the Memorandum as an
exhibit.
There can be no assurance that legislation to implement the Memorandum will
be enacted or that it will be enacted without modification that is materially
adverse to the tobacco industry, particularly in light of the complex legal and
factual issues involved and the need to reconcile the views of many competing
interests. It is not certain that any proposed legislation that emerges from
this process will be acceptable to RJRT. If enacted, the legislation could face
challenges on the grounds, among others, that the federal government lacks the
authority to regulate the tobacco industry or limit its liability in the manner
contemplated by the Memorandum. Regardless of the legislative outcome, the
negotiation and signing of the Memorandum could adversely affect other federal,
state and local regulation of the tobacco industry, alter the climate for
pending litigation against RJRN, RJRT and other tobacco companies and affect the
number of new smoking and health claims filed against the industry.
The Memorandum requires the tobacco companies to make an initial $10 billion
payment and subsequent annual multi-billion dollar payments. Discussions with
other manufacturers who were participants in the negotiations which led to the
Memorandum are still in progress, but, RJRT believes that its share of the
initial payment will be in the range of $600 to $700 million and that subsequent
payments will be allocated within the industry based on market share. However,
the financial effects of this legislation and the related contractual protocol
are difficult to predict. They depend, among other things, on (i) the amount and
timing of the payments actually required of RJRT by the legislation; (ii) the
means used to finance these payments; (iii) the impact of increased cigarette
prices and other aspects of the legislation and the contractual protocol on
domestic cigarette consumption; (iv) the effect of the legislation and the
contractual protocol on the consumption of tobacco products and the regulatory
and litigation environment outside the United States; (v) their effect, if any,
on public attitudes toward smoking and the tobacco industry; and (vi) their
impact on RJRT's competitive position in the tobacco industry.
Despite these uncertainties, RJRN believes that implementation of the
Memorandum would increase the costs and reduce the consumption of RJRT's tobacco
products in the United States and that it could have a significant negative
effect on the business of RJRT and the stated financial position of RJRN and
RJRT. Any significant negative effect on the financial position of RJRN could
ultimately impact the share repurchase and dividend policies of RJRN Holdings.
On the other hand, the proposals contemplated by the Memorandum offer a measure
of relief from certain litigation that could otherwise materially affect the
results of operations or cash flows of RJRN in particular quarterly or annual
periods or its financial condition. In evaluating any legislation to resolve
tobacco issues, RJRN and RJRT will continue to weigh carefully the potential
benefits, principally greater regulatory and litigation certainty and a
reduction in aggregate contingency risk, against the resulting monetary,
regulatory and other costs.
THE MISSISSIPPI AGREEMENT. Because the Memorandum, unless and until it is
enacted into law, will not resolve any pending litigation scheduled for trial in
advance of such enactment, the parties in each of these cases must decide, on a
case-by-case basis, whether to proceed to trial or seek some other resolution.
The
10
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONTINGENCIES (CONTINUED)
first attorney general case scheduled for trial after adoption of the Memorandum
was MOORE V. AMERICAN TOBACCO COMPANY. In that case, a settlement was agreed to
on July 2, 1997, based on a Memorandum of Understanding and subject to a number
of conditions, including the negotiation and execution of a full settlement
agreement.
The agreement calls for the defendants to pay an aggregate of $170 million
to the State of Mississippi, as well as additional amounts to the Attorney
General and plaintiffs' private counsel for their litigation costs and expenses.
It also provides for continuing payments commencing December 31, 1998, and
annually thereafter, based on Mississippi's 1.7% share of $4 billion in the
first year, escalating to 1.7% of $8 billion in year eight and thereafter,
adjusted upward by no less than 3% per year and further adjusted upward or
downward to reflect increases or decreases in volume of domestic tobacco product
sales. If the U.S. Congress enacts federal legislation in keeping with the
Memorandum discussed above, the terms of that legislation would supersede the
terms of the Mississippi agreement and defendants would receive credit for these
payments against the obligations arising under the federal legislation for
payments already made to Mississippi. If, instead, the defendants enter into a
number of separate settlement agreements with the other individual states that
have brought cost recovery suits against tobacco companies, Mississippi would be
entitled to payment adjustments to assure that it receives at least as favorable
a settlement as any other separately settling non-federal governmental
plaintiff.
On July 15, 1997, the settling defendants made their first payment under the
Mississippi agreement into an escrow account to be released to the State when
certain conditions, including the execution of a definitive agreement, have been
satisfied. RJRT's payment into that escrow account was $12,410,000. An
additional aggregate payment of $15 million relating to plaintiffs' legal
expenses (subject to later adjustment) was paid on July 30, 1997. RJRT's share
of that payment was $3,765,000.
RJRT has participated and may continue to participate in discussions with
certain other states with health care cost recovery actions scheduled to be
tried in the coming months in order to postpone or settle those actions while
awaiting passage of the legislation contemplated by the Memorandum. There can be
no assurance that any such postponement or settlement can be achieved, or, if
achieved, as to the terms ultimately agreed to. In the absence of postponement
or settlement, these actions would be tried as scheduled and any final judgment
reached prior to enactment of the contemplated legislation would not be affected
by the passage of the legislation.
RECENT AND SCHEDULED TRIALS. As of August 7, 1997, there were 12 cases
scheduled for trial in 1997 against RJRT and/or RJRN alleging injuries relating
to tobacco. Among these are three class action suits (one of which is currently
in trial) and two attorneys general suits. Cases against other tobacco company
defendants are also scheduled for trial in 1997 and thereafter. Although trial
schedules are subject to change and many cases are dismissed before trial, it is
likely that there will be an increased number of tobacco cases, involving claims
for possibly billions of dollars, against RJRT and RJRN coming to trial over the
next year as compared to prior years when trials in these cases were infrequent.
OTHER DEVELOPMENTS. On May 28, 1997, a suit was filed against RJRT in the
U.S. District Court for the Northern District of Georgia, Atlanta Division, FARR
V. R.J. REYNOLDS TOBACCO COMPANY, alleging claims under Title VII and the Equal
Pay Act on behalf of female RJRT employees and applicants for employment in the
"southeast sales region", seeking equitable relief, back pay and lost benefits,
as well as
11
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CONTINGENCIES (CONTINUED)
punitive damages, based on allegations that plaintiffs had been denied
employment, desirable job assignments, training, promotion and equal pay. RJRT
has filed an answer in the case and intends to defend it vigorously. Other
lawsuits filed by RJRT against various government agencies are described below.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Tobacco-- Governmental Activity."
RJRT, R.J. Reynolds Tobacco International ("RJRTI") and Northern Brands
International, another subsidiary of RJRN, each received document subpoenas
dated July 24, 1997, from a federal grand jury sitting in the Northern District
of New York. RJRT understands that the grand jury is investigating possible
smuggling activities. RJRT, RJRTI and Northern Brands International will respond
to these subpoenas, but are unable to predict the outcome of the grand jury's
investigation.
------------------------
Litigation is subject to many uncertainties and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) 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 or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory and other
developments relating to the tobacco industry and cigarette smoking that have
received wide media attention, including the recent Liggett settlements of
certain health care cost recovery actions and a purported nationwide smoking and
health class action, and a decision by a federal district court on a motion for
summary judgment to uphold the FDA's regulation of cigarettes as "drugs" or
"medical devices." These developments, as well as the widespread media attention
given to the Memorandum referred to above, may negatively affect the outcomes of
tobacco-related legal actions and encourage the commencement of additional
similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT and RJRN, a
significant increase in litigation and/or in adverse outcomes for tobacco
defendants could have an adverse effect on RJRT and RJRN. RJRT and RJRN each
believe that they have a number of valid defenses to any such actions and intend
to defend vigorously all such actions in which they are named defendants.
RJRN Holdings and RJRN believe that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or 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.
------------------------
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of RJRN 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 RJRN Holdings is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1997 1996 % CHANGE 1997 1996 % CHANGE
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
NET SALES:
RJRT.................................................................. $1,216 $1,173 4% $2,292 $2,230 3%
Reynolds International................................................ 879 852 3 1,677 1,691 (1)
------ ------ ------ ------
Total Tobacco....................................................... 2,095 2,025 3 3,969 3,921 1
------ ------ ------ ------
Nabisco Biscuit....................................................... 907 914 (1) 1,708 1,785 (4)
U.S. Foods Group...................................................... 647 639 1 1,174 1,202 (2)
------ ------ ------ ------
Domestic Food Group................................................... 1,554 1,553 -- 2,882 2,987 (4)
International Food Group.............................................. 637 625 2 1,214 1,181 3
------ ------ ------ ------
Total Food.......................................................... 2,191 2,178 1 4,096 4,168 (2)
------ ------ ------ ------
$4,286 $4,203 2 $8,065 $8,089
------ ------ ------ ------
------ ------ ------ ------
OPERATING COMPANY CONTRIBUTION:(1)
RJRT.................................................................. $ 395 $ 390 1% $ 775 $ 770 1%
Reynolds International................................................ 179 162 10 374 359 4
------ ------ ------ ------
Total Tobacco....................................................... 574 552 4 1,149 1,129 2
------ ------ ------ ------
Nabisco Biscuit....................................................... 183 146 25 317 271 17
U.S. Foods Group...................................................... 93 81 15 158 144 10
------ ------ ------ ------
Domestic Food Group................................................... 276 227 22 475 415 14
International Food Group.............................................. 44 63 (30) 98 113 (13)
------ ------ ------ ------
Total Food.......................................................... 320 290 10 573 528 9
------ ------ ------ ------
Headquarters.......................................................... (18) (17) (6) (35) (34) (3)
------ ------ ------ ------
$ 876 $ 825 6 $1,687 $1,623 4
------ ------ ------ ------
------ ------ ------ ------
OPERATING INCOME:
RJRT.................................................................. $ 303 $ 298 2% $ 592 $ 587 1%
Reynolds International................................................ 167 151 11 352 338 4
------ ------ ------ ------
Total Tobacco....................................................... 470 449 5 944 925 2
------ ------ ------ ------
Domestic Food Group................................................... 226 (177) -- 374 (40) --
International Food Group.............................................. 38 (18) -- 86 26 231
------ ------ ------ ------
Total Food.......................................................... 264 (195) -- 460 (14) --
------ ------ ------ ------
Headquarters.......................................................... (18) (17) (6) (35) (34) (3)
------ ------ ------ ------
$ 716 $ 237 202 $1,369 $ 877 56
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ------------------------
(1) Operating Company Contribution represents operating income before
amortization of trademarks and goodwill and restructuring expense.
13
<PAGE>
TOBACCO
The tobacco line of business is conducted by RJRT and R.J. Reynolds
International ("Reynolds International").
RJRT's net sales for the second quarter of 1997 were $1.22 billion, an
increase of $43 million or 4% from the second quarter of 1996, and $2.29 billion
for the first six months of 1997, an increase of $62 million or 3% over 1996.
The increase for both periods is mainly attributable to higher pricing,
partially offset by lower overall volume. Overall volume decreased 4% in both
the second quarter and the first six months of 1997 over the prior year. Full
price segment volume for the second quarter and the first six months of 1997
decreased 5% and 4%, respectively, over 1996, while savings segment volume
decreased 3% and 5%, respectively.
Industry volume was flat for the quarter but continues its shift to the full
price category with full price volume up 1% and savings volume down 5%. Industry
volume for the first six months of 1997 decreased 2% with full price volume flat
and savings volume down 5%. RJRT's overall market share decreased to 25.44%
during the second quarter of 1997 from 26.00% for the second quarter of 1996.
Overall market share for the first six months of 1997 decreased to 25.45% from
26.12% in 1996.
The Camel brand remained the company's strongest performing brand with
volume increases of 8% in both the second quarter and the first half of 1997.
The rollout of the Red Kamel line extension to single-pack-oriented retail
outlets was completed in April 1997 and market response to the Camel Menthol
styles introduced in January 1997 continues to be positive. Doral, the
industry's leading savings brand, posted volume gains of 4% for the second
quarter and first six months of 1997. Offsetting these increases were declines
in Winston and Salem and other low margin savings brands for both periods in
1997. The company continues its program of ceding market share of low margin
brands. RJRT continues to study Eclipse, a cigarette featuring 90% reduced
second-hand smoke, along with the Moonlight Tobacco Company brands, featuring
innovative packaging and product concepts. Additionally, during the second
quarter of 1997, RJRT announced that the Winston "No Bull" marketing campaign,
which had been tested in the state of Florida for the past year, will be rolled
out nationally during the third quarter of 1997. The new positioning will
establish Winston as a brand with a "straight-up" attitude leveraged by a unique
product point-of-difference: a 100-percent tobacco blend with no additives.
RJRT's operating company contribution increased 1% for the second quarter
and the first six months of 1997 to $395 million and $775 million, respectively,
compared to 1996. The increase in operating company contribution for both
periods is primarily due to increases in pricing and operating efficiencies,
partially offset by decreases in volume, higher marketing spending, and legal
costs. Operating income increased 2% for the second quarter and 1% for the first
six months of 1997 over the comparable 1996 periods due primarily to the
increases in operating company contribution.
Reynolds International's net sales amounted to $879 million for the second
quarter of 1997, a 3% increase over 1996 primarily due to an increase in volume
and pricing, partially offset by unfavorable foreign currency translation.
Excluding the impact of unfavorable foreign currency translation, net sales
would have increased 9% over 1996. Overall volume of 50.7 billion units
increased 13% from 1996 primarily due to a 37% gain from markets in the
Commonwealth of Independent States (CIS) and Baltic regions. Shipments into the
CIS and Baltic regions rebounded sharply after disruptions in the first quarter
of 1997. Volume in that region increased 62% in the second quarter versus the
first quarter of 1997. Sales in Russia remained strong during the second
quarter, with demand for the locally produced Peter 1st brand continuing to
exceed capacity. Volumes in Central Europe increased 22% over 1996, driven by
Turkey and Romania. Reynolds International continued to experience strong growth
in Japan where volume increased 35%, driven by the "low smoke, low smell"
Pianissimo brands. The company also reported volume momentum in South Africa and
strong performance in Tanzania, despite a difficult economic climate. Offsetting
this growth were declines in Western Europe, where flat to declining consumption
and price pressures in a number of markets, such as Spain and France,
contributed to volume softness. Reynolds
14
<PAGE>
International is continuing to move aggressively to offer medium and
low-tar/nicotine alternatives in Western Europe. Camel Lights, now introduced in
30 countries, remained on a strong growth track, with volume up 19% for the
first six months of 1997. Reynolds International launched Camel Medium in
Holland, Greece, Germany, Switzerland, Belgium and Hungary during the second
quarter of 1997. New Winston Lights and Superlights brand styles were launched
in Switzerland, Greece and Spain as part of the company's plans to expand
participation of its largest-selling international brand in the growing
worldwide lights segment. Salem continued its strong performance in Asia, with
volume up 19% in the second quarter of 1997.
Reynolds International's net sales decreased slightly to $1.68 billion for
the first six months of 1997 over the 1996 comparable period primarily due to
unfavorable foreign currency translation and unfavorable region mix, partly
offset by increased pricing. Excluding the impact of unfavorable foreign
currency translation, net sales would have increased 4% over 1996. Overall
volume of 92.3 billion units increased slightly from 1996 as a result of the
volume gains in Central Europe which more than offset the volume softness in
Western Europe and the disruptions during the first quarter of 1997 in the CIS
and Baltic regions.
Operating company contribution of $179 million for the second quarter of
1997 increased 10% from 1996 driven primarily by increased pricing, partially
offset by unfavorable foreign currency developments. Operating company
contribution was $374 million for the first six months of 1997, an increase of
4% over the comparable 1996 period, due primarily to increased pricing and
region sales mix, partially offset by unfavorable foreign currency developments
and higher product costs. Operating income increased 11% and 4% for the second
quarter and first six months of 1997, respectively, primarily as a result of the
increases in operating company contribution.
Reynolds International has commenced a European distribution rationalization
program to improve productivity and reduce costs that will not have a material
impact on the consolidated financial statements. The program includes inventory
realignment, as well as the sale and closure of certain facilities.
GOVERNMENTAL ACTIVITY
If the legislation contemplated by the Memorandum discussed at Note 3 of the
Consolidated Condensed Financial Statements above ("Note 3") is enacted, RJRT
and other cigarette manufacturers would be subject to certain actions taken (or
to be taken) by certain governmental regulatory agencies that could be expected
to have an adverse effect on cigarette sales. As described in Note 3, RJRT would
be prepared to support the enactment of such legislation as part of a
comprehensive resolution of a variety of tobacco issues. Nonetheless, in the
absence of such legislation, regulatory initiatives such as the following remain
of significant importance to RJRT.
In August 1996, the U.S. Food and Drug Administration (the "FDA") asserted
jurisdiction over cigarettes and certain other tobacco products by declaring
such products to be medical devices and adopting regulations, first proposed in
1995, on the advertising, promotion and sale of cigarettes. The regulations
include a phased in schedule of effectiveness over a two year period. The first
phase began February 28, 1997, when regulations relating to the sale of
cigarettes to minors became effective. Among other things, the regulations would
prohibit or impose stringent limits on a broad range of sales and marketing
practices, including bans on sampling, sponsorship by brand name, and
distribution of non-tobacco items carrying brand names. The FDA's rules also
limit advertising in print and on billboards to black and white text and impose
new labeling language.
The purported purpose of the FDA's assertion of jurisdiction was to curb the
use of tobacco products by underage youth. RJRT believes, however, that the
assertion of jurisdiction and the scope of the proposed rules would materially
restrict the availability of cigarettes and RJRT's ability to market its
cigarette products to adult smokers. RJRT, together with the four other major
domestic cigarette manufacturers and an advertising agency, filed suit on the
day of the initial proposal in 1995 in the U.S.
15
<PAGE>
District Court for the Middle District of North Carolina seeking to enjoin the
FDA's assertion of jurisdiction (COYNE BEAHM V. UNITED STATES FOOD & DRUG
ADMINISTRATION). On the day the final regulations were announced, the plaintiffs
filed an amended complaint challenging the regulations. Similar suits were filed
in the same court by manufacturers of smokeless tobacco products, by operators
of retail stores and by advertising interests. On April 26, 1997, the court
ruled on a motion for summary judgment, that based on the facts alleged by the
FDA, that agency was not barred from asserting jurisdiction over tobacco but
lacked authority to issue certain of the regulations bearing on marketing and
advertising. The court immediately certified its decision for appeal to the
Fourth Circuit Court of Appeals and stayed the effectiveness of that portion of
the regulations which had not yet been implemented pending appeal or further
court action. RJRT is unable to predict the ultimate outcome of this litigation
seeking to find the FDA's regulations to be unlawful. If the full regulations do
go into effect, they could be expected to have an adverse effect on cigarette
sales and RJRT.
On May 28, 1997, the Federal Trade Commission (the "FTC") issued an
unfairness complaint against RJRT, seeking to stop the use of Joe Camel
advertising, to require RJRT to undertake certain public education activities,
and to monitor sales and share of sales of each of RJRT's brands to smokers
under the age of 18. On June 17, 1997, RJRT filed suit against the FTC in the
Federal District Court for the Middle District of North Carolina, challenging
the FTC's action as procedurally improper. The FTC has moved to dismiss the
action.
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 or timing 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. RJRT submitted comments on the proposed
regulations during the comment period which closed in February 1996. 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 July 1996, Massachusetts enacted legislation that would require
manufacturers of tobacco products sold in Massachusetts to report yearly,
beginning in 1997, the ingredients of each brand sold. RJRT believes that the
disclosure of trade secrets required by this law could damage the competitive
position of its brands. The statute requires the reporting of nicotine yield
ratings in accordance with procedures to be established. Together with other
cigarette manufacturers, RJRT has filed suit in the U.S. District Court for the
District of Massachusetts seeking to have the statute declared null and void and
to restrain Massachusetts officials from enforcing it. A similar suit has been
filed by manufacturers of smokeless tobacco products. The Massachusetts district
court denied the manufacturers' motion for summary judgment based on preemption
grounds, but certified the case for appeal of this issue to the First Circuit
which heard oral argument in June 1997. RJRT is unable to predict the outcome of
this litigation.
Minnesota and Texas have also recently enacted legislation requiring
ingredients reporting. RJRT believes that the Minnesota and Texas laws also
violate the U.S. Constitution. RJRT has filed suit in the U.S. District Court
for the District of Minnesota seeking to restrain the enforcement of the
Minnesota law. RJRT is unable to predict the outcome of this litigation.
A number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. RJRT is unable to predict the
effect of the recent Memoranda on the regulatory environment for its products
abroad.
As part of a balanced budget agreement, subject to legislative enactment,
the White House and the U.S. Congress have agreed to increase the excise tax on
cigarettes by $.10 per pack in the year 2000 and an
16
<PAGE>
additional $.05 in 2002. It is not possible to determine what additional
federal, state, local or foreign legislation or regulations relating to smoking
or cigarettes will be enacted or to predict any resulting effect thereof on
RJRT, Reynolds International or the cigarette industry generally, but such
legislation or regulations could have an adverse effect on RJRT, Reynolds
International or the cigarette industry generally.
For a description of certain litigation affecting RJRT and its affiliates,
see Note 3 to the Consolidated Condensed Financial Statements.
FOOD
The food business is conducted by operating subsidiaries of Nabisco
Holdings. Nabisco's businesses in the United States are comprised of the Nabisco
Biscuit company and the U.S. Foods Group (collectively, the "Domestic Food
Group"). The U.S. Foods Group is comprised of the Specialty Products,
LifeSavers, Planters, Tablespreads and Food Service companies. Nabisco's
businesses outside the United States are conducted by Nabisco Ltd and Nabisco
International, Inc. ("Nabisco International" and together with Nabisco Ltd, the
"International Food Group").
The Domestic Food Group's net sales were flat for the second quarter and 4%
lower for the first six months of 1997, with Nabisco Biscuit down 1% and 4%,
respectively, and the U.S. Foods Group up 1% and down 2%, respectively. The
declines in Nabisco Biscuit were primarily due to lower volume in SnackWell's
and breakfast snacks, which more than offset higher volume in core cookie and
cracker brands. The U.S. Foods Group's net sales increase in the second quarter
was primarily due to higher volume for nuts, candy and gum which was partially
offset by lower sales volume for tablespreads and condiments. The U.S. Foods
Group's decline in net sales for the first six months of 1997 was primarily due
to lower sales volume for tablespreads and condiments, partially offset by
higher sales volume for nuts, candy and gum. The International Food Group
reported net sales increases for the second quarter and first six months of 1997
of 2% and 3%, respectively. The increases in net sales were primarily driven by
the second half 1996 business acquisitions, principally Lucky in Taiwan and
Fontaneda in Spain, and improved results in Mexico, China and Venezuela.
Partially offsetting these gains were volume declines in Brazil, resulting from
aggressive competitive activity in the biscuit and milk categories, and
Argentina.
The Domestic Food Group's operating company contribution for the second
quarter and first six months of 1997 increased 22% and 14%, respectively.
Excluding the impact of one-time items in 1997 and 1996 discussed below,
operating company contribution increased 13% for the second quarter and 10% for
the first six months of 1997. On the same basis, Nabisco Biscuit was up 22% and
15%, respectively, and the U.S. Foods Group was down 2% and even, respectively.
The Nabisco Biscuit increases resulted largely from restructuring driven margin
improvements and on-going productivity initiatives. The U.S. Foods Group's
decline for the second quarter was primarily due to reduced sales of higher
margin condiment products, while the first six months' profit level was
maintained due to restructuring efficiencies and lower consumer promotion
expense. The International Food Group's operating company contribution for the
second quarter and first six months of 1997 decreased 30% and 13%, respectively.
Excluding the impact in 1997 of a one-time item discussed below, the
International Food Group's operating company contribution for the second quarter
and first six months of 1997 declined 19% and 7%, respectively, principally due
to lower earnings in Latin America, most notably lower sales in Brazil and lower
sales and increased expenses in Argentina. Higher expansion costs in China and
Indonesia also impacted the International Food Group's results unfavorably.
In 1997, Nabisco's U.S. Foods Group sold certain domestic regional brands
for $50 million resulting in a $32 million pre-tax gain. In addition, one-time
expenses of $31 million were recognized which included a $14 million provision
for the additional write-down of a business held for sale by the U.S. Foods
Group, $10 million of expenses for the reorganization of the U.S. Foods Group's
selling organization, and $7 million to relocate the International Food Group's
headquarters from New York City to New Jersey. In
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1996, restructuring related expenses of $4 million at Nabisco Biscuit and $6
million at the U.S. Foods Group were recognized in connection with the
implementation of the June 1996 restructuring program.
NET INCOME
Net income for the second quarter and six months of 1997 reflects a decrease
in the overall annual effective tax rate resulting primarily from lower taxes on
foreign earnings, the benefit of which was more than offset by unfavorable
foreign currency developments.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from operating activities for the first six months of 1997
were $273 million, a decrease of $312 million from the six months of 1996 level.
The decrease in net cash flows from operating activities reflects increased
working capital requirements resulting from higher inventory levels and foreign
excise tax prepayments, and higher restructuring and related payments.
Free cash flow, another measure used by management to evaluate liquidity and
financial condition, represents cash available for the repayment of debt and
certain other corporate purposes such as common stock dividends, stock
repurchases and acquisitions. It is essentially net cash flow from operating
activities and investing activities from the Consolidated Condensed Statement of
Cash Flows adjusted for acquisitions and divestitures of businesses, less
preferred dividends. Free cash flow resulted in an outflow of $67 million for
the first six months of 1997 and an inflow of $297 million for the first six
months of 1996. The decrease in free cash flow from 1996 to 1997 primarily
reflects the higher working capital requirements and restructuring and related
payments and a higher level of proceeds from the disposition of businesses and
certain assets in the prior year.
In May 1997, 26,675,000 shares of Series C preferred stock mandatorily
converted into 53,350,000 shares of common stock.
In July 1997, RJRN issued $150 million 8.25% notes due 2004 and $200 million
8.50% notes due 2007. Interest on the notes is payable semi-annually on January
1 and July 1 of each year, beginning January 1, 1998. The net proceeds from the
issuance of the notes was used to repay a portion of outstanding commercial
paper borrowings.
Management of RJRN Holdings and its subsidiaries are continuing to review
various strategic transactions, including but not limited to, acquisitions,
divestitures, mergers and joint ventures. No assurance may be given that any
such transactions will be announced or completed.
Capital expenditures were $308 million for the first six months of 1997. The
current level of expenditures planned for 1997 is expected to be in the range of
approximately $825 million to $875 million (approximately 51% Food and 49%
Tobacco), which will be funded primarily by cash flows from operating
activities. The current planned level of capital expenditures for 1997 is higher
than 1996 primarily due to increased capital investments for Reynolds
International (notably in the CIS and Baltic regions). Management expects that
its capital expenditures program will continue at a level sufficient to support
the strategic and operating needs of RJRN Holdings' operating subsidiaries.
LITIGATION
For a description of certain litigation affecting RJRT and its affiliates,
see Note 3 to the Consolidated Condensed Financial Statements.
18
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------------------------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements, particularly with respect to capital expenditures, which reflect
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effect on financial
performance and future events of competitive pricing for products, success of
new product innovations and acquisitions, local economic conditions and the
effects of currency fluctuations in countries in which RJRN Holdings and its
subsidiaries do business, the effects of domestic and foreign government
regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in
the case of the tobacco business, litigation. Due to such uncertainties and
risks, readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof.
------------------------
19
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PART II
ITEM 1. LEGAL PROCEEDINGS
TOBACCO-RELATED LITIGATION
OVERVIEW. Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including, with increasing frequency, RJRN) or indemnitees, including those
claiming that lung cancer and other diseases as well as addiction have resulted
from the use of or exposure to RJRT's tobacco products. During the second
quarter of 1997, 124 new actions were filed or served against RJRT and/or its
affiliates or indemnitees (as against only 44 in the second quarter of 1996) and
57 such actions were dismissed or otherwise resolved in favor of RJRT and/or its
affiliates or indemnitees without trial. Since the close of the second quarter,
through August 7, 1997, an unprecedented additional 117 suits have been filed or
served, and 14 dismissed. There have also been noteworthy increases in the
number of these cases pending. On August 7, 1997, there were 448 active cases
pending against RJRT and/or its affiliates or indemnitees, as compared with 203
cases in July 1996 and 68 in July 1995. Of these cases, 443 are in the United
States, one in Canada, three in Puerto Rico, and one in Guam.
The United States cases are in 44 states and are distributed as follows: 179
in Florida, 61 in New York, 36 in Texas, 18 in Louisiana, 11 in each of New
Jersey and Pennsylvania, ten in each of Alabama, California, and Ohio, eight in
each of Tennessee and Mississippi, six in West Virginia, five in each of Indiana
and Massachusetts, four in each of Kansas, Michigan, and Oklahoma, three in each
of Arizona, Colorado, District of Columbia, Hawaii, Minnesota, New Mexico,
Oregon, and Washington, two in each of Connecticut, Georgia, Illinois, Iowa,
Maryland Missouri, Montana, New Hampshire, South Dakota, and Wisconsin, and one
in each of Alaska, Arkansas, Idaho, Kentucky, Nevada, North Carolina, South
Carolina, Utah, and Vermont. Of the 443 active cases in the United States, 331
are pending in state court and 112 in federal court.
For additional information about tobacco-related litigation and other legal
proceedings, see Note 3-- Contingencies--Tobacco Litigation of Notes to
Consolidated Condensed Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Tobacco--Governmental
Activity."
------------------------
Litigation is subject to many uncertainties and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) 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 or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory and other
developments relating to the tobacco industry and cigarette smoking that have
received wide media attention, including the recent Liggett settlements of
certain health care recovery actions and a purported nationwide smoking and
health class action, and a decision by a federal district court on a motion for
summary judgment to uphold the FDA's regulation of cigarettes as "drugs" or
"medical devices." These developments, as well as the widespread media attention
given to the Memorandum referred to above, may negatively affect the outcomes of
tobacco-related legal actions and encourage the commencement of additional
similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT and RJRN, a
significant increase in litigation and/or in adverse outcomes for tobacco
defendants could have an adverse effect on RJRT and RJRN. RJRT and RJRN each
believe that they have a number of valid defenses to any such actions and intend
to defend vigorously all such actions in which they are named defendants.
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RJRN Holdings and RJRN believe that not withstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or 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.
------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
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.
*10.1 RJR Nabisco Holdings Corp. 1990 Long-Term Incentive Plan as amended and restated
effective April 16, 1997.
*10.2 Form of Deferred Stock Unit Agreement between RJR Nabisco Holdings Corp. and the
Director named therein dated as of April 16, 1997.
*10.3 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and
the Director named therein dated as of April 16, 1997.
*10.4 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee
named therein (1997 grant--1 year period) dated as of February 28, 1997.
*10.5 Form of Restricted Stock Unit Agreement between RJR Nabisco Holdings Corp. and the
grantee named therein dated as of June 16, 1997.
*10.6 Fourth Amendment to the 364 Day Credit Agreement among RJR Nabisco Holdings Corp.,
RJR Nabisco, Inc. and certain lending institutions dated as of April 4, 1997.
*12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges for the six
months ended June 30, 1997.
*27.1 RJR Nabisco Holdings Corp. Financial Data Schedule.
*27.2 RJR Nabisco, Inc. Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K dated June 20, 1997, regarding the signing of a
Memorandum of Understanding setting forth concepts for federal
legislation and a contractual protocol to resolve a variety of
litigation and regulatory issues concerning tobacco and attaching as
exhibits, the Memorandum of Understanding and related RJRT press
release.
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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: August 8, 1997
/s/ DAVID B. RICKARD
- ------------------------------------------------
David B. Rickard
Senior Vice President and Chief
Financial Officer
/s/ RICHARD G. RUSSELL
- ------------------------------------------------
Richard G. Russell
Senior Vice President and Controller
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Exhibit 10.1
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
(As Amended and Restated effective April 16, 1997)
1. Purpose of Plan
The RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan, as amended
and restated effective April 16, 1997, subject to the approval of RJRN's
shareholders (the "Plan"), is designed:
(a) to promote the long term financial interests and growth of RJR
Nabisco Holdings Corp. and subsidiaries (the "Corporation") by attracting and
retaining management personnel with the training, experience and ability to
enable them to make a substantial contribution to the success of the
Corporation's business;
(b) to motivate management personnel by means of growth-related
incentives to achieve long range goals; and
(c) to further the identity of interests of participants with those of
the stockholders of the Corporation through opportunities for increased
stock, or stock-based, ownership in the Corporation.
2. Definitions
As used in the Plan, the following words shall have the following
meanings:
(a) "Base Value" means not less than the Fair Market Value on the date a
Stock Appreciation Right is granted, or, in the case of a Stock Appreciation
Right granted retroactively in tandem with (or in replacement of) an
outstanding stock option, not less than the exercise price of such option;
(b) "Board of Directors" means the Board of Directors of RJRN;
(c) "Code" means the Internal Revenue Code of 1986, as amended;
(d) "Committee" means the Compensation Committee of the Board of
Directors;
<PAGE>
(e) "Common Stock" or "Share" means common stock of RJRN which may be
authorized but unissued, or issued and reacquired;
(f) "Effective Date" shall have the meaning set forth in Section 12;
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended;
(h) "Fair Market Value" means such value of a Share as reported for stock
exchange transactions and/or determined in accordance with any applicable
resolutions or regulations of the Committee in effect at the relevant time;
(i) "Grant Agreement" means an agreement between RJRN and a Participant
that sets forth the terms, conditions and limitations applicable to a Grant;
(j) "Grant" means an award made to a Participant pursuant to the Plan and
described in Paragraph 5, including, without limitation, an award of an
Incentive Stock Option, Other Stock Option, Stock Appreciation Right,
Restricted Stock, Performance Units or Performance Shares or any combination
of the foregoing;
(k) "Incentive Stock Options" shall have the meaning set forth in Section
5(a);
(l) "Other Stock Options" shall have the meaning set forth in Section
5(b);
(m) "Options" shall mean Incentive Stock Options and Other Stock Options;
(n) "Participant" means any employee, or other person having a unique
relationship with RJRN or one of its Subsidiaries, to whom one or more Grants
have been made and such Grants have not all been forfeited or terminated
under the Plan; provided, however, a non-employee director of RJRN or one of
its Subsidiaries may not be a Participant;
(o) "Performance Units" shall have the meaning set forth in Section 5(e);
(p) "Performance Shares" shall have the meaning set forth in Section 5(f);
(q) "Restricted Stock" shall have the meaning set forth in Section 5(d);
(r) "RJRN" means RJR Nabisco Holdings Corp.;
(s) "Stock Appreciation Rights" shall have the meaning set forth in
Section 5(c); and
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(t) "Subsidiary" means any corporation or other entity in which RJRN has
a significant equity or other interest as determined by the Committee.
3. Administration of Plan
(a) The Plan shall be administered by the Committee or, in lieu of the
Committee, the Board of Directors. The Committee may adopt its own rules of
procedure, and the action of a majority of the Committee, taken at a meeting
or taken without a meeting by a writing signed by such majority, shall
constitute action by the Committee. The Committee shall have the power and
authority to administer, construe and interpret the Plan, to make rules for
carrying it out and to make changes in such rules. Any such interpretations,
rules, and administration shall be consistent with the basic purposes of the
Plan.
(b) The Committee may delegate to the Chief Executive Officer and to other
senior officers of the Corporation its duties under the Plan, subject to such
conditions and limitations as the Committee shall prescribe, except that only
the Committee may designate and make Grants to Participants who are subject to
Section 16 of the Exchange Act.
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, RJRN, and the officers
and directors of RJRN shall be entitled to rely upon the advice, opinions or
valuations of any such persons. All actions taken and all interpretations
and determinations made by the Committee in good faith shall be final and
binding upon all Participants, RJRN and all other interested persons. No
member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan
or the Grants, and all members of the Committee shall be fully protected by
RJRN with respect to any such action, determination or interpretation.
4. Eligibility
The Committee may from time to time make Grants under the Plan to such
employees, or other persons having a unique relationship with RJRN or any of
its Subsidiaries, and in such form and having such terms, conditions and
limitations as the Committee may determine. No Grants may be made under this
Plan to non-employee directors of RJRN or any of its Subsidiaries. Grants
may be granted singly, in combination or in tandem. The terms, conditions
and limitations of each Grant under the Plan shall be set forth in a Grant
Agreement, in a form approved by the Committee, consistent, however, with the
terms of the Plan; provided, however, such Grant Agreement shall contain
provisions dealing with the treatment of Grants in the event of the
termination, death or disability of
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<PAGE>
a Participant, and may also include provisions concerning the treatment of
Grants in the event of a change of control of RJRN.
5. Grants
From time to time, the Committee will determine the forms and amounts of
Grants for Participants. Such Grants may take the following forms in the
Committee's sole discretion:
(a) Incentive Stock Options - These are stock options within the meaning
of Section 422 of the Code to purchase Common Stock. In addition to other
restrictions contained in the Plan, an option granted under this Section
5(a), (i) may not be exercised more than 10 years after the date it is
granted, (ii) may not have an option price less than the Fair Market Value of
Common Stock on the date the option is granted, (iii) must otherwise comply
with Code Section 422, and (iv) must be designated as an "Incentive Stock
Option" by the Committee. The maximum aggregate Fair Market Value of Common
Stock (determined at the time of each Grant) with respect to which any
Participant may first exercise Incentive Stock Options under this Plan and
any Incentive Stock Options granted to the Participant for such year under
any plans of RJRN or any Subsidiary in any calendar year is $100,000.
Payment of the option price shall be made in cash or in shares of Common
Stock, or a combination thereof, in accordance with the terms of the Plan,
the Grant Agreement, and of any applicable guidelines of the Committee in
effect at the time.
(b) Other Stock Options - These are options to purchase Common Stock
which are not designated by the Committee as "Incentive Stock Options". At
the time of the Grant the Committee shall determine, and shall have contained
in the Grant Agreement or other Plan rules, the option exercise period, the
option price, and such other conditions or restrictions on the grant or
exercise of the option as the Committee deems appropriate. In addition to
other restrictions contained in the Plan, an option granted under this
Section 5(b), (i) may not be exercised more than 15 years after the date it
is granted and (ii) may not have an option exercise price less than the Fair
Market Value of Common Stock on the date the option is granted. Payment of
the option price shall be made in cash or in shares of Common Stock, or a
combination thereof, in accordance with the terms of the Plan and of any
applicable guidelines of the Committee in effect at the time. Payment of the
option price may also be made by tender of an amount equal to the full
exercise price which has been borrowed from RJRN or one of its Subsidiaries
if the Participant also authorizes the concurrent sale of the exercised
Common Stock by a broker (through an arrangement established by RJRN, or one
of its Subsidiaries, for Participants) and repays the borrowing, all in
accordance with any applicable guidelines of the Committee.
4
<PAGE>
(c) Stock Appreciation Rights - These are rights that on exercise
entitle the holder to receive the excess of (i) the Fair Market Value of a
share of Common Stock on the date of exercise over (ii) the Base Value
multiplied by (iii) the number of rights exercised in cash, stock or a
combination thereof as determined by the Committee. Stock Appreciation
Rights granted under the Plan may, but need not be, granted in conjunction
with an Option under Paragraphs 5(a) or 5(b).
The Committee, in the Grant Agreement or by other Plan rules, may impose
such conditions or restrictions on the exercise of Stock Appreciation Rights
as it deems appropriate, and may terminate, amend, or suspend such Stock
Appreciation Rights at any time. No Stock Appreciation Right granted under
this Plan may be exercised more than 15 years after the date it is granted.
(d) Restricted Stock - Restricted Stock is a Grant of Common Stock or
stock units equivalent to Common Stock subject to such conditions and
restrictions as the Committee shall determine. Any rights to dividends or
dividend equivalents accruing due to a grant of Restricted Stock shall also
be determined by the Committee. Grants of Restricted Stock shall be subject
to a normal minimum vesting schedule of 3 years. The number of shares of
Restricted Stock and the restrictions or conditions on such shares, as the
Committee may determine, shall be set forth in the Grant Agreement or by
other Plan rules, and the certificate for the Restricted Stock shall bear
evidence of the restrictions or conditions.
(e) Performance Units - These are rights, denominated in cash or cash
units, to receive, at a specified future date, payment in cash or stock of an
amount equal to all or a portion of the value of a unit granted by the
Committee. At the time of the Grant, in the Grant Agreement or by other Plan
rules, the Committee must determine the base value of the unit, the
performance factors applicable to the determination of the ultimate payment
value of the unit as set forth in Section 7 and the period over which
performance will be measured.
(f) Performance Shares - These are rights granted in the form of Common
Stock or stock units equivalent to Common Stock to receive, at a specified
future date, payment in cash or Common Stock, as determined by the Committee,
of an amount equal to all or a portion of the Fair Market Value at which the
Common Stock is traded on the last day of the specified performance period of
a specified number of shares of Common Stock based on performance during the
period. At the time of the Grant, the Committee, in the Grant Agreement or
by Plan rules, will determine the factors which will govern the portion of
the Grants so payable as set forth in Section 7 and the period over which
performance will be measured.
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6. Limitations and Conditions
(a) The number of shares available for Grants under this Plan shall be 33
million shares of the authorized Common Stock as of the Effective Date. The
maximum number of Shares subject to Grants of Options and Stock Appreciation
Rights made after December 31, 1996 to any one Participant in any calendar
year shall not exceed 2 million shares for each type of Grant, plus any
amount of shares that were available within this limit for such type of Grant
for any prior year such limitation was in effect and which were not covered
by Options or Stock Appreciation Rights granted to such Participant during
such year. No more than 3 million shares of Common Stock may be granted as
Incentive Stock Options after December 31, 1996. The maximum payment that
any one Participant may be paid in respect of any Grant of Performance Units
granted for any specified performance period shall not exceed $10 million.
The maximum payment that any one Participant may receive in respect of any
Grant of Performance Shares granted for any specified performance period
shall not exceed 500,000 shares of Common Stock or the cash equivalent
thereof. The aggregate maximum number of shares of Common Stock to which
Restricted Stock or Performance Shares granted after December 31, 1996 may
relate shall not exceed 3 million shares. Shares related to Grants that are
forfeited, terminated, cancelled, expire unexercised, settled in cash in lieu
of stock, received in full or partial payment of any exercise price or in
such manner that all or some of the Shares covered by a Grant are not issued
to a Participant, shall immediately become available for Grants. A Grant may
contain the right to receive dividends or dividend equivalent payments which
may be paid either currently, credited to a Participant or deemed invested in
shares or share units of Common Stock. Any such crediting of dividends or
dividend equivalents or reinvestment in Shares may be subject to such
conditions, restrictions and contingencies as the Committee shall establish,
including the reinvestment of such credited amounts in Common Stock
equivalents. Subject to the overall limitation on the number of shares of
Common Stock that may be delivered under this Plan, the Committee may use
available shares of Common Stock as the form of payment for compensation,
grants or rights earned or due under any other compensation plans or
arrangements of RJRN, including the plan of any entity acquired by RJRN.
(b) At the time a Grant is made or amended or the terms or conditions of
a Grant are changed, the Committee may provide for limitations or conditions
on such Grant. RJRN may adopt other compensation programs, plans or
arrangements as it deems appropriate.
(c) Nothing contained herein shall affect the right of the Corporation
to terminate any Participant's employment at any time or for any reason.
6
<PAGE>
(d) Deferrals of Grant payouts may be provided for, at the sole
discretion of the Committee, in the Grant Agreements.
(e) No benefit under the Plan shall, prior to receipt thereof by the
Participant, be in any manner liable for or subject to the debts, contracts,
liabilities, engagements, or torts of the Participant.
(f) Except to the extent otherwise provided in any other retirement or
benefit plan, any grant under this Plan shall not be deemed compensation for
purposes of computing benefits or contributions under any retirement plan of
RJRN or its Subsidiaries and shall not affect any benefits under any other
benefit plan of any kind or subsequently in effect under which the
availability or amount of benefits is related to level of compensation.
This Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee
Retirement Income Security Act of 1974, as amended. This Plan shall be
unfunded and shall not create (or be construed to create) a trust or a
separate fund or funds. The Plan shall not establish any fiduciary
relationship between RJRN and any Participant or beneficiary of a
Participant. To the extent any person holds any obligation of RJRN by virtue
of an award granted under this Plan, such obligation shall merely constitute
a general unsecured liability of RJRN and accordingly shall not confer upon
such person any right, title or interest in any assets of RJRN.
(g) Unless the Committee determines otherwise, no benefit or promise
under the Plan shall be secured by any specific assets of RJRN or any of its
Subsidiaries, nor shall any assets of RJRN or any of its Subsidiaries be
designated as attributable or allocated to the satisfaction of RJRN's
obligations under the Plan.
7. Performance Factors
The performance factors selected by the Compensation Committee in respect
of Performance Units and Performance Shares shall be based on any one or more
of the following: price of Common Stock or the stock of any affiliate,
shareholder return, return on equity, return on investment, return on
capital, return on invested capital, economic profit, economic value added,
net income, cash net income, free cash flow, earnings per share, cash
earnings per share, operating company contribution or market share. These
factors shall have a minimum performance standard below which no amount will
be paid and may have a maximum performance standard above which no additional
payments will be made. The applicable performance period shall not exceed 10
years.
8. Adjustments
7
<PAGE>
(a) In the event of any stock split, spin-off, stock dividend,
extraordinary cash dividend, stock combination or reclassification,
recapitalization or merger, change in control, or similar event, the
Committee may adjust appropriately the number or kind of shares subject to
the Plan and available for or covered by Grants, share prices related to
outstanding Grants and the other applicable limitations of Section 6(a), and
make such other revisions to outstanding Grants and the LTIP as it deems are
equitably required.
(b) In the event of a Change of Control, except as otherwise set forth
in the terms of a Grant:
(i) Options granted pursuant to paragraphs 5(a) or 5(b) hereof shall
become fully vested and exercisable; provided, however, that the Committee
may make a cash payment to Participants (A) in cancellation of such Options
as provided in the applicable Grant Agreements or any amendments or deemed
amendments thereto entered into by RJRN and the Participant in such amount as
shall be provided in such Grant Agreements or amendments or (B) in lieu of
the delivery of shares upon exercise, equal to the product of (x) and (y),
where (x) is the excess of the Fair Market Value on the date of exercise over
the exercise price, and (y) is the number of Shares subject to the stock
options being exercised;
(ii) Stock Appreciation Rights shall become fully vested and
exercisable;
(iii) Restricted Stock shall have all restrictions removed;
(iv) Performance Units whose performance period ends after the date of
the Change of Control shall become vested as to a percentage of Performance
Units granted equal to the number of months (including partial months) in the
performance period before the date of the Change of Control, divided by the
total number of months in the performance period. The value of the
Performance Units shall be equal to the greater of the target value of the
Performance Units or the value derived from the actual performance as of the
date of the Change of Control;
(v) Performance Shares whose performance period ends after the
date of the Change of Control shall become vested pro rata as to the number
of Performance Shares granted equal to the number of months (including
partial months) in the performance period before the date of Change of
Control, divided by the total number of months in the performance period.
The prorated number of Performance Shares derived from the preceding
calculation shall be further adjusted by applying the higher of target or
actual performance to the date of Change of Control; and
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(vi) The Committee shall have authority to establish or to revise
the terms of any such Grant or any other Grant as it, in its discretion,
deems appropriate; provided, however, that the Committee may not make
revisions that are adverse to the Participant without the Participant's
consent unless such revision is provided for or contemplated in the terms of
the Grant.
(c) For purposes of the Plan, a "Change of Control" shall mean the first
to occur of the following events:
(i) an individual, corporation, partnership, group, associate or
other entity or "person", as such term is defined in Section 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), other than any employee
benefit plans sponsored by RJRN, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30%
or more of the combined voting power of RJRN's outstanding securities
ordinarily having the right to vote at elections of directors.
(ii) individuals who constitute the Board of Directors on October
11, 1995 (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent
to such date whose election, or nomination for election by RJRN's
shareholders, was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of RJRN in which such person is named as a
nominee of RJRN for director), but excluding for this purpose any such
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of an
individual, corporation, partnership, group, associate or other entity or
person other than RJRN's Board, shall be, for purposes of this paragraph
(ii), considered as though such person were a member of the Incumbent Board;
(iii) the approval by the shareholders of RJRN of a plan or
agreement providing (1) for a merger or consolidation of RJRN other than with
a wholly-owned subsidiary and other than a merger or consolidation that would
result in the voting securities of RJRN outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of RJRN or such surviving
entity outstanding immediately after such merger or consolidation, or (2) for
a sale, exchange or other disposition of all or substantially all of the
assets of RJRN. If any of the events enumerated in this paragraph (iii)
occur, RJRN's Board shall determine the effective date of the Change of
Control resulting therefrom for
9
<PAGE>
purposes of this Plan and the Grants hereunder.
9. Amendment and Termination
The Committee shall have the authority to make such amendments to any
terms and conditions applicable to outstanding Grants as are consistent with
this Plan, provided that, except for adjustments under Paragraph 8(a) hereof,
no such action shall modify such Grant in a manner adverse to the Participant
without the Participant's consent except as such modification is provided for
or contemplated in the terms of the Grant. Except as provided in Section
8(a), the exercise price of any outstanding Option or Stock Appreciation
Right may not be adjusted or amended, whether through amendment, cancellation
or replacement, unless such adjustment or amendment is properly approved by
RJRN's shareholders. Likewise, the share and payment limitations set forth
in Section 6(a) cannot be increased, and the minimum Option or Stock
Appreciation Right grant price limitations set forth in Sections 5(a), 5(b)
and 5(c) cannot be reduced, in either case without proper shareholder
approval. Subject to the foregoing, RJRN's Board of Directors may amend,
suspend or terminate this Plan as it deems necessary and appropriate to
better achieve the Plan's purpose.
10. Foreign Options and Rights
(a) The Committee may make Grants to employees who are subject to the
tax laws of nations other than the United States, which Grants may have terms
and conditions that differ from the terms thereof as provided elsewhere in
the Plan for the purpose of complying with the foreign tax laws. Grants of
stock options may have terms and conditions that differ from Incentive Stock
Options and Other Stock Options for the purpose of complying with the foreign
tax laws.
(b) The terms and conditions of stock options granted under Paragraph
10(a) may differ from the terms and conditions which the Plan would require
to be imposed upon Incentive Stock Options and Other Stock Options if the
Committee determines that the Grants are desirable to promote the purposes of
the Plan.
11. Withholding Taxes
The Corporation shall have the right to deduct from any payment or
settlement made under the Plan any federal, state or local income or other
taxes required by law to be withheld with respect to such payment.
12. Effective Date and Termination Dates
The Plan shall be effective on and as of April 16, 1997, subject to the
approval of RJRN's shareholders, and shall terminate ten years later, subject
to
10
<PAGE>
earlier termination by the Board of Directors pursuant to Paragraph 9. The
terms of Grants made on or before the expiration of the Plan shall extend
beyond such expiration. Grants made under the Plan prior to the Effective
Date shall be governed by the terms of the Plan as in effect on the date such
Grant was made.
11
<PAGE>
EXHIBIT 10.2
Dir
DSU
1997
RJR NABISCO HOLDINGS CORP.
EQUITY INCENTIVE AWARD PLAN FOR
DIRECTORS AND KEY EMPLOYEES
OF RJR NABISCO HOLDINGS CORP.
AND SUBSIDIARIES
DEFERRED STOCK UNIT AGREEMENT
DATE OF GRANT: APRIL 16, 1997
W I T N E S S E T H:
1. GRANT. Pursuant to the provisions of the Equity Incentive Award Plan
For Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries
(the "Plan"), RJR Nabisco Holdings Corp. (the "Company") on the above date has
granted to
((FIRSTNAME)) ((LASTNAME)) (THE "GRANTEE"),
subject to the terms and conditions which follow and the terms and conditions of
the Plan, a Grant of
1,000 DEFERRED STOCK UNITS.
A copy of the Plan is attached and made a part of this agreement with the same
effect as if set forth in the Agreement itself. All capitalized terms used
herein shall have the meaning set forth in the Plan, unless the context requires
a different meaning.
2. VALUE OF DEFERRED STOCK UNITS. Each Deferred Stock Unit shall be equal
in value to one share of Common Stock.
3. DIVIDENDS. As of the date any dividend is paid to shareholders of Common
Stock, the Grantee shall be credited with additional Deferred Stock Units equal
to the number of shares of Common Stock (including fractions of a share) that
could have been purchased at the closing price of Common Stock on such date with
the dividend paid on the number of shares of Common Stock to which the Grantee's
Deferred Stock Units are then equivalent. In case of dividends paid in
property, the dividend shall be deemed to be the fair market value of the
property at the time of distribution of the dividend, as determined by the
Committee.
<PAGE>
4. PAYMENT OF DEFERRED STOCK UNITS.
(a) Unless a Grantee has elected to receive installment payments as
provided below, payment of a Grantee's Deferred Stock Units shall be made in one
lump-sum as soon as practicable following the end of the year in which the
Grantee ceases to be a Director.
At the election of the Grantee made in writing and delivered to the
Committee at any time on or before December 1 of the year of termination of the
Grantee's service as a Director, distribution of all of his or her Deferred
Stock Units, commencing as soon as practicable following the end of the year in
which the Grantee ceases to be a Director, shall be made in any number of annual
installments not exceeding ten. Any such election, unless made irrevocable by
its terms, may be changed by written notice to the Committee at any time prior
to December 1 of the year of a Grantee's termination of service as a Director.
(b) Distribution of a Grantee's Deferred Stock Units shall be made in
cash. The amount of distribution shall be determined by multiplying the number
of Deferred Stock Units attributable to the installment by the average of the
closing price in Common Stock on each business day in the month of December
immediately prior to the year in which the installment is to be paid.
(c) In the event a Grantee has elected to receive distribution of his or
her Deferred Stock Units in more than one installment, the amount of each
installment shall be determined by multiplying the remaining number of Deferred
Stock Units by a fraction, the numerator of which is one, and the denominator of
which is the number of installments yet to be paid.
5. TRANSFERABILITY. Other than as specifically provided in the Plan with
regard to the death of the Grantee, this Agreement and any benefit provided or
accruing hereunder shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any
attempt to do so shall be void. No such benefit shall, prior to receipt thereof
by the Grantee, be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the Grantee.
6. CONSIDERATION TO THE COMPANY. In consideration of the Grant by the
Company, the Grantee agrees to render faithful and efficient services to the
Company, with such duties and responsibilities as the Company shall from time to
time prescribe. Nothing in this Agreement or in the Plan shall confer upon the
Grantee any right to continue in the service of the Company or any Subsidiary as
a director or in any other capacity or shall interfere with or restrict in any
way the rights of the Company and its Subsidiaries and their respective
shareholders, which are hereby expressly reserved, in connection with the
removal of the Grantee from the Board of Directors of the Company or any
Subsidiary at any time for any reason whatsoever, with or without cause, subject
to applicable law and the relevant certificate of incorporation and bylaws.
7. ADJUSTMENTS IN DEFERRED STOCK UNITS. In the event that the outstanding
shares of the Common Stock subject to the Grant are, from time to time, changed
into or exchanged for a different number or kind of shares of the Company or
other securities by reason of a merger, consolidation, recapitalization,
reclassification, stock split, stock dividend, spinoff, combination
2
<PAGE>
of shares, or otherwise, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares or other consideration as to which
the Grant, shall be equivalent. Any adjustment made by the Committee shall be
final and binding upon the Grantee, the Company and all other interested
persons.
8. APPLICATION OF LAWS. The Grant and the obligations of the Company
hereunder shall be subject to all applicable laws, rules, and regulations and
to such approvals of any governmental agencies as may be required.
9. TAXES. Any taxes required by federal, state, or local laws to be
withheld by the Company on the grant or payment of Deferred Stock Units shall be
paid to the Company before payment of the Deferred Stock Units is made to the
Grantee.
10. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013 and any notice required to be given
hereunder to the Grantee shall be sent to the Grantee's address as shown on the
records of the Company.
11. GRANTEE. In consideration of the grant, the Grantee specifically
agrees that the Committee shall have the exclusive power to interpret the Plan
and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan and Agreement as are consistent
therewith and to interpret or revoke any such rules. All actions taken and all
interpretation and determinations made by the Committee shall be final,
conclusive, and binding upon the Grantee, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
the Agreement. The Committee may delegate its interpretive authority to an
officer or officers of the Company.
12. OTHER PROVISIONS.
(a) Titles are provided herein for convenience only and are not to
serve as a basis for interpretation of the Agreement.
(b) This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
(c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
3
<PAGE>
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Grantee have executed this Agreement as of the Date of Grant first above
written.
RJR NABISCO HOLDINGS CORP.
By___________________________
Authorized Signatory
______________________________
GRANTEE
Grantee's Home Address
Date:_________________________
______________________________
Grantee's Taxpayer Identification Number:
______________________________
________________________________ ______________________________
4
<PAGE>
EXHIBIT 10.3
Director's
Option
97 (Annual)
RJR NABISCO HOLDINGS CORP.
EQUITY INCENTIVE AWARD PLAN FOR DIRECTORS AND KEY EMPLOYEES
OF RJR NABISCO HOLDINGS CORP. AND SUBSIDIARIES
STOCK OPTION AGREEMENT
___________________________
DATE OF GRANT: April 16, 1997
W I T N E S S E T H :
1. GRANT OF OPTION. Pursuant to the provisions of the Equity Incentive
Award Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and
Subsidiaries (the "Plan"), RJR Nabisco Holdings Corp. (the "Company") on the
above date has granted to
(FIRST NAME)(LAST NAME)(THE "OPTIONEE"),
subject to the terms and conditions which follow and the terms and conditions of
the Plan, the right and option to exercise from the Company a total of
1,300 SHARES
of Common Stock, par value $.01 per share, of the Company, at the exercise price
of $33.50 per share (the "Option"). A copy of the Plan is attached and made a
part of this Agreement with same effect as if set forth in the Agreement itself.
All capitalized terms used herein shall have the meaning set forth in the Plan,
unless the context requires a different meaning.
2. EXERCISE OF OPTION.
(a) Shares may be purchased by giving the Corporate Secretary of the
Company written notice of exercise, on a form prescribed by the
Company, specifying the number of whole shares to be purchased. The
notice of exercise shall be accompanied by:
<PAGE>
(i) tender to the Company of cash for the full purchase price of the
shares with respect to which such Option or portion thereof is
exercised; together with payment for taxes pursuant to Section 9
herein; OR
(ii) the unsecured, demand borrowing by the Optionee from the Company on an
open account maintained solely for this purpose in the amount of the
full exercise price together with the instruction from the Optionee to
sell the shares exercised on the open market through a duly registered
broker-dealer with which the Company makes an arrangement for the sale
of such shares under the Plan. This method is known as the
"broker-dealer exercise method" and is subject to the terms and
conditions set forth herein, in the Plan and in guidelines established
by the Committee. The Option shall be deemed to be exercised
simultaneously with the sale of the shares by the broker-dealer. If
the shares purchased upon the exercise of an Option or a portion
thereof cannot be sold for a price equal to or greater than the full
exercise price plus direct costs of the sales, then there is no
exercise of the Option. Election of this method authorizes the
Company to deliver shares to the broker-dealer and authorizes the
broker-dealer to sell said shares on the open market. The
broker-dealer will remit proceeds of the sale to the Company which
will remit net proceeds to the Optionee after repayment of the
borrowing, deduction of costs, if any, and withholding of taxes. The
Optionee's borrowing from the Company on an open account shall be a
personal obligation of the Optionee which shall bear interest at the
published Applicable Federal Rate (AFR) for short-term loans and shall
be payable upon demand by the Company. Such borrowing may be
authorized by telephone or other telecommunications acceptable to the
Company. Upon such borrowing and the exercise of the Option or
portion thereof, title to the shares shall pass to the Optionee whose
election hereunder shall constitute instruction to the Company to
register the shares in the name of the broker-dealer or its nominee.
The Company reserves the right to discontinue this broker-dealer
exercise method at any time for any reason whatsoever. The Optionee
agrees that if this broker-dealer exercise method under this paragraph
is used, the Optionee promises unconditionally to pay the Company the
full balance in his open account at any time upon demand. Optionee
also agrees to pay interest on the account balance at the AFR for
short-term loans from and after demand.
(b) This Option shall be exercisable in three installments. The first
installment shall be exercisable on the first anniversary following
Date of Grant for 33% of the number of shares of Common Stock subject
to this option. Thereafter, on each subsequent anniversary, an
installment shall become exercisable for 33% and 34%, respectively, of
the number of shares subject to this Option until the Option has
become fully exercisable. To the extent that any of the above
installments is not exercised when it
-2-
<PAGE>
becomes exercisable, it shall not expire, but shall continue to be
exercisable at any time thereafter until this Option shall terminate,
expire or be surrendered. An exercise shall be for whole shares only.
(c) This Option shall not be exercisable prior to six months after the
Date of Grant.
(d) If any shares of the Common Stock are to be disposed of in accordance
with Rule 144 under the Securities Act of 1933 or otherwise, the
Optionee shall promptly notify the Company of such intended
disposition and shall deliver to the Company at or prior to the time
of such disposition such documentation as the Company may reasonably
request in connection with such sale and, in the case of a disposition
pursuant to Rule 144, shall deliver to the Company an executed copy of
any notice on Form 144 required to be filed with the SEC.
3. RIGHTS IN THE EVENT OF RESIGNATION OR NON-ELECTION TO THE BOARD.
Except as may be otherwise provided in this Section 3, after the Optionee's
resignation or non-election to the Board of Directors of the Company (the
"Board"), the Option shall NOT become exercisable as to any shares in addition
to those already exercisable pursuant to the schedule described in Section 2(b).
Notwithstanding the foregoing, if a non-election of the Optionee to the Board is
due to death or Permanent Disability (as defined in the Company's Long Term
Disability Plan), the Option shall immediately become exercisable as to all
shares.
4. EXPIRATION OF OPTION. The Option shall expire or terminate and may not
be exercised to any extent by the Optionee after the tenth anniversary of the
Date of Grant.
5. TRANSFERABILITY. Other than as specifically provided with regard to
the death of the Optionee, this Agreement and any benefit provided or accruing
hereunder shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge; and any attempt to do so
shall be void. No such benefit shall, prior to receipt thereof by the Optionee,
be in any manner liable for or subject to the debts, contracts, liabilities,
engagements or torts of the Optionee.
6. CONSIDERATION TO THE COMPANY. In consideration of the granting of this
Option by the Company, the Optionee agrees to render faithful and efficient
services to the Company, with such duties and responsibilities as shall from
time to time prescribe. Nothing in this Agreement or in the Plan shall confer
upon the Optionee any right to continue in the service of the Company or any
Subsidiary as a director or in any other capacity or shall interfere with or
restrict in any way the rights of the Company and its Subsidiaries and their
respective shareholders, which are hereby expressly reserved, in connection with
the removal of the Optionee from the Board of Directors of the Company or any
Subsidiary at any time for any reason whatsoever, with or without cause, subject
to applicable law and the relevant certificate of incorporation and bylaws.
-3-
<PAGE>
7. ADJUSTMENTS IN OPTION. In the event that the outstanding shares of the
Common Stock subject to the Option are, from time to time, changed into or
exchanged for a different number or kind of shares of the Company or other
securities by reason of a merger, consolidation, recapitalization,
reclassification, stock split, stock dividend, combination of shares, or
otherwise, the Committee shall make an appropriate and equitable adjustment in
the number and kind of shares or other consideration as to which the Option, or
portions thereof then unexercised, shall be exercisable. Any adjustment made by
the Committee shall be final and binding upon the Optionee, the Company and all
other interested persons.
8. APPLICATION OF LAWS. The granting and the exercise of this Option and
the obligations of the Company to sell and deliver shares hereunder shall be
subject to all applicable laws, rules, and regulations and to such approvals of
any governmental agencies as may be required.
9. TAXES. Any taxes required by federal, state, or local laws to be
withheld by the Company on exercise by the Optionee of the Option for Common
Stock, shall be paid to the Company before delivery of the Common Stock is made
to the Optionee. When the Option is exercised under the broker-dealer exercise
method, the full amount of any taxes required to be withheld by the Company on
exercise of stock options shall be deducted by the Company from the proceeds.
10. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013, and any notice required to be given
hereunder to the Optionee shall be sent to the Optionee's address as shown on
the records of the Company.
11. ADMINISTRATION AND INTERPRETATION. In consideration of the grant, the
Optionee specifically agrees that the Committee shall have the exclusive power
to interpret the Plan and this Agreement and to adopt such rules for the
administration, interpretation and application of the Plan and Agreement as are
consistent therewith and to interpret or revoke any such rules. All actions
taken and all interpretations and determinations made by the Committee shall be
final, conclusive, and binding upon the Optionee, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or the Agreement. The Committee may delegate its interpretive
authority to an officer or officers of the Company.
12. OTHER PROVISIONS.
a) Titles are provided herein for convenience only and are not to
serve as a basis for interpretation of the Agreement.
b) This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
-4-
<PAGE>
c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Optionee have executed this Agreement as of the date of Grant first above
written.
RJR NABISCO HOLDINGS CORP.
By ____________________________
Authorized Signatory
_______________________________
Optionee
Optionee's Taxpayer Identification Number:
_______________________________
Optionee's Home Address:
__________________________
__________________________
__________________________
-5-
<PAGE>
EXHIBIT 10.4
Performance Units
Performance Notes
1997
Special - One Year
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
GRANT AGREEMENT
DATE OF GRANT: FEBRUARY 28, 1997
WITNESSETH:
1. GRANT. Pursuant to the 1990 Long Term Incentive Plan (the "Plan"), RJR
Nabisco Holdings Corp. (the "Company") on the above date has granted to
(FIRST NAME)(LAST NAME)(THE "GRANTEE"),
subject to the terms and conditions of this Agreement and the Plan,
( ) PERFORMANCE UNITS
AND
( ) PERFORMANCE NOTES
A copy of the Plan is attached and constitutes an integral part of this
Agreement. All undefined capitalized terms in this Agreement have the same
meaning as in the Plan or, if not defined therein, the Annual Incentive Award
Plan.
2. PERFORMANCE UNITS. Each Performance Unit has an initial value of
$1,000. The Committee will value each Performance Unit at the end of 1997 using
the performance measures set forth in the grid attached as Exhibit A, but the
Committee has the discretion to reduce the resulting valuation. You agree that
these Performance Units are in lieu of an award under the Annual Incentive Award
Plan for 1997.
3. PERFORMANCE NOTES.
(a) The Performance Notes have a three year term commencing January 1, 1997
and ending December 31, 1999 (the "Performance Period"). The value of the Notes
as of January 1, 1997 is $32.00. Promptly after 1997, 1998 and 1999, the
Committee will value the Performance Notes as of December 31 of the preceding
year using the performance measures and payment formula set forth in the grid
attached as Exhibit B. The Committee has the discretion to reduce the resulting
valuations and, on the basis of the Company's performance in 1997, to cancel
some or all of the Performance Notes.
<PAGE>
(b) PURCHASE NOTES. You may elect to receive additional Performance Notes
in lieu of from 5% to 100% (in 5% increments) of the cash that you receive for
your Performance Units pursuant to Section 5 below (the "Discount Note
Program"). The number of Performance Notes issued will equal 103% of the value
of the Performance Units that you take in the form of Performance Notes, divided
by 85% of the value of the Notes on January 1, 1998. The Performance Notes
issued pursuant to the Discount Note Program will have the same value and
performance period as Performance Notes issued at the same time pursuant to the
Annual Incentive Award Plan. You must make your election to convert the
proceeds of Performance Units into additional Performance Notes at the same time
and in the same manner as the election to defer awards pursuant to Section 6.
4. VESTING.
(a) Performance Units vest on December 31, 1997 or, if earlier, your death,
Disability or Retirement. If your employment is involuntarily terminated
without Cause, your Performance Units will vest in proportion to the ratio of
(i) the number of partial or complete months of employment during 1997, to (ii)
12. If termination is voluntary or with Cause, the Performance Units will be
canceled immediately.
(b) Performance Notes granted pursuant to Section 1 vest on December 31,
1999 or, if earlier, your death, Disability or Retirement. If your employment
is involuntarily terminated without Cause, these Performance Notes will vest in
proportion to the ratio of (i) the number of partial or complete months of
employment between January 1, 1998 and December 31, 1999, to (ii) 24. If
termination is voluntary or with Cause, these Performance Notes will be canceled
immediately. Notes issued pursuant to the Discount Note Program are vested when
issued.
5. PAYMENT OF AWARDS.
(a) Subject to Section 5(b), the Company will pay you the value of your
vested Performance Units and Performance Notes as soon as practicable after the
end of 1997 and 1999, respectively.
(b) Subject to Section 5(c), if your employment terminates before you
receive payment for your vested Performance Notes, you will receive payment in
an amount equal to their value as of the beginning of the year in which
employment terminates. Payment will be made as soon as practicable.
<PAGE>
(c) If your employment terminates voluntarily or for Cause prior to
December 31, 1999, you will receive payment for Performance Notes issued
pursuant to the Discount Note Program in an amount equal to (i) 85% of the value
of the Performance Notes when issued, or (ii) the value of the Performance Notes
as of the end of the most recently completed year, whichever is less. If your
employment terminates prior to December 31, 1999 for any other reason, you will
receive payment for these Performance Notes in an amount equal to their value as
of the end of the most recently completed year.
(d) All payments will be in cash and in exchange for the Performance Units
and Performance Notes, as applicable. You may not obtain payment for them in
Common Stock or other Company securities, and they do not give you any rights as
a holder of such securities.
6. DEFERRAL.
(a) You may elect to defer payment of Performance Units as of December 31,
1997 and Performance Notes as of December 31, 1999. Your election must be in
writing, signed by you and delivered to the Company on or before the foregoing
dates. Your election will be irrevocable and must specify the percentage (from
5% to 100%, in 5% increments) of the Performance Units and Performance Notes
(collectively, the "Grants") which will be paid (i) as soon as practicable after
the year your death, Retirement, Disability or other termination of employment
occurs or (ii) in January of any designated future year. If your employment
with the Company and its subsidiaries terminates before the designated year,
your Grants will be paid as of January of the year following termination.
Common Stock credits will not be paid until at least six months after the date
of deferral. The Company will contribute an additional 3% to the amount
deferred on account of the 3% Company match that you would have received under
the Capital Investment Plan if you had not deferred payment. The 3% match will
not apply to amounts deferred on account of Performance Notes issued pursuant to
the Discount Note Program.
(b) You must specify, on the notice electing deferred payment pursuant to
Section 6(a)(i), whether payment of the Grants will be deferred by cash credit,
Common Stock credit, or a combination of the two. If you elect to defer payment
pursuant to Section 6(a)(ii) or fail to choose a mode of deferral, your deferral
will be by means of a cash credit. Cash credits and stock credits will be
recorded in accounts established in your name on the books of the Company. At
the direction of the Company, your accounts may be consolidated on the books of
the Company or any of its subsidiaries.
(i) If your deferral is wholly or partly a cash credit, your cash
credit account will be credited, as of January 1 of the year that
payment of the Grants would have been made, with the dollar
amount of the portion of the Grants deferred by means of a cash
credit. In addition, your cash credit account will be credited
as of the last day of each calendar quarter with an interest
equivalent in an amount determined
<PAGE>
by applying to the current balance in the account an interest
rate equal to the average prime rate of Morgan Guaranty Trust
Company of New York during the quarter. Interest will be
credited for the actual number of days in the quarter using a
365-day year.
(ii) If the deferral is wholly or partly a Common Stock credit, your
Common Stock credit account will be credited, as of January 1 of
the year that payment of the Grants would have been made, with
the Common Stock equivalent of the number of shares of Common
Stock (including fractions of a share) that could have been
purchased with the portion of the Grants deferred by means of a
Common Stock credit at the closing price of the Common Stock on
the date that payment of the Grants would otherwise have been
made. As of the date any dividend is paid to shareholders of
Common Stock, your Common Stock credit account will also be
credited with an additional Common Stock equivalent equal to the
number of shares of Common Stock (including fractions of a share)
that could have been purchased at the Closing Price on such date
with the dividend paid on the number of shares of Common Stock to
which your Common Stock credit account is then equivalent. If
dividends are paid in property, the dividend will be deemed to be
the fair market value of the property at the time of distribution
of the dividend, as determined by the Committee.
(c) Payment of deferred Grants will be made in a single cash payment;
provided, however, that if you elect in writing before December 31 of the year
your employment terminates due to Retirement or Disability, payment will be made
in substantially equal annual installments (not to exceed ten) commencing on the
January following the Retirement or Disability. Notwithstanding any election
under Section 6(b) to defer awards by means of a Common Stock credit, your
Common Stock credit account, if you elect to receive installment payments, will
be converted into a cash credit account as of January 1 of the year in which
such installment payments commence.
(d) At your one-time election in writing to the Committee, all or any
designated portion of your Common Stock credit account may be converted to, and
you will be credited with, a cash credit account as of the first business day of
the calendar quarter following the quarter in which the election is made. The
amount credited to the cash credit account will be determined by multiplying the
number of shares of Common Stock to which your Common Stock credit account is
then equivalent and as to which such election has been made by the Closing Price
on the first business day of the calendar quarter following the quarter in which
the election is made. Any Common Stock credits attributable to dividends paid
on Common Stock during the calendar quarter in which the election is made will
be credited before making the conversion. You may make this election at any
time prior to the end of the calendar year in which termination of employment
occurs. An election by you under this Section 6(d) will be irrevocable.
<PAGE>
(e) If the number of outstanding shares of Common Stock is increased as
the result of any stock dividend, subdivision or reclassification of shares, the
number of shares of Common Stock to which your Common Stock credit account is
equivalent will be increased in proportion to the increase in the number of
outstanding shares of Common Stock. If the number of outstanding shares of
Common Stock is decreased as the result of any combination or reclassification
of shares, the number of shares of Common Stock to which your Common Stock
credit account is equivalent will be decreased in proportion to the decrease in
the number of outstanding shares of Common Stock. In the event the Company is
consolidated with or merged into any other corporation and holders of the
Company's Common Stock receive common shares of the resulting or surviving
corporation, your Common Stock credit account, in place of the shares then
credited thereto, will be credited with a stock equivalent determined by
multiplying the number of common shares of stock given in exchange for a share
of Common Stock upon such consolidation or merger, by the number of shares of
Common Stock to which your account is then equivalent. If in such a
consolidation or merger, holders of the Company's Common Stock receive any
consideration other than common shares of the resulting or surviving
corporation, the Committee will determine the appropriate change in your
account. In the event of any extraordinary dividend, including any spin-off,
the Committee will make appropriate adjustments to your Common Stock credit
account.
(f) If you die, whether before or after termination of employment, any
cash credit account and Common Stock credit account to which you are entitled,
including any award approved after your death as to which an election to defer
was made, will be distributed in cash (unless the Committee otherwise provides)
to your beneficiaries pursuant to Section 7.
7. BENEFICIARIES. If you die, the Company will make payments pursuant to
this Agreement to the beneficiary designated in writing by you specifically for
the Plan or, if there is no such designation or the named beneficiary is dead,
to the beneficiary most recently designated by you to receive the proceeds of
any Company-paid group life insurance coverage provided to you. Otherwise, the
distribution will be made to default beneficiaries as provided under the
Company-paid group life insurance plan. Only you may change or revoke your
designation.
8. TAX WITHHOLDING. The Company or one of its subsidiaries will deduct
any taxes required to be withheld by federal, state, local or foreign
governments from the awards that you receive pursuant to this Agreement.
9. TRANSFER. Except as set forth in this Agreement, you may not transfer,
pledge or encumber your Grants or any other benefits that you receive pursuant
to this Agreement. Except as required by law, creditors may not attach or seize
such Grants or benefits.
<PAGE>
10. INTERPRETATION. The Committee has the power to interpret this
Agreement and complete discretion in making valuations and determinations and
taking other action pursuant to the Agreement. All interpretations,
determinations and actions by the Committee will be final and binding on all
parties. The Company, the Board of Directors, the Committee and the officers
and employees of the Company and its subsidiaries will not be liable for any
action taken in good faith in interpreting and performing this Agreement.
11. NO RIGHT TO EMPLOYMENT. The execution, delivery and performance of
this Agreement do not constitute an agreement or understanding, express or
implied, on the part of the Company or its subsidiaries to employ you for any
specific period or in any specific capacity and do not prevent the Company or
its subsidiaries from terminating your employment at any time with or without
Cause. "Termination of employment" under this Agreement means termination from
active employment; it does not mean the termination of pay and benefits at the
end of salary continuation or other forms of severance pay or pay in lieu of
salary.
12. NOTICES. Any notices to the Company pursuant to this Agreement
should be addressed to: The Secretary, RJR Nabisco Holdings Corp., 1301
Avenue of the Americas, New York, NY 10019-6013. Any notice to you pursuant
to this Agreement will be sent to your address as shown on Company records.
13. CHANGE OF CONTROL. In the event of a Change of Control: (i) all
unvested Performance Notes and Performance Units issued to you will vest if you
are terminated without Cause within two years after the date of the Change of
Control, and (ii) the value of the Performance Notes will not be less than the
Closing Price of Common Stock on the date of the Change of Control.
14. YOUR OBLIGATIONS.
(a) You agree that, until the third anniversary of (i) your last day of
employment with the Company or any of its subsidiaries, or (ii) the last date on
which you receive any payment pursuant to this Agreement, whichever is later:
(A) you will personally provide reasonable assistance and cooperation to the
Company or any of its subsidiaries in activities related to the prosecution or
defense of any pending or future lawsuits or claims involving the Company or any
of its subsidiaries; (B) you will promptly notify the Company upon receipt of
any requests from anyone other than an employee or agent of the Company for
information regarding the Company or any of its subsidiaries or if you become
aware of any potential claim or proposed litigation against the Company or any
of its subsidiaries; (C) you will refrain from providing any information related
to any claim or potential litigation against the Company or any of its
subsidiaries to any non-Company representatives unless you have the Company's
written permission or are required to provide information pursuant to legal
process; (D) you will not disclose or misuse any confidential information or
material concerning the Company or any of its subsidiaries; and (E) you will not
engage in any activity contrary or harmful to the
<PAGE>
interests of the Company or any of its subsidiaries. You agree that if required
by law to provide sworn testimony regarding any matter relating to the Company
or any of its subsidiaries: you will consult with and have Company-designated
legal counsel present for such testimony (the Company will be responsible for
the costs of this counsel); you will confine your testimony to items about which
you have knowledge rather than speculation, unless otherwise directed by legal
process; and you will assist the efforts of the Company's attorneys to hold all
privileged attorney-client matters in strictest confidence, especially matters
you have been privy to.
(b) If the Company reasonably determines that you have materially violated
any of your obligations under this Agreement, then the Grants hereunder shall
terminate, effective no later than the date on which such violations began. In
that event, you agree to return to the Company on its demand any amounts paid to
you pursuant to this Agreement. If you fail to do so, the Company may deduct
from any amounts the Company owes to you (including, but not limited to, wages
or other compensation), or commence judicial proceedings against you, to recover
these amounts and related attorneys' fees and expenses. In addition, you agree
that the Company may pursue any other remedies available in law or at equity,
including injunctive relief, for any breach of this Section 14.
15. CHOICE OF LAW. This Agreement will be governed by the substantive law
of the State of New York. Any legal action or proceeding with respect to this
Agreement may be brought in the federal or state courts located in the Borough
of Manhattan in New York City.
IN WITNESS WHEREOF, the Company and you have executed this Agreement as of
the Date of Grant.
RJR NABISCO HOLDINGS CORP.
By _________________________
Authorized Signatory
_______________________________
GRANTEE
Grantee's Taxpayer Identification Number: Grantee's Home Address
_________________________ ______________________________
______________________________
Date: ______________________
<PAGE>
EXHIBIT 10.5
RESTRICTED STOCK UNITS
1997 - Conversion
1990 RJR NABISCO HOLDINGS CORP.
LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK PROGRAM
RESTRICTED STOCK UNIT AGREEMENT
_____________________________________
DATE OF GRANT: June 16, 1997
W I T N E S S E T H
1. GRANT OF RESTRICTED STOCK UNITS. Subject to (i) cancellation of any
prior outstanding Restricted Stock awards granted to the Grantee pursuant to
the provisions of the 1990 RJR Nabisco Long-Term Incentive Plan and the
Restricted Stock Program (collectively, the "Plan") and (ii) surrender to RJR
Nabisco Holdings Corp. (the "Company") of any stock certificates in respect of
such restricted stock, the Company on the above date has granted to
(FIRST NAME)(LAST NAME)(THE "GRANTEE")
subject to the provisions of the Plan and the terms and conditions of the Plan
and this agreement (the "Agreement"), a total of
( ) RESTRICTED STOCK UNITS
which entitle the Grantee to receive an amount in cash equal to the fair market
value of an equivalent number of shares of Common Stock of the Company ("Common
Stock") as of the Payment Date determined in Section 4.
A copy of the Plan is attached and made a part of this Agreement with the
same effect as if set forth in the Agreement itself. All capitalized terms used
below shall have the meaning set forth in the Plan, unless the context requires
a different meaning.
2. VESTING OF RESTRICTED STOCK UNITS. The Restricted Stock Units granted
hereunder shall vest on the earliest of:
(i) July 15, 1997;
(ii) the date of the Grantee's death;
(iii) the date of the Grantee's Disability, as defined in RJR
Nabisco Inc.'s Long Term Disability Plan;
<PAGE>
(iv) the date of the Grantee's involuntary termination, if
such termination is a result of a "Reorganization" (as
defined in the Continuing Excellence Recognition
Program);
(v) one year after the date of the Grantee's transfer, as a
result of a Reorganization, to "Operating Company" (as
defined in the Continuing Excellence Recognition
Program), or an affiliated company;
(vi) the date the Grantee is involuntarily terminated without
Cause within one year after the transfer described in
(v).
For purposed of subparagraph 2 (iv) above, an involuntary termination as
result of a Reorganization shall not occur as result of a refusal to accept a
comparable position at an Operating Company or an affiliated company.
3. PRORATA REMOVAL OF RESTRICTIONS. In the event that the Grantee's
termination prior to a date listed in Paragraph 2 is (a) by action of the
Company and without Cause, or (b) by retirement, the Grantee, if approved by the
Chief Executive Officer of the Company, may receive, a portion of such
Restricted Stock Units determined by multiplying the number of such Restricted
Stock Units by a fraction, the denominator of which is the total number of
months between the Date of Grant and the date specified in subparagraph 2 (i)
above (the "Restricted Period"), and the numerator of which is the number of
months (including any portion thereof) of the Grantee's Active Employment during
the Restricted Period. "Active Employment" shall not include any period of
Salary Continuation or any compensation period in lieu of Salary Continuation.
If the Grantee is or becomes Chief Executive Officer of the Company, actions and
approvals required herein shall be made by the Committee.
4. PAYMENT OF RESTRICTED STOCK UNITS. Unless the Grantee has elected to
defer receipt of payment in accordance with Section 7, the Grantee will receive
a payment in cash in respect of Restricted Stock Units granted to him based upon
the closing price of Common Stock on the date of vesting (the "Payment Date").
The payment shall be made as soon as practicable following vesting of such
Restricted Stock Units. If the Grantee has elected to defer receipt of such
payment in accordance with Section 7, the Payment Date will be the last day of
the deferral period and payment will be made as soon as practicable thereafter.
5. FORFEITURE OF RESTRICTED STOCK UNITS. Except as otherwise provided in
Section 3, Restricted Stock Units that are not vested as of the Grantee's
Separation Date shall be cancelled, and the Grantee shall forfeit all right,
title and interest in and to such Restricted Stock Units along with the right to
any dividend equivalents paid thereon pursuant to Section 6. "Separation Date"
means termination from active employment; it does not mean the termination of
pay and benefits at the end of a period of salary continuation (or other form of
severance pay or pay in lieu of salary).
6. DIVIDEND EQUIVALENT PAYMENTS. At all times prior to the Payment Date,
the Grantee shall receive cash payments at the same time and in the same amount
as any cash dividends paid on an equivalent number of shares of Common Stock.
2
<PAGE>
7. DEFERRAL. The Grantee may elect to defer payment of vested Restricted
Stock Units in accordance with procedures established by the Committee;
provided, that the Grantee may not defer payment in respect of Restricted Stock
Units that vest in connection with the Grantee's termination of employment for
any reason and further, provided, that in no event may the period of deferral
extend beyond January of the year following the Grantee's termination of
employment for any reason. Deferred Restricted Stock Units will continue to
have a value based on the fair market value of an equivalent number of shares of
Common Stock.
8. NO RIGHT TO EMPLOYMENT. The execution and delivery of this Agreement and
the granting of Restricted Stock Units hereunder shall not constitute or be
evidence of any agreement or understanding, express or implied, on the part of
the Company or its subsidiaries to employ the Grantee for any specific period or
in any particular capacity and shall not prevent the Company or its subsidiaries
from terminating the Grantee's employment at any time with or without Cause.
9. TRANSFERABILITY. Other than as specifically provided in the Plan with
regard to the death of the Grantee, this Agreement and any benefit provided or
accruing hereunder shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any
attempt to do so shall be void. No such benefit shall, prior to receipt thereof
by the Grantee, be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the Grantee.
10. CHANGE IN COMMON STOCK OR CORPORATE STRUCTURE.
a) If at any time the number or nature of outstanding shares of Common
Stock of the Company shall be increased or changed as the result of any spinoff,
stock dividend, subdivision or reclassification of shares, or similar event the
number or nature of Restricted Stock Units subject to this Agreement after such
an event shall be increased or changed in the same proportion or manner as the
outstanding shares of Common Stock are increased or changed, or if the number of
outstanding shares of Common Stock shall at any time be decreased as the result
of any combination or reclassification of shares, the number of Restricted Stock
Units subject to this Agreement after such an event shall be decreased in the
same proportion as the outstanding number of shares of Common Stock is
decreased.
b) In the event the Company shall at any time be consolidated with or
merged into any other corporation and holders of the Company's Common Stock
receive common shares of the resulting or surviving corporation, there shall be
an adjustment to the Restricted Stock Units subject to this Agreement after such
an event, and in place of the Restricted Stock Units so subject, a stock
equivalent shall be determined by multiplying the number of common shares of
stock delivered in exchange for a share of Common Stock upon such consolidation
or merger, by the number of Restricted Stock Units subject to this Agreement.
If in such a consolidation or merger, holders of the Company's Common Stock
shall receive any consideration other than common shares of the resulting or
surviving corporation, the Committee shall determine the
3
<PAGE>
appropriate adjustment to shares held pursuant to this Agreement after such an
event; provided, however, such adjustment shall not be to the detriment of the
Grantee.
11. TAXES. Any taxes required by federal, state or local laws to be
withheld by the Company on the Grant of Restricted Stock Units or any other
payment or event hereunder shall be paid to the Company by the Grantee by the
time such taxes are required to be paid or deposited by the Company. The
Grantee hereby authorizes the Company to withhold or offset a sufficient amount
from any payment hereunder to satisfy any such tax withholding obligations.
12. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013, and any notice required to be given
hereunder to the Grantee shall be sent to the Grantee's address as shown on the
records of the Company.
13. GRANTEE. In consideration of the grant, the Grantee specifically agrees
that the Committee shall have the exclusive power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan and Agreement as are consistent therewith and to
interpret or revoke any such rules. All actions taken and all interpretation
and determinations made by the Committee shall be final, conclusive, and binding
upon the Grantee, the Company and all other interested persons. No member of
the Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Agreement.
The Committee may delegate its interpretive authority to an officer or officers
of the Company.
14. OTHER PROVISIONS.
a) Titles are provided herein for convenience only and are not to
serve as a basis for interpretation of the Agreement.
b) The Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
4
<PAGE>
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Grantee have executed this Agreement as of the Date of Grant first above
written.
RJR NABISCO, INC.
By: _____________________________
Authorized Signatory
____________________________
Grantee
Grantee's Taxpayer Identification Number:
____________________________
Grantee's Home Address:
____________________________
____________________________
5
<PAGE>
Exhibit 10.6
FOURTH AMENDMENT TO THE 364 DAY CREDIT AGREEMENT
FOURTH AMENDMENT (this "Amendment"), dated as of April 4, 1997, among
RJR NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), RJR NABISCO,
INC., a Delaware corporation (the "Borrower") and the lending institutions party
to the Credit Agreement referred to below (the "Banks"). All capitalized terms
used herein and not otherwise defined herein shall have the respective meanings
provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Holdings, the Borrower and the Banks are parties to a Credit
Agreement, dated as of April 28, 1995 (as amended, modified and supplemented to
the date hereof, the "Credit Agreement"); and
WHEREAS, the parties to the Credit Agreement wish to amend the Credit
Agreement as herein provided;
NOW, THEREFORE, it is agreed:
I. AMENDMENT TO CREDIT AGREEMENT.
1.Effective June 2, 1997, the definition of "Measurement Date"
appearing in Section 10 of the Credit Agreement shall be amended to read in its
entirety as follows:
"Measurement Date" shall mean June 2, 1997.
II. CONDITIONS PRECEDENT TO AMENDMENT EFFECTIVE DATE.
1. This Amendment shall become effective on June 2, 1997 (the
"Amendment Effective Date"), so long as each of the following conditions shall
have been met to the satisfaction of the Senior Managing Agents on or prior to
the Amendment Effective Date:
(a) EXECUTION OF AMENDMENT. On or prior to the Amendment Effective
Date, Holdings, the Borrower and each of the Banks shall have signed a copy
hereof
<PAGE>
(whether the same or different copies) and shall have delivered (including by
way of facsimile transmission) the same to the Payments Administrator at the
Payments Administrator's Office.
(b) NO DEFAULT; REPRESENTATIONS AND WARRANTIES. On the Amendment
Effective Date, both before and after giving effect to this Amendment, (i) there
shall exist no Default or Event of Default and (ii) all representations and
warranties contained in the Credit Agreement and in the other Credit Documents
shall be true and correct in all material respects.
III. GENERAL PROVISIONS
1. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
2. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with Holdings and the Payments Administrator.
3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
* * *
-2-
<PAGE>
EXHIBIT 12.1
RJR NABISCO, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
-------------
<S> <C>
Earnings before fixed charges:
Income before income taxes....................................................................... $ 878
Less minority interest in pre-tax income of Nabisco Holdings..................................... 55
------
Adjusted income before income taxes.............................................................. 823
Interest and debt expense........................................................................ 415
Interest portion of rental expense............................................................... 28
------
Earnings before fixed charges...................................................................... $ 1,266
------
------
Fixed charges:
Interest and debt expense........................................................................ $ 415
Interest portion of rental expense............................................................... 28
Capitalized interest............................................................................. 3
------
Total fixed charges............................................................................ $ 446
------
------
Ratio of earnings to fixed charges................................................................. 2.8
------
------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN
HOLDINGS' CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000847903
<NAME> RJR NABISCO HOLDINGS CORP.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 1,489
<ALLOWANCES> 0
<INVENTORY> 2,847
<CURRENT-ASSETS> 5,180
<PP&E> 8,903
<DEPRECIATION> (3,132)
<TOTAL-ASSETS> 31,301
<CURRENT-LIABILITIES> 4,186
<BONDS> 9,409
954
528
<COMMON> 3
<OTHER-SE> 9,636
<TOTAL-LIABILITY-AND-EQUITY> 31,301
<SALES> 8,065
<TOTAL-REVENUES> 8,065
<CGS> 3,674
<TOTAL-COSTS> 3,674
<OTHER-EXPENSES> 318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 463
<INCOME-PRETAX> 830
<INCOME-TAX> 341
<INCOME-CONTINUING> 489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 456
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.33
</TABLE>
<TABLE> <S> <C>
<PAGE>
<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> 0000083612
<NAME> RJR NABISCO, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 1,485
<ALLOWANCES> 0
<INVENTORY> 2,847
<CURRENT-ASSETS> 5,176
<PP&E> 8,903
<DEPRECIATION> (3,132)
<TOTAL-ASSETS> 31,276
<CURRENT-LIABILITIES> 4,134
<BONDS> 9,409
0
0
<COMMON> 0
<OTHER-SE> 11,790
<TOTAL-LIABILITY-AND-EQUITY> 31,276
<SALES> 8,065
<TOTAL-REVENUES> 8,065
<CGS> 3,674
<TOTAL-COSTS> 3,674
<OTHER-EXPENSES> 318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 415
<INCOME-PRETAX> 878
<INCOME-TAX> 360
<INCOME-CONTINUING> 518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 485
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
