<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 September 30, 1997
--------------
RJR Nabisco Holdings Corp.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 1-10215 13-3490602
<S> <C> <C>
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
RJR Nabisco, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 1-6388 56-0950247
<S> <C> <C>
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1301 Avenue of the Americas
New York, New York 10019-6013
(212) 258-5600
(Address, including zip code, and telephone number,
including area code, of the principal executive offices of
RJR Nabisco Holdings Corp. and RJR Nabisco, Inc.)
--------------
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES X , NO .
Indicate the number of shares outstanding of each of the Registrants'
classes of common stock as of the latest practicable date: September 30, 1997:
RJR Nabisco Holdings Corp.: 323,761,223 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>
Part I--Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three Months
Ended September 30, 1997 and 1996......................... 1
Consolidated Condensed Statements of Income--Nine Months
Ended September 30, 1997 and 1996........................ 2
Consolidated Condensed Statements of Cash Flows--Nine
Months Ended September 30, 1997 and 1996.................. 3
Consolidated Condensed Balance Sheets--September 30, 1997
and December 31, 1996..................................... 4
Notes to Consolidated Condensed Financial Statements....... 5-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15-22
Part II--Other Information
Item 1. Legal Proceedings........................................... 23-24
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signatures.......................................................... 26
</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
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------- --------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales*.............................................................. $ 4,409 $ 4,409 $ 4,349 $ 4,349
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold*................................................. 2,212 2,212 2,036 2,036
Selling, advertising, administrative and general expenses.............. 1,555 1,561 1,473 1,475
Amortization of trademarks and goodwill................................ 158 158 157 157
--------- --------- --------- ---------
Operating income...................................................... 484 478 683 681
Interest and debt expense............................................... (224) (201) (233) (209)
Other income (expense), net............................................. (16) (16) (23) (23)
--------- --------- --------- ---------
Income before income taxes............................................ 244 261 427 449
Provision for income taxes.............................................. 104 113 188 198
--------- --------- --------- ---------
Income before minority interest in income of Nabisco Holdings......... 140 148 239 251
Less minority interest in income of Nabisco Holdings.................... 18 18 14 14
--------- --------- --------- ---------
Net income............................................................ 122 130 225 237
Less preferred stock dividends.......................................... 11 -- 11 --
--------- --------- --------- ---------
Net income applicable to common stock................................. $ 111 $ 130 $ 214 $ 237
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and common equivalent share....................... $ 0.34 $ 0.66
--------- ---------
--------- ---------
Dividends per share of Series C preferred stock......................... $ -- $ 1.503
--------- ---------
--------- ---------
Dividends per share of common stock..................................... $ 0.5125 $ 0.4625
--------- ---------
--------- ---------
Weighted average number of common and common equivalent shares
outstanding (in thousands)............................................ 326,075 324,762
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* Excludes excise taxes of $946 million and $970 million for the three months
ended September 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>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------- --------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales*............................................................ $ 12,474 $ 12,474 $ 12,438 $ 12,438
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold*............................................... 5,886 5,886 5,778 5,778
Selling, advertising, administrative and general expenses............ 4,259 4,265 4,197 4,203
Amortization of trademarks and goodwill.............................. 476 476 475 475
Restructuring expense................................................ -- -- 428 428
--------- --------- --------- ---------
Operating income.................................................... 1,853 1,847 1,560 1,554
Interest and debt expense............................................. (687) (616) (697) (626)
Other income (expense), net........................................... (92) (92) (81) (81)
--------- --------- --------- ---------
Income before income taxes.......................................... 1,074 1,139 782 847
Provision for income taxes............................................ 445 473 404 432
--------- --------- --------- ---------
Income before minority interest in income (loss) of Nabisco
Holdings........................................................... 629 666 378 415
Less minority interest in income (loss) of Nabisco Holdings........... 51 51 (18) (18)
--------- --------- --------- ---------
Net income.......................................................... 578 615 396 433
Less preferred stock dividends........................................ 33 -- 32 --
--------- --------- --------- ---------
Net income applicable to common stock............................... $ 545 $ 615 $ 364 $ 433
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and common equivalent share..................... $ 1.67 $ 1.11
--------- ---------
--------- ---------
Dividends per share of Series C preferred stock....................... $ 2.254 $ 4.509
--------- ---------
--------- ---------
Dividends per share of common stock................................... $ 1.5375 $ 1.3875
--------- ---------
--------- ---------
Weighted average number of common and common equivalent shares
outstanding (in thousands).......................................... 326,024 327,070
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* Excludes excise taxes of $2.677 billion and $2.825 billion for the nine
months ended September 30, 1997 and 1996, respectively.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ ----------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income................................................................. $ 578 $ 615 $ 396 $ 433
----- ----- ----- ---------
Adjustments to reconcile net income to net cash flows from (used in)
operating activities:
Depreciation and amortization............................................. 868 868 866 866
Deferred income tax provision (benefit)................................... 23 24 (197) (195)
Changes in working capital items, net..................................... (703) (486) (431) (322)
Restructuring and restructuring related expense, net of cash payments..... (179) (179) 308 308
Other, net................................................................ (8) (5) 8 2
----- ----- ----- ---------
Total adjustments........................................................ 1 222 554 659
----- ----- ----- ---------
Net cash flows from operating activities................................. 579 837 950 1,092
----- ----- ----- ---------
Cash flows from (used in) investing activities:
Capital expenditures....................................................... (517) (517) (499) (499)
Acquisition of businesses.................................................. -- -- (187) (187)
Disposition of businesses and certain assets............................... 112 112 138 138
----- ----- ----- ---------
Net cash flows used in investing activities.............................. (405) (405) (548) (548)
----- ----- ----- ---------
Cash flows from (used in) financing activities:
Net borrowings (repayments) of long-term debt.............................. 614 614 (170) (170)
Increase (decrease) in short-term borrowings............................... (234) (234) 459 459
Dividends paid on common stock and preferred stock, including dividends paid
to Nabisco Holdings' minority common shareholders......................... (574) (26) (536) (22)
Other, net -- including intercompany transfers and payments................ 38 (767) (51) (831)
----- ----- ----- ---------
Net cash flows used in financing activities.............................. (156) (413) (298) (564)
----- ----- ----- ---------
Effect of exchange rate changes on cash and cash equivalents................ (19) (19) (7) (7)
----- ----- ----- ---------
Net change in cash and cash equivalents.................................. (1) -- 97 (27)
Cash and cash equivalents at beginning of period............................ 252 251 234 232
----- ----- ----- ---------
Cash and cash equivalents at end of period.................................. $ 251 $ 251 $ 331 $ 205
----- ----- ----- ---------
----- ----- ----- ---------
</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>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- --------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................ $ 251 $ 251 $ 252 $ 251
Accounts and notes receivable, net................................... 1,421 1,419 1,418 1,413
Inventories.......................................................... 2,783 2,783 2,636 2,636
Prepaid expenses and excise taxes.................................... 463 463 445 445
--------- --------- --------- ---------
Total current assets................................................ 4,918 4,916 4,751 4,745
--------- --------- --------- ---------
Property, plant and equipment, net.................................... 5,819 5,819 5,835 5,835
Trademarks, net....................................................... 7,829 7,829 8,030 8,030
Goodwill, net......................................................... 11,982 11,982 12,268 12,268
Other assets and deferred charges..................................... 404 386 405 382
--------- --------- --------- ---------
$ 30,952 $ 30,932 $ 31,289 $ 31,260
--------- --------- --------- ---------
--------- --------- --------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings................................................ $ 586 $ 586 $ 609 $ 609
Accounts payable and accrued liabilities............................. 2,920 2,745 3,375 3,217
Current maturities of long-term debt................................. 36 36 63 63
Income taxes accrued................................................. 222 410 259 235
--------- --------- --------- ---------
Total current liabilities........................................... 3,764 3,777 4,306 4,124
--------- --------- --------- ---------
Long-term debt (less current maturities).............................. 9,632 9,632 9,256 9,256
Minority interest in Nabisco Holdings................................. 813 813 797 797
Other noncurrent liabilities.......................................... 2,171 1,356 2,223 1,872
Deferred income taxes................................................. 3,537 3,473 3,605 3,542
Contingencies (Note 3)
RJRN Holdings' obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
junior subordinated debentures*...................................... 953 -- 954 --
Stockholders' equity:
Series C convertible preferred stock................................. -- -- 3 --
Other preferred stock................................................ 524 -- 534 --
Common stock (327,138,523 shares issued at September 30, 1997)....... 3 -- 3 --
Paid-in capital...................................................... 10,045 11,888 10,038 11,890
Retained earnings.................................................... 13 320 -- --
Cumulative translation adjustments................................... (327) (327) (221) (221)
Other stockholders' equity........................................... (176) -- (209) --
--------- --------- --------- ---------
Total stockholders' equity......................................... 10,082 11,881 10,148 11,669
--------- --------- --------- ---------
$ 30,952 $ 30,932 $ 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 September 30, 1997, approximately $315 million of the restructuring
accruals were utilized as follows: $170 million for severance and related
benefits, $110 million for product line rationalizations, $27 million for
contract terminations and $8 million for plant closures.
5
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
NOTE 2--INVENTORIES
The major classes of inventory are shown in the table below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- -----------------
<S> <C> <C>
Finished products.......................................................... $ 875 $ 830
Leaf tobacco............................................................... 1,228 1,161
Raw materials.............................................................. 232 234
Other...................................................................... 448 411
------ ------
$ 2,783 $ 2,636
------ ------
------ ------
</TABLE>
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 third quarter of 1997, 191 new actions were served
against RJRT and/or its affiliates or indemnitees (as against only 64 in the
third quarter of 1996) and 49 such actions were dismissed or otherwise
resolved in favor of RJRT and/or its affiliates or indemnitees without trial.
Since the close of the third quarter, through October 25, 1997, an additional
22 suits have been served, and 4 dismissed. There have also been noteworthy
increases in the number of these cases pending. On October 25, 1997, there
were 506 active cases pending against RJRT and/or its affiliates or
indemnitees, as compared with 267 cases in October 1996 and 114 in October
1995. Of these cases, 500 are in the United States, two in Canada, three in
Puerto Rico, and one in Guam.
The United States cases are in 46 states and are distributed as follows:
215 in Florida, 76 in New York, 22 in Texas, 19 in Louisiana, 13 in
Pennsylvania, 12 in New Jersey, ten in each of Alabama and Ohio, nine in each
of California and Tennessee, eight in West Virginia, seven in Mississippi,
six in Indiana, five in each of the District of Columbia and Massachusetts,
four in each of Georgia, Illinois, Maryland, Michigan and Oklahoma, three in
each of Arizona, Colorado, Hawaii, Kansas, Minnesota, Missouri, Nevada, New
Mexico, South Dakota and Washington, two in each of Arkansas, Connecticut,
Iowa, Montana, New Hampshire, North Carolina, Oregon and Wisconsin, and one
in each of Alaska, Idaho, Kentucky, Maine, Rhode Island, South Carolina, Utah
and Vermont. Of the 500 active cases in the United States, 385 are pending in
state court and 115 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, medical
monitoring 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 500 active cases in the United States involve
alleged non-smokers claiming injuries resulting from exposure to
environmental tobacco smoke. Forty-one cases
6
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
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, and Blue Cross/Blue Shield subscribers seeking reimbursement for
premiums paid. Seventy-eight of the active cases seek, inter alia, recovery
of the cost of Medicaid payments or other health-related costs paid for
treatment of individuals suffering from diseases or conditions allegedly
related to tobacco use.
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 and RJRN Holdings have
asserted additional defenses, including jurisdictional defenses, in many of
the cases in which they are 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 October 31, 1997, in still another case (Karbiwnyk v.
R.J. Reynolds Tobacco Company) brought by the same attorney, another state
court jury found no RJRT liability. In addition, since the end of the second
quarter of 1997, RJRT and other tobacco industry defendants have settled four
lawsuits. See "Interim Agreements" below.
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, California, the District of Columbia (D.C. court), Georgia, Hawaii,
Illinois, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, New Mexico,
Nevada, Ohio, Oklahoma, New Jersey, New York, Pennsylvania, South Dakota,
Tennessee, Texas, West Virginia and Wisconsin. A similar suit had previously
been filed in Indiana. A class action filed in Tennessee seeks
7
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
reimbursement of Blue Cross/Blue Shield premiums paid by subscribers
throughout the United States. Suits are also expected to be filed in
additional jurisdictions and there are also class action suits pending in
Canada and Puerto Rico. Each such suit asserts claims on behalf of residents
of the particular jurisdiction who 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 one earlier class action suit pending in Florida, 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. The case is scheduled for trial
in February 1998. On October 28, 1997, class certification was also granted
in another case, Hoskins v. R.J. Reynolds Tobacco Company, pending in a New
York state court. A class was certified in another purported class action
suit, Scott v. American Tobacco 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
conditionally certified as a class action by a New York State court on July
24, 1997 and defendants appealed this decision. Class certification was
denied, however, on August 18, 1997, by a District of Columbia court in the
case of Reed v. Philip Morris. In October 1997, class certification was also
denied in Arch v. American Tobacco Company, (renamed Barnes v. American
Tobacco Company,) which was pending in the United States District Court for
the Eastern District of Pennsylvania. That court had initially certified a
medical monitoring class based on the plaintiffs' amended complaint (having
refused to certify a class based on the initial complaint), but on October
17, 1997, the judge reversed the certification and also dismissed the claims
of each of the class representatives.
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. A comprehensive settlement agreement,
based on the agreement in principle, was signed on October 17, 1997. See
"Interim Agreements" below.
Following the filing of the Moore case, other states, through their
attorneys general and/or other state agencies, 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 October 25, 1997, there were 39 such
cases pending in the following states, commonwealths, or territories: Alaska,
Arizona, California, Colorado, Connecticut, Georgia, Guam, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey,
New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico,
Rhode Island, South Carolina, Texas, Utah, Vermont, Washington, West Virginia
and Wisconsin. The Texas case was scheduled for trial on October 29, 1997,
but has been postponed. Another attorney general case in the state of Florida
was settled in September. See "Proposed Resolutions" below.
8
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
In addition to the 39 pending actions brought by the various attorneys
general, 39 pending 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 five 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 do RJRN and RJRN Holdings in
the cases where they are named defendants). In addition, the 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. The New Jersey Appellate Court refused to hear the
tobacco company defendants' appeal. In Maryland, the tobacco company
defendants' appeal has been briefed and argued, but no ruling has yet been
issued. In Connecticut the Second Circuit Court of Appeals reversed the
District Court's order dismissing the tobacco company defendants' motion for
declaratory judgment and remanded the case back to the District Court for
further court proceedings consistent with that ruling.
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, 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. For the complete terms
of the Memorandum, see the Companies' Report on Form 8-K, dated June 20,
1997, filed with the Securities and Exchange Commission, 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 industry defendants and their corporate parents 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
9
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
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) the effect, if any, on
public attitudes toward smoking and the tobacco industry; and (vi) the 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. In particular, the substantial price
increases necessary to fund payments of the magnitude contemplated by the
Memorandum could reduce domestic industry cigarette volumes by up to 45% over
10 years depending on the assumptions used, which assumptions by their nature
are speculative. Such volume reduction would likely have a significant
negative effect on the business of RJRT and the stated financial position of
RJRN Holdings, RJRN and RJRT. Any significant negative effect on the
financial position of any of these entities 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.
INTERIM AGREEMENTS
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. Thus far,
four cases have been settled, including two attorney general cases.
THE ATTORNEY GENERAL AGREEMENTS. The 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. A full settlement agreement was
executed on October 17, 1997. 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 and private counsel fees as set by a
panel of arbitrators. It also provides for continuing payments commencing
December 31, 1998, and annually thereafter, based on Mississippi's 1.7% share
of $4 billion (the anticipated aggregate first annual payment under the
Memorandum) 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.
10
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
The second attorney general case to come to trial, State of Florida v.
American Tobacco Company, was in the jury selection phase in Florida state
court when, on August 25, 1997, the parties announced that they had entered
into a settlement agreement. The agreement (described more fully in and
attached as an exhibit to the Registrants' Form 8-K filed September 5, 1998)
called for the tobacco company participants to make an aggregate up-front
payment of $550 million. In addition, subsequent annual payments are required
beginning with $220 million in September 1998 and increasing to approximately
double that amount by 2003 and thereafter (subject to various adjustments).
The tobacco companies also agreed (a) to fund a $200 million pilot program to
discourage youth smoking, (b) to pay the litigation costs and expenses of the
attorney general and the State's outside counsel, (c) to pay attorney's fees
as recommended by a special panel of arbitrators, and, (d) if national
legislation is enacted consistent with the Memorandum, to pay an additional
amount, again determined by arbitrators, to acknowledge the unique role of
Florida in the national resolution. The agreement also requires the tobacco
companies to discontinue all billboard advertisements as well as all
advertisements that appear on vehicles and in certain public areas, within
several months.
Because the Mississippi agreement contains a "most favored nation"
provision, Mississippi will also be awarded funding for a pilot program
($61.8 million) and a special award for its unique role in a national
resolution if one is enacted. Awards of this type, which could be as much as
$250 million for Florida and $75 million for Mississippi, would be paid over
five years, and would be subject to an annual cap for all such payments to
settling states of $100 million. In addition, the advertising proscriptions
agreed to in Florida will apply in Mississippi as well.
RJRT has made certain payments under these attorney general agreements.
Its portion of the up-front payments, based on market capitalization, was
$12.4 million for Mississippi and $37.4 million for Florida. Its portion of
the pilot program payments, based on market share, was $15.3 million for
Mississippi and $49 million for Florida. Additional payments, based on market
share, were made with respect to the costs and expenses of counsel in both
states.
THE BROIN SETTLEMENT. The plaintiffs' attorneys in a class action case,
Broin v. Philip Morris, entered into a settlement agreement with
participating tobacco company defendants on October 9, 1997. This case had
been brought in Florida state court on behalf of all flight attendants of
U.S. airlines who were suffering from diseases or ailments caused by second
hand smoke in airplane cabins. Subject to final court approval, which is not
expected before early 1998, this agreement would require the participating
tobacco companies to make a one-time payment of $300 million, allocated among
the companies by market share, to fund research on the early detection and
cure of diseases associated with tobacco smoke. It would also call for those
companies to pay a total of $49 million for plaintiffs' counsels' fees and
expenses. The agreement would bar class members from bringing aggregate
claims or obtaining punitive or exemplary damages and would also bar
individual claims to the extent that they are based on fraud,
misrepresentation, conspiracy to commit fraud or misrepresentation, RICO,
suppression, concealment or any other alleged intentional or willful conduct.
The defendants agree that in any individual case brought by a class member,
they will bear the burden of proof regarding causation that ordinarily would
be borne by the plaintiffs. No payments will be made with respect to the
Broin agreement until it has received final court approval.
THE MANGINI SETTLEMENT. On September 5, 1997, a settlement agreement was
executed on behalf of the parties to Mangini v. R.J. Reynolds Tobacco
Company, a case that had been scheduled for trial in San
11
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
Francisco Superior Court for December 1997. This case sought injunctive and
other relief against RJRT and an advertising agency with respect to the use
of Joe Camel advertising as an unfair business practice allegedly targeting
minors. The agreement requires the defendants to acknowledge that the lawsuit
along with public controversy surrounding Joe Camel, was a "substantial
factor" in the phase-out of Joe Camel advertising. It also requires prompt
removal of Joe Camel billboards and cessation of the use of Joe Camel in
advertisements and promotional items in California. The defendants agreed to
authorize release to the public of non-privileged and non-work product
documents referring to persons under the age of 18 and/or the Joe Camel
advertising campaign that were produced during discovery in the case.
Pursuant to the agreement, RJRT has paid $10 million to the City and County
of San Francisco to cover attorneys' fees ($1 million) and for distribution
to the various state jurisdictions participating in the case for anti-youth
smoking advertisements ($9 million).
The Mangini settlement provides that plaintiffs' counsel will be paid in
accordance with the counsel fee arrangements ultimately arrived at for the
national legislative settlement. If there is no such arrangement, or the
arrangement does not allow plaintiffs' counsel to participate, fees will be
determined by an arbitration panel. Finally, the agreement preserves certain
claims brought by various California public entities, including claims that
the Joe Camel campaign violated certain sections of the California Business &
Professions Code.
RJRT has participated and may continue to participate in discussions with
plaintiffs in certain health-care cost-recovery and class actions scheduled
to be tried in the coming months in order to postpone or settle those actions
in light of the pending legislative initiative. 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 might not be
affected by the passage of the legislation.
RECENT AND SCHEDULED TRIALS. As of October 25, 1997, there is one case
scheduled for trial in the remaining months of 1997 against RJRT alleging
injuries relating to tobacco. The next attorney general case scheduled for
trial is Minnesota's which has been scheduled for January 1998. A New York
class action, Hoskins v. R.J. Reynolds Tobacco Company, is scheduled for
January 1998, and a Florida class action, Engle v. R.J. Reynolds Tobacco
Company, is scheduled for February 1998. Other cases against RJRT and 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 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.
12
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
On September 15, 1997, a suit, Raymark Industries v. Brown & Williamson,
was filed against RJRT and RJRN and various other tobacco industry entities
for contribution/damages related to asbestos litigation. The suit was filed
in the United States District Court for the Northern District of Georgia.
Raymark alleged that it expended $400,000,000 on the defense and payment of
asbestos personal injury claims in trial, verdict, appeal and settlement.
Raymark alleged that cigarette smoke inhaled by the asbestos claimants caused
the cancers complained of in the litigation in which it has been involved.
Raymark seeks to recover contribution and/or indemnity from the defendants
for the share of payments made by Raymark that were allegedly caused by the
tortious and otherwise actionable conduct of defendants. Raymark's claims
included counts for: (1) negligence, (2) strict liability, (3) fraud and
misrepresentation, (4) conspiracy and (5) damages. RJRT, and the other
tobacco industry defendants in this action dispute the claims advanced by
Raymark, and intend to defend against this action vigorously.
A purported class has been granted conditional class certification in a
case, Mosely v. Philip Morris Companies, brought in Alabama state court
against RJRT, RJRN and others, alleging violations of Alabama anti-trust law.
The complaint in this case alleges that cigarette companies and others have
conspired to raise prices. The class consists of all Alabama residents who
purchased certain defendants' cigarettes for smoking purposes since March
1997. The plaintiffs seek statutory damages as well as actual damages of up
to $500 per class member. The defendants have removed the case to federal
court.
RJRT, R.J. Reynolds International ("Reynolds International") 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, Reynolds International and
Northern Brands International are responding to these subpoenas, but are
unable to predict the outcome of the grand jury's investigation.
------------
For a further discussion of litigation affecting the tobacco business see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Tobacco -- Governmental Activity" below.
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
Memorandum referred to above. These developments 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,
RJRN and RJRN Holdings, a significant increase in litigation and/or in
adverse outcomes for tobacco defendants could have an adverse effect on any
one or all of these entities. RJRT, RJRN and RJRN Holdings 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.
13
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Contingencies -- (Continued)
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.
-----------------
14
<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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
1997 1996 % CHANGE 1997 1996 % CHANGE
--------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Millions)
Net Sales:
RJRT...................................................... $ 1,295 $ 1,191 9% $ 3,587 $ 3,421 5%
Reynolds International.................................... 911 920 (1) 2,588 2,611 (1)
--------- --------- --------- ---------
Total Tobacco............................................ 2,206 2,111 5 6,175 6,032 2
--------- --------- --------- ---------
Nabisco Biscuit........................................... 920 961 (4) 2,628 2,746 (4)
U.S. Foods Group.......................................... 623 617 1 1,797 1,819 (1)
--------- --------- --------- ---------
Domestic Food Group....................................... 1,543 1,578 (2) 4,425 4,565 (3)
International Food Group.................................. 660 660 -- 1,874 1,841 2
--------- --------- --------- ---------
Total Food............................................... 2,203 2,238 (2) 6,299 6,406 (2)
--------- --------- --------- ---------
$ 4,409 $ 4,349 1 $ 12,474 $ 12,438 --
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating Company Contribution: (1)
RJRT (2).................................................. $ 161 $ 375 (57) $ 936 $ 1,145 (18)
Reynolds International.................................... 197 217 (9) 571 576 (1)
--------- --------- --------- ---------
Total Tobacco............................................ 358 592 (40) 1,507 1,721 (12)
--------- --------- --------- ---------
Nabisco Biscuit........................................... 172 141 22 489 412 19
U.S. Foods Group.......................................... 71 67 6 229 211 9
--------- --------- --------- ---------
Domestic Food Group....................................... 243 208 17 718 623 15
International Food Group.................................. 58 56 4 156 169 (8)
--------- --------- --------- ---------
Total Food............................................... 301 264 14 874 792 10
--------- --------- --------- ---------
Headquarters.............................................. (17) (16) (6) (52) (50) (4)
--------- --------- --------- ---------
$ 642 $ 840 (24) $ 2,329 $ 2,463 (5)
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating Income:
RJRT (2).................................................. $ 70 $ 284 (75) $ 662 $ 871 (24)
Reynolds International.................................... 187 207 (10) 539 545 (1)
--------- --------- --------- ---------
Total Tobacco............................................ 257 491 (48) 1,201 1,416 (15)
--------- --------- --------- ---------
Domestic Food Group....................................... 192 158 22 566 118 --
International Food Group.................................. 52 50 4 138 76 --
--------- --------- --------- ---------
Total Food (3)............................................ 244 208 17 704 194 --
--------- --------- --------- ---------
Headquarters.............................................. (17) (16) (6) (52) (50) (4)
--------- --------- --------- ---------
$ 484 $ 683 (29) $ 1,853 $ 1,560 19
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Operating Company Contribution represents operating income before
amortization of trademarks and goodwill and restructuring expense.
(2) Includes a $219 million charge related to the settlement agreements reached
by RJRT with the Florida and Mississippi state attorneys general and
certain class action cases for the three and nine months ended September
30, 1997.
(3) Includes a restructuring expense of $428 million related to the domestic
food business ($353 million) and the international food business ($75
million) for the nine months ended September 30, 1996.
15
<PAGE>
TOBACCO
RJRT and Reynolds International conduct the tobacco line of business.
RJRT's net sales were $1.3 billion for the third quarter of 1997, an
increase of $104 million or 9% from the third quarter of 1996, and $3.6
billion for the first nine months of 1997, an increase of $166 million or 5%
over 1996. The increase for both periods is mainly attributable to higher
pricing plus favorable mix. Volume for the quarter increased 1% over the
prior year, but decreased 2% over the comparable year to date period. The
company believes that its shipments and those of the entire domestic tobacco
industry, which increased 2% for the quarter, were influenced by wholesale
buying activity in anticipation of national and state settlements. Industry
volume was flat for the first nine months of 1997.
Industry volume continues its shift to the full price category with full
price volume up 4% and savings volume down 3% for the quarter. For the
nine-month period full price volume was up 1%, but savings volume was down
4%. RJRT's full price segment volume increased 4% for the third quarter, but
decreased 2% for the first nine months of 1997, while savings segment volume
decreased 3% and 4% for the respective periods. RJRT's overall market share
decreased to 25.30% during the third quarter of 1997 from 25.79% for the
comparable period in 1996. Overall market share for the first nine months of
1997 decreased to 25.40% from 26.01% in 1996.
The increase in full price shipments for the quarter was driven by a 10%
shipment increase for the Winston brand family. In August 1997, the company
began the national introduction of Winston's "No Bull" marketing campaign,
which is designed to establish Winston as a brand with a "straight up"
attitude leveraged by a unique product point-of-difference: a 100%--tobacco
blend with no additives. The Camel and Doral brands continued to post volume
and retail share gains in the third quarter. Camel's shipments rose 5% in the
quarter and were up 7% for the first nine months of 1997. Doral, the
industry's leading savings brand, had 6% and 4% volume increases in the third
quarter and first nine months of 1997, respectively, outperforming the
industry's savings brand category which declined by 3% and 4% for the third
quarter and first nine months of 1997, respectively. Offsetting these
increases was a decline in Salem and a decline in low margin savings brands
for both periods in 1997.
RJRT's operating company contribution decreased 57% and 18% for the third
quarter and the first nine months of 1997, respectively. Both periods include
a charge of $219 million ($133 million after-tax) related to settlement
agreements reached by RJRT with the Florida and Mississippi state attorneys
general and certain class action cases (See note 3 to the Consolidated
Condensed Financial Statements for further discussion). Excluding the
settlement related costs, RJRT's operating company contribution increased 1%
for the third quarter and the first nine months of 1997 to $380 million and
$1.2 billion, respectively, compared to 1996. The increase in operating
company contribution for both periods is primarily due to increases in
pricing and a more favorable product mix, partially offset by higher
marketing spending and legal costs. For the nine months, operating company
contribution was also negatively impacted by lower volume. Operating income,
excluding settlement related costs, increased 2% for the third quarter and 1%
for the first nine months of 1997 over the comparable 1996 periods due
primarily to the net increases in operating company contribution.
On September 30, 1997, a fire at RJRT's cold storage warehouse damaged
certain tobacco inventory. The company has insurance coverage and expects
reimbursements to exceed the carrying amount of any inventory or property
damaged. Accordingly, no loss was recorded at September 30, 1997, and any
gain from the insurance recovery will be reflected in the period received.
The insurance proceeds are
16
<PAGE>
anticipated to be received either in late 1997 or early 1998. The impact of the
fire will not have a material impact on the financial statements.
Reynolds International's net sales amounted to $911 million for the third
quarter and $2.6 billion for the nine months of 1997, a decrease of 1% from
1996 for the respective periods. Both periods were negatively impacted by
unfavorable foreign currency translation and market mix, partially offset by
higher pricing. Excluding the impact of unfavorable foreign currency
translation, net sales would have increased approximately 4% over 1996 for
both periods. Overall volume of 55.1 billion units and 147.4 billion units
increased 12% and 4% from 1996 for the third quarter and nine months,
respectively, due primarily to gains in Central Europe and the Commonwealth
of Independent States (CIS) and Baltic regions, partially offset by softness
in Western Europe.
For the third quarter, volume in the CIS and Baltics grew 42%, driven by
a strong performance from local or "heritage" brands reflecting national
themes. The company's Peter I brand is now the largest-selling filter
cigarette produced in Russia and Arsenal, the company's new Ukrainian
heritage brand launched in June of 1997, is receiving favorable consumer
response. Volumes in Central Europe increased 53% over 1996, primarily in
Turkey, up 65%, and Romania, up 86%. The "low smoke, low smell" Pianissimo
brand family continued to perform strongly in Japan. Reynolds International's
performance in Japan for the third quarter of 1997 was down due to the
extraordinary shipment levels recorded last year as part of the introduction
of new Pianissimo brand styles. Shipments of Pianissimo brand styles for the
first nine months of 1997 are up more than 27% and the brand is growing its
share position in the face of competitive product launches. In Western
Europe, volume across the region was down 11% for the quarter and nine
months, reflecting a decline in the full-flavor segment and continued
short-term price sensitivity in France and Spain.
Reynolds International reported positive results from several recent
marketing and product initiatives. The company continued to grow its
participation in the fast-growing lower-tar/nicotine segment, with Camel
Lights up 8% for the first nine months of 1997 in Western Europe. Camel
Medium, with its new pack design now introduced in most of Western Europe,
delivered an 11% gain for the first nine months of 1997. New Winston Lights
and Superlights are performing well, with a growth rate of 35% in three
initial markets. The new styles have been launched in four additional markets
with positive consumer response.
Operating company contribution of $197 million for the third quarter of
1997 decreased 9% from 1996 mainly due to the negative impact of foreign
currency translation and unfavorable product mix in Western Europe, partially
offset by higher pricing. Adjusting for the impact of foreign currency
translation, operating company contribution for the quarter would have been
essentially level with the prior year's third quarter. Operating company
contribution was $571 million for the first nine months of 1997, a decrease
of 1% over the comparable 1996 period, due primarily to unfavorable foreign
currency translation and unfavorable market mix, partially offset by higher
pricing. Operating income decreased 10% and 1% for the third quarter and
first nine months of 1997, respectively, primarily as a result of the
decreases in operating company contribution.
GOVERNMENTAL ACTIVITY
If the legislation contemplated by the Memorandum discussed in 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.
17
<PAGE>
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. 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. Oral argument on the
appeal has been heard, but no decision has been handed down to date. 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 December 15, 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 also requires the
reporting of nicotine yield ratings in accordance with regulations
promulgated by the Massachusetts Department of Health. Together with other
cigarette manufacturers, RJRT 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 was
filed by manufacturers of smokeless tobacco products. The Massachusetts
district court denied the manufacturers' motion for summary
18
<PAGE>
judgment, and that decision was recently upheld by the First Circuit Court of
Appeals. The manufacturers have moved to preliminarily enjoin enforcement of
the statute based on constitutional grounds. Oral argument is scheduled for
November 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 filed suit in the U.S. District Court for
the District of Minnesota earlier this year seeking to restrain the
enforcement of the Minnesota law but recently dismissed this lawsuit in light
of the possible enactment of legislation contemplated by the Memorandum
discussed in Note 3.
The California state legislature adopted two bills removing obstacles to
product liability actions against tobacco product manufacturers. One bill
removed barriers to public entities bringing such suits based on
defectiveness of the product, fraud or misconduct. The second removed tobacco
products from the list of inherently unsafe widely-used consumer products for
which manufacturers received immunity from product liability actions. These
legislative actions could result in an increase in the cases served against
RJRT.
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, the U.S. Congress has enacted an
increase in the excise tax on cigarettes by $.10 per pack in the year 2000
and an 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 2% lower in the third quarter
and 3% lower for the first nine months of 1997, with Nabisco Biscuit down 4%
for both periods, and the U.S. Foods Group up 1% and down 1%, 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 third quarter was primarily due to higher volume for nuts and gum,
partially offset by lower volume for tablespreads and certain other products
and the impact from the sale of certain domestic regional brands in the
second quarter of 1997. The U.S. Foods Group's decline in net sales for the
first nine months of 1997 was primarily due to lower volume for tablespreads
and condiments, partially offset by higher volume for nuts, candy and gum.
The International Food Group's net sales were flat for the third quarter and
2% higher for the first nine months of 1997. The increase in net sales for
the first nine
19
<PAGE>
months of 1997 was primarily driven by second half 1996 business
acquisitions, principally Lucky in Taiwan and Fontaneda in Spain, and
improved results in Mexico and China. Partially offsetting these items were
volume declines in Brazil, resulting from aggressive competitive activity in
the biscuit and milk categories, and Argentina, due to a competitive biscuit
market.
The Domestic Food Group's operating company contribution for the third
quarter and first nine months of 1997 increased 17% and 15%, respectively.
Excluding the impact of one-time items in 1997 and 1996 discussed below,
operating company contribution increased 8% for the third quarter and 9% for
the first nine months of 1997. On the same basis, Nabisco Biscuit was up 13%
and 15%, respectively, and the U.S. Foods Group was essentially even for both
periods. The Nabisco Biscuit increases resulted largely from restructuring
driven margin improvements and on-going productivity initiatives which more
than offset the impact of lower volume. The U.S. Food Group's relatively flat
performance for the quarter and first nine months of 1997 was primarily due
to mix (lower sales of higher margin products), offset by restructuring
efficiencies. The International Food Group's operating company contribution
for the third quarter and first nine months of 1997 increased 4% and
decreased 8%, respectively. Excluding the impact of one-time items in 1997
and 1996 discussed below, the International Food Group's operating company
contribution for the third quarter and first nine months of 1997 increased 2%
and decreased 4%, respectively. The increase for the third quarter of 1997
was principally due to improved results in Canada and Asia, partially offset
by lower earnings in Latin America due to lower sales in Brazil and Argentina
and increased marketing expenses in Argentina. The decrease for the first
nine months of 1997 was primarily attributable to the lower volume in Brazil
and Argentina and increased marketing expenses in Argentina, partially offset
by productivity driven earnings improvements in Canada and improved results
in Mexico.
In the second quarter 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 also recognized
during the second quarter of 1997 and 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 for the relocation of the
International Food Group's headquarters. In the third quarter and the first
nine months of 1996, restructuring related expenses of $17 million and $27
million, respectively, were recognized in connection with the June 1996
restructuring program as follows: Nabisco Biscuit--$11 million and $15
million, respectively; U.S. Foods Group--$5 million and $11 million,
respectively; and International Food Group--$1 million and $1 million,
respectively.
INCOME TAXES
The effective tax rate for the nine months of 1996 is higher than the
corresponding rate for 1997 as a result of the impact of Nabisco Holdings'
restructuring program during 1996 and lower taxes on foreign earnings during
1997.
20
<PAGE>
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from operating activities for the first nine months of
1997 were $579 million, a decrease of $371 million from the nine 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, the tobacco settlement payments 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 inflow of $63 million for
the first nine months of 1997 and an inflow of $467 million for the first
nine months of 1996. The decrease in free cash flow from 1996 to 1997
primarily reflects the decrease in net cash flows from operating activities
and a lower level of proceeds from the disposition of certain assets compared
to the prior year, partially offset by an increase in receivables sold and
lower preferred stock dividend payments as a result of the Series C preferred
stock conversion.
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 8-1/4% notes due 2004 and $200
million 8-1/2% 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 were used to repay commercial paper
borrowings.
In August 1997, Nabisco issued $200 million of floating rate notes due
2009. These notes contain a put option exercisable at the end of two years.
The net proceeds from the issuance of the notes were used to repay commercial
paper borrowings.
As of September 29, 1997, the Registrants amended certain terms of their
principal credit agreements to accommodate the Attorney General Agreements
reached by RJRT, other tobocco companies and representatives of the States of
Mississippi and Florida. The Registrants believe that they are currently in
compliance with all covenants and restrictions imposed by the terms of their
indebtedness.
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. Management is also exploring ways
to increase efficiency and productivity and to reduce the cost structures of
its respective businesses. No assurance may be given that any such
transactions will be announced or completed.
Capital expenditures were $517 million for the first nine months of 1997.
The current level of expenditures planned for 1997 is expected to be
approximately $800 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
Russia). 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.
For a discussion of the potential impact on the Registrants' financial
condition of the Proposed Resolutions, See Note 3.
21
<PAGE>
LITIGATION
For a description of certain litigation affecting RJRT and its
affiliates, see Note 3 to the Consolidated Condensed Financial Statements.
---------------
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 and the impact
of a national settlement, 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 and related legislative and regulatory
developments. 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.
----------------
22
<PAGE>
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 third quarter of 1997, 191 new actions were served
against RJRT and/or its affiliates or indemnitees (as against only 64 in the
third quarter of 1996) and 49 such actions were dismissed or otherwise
resolved in favor of RJRT and/or its affiliates or indemnitees without trial.
Since the close of the third quarter, through October 25, 1997, an additional
22 suits have been served, and 4 dismissed. There have also been noteworthy
increases in the number of these cases pending. On October 25, 1997, there
were 506 active cases pending against RJRT and/or its affiliates or
indemnitees, as compared with 267 cases in October 1996 and 114 in October
1995. Of these cases, 500 are in the United States, two in Canada, three in
Puerto Rico, and one in Guam.
The United States cases are in 46 states and are distributed as follows:
215 in Florida, 76 in New York, 22 in Texas, 19 in Louisiana, 13 in
Pennsylvania, 12 in New Jersey, ten in each of Alabama and Ohio, nine in each
of California and Tennessee, eight in West Virginia, seven in Mississippi,
six in Indiana, five in each of the District of Columbia and Massachusetts,
four in each of Georgia, Illinois, Maryland, Michigan and Oklahoma, three in
each of Arizona, Colorado, Hawaii, Kansas, Minnesota, Missouri, Nevada, New
Mexico, South Dakota and Washington, two in each of Arkansas, Connecticut,
Iowa, Montana, New Hampshire, North Carolina, Oregon and Wisconsin, and one
in each of Alaska, Idaho, Kentucky, Maine, Rhode Island, South Carolina, Utah
and Vermont. Of the 500 active cases in the United States, 385 are pending in
state court and 115 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 ("Note 3") 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 June
20th Memorandum of Understanding more fully described in Note 3 and in the
Companies' Form 8-K dated June 20, 1997. These developments 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,
RJRN and RJRN Holdings, a significant increase in litigation and/or in
adverse outcomes for tobacco defendants could have an adverse effect on any
one or all of these entities. RJRT, RJRN and RJRN Holdings 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.
23
<PAGE>
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.
------------------
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Registrants agree to furnish copies of any instruments defining the
rights of holders of long-term debt of the Registrants and their
consolidated subsidiaries that does not exceed 10 percent of the
total assets of the Registrants and their consolidated subsidiaries
to the Securities and Exchange Commission upon request.
*10.1 Amendments dated as of September 29, 1997 to the Credit Agreements
dated as of April 28, 1995 among RJR Nabisco Holdings Corp., RJR
Nabisco, Inc., Bankers Trust Company, the Chase Manhattan Bank,
N.A., Chemical Bank, Citibank, N.A. and the Fuji Bank, Limited as
Senior Managing Agents and various lending institutions.
*10.2 RJR Nabisco, Inc. Annual Incentive Award Plan, as amended and
restated effective January 1, 1997.
*12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges
for the nine months ended September 30, 1997.
*27.1 RJR Nabisco Holdings Corp. Financial Data Schedule.
*27.2 RJR Nabisco, Inc. Financial Data Schedule.
- ------------------------
* Filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K dated August 25, 1997 regarding the execution of a
settlement agreement between the various defendants on the one hand and
the State of Florida on the other, parties to State of Florida v.
American Tobacco Company and attaching as exhibits the settlement
agreement and related joint tobacco company press release.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
(Registrants)
Date: November 5, 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
26
<PAGE>
Exhibit No. 10.1
THIRD AMENDMENT TO THE 3 YEAR CREDIT AGREEMENT
FIFTH AMENDMENT TO THE 364 DAY CREDIT AGREEMENT
THIRD AMENDMENT, dated as of September 29, 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 3 Year Credit Agreement referred to below and FIFTH AMENDMENT, dated
as of September 29, 1997, among Holdings, the Borrower and the lending
institutions party to the 364 Day Credit Agreement referred to below
(collectively, the "Amendment"). All capitalized terms used herein and not
otherwise defined herein shall have the respective meanings provided such
terms in the respective Credit Agreements (as defined below).
W I T N E S S E T H :
- - - - - - - - - - -
WHEREAS, Holdings, the Borrower and various lending institutions (the "3
Year Banks") are parties to a Credit Agreement, dated as of April 28, 1995,
with respect to Commitments aggregating $2,700,000,000 on such date (the "3
Year Credit Agreement");
WHEREAS, Holdings, the Borrower and various lending institutions (the
"364 Day Banks" and, together with the 3 Year Banks, the "Banks") are parties
to a Credit Agreement, dated as of April 28, 1995, with respect to
Commitments aggregating $750,000,000 on such date (the "364 Day Credit
Agreement" and, together with the 3 Year Credit Agreement, the "Credit
Agreements");
WHEREAS, Holdings, the Borrower and the 3 Year Banks wish to enter into
the agreements with respect to the 3 Year Credit Agreement as herein
provided; and
WHEREAS, Holdings, the Borrower and the 364 Day Banks wish to enter into
the agreements with respect to the 364 Day Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
I. Amendment to the 3 Year Credit Agreement.
-----------------------------------------
1. The definition of "Adjusted Operating Income" appearing in
Section 10 of the 3 Year Credit Agreement is hereby amended by (x) deleting
the word "and" appearing at the end of clause (iii) of the proviso contained
therein and inserting a comma in lieu thereof and (y) inserting at the end of
such definition, immediately following clause (iv) thereof, the following
text:
<PAGE>
"and (v) Adjusted Operating Income shall be adjusted by adding thereto
the amount of all payments made by Holdings and its Subsidiaries during
any Test Period pursuant to (x) the Settlement Agreement, dated as of
August 25, 1997, among Lawton M. Chiles, Jr., Governor of the State of
Florida, Robert A. Butterworth, Attorney General of the State of Florida,
R.J. Reynolds Tobacco Company and certain other parties and (y) the
Memorandum of Understanding, dated as of July 2, 1997, among Michael C.
Moore, Attorney General of the State of Mississippi, R.J. Reynolds
Tobacco Company and certain other parties, to the extent (and only to the
extent) (I) the aggregate amount of all payments made by Holdings and
its Subsidiaries pursuant to the aforementioned agreements (and for which
an adjustment to Adjusted Operating Income is made) does not exceed
$125,000,000 and (II) the amount of such payments are deducted in any
determination of Adjusted Operating Income".
II Amendment to the 364 Day Credit Agreement.
------------------------------------------
1. The definition of "Adjusted Operating Income" appearing in
Section 10 of the 364 Day Credit Agreement is hereby amended by (x) deleting
the word "and" appearing at the end of clause (iii) of the proviso contained
therein and inserting a comma in lieu thereof and (y) inserting at the end of
such definition, immediately following clause (iv) thereof, the following
text:
"and (v) Adjusted Operating Income shall be adjusted by adding thereto
the amount of all payments made by Holdings and its Subsidiaries during
any Test Period pursuant to (x) the Settlement Agreement, dated as of
August 25, 1997, among Lawton M. Chiles, Jr., Governor of the State of
Florida, Robert A. Butterworth, Attorney General of the State of Florida,
R.J. Reynolds Tobacco Company and certain other parties and (y) the
Memorandum of Understanding, dated as of July 2, 1997, among Michael C.
Moore, Attorney General of the State of Mississippi, R.J. Reynolds
Tobacco Company and certain other parties, to the extent (and only to the
extent) (I) the aggregate amount of all payments made by Holdings and
its Subsidiaries pursuant to the aforementioned agreements (and for which
an adjustment to Adjusted Operating Income is made) does not exceed
$125,000,000 and (II) the amount of such payments are deducted in any
determination of Adjusted Operating Income".
III. Miscellaneous Provisions.
-------------------------
1. In order to induce the Banks to enter into this Amendment, each
Credit Party hereby (i) makes each of the representations, warranties and
agreements contained in Section 6 of each Credit Agreement and (ii)
represents and warrants that there exists no Default or Event of Default, in
each case on the date hereof and on Amendment Effective Date, after giving
effect to this Amendment.
-2-
<PAGE>
2. This Amendment is limited as specified and shall not constitute
a modification, acceptance or waiver of any other provision of either Credit
Agreement or any other Credit Document (as defined in each Credit Agreement).
3. 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.
4. 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.
5. This Amendment shall become effective as of the date first
written above on the date (the "Amendment Effective Date") when (i) each of
the Credit Parties, (ii) 3 Year Banks constituting Required Banks under the
3 Year Credit Agreement and (iii) 364 Day Banks constituting Required Banks
under the 364 Day Credit Agreement, shall have signed a copy hereof (whether
the same or different copies) and shall have delivered (including by way of
facsimile transmission) the same to White & Case, 1155 Avenue of the Americas,
New York, New York 10036, Attention: Seema Shah, Esq. (Facsimile No.: (212)
354-8113). After transmitting its executed signature page to White & Case as
provided above, each of the Banks shall deliver executed hard copies of this
Amendment to White & Case, Attention: Jacqueline Lawrence at the address
provided above.
* * *
-3-
<PAGE>
Exhibit 10.2
RJR NABISCO, INC.
ANNUAL INCENTIVE AWARD PLAN
Effective January 1, 1987
Amended and Restated Effective January 1, 1997
<PAGE>
RJR NABISCO, INC.
ANNUAL INCENTIVE AWARD PLAN
Effective January 1, 1987
Amended and Restated Effective January 1, 1997
I N D E X
<TABLE>
<CAPTION>
SECTION PAGE
- ------- -----
<S> <C> <C> <C>
1. Purpose......................................... 1
2. Definitions..................................... 1
3. Eligibility..................................... 1
4. Performance Objectives.......................... 1
5. Determination of Target Awards.................. 2
6. Determination of Cash Awards.................... 2
7. Issuance of Notes............................... 4
8. Valuation and Vesting of Notes.................. 5
9. Payment of Notes................................ 6
10. Deferral........................................ 7
11. Tax Withholding................................. 9
12. Adjustments, Amendment or Termination........... 9
13. Cancellation of Notes........................... 10
14. Miscellaneous................................... 10
15. Effective Date.................................. 11
Exhibit A: Definitions................................ 12
</TABLE>
<PAGE>
RJR NABISCO, INC.
ANNUAL INCENTIVE AWARD PLAN
Effective January 1, 1987
Amended and Restated Effective January 1, 1997
1. PURPOSE
The RJR Nabisco, Inc. Annual Incentive Award Plan is established to link
corporate and business priorities with individual and group performance
objectives for the management employees of RJR Nabisco, Inc. and its affiliated
companies.
2. DEFINITIONS
Capitalized terms have the meanings set forth in Exhibit A.
3. ELIGIBILITY
To be eligible to participate in the Plan and receive an award, an employee
must:
(a) except as otherwise provided in Section 6, be employed by a Company
or one of its subsidiaries for at least three months during the year
at a salary grade approved for participation in the Plan by the Chief
Executive Officer;
(b) not be a participant in the Sales Incentive Plan or any other bonus plan
designated by the Committee; and
(c) except as otherwise provided herein, be actively employed by a Company
or one of its subsidiaries on the last day of the year.
4. PERFORMANCE OBJECTIVES
(a) Subject to the approval of the Committee, the Chief Executive Officer of
each Company will establish specific objectives (the "Financial Objectives")
for the Company for each year. Subject to the approval of the Chief Executive
Officer of RJRN, the Chief Executive Officers of the Operating Companies may
also establish Financial Objectives for some or all of their respective
subsidiaries. Financial Objectives may be based on any financial, operational or
other criteria.
<PAGE>
(b) Each Participant and the manager to whom the Participant reports (the
"Reviewing Manager") will develop specific individual performance objectives
(the "Personal Program Objectives") for each year in which Personal Program
Objectives determine, in whole or in part, the Participant's Cash Award. The
next higher level of management will review the Personal Program Objectives to
ensure that they contribute to the Financial Objectives established by the Chief
Executive Officer.
(c) Each of the Financial Objectives and Personal Program Objectives will be
weighted for the purpose of determining awards under the Plan. Different weights
may be assigned to the objectives for different Participants and Companies.
However, the aggregate weights for the Financial Objectives and the Personal
Program Objectives will each range from 0 to 100% and together total 100%. If
weights are not otherwise assigned for any Company, the Financial Objectives and
the Personal Program Objectives for the Company will total 100% and 0%,
respectively, and each of the Financial Objectives will have the same weight.
(d) Financial Objectives and Personal Program Objectives may be reviewed and
revised during the year pursuant to the procedures used for their adoption. The
Chief Personnel Officer may change the weighting of any objective for any
Participant.
5. DETERMINATION OF TARGET AWARDS
Each Participant's target award for each year equals the product of (a)
the Participant's highest annual rate of base salary in effect for three
months or more during the year, multiplied by (b) the Participant's highest
target award level for which he was eligible for three months or more during the
year. Each Participant's target award level is expressed as a percentage of
base pay and falls within a range of target award levels set for the
Participant's salary grade. The Committee will periodically review and may
modify the range of target award levels for each salary grade. Subject to the
approval of the Chief Personnel Officer, Reviewing Managers will periodically
review and may modify specific target award levels for individual Participants.
6. DETERMINATION OF CASH AWARDS
(a) Promptly after the end of each year, the Chief Executive Officer of
RJRN will review the performance of each Company with the Committee. The
Committee will give each Company a rating (a "Financial Rating") for each of
its Financial Objectives for the year. If a Company meets or exceeds a
Financial Objective, the Committee will award a Financial Rating of 100% for
the Financial Objective. Otherwise, the Committee will set the Financial
Rating at between 0 and 99%. If the Financial Rating for any Financial
Objective is at least 100%, the Chief Executive Officer may establish a
discretionary Cash Award pool equal to up to 20% of the aggregate target
awards for such Financial Objective, which the Chief Executive Officer may
award in his discretion to any or all Participants subject to the Financial
Objective. Subject to the approval of the Committee,
2
<PAGE>
the Chief Executive Officers of the Operating Companies may give a Financial
Rating ranging from 0 to 200% for any Financial Objective .
(b) The Reviewing Manager will review the performance of each Participant
promptly after the end of each year in which Personal Program Objectives
determine, in whole or in part, the Participant's Cash Award. The Reviewing
Manager will give the Participant a rating (a "Personal Program Rating") for
each of his or her Personal Program Objectives for the year, which may range
from 0 to 200%.
(c) The amount of each Cash Award is determined by multiplying the
Participant's Financial Ratings and Personal Program Ratings by the
respective weights assigned to the corresponding Financial Objectives and
Personal Program Objectives pursuant to Section 4(c). The sum of the resulting
percentages is then multiplied by the target award for the Participant
established pursuant to Section 5. If a Participant is transferred during the
year to a position with different Financial Objectives, the Financial Ratings
applicable to the Participant will be determined by applying the applicable
Financial Ratings on a pro-rata basis, based on the period of employment during
the year in each position. Added to the Cash Award will be the amount of the
discretionary Cash Award pool, if any, assigned to each Participant as provided
under Section 6(a).
(d) When a Participant becomes eligible to participate in the Plan after the
start of the year, the Participant's Cash Award will be prorated for the
number of months of eligibility during the year. The prorating will give the
Participant a full month's credit for any partial month of eligibility. If a
Participant becomes ineligible to participate in the Plan after the start of the
year, the Participant's Cash Award will be prorated, based on the number of
full or partial months of eligibility during the year. In the event a
Participant is on a leave of absence during the year, the Participant's Cash
Award may be prorated, based on the number of full or partial months of active
employment at the discretion of the Chief Personnel Officer.
(e) If a Participant's employment is interrupted by the Participant's
death, Disability or Retirement at any time during the year, the Participant
will receive a Cash Award equal to his or her target award, prorated for the
number of full or partial months of employment during the year, as soon as
practicable after such, death, Disability or Retirement. The prorating will give
the Participant a full month's credit for any partial month of work or
short-term disability.
3
<PAGE>
(f) If a Participant's employment terminates pursuant to an SBC Program
at any time during the year, the Participant will receive a Cash Award for the
year of termination of active employment equal to the lesser of his or her
target award or the actual award determined in accordance with Section 6(c),
prorated for the number of full or partial months as an active employee. In
addition, the SBC Program may provide the Participant with credit for some or
all of the period of salary continuation and, if so, will establish criteria to
determine the Financial Ratings and Personal Program Ratings for the Participant
during this period. Payment of the resulting Cash Awards, if any, will be
governed by the terms of the SBC Program
(g) After obtaining approval from the Committee and satisfying its
requirements, the Companies will pay the Cash Award as soon as practicable after
the end of the year (or at such other time as determined by the Committee),
except as provided in the event of death, Disability or Retirement pursuant to
Section 6(e).
7. ISSUANCE OF NOTES
(a) After each year, in which a Company achieves Financial Ratings of
100% for its Financial Objectives, the Committee may award to each
Participant Notes with an aggregate Initial Value equal to 20% of the
Participant's target Cash Award. If a Company achieves Financial Ratings of
100% for some but not all of its Financial Objectives, the Committee may
award Notes to Participants pursuant to the foregoing rules based on the
relative weights assigned to each of the Financial Objectives pursuant to
Section 4(c). If a Company does not achieve a Financial Rating of 100% for
one or more of its Financial Objectives, the Committee may award Notes to
some or all Participants if the Committee determines that the Company has
improved its business fundamentals even though it did not attain the
Financial Objective, but the number of Notes issued to a Participant may not
exceed the number of Notes that would have been issued if the Financial
Rating had been 100%. The Financial Ratings and the decision to issue Notes
will be determined separately for each Company. The Notes will be issued only
to a Participant who is an active employee at the end of the year and will be
reduced in proportion to reductions in Cash Awards pursuant to Sections 6(d)
and 6(e).
4
<PAGE>
(b) Each Company may offer each Participant who is actively employed at the
end of the year the opportunity to receive additional Notes in lieu of from 5%
to 100% of the Participant's Cash Award (the "Discount Note Program"). The
number of Notes issued will equal (i) 103% of the Cash Award taken in the form
of Notes, divided by (ii) 85% of the value of the Notes on their Grant Date. The
3% increase in clause (i) above applies only to Participants who are eligible to
participate in the CIP and accounts for the 3% Company match that each
Participant would have received under the CIP if the Participant had not
converted the Cash Award into Notes; the 85% figure accounts for the 15%
discount offered as an incentive to invest in the performance of the Companies.
The Notes issued pursuant to the Discount Note Program will have the same terms
and conditions as other Notes issued in the same year, except as otherwise
provided herein. The election to convert the Cash Award to Notes will be made at
the same time and in the same manner as the election to defer awards pursuant to
Section 10.
(c) The Committee will determine the Initial Value, Performance Measures,
Payment Formulas and other terms and conditions of the Notes.
(d) The Committee may substitute other awards for the Notes prior to the
Grant Date if the Committee believes that the substitution would benefit the
Company or the Participant, for example, by providing favorable tax treatment,
without significantly increasing the costs of the Plan or otherwise adversely
affecting a Company.
8. VALUATION AND VESTING OF NOTES
(a) The Committee will determine the Payment Value of each annual series of
Notes for each Company as of the last day of each year during the Performance
Period for the Notes.
(b) Notes issued pursuant to Section 7(a) do not vest until the end of their
Performance Period or, if earlier, the Participant's death, Disability or
Retirement. These Notes may vest earlier pursuant to Sections 8(c) and 14(k).
Notes issued pursuant to the Discount Note Program are vested when issued.
(c) If a Participant's employment is involuntarily terminated without
Cause, the Participant's unvested Notes will vest in proportion to the ratio
of (i) the number of partial or complete months of employment between the Grant
Date and the last date of active employment, to (ii) 24. This vesting provision
may be modified pursuant to any salary and benefit continuation or similar
program. If termination is voluntary or with Cause, unvested Notes are
immediately canceled.
5
<PAGE>
9. PAYMENT OF NOTES
(a) Except as provided in this Section 9, the Companies will pay each
Participant an amount equal to the Payment Value of the Participant's Notes
as of the end of the applicable Performance Periods. Payment will be made as
soon as practicable thereafter.
(b) Each Participant whose employment terminates prior to the end of the
applicable Performance Period will receive payment for vested Notes issued
pursuant to Section 7(a) as follows:
(i) If the termination is due to Retirement, Disability or death, the
payment will be in an amount equal to their Payment Value as of the end
of the year immediately prior to the year of termination of employment.
Payment will be made as soon as practicable.
(ii) If the termination is involuntary and without cause, the payment will
be in an amount equal to their Payment Value as of the end of the year of
termination of active employment. Payment will be made as soon as
practicable thereafter.
(c) Each Participant whose employment terminates prior to the end of a
Performance Period will receive payment for Notes issued pursuant to the
Discount Note Program as follows:
(i) If the termination is voluntary or for Cause, the payment will be in
an amount equal to the lesser of (A) the amount of the Cash Award
surrendered by the Participant for the Notes or (B) their Payment Value
as of the end of the year of termination, and payment will made as soon
as practicable thereafter.
(ii) If the termination is due to the Participant's death, the payment
will be in an amount equal to the Payment Value of the Notes as of the most
recently completed year, and payment will be made as soon as practicable.
(iii) If the termination is for any other reason (including Retirement or
Disability), the payment for these Notes will be in an amount equal to
their Payment Value as of the end of the year of termination. Payment
will be made as soon as practicable thereafter.
6
<PAGE>
(d) All payments will be in cash and in exchange for the Notes. The cash
payment may be deferred pursuant to Section 10. Participants may not obtain
payment for the Notes in Common Stock or other Company securities, except as
provided in 13 and the Notes do not give Participants any rights as holders of
such securities.
10. DEFERRAL
(a) As of the last day of each year, each Participant who is on a United
States payroll may elect to defer payment of the Cash Award and the proceeds of
maturing Notes (collectively, the "Awards") for that year. An election to
defer will be pursuant to procedures established by the Committee and will be in
writing, signed by the Participant and delivered to the Company by December 15
of the year preceding payment. The election will be irrevocable and will specify
the percentage of the Awards (from 5% to 100%) which will be paid (i) as soon as
practicable after the year in which the Participant's Retirement, Disability or
other termination of employment occurs or, if earlier, (ii) in January of any
designated future year. If the Participant's employment with the Companies and
their subsidiaries terminates before the designated year, the award will be paid
as of January of the year following termination. If a Participant is eligible
for CIP and elects to defer the proceeds of Cash Awards or Notes issued pursuant
to Section 7(a), the Company will contribute an additional 3% to the amount
deferred on account of the 3% Company match that the Participant would have
received under CIP if the Participant had not deferred the Award.
(b) Each Participant will specify, on the notice electing deferred payment
pursuant to Section 10(a)(i), whether the Award will be deferred by cash credit,
Common Stock credit, or a combination of the two. If a Participant elects to
defer payment pursuant to Section 10(a)(ii) or fails to choose a mode of
deferral, the Participant's deferral will be by means of a cash credit. Cash
credits and stock credits will be recorded in accounts established in each
Participant's name on the books of the Participant's Company. At the
direction of RJRN, any Participants' accounts may be consolidated on the
books of RJRN or any of its subsidiaries.
(i) If the deferral is wholly or partly a cash credit, the Participant's
cash credit account will be credited, as of the date(s) that payment of
the Awards would otherwise have been made, with the dollar amount of the
portion of the Awards deferred by means of a cash credit. In addition, the
Participant's cash credit account will be credited as of the last day of
each calendar quarter with an interest equivalent in an amount determined
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 preceding quarter. Interest will be credited for the actual
number of days in the quarter using a 365-day year.
7
<PAGE>
(ii) If the deferral is wholly or partly a Common Stock credit, the
Participant's Common Stock credit account will be credited, as of the
date(s) that payment of the Awards would otherwise 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 Awards deferred by means of a Common Stock credit at the
Closing Price on the date that payment of the Awards would otherwise have
been made. As of the date any dividend is paid to shareholders of Common
Stock, the Participant's 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 the Participant's
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 Awards will be made in a single cash payment as soon
as practicable in January of the appropriate year. If and to the extent that the
deferral is by means of the Common Stock credit account the value of the payment
will be based on the Closing Price of Common Stock on the last trading day of
the year prior to payment. Notwithstanding the foregoing, if a Participant
elects in writing before December 15 of the year his 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 10(b) to
defer awards by means of a Common Stock credit, the Common Stock credit account
of a Participant who elects 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. Any election by a participant under this Section 10(c) will
be irrevocable after December 15 of the year prior to commencement of payment.
(d) At the one-time election of a Participant made in writing to the
Committee, all or any designated portion of the Common Stock credit account may
be converted to, and such Participant 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 the Participant's Common Stock credit account is then equivalent and as
to which such election has been made by the Closing Price on the last business
day of the calendar 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. Such election may be made by a Participant at any time prior to the
end of the calendar year in which termination of employment occurs. An election
by a Participant under this Section 10(d) will be irrevocable.
8
<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 each Participant's 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 each Participant's 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, each
Participant's 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 the Participant's 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
Participants' accounts. In the event of an extraordinary dividend, including
any spin-off, the Committee will make appropriate adjustments to each
Participant's Common Stock credit account.
(f) If a Participant dies, whether before or after termination of
employment, any cash credit account and Common Stock credit account to which he
or she is entitled, including any award approved after the Participant's death
as to which an election to defer was made and any remaining installment
payments, will be distributed in cash, as soon as practicable, (unless the
Committee otherwise provides) to the Participant's beneficiaries pursuant to
Section 14(l).
11. TAX WITHHOLDING
The Participant's employer or Company will deduct any taxes required to
be withheld by federal, state, local or foreign governments from payments and
distributions under the Plan.
12. ADJUSTMENTS, AMENDMENTS OR TERMINATION
(a) The Committee may make appropriate and equitable adjustments in the
Financial Ratings, Personal Program Ratings and the number, terms and conditions
of any Cash Awards and Notes if it determines that conditions warrant such
adjustment. Such conditions may include, without limitation, changes in the
economy, laws, regulations and generally accepted accounting principles, as well
as corporate events such as a merger, consolidation, recapitalization,
reclassification, stock split, stock dividend, spin-off or other event. Any
adjustment made by the Committee shall be final and binding upon the Companies
and the Participants.
9
<PAGE>
(b) The Committee may amend, suspend or terminate the Plan at will and at
any time, but it will not take any action that would materially adversely affect
the rights of Participants with respect to outstanding Notes or deferral
accounts.
13. CANCELLATION OF NOTES
The Committee may cancel Notes if it obtains the consent of their holder or
substitutes securities, debt or other obligations of equivalent value for the
Notes. All rights of the Participant with respect to canceled Notes will
terminate.
14. MISCELLANEOUS
(a) Except as determined by the Committee, no person will have any right to
receive an award.
(b) The Committee has the power to interpret the Plan and, together with the
officers of the Companies, has complete discretion in making determinations and
taking action pursuant to the Plan. All interpretations, determinations and
actions by the Committee will be final, conclusive and binding on all parties.
Subject to the preceding sentence, the Chief Executive Officer of the Company
will administer the Plan and will resolve all administrative questions and
interpretations. The Committee and the Chief Executive Officer may delegate
their authority to anyone. In such event, references in the Plan to the
Committee or to the Chief Executive Officer will refer to their delegates when
appropriate.
(c) The Companies, their Boards of Directors, the Committee, the officers
and the other employees of RJRN and its subsidiaries will not be liable for any
action taken in good faith in interpreting and administering the Plan.
(d) If the Committee determines that the listing, registration, or
qualification of the Notes is required by any securities exchange or under
any state or Federal law, or that the consent or approval of any governmental
regulatory body is necessary or desirable for the issuance of the Notes, the
Companies will not issue any Notes unless the listing, registration,
qualification, consent or approval has been effected or obtained to the
satisfaction of the Committee.
(e) For purposes of the Plan, a Participant on leave of absence approved by
a Company or a subsidiary of a Company will be considered an employee. Except as
otherwise provided herein, a Participant on salary continuation under a plan or
agreement of severance will not be considered an employee but will be deemed to
be terminated on his or her last day of active employment. A Participant absent
due to short-term disability on the last day of a year is deemed to be actively
employed if such Participant was actively employed at any time during the year.
10
<PAGE>
(f) The Cash Awards and Notes and the interest, dividends and other expenses
on deferred Awards will be charged to the Participant's Company. If the
Participant is employed by more than one Company during the year, the
Participant's Plan expenses may be allocated between the Companies in a manner
prescribed by the Committee.
(g) The Plan does not create or confer on any Participant any right to
employment, and the employment of any Participant may be terminated by the
Participant or the Participant's employer without regard to the effect that
termination might have on the Participant with respect to the Plan.
(h) Participants may not transfer, pledge or encumber any benefit under the
Plan prior to its receipt in cash. Except as required by law, creditors may not
attach or seize any such benefit.
(i) The obligations of the Companies under the Plan are unsecured
liabilities. No assets of the Companies are allocable to the satisfaction of
Plan obligations.
(j) The Plan will be governed by and subject to the laws of the State of
Delaware.
(k) In the event of a Change of Control: (i) all Notes issued to a
Participant will vest if the Participant is terminated without Cause within two
years of the Change of Control, and (ii) the Payment Value of the Notes will not
be less than the Closing Price on the date of the Change of Control.
(l) If a Participant dies, the Companies will make payments under this Plan
to the beneficiary designated in writing by the Participant specifically for
this Plan or, if there is no such designation or the named beneficiary is dead,
to the beneficiary most recently designated by the Participant to receive the
proceeds of any Company-paid group life insurance coverage provided for the
Participant. Otherwise, the distribution will be made to default beneficiaries
as provided under the Company-paid group life insurance plan. Only the
Participant may change or revoke the Participant's designation.
(m) The Company may supersede some or all of the terms of the Plan with
respect to individual Participants pursuant to an employment, termination or
similar agreement. In case of conflict, the agreement will control.
15. EFFECTIVE DATE
The Plan is effective as of January 1, 1987 and has been amended and
restated as of January 1, 1997.
11
<PAGE>
EXHIBIT A
DEFINITIONS
(a) Board of Directors. The Board of Directors of RJRN.
(b) Cash Award. Annual cash payments made to Participants pursuant to the
Plan.
(c) Cause. Termination resulting from: (a) criminal conduct; (b)
deliberate continual refusal to perform employment duties on a
substantially full-time basis; (c) deliberate and continual refusal
to act in accordance with any specific lawful instructions of a more
senior officer or employee; or (d) deliberate misconduct which could be
materially damaging to a Company's operations without a reasonable
good faith belief that such conduct is in the best interests of the
Company. A termination of employment shall not be deemed for Cause
unless confirmed by the Chief Personnel Officer. Any voluntary
termination in anticipation of an involuntary termination of
employment for Cause shall be deemed a termination of employment
for Cause.
(d) Change of Control. As defined in the RJR Nabisco Holdings Corp. 1990
Long-Term Incentive Plan.
(e) Chief Executive Officer. For employees of RJRN and the chief
executive officers of the Operating Companies, the chief executive
officer of RJRN. For the other employees of each Operating Company
and its subsidiaries, the chief executive officer of the Operating
Company primarily responsible for their performance.
(f) Chief Personnel Officer. For employees of RJRN and the executive
officers of the Operating Companies, the chief personnel officer of
RJRN. For the other employees of each Operating Company and its
subsidiaries, the chief personnel officer of the Operating Company
primarily responsible for their performance.
(g) CIP. The RJR Nabisco Capital Investment Plan, or comparable Company
sponsored 401(k) plan in which U.S. paid employees participate, or
any successor thereto.
(h) Closing Price. The closing sale price of the Common Stock as shown on
the New York Stock Exchange consolidated tape and reported in The
Wall Street Journal.
12
<PAGE>
(i) Committee. The Compensation Committee of the Board of Directors.
(j) Common Stock. The Common Stock of RJR Nabisco Holdings Corp.
(k) Companies. RJRN and the Operating Companies.
(l) Disability. Being totally and permanently disabled as currently defined
in the Long Term Disability Plan of the Operating Company employing
the participant.
(m) Discount Note Program. The opportunity of Participants to acquire Notes
in lieu of some or all of their Cash Award pursuant to Section 7(b).
(n) Grant Date. January 1 of the year in which a Company issues Notes to a
Participant.
(o) Initial Value. The value of a Note at the start of its Performance
Period.
(p) Notes. Notes indexed to a Company's performance and issued by a
Company to a Participant pursuant to an award under the Plan.
(q) Operating Companies. R.J. Reynolds Tobacco Company and R.J. Reynolds
International B.V.
(r) Participant. For any year, an employee who is eligible for or who has
deferred receipt of an award under the Plan. An eligible employee is
a Participant only with respect to the Company for which he works
most directly.
(s) Payment Formula. The formula used to value a Note at the end of each
year during the Performance Period for the Note.
(t) Payment Value. The value of a Note at the end of a year in the
Performance Period.
(u) Performance Measures. The performance objectives for a Company used
in Payment Formulas to determine Payment Values for the Company's
Notes.
(v) Performance Period. A period of three consecutive fiscal years
commencing on January 1 of the year preceding the Grant Date.
(w) Plan. RJR Nabisco, Inc. Annual Incentive Award Plan.
(x) Retirement. Retirement with eligibility for retiree medical benefits.
13
<PAGE>
(y) RJRN. RJR Nabisco, Inc.
(z) SBC Program. A salary and benefits continuation or other program
maintained by a Company for the purpose of providing severance-type
benefits to employees whose employment is involuntarily terminated.
14
<PAGE>
EXHIBIT 12.1
RJR NABISCO, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1997
-------------------
<S> <C>
Earnings before fixed charges:
Income before income taxes................................................................... $ 1,139
Less minority interest in pre-tax income of Nabisco Holdings................................. 85
------
Adjusted income before income taxes.......................................................... 1,054
Interest and debt expense.................................................................... 616
Interest portion of rental expense........................................................... 42
------
Earnings before fixed charges................................................................. $ 1,712
------
------
Fixed charges:
Interest and debt expense.................................................................... $ 616
Interest portion of rental expense........................................................... 42
Capitalized interest......................................................................... 4
------
Total fixed charges......................................................................... $ 662
------
------
Ratio of earnings to fixed charges............................................................ 2.6
------
------
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 1,421
<ALLOWANCES> 0
<INVENTORY> 2,783
<CURRENT-ASSETS> 4,918
<PP&E> 9,033
<DEPRECIATION> (3,214)
<TOTAL-ASSETS> 30,952
<CURRENT-LIABILITIES> 3,764
<BONDS> 9,632
953
524
<COMMON> 3
<OTHER-SE> 9,555
<TOTAL-LIABILITY-AND-EQUITY> 30,952
<SALES> 12,474
<TOTAL-REVENUES> 12,474
<CGS> 5,886
<TOTAL-COSTS> 5,886
<OTHER-EXPENSES> 476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 687
<INCOME-PRETAX> 1,074
<INCOME-TAX> 445
<INCOME-CONTINUING> 629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 578
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN'S INC.
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 1,419
<ALLOWANCES> 0
<INVENTORY> 2,783
<CURRENT-ASSETS> 4,916
<PP&E> 9,033
<DEPRECIATION> (3,214)
<TOTAL-ASSETS> 30,932
<CURRENT-LIABILITIES> 3,777
<BONDS> 9,632
0
0
<COMMON> 0
<OTHER-SE> 11,881
<TOTAL-LIABILITY-AND-EQUITY> 30,932
<SALES> 12,474
<TOTAL-REVENUES> 12,474
<CGS> 5,886
<TOTAL-COSTS> 5,886
<OTHER-EXPENSES> 476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 616
<INCOME-PRETAX> 1,139
<INCOME-TAX> 473
<INCOME-CONTINUING> 666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 615
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
