<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
---------------------
RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-10215 13-3490602
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<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.)
------------------------------
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: APRIL 30, 1998:
RJR NABISCO HOLDINGS CORP.: 324,823,528 SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE
RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER
SHARE
------------------------
RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three Months Ended March 31, 1998 and 1997........ 1
Consolidated Condensed Statements of Cash Flows--Three Months Ended March 31, 1998 and 1997.... 2
Consolidated Condensed Balance Sheets--March 31, 1998 and December 31, 1997.................... 3
Notes to Consolidated Condensed Financial Statements........................................... 4-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 13-18
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 19-20
Item 6. Exhibits and Reports on Form 8-K............................................................... 21
Signatures................................................................................................ 22
</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, 1998 MARCH 31, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- ----------- --------- -----------
NET SALES*.......................................................... $ 3,947 $ 3,947 $ 3,779 $ 3,779
--------- ----------- --------- -----------
Costs and expenses *
Cost of products sold............................................. 1,787 1,787 1,720 1,720
Selling, advertising, administrative and general expenses......... 1,391 1,392 1,248 1,249
Tobacco settlement expense (note 4)............................... 349 349 -- --
Amortization of trademarks and goodwill........................... 158 158 158 158
--------- ----------- --------- -----------
OPERATING INCOME................................................ 262 261 653 652
Interest and debt expense........................................... (221) (197) (232) (209)
Other income (expense), net......................................... (28) (28) (29) (29)
--------- ----------- --------- -----------
INCOME BEFORE INCOME TAXES...................................... 13 36 392 414
Provision for income taxes.......................................... 22 33 166 176
--------- ----------- --------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME OF NABISCO
HOLDINGS...................................................... (9) 3 226 238
Less minority interest in income of Nabisco Holdings................ 11 11 13 13
--------- ----------- --------- -----------
NET INCOME (LOSS)............................................... $ (20) $ (8) $ 213 $ 225
--------- ----------- --------- -----------
--------- ----------- --------- -----------
BASIC NET INCOME (LOSS) PER SHARE................................... $ (0.10) $ 0.62
DILUTED NET INCOME (LOSS) PER SHARE................................. $ (0.10) $ 0.62
DIVIDENDS PER SHARE:
Dividends per share of Series C preferred stock................... -- $ 1.503
Dividends per share of common stock............................... $ 0.5125 $ 0.5125
</TABLE>
- ------------------------
* Excludes excise taxes of $828 million and $852 million for the three months
ended March 31, 1998 and 1997, 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, 1998 MARCH 31, 1997
-------------------- ----------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)...................................................... $ (20) $ (8) $ 213 $ 225
--------- --------- ----- ---------
Adjustments to reconcile net income (loss) to net cash flows used in
operating activities:
Depreciation and amortization...................................... 284 284 293 293
Deferred income tax provision (benefit)............................ (17) (17) 11 11
Changes in working capital items, net.............................. (768) (737) (597) (551)
Tobacco settlement expense, net of cash payments................... 302 302 -- --
Restructuring and restructuring related payments................... (91) (91) (81) (81)
Other, net......................................................... 26 26 (10) (12)
--------- --------- ----- ---------
Total adjustments................................................ (264) (233) (384) (340)
--------- --------- ----- ---------
Net cash flows used in operating activities.......................... (284) (241) (171) (115)
--------- --------- ----- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures................................................... (136) (136) (131) (131)
Disposition of businesses and certain assets........................... 6 6 36 36
Repurchases of Nabisco Holdings' Class A common stock.................. (26) (26) -- --
Proceeds from exercise of Nabisco Holdings' Class A common stock
options.............................................................. 15 15 -- --
--------- --------- ----- ---------
Net cash flows used in investing activities.......................... (141) (141) (95) (95)
--------- --------- ----- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings of long-term debt....................................... 1,004 1,004 65 65
(Decrease) increase in short-term borrowings........................... (575) (575) 341 341
Dividends paid on common and preferred stock........................... (191) (9) (189) (8)
Other, net-including intercompany transfers and payments............... 55 (146) 23 (213)
--------- --------- ----- ---------
Net cash flows from financing activities............................. 293 274 240 185
--------- --------- ----- ---------
Effect of exchange rate changes on cash and cash equivalents............. -- -- (8) (8)
--------- --------- ----- ---------
Net change in cash and cash equivalents.............................. (132) (108) (34) (33)
Cash and cash equivalents at beginning of period......................... 348 348 252 251
--------- --------- ----- ---------
Cash and cash equivalents at end of period............................... $ 216 $ 240 $ 218 $ 218
--------- --------- ----- ---------
--------- --------- ----- ---------
Income taxes paid, net of refunds........................................ $ 166 $ 166 $ 145 $ 145
Interest paid............................................................ $ 213 $ 189 $ 229 $ 205
Tobacco settlement payments.............................................. $ 47 $ 47 $ -- $ --
</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, 1998 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 216 $ 240 $ 348 $ 348
Accounts and notes receivable, net.................................. 1,188 1,187 1,122 1,118
Inventories......................................................... 2,705 2,705 2,617 2,617
Prepaid expenses and excise taxes................................... 510 510 538 538
--------- --------- --------- ---------
TOTAL CURRENT ASSETS............................................ 4,619 4,642 4,625 4,621
--------- --------- --------- ---------
Property, plant and equipment, net.................................... 5,931 5,931 5,939 5,939
Trademarks, net....................................................... 7,712 7,712 7,759 7,759
Goodwill, net......................................................... 11,811 11,811 11,885 11,885
Other assets and deferred charges..................................... 420 406 470 453
--------- --------- --------- ---------
$ 30,493 $ 30,502 $ 30,678 $ 30,657
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................... $ 496 $ 496 $ 361 $ 361
Accounts payable and accrued liabilities............................ 3,190 3,017 3,483 3,305
Current maturities of long-term debt................................ 57 57 33 33
Income taxes accrued................................................ 107 110 268 243
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES....................................... 3,850 3,680 4,145 3,942
--------- --------- --------- ---------
Long-term debt (less current maturities).............................. 9,703 9,703 9,456 9,456
Minority interest in Nabisco Holdings................................. 813 813 812 812
Other noncurrent liabilities.......................................... 2,305 1,876 2,157 1,908
Deferred income taxes................................................. 3,427 3,363 3,524 3,460
Contingencies (note 4)
RJRN Holdings' obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated
debentures*......................................................... 953 -- 953 --
Stockholders' equity:
Other preferred stock............................................... 516 -- 520 --
Common stock (328,200,828 shares issued at March 31)................ 3 -- 3 --
Paid-in capital..................................................... 9,502 11,458 9,668 11,470
Retained earnings................................................... -- -- -- --
Accumulated other comprehensive income.............................. (391) (391) (391) (391)
Treasury stock, at cost............................................. (100) -- (100) --
Other stockholders' equity.......................................... (88) -- (69) --
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY.................................... 9,442 11,067 9,631 11,079
--------- --------- --------- ---------
$ 30,493 $ 30,502 $ 30,678 $ 30,657
--------- --------- --------- ---------
--------- --------- --------- ---------
</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>
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 1998
presentation.
On January 1, 1998, RJRN Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Total
comprehensive income, which primarily includes net income (loss) and foreign
currency translation adjustments, was $(20) million and $171 million for RJRN
Holdings and $(8) million and $183 million for RJRN for the three months ended
March 31, 1998 and 1997, respectively.
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, 1997.
NOTE 2 -- INVENTORIES
The major classes of inventory are shown in the table below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -------------
<S> <C> <C>
Finished products................................................... $ 829 $ 816
Leaf tobacco........................................................ 1,215 1,184
Raw materials....................................................... 247 226
Other............................................................... 414 391
----------- ------
$ 2,705 $ 2,617
----------- ------
----------- ------
</TABLE>
NOTE 3 -- EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------------------
1998 1997
------------------------ ------------------------
BASIC DILUTED BASIC DILUTED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common
stock :
Net income (loss)...................... $ (20) $ (20) $ 213 $ 213
Preferred stock dividends.............. (11) (11) (11) (11)
----------- ----------- ----------- -----------
$ (31) $ (31) $ 202 $ 202
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding
(in thousands):
Common shares outstanding.............. 323,798 323,798 323,780 323,780
Assumed exercise of RJRN Holdings'
stock options........................ -- -- -- 1,696
----------- ----------- ----------- -----------
323,798 323,798 323,780 325,476
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
4
<PAGE>
NOTE 3 -- EARNINGS PER SHARE (CONTINUED)
Shares of ESOP convertible preferred stock of 13,432,872 and 14,396,049 were
not included in computing diluted earnings per share for 1998 and 1997,
respectively, because the effect would have been antidilutive. Common shares
outstanding also exclude 966,000 shares of restricted stock as the vesting
provisions have not been met.
NOTE 4--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 and RJRN Holdings) 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 1998, 72 new actions were served against RJRT and/or
its affiliates or indemnitees (as against 102 in the first quarter of 1997) and
16 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, 1998, there were 550 active
cases pending, as compared with 278 on March 31, 1997 and 168 on March 31, 1996.
As of April 30, 1998, 572 active cases were pending against RJRT and/or its
affiliates or indemnitees, 566 in the United States, two in Puerto Rico, one in
the Marshall Islands, two in Canada and one in Nigeria.
The United States cases are in 45 states and the District of Columbia, and
are distributed as follows: 198 in Florida, 103 in New York, 25 in California,
21 in Louisiana, 20 in Pennsylvania, 18 in Texas, 13 in Ohio, 12 in each of
Alabama and Tennessee, 10 in each of Illinois and West Virginia, nine in the
District of Columbia, eight in each of Mississippi and New Jersey, seven in
Indiana, six in Georgia, five in each of Maryland, Massachusetts, Michigan, and
Minnesota, four in each of Iowa, Kansas, Missouri, Nevada and South Dakota,
three in each of Arizona, Arkansas, Colorado, Hawaii, New Mexico, Oklahoma,
Rhode Island, Utah and Wisconsin, two in each of Connecticut, Kentucky, Montana,
New Hampshire, Oregon, South Carolina, and Washington, and one each in Alaska,
Idaho, Maine, North Carolina and Vermont. Of the 566 active cases in the United
States, 451 are in state court and 115 are in federal court. Most of these cases
were 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, antitrust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring
and common law public nuisance. Punitive damages, often in amounts ranging into
the hundreds of millions or even billions of dollars, are specifically pleaded
in a number of cases in addition to compensatory and other damages. Nine of the
566 active cases in the United States involve alleged non-smokers claiming
injuries purportedly resulting from exposure to environmental tobacco smoke.
Fifty-two 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, and Blue Cross/Blue Shield subscribers seeking reimbursement
for premiums paid. One hundred twenty of the active cases seek, INTER ALIA,
recovery of the cost of Medicaid payments or other health-related costs paid for
treatment of individuals suffering from diseases or conditions allegedly related
to tobacco use. Five, brought by entities administering asbestos liability, seek
contribution for settlement costs.
DEFENSES. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act of some or all such claims arising after 1969; the lack
5
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
of any defect in the product; assumption of the risk; contributory or
comparative fault; lack of proximate cause; and statutes of limitations or
repose; and, in the attorney general cases (discussed below), additional
statutory, equitable, constitutional and other defenses. RJRN and RJRN Holdings
have asserted additional defenses, including jurisdictional defenses, in many of
these cases in which they are named.
Juries have found for plaintiffs in three smoking and health cases in which
RJRT was not a defendant, but in one such case, no damages were awarded and the
judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another
such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on
appeal and the case was subsequently dismissed. In the third such case, on
August 9, 1996, a Florida jury awarded damages of $750,000 to an individual
plaintiff. The defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking
to reverse the judgment on appeal. In two cases in 1997 brought by the same
attorney who represented plaintiffs in the CARTER case, Florida state court
juries found no RJRT liability. On March 19, 1998, an Indiana state court found
for RJRT, RJRN Holdings and other defendants in an individual case, DUNN V. RJR
NABISCO HOLDINGS CORP., in which plaintiffs sought damages for the alleged harm
caused to a non-smoker by environmental tobacco smoke. In addition, during 1997
and early 1998, RJRT and other tobacco industry defendants have settled six
lawsuits. See "Certain Settlements" below.
CERTAIN CLASS ACTION SUITS. In May 1996, in an early class action case,
CASTANO V. AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals
overturned the certification of a purported nationwide class of persons whose
claims related to alleged addiction to tobacco. Since this ruling by the Fifth
Circuit, most purported class action suits have sought certification of
statewide rather than nationwide classes.
Putative class action suits based on claims similar to those asserted in
Castano have been brought in state and, in a few instances, federal courts in
Alabama, Arkansas, California, the District of Columbia (D.C. court), Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, New Mexico, Nevada, New Jersey, New York, Ohio, Oklahoma,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, West
Virginia and Wisconsin. A putative class action filed in Tennessee seeks
reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout
the United States. Suits are also expected to be filed in additional
jurisdictions and there are also putative class action suits pending in Canada,
Puerto Rico and Nigeria. Each such suit asserts claims on behalf of residents of
a particular jurisdiction who claim to be addicted, injured, or at greater risk
of injury by the use of tobacco, or are the legal survivors of such persons.
In the class action suit pending in Florida, ENGLE V. R.J. REYNOLDS TOBACCO
COMPANY, a class consisting of Florida residents or their survivors who claim to
have diseases or medical conditions caused by their "addiction" to cigarettes
has been certified. The case is scheduled for trial on July 6, 1998. A class was
certified in another purported class action suit pending in Louisiana state
court, SCOTT V. AMERICAN TOBACCO COMPANY, on April 11, 1997. The class
certification decision is currently on appeal. Class certification was granted
in two cases pending in New York state courts, HOSKINS V. R.J. REYNOLDS TOBACCO
COMPANY and GEIGER V. AMERICAN TOBACCO COMPANY (in which certification was
conditional). The parties have briefed and argued appeals brought by defendants
in both cases. On January 28, 1998, class certification was granted by a
Maryland state court in RICHARDSON V. PHILIP MORRIS. On April 8, 1998 the
defendants filed a petition with the Maryland Court of Appeals to reverse the
class certification decision. Class certification was denied on August 18, 1997,
by a District of Columbia court in the case of REED V. PHILIP MORRIS. In October
1997, class certification was also denied in ARCH V. AMERICAN TOBACCO COMPANY
(renamed BARNES V. AMERICAN TOBACCO COMPANY), which was pending in the United
States District Court for the Eastern District of Pennsylvania. That court had
initially certified a medical monitoring class based on the plaintiffs' amended
complaint (having refused to certify a class based on the initial complaint),
but on October 17, 1997, the judge reversed the certification and also dismissed
the claims of each of the class representatives. Plaintiffs are
6
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
appealing this ruling, and briefing concluded as of April 24, 1998. Oral
argument is scheduled for June 4, 1998. In addition, in another purported class
action brought in federal court in Puerto Rico, RUIZ V. AMERICAN TOBACCO
COMPANY, the court on March 17, 1998, denied plaintiffs' motion for class
certification. Another class action suit, BROIN V. PHILIP MORRIS, was settled by
an agreement dated October 9, 1997 and approved by the Florida state court on
February 3, 1998. The settlement has been appealed by various objectors, and
briefing is underway. See "Certain Settlements" below.
THE ATTORNEY GENERAL AND RELATED CASES. Forty-three states, through their
attorneys general and/or other state agencies, have sued RJRT and other U.S.
cigarette manufacturers as well as, in some instances, their parent companies,
in actions to recover the costs of medical expenses incurred by the state or its
agencies in the treatment of diseases allegedly caused by cigarette smoking.
Some of these cases also seek injunctive relief and treble damages for state
and/or federal antitrust law and RICO violations. Certain of the actions also
seek statutory penalties and other forms of relief under state consumer
protection and antitrust statutes. On May 11, 1998, there were 39 such cases
pending in the following states, commonwealths, or territories: Alaska, Arizona,
Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois,
Indiana, Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland,
Massachusetts, Michigan, Missouri, Montana, Nevada, New Hampshire, New Jersey,
New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode
Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia
and Wisconsin. Tobacco company defendants have settled attorney general cases in
the states of Mississippi, Florida, Texas and Minnesota. See "Certain
Settlements" below.
In addition to the 39 pending actions brought by the various attorneys
general, 19 pending actions advancing similar theories have been brought by
private attorneys and/or local officials purportedly on behalf of the citizens
of certain states, counties and/or cities, union health and welfare funds, a
university and four native American tribes. A taxpayer case pending in Ohio was
dismissed for lack of standing on February 12, 1998 (COYNE V. AMERICAN TOBACCO).
UNION HEALTH AND WELFARE TRUST FUND CASES. On May 20, 1997, three Ohio
based union health and welfare trust funds filed a putative class action in the
United States District Court for the Northern District of Ohio (IRON WORKERS
LOCAL V. PHILIP MORRIS). Three additional Ohio based union health and welfare
trust funds were later added as plaintiffs. Plaintiffs seek to certify a class
defined as "all labor-management multi-employer health and welfare funds
operating in the State of Ohio whose funds were established pursuant to sections
of the Labor Management Relations Act which provide their participants and
beneficiaries medical, surgical and/or hospital care benefits and are defined as
"employee welfare benefit plans" under ERISA. Like the attorney general cases,
this and similar cases described below, seek to recover health-care costs
expended for injuries allegedly caused by tobacco as well as, in some instances
trebled anti-trust damages and other penalties.
Following the filing of the IRON WORKERS case, a number of additional union
health and welfare trust cases asserting comparable claims and seeking
class-action treatment have been filed against RJRT and other cigarette
manufacturers as well as, in some instances, their parent companies. On April
30, 1998, there were a total of fifty-six such cases, including the IRON WORKERS
case, pending in the following states: Arizona, California, Connecticut,
Florida, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, New York, Ohio,
Oregon, Pennsylvania, Rhode Island, Texas, Washington, and West Virginia.
On December 24, 1997, one such case, NORTHWEST LABORERS-EMPLOYERS HEALTH &
SECURITY TRUST FUND V. PHILIP MORRIS, filed in federal court in the State of
Washington, was certified as a class action. The certified class consists of
"all existing jointly administered and collectively bargained-for health and
welfare trusts in Washington, and/or the trustees of such entities, that have
provided or paid for health care and/or addiction treatment costs or services
for employees or other beneficiaries."
7
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
On March 26, 1998, a federal court in New York granted in part defendants'
motions to dismiss two union health and welfare trust fund cases pending in
federal court in New York City (LABORERS LOCAL 17 ET AL. V. PHILIP MORRIS AND
UNITED FEDERATION OF TEACHERS V. PHILIP MORRIS). The court granted the motions
as to plaintiffs' antitrust and unjust enrichment claims. Plaintiffs' claims
asserted under RICO and those based on fraud and breach of a special duty remain
in the case. In a California case (STATIONARY ENGINEERS LOCAL 39 HEALTH AND
WELFARE TRUST AND CARPENTERS HEALTH AND WELFARE TRUST V. PHILIP MORRIS), on
April 30, 1998, a federal district court judge dismissed plaintiffs' RICO,
federal and state anti-trust, intentional breach of special duty, unfair
business practices, and restitution and unjust enrichment claims with prejudice,
gave plaintiffs 30 days to replead their claim of fraud and misrepresentation
and left standing plaintiffs' claim for negligent breach of special duty.
Two federal courts completely dismissed suits brought by labor unions. In
SOUTHEAST FLORIDA LABORERS DISTRICT HEALTH AND WELFARE TRUST FUND V. PHILIP
MORRIS, the court held that "Florida common law does not permit a plaintiff to
recover in its own name from defendants for injuries which defendants allegedly
caused to individual third party health care recipients." In addition to the
common law claims advanced by plaintiffs, the court also dismissed their RICO
and antitrust claims. In STEAMFITTERS LOCAL UNION NO. 420 WELFARE FUND, ET AL.
V. PHILIP MORRIS, ET AL., filed in federal court in Pennsylvania, the court also
dismissed plaintiff's complaint in its entirety.
PROPOSED RESOLUTION.
Following several months of negotiations with state attorneys general,
representatives of the public health community and plaintiffs' lawyers, on June
20, 1997, a Memorandum of Understanding and Resolution (the "June 20(th)
Agreement") that set forth concepts for federal legislation and a contractual
protocol to resolve a variety of litigation and regulatory issues concerning
tobacco was executed. The June 20(th) Agreement required the tobacco companies
to make an initial $10 billion payment and subsequent annual multi-billion
dollar payments expected to aggregate to approximately $368.5 billion over 25
years. The proposed legislation would also, among other things, have reduced
retail access for tobacco products, eliminated cigarette vending machines and
tobacco product sampling, conferred authority on the FDA to regulate the
manufacture of tobacco products (with express limitations on authority relating
to nicotine) and created publicly funded smoking cessation and education
programs. The proposed legislation would have granted limited litigation
protection to the tobacco industry, including a bar on class action suits, suits
based on addiction and demands for punitive damages for past actions. It would
also have capped industry payments in permitted individual lawsuits to an
aggregate of $5 billion per year. The proposal also provided a "look-back"
provision which would penalize manufacturers if youth smoking is not reduced by
stated amounts in certain years after enactment, culminating in a 60% reduction
after 10 years.
None of the bills relating to the tobacco industry that Congress has
considered since that time have offered terms consistent with those contained in
the June 20(th) Agreement. The McCain bill reported out favorably by the Senate
Commerce Committee and most other bills currently under consideration by
Congress, among other things, significantly increase the payments required of
the tobacco companies (and the price of tobacco products) and provide no limits
on class action and other aggregated claim lawsuits while imposing limitations
on tobacco advertising that RJRT believes violate the industry's constitutional
rights. For further discussion of pending legislation, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Tobacco -- Governmental Activity."
Based on the directions being taken by Congress discussed above, on April 8,
1998, Steven Goldstone, Chairman of RJRN, stated in a speech to the National
Press Club in Washington, D.C., that "I no longer see any purpose in working
toward the June 20(th) national settlement. I stand behind the comprehensive
8
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
resolution embodied in the agreement, but I see no possibility in this
environment to achieve it." Other companies with major cigarette industry
interests have taken similar positions.
There can be no assurance that Congress will not enact legislation that
could have material adverse effects on the cigarette industry. The financial
effects of any such legislation would depend, among other things, on (i) the
amount, timing and tax treatment of the payments actually required of RJRT by
the legislation; (ii) the means used to finance these payments; (iii) whether or
not litigation protection affording financial predictability is provided; (iv)
the impact of increased cigarette prices, advertising restrictions and other
aspects of the legislation on domestic cigarette consumption; (v) the effect of
the legislation on the consumption of tobacco products and on the regulatory and
litigation environment outside the United States; (vi) the effect, if any, on
public attitudes toward smoking and the tobacco industry; and (vii) the impact
on RJRT's competitive position in the tobacco industry.
RJRN had expected that implementation of the June 20(th) Agreement would
increase the costs and reduce the consumption of RJRT's tobacco products in the
United States. In particular, the substantial price increases necessary to fund
payments of the magnitude contemplated by the June 20(th) Agreement were
projected to have the effect of reducing domestic industry cigarette volumes by
up to 45% over 10 years depending on the assumptions used. Such volume reduction
would likely have a significant negative effect on the business of RJRT and the
stated financial position of RJRN Holdings, RJRN and RJRT. Legislation that
imposes greater financial burdens and less litigation relief than the June
20(th)Agreement, if passed by Congress, would have more severe effects on these
entities. In evaluating any proposed legislation to resolve tobacco issues, RJRN
and RJRT will continue to weigh carefully the potential benefits, principally
greater regulatory and litigation certainty and predictability in annual
aggregate contingency risk, against the resulting monetary, regulatory and other
costs. For a further discussion of the effects of federal legislation, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Tobacco -- Governmental Activity."
CERTAIN SETTLEMENTS.
Six cases have been settled, including four attorney general cases, since
June 1997. The most significant of these settlements are described below.
THE ATTORNEY GENERAL AGREEMENTS. Tobacco companies settled attorney general
cases in Mississippi, Florida and Texas as they came to trial. (A subsequent
settlement with Minnesota is described separately below). Each of the first
three settling states agreed to a percentage share of the $10 billion initial
and scheduled annual payments agreed to in the June 20(th) Agreement; 1.7% for
Mississippi, 5.5% for Florida and 7.25% for Texas and also became entitled to
attorneys' costs as well as private counsel fees as set by a panel of
arbitrators subject to a $500 million aggregate annual cap for payment of such
fees for all settlements of similar litigation. Each of the first three
agreements also provides that if the U.S. Congress enacts federal legislation
substantially equivalent to the June 20(th) Agreement, the terms of that
legislation would generally supersede the terms of the state agreement.
Defendants would receive credit for their payments under the state agreements
against the obligations arising under the federal legislation. If, instead, the
defendants enter into separate settlement agreements with other individual
states, under certain circumstances these three settling states are entitled to
terms at least as favorable as any other separately settling state. Under the
most favored nation provisions of their settlement agreements, provided that
Florida and Mississippi make equivalent advances, the tobacco companies could be
required to make advances to private counsel in those states because they agreed
to do so in their agreement with the State of Texas. Based on certain orders of
the court having jurisdiction over the Florida settlement, RJRT may be required
to pay its share of $50 million (approximately $12 million) as an advance on the
9
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
fees of counsel to the State of Florida in mid May, 1998. Each tobacco company's
share of advances of this type, for all settling states, would be based on
market share.
The settlements also provide that were federal legislation substantially
equivalent to the June 20(th) Agreement to be enacted, Mississippi, Florida and
Texas, because of their contribution to securing resolution of these matters,
may apply to a panel of arbitrators for additional compensation. The settling
defendants have agreed not to oppose applications of $75 million for
Mississippi, $250 million for Florida and $329.5 million for Texas (as well as
any increase over these amounts necessary to offset the difference, if any,
between the amounts to be paid to these states during 1998 under the agreements
and the amounts allocated to those states for that period under the federal
legislation). Payment of these amounts would be made over a number of years and
would be subject to an aggregate annual cap of $100 million for all settling
states.
On May 8, 1998, following a trial of approximately four months, the parties
to STATE OF MINNESOTA AND BLUE CROSS AND BLUE SHIELD OF MINNESOTA V. PHILIP
MORRIS entered into a series of agreements settling in full the claims brought
by those entities against the tobacco industry. The financial terms of these
agreements call for the industry to: (a) make six settlement payments
aggregating $1.3 billion to the State starting with $240 million in September
1998 and, beginning January 1, 1999, continuing annually in varying amounts
until January 2003 (adjusted commencing with the 2000 payment by the greater of
3% or the consumer price index and by the change in volume of cigarettes sold);
(b) make annual payments to the State commencing December 31, 1998 and each
December 31st thereafter equal to 2.55% of the amounts that would be required
annually under the June 20(th) Agreement ranging from a payment to Minnesota of
$102 million in 1998 to $204 million in 2003 and thereafter (similarly adjusted
commencing with the 1999 payment); (c) pay $469 million in compensation to Blue
Cross/Blue Shield ("BCBS") in six installments beginning with $160 million in
September, 1998 and continuing in varying amounts through January 2003
(similarly adjusted commencing with the 2000 payment); (d) pay attorneys' fees
and costs aggregating approximately $569 million in installments (two
installments in 1998 with respect to BCBS and five installments from September
1998 through July 2000 with respect to the State), and (e) pay $10 million per
year commencing June 1, 1998 and continuing through June 1, 2007, for a national
research fund relating to tobacco use by children.
Each settling defendant's share of these obligations is generally to be
based on its market share. However, the first of the six settlement payments to
the State of Minnesota (item (a) above) and the first of the six installments
payable to BCBS (item (c) above), are not based on market share and are
expressly stipulated in the relevant agreement. RJRN Holdings has accrued $312
million in the first quarter of 1998 for its share of all fixed and determinable
portions of the obligations described in the preceding paragraph and other
settlement related costs. Total estimated payments for this and the other three
attorney general agreements are estimated to be approximately $450 million in
1998. Because of the varying terms of the Mississippi, Florida and Texas
settlement agreements, RJRN cannot currently predict whether and to what extent
the Minnesota agreements might trigger any further obligations under the "most
favored nation" provisions of those earlier agreements.
The Minnesota agreements also include injunctive provisions relating to
marketing and advertising of tobacco products. Defendants agreed not to make any
payments to encourage display of cigarettes in any U.S. movie. Defendants also
agreed not to target Minnesota children in the advertisement, promotion or
marketing of cigarettes, and, after December 31, 1998, to refrain from
marketing, licensing, distributing, selling or offering in the State of
Minnesota, any service or non-tobacco product bearing the brand name, logo,
symbol, motto, selling message, recognizable color or pattern of colors, or any
other product identification linked to those used for any domestic brand of
tobacco products.
10
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
With respect to research and information, the settling defendants agree to
disband the Council for Tobacco Research and turn over its research to the FDA
within 90 days. Defendants further agree not to enter into any agreements that
would limit competition in the production or distribution of information about
the health or other consequences of tobacco use, or that would limit smoking and
health research or research into marketing or development of new products.
Finally, defendants are required to provide public access to industry documents
and court files by maintaining existing document depositories at industry
expense. These depositories, located in the United Kingdom and in Minnesota, are
to be maintained for at least ten years.
Each individual state agreement provides that the related settlement is not
an admission or concession or evidence of any liability or wrongdoing on the
part of any party and was entered into by the settling defendants solely to
avoid the further expense and uncertainty of litigation.
THE BROIN SETTLEMENT. The plaintiffs' attorneys in a class action case,
BROIN V. PHILIP MORRIS, entered into a settlement agreement with participating
tobacco company defendants on October 9, 1997. This case had been brought in
Florida state court on behalf of all flight attendants of U.S. airlines alleged
to be suffering from diseases or ailments caused by second-hand smoke in
airplane cabins. This agreement requires the participating tobacco companies to
pay $300 million in three annual installments, allocated among the companies by
market share, to fund research on the early detection and cure of diseases
associated with tobacco smoke. It also calls for those companies to pay a total
of $49 million for plaintiffs' counsel's fees and expenses. The agreement bars
class members from bringing aggregate claims or obtaining punitive or exemplary
damages and also bars individual claims to the extent that they are based on
fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO,
suppression, concealment or any other alleged intentional or willful conduct.
The defendants agree that in any individual case brought by a class member, they
will bear the burden of proof regarding general causation that ordinarily would
be born by the plaintiffs. Trial court approval of the BROIN settlement was
granted on February 3, 1998, but this approval has been noticed for appeal and
briefing is in progress. No payments with respect to either the research fund or
attorney's fees will be due until final resolution of all appeals. RJRT's
portion will be approximately $86 million. RJRT has already paid its market
share of $3 million due to the BROIN attorneys in respect of costs and expenses.
This amount is subject to recovery if the settlement is successfully challenged.
RECENT AND SCHEDULED TRIALS. As of April 30, 1998, there were 11 cases
scheduled for trial in 1998 against RJRT alleging injuries relating to tobacco.
The next attorney general cases scheduled for trial are the State of
Washington's, which has been scheduled for September 1998 and the State of
Oklahoma's for November 1998. ENGLE V. R.J. REYNOLDS TOBACCO COMPANY, a
class-action case in Florida state court, is scheduled for trial on July 6,
1998. Cases against other tobacco company defendants are also scheduled for
trial in 1998 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. In 1997, four suits were filed in Georgia, California
and New York (two) against RJRT and RJRN and various other tobacco industry
entities for contribution/damages related to asbestos litigation. The suits
alleged that cigarette smoke inhaled by the asbestos claimants caused the
cancers complained of in the litigation in which certain asbestos companies had
been involved. Two similar cases have been filed in Florida in 1998. RJRT and
the other tobacco industry defendants in these actions dispute the claims
advanced in these cases and intend to defend all such actions vigorously.
11
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
A class action brought in Alabama state court against RJRT, RJRN and others,
alleging violations of Alabama antitrust law, (MOSELY V. PHILIP MORRIS
COMPANIES), was dismissed with prejudice on April 7, 1998. The dismissal was
based on a joint stipulation and motion of the parties.
RJRT understands that a grand jury investigation is being conducted in the
Eastern District of New York 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 responded, and will continue to
respond, to document subpoenas issued by this grand jury. In addition, five
subpoenas, the most recent dated February 12, 1998, were served on RJRT by a
grand jury sitting in the District of Columbia. RJRT has responded or is in the
process of responding to those subpoenas. RJRN and RJRT are unable to predict
the outcome of these investigations.
RJRT, R.J. Reynolds International ("Reynolds International") and Northern
Brands International, another subsidiary of RJRN, each received document
subpoenas dated July 24, 1997, from a federal grand jury sitting in the Northern
District of New York. RJRT understands that the grand jury is investigating
possible smuggling activities. RJRT, Reynolds International and Northern Brands
International are responding to these subpoenas but are unable to predict the
outcome of the grand jury's investigation.
For a further discussion of litigation affecting the tobacco business see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Tobacco -- Governmental Activity."
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 McCain bill, the various
litigation settlements and the release and wide availability of various industry
documents referred to above. These developments may negatively affect the
outcomes of tobacco-related legal actions and encourage the commencement of
additional similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT, RJRN and
RJRN Holdings, a significant increase in litigation and/or in adverse outcomes
for tobacco defendants could have an adverse effect on any one or all of these
entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of
valid defenses to any such actions and intend to defend such actions vigorously.
RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
NOTE 5--SUBSEQUENT EVENTS
The financial condition and results of operations of RJRN Holdings and RJRN
include a $312 million charge related to the settlement agreements reached on
May 8, 1998 by RJRT with the state of Minnesota and Blue Cross and Blue Shield
of Minnesota, as well as other settlement related costs. See note 4 for further
discussion.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of RJRN Holdings' financial condition
and results of operations should be read in conjunction with the historical
financial information included in the Consolidated Condensed Financial
Statements.
RESULTS OF OPERATIONS
Summarized financial data for RJRN Holdings is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1998 1997 % CHANGE
--------- --------- -------------
<S> <C> <C> <C>
(DOLLARS IN
MILLIONS)
NET SALES:
RJRT......................................................... $ 1,176 $ 1,076 9%
Reynolds International....................................... 809 798 1
--------- ---------
Total Tobacco.............................................. 1,985 1,874 6
--------- ---------
Nabisco Biscuit.............................................. 850 801 6
U.S. Foods Group............................................. 530 527 1
--------- ---------
Domestic Food Group.......................................... 1,380 1,328 4
International Food Group..................................... 582 577 1
--------- ---------
Total Food................................................. 1,962 1,905 3
--------- ---------
$ 3,947 $ 3,779 4
--------- ---------
--------- ---------
OPERATING COMPANY CONTRIBUTION(1):
RJRT(2)...................................................... $ 28 $ 380 (93)%
Reynolds International....................................... 173 195 (11)
--------- ---------
Total Tobacco.............................................. 201 575 (65)
--------- ---------
Nabisco Biscuit.............................................. 143 134 7
U.S. Foods Group............................................. 63 65 (3)
--------- ---------
Domestic Food Group.......................................... 206 199 4
International Food Group..................................... 32 54 (41)
--------- ---------
Total Food................................................. 238 253 (6)
--------- ---------
Headquarters................................................. (19) (17) (12)
--------- ---------
$ 420 $ 811 (48)
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Operating company contribution represents operating income before
amortization of trademarks and goodwill.
(2) Includes a $312 million charge for upfront settlement costs related to the
agreements reached by RJRT with the state of Minnesota and Blue Cross and
Blue Shield of Minnesota, as well as other settlement related costs.
TOBACCO
The tobacco line of business is conducted by RJRT and R.J. Reynolds
International ("Reynolds International").
RJRT's net sales for the first quarter were $1.2 billion, $100 million or 9%
higher than the comparable period in 1997. The increase is primarily
attributable to higher pricing, partially offset by lower volume. Volume for the
quarter decreased 2%, which was in line with total industry results.
RJRT's overall retail share of market was essentially unchanged at 25.45%.
RJRT's full-price share of market declined to 16.48% from 16.52%, while its
savings share of market increased to 8.97% from 8.95%. Industry wide the
full-price category for the first three months of 1998 increased to 73% of total
shipments
13
<PAGE>
compared to 72% for the comparable period in 1997. RJRT's full-price shipments
for the first three months of 1998 as a percentage of its total shipments
decreased to 62% from 63% in 1997.
Versus the comparable period in 1997, RJRT experienced growth in Winston,
its largest full-price brand. Winston's volume rose 3% compared to the first
quarter of 1997, resulting from the new national "No Bull" marketing campaign
featuring a 100-percent-tobacco blend with no additives. While Camel's volume
declined 2 percent versus the first quarter of 1997, its share increased from
5.02% to 5.25%. Salem's volume declined 10% compared to 1997. RJRT is currently
testing a new advertising and promotional campaign in select markets to reverse
Salem's declining trend. Doral, the industry's leading saving brand, experienced
a 9% volume increase and a 12% increase in its share of the savings segment
compared to the first quarter 1997.
RJRT's operating company contribution decreased 93% to $28 million. The 1998
period includes a charge of $312 million ($199 million after-tax) related to
settlement agreements reached by RJRT with the state of Minnesota and Blue Cross
and Blue Shield of Minnesota, as well as other settlement related costs. (See
note 4 to the Consolidated Condensed Financial Statements for further
discussion). Excluding the aforementioned charge, RJRT's operating company
contribution decreased 11% to $340 million. The decrease is due primarily to the
lower volume, ongoing settlement costs and increased marketing and litigation
costs, which more than offset higher selling prices.
RJRT announced a $2.50 per thousand cigarette price increase effective April
7, 1998 and subsequently announced another $2.50 per thousand cigarette price
increase effective May 13, 1998. Similar price increases were announced by other
cigarette manufacturers.
Reynolds International's net sales amounted to $809 million for the first
quarter of 1998, an increase of 1% from the comparable 1997 period. The period
was negatively impacted by unfavorable foreign currency translation, partially
offset by higher pricing and higher volume. Excluding the impact of unfavorable
foreign currency translation, net sales would have increased approximately 9%
over 1997. Overall volume of 49.0 billion units increased 18% from 1997 due
primarily to gains in Central Europe and the Commonwealth of Independent States
(CIS) and Baltic regions, partially offset by softness in Western Europe.
For the first quarter of 1998, volume in the CIS and Baltics grew 54% driven
by Russia's volume growth of 84%, reflecting a strong performance from local or
"heritage" brands promoting national themes. The company's Peter I brand is the
largest-selling filter cigarette in Russia where Reynolds market share exceeds
20% and is growing. Volume in Central Europe increased 59% over 1997, with
Turkey up 41%, fueled by Winston growth and Romania up more than 100%, fueled by
Winchester and Monte Carlo. For the first quarter of 1998, volume comparisons
remain down in the higher-margin, established markets of Western Europe.
However, competitive pricing pressures that depressed performance in Western
Europe for much of the past year have lessened and volumes in this region are
beginning to stabilize. First-quarter trends in the region showed good
improvement in 1998 versus the second half and fourth quarter of 1997.
By brand, Camel volume was up slightly for the quarter, with gains on Camel
Lights and Medium in markets such as Spain, Belgium, Greece, and Switzerland
offsetting full-flavor losses. Winston volume was up 9 percent overall, driven
by increased sales into the CIS, the Baltics and Spain. In addition, the new
Winston Lights showed significant gains in Spain, as well as in Greece,
Switzerland and Turkey. Salem volumes were soft due to declines in Asian
markets, reflecting volatile economic conditions as well as comparisons against
high quarterly volume last year in anticipation of price increases.
Operating company contribution of $173 million for the first quarter of 1998
decreased 11% from 1997 mainly due to the negative impact of foreign currency
translation. Absent the impact of foreign currency translation, operating
company contribution for the quarter would have risen 2% over same period in
1997, primarily due to higher pricing and increased volume, partially offset by
unfavorable mix.
14
<PAGE>
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 on February 28, 1997, when regulations establishing 18 as the
national minimum age for the sale of cigarettes and requiring age identification
from purchasers who appear to be under age 26 became effective. Among other
things, the remaining 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.
RJRT, together with the four other major domestic cigarette manufacturers
and an advertising agency, filed suit in the U.S. District Court for the Middle
District of North Carolina (COYNE BEAHM V. UNITED STATES FOOD & DRUG
ADMINISTRATION) challenging the regulations. Similar suits were filed in the
same court by manufacturers of smokeless tobacco products, by operators of
retail stores and by advertising interests. On April 26, 1997, the court ruled
on a motion for summary judgment, that based on the facts alleged by the FDA,
that agency was not barred from asserting jurisdiction over tobacco but lacked
authority to issue certain of the regulations bearing on marketing and
advertising. The court immediately certified its decision for appeal to the
Fourth Circuit Court of Appeals and stayed the effectiveness of that portion of
the regulations which had not yet been implemented pending appeal or further
court action. Oral argument on the appeal has been heard, but because of the
death of one of the members of the court presiding at this argument, a new
hearing has been ordered and is scheduled to occur on June 9, 1998. RJRT is
unable to predict the ultimate outcome of this litigation seeking to find the
FDA's regulations to be unlawful. If the full regulations do go into effect,
they could be expected to have an adverse effect on cigarette sales and RJRT.
On May 28, 1997, the Federal Trade Commission (the "FTC") issued an
unfairness complaint against RJRT, seeking to prohibit the use of Joe Camel
advertising, to require RJRT to undertake certain potentially costly public
education activities and to monitor sales and share of sales of each of RJRT's
brands to smokers under the age of 18. An administrative hearing is scheduled
for November 2, 1998. On June 17, 1997, RJRT filed suit against the FTC in the
Federal District Court for the Middle District of North Carolina, challenging
the FTC's action as procedurally improper. The FTC has moved to dismiss the
action.
In March 1994, the U.S. Occupational Safety and Health Administration
("OSHA") announced proposed regulations that would restrict smoking in the
workplace to designated smoking rooms that are separately exhausted to the
outside. Although RJRT cannot predict the form or timing of any regulations that
may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT
expects that many employers who have not already done so would prohibit smoking
in the workplace rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. RJRT submitted comments on the proposed
regulations during the comment period which closed in February 1996. Because
many employers currently do not permit smoking in the workplace, RJRT cannot
predict the effect of any regulations that may be adopted, but incremental
restrictions on smokers could have an adverse effect on cigarette sales and
RJRT.
In July 1996, Massachusetts enacted legislation requiring manufacturers of
tobacco products sold in Massachusetts to report yearly, beginning December 15,
1997, the ingredients of each brand sold. The statute also requires the
reporting of nicotine yield ratings in accordance with procedures established by
the State. The legislation contemplates public disclosure of all ingredients in
descending order, a trade-secret disclosure that RJRT believes could damage the
competitive position of its brands. RJRT, together with other cigarette
manufacturers, filed suit in the U.S. District Court for the District of
Massachusetts
15
<PAGE>
seeking to have the statute declared null and void and to restrain Massachusetts
officials from enforcing it. A similar suit was filed by manufacturers of
smokeless tobacco products. The court granted a preliminary injunction that
enjoined Massachusetts officials from enforcing the law relating to ingredient
reporting. Both the manufacturers and the State are now seeking summary judgment
from the district court. Oral argument is scheduled for May 1998.
In 1997, Texas enacted legislation very similar to the Massachusetts law,
except that the Texas statute authorizes confidentiality of trade secrets and
its annual reporting requirements begin in 1998. RJRT believes that regulations
proposed by Texas, however, are inadequate to prevent inadvertent disclosure of
its trade secrets. Together with other cigarette manufacturers, RJRT has
provided comments on the regulations. Final regulations are expected from Texas
by mid-year. RJRT is unable to predict whether final regulations will provide
adequate security for its trade secrets.
The governments of two states whose attorneys general have filed medical
care cost recovery actions against tobacco companies, have passed new state laws
specifically granting to the states independent (as opposed to subrogated)
claims to recover Medicaid costs. These statutes also contain other procedures
intended to facilitate recovery by the states and make it difficult for the
tobacco company defendants to assert their traditional defenses.
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 1997, the Canadian Parliament
passed legislation permitting their Health Department to adopt new regulations
that may substantially limit cigarette advertising and sponsorships. The
regulations are expected to be promulgated by the end of 1998. Also in 1997, the
EU Council of Health Ministers approved a directive banning all tobacco
advertising (except at retail point-of-sale) and sponsorships. The EU Parliament
approved the directive this year, and member countries will have three years to
enact conforming legislation.
As of April 30, 1998, the United States Congress was considering a number of
bills that would impose new and severe regulations on the manufacturing,
marketing and advertising of tobacco products and/or impose materially increased
financial obligations on the tobacco industry. Although, by its execution of the
June 20(th) Agreement, RJRT supported the enactment of legislation that would
have imposed severe regulatory and financial burdens on the industry, it did so
in anticipation that the legislation would also provide certain relief from
litigation risk. The currently pending bills generally seek to impose greater
burdens on the industry than those provided in the June 20(th) Agreement coupled
with little or no litigation risk reduction. RJRT cannot predict what
legislation, if any, will be enacted as a result of the current congressional
activity, but it is possible that such legislation will not be advantageous to
RJRT and could impact the dividend and share repurchase policies of RJRN
Holdings and have a material adverse effect on RJRT's business and financial
condition and that of its parent companies.
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,
including the effects on results of operations of certain attorney general
agreements, see note 4 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 and the U.S. Foods Group
(collectively, the "Domestic Food Group"). The U.S. Foods Group
16
<PAGE>
includes the Sales & Integrated Logistics Group, the Specialty Products,
LifeSavers, Planters, Tablespreads and Food Service organizations. Nabisco
Holdings' businesses outside the United States are conducted by Nabisco Ltd and
Nabisco International, Inc. (collectively, the "International Food Group").
The Domestic Food Group's net sales were 4% higher for the quarter, with
Nabisco Biscuit up 6% and the U.S. Foods Group up 1%. Nabisco Biscuit's increase
was principally due to the impact of four extra selling days in 1998. On a
days-adjusted basis, 1998 net sales decreased by 1%. Nonetheless, results
reflected volume improvements in core cookies and crackers, partially offset by
volume declines in SnackWell's and breakfast snacks. The U.S. Foods Group's net
sales increase was attributable to higher sales of nuts and condiments and the
inclusion of Cornnuts snacks acquired in December 1997, partially offset by
lower confectionery sales. Sales of confections were off versus last year, due
primarily to the national introduction of SnackWell's candy in the first quarter
of 1997. The International Food Group's net sales were up 1% for the quarter.
The increase in net sales reflects improved results in Canada, Mexico and South
Africa, partially offset by declines in Brazil, due principally to volume
declines resulting from aggressive competitive activity in the biscuit and milk
categories and in Asia, due to the impact of the regional economic downturn.
The Domestic Food Group's operating company contribution was up 4%, with
Nabisco Biscuit up 7% and the U.S. Foods Group down 3%. The improved operating
results at Nabisco Biscuit resulted largely from higher sales and improved
margins, partially offset by higher consumer marketing expense. The U.S. Foods
Group's decrease in operating company contribution was primarily attributable to
higher marketing and promotion expense, partially offset by slightly higher net
sales and improved margins. The International Food Group's operating company
contribution was down 41% for the quarter. The decrease was principally due to
lower earnings in Brazil due to lower net sales and higher advertising expense,
in Asia due to lower net sales, in Argentina due to competitive pricing
pressures and in Canada, due to higher marketing expense, all of which more than
offset small profitability improvements in Mexico and South Africa.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows used in operating activities were $284 million in the first
quarter of 1998 compared to $171 million in the first quarter of 1997. The
increase in the net cash flow used primarily reflects lower net income, the
prepayment of foreign excise taxes in anticipation of price increases, higher
income tax and restructuring payments and the tobacco settlement payments in
1998.
Net cash flows used in investing activities for 1998 were $141 million, an
increase of $46 million from the 1997 level of $95 million. The increase
reflects lower proceeds from the sale and closure of certain international
tobacco facilities in 1997 and the repurchases of Nabisco Holdings' Class A
common stock net of stock option exercises.
Net cash flows from financing activities increased to $293 million in the
first quarter of 1998 from $240 million in 1997. The increase was primarily due
to an overall increase in borrowings to fund operations.
Free cash flow, another measure used by management to evaluate liquidity and
financial condition, represents cash available for the repayment of debt and
certain other corporate purposes such as common stock dividends, stock
repurchases and acquisitions. It is essentially net cash flow from operating
activities and investing activities per the Consolidated Statements of Cash
Flows, adjusted for acquisitions and divestitures of businesses, less preferred
stock dividends. Free cash flow resulted in outflows of $323 million and $305
million for the first quarter of 1998 and 1997, respectively. The decrease in
free cash flow primarily reflects lower operating company contribution, higher
income tax and restructuring payments
and the tobacco settlement payments in 1998.
Total estimated payments in 1998 for all attorney general agreements,
including agreements with the state of Minnesota and Blue Cross and Blue Shield
of Minnesota, will be approximately $450 million,
17
<PAGE>
which will be funded primarily by cash flows from operating and financing
activities. Because of the varying terms of the Mississippi, Florida and Texas
settlement agreements, RJRN cannot currently predict whether and to what extent
the Minnesota agreements might trigger any further obligations under the "most
favored nation" provisions of the settlement agreements entered into with those
states in 1997 and early 1998. For further discussion of the potential impact of
the proposed resolution of national, regulatory and litigation issues and
various litigation settlements, including the effects of certain attorney
general agreements, see note 4 to the consolidated condensed financial
statements.
Management of RJRN Holdings and its subsidiaries is continuing to review
various strategic transactions, including but not limited to, acquisitions,
divestitures, mergers and joint ventures. Management is also exploring ways to
increase efficiency and productivity and to reduce the cost structures of its
respective businesses, actions that, if implemented, could affect future
results.
Capital expenditures were $136 million for the first three months of 1998.
Management expects the current level of capital expenditures planned for 1998 to
be in the range of approximately $650 million to $700 million (approximately 52%
Food and 48% Tobacco), which will be funded primarily by cash flows from
operating and financing activities. Management 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 particularly with respect to capital expenditures and the impact of
proposed national legislation and various litigation settlements, including
certain attorney general agreements, which reflect management's current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including, but not
limited to, the effect on financial performance and future events of competitive
pricing for products, success of new product innovations and acquisitions, local
economic conditions and the effects of currency fluctuations in countries in
which RJRN Holdings and its subsidiaries do business, the effects of domestic
and foreign government regulation, ratings of RJRN Holdings' or its
subsidiaries' securities and, in the case of the tobacco business, litigation
and related legislative and regulatory developments. Due to such uncertainties
and risks, readers are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date hereof.
------------------------
18
<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 and RJRN Holdings) 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 1998, 72 new actions were served against RJRT and/or
its affiliates or indemnitees (as against 102 in the first quarter of 1997) and
16 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, 1998, there were 550 active
cases pending, as compared with 278 on March 31, 1997 and 168 on March 31, 1996.
As of April 30, 1998, 572 active cases were pending against RJRT and/or its
affiliates or indemnitees, 566 in the United States, two in Puerto Rico, one in
the Marshall Islands, two in Canada and one in Nigeria.
The United States cases are in 45 states and the District of Columbia, and
are distributed as follows: 198 in Florida, 103 in New York, 25 in California,
21 in Louisiana, 20 in Pennsylvania, 18 in Texas, 13 in Ohio, 12 in each of
Alabama and Tennessee, 10 in each of Illinois and West Virginia, nine in the
District of Columbia, eight in each of Mississippi and New Jersey, seven in
Indiana, six in Georgia, five in each of Maryland, Massachusetts, Michigan, and
Minnesota, four in each of Iowa, Kansas, Missouri, Nevada and South Dakota,
three in each of Arizona, Arkansas, Colorado, Hawaii, New Mexico, Oklahoma,
Rhode Island, Utah and Wisconsin, two in each of Connecticut, Kentucky, Montana,
New Hampshire, Oregon, South Carolina, and Washington, and one each in Alaska,
Idaho, Maine, North Carolina and Vermont. Of the 566 active cases in the United
States, 451 are in state court and 115 are in federal court. Most of these cases
were brought by individual plaintiffs, but an increasing number, discussed
below, seek recovery on behalf of states or large classes of claimants.
For information about other litigation and legal proceedings, see note 4 to
the consolidated condensed financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--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 McCain bill, the various
litigation settlements and the release and wide availability of various industry
documents referred to above. These developments may negatively affect the
outcomes of tobacco-related legal actions and encourage the commencement of
additional similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT, RJRN and
RJRN Holdings, a significant increase in litigation and/or in adverse outcomes
for tobacco defendants could have an adverse effect on any one or all of these
entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of
valid defenses to any such actions and intend to defend such actions vigorously.
19
<PAGE>
RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
------------------------
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a) Exhibits
10.1 Restricted Stock Agreement between RJR Nabisco Holdings Corp. and Steven F.
Goldstone, dated as of January 15, 1998
10.2 Non-Qualified Stock Option Agreement between Nabisco Holdings Corp. and Steven F.
Goldstone, dated as of January 15, 1998.
10.3 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the
grantee named therein (1998 grant -- 1 year period) dated as of February 6, 1998.
10.4 Letter Agreement by and among Nabisco Holdings Corp., Nabisco, Inc., RJR Nabisco
Holdings Corp., RJR Nabisco, Inc. and H. John Greeniaus, dated as of January 21,
1998.
10.5 Employment Agreement (dated January 15, 1998) among RJR Nabisco Holdings Corp., RJR
Nabisco, Inc. and William L. Rosoff.
10.6 Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and James M.
Kilts, dated as of January 2, 1998.
10.7 Amended and Restated Employment Agreement (dated January 1, 1997) among RJR Nabisco
Holdings Corp., RJR Nabisco, Inc. and Steven F. Goldstone.
10.8 Form of Performance Appreciation Right Agreement between RJR Nabisco Holdings Corp.
and the grantee named therein (1998 Grant).
10.9 Restricted Stock Agreement between RJR Nabisco Holdings Corp. and David B. Rickard,
dated as of January 15, 1998.
10.10 Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and David B.
Rickard, dated as of January 15, 1998.
10.11 Restricted Stock Agreement between RJR Nabisco Holdings Corp. and William L. Rosoff,
dated as of January 15, 1998.
10.12 Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and William
L. Rosoff, dated as of January 15, 1998.
12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges for the three
months ended March 31, 1998.
27.1 RJR Nabisco Holdings Corp. Financial Data Schedule for the three months ended March
31, 1998.
27.2 RJR Nabisco, Inc. Financial Data Schedule for the three months ended March 31, 1998.
27.3 RJR Nabisco Holdings Corp. Financial Data Schedules for the nine months ended
September 30, 1997 and six months ended June 30, 1997.
27.4 RJR Nabisco Holdings Corp. Financial Data Schedules for the fiscal years ended
December 31 1996 and 1995, the nine months ended September 30, 1996, the six months
ended June 30, 1996 and the three months ended March 31, 1996.
99.1 Settlement Agreement and Release in re: THE STATE OF MINNESOTA, ET AL., V. PHILIP
MORRIS, ET AL., by and among the State of Minnesota, Blue Cross and Blue Shield of
Minnesota and the various tobacco-company defendants named therein, dated as of May
8, 1998.
99.2 Settlement Agreement and Stipulation for Entry of Consent Judgement in re: THE STATE
OF MINNESOTA, ET AL., V. PHILIP MORRIS, ET AL., by and among the State of Minnesota,
Blue Cross and Blue Shield of Minnesota and the various tobacco-company defendants
named therein, dated as of May 8, 1998.
99.3 Form of Consent Judgement by Judge Kenneth J. Fitzpatrick, Judge of District Court
in re: THE STATE OF MINNESOTA, ET AL., V. PHILIP MORRIS, ET AL.
99.4 Agreement to Pay State of Minnesota Attorneys' Fees and Costs by and among the State
of Minnesota and various tobacco companies, dated as of May 8, 1998.
99.5 Agreement to Pay Blue Cross and Blue Shield of Minnesota Attorneys' Fees and Costs
by and among Blue Cross and Blue Shield of Minnesota and various tobacco companies,
dated as of May 8, 1998.
</TABLE>
(b) Reports on Form 8-K
None
21
<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.
<TABLE>
<S> <C>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
(Registrants)
Date: May 15, 1998 /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
</TABLE>
22
<PAGE>
Exhibit 10.1
RESTRICTED STOCK
1998 - SFG
1990 RJR NABISCO HOLDINGS CORP.
LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK PROGRAM
RESTRICTED STOCK AGREEMENT
----------------------------------
DATE OF GRANT: January 15, 1998
W I T N E S S E T H
1. GRANT OF RESTRICTED STOCK. Pursuant to the provisions of the 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, and this agreement evidences the grant to
STEVEN F. GOLDSTONE (THE "GRANTEE")
subject to the terms and conditions which follow and the terms and conditions of
the Plan, a total of
200,000 SHARES
of Common Stock of the Company ("Common Stock"). 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. RECEIPT AND DELIVERY OF STOCK. The Grantee waives receipt from the
Company of a certificate or certificates representing the shares of Common Stock
granted hereunder, registered in his name and bearing a legend evidencing the
restrictions imposed on such Common Stock by this agreement. The Grantee
acknowledges and agrees that the Company shall retain custody of such
certificate or certificates until the restrictions imposed by Paragraph 3 on the
Common Stock granted hereunder lapse. Concurrently with the execution of this
agreement, the Grantee has delivered to the Company an irrevocable stock power
endorsed in blank.
3. RESTRICTIONS ON TRANSFER OF STOCK. The Common Stock granted hereunder
may not be sold, tendered, assigned, transferred, pledged or otherwise
encumbered prior to the earliest of:
<PAGE>
(i) the date of the Grantee's attainment of age 60, for 100% of the
shares;
(ii) the date of the Grantee's death, for 100% of the shares;
(iii) the date of the Grantee's Disability, as defined in RJR Nabisco
Inc.'s Long Term Disability Plan, for 100% of the shares;
(iv) the date of the Grantee's termination by the Company without
"Cause or by the Grantee for Good Reason" (all as defined in the
Grantee's Employment Agreement), for 100% of the shares; or
(v) the date of a Change of Control, for 100% of the shares.
at which time the restrictions imposed on such Common Stock by this paragraph
shall lapse for the appropriate number of shares stated above and such Common
Stock shall be delivered to the Grantee without a restrictive legend on any
Common Stock certificate. Notwithstanding the provisions of this Paragraph 3,
the Common Stock granted hereunder shall never become transferable within 6
months of the Date of Grant.
4. FORFEITURE OF STOCK. The Common Stock upon which restrictions still
exist following Grantee's Severance Date shall never become transferable by the
Grantee or anyone claiming through him and the Grantee shall forfeit all right,
title and interest in and to such Common Stock along with the right to any
dividends paid thereon and the Common Stock granted hereunder shall revert to
the Company. "Severance 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). The
Committee or its agent shall act promptly to record forfeitures pursuant to this
paragraph on the stock transfer books of the Company.
5. DIVIDENDS. If the Grantee is a shareholder of record on any applicable
record date, he shall receive any dividends on the Common Stock granted
hereunder when paid regardless of whether the restrictions imposed by Paragraph
3 hereof have lapsed.
6. VOTING. If the Grantee is a shareholder of record on any applicable
record date, he shall have the right to vote the Common Stock granted hereunder
regardless of whether the restrictions imposed by Paragraph 3 hereof have
lapsed.
7. NO RIGHT TO EMPLOYMENT. The execution and delivery of this agreement
and the granting of Common Stock 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.
8. REGISTRATION. The Common Stock granted hereunder may be offered and
sold by the Grantee only if such stock is registered for resale under the
Securities Act of 1933 (the " 1933 Act") as amended, or if an exemption from
registration under such Act is available. The Company has no obligation to
effect such registration. By executing this agreement, the Grantee
2
<PAGE>
(i) agrees not to offer or sell the Common Stock granted hereunder unless and
until such stock is registered for resale under the 1933 Act or an exemption
from registration is available, (ii) represents that he accepts such Common
Stock for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof and (iii) agrees that he
or his beneficiary, on request, will be obligated to repeat these
representations in writing prior to any future delivery of such Common Stock.
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
spinoff, stock dividend, subdivision or reclassification of shares, the number
or nature of shares of Common Stock subject to this Agreement after such an
event shall be increased or changed in the same proportion or manner as the
outstanding number of shares of Common Stock is 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
shares of Common Stock 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 shares of Common Stock subject to this Agreement after such
an event, and in place of the shares so subject, a stock equivalent shall be
determined by multiplying the number of common shares of stock given in exchange
for a share of Common Stock upon such consolidation or merger, by the number of
shares of Common Stock 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 change in shares held pursuant to this
Agreement after such an event; provided, however, such change shall not be to
the detriment of the Executive.
10. APPLICATION OF LAWS. The granting of Common Stock hereunder shall be
subject to all applicable laws, rules and regulations and to such approvals of
any governmental agencies as may be required.
11. TAXES. Any taxes required by federal, state or local laws to be
withheld by the Company on the Grant or the delivery of Common Stock 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
conversion to cash by the Company of a sufficient amount of Common Stock to
satisfy the withholding prior to the delivery of Common Stock.
12. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013, and any notice required to be given
hereunder to the Grantee shall be sent to the Grantee's address as shown on the
records of the Company.
3
<PAGE>
13. GRANTEE. In consideration of the grant, the Grantee specifically
agrees that the Committee shall have the exclusive power to interpret the Plan
and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan and Agreement as are consistent
therewith and to interpret or revoke any such rules. All actions taken and all
interpretation and determinations made by the Committee shall be final,
conclusive, and binding upon the Grantee, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
the Agreement. The Committee may delegate its interpretive authority to an
officer or officers of the Company.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Grantee have executed this agreement as of the Date of Grant first above
written.
RJR NABISCO HOLDINGS CORP.
By:
-----------------------------
Authorized Signatory
- ----------------------------
Grantee
Grantee's Taxpayer Identification Number:
- ----------------------------
Grantee's Home Address:
- ----------------------------
- ----------------------------
- ----------------------------
4
<PAGE>
Exhibit 10.2
N Option R
1998 - SFG
NABISCO HOLDINGS CORP.
1994 LONG TERM INCENTIVE PLAN
STOCK OPTION AGREEMENT
---------------------------
DATE OF GRANT: JANUARY 15, 1998
W I T N E S S E T H :
1. GRANT OF OPTION. Subject to (i) the terms and conditions herein and
(ii) the provisions of the Nabisco Holdings Corp. 1994 Long Term Incentive Plan
(the "Plan"), Nabisco Holdings Corp. (the "Company") on the above date has
granted to
STEVEN F. GOLDSTONE (THE "OPTIONEE"),
the right and option to exercise from the Company a total of
100,000 SHARES
of Class A Common Stock of the Company ("Common Stock"), at the exercise price
of $47.625 per share (the "Option"). A copy of the Plan is attached and made a
part of this agreement with same effect as if set forth in the agreement itself.
All capitalized terms used herein shall have the meaning set forth in the Plan,
unless the context requires a different meaning.
2. EXERCISE OF OPTION.
(a) Shares may be purchased by giving the Corporate Secretary of the
Company written notice of exercise, on a form prescribed by the Company,
specifying the number of 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 shares under the Plan. This method is known as the
"broker-dealer
<PAGE>
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) Notwithstanding provisions for regular exercise, if more than 80% of
the aggregate value of all classes of Company common stock is owned, directly or
indirectly, by RJR Nabisco Holdings Corp. on the date of exercise then the
Company may, in its absolute discretion, make a cash payment to the Optionee,
net of taxes, equal to the product of (x) and (y), where (x) is the excess of
the fair market value of Common Stock on the date of exercise over the exercise
price, and (y) is the number of shares subject to the Option(s) being exercised.
Such cash payment shall be in lieu of delivery of shares.
(c) Subject to Sections 2(b), 2(d), and 4, this Option shall be vested in
three installments. The first installment shall be vested on the 1st of January
following the Date of Grant for 33% of the number of shares of Common Stock
subject to this Option. Thereafter, on each subsequent January 1st an
installment shall become vested for 33% and 34%, respectively, of the number of
shares subject to this Option until the Option has become fully vested. To the
extent that any portion of the Option is not exercised, it shall not expire, but
shall continue to be vested at any time thereafter until this Option shall
terminate, expire or be surrendered. An exercise shall be for whole shares
only.
(d) This Option shall not be exercised prior to 36 months after the Date
of Grant.
2
<PAGE>
3. RIGHTS IN EVENT OF TERMINATION OF EMPLOYMENT.
Subject to Sections 2(b), 2(d) and 4:
(a) Unless otherwise provided in a written employment or termination
agreement between the Optionee and the Company, the Option shall not become
vested as to any additional shares following the Termination of Employment of
the Optionee for any reason other than a Termination of Employment because of
death, Permanent Disability, Retirement, Termination of Employment by the
Optionee with Good Reason or involuntary Termination of Employment of the
Optionee without Cause. In the event of the Optionee's Termination of
Employment because of any of the foregoing reasons, the Option shall immediately
become vested as to all shares.
(b) The Optionee shall be deemed to have a "Permanent Disability" if he
becomes 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.
(c) "Retirement" as used herein means retirement at age 65 or over, or
early retirement at age 55 or over with the approval of the Company, which
approval specifically states that the Option shall become fully exercisable as
to all Shares.
(d) "Termination of Employment" as used herein means termination from
active employment with the Company and any other entity which, as of the date of
this Agreement, is an affiliate of the Company.
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 Section 11 herein).
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
3
<PAGE>
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, combination of shares, or
otherwise, the Committee may 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 (i) on exercise by the Optionee of the Option for Common
Stock, or (ii) at the time an election, if any, is made by the Optionee pursuant
to Section 83(b) of the Internal Revenue Code, as amended, shall be paid to the
Company before delivery of the Common Stock is made to the Optionee. When the
Option is exercised under the broker-dealer exercise method, the full amount of
any taxes required to be withheld by the Company on exercise of stock options
shall be deducted by the Company from the proceeds.
10. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, Nabisco Holdings Corp., 7 Campus Drive,
Parsippany, New Jersey 07054, 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" OR WITH "GOOD REASON". For purposes of this
Agreement, the Optionee's employment shall be deemed to have been terminated for
"Cause" or with "Good Reason" only as such terms are defined and applied in the
Optionee's employment agreement with the Company. 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
4
<PAGE>
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. OTHER PROVISIONS.
a) Titles are provided herein for convenience only and are not to
serve as a basis for interpretation of the Agreement.
b) This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
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.
NABISCO HOLDINGS CORP.
By
---------------------------------
Authorized Signatory
- -----------------------------
Optionee
Optionee's Taxpayer Identification Number:
- -----------------------------
Optionee's Home Address:
- -----------------------------
- -----------------------------
- -----------------------------
5
<PAGE>
Exhibit 10.3
Performance Units
Performance Notes
1998
Special - One Year
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
GRANT AGREEMENT
DATE OF GRANT: FEBRUARY 6, 1998
WITNESSETH:
1. GRANT. Pursuant to the 1990 Long Term Incentive Plan (the "Plan"), RJR
Nabisco Holdings Corp. (the "Company") on the above date has granted to
(THE "GRANTEE"),
subject to the terms and conditions of this Agreement and the Plan,
PERFORMANCE UNITS
AND
PERFORMANCE NOTES
A copy of the Plan is attached and constitutes an integral part of this
Agreement. All undefined capitalized terms in this Agreement have the same
meaning as in the Plan or, if not defined therein, the Annual Incentive Award
Plan.
2. PERFORMANCE UNITS. Each Performance Unit has an initial value of
$1,000. The Committee will value each Performance Unit at the end of 1998 using
the performance measures set forth in the grid attached as Exhibit A, but the
Committee has the discretion to reduce the resulting valuation. You agree that
these Performance Units are in lieu of an award under the Annual Incentive Award
Plan for 1998.
3. PERFORMANCE NOTES.
(a) The Performance Notes have a three year term commencing January 1, 1998
and ending December 31, 2000 (the "Performance Period"). The value of the Notes
as of January 1, 1998 is $36.00. Promptly after 1998, 1999 and 2000, the
Committee will value the Performance Notes as of December 31 of the preceding
year using the performance measures and payment formula approved by the
Committee. The Committee has the discretion to reduce the resulting valuations
and, on the basis of the Company's performance in 1998, to cancel some or all of
the Performance Notes.
<PAGE>
(b) PURCHASE NOTES. You may elect to receive additional Performance Notes
in lieu of from 5% to 100% (in 5% increments) of the cash that you receive for
your Performance Units pursuant to Section 5 below (the "Discount Note
Program"). The number of Performance Notes issued will equal 103% of the value
of the Performance Units that you take in the form of Performance Notes, divided
by 85% of the value of the Notes on January 1, 1999. The Performance Notes
issued pursuant to the Discount Note Program will have the same value and
performance period as Performance Notes issued at the same time pursuant to the
Annual Incentive Award Plan. You must make your election to convert the
proceeds of Performance Units into additional Performance Notes at the same time
and in the same manner as the election to defer awards pursuant to Section 6.
4. VESTING.
(a) Performance Units vest on December 31, 1998 or, if earlier, your death,
Disability or Retirement. If your employment is involuntarily terminated
without Cause, your Performance Units will vest in proportion to the ratio of
(i) the number of partial or complete months of employment during 1998, to (ii)
12. If termination is voluntary or with Cause, the Performance Units will be
canceled immediately.
(b) Performance Notes granted pursuant to Section 1 vest on December 31,
2000 or, if earlier, your death, Disability or Retirement. If your employment
is involuntarily terminated without Cause, these Performance Notes will vest in
proportion to the ratio of (i) the number of partial or complete months of
employment between January 1, 1999 and December 31, 2000, to (ii) 24. If
termination is voluntary or with Cause, these Performance Notes will be canceled
immediately. Notes issued pursuant to the Discount Note Program are vested when
issued.
5. PAYMENT OF AWARDS.
(a) Subject to Section 5(b), the Company will pay you the value of your
vested Performance Units and Performance Notes as soon as practicable after the
end of 1998 and 2000, respectively.
(b) Subject to Section 5(c), if your employment terminates before you
receive payment for your vested Performance Notes, you will receive payment in
an amount equal to their value as of the beginning of the year in which
employment terminates. Payment will be made as soon as practicable.
(c) If your employment terminates voluntarily or for Cause prior to
December 31, 2000, you will receive payment for Performance Notes issued
pursuant to the Discount Note Program in an amount equal to (i) 85% of the value
of the Performance Notes when issued, or (ii) the value of the Performance Notes
as of the end of the most recently completed year, whichever is less. If your
employment terminates prior to December 31,
2
<PAGE>
2000 for any other reason, you will receive payment for these Performance Notes
in an amount equal to their value as of the end of the most recently completed
year.
(d) All payments will be in cash and in exchange for the Performance Units
and Performance Notes, as applicable. You may not obtain payment for them in
Common Stock or other Company securities, and they do not give you any rights as
a holder of such securities.
6. DEFERRAL.
(a) You may elect to defer payment of Performance Units as of December 31,
1998 and Performance Notes as of December 31, 2000. Your election must be in
writing, signed by you and delivered to the Company on or before the foregoing
dates. Your election will be irrevocable and must specify the percentage (from
5% to 100%, in 5% increments) of the Performance Units and Performance Notes
(collectively, the "Grants") which will be paid (i) as soon as practicable after
the year your death, Retirement, Disability or other termination of employment
occurs or (ii) in January of any designated future year. If your employment
with the Company and its subsidiaries terminates before the designated year,
your Grants will be paid as of January of the year following termination.
Common Stock credits will not be paid until at least six months after the date
of deferral. The Company will contribute an additional 3% to the amount
deferred on account of the 3% Company match that you would have received under
the Capital Investment Plan if you had not deferred payment. The 3% match will
not apply to amounts deferred on account of Performance Notes issued pursuant to
the Discount Note Program.
(b) You must specify, on the notice electing deferred payment pursuant to
Section 6(a)(i), whether payment of the Grants will be deferred by cash credit,
Common Stock credit, or a combination of the two. If you elect to defer payment
pursuant to Section 6(a)(ii) or fail to choose a mode of deferral, your deferral
will be by means of a cash credit. Cash credits and stock credits will be
recorded in accounts established in your name on the books of the Company. At
the direction of the Company, your accounts may be consolidated on the books of
the Company or any of its subsidiaries.
(i) If your deferral is wholly or partly a cash credit, your cash
credit account will be credited, as of January 1 of the year that
payment of the Grants would have been made, with the dollar
amount of the portion of the Grants deferred by means of a cash
credit. In addition, your cash credit account will be credited
as of the last day of each calendar quarter with an interest
equivalent in an amount determined by applying to the current
balance in the account an interest rate equal to the average
prime rate of Morgan Guaranty Trust Company of New York during
the quarter. Interest will be credited for the actual number of
days in the quarter using a 365-day year.
3
<PAGE>
(ii) If the deferral is wholly or partly a Common Stock credit, your
Common Stock credit account will be credited, as of January 1 of
the year that payment of the Grants would have been made, with
the Common Stock equivalent of the number of shares of Common
Stock (including fractions of a share) that could have been
purchased with the portion of the Grants deferred by means of a
Common Stock credit at the closing price of the Common Stock on
the date that payment of the Grants would otherwise have been
made. As of the date any dividend is paid to shareholders of
Common Stock, your Common Stock credit account will also be
credited with an additional Common Stock equivalent equal to the
number of shares of Common Stock (including fractions of a share)
that could have been purchased at the Closing Price on such date
with the dividend paid on the number of shares of Common Stock to
which your Common Stock credit account is then equivalent. If
dividends are paid in property, the dividend will be deemed to be
the fair market value of the property at the time of distribution
of the dividend, as determined by the Committee.
(c) Payment of deferred Grants will be made in a single cash payment;
provided, however, that if you elect in writing before December 31 of the year
your employment terminates due to Retirement or Disability, payment will be made
in substantially equal annual installments (not to exceed ten) commencing on the
January following the Retirement or Disability. Notwithstanding any election
under Section 6(b) to defer awards by means of a Common Stock credit, your
Common Stock credit account, if you elect to receive installment payments, will
be converted into a cash credit account as of January 1 of the year in which
such installment payments commence.
(d) At your one-time election in writing to the Committee, all or any
designated portion of your Common Stock credit account may be converted to, and
you will be credited with, a cash credit account as of the first business day of
the calendar quarter following the quarter in which the election is made. The
amount credited to the cash credit account will be determined by multiplying the
number of shares of Common Stock to which your Common Stock credit account is
then equivalent and as to which such election has been made by the Closing Price
on the first business day of the calendar quarter following the quarter in which
the election is made. Any Common Stock credits attributable to dividends paid
on Common Stock during the calendar quarter in which the election is made will
be credited before making the conversion. You may make this election at any
time prior to the end of the calendar year in which termination of employment
occurs. An election by you under this Section 6(d) will be irrevocable.
(e) If the number of outstanding shares of Common Stock is increased as
the result of any stock dividend, subdivision or reclassification of shares, the
number of shares of Common Stock to which your Common Stock credit account is
equivalent will be increased in proportion to the increase in the number of
outstanding shares of Common Stock. If the number of outstanding shares of
Common Stock is decreased as
4
<PAGE>
the result of any combination or reclassification of shares, the number of
shares of Common Stock to which your Common Stock credit account is equivalent
will be decreased in proportion to the decrease in the number of outstanding
shares of Common Stock. In the event the Company is consolidated with or merged
into any other corporation and holders of the Company's Common Stock receive
common shares of the resulting or surviving corporation, your Common Stock
credit account, in place of the shares then credited thereto, will be credited
with a stock equivalent determined by multiplying the number of common shares of
stock given in exchange for a share of Common Stock upon such consolidation or
merger, by the number of shares of Common Stock to which your account is then
equivalent. If in such a consolidation or merger, holders of the Company's
Common Stock receive any consideration other than common shares of the resulting
or surviving corporation, the Committee will determine the appropriate change in
your account. In the event of any extraordinary dividend, including any
spin-off, the Committee will make appropriate adjustments to your Common Stock
credit account.
(f) If you die, whether before or after termination of employment, any
cash credit account and Common Stock credit account to which you are entitled,
including any award approved after your death as to which an election to defer
was made, will be distributed in cash (unless the Committee otherwise provides)
to your beneficiaries pursuant to Section 7.
7. BENEFICIARIES. If you die, the Company will make payments pursuant to
this Agreement to the beneficiary designated in writing by you specifically for
the Plan or, if there is no such designation or the named beneficiary is dead,
to the beneficiary most recently designated by you to receive the proceeds of
any Company-paid group life insurance coverage provided to you. Otherwise, the
distribution will be made to default beneficiaries as provided under the
Company-paid group life insurance plan. Only you may change or revoke your
designation.
8. TAX WITHHOLDING. The Company or one of its subsidiaries will deduct
any taxes required to be withheld by federal, state, local or foreign
governments from the awards that you receive pursuant to this Agreement.
9. TRANSFER. Except as set forth in this Agreement, you may not transfer,
pledge or encumber your Grants or any other benefits that you receive pursuant
to this Agreement. Except as required by law, creditors may not attach or seize
such Grants or benefits.
10. INTERPRETATION. The Committee has the power to interpret this
Agreement and complete discretion in making valuations and determinations and
taking other action pursuant to the Agreement. All interpretations,
determinations and actions by the Committee will be final and binding on all
parties. The Company, the Board of Directors, the Committee and the officers
and employees of the Company and its
5
<PAGE>
subsidiaries will not be liable for any action taken in good faith in
interpreting and performing this Agreement.
11. NO RIGHT TO EMPLOYMENT. The execution, delivery and performance of
this Agreement do not constitute an agreement or understanding, express or
implied, on the part of the Company or its subsidiaries to employ you for any
specific period or in any specific capacity and do not prevent the Company or
its subsidiaries from terminating your employment at any time with or without
Cause. "Termination of employment" under this Agreement means termination from
active employment; it does not mean the termination of pay and benefits at the
end of salary continuation or other forms of severance pay or pay in lieu of
salary.
12. NOTICES. Any notices to the Company pursuant to this Agreement should
be addressed to: The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of the
Americas, New York, NY 10019-6013. Any notice to you pursuant to this
Agreement will be sent to your address as shown on Company records.
13. CHANGE OF CONTROL OR SPIN-OFF. In the event of a Change of Control or
a Spin-off (i) all unvested Performance Notes and Performance Units issued to
you will vest if you are terminated without Cause within two years after the
date of the Change of Control or Spin-off, and (ii) the value of the Performance
Notes will not be less than the Closing Price of Common Stock on the date of the
Change of Control or the fourth business day preceding the record date of the
Spin-off, as applicable. For purposes of this Agreement, "Spin-off" means the
payment of a dividend or the making of a distribution by the Company to all
holders of Common Stock that consists of the capital stock of any of its
subsidiaries which accounts for all or substantially all of the Company's
interest in either of its two principal lines of business as of the date hereof.
14. YOUR OBLIGATIONS.
(a) You agree that, until the third anniversary of (i) your last day of
employment with the Company or any of its subsidiaries, or (ii) the last date on
which you receive any payment pursuant to this Agreement, whichever is later:
(A) you will personally provide reasonable assistance and cooperation to the
Company or any of its subsidiaries in activities related to the prosecution or
defense of any pending or future lawsuits or claims involving the Company or any
of its subsidiaries; (B) you will promptly notify the Company upon receipt of
any requests from anyone other than an employee or agent of the Company for
information regarding the Company or any of its subsidiaries or if you become
aware of any potential claim or proposed litigation against the Company or any
of its subsidiaries; (C) you will refrain from providing any information related
to any claim or potential litigation against the Company or any of its
subsidiaries to any non-Company representatives unless you have the Company's
written permission or are required to provide information pursuant to legal
process; (D) you will not disclose or misuse any confidential information or
material concerning the Company or any of its subsidiaries; and (E) you will not
engage in any activity contrary or harmful to the
6
<PAGE>
interests of the Company or any of its subsidiaries. You agree that if required
by law to provide sworn testimony regarding any matter relating to the Company
or any of its subsidiaries: you will consult with and have Company-designated
legal counsel present for such testimony (the Company will be responsible for
the costs of this counsel); you will confine your testimony to items about which
you have knowledge rather than speculation, unless otherwise directed by legal
process; and you will assist the efforts of the Company's attorneys to hold all
privileged attorney-client matters in strictest confidence, especially matters
you have been privy to.
(b) If the Company reasonably determines that you have materially violated
any of your obligations under this Agreement, then the Grants hereunder shall
terminate, effective no later than the date on which such violations began. In
that event, you agree to return to the Company on its demand any amounts paid to
you pursuant to this Agreement. If you fail to do so, the Company may deduct
from any amounts the Company owes to you (including, but not limited to, wages
or other compensation), or commence judicial proceedings against you, to recover
these amounts and related attorneys' fees and expenses. In addition, you agree
that the Company may pursue any other remedies available in law or at equity,
including injunctive relief, for any breach of this Section 14.
15. CHOICE OF LAW. This Agreement will be governed by the substantive law
of the State of New York. Any legal action or proceeding with respect to this
Agreement may be brought in the federal or state courts located in the Borough
of Manhattan in New York City.
IN WITNESS WHEREOF, the Company and you have executed this Agreement as of
the Date of Grant.
RJR NABISCO HOLDINGS CORP.
By
-------------------------------
Authorized Signatory
- ---------------------------
GRANTEE
Grantee's Taxpayer Identification Number: Grantee's Home Address
- ----------------------------- -------------------------
Date:
------------------------ -------------------------
7
<PAGE>
Exhibit 10.4
January 21, 1998
H. John Greeniaus
Dear John:
This letter agreement (the "Agreement") by and among RJR Nabisco Holdings Corp.,
RJR Nabisco, Inc. (collectively, "RJR Nabisco"), Nabisco Holdings Corp.,
Nabisco, Inc. (collectively, "Nabisco"), (RJR Nabisco and Nabisco are
collectively referred herein as the "Company"), their successors, affiliates
and/or assigns, and you, describes the termination of your employment
relationship with the Company, and the Company's obligations to you under your
Amended and Restated Employment Agreement dated December 14, 1995, with the
Company (the "Employment Agreement"). Except as otherwise defined herein,
capitalized terms herein shall be defined as in the Employment Agreement.
1. a) Effective January 1, 1998, you will cease to be actively employed by
the Company and you will no longer serve as Chairman, President and
Chief Executive Officer of Nabisco.
b) In accordance with the letter provided by your doctor on November 3,
1997, and subject to the provisions of this Agreement, the Company and
you agree that your termination of employment is a result of your
disability.
2. The Company will make a lump-sum payment to you in January 1998, in
satisfaction of the Company's obligation with respect to your unused and
accrued vacation days. No further vacation will accrue after December 31,
1997.
3. You will receive benefits under the Company's short-term disability plan
(the "STD Plan") from January 1, 1998 until June 30, 1998. STD Plan
payments to you will be equal to 100% of your base salary as in effect on
December 31, 1997 (your "Base Salary") for the first 22 weeks of short-term
disability and two-thirds of your Base Salary thereafter. Except as
otherwise provided in this Agreement, you will continue to participate in
the Company's employee benefit programs as an active employee in accordance
with the terms of the short-term disability program.
<PAGE>
4. You will receive benefits under the Company's long-term disability plan
(the "LTD Plan") from July 1, 1998 until December 31, 2000 (your
"Retirement Date"). Payments to you under the LTD Plan will be equal to
60% of your Base Salary.
Except as otherwise provided in this Agreement, you will continue to
participate in the Company's employee benefit programs as an active
employee until December 31, 2000 and you will be retired on January 1,
2001.
5. a) Provided you make any required employee contributions in a timely
manner, full coverage (or equivalent coverage to that provided) in the
SELECT Omnibus Welfare Benefit and Insurance Plans as well as the
Executive Medical Plan (the "Welfare Plans") will continue in
accordance with the terms of the Welfare Plans, until the end of the
month in which your Retirement Date occurs. You will be required to
re-enroll each year in the same manner as active employees. Should
you become employed by an employer not affiliated with the Company,
health and dental care coverage provided by your new employer will be
coordinated with health and dental care benefits under the Welfare
Plans.
b) If, on and after your Retirement Date, the Company provides retiree
medical, dental and life insurance coverage for its retirees, you
shall be eligible for such coverage at the Company and retiree
contribution rate for a retiree with your years of service as of your
Retirement Date. New Welfare Plans which replace or supersede current
programs will apply to you unless the Company chooses to continue the
current program for you.
6. You are fully vested in your account under the RJR Nabisco Capital
Investment Plan ("CIP"). During your period of short-term disability, you
may continue to make contributions to your CIP account. After June 30,
1998, you may not contribute to your CIP account and you will not accrue
any benefits under the deferred contribution portion of SUPP or ABP (each
as defined in Section 8(a)).
7. You are fully vested in the tax-qualified Retirement Plan for Employees of
RJR Nabisco, Inc., (the "PEP"). You will receive credited service until
June 30, 2000 under the PEP.
8. a) Pursuant to Section 5 of the Employment Agreement, you participate in
(i) the RJR Nabisco, Inc. Supplemental Executive Retirement Plan
("SERP"), (ii) the RJR Nabisco, Inc. Supplemental Benefits Plan
("SUPP") and (iii) the RJR Nabisco, Inc. Additional Benefits Plan
("ABP") (collectively, the "Plans"). Annuities have been purchased
for
2
<PAGE>
your benefit and are held in the Excess Benefit Master Trust dated
February 5, 1988, as amended through January 27, 1989 (the "Secular
Trust"), representing the after-tax cash lump sum value of your
accrued benefit as of December 31, 1994 under the SERP, SUPP and ABP.
The annuities are to be delivered on your Retirement Date subject to
the terms of Section 5 of the Employment Agreement.
b) The Company agrees to contribute such funds to the Secular Trust in
1998 as shall be necessary to fully fund additional supplemental
pension accruals under the Plans for the period January 1, 1995 until
your Retirement Date (the "Supplemental Accruals"), subject to the
execution by you of acknowledgment waivers requested by the Company.
The amount to be funded in 1998 will be the discounted present value
of the Supplemental Accruals using factors reflecting the interest
rate to be credited under annuities purchased in 1998 to fund the
Supplemental Accruals. The funds will be delivered on an after-tax
basis based on tax rates applicable to you at the time of funding.
c) The Company agrees that you will continue to accrue credited service
under the Plans until your Retirement Date. The Company agrees to
consent to your retirement on December 31, 2000 and to authorize
payment of your benefits under the Plans as of January 1, 2001.
9. In addition to annuities purchased for retirement benefits as referred to
in Section 8(a), in 1989, an annuity was purchased for you from Pacific
Mutual Life Insurance Company representing the value of compensation
continuance payments calculated at that time. The annuity was placed in
the Secular Trust, to be paid to you following your termination of
employment. The Company agrees to cause the annuity to be paid to you in a
single lump-sum as soon as practicable in 1998. This payment will not
affect the amount of, or entitlement to, any other benefits contemplated in
this Agreement.
10. The Company will continue to provide you with $3,000,000 of life insurance
as provided in Section 4.4 of the Employment Agreement. The premium on
this policy shall continue to be paid by the Company on a taxed grossed-up
basis as provided in Section 4.4 of the Employment Agreement.
11. a) Except as indicated below, you will continue to receive the benefits
of the Flexible Perquisite Program until your Retirement Date. Your
perquisite allowances for calendar years 1998, 1999 and 2000 shall be
as follows, less applicable withholding taxes:
3
<PAGE>
1998 $54,750
1999 $54,750
2000 $54,750
b) Current car lease arrangements provided by the Company will continue
until your Retirement Date. No new car or lease will be provided, but
you shall have the right to buy the car currently leased for you by
the Company on your Retirement Date for its then "blue book" wholesale
value.
12. Your 1997 annual performance unit award will be paid to you in 1998, in
accordance with the terms of your grant dated February 26, 1997.
13. Prior to February 15, 1998, you are expected to submit Expense Reports for
all outstanding travel, entertainment and other business expenses cash
advances. In addition, prior to your Retirement Date you must return all
Company equipment such as personal computers and mobile telephones.
14. Because your termination of employment is due to disability, all
outstanding stock options granted to you under the Nabisco Holdings Corp.
1994 Long-Term Incentive Plan (the "Nabisco LTIP") and under the RJR
Nabisco Holdings Corp., 1990 Long-Term Incentive Plan (the "RN LTIP") will
be fully vested on January 1, 1998, in accordance with Section 3(a) of the
agreements evidencing such grants. All other provisions of the stock
option agreements, including provisions governing the exercise of your
stock options, remain in effect.
15. a) Your have outstanding indebtedness to Nabisco Holdings Corp. under
secured Promisory Notes as follows:
INITIAL INDEBTEDNESS NHC STOCK
DATE INDEBTEDNESS ON 1/1/98 HELD AS SECURITY
---- ------------ ------------ ----------------
February 26, 1996 $348,750 $389,023.52 10,000
February 28, 1996 $341,250 $380,534.40 10,000
March 11, 1996 $692,500 $770,464.41 20,000
---------- ------------- ------
Total $1,382,500 $1,540,022.33 40,000
The indebtedness becomes due and payable on your Retirement Date and,
at your election, may be satisfied by either (i) a cash payment by you
to Nabisco Holdings Corp. or (ii) the sale of collateralized stock and
use of the proceeds to repay the indebtedness. If, and to the extent
that, the
4
<PAGE>
indebtedness exceeds the sale proceeds you will be responsible to
repay the remaining indebtedness in accordance with the terms of the
appropriate Promissory Notes.
b) You have outstanding indebtedness to RJR Nabisco Holdings Corp. under
a secured promisory note dated April 15, 1991. As of January 1, 1998,
the outstanding indebtedness is $1,176,584.38, which is secured by
36,000 shares of RJR Nabisco Holdings Corp. common stock. The
indebtedness becomes due and payable on your Retirement Date and, at
your election, may be satisfied by either (i) a cash payment by you to
RJR Nabisco Holdings Corp. or (ii) the sale of collateralized stock
and use of the proceeds to repay the indebtedness. If, and to the
extent that, the indebtedness exceeds the sale proceeds you will be
responsible to repay the remaining indebtedness in accordance with the
terms of the appropriate Promissory Notes. You understand and agree
that RJR Nabisco Holdings Corp. has no further obligation to you under
your Executive Equity Program agreement dated July 1, 1993, as
modified on July 11, 1995..
16. a) You agree that until your Retirement Date you will provide consulting
services on a reasonable basis (i) to help in the transition to your
successor and (ii) with respect to any other matters concerning the
Company (past or present) about which you are knowledgeable, subject
to appropriate notice and reimbursement of all travel and other
expenses. Nothing in this Section 16(a) will require you to take any
action which you reasonably believe may be injurious to your
disability.
b) You acknowledge that as of January 1, 1998, your active employment
with the Company will end irrevocably and will not be resumed again at
any time in the future, except upon mutual agreement of the parties
hereto.
17. In the event of your death prior to your Retirement Date: (i) benefits
under the STD Plan and the LTD Plan shall cease; (ii) continued spousal
coverage is available under the Welfare Plans and retiree welfare plans in
accordance with the terms of the plans; (iii) your CIP account may be
distributed to your designated beneficiary under CIP; (iv) your retirement
plan benefits (including SERP) may be distributed to your designated
beneficiary based on the form of payment that you elect; (v) your benefits
under the Perquisite Program (including your entitlement to a company car)
will cease; (vi) outstanding stock option grants will remain in effect and
may be exercised in accordance with the
5
<PAGE>
appropriate stock option agreements; and (vii) outstanding indebtedness
will become due and payable.
18. a) Your will not, without the prior written consent of the Company,
divulge, disclose or make accessible to any other person, firm,
partnership or corporation or other entity any Confidential
Information pertaining to the business of the Company except when
required to do so by a court of competent jurisdiction, by any
governmental agency having supervisory authority over the business of
the Company, or by any administrative body or legislative body
(including a committee thereof) with jurisdiction to order you to
divulge, disclose or make accessible such information. For purposes
of this Section Agreement, "Confidential Information" means non-public
information concerning the Company's financial data, strategic
business plans, product development (or other proprietary product
data), customer lists, marketing plans and other proprietary
information, except for specific items which have become publicly
available information (other than such items which you know have
become publicly available through a breach of fiduciary duty or any
confidentiality agreement). In accordance with normal ethical and
professional standards, you agree to refrain from taking actions or
making statements, written or oral, which defame or denigrate the
goodwill or reputation of the Company, their properties, products,
directors, officers, executives and employees or which constitute
willful conduct under circumstances where it is reasonable for you to
anticipate or to expect that the natural consequences of such conduct
will be to affect adversely the morale of other employees.
b) Subject to the final sentence of this paragraph (b), during the period
ending on your Retirement Date, you agree that (1) you 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, (2) you will promptly
notify the Company if you receive any requests from anyone other than
an employee or agent of the Company for information regarding the
Company or if you become aware of any potential claim or proposed
litigation against the Company, (3) you 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, (4) if required by law to provide sworn
testimony regarding any Company-related matter, you will consult with
and have Company designated legal counsel present for such testimony,
(5) the Company will be responsible for the costs of such designated
counsel and you will bear no cost for same, (6) you will confine
6
<PAGE>
his testimony to items about which you have knowledge rather than
speculation, unless otherwise directed by legal process and (7) you
will cooperate with the Company's attorneys to assist their efforts,
especially on matters you have been privy to, holding all privileged
attorney-client matters in strictest confidence. Nothing in the
foregoing clauses 2-7 is intended to apply to governmental or judicial
investigations; provided, however, the Company will reimburse you for
legal expenses if you are compelled to appear in a governmental
judicial investigation. Nothing in this Section 18(b) will require
you to take any action which you reasonably believe may be injurious
to your disability.
c) You agree that until your Retirement Date, you will not, without the
written approval of the Chairman of Nabisco (and the Chairman of any
majority shareholder of Nabisco), accept employment or act as a
director, consultant or advisor to, or with, any other company
conducting a business which is substantially competitive with a
business conducted by the Company or any affiliate. You also agree
that until your Retirement Date you will not solicit or encourage any
incumbent employee of the Company or an affiliate to leave the employ
of the Company or an affiliate and will ask written approval from the
Chairman of Nabisco (and the Chairman of any majority shareholder of
Nabisco) to discuss employment offers with incumbent employee of the
Company or an affiliate.
d) In the event that the Company determines that you materially violate
the terms and conditions of Sections 18(a),(b) or (c) above, the
Company may, at its election upon ten (10) days notice, take such
action as it deems appropriate, including terminating the disability
period, discontinuing cash compensation payments and employee benefits
coverage, canceling any outstanding stock options or other Long Term
Incentive Plan awards and recovering amounts previously paid to, or
gain realized by, you. The Company may also initiate any form of
legal action it may deem appropriate seeking damages or injunctive
relief with respect to any material violations of Sections 18(a),(b)
or (c) above.
19. IN CONSIDERATION OF THE COMPENSATION AND BENEFITS SET FORTH IN THIS
AGREEMENT AND EXCEPT FOR THE COMPANY'S OBLIGATIONS HEREUNDER YOU
VOLUNTARILY, KNOWINGLY AND WILLINGLY RELEASE AND FOREVER DISCHARGE THE
COMPANY, ITS PARENTS, SUBSIDIARIES AND AFFILIATES, TOGETHER WITH THEIR
RESPECTIVE OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS, AND
EACH OF THEIR PREDECESSORS, SUCCESSORS AND ASSIGNS, FROM ANY
7
<PAGE>
AND ALL CHARGES, COMPLAINTS, CLAIMS, PROMISES, AGREEMENTS, CONTROVERSIES,
CAUSES OF ACTION AND DEMANDS OF ANY NATURE WHATSOEVER WHICH AGAINST THEM
YOU OR YOUR EXECUTORS, ADMINISTRATORS, SUCCESSORS OR ASSIGNS EVER HAD, NOW
HAVE OR HEREAFTER CAN, SHALL OR MAY HAVE BY REASON OF ANY MATTER, CAUSE OR
THING WHATSOEVER ARISING TO THE EFFECTIVE DATE OF THIS AGREEMENT. YOU
FURTHER AGREE THAT, EXCEPT IN CONNECTION WITH THE ENFORCEMENT OF YOUR
RIGHTS HEREUNDER, YOU WILL NOT SEEK OR BE ENTITLED TO ANY AWARD OF
EQUITABLE OR MONETARY RELIEF IN ANY PROCEEDING OF ANY NATURE BROUGHT ON
YOUR BEHALF ARISING OUT OF ANY OF THE MATTERS RELEASED BY THIS PARAGRAPH.
THIS RELEASE INCLUDES, BUT IS NOT LIMITED TO, ANY RIGHTS OR CLAIMS RELATING
IN ANY WAY TO YOUR EMPLOYMENT RELATIONSHIP WITH THE COMPANY, OR THE
TERMINATION THEREOF, OR UNDER ANY STATUTE, INCLUDING THE AGE DISCRIMINATION
IN EMPLOYMENT ACT, TITLE VII OF THE CIVIL RIGHTS ACT, THE AMERICANS WITH
DISABILITIES ACT, OR ANY OTHER FEDERAL, STATE OR LOCAL LAW.
20. The Company advises you that you may wish to consult with an attorney of
your choosing prior to signing this Agreement. You understand and agree
that you have the right and have been given the opportunity to review this
Agreement and, specifically, the release in paragraph 19, with an attorney
of your choice should you so desire. You also understand and agree that
you are under no obligation to consent to the release set forth in
paragraph 19 and that you have entered into this Agreement freely,
knowingly and voluntarily.
21. This Agreement contains our entire understanding with respect to the
subject matter hereof. There are no restrictions, agreements, promises,
warranties, covenants, representations or undertakings between the parties
with respect to the subject matter hereof other than those expressly set
forth herein.
22. You hereby acknowledge that you have consulted with, and relied on your own
advisors with respect to the amounts of the payments the Company will make
pursuant hereto or has heretofore made to you, and you further acknowledge
that in signing this Agreement you are not relying on any statements or
representations made by the Company or its agents concerning the
calculation of such amounts.
8
<PAGE>
23. You have at least twenty-one (21) days to consider the terms of this
Agreement, although you may sign and return it sooner if you wish. This
Agreement may be revoked by you for a period of seven (7) consecutive
calendar days after you have signed and dated it, and after such seven (7)
days, it becomes final ("Effective Date").
Please indicate your acceptance of the terms of this Agreement by signing this
letter and the attached duplicate and returning one signed original to me.
Sincerely,
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
By:
-------------------------------
Steven F. Goldstone
Chairman & Chief Executive Officer
NABISCO HOLDINGS CORP.
NABISCO, INC.
By:
-------------------------------
Steven F. Goldstone
Chairman
Understood and Agreed:
- ------------------------------
H. John Greeniaus
Date:
-------------------------
9
<PAGE>
Exhibit 10.5
January 15, 1998
William L. Rosoff
Dear Bill:
RJR Nabisco Holdings Corp. ("Holdings") and RJR Nabisco, Inc. (the
"Company") consider it essential to the best interests of Holdings' stockholders
to attract and foster the continuous employment of key management personnel of
the Company.
In furtherance of the foregoing interests of Holdings and its stockholders,
Holdings and the Company have previously committed, in a protection program for
headquarters employees established on July 1, 1994 and implemented as of January
31, 1995 as the RJR Nabisco Holdings Corp. Headquarters Continuing Excellence
Recognition Program (the "Headquarters Program"), to provide to certain
executives certain payments and benefits in the event of involuntary separation
of employment with the Company other than for cause.
In light of the success of the Headquarters Program in retaining and
motivating headquarters employees, the Board of Directors of Holdings (the
"Holdings Board") and the Board of Directors of the Company (the "Board") (and
sometimes, collectively, the "Boards") have determined that further appropriate
steps should be taken to reinforce and encourage the continued attention and
dedication of key management personnel, including yourself, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from any possible Change of Control (as defined in Section 3 below) or a
Spinoff (as defined in Section 4(a)(vi) below). The Boards have also determined
that it is in the best interest of Holdings and its stockholders to ensure your
continued availability to Holdings in the event of a Change of Control.
In order to induce you to become employed with the Company, Holdings and
the Company agree that you shall receive (i) certain benefits upon becoming
employed, (ii) certain payments and benefits as set forth in this letter
agreement (the "Agreement") in the event your employment with the Company is
terminated under the circumstances described below and (iii) certain other
payments, as set forth in this Agreement, upon a Change of Control (as defined
in Section 3 below).
This Agreement, when executed by you, will (1) supersede and replace the
Headquarters Program and (2) will be in lieu of your participation in the RJR
Nabisco, Inc. Salary and Benefit Continuation Program (the "SBC Program") and
the RJR Nabisco
<PAGE>
Holdings Corp. 1995 Employee Protection Program (the "1995 Program") but will in
no event provide lesser benefits to you in the event of the termination of your
employment than would otherwise have been available under the provisions of the
SBC Program or the 1995 Program, as applicable. As a precondition to payment of
the benefits provided herein, you will be required to sign the relevant release
of claims against Holdings and/or the Company, as the case may be, in the form
attached hereto as Exhibit A.
1. TERM OF AGREEMENT. This Agreement shall be effective as of the date
hereof and shall continue in effect as long as you are employed by the Company
or any of its affiliates or successors.
2. BENEFITS AND AWARDS ON EMPLOYMENT. Your employment hereunder has
commenced as of the date hereof and, subject to your execution of this
Agreement, your employment shall be on the following basis:
a) Your title will be Senior Vice President and General Counsel. You will
be in RJR Nabisco, Inc. Salary Grade A. You will have the customary
powers, responsibilities and authorities of Senior Vice Presidents and
General Counsels of corporations of the size, type and nature of Holdings
and Company, specifically, you shall have responsibility for all of
Holdings' and the Company's legal staff functions. You will report to the
Company's Chief Executive Officer and your principal office shall be at the
principal executive offices of Holdings and the Company in New York, New
York.
b) Your base salary will be $600,000 per year. Your target bonus will be
70% of base salary, subject to the terms and conditions of RJR Nabisco,
Inc. Annual Incentive Award Plan ("AIAP") or any successor plan.
c) You will receive grants annually under the RJR Nabisco Holdings Corp.
1990 Long-Term Incentive Plan ("LTIP") and/or any additional or successor
long-term incentive plan commensurate with a Salary Grade Level A position.
d) You will receive 150,000 RJR Nabisco Holdings Corp. Stock Options and
35,000 shares of RJR Nabisco Holdings Corp. Restricted Stock, both subject
to the terms and conditions of the LTIP and individual grant agreements to
be executed by you and the Company.
e) You will be entitled to a pension enhancement as described hereinafter
in Section 6.1, unless forfeited under the terms of this Agreement.
f) You will be entitled to participation in the Company's perquisite
program and employee benefits program at a level commensurate for Salary
Grade Level A, as long as the Company continues to sponsor such programs
and benefits.
3. CHANGE OF CONTROL. For purposes of this Agreement, the term "Change
of Control" shall mean the first to occur of the following events:
3
<PAGE>
(a) an individual, corporation, partnership, group, associate or other
entity or "person", as such term is defined in Section 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), other than Holdings
or any employee benefit plan(s) sponsored by Holdings or the Company, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 30% or more of the combined voting power
of the Holdings' outstanding securities ordinarily having the right to vote
at elections of directors;
(b) individuals who constitute the Holdings Board on the date of this
Agreement (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to such date whose election, or nomination for election by
Holdings' shareholders, was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board (either by a specific vote
or by approval of the proxy statement of Holdings in which such person is
named as a nominee of Holdings for director), but excluding for this
purpose any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of an individual, corporation, partnership, group, associate
or other entity or "person" other than the Holdings Board, shall be, for
purposes of this paragraph (b), considered as though such person were a
member of the Incumbent Board; or
(c) the approval by the shareholders of the Company of a plan or agreement
providing (1) for a merger or consolidation of Holdings other than with a
wholly-owned subsidiary and other than a merger or consolidation that would
result in the voting securities of Holdings outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than
50% of the combined voting power of the voting securities of Holdings or
such surviving entity outstanding immediately after such merger or
consolidation, or (2) for a sale, exchange or other disposition of all or
substantially all of the assets of Holdings. If any of the events
enumerated in this paragraph (c) occurs, the Holdings Board shall determine
the effective date of the Change of Control resulting therefrom for
purposes of this Agreement.
4. TERMINATION OF EMPLOYMENT.
(a) DEFINITIONS.
(i) DISABILITY. You shall be deemed to be Disabled if you become
totally and permanently disabled (as defined in the Company's Long
Term Disability Plan applicable to senior executive officers as in
effect on the date
3
<PAGE>
hereof) or, prior to a Change of Control, if the Board or any
committee thereof so determines.
(ii) RETIREMENT. "Retirement" shall mean your retirement on or after
attaining age 55 and with ten or more years of service with the
Company or any affiliate of the Company, including any imputed service
as described in Section 6.1 or as may otherwise be granted by the
Company.
(iii) CAUSE.
(A) Prior to a Change of Control, termination for "Cause" shall
mean termination of your employment resulting from your (I) criminal
conduct, (II) deliberate and continual refusal to perform employment
duties on substantially a full time basis (other than as a result of
total or partial incapacity due to physical or mental illness or as a
result of a termination by you for Good Reason), (III) deliberate and
continual refusal to act in accordance with any specific lawful
instructions of an authorized officer or employee senior to you or
(IV) deliberate misconduct which could be materially damaging to
Holdings or the Company without a reasonable good faith belief by the
Employee that such conduct was in the best interests of Holdings or
the Company. A termination of employment shall not be deemed for
Cause hereunder unless the senior personnel executive of Holdings or
the Company shall confirm that any such termination is for Cause as
defined above.
(B) Following a Change of Control, termination for "Cause" shall
mean termination of your employment resulting from (I) your willful
and continued failure substantially to perform your duties with
Holdings or the Company (other than as a result of total or partial
incapacity due to physical or mental illness or as a result of a
termination by you for Good Reason) after a written demand for
substantial performance is delivered to you by the Board, which demand
specifically identifies the manner in which the Board believes that
you have not substantially performed your duties, (II) the willful
engaging by you in conduct which is demonstrably and materially
injurious to Holdings or the Company, monetarily or otherwise or (III)
your conviction of (x) a felony under the laws of the United States or
any state or (y) a felony under the laws of any other country or
political sub-division thereof involving moral turpitude. For
purposes of this clause (a)(iii)(B), no act or failure to act, on your
part shall be deemed "willful" unless done or omitted to be done, by
you not in good faith and without reasonable belief that your action
or omission was in the best interest of Holdings or the Company.
Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause under this Clause (a)(iii)(B) unless and until
there shall have been an affirmative vote (which cannot be delegated)
of not less than three-quarters (3/4) of the entire membership of the
Board at a meeting
4
<PAGE>
of the Board called and held for such purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the good faith opinion of the
Board you were guilty of conduct set forth above in subclauses (I),
(II) or (III) above, specifying the particulars thereof in detail.
(iv) GOOD REASON FOLLOWING A CHANGE OF CONTROL. During the
twenty-four month period following a Change of Control, you shall be
entitled to terminate your employment for Good Reason. For purposes
of this paragraph (iv), "Good Reason" shall mean, without your express
written consent, any of the following occurring during such
twenty-four month period:
(A) A material reduction in your duties or responsibilities, a
material diminution in your position or a material adverse change in
your reporting relationship from those in effect immediately prior to
the Change of Control;
(B) A reduction in your pay, grade or bonus opportunity as in
effect immediately prior to the Change of Control or as the same may
thereafter be increased from time to time during the term of this
Agreement;
(C) The failure to continue in effect any compensation plan in
which you participate at the time of the Change of Control, including
but not limited to the LTIP and the AIAP, or any substitute plans
adopted prior to the Change of Control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan
providing you with substantially similar benefits) has been made with
respect to such plan in connection with the Change of Control, or the
failure to continue your participation therein on substantially the
same basis, both in terms of the amount of benefits provided and the
level of your participation relative to other participants, as existed
at the time of the Change of Control;
(D) The taking of any action which would directly or indirectly
materially reduce any of the benefits to be provided under Section
7(c) or deprive you of any material fringe benefit enjoyed by you at
the time of the Change of Control, or the failure to provide you with
the number of paid vacation days to which you are entitled on the
basis of the Company's practice with respect to you as in effect at
the time of the Change of Control;
(E) Any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of subsection (b) below; provided further that for
purposes of this Agreement, no such purported termination shall be
effective;
5
<PAGE>
(F) Any material breach by Holdings or the Company of any
provision of this Agreement including, but not limited to any
provision of Section 7, or any agreements entered into pursuant
hereto; or
(G) Requiring you to be based at any office or location more
than 50 miles from the office or location at which you were based
immediately prior to such Change of Control, except for travel
reasonably consistent with your travel requirements prior to such
Change of Control.
(v) GOOD REASON PRIOR TO A CHANGE OF CONTROL.
Prior to a Change of Control and following the expiration of the
twenty-four month period following a Change of Control, you shall also
be entitled to terminate your employment for Good Reason. For
purposes of this paragraph (v), "Good Reason" shall mean, without your
express written consent, any of the following occurring prior to a
Change of Control or following the expiration of such twenty-four
month period:
(A) A material reduction in your duties or responsibilities, a
material diminution in your position or a material adverse change in
your reporting relationship;
(B) A reduction in your pay, grade or bonus opportunity;
(C) Any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of Section 8 hereinafter below; provided further that for
purposes of this Agreement, no such purported termination shall be
effective;
(D) Any material breach by Holdings or the Company of any
provision of this Agreement including, but not limited to any
provision of Section 7, or any agreements entered into pursuant
hereto; or
(E) Requiring you to be based at any office or location more
than 50 miles from the office or location at which you were based on
the date of this Agreement, except for travel reasonably required in
the performance of your responsibilities.
(vi) SPINOFF. A Spinoff shall occur if the Company pays a dividend
or makes a distribution to all holders of Common Stock of the capital
stock of any subsidiary of the Company, which subsidiary represents
all or substantially all of the Company's interest in either of its
two principal lines of business as of the date hereof.
6
<PAGE>
(b) NOTICE OF TERMINATION. Any purported termination of your employment
by the Company or by you shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 8 hereof.
For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of your
employment under the provision so indicated.
(c) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (i) if
your employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30) day period),
(ii) if your employment is terminated by reason of your death, the date of
your death, and (iii) if your employment is terminated by reason of your
Retirement, for Cause, for Good Reason or for any other reason (other than
Disability or death), the date specified in the Notice of Termination
(which in the case of a termination for Cause shall not be less than thirty
(30) nor more than sixty (60) days from the date such Notice of Termination
is given).
5. COMPENSATION UPON TERMINATION.
Upon termination of your employment, subject to your execution of a release
of claims against Holdings and/or the Company (in the relevant form set forth in
Exhibit A if such termination is without Cause or for Good Reason ), you shall
be entitled to the following benefits:
(a) If your employment shall be terminated by the Company for Cause, or by
you other than for Good Reason, the Company shall pay you your full base
salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given and any amounts to be paid to you pursuant
to the Company's retirement and other benefit plans of the Company then in
effect, and Holdings and/or the Company shall have no further obligations
to you under this Agreement.
(b) If your employment shall be terminated by reason of your voluntary
Retirement, Disability or death, the Company shall pay you or your estate,
as the case may be, your full base salary through the Date of Termination
at the rate in effect at the time the Notice of Termination is given or the
time of your death, as the case may be. Benefits to you, your
beneficiaries or your estate, as the case may be, shall be determined in
accordance with the Company's retirement, benefit, disability and insurance
plans and programs in effect at the time of such termination (including the
special pension benefit under Section 6.1 herein).
(c) If, other than during the twenty-four month period following a Change
of Control or a Spinoff, your employment shall be terminated by the Company
other
7
<PAGE>
than for Cause or Disability or by you for Good Reason, you shall be
entitled to the payments and benefits provided below:
(i) The Company shall pay you your full base salary through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, and, except as set forth below, all other
amounts to which you are entitled under any compensation or benefit
plan of the Company including, but not limited to, the AIAP and LTIP
at the times such payments are due under the terms of such plans;
(ii) The Company shall pay to you in seventy-two equal semi-monthly
installments an amount equal to two times the sum of (x) your annual
base salary as in effect immediately prior to such termination and (y)
the amount of your target award under the AIAP as in effect at the
time of such termination;
(iii) The Company shall provide you with the benefits under the RJR
Nabisco, Inc. Flexible Perquisites Program (the "Perquisites Program")
for the thirty-six month period following such termination;
(iv) The Company shall provide you with the opportunity to
participate in the medical and dental plans as provided under the
SELECT Omnibus Welfare Plan as in effect for active employees other
than the Short and Long Term Disability Plans (or similar coverage as
may be provided for active employees), the core life, optional life,
and accidental death and dismemberment insurance coverage provided
under the SELECT Omnibus Insurance Plan as in effect for active
employees (or similar coverage as may be provided for active
employees), and the Executive Medical Plan as in effect for active
employees until the end of the 36 month period after such termination,
subject to any applicable coordination of benefits rules.
(v) You shall be paid for any unused vacation for the year of
termination, for vacation accrued to your Date of Termination for the
following calendar year, and/or any accumulated vacation (if
applicable) from previous years, all in accordance with the normal
practice of the Company.
(vi) You shall be entitled to outplacement assistance pursuant to
the Company's normal practice for the 12-month period following your
Date of Termination at an out-of-pocket cost to the Company not to
exceed 18% of annualized Base Pay.
(vii) You shall continue to participate in the Retirement Plans and
Savings Plans, as defined in Exhibit B, for purposes of vesting,
benefit accrual and employer matching contribution, as applicable, for
36 months.
8
<PAGE>
(viii) If you are at least age 55 with at least ten years of service
including any period of severance and including service imputed
pursuant to Section 6.1, you shall be eligible for MedChoice Retiree
Medical benefits as in effect for other retirees and as amended from
time to time thereafter.
(ix) You shall be entitled to any applicable additional benefits
and protections provided under the Headquarters Program.
(d) If within the twenty-four month period following a Change of Control
your employment by the Company shall be terminated (x) by the Company other
than for Cause or Disability or (y) by you for Good Reason, then, effective
as of the Date of Termination, in lieu of any benefits which you otherwise
would be eligible to receive under Section 5 (c) above, you shall be
entitled to the payments and benefits provided below:
(i) The Company shall pay you your full base salary through the
Date of Termination at the rate in effect at the time the Notice of
Termination is given, and, except as set forth below, all other
amounts to which you are entitled under any compensation or benefit
plan of the Company at the time such payments are due under the terms
of such plans, or as otherwise provided herein.
(ii) The Company shall pay to you, not later than 15 business days
following the Date of Termination, a lump sum cash payment equal to
(A) your AIAP Vested Amount, PS Vested Amount, if any, and PU Vested
Amount, if any, (each as defined in Exhibit B) as of the Date of
Termination plus (B) two (2) times the sum of (I) your annual base
salary as in effect immediately prior to the Change of Control or the
Date of Termination if higher and (II) the amount of your AIAP target
award as in effect at the time of such termination or, if higher, as
in effect immediately prior to the Change of Control (all as defined
in Schedule B). The amount of the payment under this Section
5(d)(ii)(B) shall be discounted to its present value, based on a
notional payment period of 36 months, assuming equal semi-monthly
payments and a discount rate equal to the product of (x) the 3-year
Treasury bond yield as published in the New York Times on the first of
the month in which the Termination Date occurs and (y) 100% minus the
aggregate applicable federal, state and local taxes then imposed on
your employment income computed at the maximum applicable marginal
rates.
(iii) (A) The Company shall pay to you a lump sum cash payment
equal to three times the value of the annual credit under the
Perquisites Program to which you were entitled immediately prior to
such termination or, if higher, to which you were entitled immediately
prior to the Change of Control, reduced by such credits as would
otherwise be applied to the continued benefits under Section
5(d)(iii)(C) below.
9
<PAGE>
(B) You shall be entitled to use the automobile assigned to
you immediately prior to the Change of Control for 36 months following
such termination and, at the end of such 36 month period, ownership of
such automobile shall be transferred to you. At the time of such
transfer, the Company shall pay to you such amount in cash that after
payment of all applicable federal, state and local taxes thereon,
computed at the maximum marginal rates, is equal to all such taxes, so
computed, imposed in connection with such transfer.
(C) The Company shall provide you with benefits equivalent
to those provided under the Perquisites Program immediately prior to
the Change of Control for 36 months following such termination.
(iv) The Company shall provide you with the opportunity to
participate in medical and dental plans and in core life, optional
life, and accidental death and dismemberment insurance coverage no
less favorable in the aggregate than provided under the SELECT Omnibus
Welfare Plan (other than the Short and Long Term Disability Plans),
the SELECT Omnibus Insurance Plan, and the Executive Medical Plan, as
such plans are in effect for active employees immediately prior to
such Change of Control, until the end of the 36 month period after
such termination, subject to any applicable coordination of benefits
rules.
(v) The Company shall pay to you, not later than 15 business days
following the Date of Termination, a lump sum cash payment for any
unused vacation for the year of termination, for vacation accrued to
the Date of Termination for the following calendar year, and/or any
accumulated vacation (if applicable) from previous years, all in
accordance with the normal practice of the Company immediately prior
to such Change of Control.
(vi) (A) You shall receive 36 months of service credit
("Additional Credited Service") under the Retirement Plans and Savings
Plans for purposes of vesting, benefit accrual and employer matching
contribution, as applicable, based on the same formula and matching
amount as in effect immediately prior to such Change of Control.
(B) Within 15 days following the Date of Termination, the
Company shall pay to you in cash a lump sum equal to (x) the actuarial
present value of such portion, if any, of the benefit resulting from
such Additional Credited Service as may not be accrued under the
qualified Retirement Plans and/or Savings Plans plus (y) the actuarial
present value of all accruals as of the Date of Termination under the
non-qualified Retirement Plans and Savings Plans in which you
participate.
10
<PAGE>
(vii) The calculation of the lump-sum in (vi)(B)(y) above shall
include the special pension benefit pursuant to Section 6.1 herein.
(viii) You shall be entitled (in addition to and upon the expiration
of the benefits provided pursuant to Section 5(d)(iv)) to MedChoice
Retiree Medical benefits as in effect for other retirees and as
amended from time to time thereafter at the minimum level of Company
subsidy or, if greater, the subsidy level based on actual service and
imputed years of service pursuant to Section 6.1.
(ix) You shall be entitled to outplacement assistance pursuant to
the Company's normal practice for the 12-month period following your
Date of Termination, in an amount not to exceed 18% of annualized Base
Pay.
(x) If the Company fails to provide any of the benefits under
Section 5(d)(iv) or Section 5(d)(viii) above, the Company shall
reimburse you for the actual cost of your obtaining comparable
benefits within 15 business days after the date you give the Company
written notice that you incurred such costs plus such additional
amount that after payment of all applicable Federal, state and local
taxes thereon, computed at the maximum marginal rates, is equal to all
such taxes, so computed, imposed with respect to such reimbursement.
(xi) (A) Anything herein to the contrary notwithstanding, in the
event that it is determined that any payment or distribution by the
Company to or for your benefit, whether paid or payable or distributed
or distributable pursuant to the terms hereof or otherwise , other
than any payment pursuant to this Section 5(d)(xi)(A), (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the" Code") or any interest
or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then you shall be
entitled to receive, within 15 days following the determination
described in Section 5(d)(xi)(B) below, an additional payment ("Excise
Tax Adjustment Payment") in an amount such that after payment by you
of all applicable Federal, state and local taxes (computed at the
maximum marginal rates and including any interest or penalties imposed
with respect to such taxes), including any Excise Tax, imposed upon
the Excise Tax Adjustment Payment, you shall retain an amount of the
Excise Tax Adjustment Payment equal to the Excise Tax imposed upon the
Payments.
(B) All determinations required to be made under this
Section 5(d)(xi), including whether an Excise Tax Adjustment Payment
is required and the amount of such Excise Tax Adjustment Payment,
shall be made by
11
<PAGE>
Ernst & Young, Winston-Salem, North Carolina, or such other accounting
firm as the Company may designate prior to a Change of Control, which
shall provide to the Company and you detailed supporting calculations
within 15 business days of the date of your termination of employment.
Except as hereinafter provided, any determination by Ernst & Young,
Winston-Salem, North Carolina, or such other accounting firm as the
Company may designate prior to a Change of Control, shall be binding
upon the Company and you. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination hereunder, it is possible that (x) Excise Tax Adjustment
Payments which should have been made will not have been made by the
Company ("Underpayment"), or (y) certain Payments will have been made
which should not have been made ("Overpayment"), consistent with the
calculations required to be made hereunder. In the event of an
Underpayment, the Company shall promptly determine the amount of the
Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for your benefit. In the event
that you discover that an Overpayment shall have occurred, the amount
thereof shall be promptly repaid to the Employer.
(xii) The Company shall also pay to you as incurred all legal and
accounting fees and expenses incurred by you as a result of such
termination (including all such fees and expenses, if any, in seeking
to obtain or enforce any right or benefit provided by this Agreement
or any other compensation-related plan, agreement or arrangement of
the Company) unless your claim is found by an arbitral tribunal of
competent jurisdiction to have been frivolous.
(e) If, within the twenty-four month period following a Spinoff,
your employment with the Company shall be terminated (x) by the Company other
than for Cause or Disability or (y) by you for Good Reason, then, effective as
of the Date of Termination, you shall be entitled to the payments and benefits
provided under Section 5(c) above, modified as provided below:
(i) The Company shall pay to you, not later than 15 business days
following the Date of Termination, a lump sum cash payment equal to
the sum of your AIAP Vested Amount, PS Vested Amount and PU Vested
Amount (each as defined in Exhibit B) as of the Date of Termination.
(ii) You shall be entitled to use the automobile assigned to you
immediately prior to the Spinoff for 36 months following such
termination and, at the end of such 36 month period, ownership of such
automobile shall be transferred to you. At the time of such transfer,
the Company shall pay to you such amount in cash that after payment of
all applicable federal, state and local taxes thereon, computed at the
maximum marginal rates, is equal to all such taxes, so computed,
imposed in connection with such transfer.
12
<PAGE>
(iii) Within 15 days following the Date of Termination, the Company
shall pay to you in cash a lump sum equal to the actuarial present
value of all accruals as of the Date of Termination under the
non-qualified Retirement Plans and Savings Plans in which you
participate, including the special pension benefit pursuant to Section
6.1 herein.
(iv) If you have at least five years of service, including the
three-year period during which your compensation continues to be paid
to you in accordance with Section 5(c)(ii), you shall be entitled (in
addition to and upon the expiration of the benefits provided pursuant
to Section 5(c)(iv)) to MedChoice Retiree Medical benefits as in
effect for other retirees and as amended from time to time thereafter
at the minimum level of Company subsidy or, if greater, the subsidy
level based on actual years of service.
6. SPECIAL BONUS PAYMENTS. Upon a Change of Control, the Company shall
pay to you a special cash bonus payment equal to the sum of (a) and (b) as
follows:
(a) The Company will make a cash payment in respect of and in
cancellation of each option you hold under the LTIP equal to the higher of (i)
the excess, if any, of the Fair Market Value (as defined in the LTIP) over the
option price of such option multiplied by the number of Shares (as defined in
the LTIP) subject to such option or (ii) the value of such option using the
Black Scholes method of valuing such option, based on the following assumptions:
(A) Fair Market Value (as so defined), (B) a term equal to the remaining life of
the option; (C) a risk-free factor equal to the average yield on 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 the shares 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 of the
shares 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 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
minus 2) 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
13
<PAGE>
weighting factors. The weighted average volatility is calculated in the same
manner as described for dividend yield. Notwithstanding the foregoing, this
Section 6(a) shall not apply in the event of a Change of Control under Section
3(c) hereof for which Holdings is using the "pooling of interest" method of
accounting.
(b) The Company will pay your AIAP Vested Amount, your PS Vested
Amount and your PU Vested Amount (all as of the date of the Change of Control
and all as defined in Exhibit B). Notwithstanding the foregoing, in the event
that following a Change of Control any performance period within which such
Change of Control occurred relating to any award under the AIAP or of
Performance Units or Performance Shares under the LTIP (as such terms are
defined therein) is completed prior to your termination of employment, upon such
completion you shall be entitled to payment in respect of each such award of an
amount, if any, equal to the excess of the value of such award, based on actual
performance for such performance period, over the AIAP Vested Amount, PU Vested
Amount or PS Vested Amount, as the case may be, previously paid to you upon such
Change of Control in respect of such AIAP award, Performance Units or
Performance Shares.
.
6.1 SPECIAL PENSION BENEFIT. In order to make you whole for forfeited
pension entitlements from prior employers, you will be granted 10 years
additional service credit for pension calculation purposes using the formulae
under the Retirement Plan for Employees of RJR Nabisco, Inc. (the "PEP") or any
successor plan. This 10 years service credit shall be forfeited if you
terminate your employment voluntarily without Good Reason prior to completing
five years of service with the Company or if you are at any time terminated for
Cause (as defined herein). The benefit representing this additional 10 years
service credit will not be paid from the tax qualified PEP or the Company's
Additional Benefits Plan or Supplemental Benefits Plan, but instead will be paid
by the Company in a lump sum, discounted to present value using Pension Benefit
Guaranty Corporation rates, from the general assets of the Company upon your
termination provided the service credit has not been forfeited as provided
above.
7. SUCCESSORS; BINDING AGREEMENT; UNDERTAKING.
(a) Holdings and the Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Holdings and the Company
to expressly assume and agree to perform this Agreement in the same manner
and to the same extent that Holdings and the Company would be required to
perform it if no such succession had taken place. As used in this
Agreement, "Holdings" and/or the "Company" shall mean Holdings or the
Company, respectively, as herein before defined and any successor to the
business and/or assets of either of them as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise. Prior
to a Change of Control, the term "Company" shall also mean any affiliate of
the Company to which you may be transferred and the
14
<PAGE>
Company shall cause such successor employer to be considered the "Company"
bound by the terms of this Agreement and this Agreement shall be amended to
so provide. Following a Change of Control the term "Company" shall not
mean any affiliate of the Company to which you may be transferred unless
you shall have previously approved of such transfer in writing, in which
case the Company shall cause such successor employer to be considered the
"Company" bound by the terms of this Agreement and this Agreement shall be
amended to so provide.
(b) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there is no such designee, to
your estate.
(c) (i) During the two-year period following a Change of Control,
there shall be no reduction in the benefit formula of the Retirement
Plans or the employer matching contribution amount of the Savings
Plans except as may be required by the Code or the Employee Retirement
Income Security Act of 1974, as amended, ("ERISA"); and
(ii) The Company shall maintain for not less than two years
following a Change of Control programs providing benefits on a basis
no less favorable in the aggregate than provided under the SELECT
Omnibus Welfare Plan, the Executive Medical Plan, the SELECT Omnibus
Insurance Plan and the Perquisites Program, or successor programs, all
as in effect for active employees immediately prior to such Change of
Control.
8. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement; PROVIDED
that all notices to Holdings or the Company shall be directed to the attention
of the Board with a copy to the Secretaries of the Company and of Holdings, or
to such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
9. AMENDMENTS; WAIVERS; MITIGATION; OTHER PLANS.
(a) Except as otherwise specifically provided herein, no provision of this
Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by you and
such officers as may be specifically designated by the respective Boards.
No waiver by
15
<PAGE>
any party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not expressly set forth in this Agreement.
(b) You shall not be required to mitigate the amount of any payment
provided for in Section 5 by seeking other employment or otherwise, nor
except to the extent provided in Section 5(c)(iv) or Section 5(d)(iv),
shall the amount of any payment or benefit provided for in Sections 5(c),
5(d) or 5(e) hereof be reduced by any compensation earned by you as the
result of employment by another employer or by retirement benefits after
the Date of Termination, or otherwise.
(c) Except as provided in this Agreement, if you are a participant in the
LTIP or any other stock award plan of Holdings or an affiliate and have
outstanding awards thereunder, the treatment of such awards shall be
governed by the terms of such applicable plans and awards.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the substantive law (and not the choice of law rules) of the
State of New York.
11. VALIDITY. If any provision of this Agreement shall be declared to be
invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
12. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
13. ARBITRATION. Following a Change of Control, any dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in New York, New York in accordance with the rules of
the American Arbitration Association then in effect. The determination of the
arbitrator shall be conclusive and binding on the parties and judgment may be
entered on the arbitrator's award in any court having jurisdiction.
14. CONTINUED EMPLOYMENT. You agree to be bound by the terms and
conditions of this Agreement and to remain in the employ of the Company during
any period following any public announcement by any person of any proposed
transaction or transactions which, if effected, would result in a Change of
Control or a Spinoff until such transaction has taken place or, in the opinion
of the Holdings Board, such person has
16
<PAGE>
abandoned or terminated its efforts to effect such transaction. Subject to the
foregoing, nothing contained in this Agreement shall impair or interfere in any
way with your right to terminate your employment. In addition, nothing in this
Section 14 shall impair or interfere with the right of the Company or any
subsidiary to terminate your employment with or without cause at any time,
subject to the provisions of this Agreement.
15. PAYMENT OBLIGATIONS ABSOLUTE; OBLIGOR. Following a Change of Control,
Holdings' and the Company's obligations to make all payments and honor all
commitments under this Agreement shall be absolute and unconditional and shall
not be affected by any circumstances including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which Holdings or the Company
may have against you, subject to, in the event of your termination of
employment, your execution of the relevant release of claims against Holdings
and/or the Company in the form set forth on Exhibit A hereto. In default of any
payment or provision of benefits hereunder by the Company, such payment or
benefit shall be the obligation of Holdings.
16. INTEREST ON LATE PAYMENTS. To the extent that any payments required
to be made hereunder following a Change of Control are not made within the
period specified therefor, the Company shall be liable for interest on such
delayed payments at the rate of 150% of the prime rate compounded monthly, as
posted by the Morgan Guaranty Trust Company of New York, from time to time.
17. WITHHOLDING. Payments under this Agreement will be subject to normal
deductions for taxes and other legally required withholding.
18. ACTUARIAL CALCULATIONS. All required actuarial calculations of
payments to be made hereunder shall be made by Watson Wyatt Worldwide, New York,
New York, or such other actuarial firm as the Company may designate prior to a
Change of Control.
19. FUNDING. All benefits hereunder are unfunded and will be paid out of
the general assets of the Company or Holdings. Notwithstanding the foregoing,
the Company or Holdings may choose to maintain a rabbi trust or trusts for the
purpose of paying certain of the benefits hereunder or under other plans and
programs of the Company or Holdings and, if so, you shall be entitled to
payments therefrom, if any, as and to the extent provided in such rabbi trust or
trusts.
17
<PAGE>
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter which
will then constitute our agreement on this subject.
Sincerely,
RJR NABISCO HOLDINGS CORP.
By
--------------------------------
Name: Steven F. Goldstone
Title: Chairman and CEO
RJR NABISCO, INC.
By
--------------------------------
Name: Steven F. Goldstone
Title: Chairman and CEO
Agreed to this ____ day of
_____________________, 1998
- ---------------------------------
William L. Rosoff
18
<PAGE>
EXHIBIT A
FORM OF RELEASE AGREEMENT
[ ] [Incorporation of terms of Employment Contract]
[ ] [Acknowledgment that Release Agreement is the entire agreement to
provide severance benefits.]
[ ] [Description of Benefits to be provided]
[ ] You shall maintain the terms and conditions of this Agreement in
confidence. In addition, you will not disclose to any other employer
or person any trade secrets or other proprietary, non-public, or
confidential information pertaining to the Company. You will return
all confidential Company information or documents in whatever form,
except information relating to your personal employee benefits or
executive compensation. In accordance with normal ethical and
professional standards, you will refrain from taking actions or making
statements, written or oral, which defame the goodwill or reputation
of the Company, its directors, officers, executives and employees or
which constitute willful misconduct under circumstances where it is
reasonable for you to anticipate or to expect that the natural
consequences of such conduct by you will be to affect adversely the
business or reputation of the Company or its affiliates, or the morale
of other employees.
[ ] a) You agree that you 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. b) You will promptly notify the Company if
you receive any requests from anyone other than an employee or agent
of the Company for information regarding the Company or if you become
aware of any potential claim or proposed litigation against the
Company. c) You 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. d) If required by law to provide sworn testimony regarding
any Company-related matter, you will consult with and have
Company-designated legal counsel present for such testimony. e) The
Company will be responsible for the costs of such designated counsel
and you will bear no cost for same. f) You will confine your
testimony to items about which you have knowledge rather than
speculation, unless otherwise directed by legal process. g) You will
cooperate with the Company's attorneys to assist their efforts,
especially on matters you have been privy to, holding all privileged
attorney-client matters in strictest confidence.
<PAGE>
Nothing in sentences c-g of the above paragraph is intended to apply
to governmental or judicial investigations, including, but not limited
to, an investigation by any agency or department of the Federal or
state government, any hearing before a committee of the Congress of
the United States or of a state legislature, any investigation or
proceeding by or of a special prosecutor, or any proceeding by or
before a grand jury; provided, however, the Company will reimburse you
for legal expenses including, but not limited to, the cost of any
attorney reasonably acceptable to the Company and other out-of-pocket
expenses if you are compelled to appear in a governmental or judicial
investigation.
[ ] IN CONSIDERATION OF THE COMPENSATION AND BENEFITS SET FORTH IN THIS
AGREEMENT, YOU VOLUNTARILY, KNOWINGLY AND WILLINGLY RELEASE AND
FOREVER DISCHARGE THE COMPANY, ITS PARENTS, SUBSIDIARIES AND
AFFILIATES, TOGETHER WITH THEIR RESPECTIVE OFFICERS, DIRECTORS,
SHAREHOLDERS, EMPLOYEES AND AGENTS, AND EACH OF THEIR PREDECESSORS,
SUCCESSORS AND ASSIGNS, FROM ANY AND ALL CHARGES, COMPLAINTS, CLAIMS,
PROMISES, AGREEMENTS, CONTROVERSIES, CAUSES OF ACTION AND DEMANDS OF
ANY NATURE WHATSOEVER WHICH AGAINST THEM YOU OR YOUR EXECUTORS,
ADMINISTRATORS, SUCCESSORS OR ASSIGNS EVER HAD, NOW HAVE OR HEREAFTER
CAN, SHALL OR MAY HAVE BY REASON OF ANY MATTER, CAUSE OR THING
WHATSOEVER ARISING TO THE TIME YOU SIGN THIS AGREEMENT. YOU FURTHER
AGREE THAT YOU WILL NOT SEEK OR BE ENTITLED TO ANY AWARD OF EQUITABLE
OR MONETARY RELIEF IN ANY PROCEEDING OF ANY NATURE BROUGHT ON YOUR
BEHALF ARISING OUT OF ANY OF THE MATTERS RELEASED BY THIS PARAGRAPH.
THIS RELEASE INCLUDES, BUT IS NOT LIMITED TO, ANY RIGHTS OR CLAIMS
RELATING IN ANY WAY TO YOUR EMPLOYMENT RELATIONSHIP WITH THE COMPANY,
OR THE TERMINATION THEREOF, OR UNDER ANY STATUTE, INCLUDING THE AGE
DISCRIMINATION IN EMPLOYMENT ACT, TITLE VII OF THE CIVIL RIGHTS ACT,
THE AMERICANS WITH DISABILITIES ACT, THE NEW YORK STATE AND CITY HUMAN
RIGHTS LAWS OR ANY OTHER FEDERAL, STATE OR LOCAL LAW.
[ ] By signing this Agreement, you represent that you have not commenced
any proceeding against the Company in any forum (administrative or
judicial) concerning your employment or the termination thereof. You
further acknowledge that you were given sufficient notice under the
Worker Adjustment and Retraining Notification Act (the "WARN Act") and
that the termination of your employment does not give rise to any
claim or right to notice, or pay or benefits in lieu of notice under
the WARN Act. In the event any WARN Act issue does exist or arises in
the future, you agree and acknowledge that the payments and benefits
set forth in this Agreement shall be applied to any pay or
2
<PAGE>
benefits in lieu of notice required by the WARN Act, provided that any
such offset shall not impair or affect the validity of any provision
of this Agreement, including the release set forth in paragraph [ ].
[ ] The Company advises you that you may wish to consult with an attorney
of your choosing prior to signing this Agreement. You understand and
agree that you have the right and have been given the opportunity to
review this Agreement and, specifically, the release in paragraph
[ ], with an attorney of your choice should you so desire. You have
entered into this Agreement freely, knowingly and voluntarily.
[ ] You have at least twenty-one days to consider the terms of this
Agreement, although you may sign and return it sooner if you wish.
This Agreement may be revoked by you for a period of seven (7)
consecutive calendar days after you have signed and dated it, and
after such seven (7) days, it becomes final.
3
<PAGE>
EXHIBIT B
DEFINITIONS
AIAP VESTED AMOUNT means, as of a Change of Control or as of the date your
employment terminates after a Change of Control or a Spinoff, as the case may
be, an amount equal to the value of your target award under the AIAP for the
relevant performance period in which the Change of Control or such termination
occurs, as the case may be, multiplied by a fraction, the numerator of which is
the number of months (including partial months) in the period beginning on the
first day of the relevant performance period and ending on the Change of Control
or such termination, as the case may be, and the denominator of which is the
number of months in such performance period; provided that in the event of a
termination of employment following a Change of Control in the year in which a
Change of Control occurs, for purposes of computing the AIAP Vested Amount as of
the date of such termination, the performance period shall be deemed to begin on
the first day following the Change of Control and the target award shall be that
in effect immediately preceding such Change of Control.
PS VESTED AMOUNT means, with respect to any award of Performance Shares (as
defined in the LTIP) you hold as of a Change of Control or as of the date your
employment terminates after a Change of Control or a Spinoff, as the case may
be, an amount equal to the adjusted value of (i) the number of Performance
Shares subject to such award, multiplied by a fraction, the numerator of which
is the number of months (including partial months) elapsed in the relevant
performance period as of the Change of Control or as of the date of such
termination, as the case may be, and the denominator of which is the number of
months in such performance period, (ii) adjusted by applying target performance
with respect to such award; provided that in the event of a termination of
employment following a Change of Control in the year in which such Change of
Control occurs, for purposes of computing the PS Vested Amount as of the date of
such termination, the performance period shall be deemed to begin on the first
day following the Change of Control and target performance with respect to such
Performance Shares shall be that in effect immediately preceding such Change of
Control.
PU VESTED AMOUNT means, with respect to any award of Performance Units (as
defined in the LTIP) you hold as of a Change of Control or as of the date your
employment terminates after a Change of Control or a Spinoff, as the case may
be, an amount equal to the target value of the number of Performance Units
subject to such award multiplied by a fraction, the numerator of which is the
number of months (including partial months) elapsed in the relevant performance
period as of the Change of Control or as of the date of such termination, as the
case may be, and the denominator of which is the number of months in such
performance period; provided that in the event of a termination of employment
following a Change of Control in the year in which a Change of Control occurs,
for purposes of computing the PU Vested Amount as of the date of such
termination, the performance period shall be deemed to begin on the first day
<PAGE>
following the Change of Control and the target value of such Performance Units
shall be that in effect immediately preceding such Change of Control.
RETIREMENT PLANS means the Retirement Plan for Employees of RJR Nabisco,
Inc., the RJR Nabisco, Inc. Additional Benefits Plan, the RJR Nabisco, Inc.,
Supplemental Benefits Plan and the RJR Nabisco, Inc. Supplemental Executive
Retirement Plan, and such other plans as the Board may hereafter determine.
SAVINGS PLANS means the RJR Nabisco, Inc. Capital Investment Plan, the RJR
Nabisco, Inc. Additional Benefits Plan and the RJR Nabisco, Inc. Supplemental
Benefits Plans and such other plans as the Board may hereafter determine.
YEAR OF SERVICE means each completed 12-month period of service by you with
the Company or any other affiliate of the Company, including periods of approved
leaves of absence, up to the last day of active employment.
2
<PAGE>
Exhibit 10.6
RN Option
1998
JMK
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
STOCK OPTION AGREEMENT
---------------------------
DATE OF GRANT: January 2, 1998
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
JAMES M. KILTS (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
250,000 SHARES
of Common Stock of the Company, at the exercise price of $37.375 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) Subject to Section 2(c), this Option shall be vested in three
installments. The first installment shall be vested 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 vested for 33% and 34%, respectively, of the number of
shares subject to this Option until the Option has become fully vested. To the
extent that any of the above installments is not exercised when it becomes
vested, it shall not expire, but shall continue to be exercisable at any time
thereafter until this Option shall terminate, expire or be surrendered. An
exercise shall be for whole shares only.
(c) Except as provided in Section 3, this Option shall not be exercised
prior to 36 months after the Date of Grant.
3. TERMINATION OF EMPLOYMENT
(a) Except as may be otherwise provided in a written employment or
termination agreement between the Optionee and the Company, the Option shall not
become vested as to any additional shares following the Termination of
Employment of the Optionee for
2
<PAGE>
any reason other than a Termination of Employment because of death, Permanent
Disability, Retirement, termination of employment by the Optionee with Good
Reason or involuntary termination of the Optionee without Cause. In the event
of Termination of Employment because of death, Permanent Disability, Retirement,
termination of employment by the Optionee with Good Reason or involuntary
termination without Cause, the Option shall immediately become vested and
exercisable as to all shares.
(b) The Optionee shall be deemed to have a "Permanent Disability" if he
becomes 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.
(c) "Retirement" as used herein means retirement at age 65 or over, early
retirement at age 55 or over with at least 10 years of service or early
retirement at age 55 or over with the approval of the Company, which approval
specifically states that the Option shall become fully exercisable as to all
Shares.
(d) "Termination of Employment" as used herein means termination from
active employment with the Company and any other entity which, as of the date of
this Agreement, is an affiliate of the Company.
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
3
<PAGE>
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 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" OR WITH "GOOD REASON"."
(a) 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 agreement with Nabisco Holdings Corp. and Nabisco, Inc.
effective as of November 20, 1997 (the "Employment 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.
(b) For purposes of the Agreement, the Optionee's employment shall be
deemed to have been terminated for "Good Reason" only as such term is defined in
the Optionee's Employment Agreement.
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
4
<PAGE>
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 misuse or, other than in the course of performing his duties,
disclose 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 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.
5
<PAGE>
(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 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 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 minus 2) 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.
6
<PAGE>
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:
- ----------------------------
- ----------------------------
- ----------------------------
7
<PAGE>
Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and among RJR Nabisco Holdings Corp., a Delaware
corporation ("Holdings"), RJR Nabisco, Inc., a Delaware corporation and a direct
subsidiary of Holdings (the "Company") and Steven F. Goldstone ("Executive") is
effective as of January 1, 1997 and supersedes and revokes the prior Employment
Agreement with Executive dated as of December 5, 1995. This Agreement will (i)
following a Change of Control (as defined in Exhibit A), supersede the
Executive's participation in the RJR Nabisco Holdings Corp. Headquarters
Continuing Excellence Recognition Program (the "Headquarters Program") and (ii)
be in lieu of Executive's participation in the RJR Nabisco Holdings Corp. 1995
Employee Protection Program (the "1995 Program"), but will in no event provide
lesser benefits to Executive in the event of the termination of Executive's
employment following a Change of Control than would otherwise be available under
the 1995 Program.
RECITALS
In order to induce Executive to continue in the positions of Chairman,
Chief Executive Officer and President of Holdings and the Company, Holdings and
the Company desire to provide Executive with compensation and other benefits
under the conditions set forth in this Agreement. Executive is willing to
accept such employment and perform services for
<PAGE>
Holdings and the Company on the terms and conditions hereinafter set forth.
It is therefore hereby agreed by and between the parties as follows:
1. EMPLOYMENT.
1.1 Subject to the terms and conditions of this Agreement, Holdings
agrees to employ Executive during the term hereof as Chief Executive Officer and
President, of Holdings and the Company. Executive shall have the customary
powers, responsibilities and authorities of Chief Executive Officers of
corporations of the size, type and nature of Holdings and Company, and
specifically, he shall have responsibility for all of Holdings' and the
Company's staff functions, including finance, human resources, administration
and communications, in addition to responsibility for Holdings. Executive's
principal office shall be at the principal executive offices of Holdings and the
Company in New York, New York.
1.2 Holdings and the Company shall, throughout the term hereof, cause
the election and retention of Executive as Chairman of the Boards of Directors
of Holdings and the Company.
1.3 Subject to the terms and conditions set forth herein, Executive
hereby (i) accepts employment as Chief Executive Officer and President of
Holdings and the Company
2
<PAGE>
and shall devote his full working time and efforts, to the best of his ability,
experience and talent, to the performance of the services, duties and
responsibilities in connection therewith and (ii) agrees to serve as Chairman of
the Boards of Directors of Holdings and the Company. Nothing in this Agreement
shall preclude the Executive from engaging, consistent with his duties and
responsibilities hereunder, in charitable and community affairs, from managing
his personal investments, from continuing to serve on the boards of directors of
any Affiliate (as hereinafter defined) of Holdings or the Company or from
serving, subject to approval of the Holdings Board (as defined in Exhibit A), as
a member of boards of directors of other companies. The term "Affiliate" shall
mean any direct or indirect subsidiary of Holdings or the Company or any
successor thereto. For purposes of this Agreement, the term "available to Senior
Executive Officers" shall mean that something is available to the senior
executive officers of Holdings or the Company or generally available to all
chief executive officers of the major operating companies of Holdings.
1.4 This Agreement supersedes and revokes in their entirety any and
all prior employment or service agreements with Holdings or the Company, and in
particular, the Engagement Agreement with Holdings dated March 3, 1995
3
<PAGE>
and the Employment Agreement dated as of October 1, 1995 as amended and restated
as of December 5, 1995.
2. TERM OF EMPLOYMENT.
Executive's term of employment under this Agreement shall continue in
accordance with the terms hereof until a termination of Executive's employment.
3. COMPENSATION.
3.1 SALARY. The Company shall pay Executive a base salary ("Base
Salary") at the rate of $1,250,000 per annum. Base Salary shall be payable in
accordance with the ordinary payroll practices of the Company. Executive's rate
of Base Salary shall be reviewed for possible increases by the Board at least
annually and, once approved by the Board (as defined in Exhibit A), such higher
amount shall constitute Executive's Base Salary.
3.2 ANNUAL BONUS.
(a) In addition to his Base Salary, subject to Section 3.2(b) below,
Executive shall be entitled, while he remains employed hereunder, to receive an
annual bonus opportunity under the Company's Annual Incentive Award Plan in
effect on the date of this Agreement, as amended from time to time, a copy of
which has been given to Executive, or under any successor plan thereto available
to Senior Executive Officers ("AIAP"), in accordance with the terms thereof.
Such AIAP, in any event, will provide an annual target bonus opportunity to
Executive no less favorable than one hundred percent (100%) of
4
<PAGE>
his Base Salary paid or accrued with respect to the related year, subject to the
attainment of the performance goals established from time to time under such
AIAP.
(b) For fiscal years beginning on and after January 1, 1996,
Executive may be granted Performance Units under the Company's 1990 Long Term
Incentive Plan or a successor plan (the "LTIP") in lieu of a cash bonus
opportunity under the AIAP pursuant to Section 3.2(a), provided that the
aggregate "Initial Grant Value" of all such Performance Units granted in any
year shall not be less than the annual target bonus opportunity under Section
3.2(a) (the annual target bonus opportunity under Section 3.2(a) or 3.2(b), as
applicable, is hereinafter referred to as the "Target Bonus Opportunity"). If
such grants are made, each Performance Unit Agreement under the LTIP to which
Executive is a party shall specifically provide that following a Change of
Control the Committee responsible for exercising any discretion with respect to
any such award shall not exercise such discretion so as to reduce the "Payment
Value" of such award below the award's "Initial Grant Value". The terms
"Initial Grant Value" and "Payment Value" shall have the meanings customarily
given to them in Performance Unit Agreements awarded to Senior Executive
Officers of the Company under the LTIP prior to the date hereof).
5
<PAGE>
3.3 COMPENSATION PLANS AND PROGRAMS. Subject only to Section 3.2(b),
Executive shall participate in any compensation plan or program, whether annual
or long term, maintained by Holdings or the Company on terms no less favorable
than those available to Senior Executive Officers eligible to participate
therein.
3.4 SPECIAL BONUS PAYMENTS. Upon a Change of Control, the Company
shall (a) pay to Executive a special cash bonus payment equal to the sum of
Executive's AIAP Vested Amount as of such Change of Control, Executive's PS
Vested Amount as of such Change of Control, and Executive's PU Vested Amount as
of such Change of Control (all as defined in Exhibit A); (b) make any additional
funding contributions required to fully fund the Benefit (as defined in Section
5) accrued to the date of such Change of Control under Section 5 hereof; and (c)
make any additional premium payments required to maintain the life insurance
coverage under Section 4.5 in force for Executive's lifetime. Notwithstanding
the foregoing, in the event that following a Change of Control any performance
period relating to any award under the AIAP or of Performance Units or
Performance Shares under the LTIP within which such Change of Control occurred
is completed prior to Executive's termination of employment, upon such
completion Executive shall be entitled to payment in respect of each such award
of an amount, if
6
<PAGE>
any, equal to the excess of the value of such award based on actual performance
for such performance period over the AIAP Vested Amount, PU Vested Amount or PS
Vested Amount, as the case may be, previously paid to Executive upon such Change
of Control in respect of such AIAP award, Performance Units or Performance
Shares.
4. EMPLOYEE BENEFITS.
4.1 EMPLOYEE BENEFIT PLANS AND PROGRAMS. The Company and Holdings
shall provide Executive during the term of his employment hereunder coverage
under all employee benefit programs, plans and practices (commensurate with his
position in the Company and to the extent possible under any employee benefit
plan), in accordance with the terms thereof, which Holdings and the Company make
available to Senior Executive Officers, including, but not limited to (a)
retirement, pension and profit sharing (including the SERP, as defined in
Section 5, subject to the provisions of Section 5) and (b) medical, dental,
hospitalization, short and long term disability (subject to the provisions of
Section 6.2), accidental death and dismemberment and travel accident coverage.
4.2 VACATION AND FRINGE BENEFITS. Executive shall be entitled to the
number of vacation days customarily available to Senior Executive Officers of
the Company. In addition, Executive shall be entitled to the perquisites and
7
<PAGE>
fringe benefits from time to time available to Senior Executive Officers.
4.3 DIRECTORS AND OFFICERS LIABILITY COVERAGE. Executive shall be
entitled to the same level of coverage (as determined from time to time by the
Boards (as defined in Exhibit A)) under such directors' and officers' liability
insurance policies, if any, or other arrangements as are available to Senior
Executive Officers and directors of Holdings and the Company, to the fullest
extent permitted by the existing By-laws of Holdings and the Company. In any
event, Holdings and the Company shall indemnify and hold Executive harmless, to
the fullest extent permitted by the laws of the States of Holdings' and the
Company's incorporations, from and against all costs, charges and expenses
(including reasonable attorneys' fees) whatsoever incurred or sustained by him
or his legal representatives in connection with any action, suit or proceeding
to which he or his legal representatives may be made a party by reason of his
being or having been a director or officer of Holdings or the Company or any of
their Affiliates. This Section 4.3 shall survive the termination of this
Agreement for any reason.
4.4 RETIREE MEDICAL. Upon retirement under Section 5 herein,
Executive shall be eligible for retiree medical coverage based on (i) the
greater of his actual age
8
<PAGE>
or a minimum deemed age of 55 and (ii) the maximum number of years of service
that may be credited under the retiree medical program.
4.5 LIFE INSURANCE.
(a) As long as Executive is (i) actively employed by the Company (ii)
retires pursuant to Section 5(d) herein or (iii) is terminated by the Company
and/or Holdings other than for Cause (as defined in Section 6.4) or Executive
terminates for Good Reason (as defined in Section 6.1(b)), the Company shall,
from the initial purchase of a policy of insurance on the life of Executive
issued by The Equitable Variable Life Insurance Company and dated as of April
19, 1996 (the "Policy"), provide sufficient funds to the owner of the Policy to
make sufficient premium payments on the Policy to maintain $3 million of
variable life insurance on Executive's life thereunder in force throughout
Executive's lifetime (it is anticipated that the Policy will be fully funded
over a ten-year period). Subject to the conditions of the preceding sentence
and if, and only if, additional premiums are required by the insurance company
providing the Policy to keep $3 million of life insurance in force during the
Executive's lifetime, the Company shall provide sufficient additional funds to
the owner of the Policy to make such additional premium payments.
9
<PAGE>
(b) The Company shall hold Executive harmless from any taxes (excluding
any gift, estate, transfer, inheritance or other similar taxes), if any,
incurred as a result of payments made by the Company pursuant to Section 4.5(a)
and this Section 4.5(b).
(c) Executive shall have the right, without the consent of the owner of
the Policy, to relieve the Company of its obligations under Section 4.5(a) and
if (i) Executive shall release the Company from such obligations or (ii) the
owner of the Policy shall fail to contribute payments made pursuant to Section
4.5(a) to the Policy or take any action which causes a diminution in coverage or
a cancellation of the Policy, the Company shall have no further obligation under
Section 4.5(a).
5. SUPPLEMENTAL PENSION.
(a) Executive is a participant in the Company's Supplemental Executive
Retirement Program ("SERP"). Executive shall accrue a benefit (the "Benefit")
under the SERP formula resulting from (i) his years of actual Service plus (ii)
13.5 additional years of imputed Service plus (iii) additional years of imputed
service for the period, if any, with respect to which Executive receives
Compensation Continuance (as defined in Section 6.1(a)). "Average Final
Compensation" (as used in the SERP) shall for the foregoing calculation, or any
other SERP calculation made before
10
<PAGE>
October 1, 1998, be an amount not less than the sum of the amounts described
under Section 6.1(a)(i) and Section 6.1(a)(ii) (without reduction for actual
performance). Executive's Benefit shall be forfeited if he voluntarily leaves
employment without Good Reason as defined in Section 6.1(b) or is terminated by
the Company for Cause (as defined in Section 6.4) in either case prior to the
earlier of (i) October 1, 1998 or (ii) a Change of Control. If Executive
forfeits the accrued Benefit as described in this 5(a), Executive shall be
deemed to have instructed the Trustee of the secular trust referred to in
Section 5(b) below to return to the Company the cash value of any annuity
securing such Benefit (as described in Section 5(b) below) at the time of such
forfeiture, net of all taxes imposed on the surrender thereof (computed at the
maximum marginal rates). Subject to Section 5(d)(ii), if Executive's employment
is terminated (I) by the Company or Holdings other than for Cause (as
hereinafter defined) or by Executive for Good Reason (as hereinafter defined)
prior to or more than twenty-four months after a Change of Control, or (II) for
any reason during the twenty-four month period following a Change of Control, or
if Executive attains his Retirement Date as a result of his permanent disability
in accordance with Section 5(d)(i)(III), Executive's Benefit shall be equal to
the maximum 50% SERP benefit, with no reduction for
11
<PAGE>
early commencement of payment. The preceding sentence shall be disregarded for
purposes of Section 5(b)(ii).
(b) (i) To provide Executive with greater security and financial
flexibility, not later than April 30, 1996 the present value of the after-tax
equivalent of the accrued Benefit as of the date of delivery of the annuity
contract as described herein has been secured by the Company's purchase and
delivery to a secular trust for Executive's benefit of an annuity contract
having a lump-sum cash-out option which is the same type of annuity previously
purchased for SERP participants. Executive has made a timely election under
Section 83(b) (an "83(b) election") of the Internal Revenue Code of 1986, as
amended (the "Code") to be taxed on such transfer and the Company paid to
Executive at the time of such election an additional amount and will pay a
further additional amount, if necessary,such that after payment by Executive of
all applicable Federal, state and local taxes thereon (computed at the maximum
marginal rates) there shall have been retained a sufficient amount to pay all
such taxes incurred by Executive on such transfer.
(ii) For fiscal year 1996 and for each fiscal year or portion thereof
thereafter, during which Executive is actively employed or with respect to which
period Executive receives Compensation Continuance, the Company shall
12
<PAGE>
purchase and deliver to such secular trust for Executive's benefit an annuity,
as described in sub paragraph (iv) below, reflecting the incremental accrued
Benefit in respect of that year not already secured by the prior purchase and
delivery of such annuities until such time as, and to ensure that, Executive's
Benefit under the SERP has been fully secured by such purchases and deliveries
of annuities. The Company shall use its best efforts to ensure that the purchase
and delivery of annuities in respect of any fiscal year shall take place no
later than the earlier of April 30 of the following fiscal year or Executive's
Retirement Date. In connection with the Company's purchase and delivery to a
secular trust for Executive's benefit of any such additional annuities under
this subparagraph (ii) prior to Executive's Retirement Date, Executive shall
make a timely 83(b) election if such purchase and delivery occur prior to the
Benefit becoming non-forfeitable pursuant to Section 5(a). In addition, upon
(x) each such purchase and transfer of additional annuities giving rise to taxes
payable by Executive and (y) the imposition on Executive of any other Federal,
state or local taxes in connection with the maintenance of such secular trust,
the Company, in the case of clause (x) or (y), or a trust established for such
purpose, in the case of clause (y), shall pay to Executive (or remit to the
appropriate taxing authorities) an
13
<PAGE>
additional amount such that after payment by Executive of all applicable
Federal, state and local taxes thereon (computed at the maximum marginal rates)
there is retained a sufficient amount to pay all such taxes incurred by
Executive.
(iii) The benefits due Executive under the SERP will be offset by the
annuities purchased hereunder including earnings thereon to the extent that the
present value of the after-tax benefits to be received by Executive under such
annuities equals or exceeds the present value of the after-tax benefits due
Executive under the SERP, determined in each case as of Executive's Retirement
Date using a discount rate determined by the Company's independent actuary as
being consistent with the purchase rates which would be used by insurance
companies to fund the Benefit and mortality assumptions as specified for the
determination of "current liability" as defined in section 412(l)(7) of the
Internal Revenue Code of 1986, as amended (the "Code") and taking into
consideration all applicable Federal, state and local income taxes (computed at
the maximum marginal rates in effect at Executive's Retirement Date) and, in the
case of the annuities, the recovery of the investment in such contract under
Section 72 of the Code based upon the mortality assumptions referred to above.
If an annuity instead of a lump sum is elected at retirement, a
14
<PAGE>
portion of the annuity payments to be made during retirement may be taxable to
Executive, and Executive will be responsible for the payment of any taxes on
such payments. The event of the Executive's retirement on the Retirement Date,
shall be a termination of employment, but shall not automatically be a
termination under Section 6.1(a) entitling Executive to Compensation Continuance
under this Agreement
(iv) The annuities delivered to secure any incremental accrued Benefit for
fiscal years ending before Executive's Retirement Date, and any additional
annuities transferred to Executive in accordance with Section 5 (c) below to
fully fund the aggregate Benefit accrued to Executive's Retirement Date, shall
have a lump sum cash-out option and provide the same periodic after tax payments
to Executive as would the corresponding Benefit if provided to Executive under
the SERP without the use of such annuities, in each case calculated after
payment therefrom by Executive of all applicable Federal, state and local income
taxes thereon (computed at the maximum marginal rates then in effect) and, in
the case of any annuity, the recovery of the investment in such contract under
Section 72 of the Code Assuming Executive were to receive "the expected return"
under such contract within the meaning of Section 72.
15
<PAGE>
(c) No later than Executive's Retirement Date, the Company shall purchase
and transfer to Executive such additional annuities as shall be necessary to
fully fund the Benefit accrued to Executive's Retirement Date (including without
limitation pursuant to the next to last sentence of Section 5(a) above and
Section 5(d)(ii) below) and any annuities, to the extent then held in a secular
trust for Executive's benefit, will be delivered to Executive from such secular
trust. The Company shall pay to Executive at the time of such transfer an
additional amount such that after payment of all applicable Federal, state and
local taxes thereon (computed at the maximum marginal rates) there is retained a
sufficient amount to pay all such taxes incurred on such transfer Upon delivery
to Executive on or following his Retirement Date of the annuities provided for
herein, Executive shall reimburse to the Company an amount equal to the Federal
Insurance Contributions Act ("FICA") taxes, if any, for which Executive would
have been liable had Executive received the Benefit under the SERP without the
use of the annuities provided for herein, provided, however, that in no event
shall the amount of such reimbursement exceed the amount of Executive's FICA
taxes actually paid by the Company to or for the account of Executive in
accordance with the terms of the Agreement on
16
<PAGE>
account of Executive's liability for FICA taxes on such annuities.
(d) (i) Subject to clause (ii) of this Section 5(d), Executive's
"Retirement Date" shall be the first to occur of (I) his attainment of age
60,(II) his death or (III) the second anniversary of Executive's commencement of
benefits under the Company's short term disability plan (provided that Executive
had been disabled throughout the two year period). In the event of Executive's
death prior to his attainment of age 60, the Company's sole obligations under
Section 5(c) shall be (x) to deliver or cause to be delivered to Executive's
designated beneficiary or, if none, to his estate, the annuities then held in a
secular trust for Executive's benefit (the "Existing Annuities"), (y) to
purchase and transfer to Executive's designated beneficiary or, if none, to his
estate, such additional annuities, if any, as would be necessary to fully fund a
"Pre-Retirement Spouse's Benefit" under the SERP as accrued to the date of
Executive's death assuming both the Existing Annuities and such additional
annuities, if any, were applied to such "Pre-Retirement Spouse's Benefit" and
(z) to pay to Executive's designated beneficiary or, if none, to his estate the
additional amount referred to in the penultimate sentence of Section 5(c). In
the event of Executive's death, any reference in this Section 5 to payments or
17
<PAGE>
transfers required to be made to "Executive" shall be made to Executive's
designated beneficiary or, if none, to his estate. Any annuity delivered to
Executive, Executive's designated beneficiary or Executive's estate hereunder
shall have a lump sum cash-out option. Executive agrees that a pre-condition to
any funding prior to a Change of Control of a Benefit under this Section 5 is
the Executive's execution at such time of funding acknowledgment waivers
reasonably requested by the Company. Executive hereby instructs the Company to
deliver all annuities purchased for Executive hereunder prior to Executive's
Retirement Date to a secular trust for his benefit designated by the Company.
(ii) If Executive's employment is terminated (I) by the Company or Holdings
other than for Cause (as hereinafter defined) or by Executive for Good Reason
(as hereinafter defined) prior to or more than twenty-four months after a Change
of Control, or (II) for any reason during the twenty-four month period following
a Change of Control, the Benefit shall be payable upon such termination (which
date shall become his Retirement Date) and shall be equal to the present value
of the maximum 50% SERP benefit that would have been paid to him commencing on
the third anniversary of his Retirement Date (the "Calculation Date"). The
present value shall be calculated using the same methodology as in Section
6.1(a)(y) and shall reflect the acceleration of such payments
18
<PAGE>
by the lesser of (A) 36 months or (B) the number of full months remaining from
the month of Executive's Retirement Date until the month of Exectuive's 60th
birthday, but without any other reduction under the SERP formula for early
commencement of payment prior to age 60.
(e) References in this Agreement to annuities or annuity contracts
purchased or to be purchased by the Company to secure the Benefit shall be
deemed to include Executive's interest as the insured in any group annuity
contract purchased for such purpose by the Company or by the trustee of the
secular trust referred to above, including but not limited to any such interest
reflected in a certificate issued to Executive by the respective insurance
company pursuant to such a group annuity contract. In addition, the obligation
under this Agreement to deliver or cause to be delivered any such annuity or
annuity contract to Executive, to his designated beneficiary or to his estate
shall be deemed satisfied by the distribution to such recipient either of a cash
lump sum in the case of such a payment election by such recipient or of such a
certificate issued by the respective insurance company in the case of an
alternative form of distribution election.
6. TERMINATION OF EMPLOYMENT.
6.1 TERMINATION NOT FOR CAUSE OR FOR GOOD REASON.
19
<PAGE>
(a) The Company and Holdings may terminate Executive's employment at
any time for any reason, and Executive may terminate his employment at any time
for any reason. If Executive's employment is terminated by the Company or
Holdings other than for Cause (as hereinafter defined) or Executive terminates
his employment for Good Reason (as hereinafter defined), the Company shall pay
to Executive as additional compensation ("Compensation Continuance") (x) if such
termination is prior to, or more than twenty-four months after, a Change of
Control, compensation until the third anniversary (the "Compensation Period") of
the date his employment terminated (or, if earlier, until his date of death),
payable monthly at an annual rate equal to the amounts set forth in clauses (i)
and (ii) below, or (y) if such termination occurs during the twenty-four month
period following a Change of Control, then upon such termination a lump sum
payment, discounted to its present value, based on a notional payment period of
3 years assuming equal monthly payments and a discount rate equal to the product
of (I) the three-year Treasury bond yield as published in the New York Times on
the first of the month in which the termination occurs and (II) 100% minus the
aggregate applicable Federal, state and local taxes then imposed on Executive's
employment income computed at the maximum applicable marginal rates, in cash in
an amount
20
<PAGE>
equal to three (3) times the sum of the amounts set forth in clauses (i) and
(ii) below:
(i) his Base Salary at its then current annual rate or following a Change
of Control, if higher, the rate in effect immediately prior to such
Change of Control; and
(ii) his target bonus at its then current percentage or following a Change
of Control, if higher, the percentage in effect immediately prior to
such Change of Control; and computed in the case of any such bonus
opportunity in the form of Performance Units based on the Initial
Grant Value (as defined in Section 3.2(b)) of such Performance Units.
In addition, Executive, if he is entitled to Compensation Continuance, shall be
entitled to receive:
(iii) Executive's full Base Salary through the date of termination at the
rate in effect at the time notice of termination is given, AIAP Vested
Amount (or, in the case of any annual bonus opportunity in the form of
Performance Units, PU Vested Amount) as of the date of termination,
and, except as set forth below, all other amounts to which Executive
is entitled under any compensation or benefit plan of the Company
including, but not limited to, the AIAP and LTIP, and all unpaid
amounts, as of the date of such termination, in respect of any bonus,
including any bonus for any Fiscal Year ending before such termination
which would have been payable had the Executive remained in employment
until the date such bonus would otherwise have been paid and including
any bonus under Section 3.4, at the times such payments are due under
the terms of such plans or, in the event such termination occurs
during the twenty-four month period following a Change of Control,
upon such termination;
(iv) any payment deferred by Executive, together with any applicable
interest or other accruals thereon
(v) the benefits under Section 5 hereof shall be paid out in accordance
with their terms; PROVIDED, HOWEVER, that, for purposes of computing
such
21
<PAGE>
benefits under Section 5, Executive's compensation level shall be
deemed to be the compensation level in effect on the date of
termination or, if such termination occurs during the twenty-four
month period following a Change of Control, the compensation level in
effect immediately prior to such Change of Control if higher;
(vi) continued coverage under Holdings' and the Company's employee benefit
programs, plans and practices described in Section 4.1 and 4.2 hereof
until the third anniversary of the date his employment terminated, or
Holdings or the Company will provide for equivalent coverage (on an
after-tax basis), subject to any applicable coordination of benefits
rules; provided that (A) in the case of any plan meeting the
requirements of Section 401(a) of the Code, prior to a Change of
Control, such coverage shall be provided only to the extent consistent
with such requirements and (B) in the event of such a termination
during the twenty-four month period following a Change of Control,
such coverage shall not be less favorable in the aggregate than that
in effect immediately prior to such Change of Control;
(vii) such payments under applicable plans or programs, including but not
limited to those described in Section 3.3 and 4.3 and payment for
accrued vacation, as may be determined pursuant to the terms of such
plans or programs and this Agreement;
(viii) outplacement counseling services at Company expense; provided however,
this expense shall not exceed 18% of annualized Base Pay in any
calendar year;
(ix) until Executive attains age sixty five (65), but in no event for fewer
than six (6) months after termination, the reasonable cost of one
secretary and a fully functional office, such office location to be
determined by Executive as long as the office is not located on the
premises of the Company;
(x) if Executive's termination occurs prior to March 1, 1996 and prior to
a Change of Control, any applicable additional benefits and
protections provided under the Headquarters Program;
22
<PAGE>
(xi) if Executive's termination occurs during the twenty-four month period
following a Change of Control, all cash payments to be made hereunder
upon a termination of employment shall be made not later than 15
business days following the date of termination, and in addition
Executive shall receive, to the extent not already provided herein:
(A) a lump sum cash payment equal to the sum of Executive's AIAP
Vested Amount, PS Vested Amount and PU Vested Amount all as of the
date of termination;
(B) a lump sum cash payment equal to three times the value of
the annual credit under the RJR Nabisco. Inc. Flexible Perquisites
Program (the "Perquisites Program") to which Executive was entitled
immediately prior to such termination or, if higher, to which
Executive was entitled immediately prior to the Change of Control,
reduced by such credits as would otherwise be applied to the continued
benefits under Section 6.1(a)(vi) above;
(C) use of the automobile assigned to Executive immediately
prior to the Change of Control until the third anniversary of the date
of termination and, at the end of such period, the transfer of
ownership of such automobile to Executive plus such amount in cash
that after payment of all applicable Federal, state and local taxes
thereon, computed at the maximum marginal rates, is equal to all such
taxes, so computed, imposed in connection with such transfer;
(D) in addition to and upon the expiration of the benefits
provided pursuant to Section 6.1(a) (vi) above, MedChoice Retiree
Medical benefits as may be in effect at the time of such expiration
for other retirees and as amended from time to time thereafter at the
minimum level of Company subsidy or, if greater, the subsidy level
based on all his years of service (actual and imputed) credited for
purposes of the Benefit; and
(E) if the Company fails to provide any of the benefits under
Section 6.1(a) (vi) or Section 6.1(a)(xi) (D) above, reimbursement for
the actual
23
<PAGE>
cost of Executive's obtaining comparable benefits within 15 business
days after the date Executive gives the Company written notice that he
incurred such costs plus such additional amount that after payment of
all applicable Federal, state and local taxes thereon, computed at the
maximum applicable marginal rates, is equal to all such taxes, so
computed, imposed with respect to such reimbursement.
(b) For purposes of this Agreement, "Good Reason" shall mean any of
the following (without Executive's express prior written consent):
(i) (A) The assignment to Executive of duties materially inconsistent with
Executive's position (including duties, responsibilities, status,
titles or offices as set forth in Section 1 hereof); (B) any
elimination or reduction of Executive's duties or responsibilities as
set forth in Section 1; or (C) any removal of Executive from or any
failure to elect or reelect Executive to the position of Chief
Executive Officer of Holdings and the Company (including the failure
to elect Executive to the position of Chief Executive Officer of the
ultimate controlling entity in connection with any merger, acquisition
or other extraordinary corporate transaction that includes Holdings or
the Company), except in connection with the termination of Executive's
employment for Cause, Permanent Disability (as hereinafter defined) or
as a result of Executive's death or by Executive other than for Good
Reason;
(ii) A reduction in Executive's Base Salary or annual Target Bonus
Opportunity from the level required hereunder at the time in question,
as the same may be increased from time to time during the term or
pursuant to the terms of this Agreement;
(iii) The failure by the Company or Holdings to obtain the specific
assumption of this Agreement by any successor or assign of Holdings or
the Company or any person acquiring substantially all of the Company's
or Holdings' assets;
24
<PAGE>
(iv) Any material breach by the Company or Holdings of any provision of
this Agreement or any agreements entered into pursuant thereto;
(v) Requiring Executive to be based at any office or location other than
that described in Section 1 above, except for travel reasonably
required in the performance of Executive's responsibilities or,
following a Change of Control, travel reasonably consistent with the
Executive's travel requirements prior to the Change of Control, or
(vi) During the twenty-four month period following a Change of Control, (A)
the failure to continue in effect any compensation plan in which
Executive participates at the time of the Change of Control, including
but not limited to the LTIP, the AIAP, the Perquisites Program, or any
substitute plans adopted prior to the Change of Control, unless an
equitable arrangement (embodied in an ongoing substitute or
alternative plan providing Executive with substantially similar
benefits) has been made with respect to such plan in connection with
the Change of Control, or the failure to continue Executive's
participation therein on substantially the same basis, both in terms
of the amount of benefits provided and the level of his participation
relative to other participants, as existed at the time of the Change
of Control; or (B) the failure to continue to provide Executive with
benefits at least as favorable in the aggregate as those enjoyed by
him under any of the Company's pension, life insurance, medical,
health and accident, disability, deferred compensation or savings
plans in which he was participating at the time of the Change of
Control, the taking of any action which would directly or indirectly
materially reduce any of such benefits or deprive Executive of any
material fringe benefit enjoyed by him at the time of the Change of
Control, or the failure to provide him with the number of paid
vacation days to which he was entitled on the basis of the Company's
practice with respect to him as in effect at the time of the Change of
Control.
25
<PAGE>
(c) (i) Anything in this Agreement to the contrary notwithstanding,
in the event that it is determined that any payment or distribution by
Holdings or the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, other than any payment pursuant to this Section
6.1(c), (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive from Holdings or the Company, within
15 days following the determination described in Section 6.1(c)(ii) below,
an additional payment ("Excise Tax Adjustment Payment") in an amount such
that after payment by Executive of all applicable Federal, state and local
taxes (computed at the maximum marginal rates and including any interest or
penalties imposed with respect to such taxes), including any Excise Tax,
imposed upon the Excise Tax Adjustment Payment, Executive retains an amount
of the Excise Tax Adjustment Payment equal to the Excise Tax imposed upon
the Payments.
26
<PAGE>
(ii) All determinations required to be made under this Section
6.1(c), including whether an Excise Tax Adjustment Payment is required and
the amount of such Excise Tax Adjustment Payment, shall be made by Ernst &
Young, Winston-Salem, North Carolina, or such other national accounting
firm as the Company or Holdings may designate prior to a Change of Control,
which shall provide detailed supporting calculations to the Company and the
Executive within 15 business days of the date of termination of Executive's
employment. Except as hereinafter provided, any determination by Ernst &
Young, Winston-Salem, North Carolina, or such other national accounting
firm as the Company or Holdings may designate prior to a Change of Control,
shall be binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of
the initial determination hereunder, it is possible that (x) certain Excise
Tax Adjustment Payments will not have been made by the Company which should
have been made (an "Underpayment"), or (y) certain Excise Tax Adjustment
Payments will have been made which should not have been made (an
"Overpayment"), consistent with the calculations required to be made
hereunder. In the event of an Underpayment, such Underpayment shall be
27
<PAGE>
promptly paid by Holdings or the Company to or for the benefit of the
Executive. In the event that the Executive discovers that an Overpayment
shall have occurred, the amount thereof shall be promptly repaid to
Holdings or the Company.
(d) Except as provided in this Agreement, if Executive is a participant in
the LTIP or any other stock award plan of the Company, Holdings, or any of their
affiliates and has outstanding awards thereunder, the treatment of such awards
shall be governed by the terms of such applicable plans and awards.
6.2 PERMANENT DISABILITY. (a) In the event Executive becomes
eligible for benefits under the Company's Short Term Disability Plan and/or
the Company's Long Term disability Plan (collectively, the "Disability Plans"),
Executive's disability benefit will be determined under the appropriate
Disability Plan except that Executive's disability benefit shall be equal to
100% of his base salary (as in effect immediately prior to the disability)
subject to offsets as provided under the appropriate Disability Plan.
Disability benefits shall be paid for twenty four 24 months (at which time
Executive will attain his Retirement Date in accordance with Section
5(d)(i)(III)), but in no event shall disability benefits be paid following (i)
the date Executive
28
<PAGE>
is no longer disabled within the meaning of the appropriate Disability Plan or
(ii) Executive's attainment of age 65.
(b) The event of the Executive becoming eligible for benefits under
the Company's Long Term Disability Plan is not a termination under Section
6.1(a) entitling Executive to Compensation Continuance under this Agreement.
If, however, Executive becomes eligible for benefits under the Company's Long
Term Disability Plan during his Compensation Period, the amount of Compensation
Continuance shall be reduced during the Compensation Period by the amount of
disability benefits payable to the Executive. The period during which
disability benefits are paid to Executive (in accordance with Section 6.2(a)
hereof) shall be recognized as Service for purposes of determining Executive's
SERP Benefits pursuant to Section 5 hereof. All other provisions of this
Agreement shall remain in effect notwithstanding the Executive's disability
including, without limitation, , the terms of any applicable plans, including,
but not limited to, those described in Sections 3.3, 4.1, 4.2, 4.3 and 4.4
hereof, and all unpaid amounts, as of the date of such disability, in respect of
any bonus, including any bonus payable for any fiscal year ending prior to such
disability and including any bonus under Section 3.4, and any payment deferred
by Executive, together with any applicable interest or other accruals thereon.
29
<PAGE>
6.3 DEATH. In the event of Executive's death while actively
employed, the Company's and Holdings' obligations under this Agreement shall
cease and terminate except with respect to obligations pursuant to Section 5
hereof, the terms of any applicable plans, including, but not limited to, those
described in Sections 3.3, 4.1, 4.2, 4.3 and 4.4 hereof, all unpaid amounts, as
of the date of death, in respect of any bonus, including any bonus for any
fiscal year ending prior to death which would have been payable had Executive
remained in employment until the date such bonus would otherwise have been paid
and including any bonus under Section 3.4, and any payment deferred by
Executive, together with any applicable interest or other accruals thereon. In
the event of Executive's death subsequent to commencement of his Compensation
Period hereunder, the balance of Compensation Continuance will be paid to his
designated beneficiary in a lump sum. For purposes of this Section 6.3, unless
Executive otherwise elects, Executive's "designated beneficiary" shall mean the
Executive's estate.
6.4 VOLUNTARY RESIGNATION; DISCHARGE FOR CAUSE.
If Executive resigns voluntarily, other than for Good Reason or Permanent
Disability, or the Company and Holdings terminate the employment of Executive
for Cause, the Company's and Holdings' obligations under this Agreement to make
any further
30
<PAGE>
payments to Executive shall thereupon cease and terminate except with respect to
accrued and nonforfeitable obligations pursuant to Section 5 hereof, the terms
of any applicable plans, including those described in Sections 3.3, 4.1, and 4.3
hereof all unpaid amounts, as of the date of such termination, in respect of any
bonus, including any bonus for any fiscal year ending prior to such termination
which would have been payable had Executive remained in employment until the
date such bonus would otherwise have been paid and including any bonus under
Section 3.4, and any payment deferred by Executive, together with any applicable
interest or other accruals thereon. The term "Cause" shall be limited to (a)
action by Executive involving willful malfeasance in connection with his
employment having a material adverse effect on Holdings or the Company, (b) any
action by Executive involving willful gross misconduct having a material adverse
effect on Holdings or the Company (other than an effect that could not
reasonably constitute grounds for dismissal under the circumstances), (c)
substantial and continuing willful refusal by Executive in breach of this
Agreement to perform the duties ordinarily performed by an Executive occupying
his positions, which refusal has a material adverse effect on Holdings or the
Company or (d) Executive being convicted of (i) a felony under the laws of the
United States or any state or (ii) a felony under the laws of any other country
or
31
<PAGE>
political subdivision thereof involving moral turpitude; provided that no action
or refusal to perform shall be deemed willful if done in the reasonable belief
that such action or refusal was in the best interests of the Company or
Holdings. Termination of Executive pursuant to this Section 6.4 shall be
communicated by a Notice of Termination given within one year after the Holdings
Board both (i) had knowledge of conduct or an event allegedly constituting Cause
and (ii) had reason to believe that such conduct or event could be grounds for
Cause. For purposes of this Agreement a "Notice of Termination" shall mean
delivery to Executive of a copy of a resolution duly adopted by the affirmative
vote of not less than three-quarters of the entire membership of Holdings Board
at a meeting of the Holdings Board called and held for the purposes (after
reasonable notice to the Executive ("Preliminary Notice") and reasonable
opportunity for Executive, together with the Executive's counsel, to be heard
before the Holdings Board prior to such vote), finding that, in the good faith
opinion of the Holdings Board, Executive was guilty of conduct set forth in the
second sentence of this Section 6.4 and specifying the particulars thereof in
detail. Upon the receipt of the Preliminary Notice, Executive shall have 14
days in which to appear with counsel or take such other action as he desires on
his behalf, and such 14-day period is hereby agreed to by the parties as a
32
<PAGE>
reasonable opportunity for Executive to be heard. The Holdings Board shall no
later than 30 days after the receipt of the Preliminary Notice by Executive
communicate its findings to Executive. A failure by the Holdings Board to make
its findings of Cause or to communicate its conclusions within such 30-day
period shall be deemed to be a finding that Executive was not guilty of the
conduct described in the second sentence of this Section 6.4. Where the
Holdings Board has made such findings that, based upon conduct described in
clause (a), (b) or (c) above, Cause exists the Executive shall have 30 days in
which to cure such conduct, to the extent such cure is possible. Any
termination of Executive's employment (other than by death or Permanent
Disability) within 30 days after the date that the Preliminary Notice has been
given to Executive shall be deemed to be a termination for Cause; provided,
however, that if during such period Executive voluntarily terminates other than
for Good Reason or the Company terminates Executive other than for Cause, and
either (A) Executive cured his conduct, as permitted in the preceding sentence
of this Section 6.4, or (B) Executive is found (or is deemed to be found) not
guilty of the conduct described in the second sentence of this Section 6.4, such
termination shall not be deemed to be for Cause.
7. STOCK ARRANGEMENTS. (a) Except as otherwise provided in Section 3.4,
Section 6, Section 7(b), and
33
<PAGE>
Section 13, awards under the LTIP shall be governed by the provisions of the
individual grant agreements made under the LTIP.
(b) Stock options granted under the LTIP shall be fully vested upon
Executive's permanent disability, death, retirement or other termination of
employment for any reason, except for termination by the Company or Holdings for
Cause or by Executive without Good Reason.
8. EXPENSES. The Executive is authorized to incur reasonable expense in
carrying out his duties and responsibilities under this Agreement, including
expenses for travel and similar items related to such duties and
responsibilities. The Company shall reimburse Executive for all such expenses
upon presentation by Executive from time to time of an itemized account of such
expenditures.
9. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not be required
to mitigate damages or the amount of any payment provided for under this
Agreement by seeking other employment or otherwise nor will (a) any payments
hereunder be subject to offset in respect of any claims which the Company may
have against Executive or (b) except as provided in Section 6.1(a)(vi), the
amount of any payment or benefit provided for in Section 6 be reduced by any
compensation earned as a result of Executive's employment with another employer.
34
<PAGE>
10. NOTICES. All notices or communications hereunder shall be in writing,
addressed as follows:
To the Company or Holdings:
Mr. Gerald I. Angowitz
c/o RJR Nabisco Holdings Corp.
1301 Avenue of the Americas
New York, New York 10019
To the Executive:
Mr. Steven F. Goldstone
205 Silver Spring Road
Ridgefield, CT 06877
Any such notice or communication shall be sent certified or registered
mail, return receipt requested, postage prepaid, addressed as above (or to such
other address as such party may designate in a notice duly delivered as
described above), and the actual date of mailing shall determine the time at
which notice was given.
11. SEPARABILITY; LEGAL FEES; ARBITRATION. If any provision of this
Agreement shall be declared to be invalid or unenforceable, in whole or in part,
such invalidity or unenforceability shall not affect the remaining provisions
hereof which shall remain in full force and effect. In addition, the Company
shall reimburse Executive for reasonable legal fees incurred in connection with
entering into this Agreement and shall also pay to Executive as incurred all
legal and accounting fees and expenses incurred by Executive in seeking to
obtain or enforce any right or
35
<PAGE>
benefit provided by this Agreement or any other compensation-related plan,
agreement or arrangement of the Company, unless Executive's claim is found by an
arbitral tribunal of competent jurisdiction to have been frivolous. Any good
faith controversy or claim arising out of or relating to this Agreement or the
breach of this Agreement (other than Section 14 hereof) that cannot be resolved
by Executive and the Company, including any dispute as to the calculation of
Executive's benefits or any payments hereunder shall be submitted to arbitration
in New York City in accordance with New York law and the procedures of the
American Arbitration Association. The determination of the arbitrator(s) shall
be conclusive and binding on the Company and Executive and judgment may be
entered on the arbitrator(s)' award in any court having jurisdiction.
12. ASSIGNMENT. This contract shall be binding upon and inure to the
benefit of the heirs and representatives of Executive and the assigns and
successors of Holdings and the Company, but neither this Agreement nor any
rights hereunder shall be assignable or otherwise subject to hypothecation by
Executive (except by will or by operation of the laws of intestate succession)
or by Holdings or the Company, except that Holdings or the Company may assign
this Agreement to any successor (whether by merger, purchase or otherwise) to
36
<PAGE>
all or substantially all of the stock, assets or businesses of Holdings or the
Company.
13. AMENDMENT/TERMINATION.
(a) The Agreement may only be amended at any time by mutual written
agreement of the parties hereto.
(b) Company and Holdings represent and warrant they will make
appropriate adjustments and amendments to the number of shares subject to, and
the exercise price of, options to purchase Holdings common stock granted under
the LTIP ("Options") (including, in the event of a spinoff or distribution of
assets or stock of Holdings or an affiliated entity, substituting or replacing
the shares issuable upon the exercise of Options) should extraordinary events or
transactions occur involving the Company, Holdings, or an affiliated
corporation.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION; NON-COMPETITION.
(a) Executive shall not, without the prior written consent of
Holdings or the Company, divulge, disclose or make accessible to any other
person, firm, partnership or corporation or other entity any Confidential
Information pertaining to the business of Holdings or the Company except (i)
while employed by Holdings or the Company in the business of and for the benefit
of Holdings or the Company or (ii) when required to do so by a court of
37
<PAGE>
competent jurisdiction, by any governmental agency having supervisory authority
over the business of Holdings or the Company, or by any administrative body or
legislative body (including a committee thereof) with purported or apparent
jurisdiction to order Executive to divulge, disclose or make accessible such
information. For purposes of this Section 14(a), "Confidential Information"
shall mean non-public information concerning Holdings' or the Company's
financial data, strategic business plans, product development (or other
proprietary product data), customer lists, marketing plans and other proprietary
information, except for specific items which have become publicly available
information or otherwise known to the public other than through a breach by
Executive of his fiduciary duty or any confidentiality agreement, or information
known to the Executive prior to the date of this Agreement. Confidential
Information does not include information the disclosure of which cannot
reasonably be expected to adversely affect the business of Holdings or the
Company.
(b) During the period commencing on the date hereof and ending (i) in
the case of a termination described in Section 6.1 hereof, three years after the
date of termination and (ii) in case of a termination described in Section 6.4
hereof, two years after the date of termination, Executive covenants and agrees
that he will not be an
38
<PAGE>
executive officer, board member, owner, partner, consultant or employee of a
food or tobacco company with annual revenues over $1 billion, if such food or
tobacco company is engaged in a "major business" of Holdings or the Company. A
"major business" for this purpose is each major business segment of the Company
and its subsidiaries on the date hereof that produces products constituting over
5% of the annual revenues of Holdings and its subsidiaries. For purposes of
this Section 14, Executive shall be deemed not a shareholder of a company that
would otherwise be a competing entity if Executive's record and beneficial
ownership of the capital stock of such company amount to not more than one
percent of the outstanding capital stock of any such company subject to the
periodic and other reporting requirements of Section 13 or Section 15(d) or the
Securities Exchange Act of 1934, as amended. Executive, Holdings, and Company
agree this covenant not to compete is a reasonable covenant under the
circumstances, and further agree that if in the opinion of any court of
competent jurisdiction, such restraint is not reasonable in any respect, such
court shall have the right, power and authority to excise or modify such
provision or provisions of this covenant as to the court shall appear not
reasonable and to enforce the remainder of the covenant as so amended.
39
<PAGE>
(c) Executive agrees that any breach of the covenants contained in
this Section 14 would irreparably injure Holdings and the Company. Accordingly,
Holdings or the Company may, in addition to pursuing any other remedies they may
have in law or in equity, obtain an injunction against Executive from any court
having jurisdiction over the matter, restraining any further violation of this
Agreement by Executive.
15. BENEFICIARIES/REFERENCES. Executive shall be entitled to select (and
change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Executive's death, and may change such election, in either case by giving the
Company written notice hereof. In the event of Executive's death or a judicial
determination of his incompetence, reference in this Agreement to Executive
shall be deemed, where appropriate, to refer to his beneficiary, estate or other
legal representative. Any reference to the masculine gender in this Agreement
shall include, where appropriate, the feminine.
16. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations. The
40
<PAGE>
provisions of this Section are in addition to the survivorship provisions of any
other section of this Agreement.
17. REPRESENTATIONS AND WARRANTIES. Holdings and the Company each
represent and warrant that (a), respectively, they are fully authorized and
empowered to enter into this Agreement, (b) the execution of this Agreement and
the performance of their respective obligations under this Agreement will not
violate or result in a breach of the terms of any material agreement to which
Holdings and/or the Company is a party or by which it is bound, (c) no approval
by any governmental authority or body is required for them to enter into this
Agreement or perform their obligations hereunder, and (d) this Agreement is
valid, binding and enforceable against Holdings and the Company in accordance
with its terms, except to the extent affected or limited by applicable
bankruptcy laws or other statutes governing the rights of creditors and any
regulations or interpretations thereof. Executive represents and warrants that
his execution of this Agreement and his performance of his duties and
responsibilities under this Agreement will not violate or result in a breach of
the terms of any material agreement to which he is a party or by which he is
bound.
18. GOVERNING LAW. This Agreement shall be construed, interpreted, and
governed in accordance with laws of New
41
<PAGE>
York, without reference to rules relating to conflicts of law.
19. WITHHOLDING. The Company and Holdings shall be entitled to withhold
for payment any amount of withholding required by law.
20. INTEREST ON LATE PAYMENTS. To the extent that any payments required
to be made hereunder upon or following a Change of Control are not made within
the period specified therefor, the Company and Holdings shall be liable for
interest on such delayed payments at the rate of 150% of the prime rate
compounded monthly, as posted by the Morgan Guaranty Trust Company of New York
from time to time.
21. ACTUARIAL CALCULATIONS. All required actuarial calculations of
payments to be made hereunder and of annuities to be purchased pursuant to
Section 5 hereof shall be made by Watson Wyatt Worldwide, New York, New York, or
such other national actuarial firm as the Company or Holdings may designate
prior to a Change of Control.
22. FUNDING. Except as otherwise provided herein, all benefits hereunder
are unfunded and will be paid out of the general assets of the Company or
Holdings. Notwithstanding the foregoing, the Company or Holdings may choose to
maintain a rabbi trust or other trusts for the purpose of paying certain of the
benefits hereunder or under other plans and programs of the Company or Holdings
and, if so,
42
<PAGE>
Executive shall be entitled to payments therefrom, if any, as and to the extent
provided in such rabbi trust or other trusts.
23. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original.
RJR NABISCO HOLDINGS CORP.
-------------------------------------
By:
RJR NABISCO, INC.
-------------------------------------
By:
------------------------
STEVEN F. GOLDSTONE
43
<PAGE>
EXHIBIT "A"
AIAP VESTED AMOUNT means, as of a Change of Control or as of the date
Executive's employment terminates, as the case may be, an amount equal to (a) in
the case of any bonus opportunity under the AIAP, the value of Executive's
target award under the AIAP for the relevant period in which such Change of
Control or such termination occurs, as the case may be, multiplied by a
fraction, the numerator of which is the number of months (including partial
months) in the period beginning on the first day of the relevant performance
period and ending on the Change of Control or such termination, as the case may
be, and the denominator of which is the number of months in such performance
period; provided that in the event of a termination of employment following a
Change in Control in the year in which such Change of Control occurs, for
purposes of computing the AIAP Vested Amount as of the date of such termination,
the performance period shall be deemed to begin on the first day following such
Change of Control and the target award shall be that in effect immediately
preceding such Change of Control, or (b) in the case of any annual bonus
opportunity in the form of Performance Units, the PU Vested Amount as of the
date of such termination.
BOARD means the Board of Directors of the Company.
<PAGE>
BOARDS means, collectively, the Board and the Holdings Board.
CHANGE OF CONTROL means the first to occur of the following events:
(a) an individual, corporation, partnership, group, associate or other
entity or "person", as such term is defined in Section 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), other than
Holdings or any employee benefit plan(s) sponsored by Holdings or the
Company, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 30% or more
of the combined voting power of Holdings' outstanding securities
ordinarily having the right to vote at elections of directors.
(b) individuals who constitute the Holdings Board on October 11, 1995 (the
"Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to such date whose election, or nomination for election by
Holdings' shareholders, was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board (either
by a specific vote or by approval of the proxy statement of Holdings
in which such person is named as a nominee of Holdings for director),
but excluding for this purpose any such individual whose initial
assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of an
individual, corporation, partnership, group, associate or other entity
or "person" other than the Holdings Board, shall be, for purposes of
this paragraph (b), considered as though such person were a member of
the Incumbent Board;
(c) the approval by the shareholders of Holdings of a plan or agreement
providing (1) for a merger or consolidation of Holdings other than
with a wholly-owned subsidiary and other than a merger or
consolidation that would result in the voting securities of Holdings
outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities
of the surviving entity) more than 50% of the
2
<PAGE>
combined voting power of the voting securities of Holdings or such
surviving entity outstanding immediately after such merger or
consolidation, or (2) for a sale, exchange or other disposition of all
or substantially all of the assets of Holdings. If any of the events
enumerated in this paragraph (c) occurs, the Holdings Board shall
determine the effective date of the Change of Control resulting
therefrom for purposes of the Program.
HOLDINGS BOARD means the Board of Directors of Holdings.
PS VESTED AMOUNT means with respect to any award of Performance Shares
(as defined in the LTIP) Executive holds as of a Change of Control or as of the
date Executive's employment terminates, as the case may be, an amount equal to
the adjusted value of (i) the number of Performance Shares subject to such
award, multiplied by a fraction, the numerator of which is the number of months
(including partial months) elapsed in the relevant performance period as of such
Change of Control or as of the date of such termination, as the case may be, and
the denominator of which is the number of months in such performance period,
(ii) adjusted by applying target performance with respect to such award;
provided that in the event of a termination of employment following a Change of
Control in the year in which such Change of Control occurs, for purposes of
computing the PS Vested Amount as of the date of such termination, the
performance period shall be deemed to begin on the first day following such
Change of Control and target performance with respect to such Performance Shares
shall be that in effect immediately preceding the Change of Control.
3
<PAGE>
PU VESTED AMOUNT means, for any award of Performance Units (as defined
in the LTIP) Executive holds as of a Change of Control or as of the date
Executive's employment terminates, as the case may be, an amount equal to the
target value of the number of Performance Units subject to such award multiplied
by a fraction, the numerator of which is the number of months (including partial
months) elapsed in the relevant performance period as of the Change of Control
or termination of employment, as the case may be, and the denominator of which
is the number of months in such performance period; provided that in the event
of a termination of employment following a Change of Control in the year in
which such Change of Control occurs, for purposes of computing the PU Vested
Amount as of the date of such termination, the performance period shall be
deemed to begin on the first day following such Change of Control and the target
value of such Performance Units shall be that in effect immediately preceding
the Change of Control.
4
<PAGE>
Exhibit 10.8
PAR-RN 1998
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
PERFORMANCE APPRECIATION RIGHT AGREEMENT
DATE OF GRANT: FEBRUARY 6, 19987
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
("you", or the "Grantee")
subject to the terms and conditions of the Plan and this Agreement (the
"Agreement"):
a) RJR Nabisco, Inc. (RJRN) Appreciation Rights
b) R.J. Reynolds Tobacco Company (RJRT) Appreciation Rights
c) R.J. Reynolds International (RJRI) Appreciation Rights
d) Nabisco Holdings Corp. (Nabisco) Appreciation Rights
Total
-----
This grant supersedes and cancels any other grant of Performance
Appreciation Rights made to you and dated as of the Date of Grant.
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 $36.00. Each
Nabisco Note has an Initial Value of $46.00. 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 preceding year for each type of Note using Performance Measures and
Valuation Formulas determined by the Committee. The Committee will set Note
Values only once
<PAGE>
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, for
exercises within thirty (30) days of the date the Committee makes its regular
annual determination of new Note Values pursuant to Section 3(b) above, the
Payment Value for Appreciation Rights that were exercisable during the
immediately preceding year 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) In the event of a Change of Control or a Spinoff, 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, on the date of the Change of Control or the fourth business day
preceding the record date of the Spinoff, as applicable, of (A) the Closing
Price of the RJRN Common Stock over $36.00, in the case of RJRN, RJRT and RJRI
Appreciation Rights, and (B) the Closing Price of Nabisco Stock over $46.00, in
the case of Nabisco Appreciation Rights.
4. VESTING.
Subject to Section 5 below, 33% of each type of Appreciation Right will
vest on each of December 31, 1998 and 1999 and 34% will vest on December 31,
2000, 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 Appreciation Rights will be vested in proportion to
the ratio of (i) the number of partial or complete months of employment since
January 1, 1998 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.
2
<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.
(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
3
<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.
4
<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:
- ---------------------------
- ---------------------------
- ---------------------------
5
<PAGE>
EXHIBIT A
DEFINITIONS
BOARD OF DIRECTORS. The Board of Directors of RJRN Holdings.
CLOSING PRICE. The closing sale price of the RJRN Common Stock or the Nabisco
Stock, as applicable, 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.
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, 19987,
as set forth in Section 3(a).
NABISCO STOCK. The Class A Common Stock of Nabisco.
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 19998 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, 19987 through December 31, 20012.
RJRN COMMON STOCK. The Common Stock of RJRN Holdings.
SPINOFF. The payment of a dividend or the making of a distribution by RJRN
Holdings to all holders of RJRN Common Stock that consists of the capital stock
of any of its subsidiaries which accounts for all or substantially all of RJRN
Holdings' interest in either of its two principal lines of business as of the
date hereof.
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).
6
<PAGE>
Exhibit 10.9
RESTRICTED STOCK
1998 - DBR
1990 RJR NABISCO HOLDINGS CORP.
LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK PROGRAM
RESTRICTED STOCK AGREEMENT
---------------------------
DATE OF GRANT: January 15, 1998
W I T N E S S E T H
1. GRANT OF RESTRICTED STOCK. Pursuant to the provisions of the 1990
Long-TermIncentive Plan and the Restricted Stock Program (collectively, the
"Plan") RJR Nabisco HoldingsCorp. (the "Company") on the above date has granted,
and this agreement evidences the grant to
David B. Rickard (THE "GRANTEE")
subject to the terms and conditions which follow and the terms and conditions of
the Plan, a total of
20,000 SHARES
of Common Stock of the Company ("Common Stock"). 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. RECEIPT AND DELIVERY OF STOCK. The Grantee waives receipt from the
Company of a certificate or certificates representing the shares of Common Stock
granted hereunder, registered in his name and bearing a legend evidencing the
restrictions imposed on such Common Stock by this agreement. The Grantee
acknowledges and agrees that the Company shall retain custody of such
certificate or certificates until the restrictions imposed by Paragraph 3 on the
Common Stock granted hereunder lapse. Concurrently with the execution of this
agreement, the Grantee has delivered to the Company an irrevocable stock power
endorsed in blank.
3. RESTRICTIONS ON TRANSFER OF STOCK. The Common Stock granted hereunder
may not be sold, tendered, assigned, transferred, pledged or otherwise
encumbered prior to the earliest of:
<PAGE>
(i) January 15, 2003, for 100% of the shares;
(ii) the date of the Grantee's death, for 100% of the shares;
(iii) the date of the Grantee's Disability, as defined in RJR Nabisco Inc.'s
Long Term Disability Plan, for 100% of the shares; or
(iv) 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" or for "Good Reason" (each as
defined and applied in the Grantee's Employment Agreement) (as "Involuntary
Termination"), the Grantee will be vested in a number of shares of Restricted
Stock which is equal to the product of (i) the total number of shares of
Restricted Stock 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 Severance Date (as defined in Section 4) and
the denominator of which is 60. Notwithstanding the foregoing sentence, if the
Involuntary Termination occurs after the Company pays a dividend or makes a
distribution to all holders of Common Stock of the capital stock of any
subsidiary of the Company, which subsidiary represents all or substantially all
of the Company's interest in either of its two principal lines of business as of
the date hereof, the Grantee will be vested in 100% of the shares.
At the time the restrictions imposed by this Section 3 shall lapse, the
appropriate number of shares of Common Stock shall be delivered to the Grantee
without a restrictive legend on any Common Stock certificate.
4. FORFEITURE OF STOCK. The Common Stock upon which restrictions still
exist following the Grantee's Severance Date shall never become transferable by
the Grantee or anyone claiming through him and the Grantee shall forfeit all
right, title and interest in and to such Common Stock along with the right to
any dividends paid thereon and the Common Stock granted hereunder shall revert
to the Company. "Severance 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).
The Committee or its agent shall act promptly to record forfeitures pursuant to
this paragraph on the stock transfer books of the Company.
5. DIVIDENDS. If the Grantee is a shareholder of record on any applicable
record date, he shall receive any dividends on the Common Stock granted
hereunder when paid regardless of whether the restrictions imposed by Paragraph
3 hereof have lapsed.
6. VOTING. If the Grantee is a shareholder of record on any applicable
record date, he shall have the right to vote the Common Stock granted hereunder
regardless of whether the restrictions imposed by Paragraph 3 hereof have
lapsed.
2
<PAGE>
7. NO RIGHT TO EMPLOYMENT. The execution and delivery of this agreement
and the granting of Common Stock 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.
8. REGISTRATION. The Common Stock granted hereunder may be offered and
sold by the Grantee only if such stock is registered for resale under the
Securities Act of 1933 (the " 1933 Act") as amended, or if an exemption from
registration under such Act is available. The Company has no obligation to
effect such registration. By executing this agreement, the Grantee (i) agrees
not to offer or sell the Common Stock granted hereunder unless and until such
stock is registered for resale under the 1933 Act or an exemption from
registration is available, (ii) represents that he accepts such Common Stock for
his own account for investment and not with a view to, or for sale in connection
with, the distribution of any part thereof and (iii) agrees that he or his
beneficiary, on request, will be obligated to repeat these representations in
writing prior to any future delivery of such Common Stock.
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 spinoff,
stock dividend, subdivision or reclassification of shares, the number or nature
of shares of Common Stock subject to this Agreement after such an event shall be
increased or changed in the same proportion or manner as the outstanding number
of shares of Common Stock is 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 shares of Common
Stock 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 shares of Common Stock subject to this Agreement after such
an event, and in place of the shares so subject, a stock equivalent shall be
determined by multiplying the number of common shares of stock given in exchange
for a share of Common Stock upon such consolidation or merger, by the number of
shares of Common Stock 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 change in shares held pursuant to this
Agreement after such an event; provided, however, such change shall not be to
the detriment of the Executive.
10. APPLICATION OF LAWS. The granting of Common Stock hereunder shall be
subject to all applicable laws, rules and regulations and to such approvals of
any governmental agencies as may be required.
3
<PAGE>
11. TAXES. Any taxes required by federal, state or local laws to be
withheld by the Company on the Grant or the delivery of Common Stock 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
conversion to cash by the Company of a sufficient amount of Common Stock to
satisfy the withholding prior to the delivery of Common Stock.
12. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013, and any notice required to be given
hereunder to the Grantee shall be sent to the Grantee's address as shown on the
records of the Company.
13. GRANTEE. In consideration of the grant, the Grantee specifically
agrees that the Committee shall have the exclusive power to interpret the Plan
and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan and Agreement as are consistent
therewith and to interpret or revoke any such rules. All actions taken and all
interpretation and determinations made by the Committee shall be final,
conclusive, and binding upon the Grantee, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
the Agreement. The Committee may delegate its interpretive authority to an
officer or officers of the Company.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Grantee have executed this agreement as of the Date of Grant first above
written.
RJR NABISCO HOLDINGS CORP.
By:
-------------------------------
Authorized Signatory
- ----------------------------
Grantee
Grantee's Taxpayer Identification Number:
- ----------------------------
Grantee's Home Address:
- ----------------------------
- ----------------------------
- ----------------------------
4
<PAGE>
Exhibit 10.10
RN Option
1998 - DBR
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
STOCK OPTION AGREEMENT
---------------------------
DATE OF GRANT: January 15, 1998
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
DAVID B. RICKARD (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
150,000 SHARES
of Common Stock of the Company, at the exercise price of $36.50 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 come vested on the fifth anniversary following
the Date of Grant for all of the shares of Common Stock subject to this Option.
To the extent that the Option is not exercised when it becomes vested, 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) Except as may be otherwise provided in a written employment or
termination agreement between the Optionee and the Company, the Option shall not
become vested as to any additional shares following the Termination of
Employment of the Optionee for any reason other than a Termination of Employment
because of death, Permanent Disability, Retirement, Termination of Employment by
the Optionee with Good Reason or involuntary Termination of Employment of the
Optionee without Cause. In the event of Termination of Employment because of
any of the foregoing reasons, the Option shall immediately become vested and
exercisable as to all shares.
2
<PAGE>
(b) The Optionee shall be deemed to have a "Permanent Disability" if he
becomes 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.
(c) "Retirement" as used herein means retirement at age 65 or over, early
retirement at age 55 or over with at least 10 years of service or early
retirement at age 55 or over with the approval of the Company, which approval
specifically states that the Option shall become fully exercisable as to all
Shares.
(d) "Termination of Employment" as used herein means termination from
active employment with the Company and any other entity which, as of the date of
this Agreement, is an affiliate of the Company.
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.
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.
3
<PAGE>
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 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" OR WITH "GOOD REASON". For purposes of this
Agreement, the Optionee's employment shall be deemed to have been terminated for
"Cause" or with "Good Reason" only as such terms are defined and applied in the
Optionee's employment agreement with the Company. 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
4
<PAGE>
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 misuse or, other than in the course of performing his
duties, disclose 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
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 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
5
<PAGE>
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 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 minus 2) 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.
6
<PAGE>
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:
- ------------------------------
- ------------------------------
- ------------------------------
7
<PAGE>
Exhibit 10.11
RESTRICTED STOCK
1998 - R
1990 RJR NABISCO HOLDINGS CORP.
LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK PROGRAM
RESTRICTED STOCK AGREEMENT
---------------------------
DATE OF GRANT: January 15, 1998
W I T N E S S E T H
1. GRANT OF RESTRICTED STOCK. Pursuant to the provisions of the 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, and this agreement evidences the grant to
WILLIAM ROSOFF (THE "GRANTEE")
subject to the terms and conditions which follow and the terms and conditions of
the Plan, a total of
35,000 SHARES
of Common Stock of the Company ("Common Stock"). 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. RECEIPT AND DELIVERY OF STOCK. The Grantee waives receipt from the
Company of a certificate or certificates representing the shares of Common Stock
granted hereunder, registered in his name and bearing a legend evidencing the
restrictions imposed on such Common Stock by this agreement. The Grantee
acknowledges and agrees that the Company shall retain custody of such
certificate or certificates until the restrictions imposed by Paragraph 3 on the
Common Stock granted hereunder lapse. Concurrently with the execution of this
agreement, the Grantee has delivered to the Company an irrevocable stock power
endorsed in blank.
3. RESTRICTIONS ON TRANSFER OF STOCK. The Common Stock granted hereunder
may not be sold, tendered, assigned, transferred, pledged or otherwise
encumbered prior to the earliest of:
<PAGE>
(i) a) January 15, 2001 for 11,666 shares,
b) January 15, 2002 for 11,666 shares,
c) January 15, 2003 for 11,668 shares;
(ii) the date of the Grantee's death, for 100% of the shares;
(iii) the date of the Grantee's Disability, as defined in RJR Nabisco
Inc.'s Long Term Disability Plan, for 100% of the shares; or
(iv) the date of the Grantee's termination by the Company without "Cause or
by Grantee for Good Reason" (all as defined and applied in the
Grantee's Employment Agreement, for 100% of the shares); or
(v) the date of a Change of Control for 100% of the shares.
at which time the restrictions imposed on such Common Stock by this paragraph
shall lapse for the appropriate number of shares stated above and such Common
Stock shall be delivered to the Grantee without a restrictive legend on any
Common Stock certificate. Notwithstanding the provisions of this Paragraph 3,
the Common Stock granted hereunder shall never become transferable within 6
months of the Date of Grant.
4. FORFEITURE OF STOCK. The Common Stock upon which restrictions still
exist following Grantee's Severance Date shall never become transferable by the
Grantee or anyone claiming through him and the Grantee shall forfeit all right,
title and interest in and to such Common Stock along with the right to any
dividends paid thereon and the Common Stock granted hereunder shall revert to
the Company. "Severance 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). The
Committee or its agent shall act promptly to record forfeitures pursuant to this
paragraph on the stock transfer books of the Company.
5. DIVIDENDS. If the Grantee is a shareholder of record on any applicable
record date, he shall receive any dividends on the Common Stock granted
hereunder when paid regardless of whether the restrictions imposed by Paragraph
3 hereof have lapsed.
6. VOTING. If the Grantee is a shareholder of record on any applicable
record date, he shall have the right to vote the Common Stock granted hereunder
regardless of whether the restrictions imposed by Paragraph 3 hereof have
lapsed.
7. NO RIGHT TO EMPLOYMENT. The execution and delivery of this agreement
and the granting of Common Stock 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.
8. REGISTRATION. The Common Stock granted hereunder may be offered and
sold by the Grantee only if such stock is registered for resale under the
Securities Act of 1933 (the " 1933 Act") as amended, or if an exemption from
registration under such Act is available. The Company has no obligation to
effect such registration. By executing this agreement, the Grantee
2
<PAGE>
(i) agrees not to offer or sell the Common Stock granted hereunder unless and
until such stock is registered for resale under the 1933 Act or an exemption
from registration is available, (ii) represents that he accepts such Common
Stock for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof and (iii) agrees that he
or his beneficiary, on request, will be obligated to repeat these
representations in writing prior to any future delivery of such Common Stock.
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 spinoff,
stock dividend, subdivision or reclassification of shares, the number or nature
of shares of Common Stock subject to this Agreement after such an event shall be
increased or changed in the same proportion or manner as the outstanding number
of shares of Common Stock is 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 shares of Common
Stock 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 shares of Common Stock subject to this Agreement after such
an event, and in place of the shares so subject, a stock equivalent shall be
determined by multiplying the number of common shares of stock given in exchange
for a share of Common Stock upon such consolidation or merger, by the number of
shares of Common Stock 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 change in shares held pursuant to this
Agreement after such an event; provided, however, such change shall not be to
the detriment of the Executive.
10. APPLICATION OF LAWS. The granting of Common Stock hereunder shall be
subject to all applicable laws, rules and regulations and to such approvals of
any governmental agencies as may be required.
11. TAXES. Any taxes required by federal, state or local laws to be
withheld by the Company on the Grant or the delivery of Common Stock 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
conversion to cash by the Company of a sufficient amount of Common Stock to
satisfy the withholding prior to the delivery of Common Stock.
12. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of
the Americas, New York, NY 10019-6013, and any notice required to be given
hereunder to the Grantee shall be sent to the Grantee's address as shown on the
records of the Company.
3
<PAGE>
13. GRANTEE. In consideration of the grant, the Grantee specifically
agrees that the Committee shall have the exclusive power to interpret the Plan
and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan and Agreement as are consistent
therewith and to interpret or revoke any such rules. All actions taken and all
interpretation and determinations made by the Committee shall be final,
conclusive, and binding upon the Grantee, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
the Agreement. The Committee may delegate its interpretive authority to an
officer or officers of the Company.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Grantee have executed this agreement as of the Date of Grant first above
written.
RJR NABISCO, HOLDINGS CORP.
By:
-----------------------------
Authorized Signatory
- -------------------------------
Grantee
Grantee's Taxpayer Identification Number:
- -------------------------------
Grantee's Home Address:
- -------------------------------
- -------------------------------
- -------------------------------
4
<PAGE>
Exhibit 10.12
RN Option
1998 - WLR
RJR NABISCO HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
STOCK OPTION AGREEMENT
---------------------------
DATE OF GRANT: January 15, 1998
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
WILLIAM L. ROSOFF (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
150,000 SHARES
of Common Stock of the Company, at the exercise price of $36.5037.375 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 shares under the Plan. This method is known as the
"broker-dealer exercise method" and is subject to the terms and
conditions set forth
<PAGE>
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 vested in three installments. The first
installment shall be vested 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
vested for 33% and 34%, respectively, of the number of shares subject to this
Option until the Option has become fully vested. To the extent that any of the
above installments is not exercised when it becomes vested, 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) Except as may be otherwise provided in a written employment or
termination agreement between the Optionee and the Company, the Option shall not
become vested as to any additional shares following the Termination of
Employment of the Optionee for any reason other than a Termination of Employment
because of death, Permanent Disability, Retirement, Termination of Employment by
the Optionee with Good Reason or Involuntary Termination of Employment of the
Optionee without Cause. In the event of Termination of Employment because of any
of the foregoing reasons, the Option shall immediately become vested and
exercisable as to all shares.
2
<PAGE>
(b) The Optionee shall be deemed to have a "Permanent Disability" if he
becomes 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.
(c) "Retirement" as used herein means retirement at age 65 or over, early
retirement at age 55 or over with at least 10 years of service or early
retirement at age 55 or over with the approval of the Company, which approval
specifically states that the Option shall become fully exercisable as to all
Shares.
(d) "Termination of Employment" as used herein means termination from
active employment with the Company and any other entity which, as of the date of
this Agreement, is an affiliate of the Company.
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
3
<PAGE>
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 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" OR WITH "GOOD REASON" For purposes of this
Agreement, the Optionee's employment shall be deemed to have been terminated for
"Cause" or with "Good Reason" only as such terms are defined and applied in the
Optionee's employment agreement with the Company. 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
4
<PAGE>
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 misuse or, other than in
the course of performing his duties, disclose 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 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 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
5
<PAGE>
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 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 minus 2) 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.
6
<PAGE>
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:
- -------------------------------
- -------------------------------
- -------------------------------
7
<PAGE>
EXHIBIT 12.1
RJR NABISCO, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1998
-----------------
<S> <C>
Earnings before fixed charges:
Income before income taxes...................................................................... $ 36
Less minority interest in pre-tax income of Nabisco Holdings.................................... 18
-----
Adjusted income before income taxes............................................................. 18
Interest and debt expense....................................................................... 197
Interest portion of rental expense.............................................................. 15
-----
Earnings before fixed charges..................................................................... $ 230
-----
-----
Fixed charges:
Interest and debt expense....................................................................... $ 197
Interest portion of rental expense.............................................................. 15
Capitalized interest............................................................................ 1
-----
Total fixed charges......................................................................... $ 213
-----
-----
Ratio of earnings to fixed charges................................................................ 1.1
-----
-----
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM RJRN HOLDINGS'
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000847903
<NAME> RJR NABISCO HOLDINGS CORP.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 216
<SECURITIES> 0
<RECEIVABLES> 1,188
<ALLOWANCES> 0
<INVENTORY> 2,705
<CURRENT-ASSETS> 4,619
<PP&E> 9,252
<DEPRECIATION> (3,321)
<TOTAL-ASSETS> 30,493
<CURRENT-LIABILITIES> 3,850
<BONDS> 9,703
953
516
<COMMON> 3
<OTHER-SE> 8,923
<TOTAL-LIABILITY-AND-EQUITY> 30,493
<SALES> 3,947
<TOTAL-REVENUES> 3,947
<CGS> 2,136
<TOTAL-COSTS> 2,136
<OTHER-EXPENSES> 158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> 13
<INCOME-TAX> 22
<INCOME-CONTINUING> (20)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> RJR NABISCO, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 240
<SECURITIES> 0
<RECEIVABLES> 1,187
<ALLOWANCES> 0
<INVENTORY> 2,705
<CURRENT-ASSETS> 4,642
<PP&E> 9,252
<DEPRECIATION> (3,321)
<TOTAL-ASSETS> 30,502
<CURRENT-LIABILITIES> 3,680
<BONDS> 9,703
0
0
<COMMON> 0
<OTHER-SE> 11,067
<TOTAL-LIABILITY-AND-EQUITY> 30,502
<SALES> 3,947
<TOTAL-REVENUES> 3,947
<CGS> 2,136
<TOTAL-COSTS> 2,136
<OTHER-EXPENSES> 158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> 36
<INCOME-TAX> 33
<INCOME-CONTINUING> (8)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000847903
<NAME> RJR NABISCO HOLDINGS CORP
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997
<CASH> 251 251
<SECURITIES> 0 0
<RECEIVABLES> 1,421 1,489
<ALLOWANCES> 0 0
<INVENTORY> 2,783 2,847
<CURRENT-ASSETS> 4,918 5,180
<PP&E> 9,033 8,903
<DEPRECIATION> (3,214) (3,132)
<TOTAL-ASSETS> 30,952 31,301
<CURRENT-LIABILITIES> 3,764 4,186
<BONDS> 9,632 9,409
953 954
524 528
<COMMON> 3 3
<OTHER-SE> 9,555 9,636
<TOTAL-LIABILITY-AND-EQUITY> 30,952 31,301
<SALES> 12,474 8,065
<TOTAL-REVENUES> 12,474 8,065
<CGS> 5,886 3,674
<TOTAL-COSTS> 5,886 3,674
<OTHER-EXPENSES> 476 318
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 687 463
<INCOME-PRETAX> 1,074 830
<INCOME-TAX> 445 341
<INCOME-CONTINUING> 578 456
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 578 456
<EPS-PRIMARY> 1.68 1.34
<EPS-DILUTED> 1.67 1.33
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000847903
<NAME> RJR NABISCO HOLDINGS CORP
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 12-MOS 9-MOS 6-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 SEP-30-1996 JUN-30-1996
MAR-31-1996
<CASH> 234 252 331 361
574
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 1,334 1,418 1,434 1,420
1,361
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 2,489 2,636 2,576 2,581
2,501
<CURRENT-ASSETS> 4,560 4,751 4,767 4,810
4,927
<PP&E> 8,386 8,837 8,670 8,525
8,475
<DEPRECIATION> (2,696) (3,002) (2,914) (2,826)
(2,770)
<TOTAL-ASSETS> 31,518 31,289 31,413 31,475
31,808
<CURRENT-LIABILITIES> 4,124 4,306 4,174 4,211
4,019
<BONDS> 9,429 9,256 9,595 9,569
9,785
957 957 957 957
957
404 534 424 417
413
<COMMON> 3 3 3 3
3
<OTHER-SE> 9,919 9,608 9,689 9,696
9,941
<TOTAL-LIABILITY-AND-EQUITY> 31,518 31,289 31,413 31,475
31,808
<SALES> 16,008 17,063 12,438 8,089
3,886
<TOTAL-REVENUES> 16,008 17,063 12,438 8,089
3,886
<CGS> 7,468 7,973 5,778 3,742
1,801
<TOTAL-COSTS> 13,670 7,973 5,778 3,742
1,801
<OTHER-EXPENSES> 790 1,064 903 746
158
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 899 927 697 464
234
<INCOME-PRETAX> 1,266 1,199 782 355
371
<INCOME-TAX> 580 585 404 216
163
<INCOME-CONTINUING> 627 611 396 171
198
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> (16) 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 611 611 396 171
198
<EPS-PRIMARY> 1.54 1.75 1.12 0.46
0.58
<EPS-DILUTED> 1.53 1.74 1.11 0.46
0.57
</TABLE>
<PAGE>
AGREEMENT TO PAY
BLUE CROSS AND BLUE SHIELD OF MINNESOTA
ATTORNEYS' FEES AND COSTS
Philip Morris Incorporated (hereinafter "PM"), R.J. Reynolds Tobacco
Company (hereinafter "RJR"), Brown & Williamson Tobacco Corporation
(hereinafter "B&W"), and Lorillard Tobacco Company (hereinafter "Lorillard")
(collectively referred to as "The Settling Defendants"), hereby enter into
this Agreement To Pay Blue Cross and Blue Shield of Minnesota Attorneys' Fees
And Costs (hereinafter the "Agreement") with Robins, Kaplan, Miller & Ciresi
L.L.P. (hereinafter "RKM&C") providing for the payment of all attorneys' fees
and costs incurred in the prosecution of the lawsuit captioned The State of
Minnesota and Blue Cross and Blue Shield of Minnesota vs. Philip Morris
Incorporated, et al., Court File C1-94-8565 (hereinafter "The Case"), by
BCBS, Inc., d/b/a Blue Cross and Blue Shield of Minnesota (hereinafter
"BCBS").
BACKGROUND
1. On August 17, 1994, The State of Minnesota, together with BCBS,
commenced The Case in Ramsey County District Court in St. Paul, Minnesota.
2. From August 1994 until January 1998, RKM&C engaged in extensive and
unprecedented pretrial and discovery proceedings, which led to the
establishment of a document depository in Minneapolis, Minnesota, into which
was placed in excess of 28 million pages of documents. A second document
depository was established in Guildford, England, into which was placed in
excess of six million pages of documents. The majority of the documents in
the U.S. and Guildford depositories were never previously produced by
defendants in any lawsuit. Also included among the documents in the
Minneapolis depository are in excess of 40,000 documents obtained by RKM&C
over which defendants had continuously maintained the claim of
attorney-client privilege.
1
<PAGE>
The production of the attorney-client privilege documents was the subject of
numerous appeals, including an appeal to the U.S. Supreme Court.
3. RKM&C painstakingly reviewed the 34 million documents and selected
those it deemed the most probative and relevant, which set of documents
became nationally known as the "Minnesota select" documents. The Minnesota
select documents have been provided to other litigants (including state
attorneys general and private parties), Congress and Governmental
authorities.
4. RKM&C took or defended the depositions of more than 300 fact and
expert witnesses.
5. Throughout the pretrial proceedings, more than 190 motions were
prosecuted and defended by Defendants and RKM&C, resulting in 200 orders
being issued by the trial court.
6. Interlocutory appeals were taken by Defendants of numerous trial
court orders resulting in 12 appeals to the Minnesota Court of Appeals; four
appeals to the Minnesota Supreme Court; and two appeals to the U.S. Supreme
Court.
7. On January 20, 1998, trial of The Case began before the Honorable
Kenneth J. Fitzpatrick. The trial proceeded for 74 trial days until May 4,
1998. Forty-one witnesses testified, and the transcript of the trial is
more than 15,000 pages in length.
8. On May 8, 1998, after all parties to the trial had rested, but
before the case was submitted to the jury, The Case was settled. After
settlement of the BCBS's claims, RKM&C relinquished its right to receive
attorneys' fees and costs pursuant to the retainer agreement entered into
between RKM&C and BCBS based upon the undertaking by The Settling
Defendants to negotiate directly with RKM&C for payment of attorneys' fees
and costs. This Agreement between
2
<PAGE>
The Settling Defendants and RKM&C is the result of those negotiations and
represents The Settling Defendants' undertaking to pay attorneys' fees and
costs to RKM&C
AGREEMENT
Now, therefore, the undersigned parties agree as follows:
9. For and in consideration of the payment of attorneys' fees and costs
as set forth herein, RKM&C relinquishes its right to receive attorneys' fees
and costs pursuant to the retainer agreement entered into between RKM&C and
BCBS.
10. For and in consideration of the facts set forth above and in
consideration of RKM&C agreeing to relinquish its right to claim any fees and
costs under its retainer agreement with BCBS, and in partial consideration
for the settlement of The Case, The Defendants agree to pay to RKM&C
attorneys' fees in the amount of One Hundred Seventeen Million Two Hundred
Fifty Thousand Dollars ($117,250,000) to be paid as follows: Sixty Million
Dollars ($60,000,000) on July 1, 1998; Fifty-seven Million Two Hundred Fifty
Thousand Dollars ($57,250,000) on September 4, 1998.
11. Defendants also agree to pay Four Million Dollars ($4,000,000) as
and for costs due and owing by BCBS to RKM&C on or before May 18, 1998.
12. The amount of fees and costs due and owing pursuant to paragraphs 10
and 11 shall be paid by Settling Defendants pro rata in proportion to their
Market Share. No Settling Defendant shall be obligated to make any payment
due from any other Settling Defendant. All obligations of The Settling
Defendants pursuant to this Agreement are intended to be and shall remain
several, and not joint.
3
<PAGE>
13. The payment of fees pursuant to paragraph 10 shall constitute the
entire obligation of The Settling Defendants with respect to attorneys' fees
in connection with the representation by RKM&C of BCBS in connection with
this action, and the exclusive means by which RKM&C may seek payment of fees
from defendants, or otherwise, in connection with its representation of BCBS
in this action. RKM&C represents that it has served as sole outside counsel
to BCBS in connection with this action.
MISCELLANEOUS PROVISIONS
14. In the event either party to this Agreement is required to seek
enforcement of the terms of this Agreement in court, all attorneys' fees and
costs incurred in enforcing the Agreement shall be paid by the party against
whom enforcement is obtained.
15. Each Defendant has all requisite corporate power and authority to
execute, deliver and perform this Agreement and to consummate the
transactions contemplated herein. This Agreement has been duly and validly
executed and delivered by each Defendant and constitutes its legal, valid and
binding obligation.
16. This Agreement constitutes the entire agreement among the parties
with regard to the subject matter of the Agreement and supersedes any
previous agreements and understandings between the parties with respect to
the subject matter. This Agreement may not be modified or amended except in
writing and signed by all parties.
17. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
4
<PAGE>
18. Except as otherwise specifically provided for in this Agreement, no
party shall be liable for any costs or expenses incurred by or on behalf of
any other party in connection with this Agreement and the actions
contemplated hereby.
19. This Agreement shall be construed in accordance with and governed by
the laws of Minnesota applicable to agreements made and to be performed in
Minnesota.
20. Any disputes regarding the interpretation of this Agreement and any
actions to enforce its terms shall be venued in Ramsey County District Court
in the State of Minnesota.
21. The parties agree that the payment of attorneys' fees and costs
provided for in this Agreement shall be made strictly according to its terms.
The Settling Defendants will not seek to avoid through legislation any of
their obligations under this Agreement.
22. This Agreement is not intended to, and does not, vest standing in
any third party with respect to the terms hereof, or create for any person
other than the parties hereto a right to enforce the terms hereof.
23. For and in consideration for the payment of fees as provided herein,
RKM&C hereby releases Settling Defendants from any and all claims (other than
a claim to enforce this Agreement) arising out of or in any way related to
the litigation or settlement of The Case.
24. Unless otherwise specified, the terms used in this Agreement are
subject to the definitions contained in the Settlement Agreement.
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Agreement To Pay Blue Cross and Blue
Shield of Minnesota Attorneys' Fees and Costs as of this ____ day of May,
1998.
ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
5
<PAGE>
By:
-------------------------------------
Michael V. Ciresi
PHILIP MORRIS INCORPORATED
By:
-------------------------------------
Meyer G. Koplow
Counsel
By:
-------------------------------------
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By:
-------------------------------------
D. Scott Wise
Counsel
By:
-------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO CORPORATION
By:
-------------------------------------
Stephen R. Patton
Counsel
By:
-------------------------------------
F. Anthony Burke
Vice President and General Counsel
LORILLARD TOBACCO COMPANY
6
<PAGE>
By:
-------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
7
<PAGE>
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA, Case Type: Other Civil
BY HUBERT H. HUMPHREY III, Court File No. C1-94-8565
ITS ATTORNEY GENERAL,
and
BLUE CROSS AND BLUE SHIELD
OF MINNESOTA,
Plaintiffs,
vs.
PHILIP MORRIS INCORPORATED,
R.J. REYNOLDS TOBACCO COMPANY,
BROWN & WILLIAMSON TOBACCO
CORPORATION, B.A.T. INDUSTRIES
P.L.C., BRITISH-AMERICAN TOBACCO
COMPANY LIMITED, BAT (U.K. &
EXPORT) LIMITED, LORILLARD
TOBACCO COMPANY, THE AMERICAN
TOBACCO COMPANY, LIGGETT GROUP,
INC., THE COUNCIL FOR TOBACCO
RESEARCH-U.S.A., INC., and THE
TOBACCO INSTITUTE, INC.,
Defendants.
SETTLEMENT AGREEMENT AND STIPULATION
FOR ENTRY OF CONSENT JUDGMENT
THIS SETTLEMENT AGREEMENT AND RELEASE ("Settlement Agreement") is made
as of the date hereof, by and among the parties hereto, as indicated by their
signatures below, to
<PAGE>
settle and resolve with finality all claims of the State of Minnesota
relating to the subject matter of this action which have been or could have
been asserted by the State of Minnesota.
WHEREAS, the State of Minnesota, through its Attorney General Hubert H.
Humphrey III, and Blue Cross and Blue Shield of Minnesota, commenced this
action on August 17, 1994, asserting various claims for monetary, equitable
and injunctive relief on behalf of the State of Minnesota and Blue Cross and
Blue Shield of Minnesota against certain tobacco manufacturers and others as
Defendants;
WHEREAS, the Defendants have denied each and every one of Plaintiffs'
allegations of unlawful conduct or wrongdoing and have asserted a number of
defenses to Plaintiffs' claims, which defenses have been contested by
Plaintiffs;
WHEREAS, the parties hereto wish to avoid the further expense, delay,
inconvenience, burden and uncertainty of continued litigation of this matter
(including appeals from any verdict), the State of Minnesota and the Settling
Defendants have agreed to settle this litigation pursuant to terms which will
achieve for the State of Minnesota (and thus for the people of the State of
Minnesota) significant funding for the advancement of public health, the
implementation of important tobacco-related public health measures in
Minnesota, as well as funding for national research dedicated to studying and
significantly reducing the use of Tobacco Products by youth;
WHEREAS, the State of Minnesota and Settling Defendants have agreed to
settle this lawsuit on terms set forth in this Settlement Agreement and
Stipulation for Entry of Consent Judgment and the attached Consent Judgment;
WHEREAS, the parties have further agreed to jointly petition the Court
for approval of the Consent Judgment, on the grounds that settlement would be
in the public interest;
2
<PAGE>
NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the payments to be
made by the Settling Defendants, the dismissal and release of claims by the
State of Minnesota and such other consideration as described herein, the
sufficiency of which is hereby acknowledged, the parties hereto, acting by
and through their authorized agents, memorialize and agree as follows:
I. GENERAL PROVISIONS
A. Jurisdiction. The State and the Settling Defendants acknowledge
that this Court has jurisdiction over the subject matter of this action and
over each of the parties to this Settlement Agreement, and that this Court
shall retain jurisdiction for the purposes of implementing and enforcing this
Settlement Agreement. The parties hereto agree to present any disputes under
this Settlement Agreement, including without limitation any claims for breach
or enforcement of this Settlement Agreement, exclusively to this Court. The
Court may, upon the State's application, enter a Consent Judgment in the form
attached hereto as Exhibit A. The cumulative terms of this Settlement
Agreement and Stipulation for Entry of Consent Judgment, and the attached
Consent Judgment, may be referred to for convenience as this "Agreement" or
"Settlement Agreement."
B. Voluntary Agreement of the Parties. The State and the Settling
Defendants acknowledge and agree that this Settlement Agreement is
voluntarily entered into by all parties hereto as the result of arm's-length
negotiations during which all such parties were represented by counsel. The
State and Settling Defendants understand that Congress may enact legislation
dealing with some of the issues addressed in this Agreement. Settling
Defendants and their assigns, affiliates, agents, and successors hereby waive
any right to challenge this Agreement or the Consent Judgment, directly or
through third parties, on the ground that any term hereof is
unconstitutional, outside the power or jurisdiction of the Court, preempted
by or in conflict with any current or future
3
<PAGE>
federal legislation (except where non-economic terms of future federal
legislation are irreconcilable).
C. Definitions.
For the purposes of this Settlement Agreement and attached Consent
Judgment, the following terms shall have the meanings set forth below:
1. "State" or "State of Minnesota" means the State of Minnesota
acting by and through its Attorney General;
2. "Blue Cross" means BCBSM, Inc., d/b/a Blue Cross and Blue
Shield of Minnesota, and all of its administrators, representatives,
employees, directors, officers, agents, attorneys, parents and divisions;
3. "Settling Defendants" means those Defendants in this action
that are signatories hereto;
4. "Defendants" means Philip Morris Incorporated, R.J. Reynolds
Tobacco Company, Brown & Williamson Tobacco Corporation, B.A.T
Industries P.L.C., British-American Tobacco Company Limited, BAT (U.K.
and Export) Limited, Lorillard Tobacco Company, The American Tobacco
Company, The Council for Tobacco Research-U.S.A., Inc., and the Tobacco
Institute, Inc. and their successors and assigns;
5. "Consumer Price Index" shall mean the Consumer Price Index for
All Urban Consumers, for the most recent twelve-month period for which
such percentage information is available as published by the Bureau of
Labor Statistics of the U.S. Department of Labor.
6. "Court" means the District Court of the State of Minnesota,
County of Ramsey, Second Judicial District;
4
<PAGE>
7. "Market Share" means a Settling Defendant's respective share of
sales of cigarettes by unit for consumption in the United States during
(i) with respect to payments made pursuant to Paragraph II.D. of this
Settlement Agreement, the calendar year ending on the date on which the
payment at issue is due, regardless of when such payment is made, and
(ii) with respect to all other payments made pursuant to this Settlement
Agreement, the calendar year immediately preceding the year in which the
payment at issue is due, regardless of when such payment is made;
8. "Cigarettes" means any product which contains nicotine, is
intended to be burned or heated under ordinary conditions of use, and
consists of or contains (i) any roll of tobacco wrapped in paper or in
any substance not containing tobacco; or (ii) tobacco, in any form, that
is functional in the product, which, because of its appearance, the type
of tobacco used in the filler, or its packaging and labeling, is likely
to be offered to, or purchased by, consumers as a cigarette; or (iii)
any roll of tobacco wrapped in any substance containing tobacco which,
because of its appearance, the type of tobacco used in the filler, or
its packaging and labeling, is likely to be offered to, or purchased by,
consumers as a cigarette described in subparagraph (i) of this paragraph;
9. "Smokeless Tobacco" means any powder that consists of cut,
ground, powdered, or leaf tobacco that contains nicotine and that is
intended to be placed in the oral cavity;
10. "Tobacco Products" means Cigarettes and Smokeless Tobacco;
11. "Billboards" includes billboards, as well as all signs and
placards in arenas and stadiums, whether open-air or enclosed.
"Billboards" does not include (1) any
5
<PAGE>
advertisements placed on or outside the premises of retail
establishments which sell tobacco products, or any retail point-of-sale;
and (2) billboards or advertisements in connection with the sponsorship
by the Defendants of any entertainment, sporting or similar event, such
as NASCAR, that appears in the State of Minnesota as part of a national
or multi-state tour;
12. "Children" or "youth" means persons under the age of 18;
13. "Depository," unless otherwise specified, means the Minnesota
document depository established by the Court's Order dated June 16,
1995. "Depositories" includes both the Minnesota depository and the
Guildford, U.K. document depository established by the Court's Order
dated September 6, 1995;
14. "Transit Advertisements" means advertising on private or public
vehicles and all advertisements placed at, on or within any bus stop,
taxi stand, waiting area, train station, airport or any similar
location. "Transit Advertisements" does not include any advertisements
placed on or outside the premises of retail establishments licensed to
sell Tobacco Products or any retail point-of-sale;
15. "Special State Counsel" means Robins, Kaplan, Miller & Ciresi
L.L.P. or a successor, if any; and
16. "Final Approval" means the date on which this Settlement
Agreement and the form of State Escrow Agreement are approved by the
Court. At the time of such approval, the settlement between the parties
is final.
II. SETTLEMENT PAYMENTS
A. Settlement Receipts. The payments to be made by the Settling
Defendants under this Settlement Agreement are in satisfaction of all of
the State of Minnesota's claims for damages
6
<PAGE>
incurred by the State in the year of such payment or earlier years related to
the subject matter of this action, including, without limitation, claims for
equitable and injunctive relief, claims for health care expenditures and
claims for punitive damages, except that no part of any payment under this
Settlement Agreement is made in settlement of an actual or potential
liability for a fine, penalty (civil or criminal) or enhanced damages.
B. Settlement Payments to the State of Minnesota. Each Settling
Defendant severally shall cause to be paid to an account designated in
writing by the State of Minnesota in accordance with and subject to paragraph
II.E. of this Settlement Agreement, the following amounts: the amount listed
for it in Schedule A hereto, such amount representing its share of
$240,000,000, to be paid on or before September 5, 1998; pro rata in
proportion to its Market Share, its share of $220,800,000, to be paid on or
before January 4, 1999; pro rata in proportion to its Market Share, its share
of $242,550,000, to be paid on or before January 3, 2000; pro rata in
proportion to its Market Share, its share of $242,550,000, to be paid on or
before January 2, 2001; pro rata in proportion to its Market Share, its share
of $242,550,000, to be paid on or before January 2, 2002; and pro rata in
proportion to its Market Share, its share of $121,550,000, to be paid on or
before January 2, 2003. The payments made by the Settling Defendants
pursuant to this Paragraph shall be adjusted upward by the greater of 3% or
the Consumer Price Index applied each year on the previous year, beginning
with the payment due to be made on or before January 3, 2000. The payments
due to be made by the Settling Defendants pursuant to this Paragraph on or
before January 3, 2000, on or before January 2, 2001, on or before January 2,
2002, and on or before January 2, 2003, will also be decreased or increased,
as the case may be, in accordance with the formula for adjustments of
payments as set forth in Appendix A. The payments due to be made by the
Settling
7
<PAGE>
Defendants pursuant to this Paragraph on or before September 5, 1998, and on
or before January 4, 1999, shall not be subject to inflation escalation and
volume adjustments described in the preceding sentences.
In the event that any of the Settling Defendants fails to make any
payment required of it pursuant to this Paragraph (a "Defaulting Defendant")
by the applicable date set forth in this paragraph II.B. (a "Missed
Payment"), the State of Minnesota shall provide notice to each of the
Settling Defendants of such non-payment. The Defaulting Defendant shall have
15 days after receipt of such notice to pay the Missed Payment, together with
interest accrued from the original applicable due date at the prime rate as
published in the Wall Street Journal on the latest publication date on or
before the date of default plus 3%. If the Defaulting Defendant does not
make such payment within such 15-day period, the State of Minnesota shall
provide notice to each of the Settling Defendants of such continued
non-payment. Any or all of the Settling Defendants (other than the
Defaulting Defendant) shall thereafter have 15 days after receipt of such
notice to elect (in such Settling Defendant's or such Settling Defendants'
sole and absolute discretion) to pay the Missed Payment, together with
interest accrued from the original applicable due date at the prime rate as
published in the Wall Street Journal on the latest publication date on or
before the date of default plus 3%. In the event that the State of Minnesota
does not receive the Missed Payment, together with such accrued interest,
within such additional 15-day period, all payments required to be made by
each of the respective Settling Defendants pursuant to this Paragraph shall
at the end of such additional 15-day period be accelerated and shall
immediately become due and owing to the State of Minnesota from each Settling
Defendant pro rata in proportion to its Market Share; provided, however, that
any such accelerated payments (a) shall all be adjusted upward by the greater
of (i) the
8
<PAGE>
rate of 3% per annum or (ii) the actual total percent change in the CPI, in
either instance for the period between January 1 of the year in which the
acceleration of payments pursuant to this Paragraph occurs and the date on
which such accelerated payments are due pursuant to this subsection, and (b)
shall all immediately be adjusted in accordance with the formula for
adjustments of payments set forth in Appendix A.
Nothing in this Paragraph shall be deemed under any circumstance to
create any obligation on the part of any Settling Defendant to pay any amount
owed or payable to the State of Minnesota by any other Settling Defendant.
All obligations of the Settling Defendants pursuant to this Paragraph are
intended to be and shall remain several, and not joint.
C. Public Health Foundation. The Attorney General will propose, and
the Settling Defendants have agreed not to oppose, that the Legislature
appropriate to a foundation one-half the payments due in September 1998, and
in January of the years 1999 through 2003, to be used for such activities as
the directors of the foundation may determine will diminish the human and
economic consequences of tobacco use. It is contemplated that the directors
of the foundation will include public representatives, and representatives of
such groups as the American Lung Association, Minnesota Chapter; the
University of Minnesota School of Public Health; the Minnesota SmokeFree 2000
Coalition; the American Cancer Society, Minnesota Division; the American
Heart Association, Minnesota Chapter; the Association for Non-Smokers'
Rights--Minnesota; and the Mayo Clinic Nicotine Dependence Center.
D. Annual Payments. Each of the Settling Defendants agrees that,
beginning on December 31, 1998, and annually thereafter on December 31st of
each year after 1998 (subject to final adjustment within 30 days), it shall
severally cause to be paid to an account designated in
9
<PAGE>
writing by the State of Minnesota in accordance with and subject to paragraph
II.E. of this Settlement Agreement, pro rata in proportion to its respective
Market Share, its share of 2.55% of the following amounts (in billions):
<TABLE>
<CAPTION>
Year 1998 1999 2000 2001 2002 2003 thereafter
<C> <S> <S> <S> <S> <S> <S> <S>
1 2 3 4 5 6
Amount $4B $4.5B $5B $6.5B $6.5B $8B $8B
</TABLE>
The payments made by Settling Defendants pursuant to this Paragraph shall be
adjusted upward by the greater of 3% or the Consumer Price Index applied each
year on the previous year, beginning with the annual payment due on December
31, 1999. Such payments will also be decreased or increased, as the case may
be, beginning with the annual payment due on December 31, 1999, in accordance
with the formula for adjustments of payments set forth in Appendix A.
E. Payment of Settlement Proceeds. Any payment made pursuant to this
Settlement Agreement shall be made to an account designated in writing by the
State of Minnesota or the Court, as applicable; provided that after Final
Approval, if the Court's approval is challenged by any third party, payments
due to be made shall be paid into a special escrow account (the "State Escrow
Account"), and held in escrow pursuant to this Section V.B. and the State
Escrow Agreement.
F. Adjustments in Event of Federal Legislation. The enactment of
federal tobacco-related legislation shall not affect the payments required by
this Agreement except as follows:
1. If federal tobacco-related legislation providing for the
resolution or other disposition of State Attorney General actions
brought against tobacco companies is enacted
10
<PAGE>
on or before November 30, 2000, and if such legislation provides for
payment(s) by tobacco companies (whether by settlement payment, tax or
any other means), all or part of which is made available to States, the
State of Minnesota shall elect to receive any funds that are (i)
unrestricted as to their use, or (ii) are restricted to any form of
health care or to any use related to tobacco (collectively "Federal
Settlement Funds"), and Settling Defendants shall receive a
dollar-for-dollar offset up to the full amount of payments required
under Section II.D of this Agreement for any and all Settlement Funds
received by the State of Minnesota, until all Federal Settlement Funds
provided however:
a. There shall be no offset to payments required by this
Agreement on account of any federal program, subsidies, payments,
credits or other aid to the State which are not conditioned or tied
to the settlement of a state tobacco-related suit or the
relinquishment of state tobacco-related claims;
b. The State relinquishes no rights or benefits under this
Agreement except for payments subject to the offset;
c. There are no federally imposed preconditions to the
receipt of Federal Settlement Funds other than (i) the settlement
of any state tobacco-related lawsuit or the relinquishment of state
tobacco-related claims, (ii) actions or expenditures related to
tobacco, including but not limited to, education, cessation,
control or enforcement, or (iii) actions or expenditures related
to health care;
d. If Settling Defendants enter into any pre-verdict
settlement agreement (subsequent to the date of this Agreement) of
similar litigation brought by a non-
11
<PAGE>
federal governmental plaintiff which does not require such an
offset, this Section is null and void;
e. If Settling Defendants enter into any pre-verdict
settlement agreement (subsequent to the date of this Agreement) of
similar litigation brought by a non-federal governmental plaintiff
which has an offset term more favorable to the plaintiff, this
Settlement Agreement shall, at the option of the Office of the
Attorney General of the State of Minnesota, be revised to include a
comparable term.
2. Nothing in this section is intended to or shall reduce the
total amounts payable to the State under this Agreement by Settling
Defendants beyond the amount of Federal Settlement Funds actually
received by the State of Minnesota.
III. DISMISSAL OF CLAIMS AND RELEASES
A. State of Minnesota's Dismissal of Claims. Upon approval of this
Settlement Agreement by the Court, the Court shall enter a Final Judgment
dismissing with prejudice all claims as to all Defendants.
This Agreement resolves all claims between the State and the Defendants,
except for issues pending before the court pertaining to the discoverability
or production of documents for which the Defendants reserve their rights of
appeal.
B. State of Minnesota's Release and Discharge. Upon Final Approval,
the State of Minnesota shall release and forever discharge all Defendants and
their present and former parents, subsidiaries (whether or not wholly owned)
and affiliates, and their respective divisions, organizational units,
officers, directors, employees, representatives, insurers, suppliers, agents,
attorneys and distributors (and the predecessors, heirs, executors,
administrators, successors and
12
<PAGE>
assigns of each of the foregoing) from any and all manner of civil claims,
demands, actions, suits and causes of action, damages whenever incurred,
liabilities of any nature whatsoever, including civil penalties, as well as
costs, expenses and attorneys' fees, known or unknown, suspected or
unsuspected, accrued or unaccrued, whether legal, equitable or statutory
("Claims") that the State of Minnesota (including any of its past, present or
future administrators, representatives, employees, officers, attorneys,
agents, representatives, officials acting in their official capacities,
agencies, departments, commissions, and divisions, and whether or not any
such person or entity participates in the settlement), whether directly,
indirectly, representatively, derivatively or in any other capacity, ever
had, now has or hereafter can, shall or may have, as follows:
a. for past conduct, as to any Claims relating to the subject
matter of this action which have been asserted or could be asserted
now or in the future in this action or a comparable Federal action
by the State; and
b. for future conduct, only as to monetary Claims directly or
indirectly based on, arising out of or in any way related to, in
whole or in part, the use of or exposure to Tobacco Products
manufactured in the ordinary course of business, including without
limitation any future claims for reimbursement for health care
costs allegedly associated with use of or exposure to Tobacco
Products;
(such past and future Claims hereinafter referred to as the "Released
Claims"); provided, however, that the foregoing shall not operate as a
release of any person, party or entity (whether or not a signatory to this
Agreement) as to any of the obligations undertaken in this Agreement in
connection with a monetary breach or default of this Agreement.
13
<PAGE>
The State of Minnesota hereby covenants and agrees that it shall not
hereafter sue or seek to establish civil liability against any person or
entity covered by the release provided under Paragraph III.B based, in whole
or in part, upon any of the Released Claims, and the State of Minnesota
agrees that this covenant and agreement shall be a complete defense to any
such civil action or proceeding.
C. Settling Defendants' Release and Discharge. Upon Final Approval,
Settling Defendants shall release and forever discharge the State of
Minnesota (including any of its past, present or future administrators,
representatives, employees, officers, attorneys, agents, representatives,
officials acting in their official capacities, agencies, departments,
commissions, and divisions, and whether or not any such person or entity
participates in the settlement) from any and all manner of civil claims,
demands, actions, suits and causes of action, damages whenever incurred,
liabilities of any nature whatsoever, including costs, expenses, penalties
and attorneys' fees, known or unknown, suspected or unsuspected, accrued or
unaccrued, whether legal, equitable or statutory, arising out of or in any
way related to, in whole or in part, the subject matter of the litigation of
this lawsuit, that Settling Defendants (including any of their present and
former parents, subsidiaries, divisions, affiliates, officers, directors,
employees, witnesses (fact or expert), representatives, insurers, agents,
attorneys and distributors and the predecessors, heirs, executors,
administrators, successors and assigns of each of the foregoing, and whether
or not any such person participates in the settlement), whether directly,
indirectly, representatively, derivatively or in any other capacity, ever
had, now has or hereafter can, shall or may have.
D. Limited Most-Favored Nation Provision. In partial consideration for
the monetary payments to be made by the Settling Defendants pursuant to this
Settlement Agreement, the State
14
<PAGE>
of Minnesota agrees that if the Settling Defendants enter into any future
pre-verdict settlement agreement of other similar litigation brought by a
non-federal governmental plaintiff on terms more favorable to such
non-federal governmental plaintiff than the terms of this Settlement
Agreement (after due consideration of relevant differences in population or
other appropriate factors), the terms of this Settlement Agreement shall not
be revised except as follows: to the extent, if any, such other pre-verdict
settlement agreement includes terms that provide (a) for joint and several
liability among the Settling Defendants with respect to monetary payments to
be made pursuant to such agreement; (b) a guarantee by the parent company of
any of the Settling Defendants or other assurances of payment or creditors'
remedies with respect to monetary payments to be made pursuant to such
agreement; or (c) for the implementation of non-economic tobacco-related
public health measures different from those contained in this Settlement
Agreement, then this Settlement Agreement shall, at the option of the Office
of the Attorney General of the State of Minnesota, be revised to include
terms comparable to such terms.
IV. DEFENDANTS' ASSURANCES
A. Settling Defendants agree not to directly or indirectly, including
through any third party or affiliate:
1. Oppose the passage of those future Minnesota legislative
proposals or administrative rules intended by their terms to reduce
tobacco use by children listed on Schedule B. (The foregoing does not
prohibit Settling Defendants from resisting enforcement of, or suing for
declaratory or injunctive relief with respect to any such legislation or
rule on any grounds.)
15
<PAGE>
2. Facially challenge the enforceability or constitutionality of
existing Minnesota laws or rules relating to tobacco control, including,
but not limited to, Minnesota Statutes Section 461.17 regarding the
disclosure of certain ingredients in cigarettes; Minnesota Statutes
Sections 461.12, et. seq., and 609.685 regarding the sale of tobacco to
minors; Minnesota Statutes Section 325F.77 regarding the distribution
of samples; and Minnesota Statutes Section 144.411 et. seq. regarding
clean indoor air.
3. Support in Congress or any forum, legislation, rules or
policies which would preempt, override, or abrogate or diminish the
State's rights or recoveries under this Agreement. Except as
specifically provided in the foregoing sentence, nothing in this
Agreement shall be deemed to restrain the parties from advocating terms
of any national settlement or taking any other positions on issues
relating to tobacco. The State and its attorneys specifically reserve
the right to continue to litigate or advocate for additional document
disclosure beyond that ordered by the Ramsey County District Court, in
any forum outside of Minnesota.
4. Settling Defendants' obligation to produce documents in
discovery pertaining to enactment or repeal of, or opposition to, state
legislation or state executive action relating to tobacco in Minnesota
is extended beyond August 17, 1994, to the date of this Agreement, with
Settling Defendants required to produce these documents within thirty
(30) days of the date of this Agreement.
B. Disclosure of Payments Likely to Affect Public Policy.
16
<PAGE>
1. Each Settling Defendant shall disclose to the Office of the
Attorney General and the Office of the Governor, at the times and in the
manner provided below, information about the following payments:
a. Any payment to a "lobbyist" or "principal" within the
meaning of Minnesota Statutes, Section 10A.01, subdivisions 11 and
28, if Settling Defendant knows or has reason to know that the
payment will be used, directly or indirectly, to influence
legislative or administrative action, or the official action of state
or local government in Minnesota in any way relating to Tobacco
Products or their use.
b. Any payment to a third party, if the Settling Defendant
knows the payment is partly in consideration for the third party
attending, offering testimony at, or participating before a state
or local government hearing in Minnesota in any way relating to
Tobacco Products or their use; and
c. Any payment (other than a "political contribution" under
Minn. Stat. Section 10.01, subd. 7, or 2 USC Section 431(8)(A))
to, or for the benefit of, a state or local official in Minnesota,
whether made directly by a defendant or indirectly through an
employee acting in the scope of his employment, affiliate,
lobbyist, or other agent acting under the substantial control of a
defendant.
2. Disclosures required under this section shall be filed with the
Office of the Attorney General and with the Office of the Governor on
the first day of January, April, July and October of each year for any
and all payments made through the first day of the previous month and
shall be transmitted in electronic format or such format as the attorney
general may require, with the following information:
17
<PAGE>
a. The name, address, telephone number and e-mail address of
the recipient.
b. The amount of each payment described in Paragraph B(1).
c. The aggregate amount of all payments described in
Paragraph B(1) to the recipient in the calendar year.
3. Information filed under this section is "public data" within the
meaning of the Minnesota Government Data Practices Act.
C. Settling Defendants agree to discontinue all Billboards and Transit
Advertisements of Tobacco Products in the State. Settling Defendants shall
use their best efforts in cooperation with the State to identify all such
Billboards that are located within 1000 feet of any public or private school
or playground in the State, and shall provide the State with a preliminary
list of the location of all Billboards and stationary Transit Advertisements
within 30 days from the date hereof, such list to be finalized within an
additional 15 days. Settling Defendants shall, at the earlier of the
expiration of applicable contracts or four months from the date the final
list is supplied to the State, remove all Billboards and Transit
Advertisements for Tobacco Products from within the State, leaving the space
unused or used for advertising unrelated to Tobacco Products; or at the
option of the State of Minnesota, will allow the State, at its expense, to
substitute for the remaining term of the contract, alternative advertising
intended to discourage the use of Tobacco Products by children and their
exposure to second-hand smoke. The parties also agree to secure the
expedited removal of up to 50 Billboards or stationary Transit Advertisements
for Tobacco Products designated by the State within 30 days after their
designation. Each Settling Defendant which has Billboard advertising in the
State shall provide the Court and the Attorney General, or his designee, with
the
18
<PAGE>
name of a contact person to whom the State may direct inquiries during the
time such Billboards and Transit Advertisements are being eliminated, from
whom the State may obtain periodic reports as to the progress of their
elimination and who will be responsible for ensuring that appropriate action
is taken to remove any Billboards that have not been timely eliminated.
D. Settling Defendants shall not make, in the connection with any
motion picture made in the United States, or cause to be made any payment,
direct or indirect, to any person to use, display, make reference to, or use
as a prop any cigarette, cigarette package, advertisement for cigarettes, or
any other item bearing the brand name, logo, symbol, motto, selling message,
recognizable color or pattern of colors, or any other indicia of product
identification identical or similar to, or identifiable with, those used for
any brand of domestic tobacco products.
E. On and after December 31, 1998, Settling Defendants shall
permanently cease marketing, licensing, distributing, selling or offering,
directly or indirectly, including by catalogue or direct mail, in the State
of Minnesota, any service or item (other than tobacco products or any item of
which the sole function is to advertise tobacco products) which bears the
brand name (alone or in conjunction with any other word), logo, symbol,
motto, selling message, recognizable color or pattern of colors, or any other
indicia of product identification identical or similar to, or identifiable
with, those used for any brand of domestic tobacco products.
F. Settling Defendants and the Law Firm of Robins, Kaplan, Miller &
Ciresi L.L.P. ("RKM&C") have reached a separate agreement for the payment of
the State's costs and attorneys fees. In consideration for said agreement,
RKM&C has released the State from its obligation to pay costs and attorneys
fees under the Special Attorney Appointment dated May 23, 1994.
V. MISCELLANEOUS PROVISIONS
19
<PAGE>
A. Representations of Parties. The respective parties hereto hereby
represent that this Settlement Agreement has been duly authorized and, upon
execution, will constitute a valid and binding contractual obligation,
enforceable in accordance with its terms, of each of the parties hereto. The
State represents that all of its outside counsel that have represented it in
this action are, by and through their authorized representatives, signatores
to this Settlement Agreement.
B. Court Approval. The Parties agree to submit this Settlement
Agreement to the Court for its review and approval on Friday, May 8, 1998. If
the Court declines to approve this Settlement Agreement, the Blue Cross
Settlement Agreement, the form of State Escrow Agreement, and the form of
Blue Cross Escrow Agreement, the matter will be immediately submitted to the
jury. If the Court, as a condition of approval or otherwise, requires any
change in the Agreements which any signatory is unwilling to make, the case
will be immediately submitted to the jury. If before the Court approves the
Agreements, any third-party seeks to intervene for the purpose of opposing
the Settlement Agreement, the Blue Cross Settlement Agreement, the State
Escrow Agreement, and the Blue Cross Escrow Agreement, any Party at its sole
election, may withdraw from this Agreement, after first giving notice to the
Court and all of the Parties before the jury is dismissed, and submit the
case to the jury. If the Court approves the Settlement Agreement as
submitted, the Agreement will be final and binding upon all Parties.
In the event that there is a challenge to any provision of this
Settlement Agreement by anyone other than the Attorney General of the State
of Minnesota as of the date of this Agreement, BCBS or Settling Defendants
("a third-party challenge") after Final Approval, any amounts required to be
paid by Settling Defendants pursuant to this Settlement Agreement shall be
paid into escrow pursuant to the State Escrow Agreement. If, as a result of
such a challenge, any material
20
<PAGE>
term of Sections II, III, IV of this Settlement Agreement is modified or
rendered unenforceable, the parties shall negotiate an equivalent or
comparable substitute term or other appropriate credit or adjustment. In the
event that the parties are unable to agree on such a substitute term or
appropriate credit or adjustment, then the parties will submit the issue to
the Court for resolution, subject to any available appeal rights. In the
event that any third-party challenge is made after December 31, 1998, any
payments due under Paragraph II.B. shall be made to the State according to
the terms of this Settlement Agreement, and only those payments due under
Paragraph II.D. shall be placed into escrow as provided above.
In the event that the Court determines that there has been a failure of
consideration legally sufficient to warrant termination of this Settlement
Agreement, then this Settlement Agreement may be terminated by the party
adversely affected. In the event of such termination, the action will be
reinstated and all decisions of the trial court, and any party's appeal or
other rights with respect thereto, will have the same force and effect as if
this Settlement Agreement had never been entered into.
C. Obligations Several, Not Joint. All obligations of the Settling
Defendants pursuant to this Settlement Agreement are intended to be and shall
remain several, and not joint.
D. Headings. The headings of the paragraphs of this Settlement
Agreement are not binding and are for reference only and do not limit, expand
or otherwise affect the contents of this Settlement Agreement.
E. No Determination or Admission. This Settlement Agreement and any
proceedings taken hereunder are not intended to be and shall not in any event
be construed as, or deemed to be, an admission or concession or evidence of
any liability or any wrongdoing whatsoever on the part
21
<PAGE>
of any party hereto or any person covered by the releases provided under
paragraphs III.B. and C. hereof. The Settling Defendants specifically
disclaim and deny any liability or wrongdoing whatsoever with respect to the
allegations and claims asserted against them in this action and enter into
this Settlement Agreement solely to avoid the further expense, inconvenience,
burden and uncertainty of litigation.
F. Non-Admissibility. The settlement negotiations resulting in this
Settlement Agreement have been undertaken by the parties hereto in good faith
and for settlement purposes only, and neither this Settlement Agreement nor
any evidence of negotiations hereunder shall be offered or received in
evidence in this action, or any other action or proceeding, for any purpose
other than in an action or proceeding arising under this Settlement Agreement.
G. Amendment; Waiver. This Settlement Agreement may be amended only by
a written instrument executed by the Attorney General and the Settling
Defendants. The waiver of any rights conferred hereunder shall be effective
only if made by written instrument executed by the waiving party. The waiver
by any party of any breach of this Settlement Agreement shall not be deemed
to be or construed as a waiver of any other breach, whether prior, subsequent
or contemporaneous, of this Settlement Agreement.
H. Notices. All notices or other communications to any party to this
Settlement Agreement shall be in writing (and shall include telex, telecopy
or similar writing) and shall be given to the respective parties hereto at
the following addresses. Any party hereto may change the name and address of
the person designated to receive notice on behalf of such party by notice
given as provided in this paragraph.
22
<PAGE>
For the State of Minnesota:
- ---------------------------
Hubert H. Humphrey III
Attorney General
102 State Capitol
St. Paul, MN 55155
Fax: 612.297.4193
with copies to:
---------------
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, MN 55402-2015
Fax: 612.339.4181
Chief Deputy Attorney General
State of Minnesota
102 State Capitol
St. Paul, MN 55155
Fax: 612.297.4193
For Philip Morris Incorporated:
- -------------------------------
Martin J. Barrington
Philip Morris Incorporated
120 Park Avenue
New York, NY 10017-5592
Fax: 212.907.5399
With a copy to:
---------------
Meyer G. Koplow
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Fax: 212.403.2000
For R.J. Reynolds Tobacco Company:
- ----------------------------------
Charles A. Blixt
General Counsel
23
<PAGE>
R.J. Reynolds Tobacco Company
401 North Main Street
Winston-Salem, NC 27102
Fax: 910.741.2998
With a copy to:
---------------
Arthur F. Golden
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Fax: 212.450.4800
For Brown & Williamson Tobacco Corporation:
- -------------------------------------------
F. Anthony Burke
Brown & Williamson Tobacco Corporation
200 Brown & Williamson Tower
401 South Fourth Avenue
Louisville, KY 40202
Fax: 502.568.7297
With a copy to:
---------------
Stephen R. Patton
Kirkland & Ellis
200 East Randolph Dr.
Chicago, IL 60601
Fax: 312.861.2200
For Lorillard Tobacco Company:
- ------------------------------
Arthur J. Stevens
Lorillard Tobacco Company
714 Green Valley Road
Greensboro, NC 27408
Fax: 910.335.7707
I. Cooperation. The parties hereto agree to use their best efforts
and to cooperate with each other to cause this Settlement Agreement to become
effective, to obtain all necessary approvals, consents and authorizations, if
any, and to execute all documents and to take such other action as
24
<PAGE>
may be appropriate in connection therewith. Consistent with the foregoing,
the parties hereto agree that they will not directly or indirectly assist or
encourage any challenge to this Settlement Agreement by any other person. All
parties hereto agree to support the integrity and enforcement of the terms of
this Settlement Agreement.
J. Governing Law. This Settlement Agreement shall be governed by the
laws of the State of Minnesota, without regard to the conflicts of law rules
of such state.
K. Construction. None of the parties hereto shall be considered to be
the drafter of this Settlement Agreement or any provision hereof for the
purpose of any statute, case law or rule of interpretation or construction
that would or might cause any provision to be construed against the drafter
hereof.
L. Severability. Subject to the provisions of Paragraph V.B., the
terms of this Agreement are severable. If any term of this Agreement is found
to be unlawful, the remaining terms shall remain in full force and effect,
and the parties agree to negotiate a substitute term of equivalent value.
M. Intended Beneficiaries. This action was brought by the State of
Minnesota, through its Attorney General, and by Blue Cross to recover certain
monies and to promote the health and welfare of the people of Minnesota. No
portion of this Settlement Agreement shall provide any rights to, or be
enforceable by, any person or entity that is neither a party hereto nor a
person encompassed by the releases provided in paragraphs III.B. and C. of
this Settlement Agreement. Except as expressly provided in this Settlement
Agreement, no portion of this Settlement Agreement shall bind any non-party
or determine, limit or prejudice the rights of any such person or entity.
None of the rights granted or obligations assumed under this Settlement
Agreement by the parties
25
<PAGE>
hereto may be assigned or otherwise conveyed without the express prior
written consent of all of the parties hereto.
N. Counterparts. This Settlement Agreement may be executed in
counterparts. Facsimile or photocopied signatures shall be considered as
valid signatures as of the date hereof, although the original signature pages
shall thereafter be appended to this Settlement Agreement.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Comprehensive Settlement Agreement and
Release as of this 8th day of May, 1998.
STATE OF MINNESOTA, acting by and through
Hubert H. Humphrey III, its duly elected and
authorized Attorney General
By:
-------------------------------------
Hubert H. Humphrey III
Attorney General
-----------------------------------
Lee E. Sheehy
Chief Deputy Attorney General
-----------------------------------
Eric A. Johnson
Executive Assistant to the Attorney
General
-------------------------------------
Thomas F. Pursell
Senior Counsel to the Attorney General
-------------------------------------
D. Douglas Blanke
Director of Consumer Policy
COUNSEL TO THE STATE OF MINNESOTA
By:
--------------------------------
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
PHILIP MORRIS INCORPORATED
27
<PAGE>
By:
--------------------------------
Meyer G. Koplow
Counsel
By:
---------------------------------
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By:
---------------------------------
D. Scott Wise
Counsel
By:
---------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO CORPORATION
By:
----------------------------------
Stephen R. Patton
Counsel
By:
----------------------------------
F. Anthony Burke
Vice President and General Counsel
LORILLARD TOBACCO COMPANY
By:
----------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
28
<PAGE>
SCHEDULE A
AMOUNTS PAYABLE BY SETTLING DEFENDANTS ON OR
BEFORE SEPTEMBER 5, 1998 PURSUANT TO
PARAGRAPH II.B. OF THE SETTLEMENT AGREEMENT
<TABLE>
<CAPTION>
Date 9/5/98
<S> <C>
Settling Defendants
- -------------------
Philip Morris Incorporated......................... $163,200,000
R.J. Reynolds Tobacco Company...................... $ 16,320,000
Brown & Williamson Tobacco Corporation............. $ 42,960,000
Lorillard Tobacco Company.......................... $ 17,520,000
Total Amount....................................... $240,000,000
</TABLE>
1
<PAGE>
SCHEDULE B
Potential Future Legislation to Reduce Tobacco Use by Children
- Legislation to expand the self-service-sale restrictions of the youth
access to tobacco law and to remove the current exception for sales of
cigars.
- Legislation to clarify the current youth access law provision on
vending machines, making clear that machines equipped with automatic
locks or that use tokens are vending machines within the meaning of the
law.
- Legislation providing enhanced or coordinated funding for enforcement
efforts under sales-to-minors provisions of the criminal code or the
youth access statute and ordinances.
- Legislation to encourage or support the use of technology to increase
effectiveness of age-of-purchase laws, such as, without limitation, the
use of programmable scanners or scanners to read drivers' licenses.
- Legislation or rules restricting the wearing, carrying or display of
tobacco indicia in school-related settings, including, without
limitation, in school facilities, on school premises, or in connection
with school-sponsored activities.
- Legislation to create or stiffen non-monetary incentives for youth not
to smoke, such as expansion of youth community service programs.
2
<PAGE>
APPENDIX A
FORMULA FOR CALCULATING
STATE OF MINNESOTA VOLUME ADJUSTMENTS
Any payment that by the terms of the Settlement Agreement is to be
adjusted pursuant to this Appendix (the "Applicable Base Payment") shall be
adjusted pursuant to this Appendix in the following manner:
(A) in the event the aggregate number of units of Tobacco Products
sold domestically by the Settling Defendants in the Applicable Year (as
defined hereinbelow) (the "Actual Volume") is greater than the aggregate
number of units of Tobacco Products sold domestically by the Settling
Defendants in 1997 (the "Base Volume"), the Applicable Base Payment
shall be multiplied by the ratio of the Actual Volume to the Base Volume;
(B) in the event the Actual Volume is less than the Base Volume,
(i) the Applicable Base Payment shall be multiplied by the ratio
of the Actual Volume to the Base Volume, and the resulting
product shall be divided by 0.98; and
(ii) if a reduction of the Applicable Base Payment results from the
application of subparagraph (B)(i) of this Appendix, but the
Settling Defendants' aggregate net operating profits from domestic
sales of Tobacco Products for the Applicable Year (the "Actual Net
Operating Profit") is greater than the Settling Defendants'
aggregate net operating profits from domestic sales of Tobacco
Products in 1997 (the "Base Net Operating Profit") (such Base Net
Operating Profit being adjusted upward by the greater of the rate
of 3% per annum or the actual total percent change in the Consumer
Price Index, in either instance for the period between January 1,
1998 and the date on which the payment at issue is made), then the
amount by which the Applicable Base Payment is reduced by the
application of subparagraph (B)(i) shall be reduced (but not below
zero) by 2.55% of 25% of such increase in such profits. For
purposes of this Appendix, "net
3
<PAGE>
operating profits from domestic sales of Tobacco Products" shall
mean net operating profits from domestic sales of Tobacco Products
as reported to the United States Securities and Exchange Commission
("SEC") for the Applicable Year or, in the case of a Settling
Defendant that does not report profits to the SEC, as reported in
financial statements prepared in accordance with generally accepted
accounting principles and audited by a nationally recognized
accounting firm. The determination of the Settling Defendants'
aggregate net operating profits from domestic sales of Tobacco
Products shall be derived using the same methodology as was
employed in deriving such Settling Defendants' aggregate net
operating profits from domestic sales of Tobacco Products in 1997.
Any increase in an Applicable Base Payment pursuant to this
subparagraph B(ii) shall be payable within 120 days after the date
that the payment at issue was required to be made.
(C) "Applicable Year" means (i) with respect to the payments made
pursuant to paragraph II.D of the Settlement Agreement, the calendar
year ending on the date on which the payment at issue is due, regardless
of when such payment is made; and (ii) with respect to all other
payments made pursuant to this Settlement Agreement, the calendar year
immediately preceding the year in which the payment at issue is due,
regardless of when such payment is made.
4
<PAGE>
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA, Case Type: Other Civil
BY HUBERT H. HUMPHREY III, Court File No. C1-94-8565
ITS ATTORNEY GENERAL,
and
BLUE CROSS AND BLUE SHIELD
OF MINNESOTA,
Plaintiffs,
vs.
PHILIP MORRIS INCORPORATED, CONSENT JUDGMENT
R.J. REYNOLDS TOBACCO COMPANY,
BROWN & WILLIAMSON TOBACCO
CORPORATION, B.A.T. INDUSTRIES
P.L.C., BRITISH-AMERICAN TOBACCO
COMPANY LIMITED, BAT (U.K. &
EXPORT) LIMITED, LORILLARD
TOBACCO COMPANY, THE AMERICAN
TOBACCO COMPANY, LIGGETT GROUP,
INC., THE COUNCIL FOR TOBACCO
RESEARCH-U.S.A., INC., and THE
TOBACCO INSTITUTE, INC.,
Defendants.
WHEREAS, the State of Minnesota, by its Attorney General, Hubert H.
Humphrey III, and Blue Cross and Blue Shield of Minnesota filed their
Complaint herein on August 17, 1994, and their Second Amended Complaint
on January 6, 1998;
EXHIBIT A
---------
1
<PAGE>
WHEREAS, Defendants have contested the claims in the Plaintiffs'
Complaint and Second Amended Complaint;
WHEREAS, the parties recognize that Congress is considering national
tobacco legislation and have agreed to settle this case on a basis which
acknowledges possible federal legislation, but which guarantees to the people
of Minnesota the relief granted herein;
WHEREAS, Settling Defendants, in the Settlement Agreement and
Stipulation for Entry of Consent Judgment, have waived as specified therein
their right to challenge the terms of this Consent Judgment as being
superseded or preempted by future Congressional enactments; and
WHEREAS, the Attorney General believes the entry of this Consent
Judgment is appropriate and in the public interest;
NOW THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED AS FOLLOWS:
I. JURISDICTION AND VENUE
The Court has jurisdiction over the subject matter of this action and
over the Settling Defendants under Minn. Stat. Sections 8.31, 325D.15,
325D.45, 325D.58, 325F.70 and 484.01 (1994). Venue is proper in Ramsey
County pursuant to Minn. Stat. Sections 325D.65 and 542.09 (1994) in that
Settling Defendants do business in Ramsey County.
II. DEFINITIONS
The definitions set forth in the Settlement Agreement and Stipulation
for Entry of Consent Judgment ("Settlement Agreement") are incorporated by
reference herein.
2
<PAGE>
III. APPLICABILITY
This Consent Judgment applies only to Settling Defendants in their
corporate capacity acting through their respective successors and assigns,
directors, officers, employees, agents, subsidiaries, divisions, or other
internal organizational units of any kind or any other entities acting in
concert or participation with them. The remedies and penalties in Sections
XD. and E. herein for a violation of this Consent Judgment shall apply only
to Settling Defendants, and shall not be imposed or assessed against any
employee, officer or director of Settling Defendants or other person or
entity as a consequence of such a violation, and there shall be no
jurisdiction under this Consent Judgment to do so.
IV. EFFECT ON THIRD PARTIES
This Consent Judgment is not intended to and does not vest standing in
any third party with respect to the terms hereof, or create for any person
other than the parties hereto a right to enforce the terms hereof.
V. INJUNCTIVE RELIEF
Settling Defendants are permanently enjoined from:
A. On and after December 31, 1998, marketing, licensing, distributing,
selling or offering, directly or indirectly, including by catalogue or direct
mail, in the State of Minnesota, any service or item (other than tobacco
products or any item the sole function of which is to advertise tobacco
products) which bears the brand name (alone or in conjunction with any other
word), logo, symbol, motto, selling message, recognizable color or pattern of
colors, or any other indicia or product identification identical or similar
to, or identifiable with, those used for any domestic brand of tobacco
products.
3
<PAGE>
B. Making any material misrepresentation of fact regarding the health
consequence of using any tobacco product, including any tobacco additives,
filters, paper or other ingredients. Nothing in this paragraph shall limit
the exercise of any First Amendment right or any defense or position which
persons bound by this Consent Judgment may assert in any judicial,
legislative, or regulatory forum.
C. Entering into any contract, combination or conspiracy between or
among themselves, which has the purpose or effect of: (1) limiting
competition in the production or distribution of information about the health
hazards or other consequences of the use of their products; (2) limiting or
suppressing research into smoking and health; or (3) limiting or suppressing
research into, marketing, or development of new products.
D. Taking any action, directly or indirectly, to target children in
Minnesota in the advertising, promotion, or marketing of cigarettes, or
taking any action the primary purpose of which is to initiate, maintain or
increase the incidence of underage smoking in Minnesota.
VI. DISSOLUTION OF DEFENDANT COUNCIL FOR TOBACCO RESEARCH
4
<PAGE>
Settling Defendants represent that they have the authority to
effectuate the following and will do so within 90 days of this Agreement: The
Council for Tobacco Research-U.S.A. Inc. shall cease all operations except as
necessary to comply with existing grants or contracts and to continue its
defense of other lawsuits and will be disbanded and dissolved within a
reasonable time period thereafter. To the extent not required elsewhere in
this Consent Judgment, the Council for Tobacco Research shall forward all
smoking and health research in its possession or control to the Food and Drug
Administration subject to appropriate confidentiality protection required by
contracts between the Council for Tobacco Research and any third party.
Defendants shall preserve all other records of the Council for Tobacco
Research which relate in any way to issues raised in this or any other
Attorney General lawsuit. Defendants may not reconstitute the Council for
Tobacco Research or its function in any form.
VII. PUBLIC ACCESS TO DOCUMENTS AND COURT FILES
A. The Court's previous Protective Orders are hereby dissolved with
respect to all documents, including the 4A and 4B indices and the privilege
logs, which have been produced to the Plaintiffs and for which Defendants
have made no claim of privilege or Category II trade secret protection. Such
documents shall be made available to the public at the Depository, in the
manner provided as follows:
1. The public shall be given access to all non-privileged
documents contained in the Minnesota Depository, including all
documents set forth in Paragraph VII.A. above.
2. Plaintiffs and Settling Defendants shall meet with
representatives of the current Minnesota Depository administrators,
Smart Legal Assistance and Merrill Corporation, and/or other appropriate
persons, to discuss staffing issues and the procedures
5
<PAGE>
that should be implemented to continue the operation of the Minnesota
Depository, thereby to ensure broad and orderly access to these
documents.
3. Category II documents shall be returned to the Defendants as
soon as practical, provided that Defendants, upon receiving appropriate
assurances of trade secret protection from the Food and Drug
Administration, shall forward a copy of the Category II documents
bearing the Bates numbers from this action to said agency. Plaintiffs
shall retain the Bates stamp numbers of all Category II documents
produced in this case.
B. The documents produced in this case are not "government data" under
the Minnesota Government Data Practices Act.
C. For documents upon which a privilege was claimed and found not to
exist, including any briefs, memoranda and other pleadings filed by the
parties which include reference to such documents, Plaintiffs may seek court
approval to make such documents available to the public, provided that any
such request be made to the Court within 45 days of the date of entry of this
Consent Judgment.
D. Defendant British-American Tobacco Company Limited shall maintain
and operate the Guildford Depository for a period of ten years. Defendant
British-American Tobacco Company Limited shall have the option of maintaining
such depository at its current location or at an appropriate alternative
location. All documents, except those identified in Paragraph VII.A.3 above,
which were selected by plaintiffs from the Guildford Depository in response
to the Plaintiffs' discovery requests shall be moved to and retained at the
Minnesota Depository.
E. The Minnesota Depository shall be maintained and operated at
Settling Defendants' sole expense, in the manner set forth above for ten
years after the date hereof, or such longer period
6
<PAGE>
as may be provided in federal legislation for a national document depository.
At the end of such period, or sooner, at the State's discretion, the
documents shall be transferred to the State Archives or other appropriate
state body, where they shall remain available for historical and research
purposes. The parties and the Depository staff shall cooperate with the
State Archivist or such other state officials as may be involved in
transferring the documents to the custody of the State.
F. Settling Defendants shall provide to the State for the Depository a
copy of all existing CD-ROMs of documents produced in this action that do not
contain any privileged or work-product documents or information, to be placed
in the Depository.
G. Defendants shall produce to the Depository all documents produced
by such defendants in other United States smoking and health litigation but
not previously produced in Minnesota, within 30 days of their production such
the other litigation, provided Defendants do not claim privilege with respect
to such documents, and provided such documents are not subject to any
protective order.
VIII. EQUITABLE RELIEF: NATIONAL RESEARCH; DEPOSIT OF FUNDS.
A. In furtherance of the equitable relief sought by the State,
pursuant to the Court's equitable powers to shape appropriate injunctive
relief, in light of the public health interests demonstrated by the evidence
in this case, and pursuant to the agreement of the parties:
1. Consistent with the Prayer for Relief in the State's Complaint
and Amended Complaints that the Defendants fund cessation programs in
the State of Minnesota, the amount due in December, 1998 ($102 million),
pursuant to the Settlement Agreement, Section II.D, shall be deposited
into a separate cessation account and used to offer smoking
7
<PAGE>
cessation opportunities to Minnesota smokers, and shall be administered
as ordered by the Court.
2. In addition to other money paid under this Consent Judgment and
the Settlement Agreement and Stipulation for Entry of Consent Judgment,
each Settling Defendant shall pay pro rata in proportion to its Market
Share, on or before June 1, 1998, and no later than June 1 of each
succeeding year through and including June 1, 2007, its share of $10
million into a national research account, to be administered as ordered
by the Court. The parties envision that approximately 70% of the $100
million total will be used for research grants relating to the
elimination of tobacco use by children, and 30% for program
implementation, evaluation and other tobacco control purposes; provided,
however, the administrator of the national research account may, in its
discretion, change the allocation.
3. The State shall submit a plan for the administration and
authorized uses of the funds payable under this section within 45 days
of the date of entry of this Consent Judgment.
4. Monies payable under this section and Section V.B. of the
Settlement Agreement shall be deposited in interest bearing accounts at
a bank to be designated by the Commissioner of Finance. Settling
Defendants' payment of the amounts set forth above are Settling
Defendants' sole obligation under this section.
B. Except as specified in this section and Section V.B of the
Settlement Agreement, all monies payable under Sections II.B. and D. of the
Settlement Agreement between the parties shall be deposited into the general
fund of the State of Minnesota.
8
<PAGE>
IX. FINAL DISPOSITION
This Consent Judgment resolves all claims set forth in the State's
Second Amended Complaint against Defendants, which are hereby dismissed with
prejudice, and shall constitute the final disposition of this action.
X. MISCELLANEOUS PROVISIONS
A. Jurisdiction of this case is retained for the purpose of
enforcement and enabling the continuing proceedings contemplated herein. Any
party to this Consent Judgment may apply to this Court at any time for such
further orders and directions as may be necessary or appropriate for the
construction and enforcement of this Consent Judgment.
B. This Consent Judgment is not intended to be and shall not in any
event be construed as, or deemed to be, an admission or concession or
evidence of personal jurisdiction or any liability or any wrongdoing
whatsoever on the part of any Defendant. The Defendants specifically
disclaim any liability or wrongdoing whatsoever with respect to the claims
and allegations asserted against them in this action and Settling Defendnats
have stipulated to entry of this Consent Judgment solely to avoid the further
expense, inconvenience, burden and risk of litigation.
C. Except as provided in Section III.D. of the Settlement Agreement
and Stipulation for Entry of Consent Judgment, this Consent Judgment shall
not be modified unless the party seeking modification demonstrates, by clear
and convincing evidence, that it will suffer irreparable harm from new and
unforeseen conditions; provided, however, that the provisions of Section III
of this Consent Judgment shall in no event be subject to modification.
Changes in the economic conditions of the parties shall not be grounds for
modification. It is intended that Settling Defendants will comply with this
Consent Judgment as originally entered, even if Settling Defendants'
obligations
9
<PAGE>
hereunder are greater than those imposed under current or future law.
Therefore, a change in law that results, directly or indirectly, in more
favorable or beneficial treatment of any one or more of the Settling
Defendants shall not support modification of this Consent Judgment.
D. In enforcing this Consent Judgment the Attorney General shall have
the discovery powers of Minn. Stat. Section 8.31 (1996), as amended. Any
Settling Defendant which violates this Consent Judgment shall be subject to
contempt and to the remedies provided in Minn. Stat. Section 8.31 (1996), as
amended. In addition, in any proceeding which results in a finding that a
Settling Defendant violated this Consent Judgment, the responsible Settling
Defendant or Settling Defendants shall pay the State's costs and attorneys'
fees incurred in such proceeding.
E. The remedies in this Consent Judgment are cumulative and in
addition to any other remedies the State may have at law or equity. Nothing
herein shall be construed to prevent the State from bringing any action for
conduct not released hereunder, even though that conduct may also violate
this Consent Judgment.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated:
------------------------ ---------------------------
KENNETH J. FITZPATRICK
Judge of District Court
JUDGMENT
Pursuant to the foregoing Consent Judgment, judgment is hereby entered
accordingly.
Dated:
------------------------ ---------------------------
Court Administrator
10
<PAGE>
AGREEMENT TO PAY STATE OF MINNESOTA
ATTORNEYS' FEES AND COSTS
Philip Morris Incorporated (hereinafter "PM"), R.J. Reynolds Tobacco
Company (hereinafter "RJR"), Brown & Williamson Tobacco Corporation
(hereinafter "B&W"), and Lorillard Tobacco Company (hereinafter "Lorillard")
(collectively referred to as "The Settling Defendants"), hereby enter into
this Agreement To Pay Attorneys' Fees And Costs (hereinafter the "Agreement")
with Robins, Kaplan, Miller & Ciresi L.L.P. (hereinafter "RKM&C") providing
for the payment of all attorneys' fees and costs incurred in the prosecution
of the lawsuit captioned the State of Minnesota and Blue Cross and Blue
Shield of Minnesota vs. Philip Morris Incorporated, et al., Court File
C1-94-8565 (hereinafter "The Case"), by The State of Minnesota.
BACKGROUND
1. On August 17, 1994, The State of Minnesota, together with Blue
Cross and Blue Shield of Minnesota (hereinafter "BCBS"), commenced The Case
in Ramsey County District Court in St. Paul, Minnesota.
2. From August 1994 until January 1998, RKM&C engaged in extensive and
unprecedented pretrial and discovery proceedings, which led to the
establishment of a document depository in Minneapolis, Minnesota, into which
was placed in excess of 28 million pages of documents. A second document
depository was established in Guildford, England, into which was placed in
excess of six million pages of documents. The majority of the documents in
the U.S. and Guildford depositories were never previously produced by
defendants in any lawsuit. Also included among the documents in the
Minneapolis depository are in excess of 40,000 documents obtained by
1
<PAGE>
RKM&C over which defendants had continuously maintained the claim of
attorney-client privilege. The production of the attorney-client privilege
documents was the subject of numerous appeals, including an appeal to the
U.S. Supreme Court.
3. RKM&C painstakingly reviewed the 34 million pages of documents and
selected those it deemed the most probative and relevant, which set of
documents became nationally known as the "Minnesota select" documents. The
Minnesota select documents have been provided to other litigants (including
state attorneys general and private parties), Congress and Governmental
authorities.
4. RKM&C took or defended the depositions of more than 300 fact and
expert witnesses.
5. Throughout the pretrial proceedings, more than 190 motions were
prosecuted and defended by Defendants and RKM&C, resulting in 200 orders
being issued by the trial court.
6. Interlocutory appeals were taken by Defendants of numerous trial
court orders resulting in 12 appeals to the Minnesota Court of Appeals; four
appeals to the Minnesota Supreme Court; and two appeals to the U.S. Supreme
Court.
7. On January 20, 1998, trial of The Case began before the Honorable
Kenneth J. Fitzpatrick. The trial proceeded for 74 trial days until May 4,
1998. Forty-one witnesses testified, and the transcript of the trial is
more than 15,000 pages in length.
8. On May 8, 1998, after all parties to the trial had rested, but
before submission of The Case to the jury, The Case was settled. After
settlement of the State's claims, RKM&C relinquished its right to receive
attorneys' fees and costs pursuant to the retainer agreement entered
2
<PAGE>
into between RKM&C and the State of Minnesota based upon the undertaking by
The Settling Defendants to negotiate directly with RKM&C for payment of
attorneys' fees and costs. This Agreement between The Settling Defendants
and RKM&C is the result of those negotiations and represents The Settling
Defendants' undertaking to pay attorneys' fees and costs to RKM&C.
AGREEMENT
Now, therefore, the undersigned parties agree as follows:
9. For and in consideration of the payment of attorneys' fees and
costs as set forth herein, RKM&C relinquishes its right to receive attorneys'
fees and costs pursuant to the retainer agreement entered into between RKM&C
and The State of Minnesota as part of the Special Attorney Appointment dated
May 23, 1994.
10. For and in consideration of the facts set forth above; and (a) in
consideration of RKM&C foregoing the offer of a comprehensive, non-severable
set of terms in connection with the payment of attorneys' fees relating to
this action, which terms included, without limitation, the following: the
determination of attorneys' fees by an arbitration panel of three (3) members
with no cap on the amount of fees to be awarded by such panel; a Five Hundred
Million Dollar ($500,000,000) annual cap on the payment in any one year of
fees awarded by all such arbitration panels nationwide in tobacco and health
litigation; provision that RKM&C's contractual rights, if any, for payment of
attorneys' fees by The State of Minnesota or any other plaintiff would be
unaffected by RKM&C's participation in such arbitration process; and a
"most-favored nation" clause applicable to the payment of attorneys' fees;
and (b) in consideration of RKM&C agreeing to relinquish its right to claim
any fees and costs under its retainer agreement with The State of
3
<PAGE>
Minnesota, and in partial consideration for the settlement of The Case, The
Settling Defendants agree to pay to RKM&C attorneys' fees in connection with
its representation of The State of Minnesota in this action, over and above
payments owed to The State of Minnesota by virtue of the Settlement Agreement
and Release, the sum of the lodestar component described in paragraph 11.b.,
and the contingency component described in paragraph 12, according to the
schedule set forth in paragraph 15.
11. The lodestar component shall be calculated as follows:
a. RKM&C represents to The Settling Defendants that the total amount
of fees incurred as documented in its billing records for all time spent
prosecuting The Case on behalf of The State of Minnesota is $27,500,000 for
purposes of the initial calculation in paragraph 11(b). This amount takes
into account continuing work on The Case up to and through Final Approval
of Settlement. Within ten (10) days of the execution of this Agreement, The
Settling Defendants may elect to require RKM&C to submit to a mutually
agreeable third party selected by The Settling Defendants an accounting of
hours reasonably worked in connection with the RKM&C representation of The
State of Minnesota in this action, broken out by name of attorney and
including a description of the type of work done and the normal hourly
billing rate of each attorney in question and costs reasonably expended and
customarily charged to clients of the firm. Such accounting shall also set
forth the aggregate billable amount by multiplying all hours reasonably
worked in connection with RKM&C's representation of The State of Minnesota
in this action times the normal hourly billing rate of the attorneys in
question, which hourly rates are actually charged to other
4
<PAGE>
clients of RKM&C to determine whether the hours listed in such accounting
were reasonably worked and charged in connection with RKM&C's
representation of The State of Minnesota in this action. Determinations by
such third party shall be binding on the parties. If the third party
determines that any hours listed in such an accounting were not reasonably
worked in connection with RKM&C's representation of The State of Minnesota
in this action, or that hourly rates were overstated, the aggregate
billable amount shall be recalculated so as to exclude such hours or
recalculate the rates. If the third party determines that any costs listed
in such an accounting were not reasonably expended or not customarily
charged to clients of the firm, such costs will be excluded. Nothing in
this section which gives The Settling Defendants the right to request a
third-party review of RKM&C's time and costs records entitles The
Defendants to see a copy of the time and costs records. Furthermore, the
parties agree that in making the time and costs records available for
review by a third party for purposes of paying attorneys' fees and costs
in partial consideration for The Settling Defendants' agreement to settle
with The State of Minnesota, neither RKM&C nor The State of Minnesota is
waiving any right to claim attorney-client or other privilege with regard
to any RKM&C time and costs records or any other document or matter
pertaining to this litigation.
b. The lodestar component shall be calculated by multiplying the
aggregate billable amount (as adjusted pursuant to subsection a.), insofar
as it does not exceed Thirty Million Dollars ($30,000,000) times a
multiplier derived as follows:
i. 6; plus
5
<PAGE>
ii. 2, in that this action was filed prior to January 1, 1995, in
the name of The State to recover health-care costs allegedly
associated with tobacco; plus
iii. 2, in that this action was not predicated, in any part, upon a
state statute specifically directed at tobacco companies or at
a recovery of costs allegedly associated with tobacco; plus
iv. 4, in that this action was tried to the conclusion.
12. The contingency component shall be composed of the sum of the
following:
a. One percent (1%) of the first Five Billion Dollars
($5,000,000,000) or less of nominal recovery to be paid to The State
over the first twenty-five (25) years (The "Nominal Recovery");
b. .5% times the amount by which the Nominal Recovery exceeds
Five Billion Dollars ($5,000,000,000) and is less than or equal to Ten
Billion Dollars ($10,000,000,000);
c. .2% times the amount by which the Nominal Recovery exceeds Ten
Billion Dollars ($10,000,000,000) and is less than or equal to Fifteen
Billion Dollars ($15,000,000,000); and
d. .1% times the amount by which the Nominal Recovery exceeds
Fifteen Billion Dollars ($15,000,000,000).
13. The Nominal Recovery for The State herein is Six Billion One
Hundred Sixty-five Million Dollars ($6,165,000,000). Accordingly, the
contingency component equals Fifty-five Million Eight Hundred Twenty-five
Thousand Dollars ($55,825,000).
6
<PAGE>
14. The lodestar component equals Three Hundred Eighty-five Million
Dollars ($385,000,000).
15. The sum of the lodestar and contingency components equals Four
Hundred Forty Million Eight Hundred Twenty-five Thousand Dollars
($440,825,000). The Defendants agree to pay this amount to RKM&C as and for
attorneys' fees pursuant to the following schedule:
a. Seventy-four Million Seven Hundred Fifty Thousand Dollars
($74,750,000) on or before September 5, 1998;
b. One Hundred Million Dollars ($100,000,000) on or before
January 31, 1999;
c. One Hundred Million Dollars ($100,000,000) on or before
April 15, 1999;
d. One Hundred Million Dollars ($100,000,000) on or before
January 31, 2000.
e. Sixty-six Million Seventy-five Thousand Dollars ($66,075,000) on
or before July 1, 2000.
16. Defendants also agree to pay Four Million Dollars ($4,000,000) as
and for costs due and owing by The State of Minnesota to RKM&C on or before
May 18, 1998.
17. The amount of fees and costs due and owing pursuant to paragraphs
15 and 16 shall be paid by Settling Defendants pro rata in proportion to
their Market Share. No Settling Defendant shall be obligated to make any
payment due from any other Settling Defendant. All obligations of The
Settling Defendants pursuant to this Agreement are intended to be and shall
remain several, and not joint.
18. The payment of fees pursuant to paragraph 15 shall constitute the
entire obligation of The Settling Defendants with respect to attorneys' fees
in connection with the
7
<PAGE>
representation by RKM&C of The State of Minnesota in connection with this
action, and the exclusive means by which RKM&C may seek payment of fees from
defendants, or otherwise, in connection with its representation of The State
of Minnesota in this action. RKM&C represents that it has served as sole
outside counsel to The State of Minnesota in this action.
19. The Settling Defendants' obligation to pay attorneys' fees pursuant
to paragraph 15 is contingent upon approval of the Settlement Agreement and
Release between The Settling Defendants and The State of Minnesota and the
State Escrow Agreement. If the Court declines to approve the Settlement
Agreement between The Settling Defendants and The State of Minnesota or the
State Escrow Agreement, or, pursuant to paragraph VI.B. (Court Approval) of
the Settlement Agreement, either party withdraws from the Agreement before
Court approval, this Agreement shall become null and void and of no effect.
Once the Court has approved the Settlement Agreement between The State of
Minnesota and The Settling Defendants, The Settling Defendants are obligated
to make the payments set forth herein, unless there is a challenge to the
Settlement Agreement between The Settling Defendants and The State of
Minnesota which results in a payment required to be paid by Settling
Defendants pursuant to the Settlement Agreement with The State of Minnesota
being paid into escrow.
20. In the event any payments due to The State of Minnesota are
required to be paid into escrow, then any unpaid attorneys' fees due under
this Agreement shall also be paid into a special escrow account (the "RKM&C
Escrow Account"). Any funds held in the RKM&C Escrow Account shall be
immediately released to RKM&C at the same time that funds are released from
The State of Minnesota Escrow Account to the State of Minnesota. Provided,
however, that in the event
8
<PAGE>
a court should determine that the Settlement Agreement between The State of
Minnesota and The Defendants is cancelled or terminated such that no further
payment obligations are due under The State Settlement Agreement, then any
outstanding funds held in the RKM&C Escrow Account shall be returned to The
Defendants, and Defendants' obligations under this Agreement shall become
null and void and of no effect.
MISCELLANEOUS PROVISIONS
21. In the event either party to this Agreement is required to seek
enforcement of the terms of this Agreement in court, all attorneys' fees and
costs incurred in enforcing the Agreement shall be paid by the party against
whom enforcement is obtained.
22. Each Settling Defendant has all requisite corporate power and
authority to execute, deliver and perform this Agreement and to consummate
the transactions contemplated herein. This Agreement has been duly and
validly executed and delivered by each Settling Defendant and constitutes its
legal, valid and binding obligation.
23. This Agreement constitutes the entire agreement among the parties
with regard to the subject matter of the Agreement and supersedes any
previous agreements and understandings between the parties with respect to
the subject matter. This Agreement may not be modified or amended except in
writing and signed by all parties.
24. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
9
<PAGE>
25. Except as otherwise specifically provided for in this Agreement, no
party shall be liable for any costs or expenses incurred by or on behalf of
any other party in connection with this Agreement and the actions
contemplated hereby.
26. This Agreement shall be construed in accordance with and governed
by the laws of The State of Minnesota applicable to agreements made and to be
performed in Minnesota.
27. Any disputes regarding the interpretation of this Agreement and any
actions to enforce its terms shall be venued in Ramsey County District Court
in the State of Minnesota.
28. The parties agree that the payment of attorneys' fees and costs
provided for in this Agreement shall be made strictly according to its terms.
The Settling Defendants agree not to support, directly or indirectly, in
Congress or any forum, legislation, rules or other policies which would
preempt, override, abrogate or diminish their obligations under this
Agreement.
29. This Agreement is not intended to, and does not, vest standing in
any third party with respect to the terms hereof, or create for any person
other than the parties hereto a right to enforce the terms hereof.
30. For and in consideration for the payment of fees as provided
herein, RKM&C hereby releases Settling Defendants from any and all claims
(other than a claim to enforce this Agreement) arising out of or in any way
related to the litigation or settlement of The Case.
31. Unless otherwise specified, the terms used in this Agreement are
subject to the definitions contained in the Settlement Agreement.
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Agreement as of this _____ day of May,
1998.
10
<PAGE>
ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
By:
------------------------------------
Michael V. Ciresi
PHILIP MORRIS INCORPORATED
By:
------------------------------------
Meyer G. Koplow
Counsel
By:
------------------------------------
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By:
------------------------------------
D. Scott Wise
Counsel
By:
------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO CORPORATION
By:
------------------------------------
Stephen R. Patton
Counsel
By:
------------------------------------
F. Anthony Burke
Vice President and General Counsel
11
<PAGE>
LORILLARD TOBACCO COMPANY
By:
------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
12
<PAGE>
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA, Court File No. C1-94-8565
BY HUBERT H. HUMPHREY, III,
ITS ATTORNEY GENERAL,
and
BLUE CROSS AND BLUE SHIELD
OF MINNESOTA,
Plaintiffs,
vs.
PHILIP MORRIS INCORPORATED,
R.J. REYNOLDS TOBACCO COMPANY,
BROWN & WILLIAMSON TOBACCO
CORPORATION, B.A.T. INDUSTRIES
P.L.C., BRITISH-AMERICAN TOBACCO
COMPANY LIMITED, BAT (U.K. &
EXPORT) LIMITED, LORILLARD
TOBACCO COMPANY, THE
AMERICAN TOBACCO COMPANY,
LIGGETT GROUP, INC., THE
COUNCIL FOR TOBACCO RESEARCH
U.S.A., INC. and THE TOBACCO
INSTITUTE, INC.,
Defendants.
SETTLEMENT AGREEMENT AND RELEASE
THIS SETTLEMENT AGREEMENT AND RELEASE ("Settlement Agreement") is made
as of the date hereof, by and among the parties hereto, as indicated by their
signatures below, to settle and resolve with finality all claims of BCBSM, Inc.
d/b/a Blue Cross and Blue Shield of
<PAGE>
Minnesota ("Blue Cross") relating to the subject matter of this action which
have been or could have been asserted by Blue Cross and Blue Shield of
Minnesota.
WHEREAS, Blue Cross is a nonprofit health service plan corporation
organized pursuant to Minnesota Statutes Chapter 62C, and as such fulfills a
variety of health related functions in the State of Minnesota;
WHEREAS, the general purposes of Blue Cross under its enabling
legislation and its Articles of Incorporation is "to make possible wide,
economic and timely availability of hospital, medical surgical, dental and other
health services for the people of Minnesota and others" and "advance public
health and the art and science of hospital, medical and health care under the
laws of the State of Minnesota;"
WHEREAS, Blue Cross in recognition and furtherance of its statutory
mandate and charter, and the State of Minnesota, through its Attorney General,
Hubert H. Humphrey III, commenced this action on August 17, 1994, asserting
various claims for monetary and injunctive relief on behalf of Blue Cross and
the State of Minnesota against certain tobacco manufacturers and others as
Defendants;
WHEREAS, Blue Cross brought this action with the objectives of seeking
disclosure of cigarette industry knowledge about Tobacco Products to help better
inform the public and banning the marketing of Tobacco Products to children;
WHEREAS, Blue Cross has achieved disclosure of millions of cigarette
industry documents that shall hereafter be available to the public in the
Minnesota depository;
WHEREAS, Blue Cross has, by this action, sought to affect conduct of
Defendants, including:
2
<PAGE>
- to refrain from opposition to Minnesota legislative activity
intended to control tobacco use by children;
- to refrain from challenging the enforceability of existing
Minnesota laws or rules relating to tobacco control;
- to discontinue all billboard and transit advertisements of
Tobacco Products in the State of Minnesota;
- to refrain from the payment for product placement within
motion pictures made within the United States;
- to permanently cease the marketing of any service or item,
other than Tobacco Products and advertisements for such
products, which bears the brand name or other identifying mark
of any domestic Tobacco Product;
- to disclose certain payments or provision of other benefits to
lobbyists, third parties and public officials; and
- to cause The Council for Tobacco Research-U.S.A. to cease
operations.
WHEREAS, Blue Cross has specifically asserted various claims for
monetary relief against the tobacco manufacturers and other defendants to
recover amounts which Blue Cross has expended for the treatment of the
smoking-caused illnesses of its subscribers;
WHEREAS, Blue Cross is the first such health plan to undertake such
action against any of the Defendants with regard to issues of smoking and
health, and until 1998, was the only such health plan to have commenced such an
action;
3
<PAGE>
WHEREAS, the Defendants have denied each and every one of Plaintiffs'
allegations of unlawful conduct or wrongdoing and have asserted a number of
defenses to Plaintiffs' claims, which defenses have been contested by
Plaintiffs; and
WHEREAS, the parties hereto wish to avoid the further expense, delay,
inconvenience, burden and uncertainty of continued litigation of this matter
(including appeals from any verdict), Blue Cross and the Settling Defendants
have agreed to settle this litigation:
NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the payments to
be made by the Settling Defendants, the dismissal and release of claims by Blue
Cross and such other consideration as described herein, the sufficiency of which
is hereby acknowledged, the parties hereto, acting by and through their
authorized agents, memorialize and agree as follows:
I. GENERAL PROVISIONS
A. Jurisdiction. Blue Cross and the Settling Defendants acknowledge
that this Court has jurisdiction over the subject matter of this action and over
each of the parties to this Settlement Agreement, and that this Court shall
retain jurisdiction for the purposes of implementing and enforcing this
Settlement Agreement. The parties hereto agree to present any disputes under
this Settlement Agreement, including without limitation any claims for breach or
enforcement of this Settlement Agreement, exclusively to this Court.
B. Voluntary Agreement of the Parties. Blue Cross and the Settling
Defendants acknowledge and agree that this Settlement Agreement is voluntarily
entered into by all parties hereto as the result of arm's-length negotiations
during which all such parties were represented by counsel. Blue Cross and
Settling Defendants understand that Congress may enact legislation dealing with
some of the issues addressed in this Agreement. Settling Defendants and their
assigns,
4
<PAGE>
affiliates, agents, and successors, hereby waive any right to challenge this
Agreement, directly or through third parties, on the ground that any term hereof
is unconstitutional, outside the power or jurisdiction of the Court, preempted
by or in conflict with any current or future federal legislation (except where
non-economic terms of future federal legislation are irreconcilable).
C. Definitions.
For the purposes of this Settlement Agreement, the following terms
shall have the meanings set forth below:
1. "State" or "State of Minnesota" means the State of
Minnesota acting by and through its Attorney General;
2. "Blue Cross" means BCBSM, Inc., d/b/a Blue Cross and Blue
Shield of Minnesota, and all of its employees, directors, officers,
attorneys, parents, and divisions. BCBSM, Inc. represents that it is an
independent corporation operating under license from Blue Cross and
Blue Shield Association, an association of independent Blue Cross and
Blue Shield Plans (the "Association"), permitting BCBSM, Inc. to use
the Blue Cross and Blue Shield service marks in Minnesota, and that
BCBSM, Inc. is not serving as an agent of the Association or any other
Blue Cross/Blue Shield Plans in entering into this Settlement
Agreement;
3. "Settling Defendants" means those Defendants in this action
that are signatories hereto;
4. "Defendants" means Philip Morris Incorporated, R.J.
Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation,
B.A.T. Industries P.L.C., British- American Tobacco Company Limited,
BAT (U.K. and Export) Limited, Lorillard Tobacco
5
<PAGE>
Company, The American Tobacco Company, The Council for Tobacco
Research-U.S.A., Inc., and the Tobacco Institute, Inc. and their
successors and assigns;
5. "Consumer Price Index" shall mean the Consumer Price Index
for All Urban Consumers for the most recent twelve-month period, as
published by the Bureau of Labor Statistics of the U.S. Department of
Labor;
6. "State Settlement Agreement" means the settlement agreement
entitled "Settlement Agreement and Stipulation for Entry of Consent
Judgment" entered into among the State and the Settling Defendants with
respect to the settlement of this action;
7. "State Escrow Agreement" means the escrow agreement so
entitled and entered into among State, the Settling Defendants and an
escrow agent;
8. "Court" means the District Court of the State of Minnesota,
County of Ramsey, Second Judicial District;
9. "Market Share" means a Settling Defendant's respective
share of sales of cigarettes by unit for consumption in the United
States during the calendar year immediately preceding the year in which
the payment at issue is due, regardless of when payment is made;
10. "Cigarettes" means any product which contains nicotine, is
intended to be burned or heated under ordinary conditions of use, and
consists of or contains (i) any roll of tobacco wrapped in paper or in
any substance not containing tobacco; or (ii) tobacco, in any form,
that is functional in the product, which, because of its appearance,
the type of tobacco used in the filler, or its packaging and labeling,
is likely to be offered to, or purchased by, consumers as a cigarette;
or (iii) any roll of tobacco wrapped in any substance containing
tobacco which, because of its appearance, the type of tobacco used in
the filler, or its
6
<PAGE>
packaging and labeling, is likely to be offered to, or purchased by,
consumers as a cigarette described in subparagraph (i) of this
Paragraph.;
11. "Smokeless Tobacco" means any powder that consists of cut,
ground, powdered, or leaf tobacco that contains nicotine and that is
intended to be placed in the oral cavity;
12. "Tobacco Products" means Cigarettes and Smokeless Tobacco;
13. "Depository," unless otherwise specified, means the
Minnesota document depository established by the Court's Order dated
June 16, 1995. "Depositories" includes both the Minnesota depository
and the Guildford, U.K. document depository established by the Court's
Order dated September 6, 1995.
14. "Private Counsel" means Robins, Kaplan, Miller & Ciresi
L.L.P.
15. "Final Settlement" means the date on which this Settlement
Agreement, is executed and a Stipulation of Dismissal with prejudice is
filed with the Court;
16. "Allocation Fraction" means that fraction of each of the
payments made to Blue Cross which is expressed as a fraction for which,
for each year, 1978-1996, the numerator is Blue Cross's damages for
that year and the denominator is Blue Cross's total damages for years
1978-1996. The Allocation Fractions for years 1978-1996 are as follows:
For year, 1978: 0.028166303;
For year, 1979: 0.032609439;
For year, 1980: 0.039670851;
For year, 1981: 0.040893991;
For year, 1982: 0.042167950;
7
<PAGE>
For year, 1983: 0.037203831;
For year, 1984: 0.031715039;
For year, 1985: 0.040184252;
For year, 1986: 0.046644637;
For year, 1987: 0.048474365;
For year, 1988: 0.049674533;
For year, 1989: 0.058874757;
For year, 1990: 0.066059121;
For year, 1991: 0.068837235;
For year, 1992: 0.071286135;
For year, 1993: 0.066550282;
For year, 1994: 0.075199152;
For year, 1995: 0.075114815; and
For year, 1996: 0.080673311.
D. Settlement Receipts. The payments to be made by the Settling
Defendants under this Settlement Agreement are in satisfaction of all of Blue
Cross's claims for damages, including, without limitation, those for punitive
damages, incurred by Blue Cross in the year of payment or earlier years, except
that no part of any payment under this Settlement Agreement is made in
settlement of an actual or potential liability for a fine, penalty (civil or
criminal) or enhanced damages. Blue Cross represents that it does not have
authority to bring: (1) claims attributable to or arising out of the payment of
benefits by self-funded employer-employee benefit plans for which Blue Cross
presently provides or has formerly provided administrative services, (2) claims
8
<PAGE>
attributable to or arising out of the payment of benefits under any program or
plan for the Minnesota Comprehensive Health Association or under the Federal
Employees Health Benefit Act or any other federal health benefit plan, or
(3) claims attributable to or arising out of the payment of benefits by any
employee benefit plan of any political subdivision of the State of Minnesota for
which Blue Cross provides or has provided administrative services. Each payment
set forth in this section shall be in partial satisfaction of each year of
damages incurred and alleged by Blue Cross for the years 1978 through 1996 and
each payment shall accordingly be allocated to the satisfaction of each specific
year of damages incurred by Blue Cross according to the Allocation Fraction set
forth above.
E. Settlement Payments to Blue Cross. Each Settling Defendant severally
shall cause to be paid to an account designated in writing by Blue Cross in
accordance with and subject to Paragraph I.F. of this Settlement Agreement, the
following amounts: the amount listed for it in Schedule A hereto, such amount
representing its share of $160,000,000, to be paid on or before September 5,
1998; pro rata in proportion to its Market Share, its share of $79,200,000, to
be paid on or before January 4, 1999; pro rata in proportion to its Market
Share, its share of $57,450,000, to be paid on or before January 3, 2000; pro
rata in proportion to its Market Share, its share of $57,450,000, to be paid on
or before January 2, 2001; pro rata in proportion to its Market Share, its share
of $57,450,000, to be paid on or before January 2, 2002; and pro rata in
proportion to its Market Share, its share of $57,450,000, to be paid on or
before January 2, 2003. The payments made by the Settling Defendants pursuant to
this Paragraph shall be adjusted upward by the greater of 3% or the percentage
increase in the Consumer Price Index applied each year on the previous year,
beginning with the payment due to be made on or before January 3, 2000. The
payments due to be made by the Settling Defendants pursuant to this Paragraph E
on or before January 3, 2000, on or
9
<PAGE>
before January 2, 2001, on or before January 2, 2002, and on or before January
2, 2003, will also be decreased or increased, as the case may be, in accordance
with the formula for adjustments of payments set forth in Appendix A. The
payments due to be made by the Settling Defendants pursuant to this Paragraph E
on or before September 5, 1998, and on or before January 4, 1999, shall not be
subject to the inflation escalation and volume adjustment described in the
preceding sentences.
In the event that any of the Settling Defendants (a "Defaulting
Defendant") fails to make any payment required of it pursuant to this Paragraph
E by the applicable date set forth in this Paragraph E (a "Missed Payment"),
Blue Cross shall provide notice to each of the Settling Defendants of such
non-payment. The Defaulting Defendant shall have 15 days after receipt of such
notice to pay the Missed Payment, together with interest accrued from the
original applicable due date at the prime rate as published in the Wall Street
Journal on the latest publication date on or before the date of default plus 3%.
If the Defaulting Defendant does not make such payment within such 15-day
period, Blue Cross shall provide notice to each of the Settling Defendants of
such continued non-payment. Any or all of the Settling Defendants (other than
the Defaulting Defendant) shall thereafter have 15 days after receipt of such
notice to elect (in such Settling Defendant's or such Settling Defendants' sole
and absolute discretion) to pay the Missed Payment, together with interest
accrued from the original applicable due date the rate of prime rate as
published in the Wall Street Journal on the latest publication date on or before
the date of default plus 3%.
In the event that Blue Cross does not receive the Missed Payment,
together with such accrued interest, within such additional 15-day period, all
payments required to be made by each of the respective Settling Defendants
pursuant to this Paragraph E shall at the end of such additional 15-
10
<PAGE>
day period be accelerated and shall immediately become due and owing to Blue
Cross from each Settling Defendant pro rata in proportion to its Market Share;
provided, however, that any such accelerated payments (a) shall all be adjusted
upward by the greater of (i) the rate of 3% per annum or (ii) the actual total
percent change in the CPI, in either instance for the period between January 1
of the year in which the acceleration of payments pursuant to this Paragraph
occurs and the date on which such accelerated payments are due pursuant to this
subsection, and (b) shall all immediately be adjusted in accordance with the
formula for adjustments of payments set forth in Appendix A.
Nothing in this Paragraph E shall be deemed under any circumstance to
create any obligation in any of the Settling Defendants to pay any amount owed
or payable to Blue Cross from any other Settling Defendant. All obligations of
the Settling Defendants pursuant to this Paragraph E are intended to be and
shall remain several, and not joint.
F. Payment of Settlement Proceeds. Any payment made pursuant to the
Settlement Agreement shall be made to an account designated in writing by Blue
Cross.
G. Blue Cross's Dismissal of Claims. Upon execution of this Settlement
Agreement Blue Cross shall file a Stipulation of Dismissal dismissing with
prejudice all claims as to all Defendants.
H. Blue Cross's Release and Discharge. Upon Final Approval, Blue Cross
shall release and forever discharge all Defendants and their present and former
parents, subsidiaries (whether or not wholly owned) and affiliates, and their
divisions, organizational units, affiliates, officers, directors, employees,
representatives, insurers, suppliers, agents, attorneys and distributors (and
the predecessors, heirs, executors, administrators, successors and assigns of
each of the foregoing) ("Releasees") from any and all manner of civil claims,
demands, actions, suits and causes of action,
11
<PAGE>
damages whenever incurred, liabilities of any nature whatsoever, including civil
penalties, as well as costs, expenses and attorneys' fees, known or unknown,
suspected or unsuspected, accrued or unaccrued, whether legal, equitable or
statutory ("Claims") that Blue Cross (including any of its past, present or
future parents, subsidiaries (whether or not wholly owned) and their respective
representatives, employees, directors, trustees, officers, attorneys, Private
Counsel, agents, representatives, divisions, organizational units (and the
predecessors, heirs, executors, administrators, successors and assigns of each
of the foregoing, and whether or not any such person or entity participates in
the settlement), whether directly, indirectly, representatively, derivatively or
in any other capacity, ever had, now has or hereafter can, shall or may have as
to any claims relating to the subject matter of this action (including damages
not incurred as of the date of this Settlement); provided, however, that the
foregoing shall not operate as a release of any person, party or entity (whether
or not a signatory to this Agreement) as to any of the monetary obligations
undertaken in this Agreement in connection with a breach or default of this
Agreement.
Blue Cross hereby covenants and agrees that it shall not hereafter sue
or seek to establish civil liability against any person or entity covered by the
release provided under this Paragraph H based, in whole or in part, upon any of
the Released Claims, and Blue Cross agrees that this covenant and agreement
shall be a complete defense to any such civil action or proceeding. .
Notwithstanding the foregoing, if the Settling Defendants enter into
any future pre-verdict settlement of any action brought by any insurer, health
maintenance organization, Blue Cross plan, Blue Shield plan, employee welfare
benefit plan, union trust fund providing health care benefits and/or coverage
for health care benefits, or any other third-party payor (hereinafter
collectively referred to as "Third-Party Payors") of health care coverage or
benefits that does not release claims
12
<PAGE>
for damages not incurred as of the date of such settlement relating to the
subject matter of such action, the scope of the release provided herein shall be
revised so as to permit Blue Cross to assert claims for damages not incurred as
of the date hereof relating to the subject matter of this action.
I. Settling Defendants' Release and Discharge. Upon Final Approval,
Settling Defendants shall release and forever discharge Blue Cross from any and
all manner of civil claims, demands, actions, suits and causes of action,
damages whenever incurred, liabilities of any nature whatsoever, including
costs, expenses, penalties and attorneys' fees, known or unknown, suspected or
unsuspected, accrued or unaccrued, whether legal, equitable or statutory,
arising out of or in any way related to, in whole or in part, the subject matter
of the litigation of this lawsuit, that Settling Defendants (including any of
their present and former parents, subsidiaries, divisions, affiliates, officers,
directors, employees, witnesses (fact or expert), representatives, insurers,
agents, attorneys and distributors and the predecessors, heirs, executors,
administrators, successors and assigns of each of the foregoing, and whether or
not any such person participates in the settlement), whether directly,
indirectly, representatively, derivatively or in any other capacity, ever had,
now has or hereafter can, shall or may have.
J. Pierringer Release. Without limiting the terms or effect of
Paragraph I.H. of this Settlement Agreement, Blue Cross hereby expressly
releases and discharges each Releasee from its respective fraction(s),
portion(s), or percentage(s) of any of the Released Claims that shall hereafter
be determined at trial or other disposition to be the fault of such Releasee.
Blue Cross expressly agrees to indemnify and hold harmless all Releasees from
any claims, demands, damages or causes of action for contribution or
indemnification that may be made by any person or entity with respect to any
Released Claim, and to satisfy such fraction, portion or percentage of any
judgment,
13
<PAGE>
settlement or other disposition with respect to any Released Claim which is
determined to be the fault of any of such Releasees. The parties to this
Settlement Agreement specifically intend that one of the purposes and legal
effects of this Settlement Agreement is to bar forever any right of contribution
and/or indemnify against the Releasees, and that it thus have the effect of a
"Pierringer-type" release and be construed in accordance with Pierringer v.
Hoger, 124 N.W.2d 106 (Wisc. 1963); Frey v. Snelgrove, 269 N.W.2d 918 (Minn.
1978); and Alumax Mill Products, Inc. v. Congress Financial Corp., 912 F.2d 996
(8th Cir. 1990).
K. Limited Most-Favored Nation Provision. In partial consideration for
the monetary payments to be made by the Settling Defendants pursuant to this
Settlement Agreement, Blue Cross agrees that if the Settling Defendants enter
into any future pre-verdict settlement agreement of other similar litigation
brought by a Third-Party Payor on terms more favorable to such Third-Party Payor
than the terms of this Settlement Agreement, the terms of this Settlement
Agreement shall not be revised except as follows: to the extent, if any, such
other pre-verdict settlement agreement includes terms that provide (a) for joint
and several liability among the Settling Defendants with respect to monetary
payments to be made pursuant to such agreement or (b) a guarantee by the parent
company of any of the Settling Defendants or other assurances of payment or
creditors' remedies with respect to monetary payments to be made pursuant to
such agreement, then this Settlement Agreement shall, at the option of Blue
Cross, be revised to include terms comparable to such terms.
II. PUBLIC ACCESS TO DOCUMENTS AND COURT FILES
In connection with the settlement of this action, Blue Cross has
insisted that the Settling Defendants enter into a Consent Judgment with the
State of Minnesota providing for the
14
<PAGE>
maintenance of the Minnesota and Guildford Depositories, thereby achieving
continued public access to millions of industry documents for the public
benefit.
III. MISCELLANEOUS PROVISIONS
A. Settling Defendants and the Law Firm of Robins, Kaplan, Miller &
Ciresi L.L.P. ("RKM&C") have reached separate agreement for the payment of
the Blue Cross' costs and attorneys' fees. In consideration for said
agreement, RKM&C has released Blue Cross from its obligation to pay costs and
attorneys' fees under the retainer agreement entered into between the Blue
Cross and RKM&C.
B. Representations of Parties. The respective parties hereto hereby
represent that this Settlement Agreement has been duly authorized and, upon
execution, will constitute a valid and binding contractual obligation,
enforceable in accordance with its terms, of each of the parties hereto. Blue
Cross represents that all of its outside counsel that have represented it in
connection with this action are, by and through their authorized
representatives, signatories to this Settlement Agreement.
C. Obligation Several, Not Joint. All obligations of the Settling
Defendants pursuant to this Settlement Agreement are intended to be and shall
remain several, and not joint.
D. Headings. The headings of the paragraphs of this Settlement
Agreement are not binding and are for reference only and do not limit, expand or
otherwise affect the contents of this Settlement Agreement.
E. No Determination or Admission. This Settlement Agreement and any
proceedings taken hereunder are not intended to be and shall not in any event be
construed as, or deemed to be, an admission or concession or evidence of any
liability or any wrongdoing whatsoever on the part of any party hereto or any
person covered by the releases provided under Paragraphs I.H. and I.I.
15
<PAGE>
hereof. The Settling Defendants specifically disclaim and deny any liability or
wrongdoing whatsoever with respect to the allegations and claims asserted
against them in this action and enter into this Settlement Agreement solely to
avoid the further expense, inconvenience, burden and uncertainty of litigation.
F. Non-Admissibility. The settlement negotiations resulting in this
Settlement Agreement have been undertaken by the parties hereto in good faith
and for settlement purposes only, and neither this Settlement Agreement nor any
evidence of negotiations hereunder shall be offered or received in evidence in
this action, or any other action or proceeding, for any purpose other than in an
action or proceeding arising under this Settlement Agreement.
G. Amendment; Waiver. This Settlement Agreement may be amended only by
a written instrument executed by Blue Cross, and the Settling Defendants. The
waiver of any rights conferred hereunder shall be effective only if made by
written instrument executed by the waiving party. The waiver by any party of any
breach of this Settlement Agreement shall not be deemed to be or construed as a
waiver of any other breach, whether prior, subsequent or contemporaneous, of
this Settlement Agreement.
H. Notices. All notices or other communications to any party to this
Settlement Agreement shall be in writing (and shall include telex, telecopy or
similar writing) and shall be given to the respective parties hereto at the
following addresses. Any party hereto may change the name and address of the
person designated to receive notice on behalf of such party by notice given as
provided in this paragraph.
16
<PAGE>
For Blue Cross:
Thomas F. Gilde
Associate Corporate Counsel
Blue Cross and Blue Shield of Minnesota
3535 Blue Cross Road
Eagan, MN 55122
or
P. O. Box 64560
St. Paul, MN 55164
Fax: 612.456.6017
with a copy to:
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, MN 55402-2015
Fax: 612.339.4181
For Philip Morris Incorporated:
Martin J. Barrington
Philip Morris Incorporated
120 Park Avenue
New York, NY 10017-5592
Fax: 212.907.5399
With a copy to:
Meyer G. Koplow
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Fax: 212.403.2000
17
<PAGE>
For R.J. Reynolds Tobacco Company:
Charles A. Blixt
General Counsel
R.J. Reynolds Tobacco Company
401 North Main Street
Winston-Salem, NC 27102
Fax: 910.741.2998
With a copy to:
Arthur F. Golden
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Fax: 212.450.4800
For Brown & Williamson Tobacco Corporation:
F. Anthony Burke
Brown & Williamson Tobacco Corporation
200 Brown & Williamson Tower
401 South Fourth Avenue
Louisville, KY 40202
Fax: 502.568.7297
With a copy to:
Stephen R. Patton
Kirkland & Ellis
200 East Randolph Dr.
Chicago, IL 60601
Fax: 312.861.2200
For Lorillard Tobacco Company:
Arthur J. Stevens
Lorillard Tobacco Company
714 Green Valley Road
Greensboro, NC 27408
Fax: 910.335.7707
18
<PAGE>
I. Cooperation. The parties hereto agree to use their best efforts and
to cooperate with each other to cause this Settlement Agreement to become
effective, to obtain all necessary approvals, consents and authorizations, if
any, and to execute all documents and to take such other action as may be
appropriate in connection therewith. Consistent with the foregoing, the parties
hereto agree that they will not directly or indirectly assist or encourage any
challenge to this Settlement Agreement by any other person. All parties hereto
agree to support the integrity and enforcement of the terms of this Settlement
Agreement.
J. Governing Law. This Settlement Agreement shall be governed by the
laws of the State of Minnesota, without regard to the conflicts of law rules of
such state.
K. Construction. None of the parties hereto shall be considered to be
the drafter of this Settlement Agreement or any provision hereof for the purpose
of any statute, case law or rule of interpretation or construction that would or
might cause any provision to be construed against the drafter hereof.
L. Intended Beneficiaries. This action was brought by the Blue Cross,
through its Attorney General, and by Blue Cross to recover certain monies and to
promote the health and welfare of the people of Minnesota. No portion of this
Settlement Agreement shall provide any rights to, or be enforceable by, any
person or entity that is neither a party hereto nor a person encompassed by the
releases provided in Paragraphs I.H. and I.I. of this Settlement Agreement.
Except as expressly provided in this Settlement Agreement, no portion of this
Settlement Agreement shall bind any non- party or determine, limit or prejudice
the rights of any such person or entity. None of the rights granted or
obligations assumed under this Settlement Agreement by the parties hereto may be
assigned or otherwise conveyed without the express prior written consent of all
of the parties hereto.
19
<PAGE>
M. Counterparts. This Settlement Agreement may be executed in
counterparts. Facsimile or photocopied signatures shall be considered as valid
signatures as of the date hereof, although the original signature pages shall
thereafter be appended to this Settlement Agreement.
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Comprehensive Settlement Agreement and
Release as of this 8th day of May, 1998.
BLUE CROSS AND BLUE SHIELD OF
MINNESOTA
By:
-----------------------------------------
Andrew P. Czajkowski
Chief Executive Officer
Blue Cross and Blue Shield of Minnesota
By:
-----------------------------------------
Thomas F. Gilde
Associate Corporate Counsel
By:
-----------------------------------------
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
PHILIP MORRIS INCORPORATED
By:
-----------------------------------------
Meyer G. Koplow
Counsel
By:
-----------------------------------------
Martin J. Barrington
General Counsel
20
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
By:
-----------------------------------------
D. Scott Wise
Counsel
By:
-----------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
-----------------------------------------
Stephen R. Patton
Counsel
By:
-----------------------------------------
F. Anthony Burke
Vice President and General Counsel
LORILLARD TOBACCO COMPANY
By:
-----------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
21
<PAGE>
SCHEDULE A
AMOUNTS PAYABLE BY SETTLING DEFENDANTS ON OR
BEFORE SEPTEMBER 5, 1998 PURSUANT TO
PARAGRAPH I.E OF THE SETTLEMENT AGREEMENT
<TABLE>
<S> <C>
Philip Morris Incorporated .. $108,800,000
R.J. Reynolds Tobacco Company $ 10,880,000
Brown & Williamson Tobacco
Corporation ................. $ 28,640,000
Lorillard Tobacco Company ... $ 11,680,000
Total Amount ................ $160,000,000
</TABLE>
1
<PAGE>
