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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 MARCH 31, 1997
--------------
RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 1-10215 13-3490602
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
<CAPTION>
<S> <C> <C>
DELAWARE 1-6388 56-0950247
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6013
(212) 258-5600
(Address, including zip code, and telephone number,
including area code, of the principal executive offices of RJR
Nabisco Holdings Corp. and RJR Nabisco, Inc.)
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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: MARCH 31, 1997
RJR NABISCO HOLDINGS CORP.: 270,535,434 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.
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<TABLE>
<CAPTION>
INDEX
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three Months Ended
March 31, 1997 and 1996................................................... 1
Consolidated Condensed Statements of Cash Flows--Three Months Ended
March 31, 1997 and 1996................................................... 2
Consolidated Condensed Balance Sheets--March 31, 1997
and December 31, 1996..................................................... 3
Notes to Consolidated Condensed Financial Statements......................... 4-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 11-15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 16-17
Item 4. Submission of Matters to a Vote of Security Holders.......................... 18-19
Item 6. Exhibits and Reports on Form 8-K............................................. 20
Signatures............................................................................. 21
</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
MARCH 31, 1997 MARCH 31, 1996
------------------------- -----------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
<S> <C> <C> <C> <C>
NET SALES*...................................................... $ 3,779 $ 3,779 $ 3,886 $ 3,886
-------- --------- --------- --------
Costs and expenses *:
Cost of products sold........................................ 1,720 1,720 1,801 1,801
Selling, advertising, administrative and general expenses.... 1,248 1,249 1,287 1,287
Amortization of trademarks and goodwill...................... 158 158 158 158
-------- --------- --------- --------
OPERATING INCOME.......................................... 653 652 640 640
Interest and debt expense....................................... (232) (209) (234) (210)
Other income (expense), net..................................... (29) (29) (35) (35)
-------- --------- --------- --------
Income before income taxes................................ 392 414 371 395
Provision for income taxes...................................... 166 176 163 171
-------- --------- --------- --------
INCOME BEFORE MINORITY INTEREST IN INCOME OF NABISCO
HOLDINGS................................................. 226 238 208 224
Less minority interest in income of Nabisco Holdings............ 13 13 10 10
-------- --------- --------- --------
NET INCOME................................................ 213 225 198 214
Less preferred stock dividends.................................. 11 -- 11 --
-------- --------- --------- --------
NET INCOME APPLICABLE TO COMMON STOCK..................... $ 202 $ 225 $ 187 $ 214
======== ========= ========= =========
Net income per common and common equivalent share............... $ 0.62 $ 0.57
======== =========
Dividends per share of Series C preferred stock................. $ 1.503 $ 1.503
======== =========
Dividends per share of common stock............................. $ 0.5125 $ 0.4625
======== =========
Weighted average number of common and common equivalent shares
outstanding (in thousands)................................... 326,389 328,711
======== =========
</TABLE>
- --------------------
* Excludes excise taxes of $852 million and $895 million for the three months
ended March 31, 1997 and 1996, respectively.
See Notes to Consolidated Condensed Financial Statements
1
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1996
---------------------- --------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
<S> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income.................................................. $ 213 $ 225 $ 198 $ 214
-------- --------- ------- -------
Adjustments to reconcile net income to net cash flows
from (used in) operating activities:
Depreciation and amortization........................... 293 293 291 291
Deferred income tax provision (benefit)................. 11 11 (24) (24)
Changes in working capital items, net................... (597) (551) (297) (290)
Restructuring and restructuring related payments........ (81) (81) (36) (36)
Other, net.............................................. (10) (12) (2) (2)
-------- --------- ------- -------
Total adjustments..................................... (384) (340) (68) (61)
-------- --------- ------- -------
Net cash flows from (used in) operating activities........ (171) (115) 130 153
-------- --------- ------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures........................................ (131) (131) (149) (149)
Acquisition of businesses................................... -- -- (54) (54)
Disposition of businesses and certain assets................ 36 36 45 45
-------- --------- ------- -------
Net cash flows used in investing activities............... (95) (95) (158) (158)
-------- --------- ------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings (repayments) of long-term debt............... 65 65 (25) (25)
Increase in short-term borrowings........................... 341 341 541 541
Dividends paid on common stock and preferred stock, including
dividends paid to Nabisco Holdings' minority common
shareholders.............................................. (189) (8) (166) (7)
Other, net-including intercompany transfers and payments.... 23 (213) 23 (162)
-------- --------- ------- -------
Net cash flows from financing activities.................. 240 185 373 347
-------- --------- ------- -------
Effect of exchange rate changes on cash and cash equivalents... (8) (8) (5) (5)
-------- --------- ------- -------
Net change in cash and cash equivalents................... (34) (33) 340 337
Cash and cash equivalents at beginning of period............... 252 251 234 232
-------- --------- ------- -------
Cash and cash equivalents at end of period..................... $ 218 $ 218 $ 574 $ 569
======== ========= ======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements
2
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
--------------------- --------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 218 $ 218 $ 252 $ 251
Accounts and notes receivable, net....................... 1,428 1,426 1,418 1,413
Inventories.............................................. 2,831 2,831 2,636 2,636
Prepaid expenses and excise taxes........................ 472 472 445 445
--------- --------- --------- ---------
TOTAL CURRENT ASSETS................................. 4,949 4,947 4,751 4,745
--------- --------- --------- ---------
Property, plant and equipment, net.......................... 5,767 5,767 5,835 5,835
Trademarks, net............................................. 7,968 7,968 8,030 8,030
Goodwill, net............................................... 12,176 12,176 12,268 12,268
Other assets and deferred charges........................... 382 362 405 382
--------- --------- --------- ---------
$31,242 $31,220 $31,289 $ 31,260
========= ========= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.................................... $ 589 $ 589 $ 609 $ 609
Accounts payable and accrued liabilities................. 2,948 2,782 3,375 3,217
Current maturities of long-term debt..................... 44 44 63 63
Income taxes accrued..................................... 292 309 259 235
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES............................ 3,873 3,724 4,306 4,124
--------- --------- --------- ---------
Long-term debt (less current maturities).................... 9,653 9,653 9,256 9,256
Minority interest in Nabisco Holdings....................... 797 797 797 797
Other noncurrent liabilities................................ 2,230 1,783 2,223 1,872
Deferred income taxes....................................... 3,592 3,529 3,605 3,542
Contingencies (Note 3)
RJRN Holdings' obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
junior subordinated debentures*.......................... 954 -- 954 --
Stockholders' equity:
Series C convertible preferred stock (26,675,000 shares
issued and outstanding).............................. 3 -- 3 --
Other preferred stock.................................... 531 -- 534 --
Common stock (273,912,734 shares issued at March 31,
1997)................................................ 3 -- 3 --
Paid-in capital.......................................... 10,045 11,887 10,038 11,890
Retained earnings........................................ 22 110 -- --
Cumulative translation adjustments....................... (263) (263) (221) (221)
Other stockholders' equity............................... (198) -- (209) --
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY........................... 10,143 11,734 10,148 11,669
--------- --------- --------- ---------
$ 31,242 $ 31,220 $ 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
3
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - INTERIM REPORTING
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.
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, will
generally be higher and diluted net income per share will be approximately the
same as compared with net income per share calculated under current accounting
standards.
NOTE 2 - INVENTORIES
The major classes of inventory are shown in the table below:
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
Finished products....................... $ 897 $ 830
Leaf tobacco............................ 1,261 1,161
Raw materials........................... 251 234
Other................................... 422 411
------- -------
$ 2,831 $ 2,636
======= =======
NOTE 3 -- CONTINGENCIES
TOBACCO 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 first quarter of 1997, 102 new actions were filed or served against
RJRT and/or its affiliates or indemnitees and 58 such actions were dismissed or
4
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 -- CONTINGENCIES -- (CONTINUED)
otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without
trial. There have been noteworthy increases in the number of these cases
pending. On March 31, 1997 there were 278 active cases pending, as compared with
168 on March 31, 1996 and only 61 on May 1, 1995. As of May 8, 1997, 295 active
cases were pending against RJRT and/or its affiliates or indemnitees, 292 in the
United States, one in Canada and two in Puerto Rico.
The United States cases are in 33 states and are distributed as
follows: 119 in Florida, 52 in Texas, 29 in New York, 14 in Louisiana, nine in
California, seven in Alabama, six in each of Mississippi and New Jersey, five in
Indiana, four in each of Kansas, Pennsylvania and Tennessee, three in each of
Massachusetts, Michigan, Minnesota and Ohio, two in each of Colorado, Hawaii,
Maryland and West Virginia and one in each of Arizona, Arkansas, Connecticut,
District of Columbia, Illinois, Iowa, Nevada, New Hampshire, New Mexico,
Oklahoma, Utah, Washington and Wisconsin. Of the 292 active cases in the United
States, 194 are pending in state court and 98 in federal court. Most of these
cases are brought by individual plaintiffs, but an increasing number, discussed
below, seek recovery on behalf of states or large classes of claimants.
THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on
a variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, anti-trust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity and common law
public nuisance. Punitive damages, often in amounts ranging into the hundreds of
millions or even billions of dollars, are specifically pleaded in a number of
cases in addition to compensatory and other damages. Seven of the 292 active
cases in the United States involve alleged non-smokers claiming injuries
resulting from exposure to environmental tobacco smoke. Twenty three cases
purport to be class actions on behalf of thousands of individuals. Purported
classes include individuals claiming to be addicted to cigarettes, individuals
and their estates claiming illness and death from cigarette smoking, flight
attendants alleging personal injury from exposure to environmental tobacco smoke
in their workplace and Blue Cross/Blue Shield subscribers claiming reimbursement
for premiums paid. Thirty of the active cases seek, inter alia, recovery of the
cost of Medicaid funds paid for treatment of individuals suffering from diseases
or conditions allegedly related to tobacco.
DEFENSES. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act ("the Cigarette Act") of some or all such claims arising after 1969; the
lack of any defect in the product; assumption of the risk; comparative fault;
lack of proximate cause; and statutes of limitations or repose; and, in the
attorneys general cases (discussed below), additional constitutional defenses.
RJRN has asserted additional defenses, including jurisdictional defenses, in
many of the cases in which it is named. Juries have found for plaintiffs in
three smoking and health cases in which RJRT was not a defendant, but in one
such case, no damages were awarded and the judgment was affirmed on appeal. The
jury awarded plaintiffs $400,000 in another such case, Cipollone v. Liggett
Group, Inc., but the award was overturned on appeal and the case was
subsequently dismissed. In the third such case, on August 9, 1996, a Florida
jury awarded damages of $750,000 to an individual plaintiff. The defendants in
that case, Carter v. Brown & Williamson, are 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.
5
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 -- CONTINGENCIES -- (CONTINUED)
On June 24, 1992, the United States Supreme Court in Cipollone held
that claims that tobacco companies failed adequately to warn of the risks of
smoking after 1969 and claims that their advertising and promotional practices
undermined the effect of warnings after that date were preempted by the
Cigarette Act. The Supreme Court also held that certain claims sounding in
breach of express warranty, fraud, misrepresentation and conspiracy were not
preempted.
CERTAIN CLASS ACTION SUITS. In May 1996, there was an important ruling
in one of the purported class action cases, Castano v. The American Tobacco
Company, originally filed in March 1994 in the United States District Court for
the Eastern District of Louisiana against tobacco industry defendants, including
RJRT and RJRN. Plaintiffs sought to obtain certification of a class action on
behalf of all United States residents who allegedly are or claim to be addicted,
or are the legal survivors of persons who allegedly were addicted, to tobacco
products manufactured by defendants. The complaint alleged that cigarette
manufacturers manipulated the levels of nicotine in their tobacco products to
induce addiction in smokers. Plaintiffs' motion for certification of the class
was granted in part on February 17, 1995 but, on May 23, 1996, the Fifth Circuit
Court of Appeals overturned the certification and ordered the case remanded to
the district court for decertification of the class on the grounds that a class
consisting of all "addicted" smokers failed to meet the standards and
requirements of Federal Rule 23 governing class actions. The class has been
decertified and the case is proceeding as an individual suit. Another purported
class action, filed shortly after Castano, remains stayed in federal district
court in Louisiana.
Since the federal appeals court decision in Castano, class action suits
based on similar claims have been brought in state courts in Alabama, Arkansas,
the District of Columbia (D.C. court), Louisiana, Maryland, Michigan, Minnesota,
New Mexico, Ohio, New York, Pennsylvania, Texas and West Virginia. A similar
suit had previously been filed in Indiana. Similar suits are also expected to be
filed in additional jurisdictions. Each such suit asserts claims on behalf of
residents of the particular state who allegedly are or claim to be addicted, or
are the legal survivors of such persons. In addition, two earlier class action
suits are still pending in Florida. In one case, Engle v. R.J. Reynolds Tobacco
Company, a class consisting of Florida residents or their survivors who claim to
have diseases or medical conditions caused by their "addiction" to cigarettes
has been certified, and a petition to review the certification has been denied.
Notice to the class is in progress and the case is scheduled for trial in
September 1997. In a second case, Broin v. Philip Morris Company, a class
consisting of all non-smoking flight attendants who work or have worked for U.S.
airlines has been certified, and a mandamus petition to reverse this
certification was denied. Notice to the class is now in progress and the case is
scheduled for trial in June 1997. 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. A class action filed in Tennessee seeks
reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout
the United States.
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. The 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 seeks an injunction against
6
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RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 -- CONTINGENCIES -- (CONTINUED)
"promoting" or "aiding and abetting" the sale of cigarettes to minors. Both
actual and punitive damages are sought in unspecified amounts. Motions by the
defendants to dismiss the case or to transfer it to circuit (jury) court were
denied on February 21, 1995 and the case is scheduled for trial on July 7,
1997. RJRN and other industry holding companies have been voluntarily
dismissed from the case.
Following the filing of the Moore case referred to above, other states,
through their attorneys general and/or other state agencies, have sued RJRT and
other U.S. cigarette manufacturers as well as, in some instances, their parent
companies, in actions to recover the costs of medical expenses incurred by the
state or its agencies in the treatment of diseases allegedly caused by cigarette
smoking. Some of these cases also seek injunctive relief and treble damages for
state and/or federal antitrust law and RICO violations. On May 8, 1997, there
were 23 such cases pending in the following states: Arizona, Connecticut,
Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, New York, New Jersey, Oklahoma,
Pennsylvania, Texas, Utah, Washington, West Virginia and Wisconsin. The
Mississippi case is the first such case currently scheduled for trial, with a
trial date set for July 7, 1997. The Florida attorney general's case is
scheduled for trial on August 4, 1997 and the Texas case is scheduled for
September 22, 1997.
The suit by the State of Florida raises special issues because it was
brought under a July 1994 amendment to a Florida statute which allows the state
to bring an action in its own name against the tobacco industry to recover the
state's Medicaid payments for the treatment of illnesses statistically
associated with cigarette smoking. The amendment did not require the state to
identify the individuals who received medical care, permitted claims to be filed
in the aggregate and eliminated the comparative negligence and assumption of
risk defenses. The amendment was challenged on state and federal constitutional
grounds in a lawsuit brought by Philip Morris Companies Inc., Associated
Industries of Florida and others in June 1994. The case was appealed to the
Florida Supreme Court which, on June 27, 1996, issued its opinion limiting the
amendment in several respects. Among other things, the court ruled: that
provisions abrogating affirmative defenses available to tobacco companies if
sued by individuals could only be applied to claims brought by the state arising
out of payments made after July 1, 1994, the effective date of the amendment;
that the state must identify individual recipients of Medicaid payments; and
that claims previously barred by the statute of repose could not be revived. The
Florida Supreme Court, in a 4-3 decision, expressly stated that although it
found provisions of the statute to be "facially" constitutional, it was
specifically leaving open the right to challenge those provisions as applied in
any specific lawsuit. The plaintiffs in that lawsuit were unsuccessful in their
request to obtain United States Supreme Court review of the Florida Supreme
Court's decision.
In an order dated September 16, 1996, the Florida trial court hearing
the attorney general's case applied the Florida Supreme Court decision to that
case. The order dismissed fifteen of plaintiff's eighteen causes of action, but
left standing the claims of negligence and/or products liability and one count
of the complaint which seeks to enjoin certain acts including the sale of
cigarettes to minors. It also required the attorney general to identify the
individual Medicaid recipients for whom the state is seeking recovery within 30
days and precluded recovery by the state on payments made prior to July 1994,
except by subrogation and assignment. Following this ruling, the State of
Florida filed an amended complaint that restated the counts of the prior
complaint left standing by the September order and added five additional counts.
One of these counts alleged various statutory and criminal violations arising
under the Florida Drug and Cosmetic Act, based on alleged wrongful and illegal
7
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 -- CONTINGENCIES -- (CONTINUED)
targeting of minors, fraudulent practices, public nuisance and deceptive and
unfair trade practices. The other four new counts alleged violations of various
sections of the Florida RICO Act. Defendants' motion to dismiss the RICO counts
was denied.
In addition to the 23 actions brought by the various state attorneys
general, seven 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.
RJRT and most other cigarette manufacturers are defending these
attorneys general and related cases vigorously (as is RJRN in the cases where it
is a named defendant). In addition, these defendants have filed for declaratory
judgment in several of the states in which the attorneys general cases are
pending or threatened, 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 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 two cases have noticed
appeals seeking to overturn these rulings.
RECENT AND SCHEDULED TRIALS. As of May 8, 1997, there were 18 cases
scheduled for trial in 1997 against RJRT and/or RJRN alleging injuries relating
to tobacco. Among these are three class action suits and three attorneys general
suits. Cases against other tobacco company defendants are also scheduled for
trial in 1997 and thereafter. Although trial schedules are subject to change and
many cases are dismissed before trial, it is likely that there will be an
increased number of tobacco cases involving claims for possibly billions of
dollars, against RJRT and RJRN coming to trial over the next year as compared to
prior years when trials in these cases were infrequent.
OTHER DEVELOPMENTS. On March 20, 1997, Liggett announced a new
settlement agreement related to pending (and, in certain respects, potential)
actions filed by various state attorneys general and certain other tobacco
litigation. In this settlement, Liggett agreed INTER ALIA to make a one-time
$25 million payment, but only if Liggett or Brooke Group acquires or are
themselves acquired by one of the other defendant tobacco companies, with
market share less than 30% of the U.S. cigarette market. In addition,
Liggett agreed to pay up to 25% of its pre-tax income to the states for the
next 25 years. Liggett also agreed to cooperate fully with the attorneys
general in their lawsuits against the other tobacco companies. To that end,
Liggett undertook to make available to the attorneys general all relevant
documents and information, including documents subject to Liggett's own
attorney-client privileges and work-product protections, and undertook to
assist the attorneys general in obtaining prompt court adjudication of the
rest of the industry's joint privilege claims to certain documents.
Notwithstanding these settlement agreements, all other cigarette
manufacturers, including RJRT, announced their intent to continue to defend
the cases.
Representatives of RJRN and RJRT, together with representatives of
companies in the United States tobacco industry, have met and may continue to
meet with state attorneys general, representatives of certain plaintiffs and
others to explore the potential for comprehensive federal legislation
concerning tobacco. Components of such legislation could include the
resolution of significant existing and potential future tobacco litigation
against RJRN and RJRT, the payment by tobacco manufacturers of material
amounts both initially and over a number of years and incremental
comprehensive regulation by federal and state governments over the
manufacturing, marketing and selling of tobacco products in the United
States. Although such legislation could potentially lower the aggregate
tobacco litigation risk to RJRN and RJRT and result in increased stability in
the markets for RJRN's securities, such legislation would likely increase the
costs of tobacco products and result in reduced consumption of RJRT's tobacco
products in the United States and could have a significant negative effect on
the business of RJRT and the stated financial position of both RJRN and RJRT.
RJRT and RJRN are unable to predict the ultimate effect, if any, of these
discussions, but the potential for the enactment of any legislation of this
nature, as well as the ultimate content of any such legislation, is highly
speculative and such legislation could well face insurmountable hurdles in
reconciling the views of many relevant competing interests. Accordingly,
there can be no assurance that any legislation will be enacted or if enacted,
what the content or overall effect thereof on RJRN and RJRT would be.
8
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 -- CONTINGENCIES -- (CONTINUED)
RJRT understands that a grand jury investigation being conducted in
the Eastern District of New York is examining possible violations of criminal
law in connection with activities relating to the Council for Tobacco
Research-USA, Inc., of which RJRT is a sponsor. RJRT has, and will continue
to respond to document subpoenas issued by this grand jury. On March 20,
1996, RJRT and RJRN each received a subpoena from a Federal grand jury
sitting in the Southern District of New York. RJRT and RJRN understand that
this investigation is no longer active in the Southern District of New York
and has been transferred to the District of Columbia. In addition, subpoenas
dated May 24, 1996, November 8, 1996 and December 5, 1996 were served on RJRT
by a grand jury sitting in the District of Columbia. RJRT has, and will
continue to respond to those subpoenas. RJRN and RJRT are unable to predict
the outcome of these investigations.
-----------
Litigation is subject to many uncertainties and it is possible that
some of the tobacco-related legal actions, proceedings or claims could be
decided against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or
its affiliates or indemnitees and could encourage an increase in the number
of such claims. There have been a number of political, legislative,
regulatory and other developments relating to the tobacco industry and
cigarette smoking that have received wide media attention, including the
recent Liggett settlements of certain health care recovery actions and a
purported nationwide smoking and health class action, and a decision by a
federal district court on a motion for summary judgement to uphold the FDA's
regulation of cigarettes as "drugs" or "medical devices." These
developments, as well as the widespread media attention given to the
legislative discussions referred to above, may negatively affect the outcomes
of tobacco-related legal actions and the continuation or termination of such
discussions may encourage the commencement of additional similar litigation.
Although it is impossible to predict the outcome of such events on
pending litigation and the rate at which new lawsuits are filed against RJRT
and RJRN, a significant increase in litigation and/or in adverse outcomes for
tobacco defendants could have an adverse effect on RJRT and RJRN. RJRT and
RJRN each believe that they have a number of valid defenses to any such
actions and intend to defend vigorously all such actions in which they are
named defendants.
RJRN Holdings and RJRN believe that 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.
-----------
ENVIRONMENTAL MATTERS
The U.S. Government and various state and local governments have
enacted or adopted laws and regulations concerning protection of the
environment. The regulations promulgated by the Environmental Protection Agency
and other governmental agencies under various statutes have resulted in, and
will likely
9
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 -- CONTINGENCIES -- (CONTINUED)
continue to result in, substantial expenditures for pollution
control, waste treatment, plant modification and similar activities.
RJRN Holdings' and RJRN's subsidiaries have been engaged in a
continuing program to assure compliance with U.S., state and local laws and
regulations. Although it is difficult to identify precisely the portion of
capital expenditures or other costs attributable to compliance with
environmental laws and to estimate the cost of resolving these CERCLA matters,
RJRN Holdings and RJRN do not expect such expenditures or other costs to have a
material adverse effect on the business or financial condition of RJRN Holdings
and RJRN and their subsidiaries taken as a whole.
-----------
10
<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
ENDED
MARCH 31,
----------------------------------------
1997 1996 % CHANGE
---- ---- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
NET SALES:
RJRT.......................................... $ 1,076 $ 1,057 2%
Reynolds International........................ 798 839 (5)
---------- --------
Total Tobacco............................... 1,874 1,896 (1)
---------- --------
Nabisco Biscuit............................... 801 871 (8)
U.S. Foods Group.............................. 527 563 (6)
---------- --------
Domestic Food Group........................... 1,328 1,434 (7)
International Food Group...................... 577 556 4
---------- --------
Total Food.................................. 1,905 1,990 (4)
---------- --------
$ 3,779 $ 3,886 (3)
========== ========
OPERATING COMPANY CONTRIBUTION(1):
RJRT.......................................... $ 380 $ 380 --%
Reynolds International........................ 195 197 (1)
---------- --------
Total Tobacco............................... 575 577 --
---------- --------
Nabisco Biscuit............................... 134 125 7
U.S. Foods Group.............................. 65 63 3
---------- --------
Domestic Food Group........................... 199 188 6
International Food Group...................... 54 50 8
---------- --------
Total Food.................................. 253 238 6
---------- --------
Headquarters.................................. (17) (17) --
---------- --------
$ 811 $ 798 2
========== ========
OPERATING INCOME:
RJRT.......................................... $ 289 $ 289 --%
Reynolds International........................ 185 187 (1)
---------- --------
Total Tobacco............................... 474 476 --
---------- --------
Domestic Food Group........................... 148 137 8
International Food Group...................... 48 44 9
---------- --------
Total Food.................................. 196 181 8
---------- --------
Headquarters.................................. (17) (17) --
---------- --------
$ 653 $ 640 2
========== =========
</TABLE>
- ------------
(1) Operating company contribution represents operating income before
amortization of trademarks and goodwill.
TOBACCO
The tobacco line of business is conducted by RJRT and R.J. Reynolds
International ("Reynolds International").
11
<PAGE>
RJRT's net sales for the first quarter of 1997 was $1.1 billion, an
increase of $19 million or 2% over the comparable period in 1996. The increase
is primarily attributable to pricing ($62 million), partially offset by lower
overall volume ($51 million). Volume of 26.7 billion units decreased by 1.4
billion units or 5% from 1996 with full price volume decreasing 4% and savings
brand volume decreasing 6%. Volume for the quarter was impacted by one less
shipping day.
Industry volume decreased approximately 3% and continued its shift
toward full price brands which increased to 72% from 71%. RJRT's overall market
share decreased to 25.56% in the 1997 March quarter from 26.46% for 1996. The
company's full price volume as a percentage of total volume increased to 63% for
the quarter compared to 62% for 1996. Savings brands comprised 37% and 38% of
total volume for the respective periods.
By brand, Camel's volume increased 8% led by its Red Kamel line
extension and the introduction of Camel Menthol. Doral strengthened its
position as the industry's leading savings brand with a 3% volume gain.
Offsetting these increases were declines in Winston, Salem and low margin
savings brands. The company continues its program of ceding market share of
low margin brands. RJRT continues to study Eclipse, a cigarette featuring 90%
reduced second-hand smoke, along with the Moonlight Tobacco Company brands
that feature innovative packaging and product concepts. Additionally, RJRT is
test marketing a repositioning of Winston in Florida emphasizing a no
additive blend using the "No Bull" theme.
RJRT's operating contribution of $380 million for the quarter was even
with 1996, despite lower volume, primarily due to pricing and operating
efficiencies. Operating income was $289 million, also flat with 1996.
On March 25, 1997, RJRT followed the industry as Philip Morris
announced a $2.50 per thousand price increase effective with shipments on March
24th. It is higher than the previously announced increase of $2.00 per thousand
or 4% average price increase, which RJRT lead on March 6, 1997.
Reynolds International's net sales decreased 5% to $798 million for the
March quarter, primarily due to volume ($67 million) and foreign currency
translation ($31 million), partly offset by pricing ($58 million). Overall
volume of 41.5 billion units decreased 11% from 1996 primarily due to volume
shortfalls in the former Soviet Union. Excluding the former Soviet Union, volume
increased 2% over 1996. The volume decrease in the former Soviet Union resulted
from uncertainty surrounding the government tax policies that forced importers
to delay purchases of higher margin products. The company expects volume to
return to normal levels as the tax issues have been resolved. In other regions,
volume in Asia increased 6% primarily in Japan where volume increased 38%.
Reynolds International continues to be the fastest-growing international tobacco
company in Japan. Volume in Central Europe increased 36% due to strong
performance in Turkey and Romania. Offsetting these increases were declines in
Western Europe, particularly Spain and France, related to recent excise tax
increases.
By brand, the Camel family continues to perform strongly worldwide,
fueled by several line extensions. Camel Medium, introduced in Holland, Belgium
and Germany, is receiving favorable response. Plans are to roll out the product
in other markets through 1997. Camel Lights, introduced in late 1996, continues
to perform well in all its markets. Winston reported solid growth in Greece,
Turkey, the Adriatic region and Japan. New Winston Lights and super-lights were
launched in Switzerland in March as part of the company's plans to expand
participation of its largest-selling international brand in the growing
worldwide lights segment. Salem continues its strong performance across Asia led
by the continued success of Salem Pianissimo in Japan, which drove Salem's
volume more than 20% higher.
Operating company contribution of $195 million decreased 1% from 1996,
primarily driven by the volume declines and unfavorable foreign currency,
partially offset by pricing. Operating income decreased
12
<PAGE>
1% to $185 million as a result of the decrease in operating company
contribution. Reynolds International has commenced a European distribution
rationalization program to improve productivity and reduce costs that will
not have a material impact on the financial statements. The program includes
inventory realignment as well as the sale and closure of certain facilities.
GOVERNMENTAL ACTIVITY
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 have been filed in the same
court by manufacturers of smokeless tobacco products, by operators of retail
stores and by advertising interests. On April 26, 1997, the court ruled on a
motion for summary judgment, that based on the facts alleged by the FDA, that
agency was not barred from asserting jurisdiction over tobacco but lacked
authority to issue certain of the regulations bearing on marketing and
advertising. The court immediately certified its decision for appeal to the
Fourth Circuit court of appeals and stayed the effectiveness of that portion of
the regulations which had not yet been implemented pending appeal or further
court action. RJRT is unable to predict the ultimate outcome of this litigation
seeking to find the FDA's regulations to be unlawful. If the full regulations do
go into effect, they could be expected to have an adverse effect on cigarette
sales and RJRT.
RJRT understands that the U.S. Federal Trade Commission is considering
filing a complaint against RJRT based on allegations regarding a purported
connection between "Joe Camel" and youth smoking decisions.
In March 1994, the U.S. Occupational Safety and Health Administration
("OSHA") announced proposed regulations that would restrict smoking in the
workplace to designated smoking rooms that are separately exhausted to the
outside. Although RJRT cannot predict the form or timing of any regulations that
may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT
expects that many employers who have not already done so would prohibit smoking
in the workplace rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. RJRT submitted comments on the proposed
regulations during the comment period which closed in February 1996. Because
many employers currently do not permit smoking in the workplace, RJRT cannot
predict the effect of any regulations that may be adopted, but incremental
restrictions on smokers could have an adverse effect on cigarette sales and
RJRT.
In July 1996, Massachusetts enacted legislation that would require
manufacturers of tobacco products sold in Massachusetts to report yearly,
beginning in 1997, the ingredients of each brand sold. RJRT believes that the
disclosure of trade secrets required by this law could damage the competitive
position of its brands. The statute requires the reporting of nicotine yield
ratings in accordance with procedures to be established. Together
13
<PAGE>
with other cigarette manufacturers, RJRT has filed suit in the U.S. District
Court for the District of Massachusetts seeking to have the statute declared
null and void and to restrain Massachusetts officials from enforcing it. A
similar suit has been filed by manufacturers of smokeless tobacco products.
The Massachusetts district court denied the manufacturers' motion for summary
judgment based on preemption grounds, but certified the case for appeal of
this issue to the First Circuit which will hear oral argument in June 1997.
RJRT is unable to predict the outcome of this litigation.
A number of foreign countries have also taken steps to discourage
cigarette smoking, to restrict or prohibit cigarette advertising and
promotion and to increase taxes on cigarettes. Such restrictions are, in some
cases, more onerous than restrictions imposed in the United States. In June
1988, Canada enacted a ban on cigarette advertising, which was struck down on
grounds of constitutionality by the Supreme Court of Canada in 1995. A new
law of similar impact was recently enacted by the Canadian parliament and
became effective immediately. It is being challenged as to constitutionality
in a Toronto court.
Senators Kennedy and Hatch have introduced legislation into the U.S.
Congress expanding Medicaid/Medicare coverage of children. The bill includes
an increase of $.43 per pack of cigarettes to finance the expanded coverage
and to reduce the federal budget deficit. 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 line of business is conducted through the operating
subsidiaries of Nabisco Holdings Corp. ("Nabisco Holdings"). Nabisco Holdings'
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 Holdings' businesses outside the United
States are conducted by Nabisco Ltd and Nabisco International, Inc.
(collectively, the "International Food Group").
Nabisco Holdings reported net sales of $1.91 billion in the first
quarter of 1997, a decrease of 4% from the first quarter 1996 level of $1.99
billion, with the Domestic Food Group down 7% and the International Food
Group up 4%. Within the Domestic Food Group, Nabisco Biscuit sales declined
8%, principally due to the impact of reorganizing the sales force and volume
declines caused by three fewer selling days in the 1997 first quarter versus
the 1996 first quarter. The U.S. Foods Group net sales decline of 6% was
attributable to lower sales volume for tablespreads and condiments, partially
offset by higher sales volume for nuts, candy and gum. The International Food
Group's sales increase was primarily driven by business acquisitions during
the second half of 1996, and improved results in Argentina, Mexico and
Iberia, mainly due to volume gains. Partially offsetting these gains were
volume declines in Brazil, due to a change in trade practices which reduced
distributor purchases, and South Africa.
Nabisco Holdings' operating company contribution was $253 million in
the first quarter of 1997, an increase of 6% from the first quarter 1996
level of $238 million, with the Domestic Food Group up 6% and the
International Food Group up 8%. The Domestic Food Group's operating company
contribution increase for the first quarter of 1997 was primarily due to
improved operating results at Nabisco Biscuit, resulting largely from
restructuring driven margin improvements. The U.S. Food Group's increase in
operating company contribution was primarily attributable to restructuring
efficiencies. The International Food Group's increase in operating company
contribution for the first quarter of 1997 was principally due to the
14
<PAGE>
1996 business acquisitions, the profit impact of increased sales volumes in
Argentina, Mexico and Iberia, and productivity initiatives in Canada.
Nabisco Holdings' operating income was $196 million in the first
quarter of 1997, an increase of 8% from the first quarter of 1996 level of $181
million, as a result of the increase in operating company contribution discussed
above.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from operating activities resulted in an outflow of $171
million in 1997, a decrease of $301 million compared to net cash flows provided
from operating activities in 1996 of $130 million. The decrease in net cash
flows from operating activities primarily reflects higher inventory levels,
restructuring and restructuring related payments and income tax payments.
Free cash flow, another measure used by management to evaluate
liquidity and financial condition, is essentially net cash flow from operating
activities and investing activities per the Consolidated Statement of Cash
Flows, adjusted for acquisitions and divestitures of businesses, less preferred
dividends. It represents cash available for the repayment of debt and certain
other corporate purposes such as common stock dividends, stock repurchases and
acquisitions. Free cash flow resulted in an outflow of $305 million in 1997 and
an outflow of $16 million in 1996. The higher outflow of free cash flow in 1997
primarily reflects the higher inventory levels, restructuring and restructuring
related payments and income tax payments discussed above, which more than offset
the impact from lower capital expenditures.
Management of RJRN Holdings and its subsidiaries are continuing to
review various strategic transactions, including but not limited to,
acquisitions, divestitures, mergers and joint ventures. No assurance may be
given that any such transactions will be announced or completed.
Capital expenditures were $131 million for the first three months of
1997. Management expects that the current level of capital expenditures
planned for 1997 to be in the range of approximately $800 million to $850
million (approximately 53% Food and 47% Tobacco), which will be funded
primarily by cash flows from operating activities. The current planned level
of capital expenditures for 1997 is higher than the 1996 amount of $741
million primarily due to the increased capital investments for Reynolds
International (notably in the former Soviet Union). Management also expects
its capital expenditures program will continue at a level sufficient to
support the strategic and operating needs of RJRN Holdings' operating
subsidiaries.
----------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements which reflect management's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including, but not limited to, the effect on
financial performance and future events of competitive pricing for products,
success of new product innovations and acquisitions, local economic conditions
and the effects of currency fluctuations in countries in which RJRN Holdings and
its subsidiaries do business, the effects of domestic and foreign government
regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in
the case of the tobacco business, litigation. Due to such uncertainties and
risks, readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof.
---------------
15
<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 first quarter of 1997, 102 new actions were filed or served against
RJRT and/or its affiliates or indemnitees and 58 such actions were dismissed or
otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without
trial. There have been noteworthy increases in the number of these cases
pending. On March 31, 1997 there were 278 active cases pending, as compared with
168 on March 31, 1996 and only 61 on May 1, 1995. As of May 8, 1997, 295 active
cases were pending against RJRT and/or its affiliates or indemnitees, 292 in the
United States, one in Canada and two in Puerto Rico.
The United States cases are in 33 states and are distributed as
follows: 119 in Florida, 52 in Texas, 29 in New York, 14 in Louisiana, nine in
California, seven in Alabama, six in each of Mississippi and New Jersey, five in
Indiana, four in each of Kansas, Pennsylvania and Tennessee, three in each of
Massachusetts, Michigan, Minnesota and Ohio, two in each of Colorado, Hawaii,
Maryland and West Virginia, and, one in each of Arizona, Arkansas, Connecticut,
District of Columbia, Illinois, Iowa, Nevada, New Hampshire, New Mexico,
Oklahoma, Utah, Washington and Wisconsin. Of the 292 active cases in the United
States, 194 are pending in state court and 98 in federal court. Most of these
cases are brought by individual plaintiffs, but an increasing number seek
recovery on behalf of states or large classes of claimants.
For additional information about tobacco-related litigation and
legal proceedings, see Note 3-- Contingencies -- Tobacco Litigation of Notes
to Consolidated Condensed Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Tobacco
- -Governmental Activity."
---------------
Litigation is subject to many uncertainties and it is possible that
some of the tobacco-related legal actions, proceedings or claims could be
decided against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or
its affiliates or indemnitees and could encourage an increase in the number
of such claims. There have been a number of political, legislative,
regulatory and other developments relating to the tobacco industry and
cigarette smoking that have received wide media attention, including the
recent Liggett settlements of certain health care recovery actions and a
purported nationwide smoking and health class action, and a decision by a
federal district court on a motion for summary judgement to uphold the FDA's
regulation of cigarettes as "drugs" or "medical devices." These
developments, as well as the widespread media attention given to the
legislative discussions referred to above, may negatively affect the outcomes
of tobacco-related legal actions and the continuation or termination of such
discussions may encourage the commencement of additional similar litigation.
Although it is impossible to predict the outcome of such events on
pending litigation and the rate at which new lawsuits are filed against RJRT
and RJRN, a significant increase in litigation and/or in adverse outcomes for
tobacco defendants could have an adverse effect on RJRT and RJRN. RJRT and
RJRN each believe that they have a number of valid defenses to any such
actions and intend to defend vigorously all such actions in which they are
named defendants.
RJRN Holdings and RJRN believe that 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.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The matters indicated below were voted upon at the annual meeting of
stockholders of RJRN Holdings held on April 16, 1997. Holders of Common Stock,
Series C Conversion Preferred Stock and ESOP Convertible Preferred Stock were
entitled to vote upon the proposals to elect directors, ratify the appointment
of auditors and to vote on nine stockholder proposals. At the meeting, they were
entitled to vote 238,524,783 shares of Common Stock, 21,000,251 shares of Series
C Conversion Preferred Stock and 14,428,136 shares of ESOP Convertible Preferred
Stock.
(a) Election of Nine Directors.
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
John T. Chain. Jr. 238,837,722 3,987,606
Julius L. Chambers 238,871,618 3,953,710
John L. Clendenin 238,807,115 4,018,213
Steven F. Goldstone 238,907,800 3,917,528
Ray J. Groves 238,901,375 3,923,953
L. Dennis Kozlowksi 238,885,908 3,939,420
H. Eugene Lockhart 238,830,788 3,994,540
John G. Medlin, Jr. 238,799,740 4,025,588
Rozanne L. Ridgway 238,800,967 4,024,361
(b) Ratification of Appointment of Deloitte & Touche LLP as Independent
Auditors.
For: 241,207,229
Against: 962,835
Abstain: 655,264
(c) Amendment and Restatement of the RJR Nabisco Holdings Corp. 1990 Long
Term Incentive Plan.
For: 191,788,918
Against: 8,771,739
Abstain: 1,674,166
(d) Stockholder Proposal on Testing Cigarette Additives.
For: 6,758,037
Against: 184,183,548
Abstain: 11,293,238
(e) Stockholder Proposal on Maternal Smoking.
For: 8,513,069
Against: 175,517,523
Abstain: 18,204,231
17
<PAGE>
(f) Stockholder Proposal on U.S. Youth Smoking Programs in Developing
Countries.
For: 12,959,870
Against: 184,302,962
Abstain: 4,971,991
(g) Stockholder Proposal on Removing Benzo(a)pyrene from Tobacco Products.
For: 6,451,827
Against: 187,954,899
Abstain: 7,828,097
(h) Stockholder Proposal on Camel Advertising.
For: 12,476,109
Against: 183,470,888
Abstain: 6,287,826
(i) Stockholder Proposal on Voluntary Adoption of FDA Regulations.
For: 15,945,545
Against: 180,601,329
Abstain: 5,687,949
(j) Stockholder Proposal to "Accomplish a Separation of the Corporation's
Non-Tobacco Business from all its Tobacco Businesses No Later than
January 1, 1998".
For: 13,615,583
Against: 184,153,315
Abstain: 4,465,925
(k) Stockholder Proposal on Equal Employment Opportunity Reporting.
For: 11,801,449
Against: 174,217,148
Abstain: 16,216,226
18
<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 Non-qualified Stock Option Agreement dated January 10, 1997
between RJR Nabisco Holdings Corp. and Steven F. Goldstone.
*10.2 Form of Performance Appreciation Right Agreement between RJR
Nabisco Holdings Corp. and the grantee named therein.
*10.3 Restricted Stock Unit Agreement dated March 24, 1997 between
RJR Nabisco Holdings Corp. and David B. Rickard.
*12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed
Charges for the three months ended March 31, 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
None
19
<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: May 13, 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
20
<PAGE>
Exhibit 10.1
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
STOCK OPTION AGREEMENT
___________________________
DATE OF GRANT: January 10, 1997
W I T N E S S E T H :
1. GRANT OF OPTION. Pursuant to the provisions of the 1990 Long Term
Incentive Plan (the "Plan"), RJR Nabisco Holdings Corp. (the "Company") on the
above date has granted to
STEVEN F. GOLDSTONE (THE "OPTIONEE"),
subject to the terms and conditions which follow and the terms and conditions of
the Plan, the right and option to exercise from the Company a total of
460,000 SHARES
of Common Stock of the Company, at the exercise price of $32.25 per share (the
"Option"). A copy of the Plan is attached and made a part of this agreement
with the same effect as if set forth in the agreement itself. All capitalized
terms used herein shall have the meaning set forth in the Plan, unless the
context requires a different meaning.
2. EXERCISE OF OPTION.
(a) Shares may be purchased by giving the Corporate Secretary of the
Company written notice of exercise, on a form prescribed by the Company,
specifying the number of shares to be purchased. The notice of exercise shall
be accompanied by
(i) tender to the Company of cash for the full purchase price of the
shares with respect to which such Option or portion thereof is
exercised; OR
(ii) the unsecured, demand borrowing by the Optionee from the Company
on an open account maintained solely for this purpose in the
amount of the full exercise price together with the instruction
from the Optionee to sell the shares exercised on the open market
through a duly registered broker-dealer with which the Company
makes an arrangement for the sale of such
<PAGE>
shares under the Plan. This method is known as the "broker-dealer
exercise method" and is subject to the terms and conditions set forth
herein, in the Plan and in guidelines established by the Committee.
The Option shall be deemed to be exercised simultaneously with the
sale of the shares by the broker-dealer. If the shares purchased upon
the exercise of an Option or a portion thereof cannot be sold for a
price equal to or greater than the full exercise price plus direct
costs of the sales, then there is no exercise of the Option. Election
of this method authorizes the Company to deliver shares to the
broker-dealer and authorizes the broker-dealer to sell said shares on
the open market. The broker-dealer will remit proceeds of the sale to
the Company which will remit net proceeds to the Optionee after
repayment of the borrowing, deduction of costs, if any, and
withholding of taxes. The Optionee's borrowing from the Company on an
open account shall be a personal obligation of the Optionee which
shall bear interest at the published Applicable Federal Rate (AFR) for
short-term loans and shall be payable upon demand by the Company.
Such borrowing may be authorized by telephone or other
telecommunications acceptable to the Company. Upon such borrowing and
the exercise of the Option or portion thereof, title to the shares
shall pass to the Optionee whose election hereunder shall constitute
instruction to the Company to register the shares in the name of the
broker-dealer or its nominee. The Company reserves the right to
discontinue this broker-dealer exercise method at any time for any
reason whatsoever. The Optionee agrees that if this broker-dealer
exercise method under this paragraph is used, the Optionee promises
unconditionally to pay the Company the full balance in his open
account at any time upon demand. Optionee also agrees to pay interest
on the account balance at the AFR for short-term loans from and after
demand.
(b) This Option shall be exercisable in three installments. The first
installment shall be exercisable on the first anniversary following the Date of
Grant for 33% of the number of shares of Common Stock subject to this Option.
Thereafter, on each subsequent anniversary date an installment shall become
exercisable for 33% and 34%, respectively, of the number of shares subject to
this Option until the Option has become fully exercisable. To the extent that
any of the above installments is not exercised when it becomes exercisable, it
shall not expire, but shall continue to be exercisable at any time thereafter
until this Option shall terminate, expire or be surrendered. An exercise shall
be for whole shares only.
3. TERMINATION OF EMPLOYMENT
(a) The Option shall become exercisable as to all remaining shares
following the Termination of Employment of the Optionee for any reason, other
than a Termination of Employment by the Optionee voluntarily without "Good
Reason" or by the Company for "Cause" (each as defined in the Optionee's
employment agreement).
2
<PAGE>
(b) "Termination of Employment" as used herein means termination from
active employment; it does not mean termination of payment of severance or
benefits at the end of salary continuation or other form of severance or pay in
lieu of salary.
4. EXPIRATION OF OPTION. The Option shall expire or terminate and may not
be exercised to any extent by the Optionee after the first to occur of the
following events:
(a) The tenth anniversary of the Date of Grant, or such earlier time as
the Company may determine is necessary or appropriate in light of applicable
foreign tax laws; or
(b) Immediately upon the Optionee's Termination of Employment for Cause
(as defined in the Optionee's employment agreement).
5. TRANSFERABILITY. Other than as specifically provided with regard to
the death of the Optionee, this Option agreement and any benefit provided or
accruing hereunder shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any
attempt to do so shall be void. No such benefit shall, prior to receipt thereof
by the Optionee, be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the Optionee.
6. NO RIGHT TO EMPLOYMENT. Neither the execution and delivery of this
agreement nor the granting of the Option evidenced by this agreement shall
constitute or be evidence of any agreement or understanding, express or implied,
on the part of the Company or its subsidiaries to employ the Optionee for any
specific period or shall prevent the Company or its subsidiaries from
terminating the Optionee's employment at any time with or without "Cause" (as
defined in Section 11 herein).
7. ADJUSTMENTS IN OPTION. In the event that the outstanding shares of
the Common Stock subject to the Option are, from time to time, changed into or
exchanged for a different number or kind of shares of the Company or other
securities by reason of a merger, consolidation, recapitalization,
reclassification, stock split, stock dividend, spinoff, combination of shares,
or otherwise, the Committee shall make an appropriate and equitable adjustment
in the number and kind of shares or other consideration as to which the Option,
or portions thereof then unexercised, shall be exercisable. Any adjustment made
by the Committee shall be final and binding upon the Optionee, the Company and
all other interested persons.
8. APPLICATION OF LAWS. The granting and the exercise of this Option and
the obligations of the Company to sell and deliver shares hereunder and to remit
cash under the broker-dealer exercise method shall be subject to all applicable
laws, rules, and regulations and to such approvals of any governmental agencies
as may be required.
9. TAXES. Any taxes required by federal, state, or local laws to be
withheld by the Company on exercise by the Optionee of the Option for Common
Stock shall be paid to the Company before delivery of the Common Stock is made
to the Optionee. When the Option is exercised under the broker-dealer exercise
method, the full amount of any taxes
3
<PAGE>
required to be withheld by the Company on exercise of stock options shall be
deducted by the Company from the proceeds.
10. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013, and any notice required to be given
hereunder to the Optionee shall be sent to the Optionee's address as shown on
the records of the Company.
11. TERMINATION FOR "CAUSE." For purposes of this Agreement, the
Optionee's employment shall be deemed to have been terminated for "Cause" only
as such term is defined in the Optionee's employment or severance agreement.
Any voluntary termination by the Optionee in anticipation of an involuntary
termination of the Optionee's employment for Cause shall be deemed to be a
termination of Optionee's employment for Cause.
12. ADMINISTRATION AND INTERPRETATION. In consideration of the grant, the
Optionee specifically agrees that the Committee shall have the exclusive power
to interpret the Plan and this Agreement and to adopt such rules for the
administration, interpretation and application of the Plan and Agreement as are
consistent therewith and to interpret or revoke any such rules. All actions
taken and all interpretations and determinations made by the Committee shall be
final, conclusive, and binding upon the Optionee, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or the Agreement. The Committee may delegate its interpretive
authority to an officer or officers of the Company.
13. OBLIGATIONS OF OPTIONEE
(a) In consideration of the grant, the Optionee, while both actively
employed and in the event of Optionee's Termination of Employment for any
reason, specifically agrees that within the term of this grant or within three
years following the payment of any amounts pursuant to the grant, if later: (i)
the Optionee will personally provide reasonable assistance and cooperation to
the Company in activities related to the prosecution or defense of any pending
or future lawsuits or claims involving the Company; (ii) the Optionee will
promptly notify the Company upon receipt of any requests from anyone other than
an employee or agent of the Company for information regarding the Company, or if
the Optionee becomes aware of any potential claim or proposed litigation against
the Company; (iii) the Optionee will refrain from providing any information
related to any claim or potential litigation against the Company to any
non-Company representatives without either the Company's written permission or
being required to provide information pursuant to legal process; (iv) the
Optionee will not disclose or misuse any confidential information or material
concerning the Company; and (v) the Optionee will not engage in any activity
contrary or harmful to the interests of the Company. In further consideration of
the grant, the Optionee specifically agrees that if required by law to provide
sworn testimony regarding any Company-related matter: the Optionee will consult
with and have Company designated legal counsel present for such testimony (the
Company will be responsible for the costs of such designated counsel); the
4
<PAGE>
Optionee will confine his testimony to items about which he has knowledge rather
than speculation, unless otherwise directed by legal process; and the Optionee
will cooperate with the Company's attorneys to assist their efforts, especially
on matters the Optionee has been privy to, holding all privileged
attorney-client matters in strictest confidence.
(b) If the Company reasonably determines that the Optionee has
materially violated any of his obligations under this agreement, then this
Option shall terminate, effective the date on which such violation began (unless
otherwise terminated sooner) and the Company may demand the return of any gain
realized by the Optionee from the exercise of all or a portion of this Option
and the Optionee hereby agrees to return such amounts upon such demand. If
after such demand the Optionee fails to return said amounts, the Optionee
acknowledges that the Company has the right to deduct from any amounts the
Company owes to the Optionee (including, but not limited to, wages or other
compensation), or to commence judicial proceedings against the Optionee, to
recover said amounts and any and all of its attorney's fees and costs.
14. OTHER PROVISIONS.
a) Titles are provided herein for convenience only and are not to
serve as a basis for interpretation of the Agreement.
b) This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
c) In the event of a Change of Control, the Optionee shall receive
in cash in respect of the Option and in exchange for the cancellation of the
Option, the higher of (i) or (ii) where (i) is the excess, if any, of the Fair
Market Value over the exercise price of the Option, multiplied by the number of
Shares subject to the Option and (ii) is the value of the Option using the
Black-Scholes method of valuing the Option based on the following assumptions:
(A) Fair Market Value; (B) a term equal to the remaining life of the option; (C)
a risk-free factor equal to the average yield on term equal to the expected term
of the option, a dividend yield calculated by dividing the annual dividend by
the Fair Market Value, and volatility of 35.6% (the 4 1/2 year weighted average
volatility of the Shares).zero-coupon U.S. government issues, with a maturity
coincident with the expiration of the remaining term of the option, as reported
in the Wall Street Journal for the day the Change of Control is deemed to have
occurred; (D) a dividend yield equal to the weighted average annual dividend
yield of Holdings for the time period since March 1995, or the immediately
preceding 60 months, whichever time period is less; and (E) a volatility equal
to the weighted average volatility for the immediately preceding 60 months. The
volatility shall be calculated for each year (12-month periods counting back
from the month prior to that in which the Change in Control is deemed to have
occurred) by using the month-end closing prices plus dividends paid in that
month. The dividend yield shall be calculated for each year (12-month periods
counting back from the month prior to that in which the Change of Control is
deemed to have occurred) by dividing the total dividends (for which the
ex-dividend dates occur within that 12-month period) by the average month-end
closing prices during that 12 month period. The weighted average dividend yield
is calculated by applying a weighting factor to each annual yield where the
highest factor is the number that equals the number of full or partial years in
the time
5
<PAGE>
period and is applied to the annual yield of the most recent 12-month period,
the second highest factor (highest factor minus 1) is applied to the annual
yield of the second most recent 12-month period, the third highest factor
(highest factor minus2) is applied to the annual yield of the most recent
12-month period, and so forth, adding all of these products together and
dividing by a number that equals the sum of the weighting factors. The weighted
average volatility is calculated in the same manner as described for dividend
yield. Notwithstanding the foregoing, this Section 14(c) shall not apply in the
event of a Change of Control under Section 8(c)(iii) of the Plan for which
Holdings is using the "pooling of interest" method of accounting.
d) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Optionee have executed this Agreement as of the date of Grant first above
written.
RJR NABISCO HOLDINGS CORP.
By:
------------------------------------
Authorized Signatory
- --------------------------------
Optionee
Optionee's Taxpayer Identification Number:
- --------------------------------
Optionee's Home Address:
- --------------------------------
- --------------------------------
- --------------------------------
6
<PAGE>
Exhibit 10.2
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
PERFORMANCE APPRECIATION RIGHT AGREEMENT
DATE OF GRANT: JANUARY 9, 1997
1. GRANT. Pursuant to the RJR Nabisco Holdings Corp. 1990 Long Term
Incentive Plan (the "Plan"), RJR Nabisco Holdings Corp. ("RJRN Holdings") hereby
grants the following Performance Appreciation Rights ("Appreciation Rights") to
FIRST_NAME LAST_NAME
("you", or the "Grantee")
subject to the terms and conditions of the Plan and this Agreement (the
"Agreement"):
A) (RN) RJR Nabisco, Inc. ("RJRN") Appreciation Rights
B) (TO) R.J. Reynolds Tobacco Company ("RJRT") Appreciation
Rights
C) (RI) R.J. Reynolds International ("RJRI") Appreciation
Rights
D) (NAB) Nabisco Holdings Corp. ("Nabisco") Appreciation Rights
(TOTAL) Total
-------
2. DEFINITIONS. Capitalized terms have the meanings set forth in Exhibit
A to this Agreement or, if not defined therein, the Plan.
3. VALUATION.
(a) Each Appreciation Right represents the right to receive a cash payment
from RJRN Holdings in an amount (the "Payment Value") equal to the excess of the
Note Value for each type of Note at the time of exercise over its Initial Value.
Each of the RJRN, RJRT and RJRI Notes has an Initial Value of $32.00. Each
Nabisco Note has an Initial Value of $38.00. The Note Values are set
periodically pursuant to Section 3(b) below.
(b) As soon as practicable after the end of each year during the
Performance Period, the Committee will determine the Note Values as of December
31 of the
<PAGE>
preceding year for each type of Note using the Performance Measures and
Valuation Formulas set forth on Exhibit B to this Agreement. The Committee will
set Note Values only once each year, so the Note Values will remain unchanged
during the year. The Committee will provide a written notice (the "Valuation
Notice") setting forth the Note Values and the Payment Values for Appreciation
Rights promptly after the Committee completes each valuation.
(c) In general, the Payment Value for each type of Appreciation Right will
be based on the Note Value in effect at the time of exercise. However, Payment
Values for Appreciation Rights exercised within thirty (30) days of the date the
Committee makes its regular annual determination of new Note Values pursuant to
Section 3(b) above will be calculated using the higher of the Note Values in
effect for the year of exercise or the Note Values in effect for the immediately
preceding year.
(d) If a Change of Control occurs, the Payment Value of each Appreciation
Right will equal the greater of (i) the Payment Value of the Appreciation Right
as determined pursuant to Sections 3(b) and 3(c) above, and (ii) the excess of
the Closing Price of the Common Stock on the date of the Change of Control over
$32.00.
4. VESTING.
Subject to Section 5 below, 33% of each type of Appreciation Right will
vest on each of December 31, 1997 and 1998 and 34% will vest on December 31,
1999, provided in each case that you remain actively employed by a Company or
one of its subsidiaries through the date of vesting.
5. RIGHTS IN EVENT OF TERMINATION OF EMPLOYMENT.
(a) Unless otherwise provided in a written employment or termination
agreement between you and your Employer, no additional Appreciation Rights shall
vest following your Termination of Active Employment for any reason other than a
Termination of Active Employment because of death, Permanent Disability,
Retirement or your involuntary termination by your Employer without Cause.
(b) In the event of your Termination of Active Employment because of
death, Permanent Disability, Retirement or involuntary termination by your
Employer without Cause, your unvested Appreciation Rights will vest immediately,
but only in proportion to the ratio of (i) the number of partial or complete
months of employment since January 1, 1997 to (ii) 36.
(c) If your employment is terminated by your Employer without Cause within
two years after a Change of Control, all of your Appreciation Rights will vest
immediately.
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<PAGE>
(d) If your employment is terminated by your Employer for Cause, all of
your outstanding Appreciation Rights shall be cancelled and no longer
exercisable as of your Termination of Active Employment.
(e) You shall be deemed to have a "Permanent Disability" if you become
totally and permanently disabled (as defined in RJR Nabisco, Inc.'s Long Term
Disability Plan applicable to senior executive officers as in effect on the date
hereof), or if the Board of Directors or any committee thereof so determines.
(f) "Retirement" as used herein means retirement at age 65 or over, or
early retirement at age 55 or over with at least ten (10) years of service.
(g) "Termination of Active Employment" as used herein means termination
from active employment; it does not mean termination of payment or benefits at
the end of salary continuation or other form of severance or pay in lieu of
salary.
(h) If you have an employment or severance agreement, your employment
shall be deemed to have been terminated for "Cause" only as such term is defined
in your employment or severance agreement. If you do not have an employment or
severance agreement which defines the term "Cause", your employment shall be
deemed to have been terminated for "Cause" if the termination results from your
(a) criminal conduct, (b) deliberate continual refusal to perform employment
duties on substantially a full time basis, (c) deliberate and continual refusal
to act in accordance with any specific lawful instructions of an authorized
officer or employee more senior than you, or (d) deliberate misconduct which
could be materially damaging to your Employer or any of its business operations
without a reasonable good faith belief by you that such conduct was in the best
interests of your Employer. A termination of your employment shall not be
deemed for Cause hereunder unless the senior personnel executive of your
Employer shall confirm that any such termination is for Cause as defined
hereunder. Any voluntary termination by your in anticipation of an involuntary
termination of your employment for Cause shall be deemed to be a termination of
your employment for Cause.
6. EXERCISE.
(a) You may exercise your Appreciation Rights by giving a written notice
to RJRN Holdings in the manner prescribed by the Committee, which specifies the
type and number of Appreciation Rights being exercised. You must exercise all
of your vested Appreciation Rights for a Company unless you exercise at least
1,000 of its Appreciation Rights and, after the exercise, you still have at
least 1,000 vested Appreciation Rights in the Company
(b) If you do not exercise them earlier, Appreciation Rights that vest
pursuant to Sections 5(b) or 5(c) above will be deemed exercised as of the date
of the next regularly scheduled annual Valuation Notice. In the event of any
other Termination of Active Employment within the Performance Period, vested
Appreciation Rights will be deemed
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<PAGE>
exercised as soon as administratively practicable following such Termination of
Active Employment.
(c) If you do not exercise them earlier, outstanding vested Appreciation
Rights will be deemed exercised as of the last day of the Performance Period.
7. PAYMENT OF AWARDS.
Promptly after your election to exercise an Appreciation Right is processed,
RJRN Holdings will pay you, in cash, the amount of its Payment Value unless you
have elected to defer receipt of the Payment Value pursuant to the provisions of
the Plan or as otherwise provided by the Committee. However, RJRN Holdings may
limit the frequency of the payments to one settlement date each month.
8. ADJUSTMENTS
The Committee may make an appropriate and equitable adjustment in the
number and/or Values of any type of Appreciation Rights if it determines that
conditions warrant such adjustment. Such conditions may include, but are not
limited to, 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,
spinoff or other event. Any adjustment made by the Committee shall be final and
binding upon you, any Company and all other interested persons.
9. TAXES
Any taxes required by federal, state or local laws to be withheld by the
Company in respect of the grant or exercise of Appreciation Rights hereunder
shall be paid to the Company by you by the time such taxes are required to be
paid or deposited by the Company. You hereby authorize the necessary
withholding by the Company to satisfy such tax withholding obligations prior to
delivery of the Payment Value.
10. MISCELLANEOUS.
(a) The Committee has the power to interpret this Agreement and, together
with the officers of RJRN Holdings and its subsidiaries, complete discretion in
making determinations and taking action pursuant to the Agreement. All
interpretations, determinations and actions by the Committee and the officers
and employees to whom they delegate these responsibilities will be final,
conclusive and binding on all parties.
(b) This Agreement is subject to the Plan, a copy of which is attached.
The Board may amend the Plan and the Committee may amend this Agreement at any
time and in any way, except that any amendment of the Plan or this Agreement
that would impair your rights hereunder may not be made without your consent.
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<PAGE>
(c) This Agreement and the award to you of Appreciation Rights does not
give you any right to employment or limit the ability of RJRN Holdings and its
subsidiaries to terminate your employment at any time with or without cause.
(d) Except for the payments to your beneficiaries contemplated by the
Plan, you may not transfer, pledge or encumber any benefit hereunder. Except as
required by law, your creditors may not attach or seize any such benefit.
(e) Except to the extent that you receive different instructions from the
Companies, you should send notices concerning this Agreement and the
Appreciation Rights to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013. RJRN Holdings will send any notices to
your office or to your address as shown on the records of the Companies.
IN WITNESS WHEREOF, RJRN Holdings and the Grantee have executed this
Agreement as of the Date of Grant.
RJR NABISCO HOLDINGS CORP.
By:
-------------------------
Authorized Signatory
--------------------------
GRANTEE
Grantee's Taxpayer Identification Number:
--------------------------
Date:
-----------------------
Grantee's Home Address:
--------------------------
--------------------------
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<PAGE>
EXHIBIT A
DEFINITIONS
-----------
BOARD OF DIRECTORS. The Board of Directors of RJRN Holdings.
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.
COMMITTEE. The Compensation Committee of the Board of Directors.
COMMON STOCK. The Common Stock of RJRN Holdings.
COMPANIES. RJRN, RJRT, RJRI and Nabisco.
DATE OF GRANT. The date of this Agreement.
EMPLOYER. The Company (including any subsidiary) with which you are
employed.
INITIAL VALUE. The initial values assigned to the Notes as of January 1,
1997, as set forth in Section 3(a).
NOTES. The Performance Notes that RJRN (or Nabisco, in the case of
Nabisco Performance Notes) may issue to directors, officers and employees of
the Companies and their subsidiaries during the first 90 days of 1998
pursuant to its Annual Incentive Award Plan.
NOTE VALUE. The value of a Note as determined pursuant to Section 3(b).
PAYMENT VALUE. For any Appreciation Right, the excess of its Note Value
over its Initial Value.
PERFORMANCE MEASURES. The performance objectives for a Company that are
used in Valuation Formulas to determine Payment Values for the Company's
Notes.
PERFORMANCE PERIOD. January 1, 1997 through December 31, 2001.
VALUATION FORMULAS. The formulas used to value Notes as of December 31 in
each year in the Performance Period.
VALUATION NOTICE. The notice setting forth Note Values and Payment Values
described in Section 3(c).
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<PAGE>
Exhibit 10.3
1990 RJR NABISCO HOLDINGS CORP.
LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK PROGRAM
RESTRICTED STOCK UNIT AGREEMENT
_____________________________________
DATE OF GRANT: March 24, 1997
W I T N E S S E T H
1. GRANT OF RESTRICTED STOCK UNITS. Pursuant to the provisions of its 1990
Long-Term
Incentive Plan and the Restricted Stock Program (collectively, the "Plan"), RJR
Nabisco Holdings Corp. (the "Company") on the above date has granted to
DAVID B. RICKARD (THE "GRANTEE")
subject to the terms and conditions of the Plan and this agreement (the
"Agreement"), a total of
30,000 RESTRICTED STOCK UNITS
which entitle the Grantee to receive an amount in cash equal to the fair market
value of an equivalent number of shares of Common Stock of the Company ("Common
Stock") as of the Payment Date determined in Section 3.
A copy of the Plan is attached and made a part of this Agreement with the
same effect as if set forth in the Agreement itself. All capitalized terms used
below shall have the meaning set forth in the Plan, unless the context requires
a different meaning.
2. VESTING OF RESTRICTED STOCK UNITS. The Restricted Stock Units granted
hereunder shall vest on the earliest of:
(i) (a) March 24, 2000 for 10,000 shares;
(b) March 24, 2001 for 10,000 shares;
(c) March 24, 2002 for 10,000 shares;
(ii) the date of the Grantee's death;
(iii) the date of the Grantee's Disability, as defined in RJR Nabisco
Inc.'s Long Term Disability Plan;
<PAGE>
(iv) the date of the Grantee's retirement at the Normal Retirement
Date under the provisions of a retirement plan of the Company; or
(v) the date of a Change of Control.
In the event of the involuntary termination of the Grantee's employment
with the Company or a subsidiary without Cause, the Grantee will be vested in a
number of Restricted Stock Units which is equal to the product of (i) the total
number of Restricted Stock Units granted to the Grantee pursuant to this
Agreement and (ii) a fraction, the numerator of which is number of whole or
partial months between the Date of Grant and the Grantee's Separation Date (as
defined in Section 4) and the denominator of which is 60.
3. PAYMENT OF RESTRICTED STOCK UNITS. Unless the Grantee has elected to
defer receipt of payment in accordance with Section 6, the Grantee will receive
a payment in cash in respect of Restricted Stock Units granted to him based upon
the closing price of Common Stock on the date of vesting (the "Payment Date").
The payment shall be made as soon as practicable following vesting of such
Restricted Stock Units. If the Grantee has elected to defer receipt of such
payment in accordance with Section 6, the Payment Date will be the last day of
the deferral period and payment will be made as soon as practicable thereafter.
4. FORFEITURE OF RESTRICTED STOCK UNITS. Except as otherwise provided in
Section 3 and in this Section 4, Restricted Stock Units that are not vested as
of the Grantee's Separation Date shall be cancelled, and the Grantee shall
forfeit all right, title and interest in and to such Restricted Stock Units
along with the right to any dividend equivalents paid thereon pursuant to
Section 5. "Separation Date" means termination from active employment; it does
not mean the termination of pay and benefits at the end of a period of salary
continuation (or other form of severance pay or pay in lieu of salary).
5. DIVIDEND EQUIVALENT PAYMENTS. At all times prior to the Payment Date,
the Grantee shall receive cash payments at the same time and in the same amount
as any cash dividends paid on an equivalent number of shares of Common Stock.
6. DEFERRAL. The Grantee may elect to defer payment of vested Restricted
Stock Units in accordance with procedures established by the Committee;
provided, that the Grantee may not defer payment in respect of Restricted Stock
Units that vest in connection with the Grantee's termination of employment for
any reason and further, provided, that in no event may the period of deferral
extend beyond January of the year following the Grantee's termination of
employment for any reason. Deferred Restricted Stock Units will continue to
have a value based on the fair market value of an equivalent number of shares of
Common Stock.
7. NO RIGHT TO EMPLOYMENT. The execution and delivery of this Agreement and
the granting of Restricted Stock Units hereunder shall not constitute or be
evidence of any agreement or understanding, express or implied, on the part of
the Company or its subsidiaries to employ the Grantee for any specific period or
in any particular capacity and shall not prevent the Company or its subsidiaries
from terminating the Grantee's employment at any time with or without Cause.
2
<PAGE>
8. TRANSFERABILITY. Other than as specifically provided in the Plan with
regard to the death of the Grantee, this Agreement and any benefit provided or
accruing hereunder shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any
attempt to do so shall be void. No such benefit shall, prior to receipt thereof
by the Grantee, be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the Grantee.
9. CHANGE IN COMMON STOCK OR CORPORATE STRUCTURE.
a) If at any time the number or nature of outstanding shares of Common
Stock of the Company shall be increased or changed as the result of any stock
dividend, subdivision or reclassification of shares, the number or nature of
Restricted Stock Units subject to this Agreement after such an event shall be
increased or changed in the same proportion or manner as the outstanding shares
of Common Stock are increased or changed, or if the number of outstanding shares
of Common Stock shall at any time be decreased as the result of any combination
or reclassification of shares, the number of Restricted Stock Units subject to
this Agreement after such an event shall be decreased in the same proportion as
the outstanding number of shares of Common Stock is decreased.
b) In the event the Company shall at any time be consolidated with or
merged into any other corporation and holders of the Company's Common Stock
receive common shares of the resulting or surviving corporation, there shall be
an adjustment to the Restricted Stock Units subject to this Agreement after such
an event, and in place of the Restricted Stock Units so subject, a stock
equivalent shall be determined by multiplying the number of common shares of
stock delivered in exchange for a share of Common Stock upon such consolidation
or merger, by the number of Restricted Stock Units subject to this Agreement.
If in such a consolidation or merger, holders of the Company's Common Stock
shall receive any consideration other than common shares of the resulting or
surviving corporation, the Committee shall determine the appropriate adjustment
to shares held pursuant to this Agreement after such an event; provided,
however, such adjustment shall not be to the detriment of the Grantee.
10. TAXES. Any taxes required by federal, state or local laws to be
withheld by the Company on the Grant of Restricted Stock Units or any other
payment or event hereunder shall be paid to the Company by the Grantee by the
time such taxes are required to be paid or deposited by the Company. The
Grantee hereby authorizes the Company to withhold or offset a sufficient amount
from any payment hereunder to satisfy any such tax withholding obligations.
11. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013, and any notice required to be given
hereunder to the Grantee shall be sent to the Grantee's address as shown on the
records of the Company.
12. GRANTEE. In consideration of the grant, the Grantee specifically agrees
that the Committee shall have the exclusive power to interpret the Plan and this
Agreement and to adopt
3
<PAGE>
such rules for the administration, interpretation and application of the Plan
and Agreement as are consistent therewith and to interpret or revoke any such
rules. All actions taken and all interpretation and determinations made by the
Committee shall be final, conclusive, and binding upon the Grantee, the Company
and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or the Agreement. The Committee may delegate its
interpretive authority to an officer or officers of the Company.
13. OTHER PROVISIONS.
a) Titles are provided herein for convenience only and are not to
serve as a basis for interpretation of the Agreement.
b) The Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Grantee have executed this Agreement as of the Date of Grant first above
written.
RJR NABISCO, INC.
By:
----------------------------
Authorized Signatory
- -----------------------------
Grantee
Grantee's Taxpayer Identification Number:
- -----------------------------------
Grantee's Home Address:
- -----------------------------------
- -----------------------------------
4
<PAGE>
EXHIBIT 12.1
RJR NABISCO, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
Earnings before fixed charges:
Income before income taxes.................................... $ 414
Less minority interest in pre-tax income of Nabisco Holdings.. 21
-------
Adjusted income before income taxes........................... 393
Interest and debt expense..................................... 209
Interest portion of rental expense............................ 14
-------
Earnings before fixed charges.................................... $ 616
=======
Fixed charges:
Interest and debt expense..................................... $ 209
Interest portion of rental expense............................ 14
Capitalized interest.......................................... 2
-------
Total fixed charges......................................... $ 225
=======
Ratio of earnings to fixed charges............................... 2.7
=======
<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 NABSICO HOLDINGS CORP.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 218
<SECURITIES> 0
<RECEIVABLES> 1,428
<ALLOWANCES> 0
<INVENTORY> 2,831
<CURRENT-ASSETS> 4,949
<PP&E> 8,817
<DEPRECIATION> (3,050)
<TOTAL-ASSETS> 31,242
<CURRENT-LIABILITIES> 3,873
<BONDS> 9,653
957
531
<COMMON> 3
<OTHER-SE> 9,606
<TOTAL-LIABILITY-AND-EQUITY> 31,242
<SALES> 3,779
<TOTAL-REVENUES> 3,779
<CGS> 1,720
<TOTAL-COSTS> 1,720
<OTHER-EXPENSES> 158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> 392
<INCOME-TAX> 166
<INCOME-CONTINUING> 226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 213
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN'S
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> RJR NABISCO, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 218
<SECURITIES> 0
<RECEIVABLES> 1,426
<ALLOWANCES> 0
<INVENTORY> 2,831
<CURRENT-ASSETS> 4,947
<PP&E> 8,817
<DEPRECIATION> (3,050)
<TOTAL-ASSETS> 31,220
<CURRENT-LIABILITIES> 3,724
<BONDS> 9,653
0
0
<COMMON> 0
<OTHER-SE> 11,734
<TOTAL-LIABILITY-AND-EQUITY> 31,220
<SALES> 3,779
<TOTAL-REVENUES> 3,779
<CGS> 1,720
<TOTAL-COSTS> 1,720
<OTHER-EXPENSES> 158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> 414
<INCOME-TAX> 176
<INCOME-CONTINUING> 238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
