<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
------------------------
R.J. REYNOLDS TOBACCO HOLDINGS, 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
incorporation or organization) No.)
</TABLE>
401 NORTH MAIN ST.
WINSTON-SALEM, NC 27102
(336) 741-5500
(Address, including zip code, and telephone number, including area code,
of the registrant's principal executive offices)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS 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
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: OCTOBER 31, 1999,
109,630,467 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) - Three and Nine Months Ended September 30, 1999
and 1998.................................................... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended September 30, 1999 and
1998........................................................ 4
Condensed Consolidated Balance Sheets - September 30, 1999
(Unaudited) and December 31, 1998........................... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6-20
Item 2. Management's Discussion and Analysis of Financial Condition 21-29
and Results of Operations...................................
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................... 30
Item 6. Exhibits and Reports on Form 8-K............................ 31
Signature............................................................ 32
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
NET SALES* $ 1,991 $ 1,531 $ 5,591 $ 4,179
Costs and expenses:
Cost of products sold* (Note 1) 842 345 2,435 1,010
Selling, advertising, administrative and general expenses 796 770 2,222 2,021
Tobacco settlement and related expenses (Notes 1 and 4) 40 - 40 457
Amortization of trademarks and goodwill 91 91 274 274
Restructuring expense (Note 1) (2) - (2) -
Headquarters close-down and related charges (Note 1) - - 143 -
------- ------- ------- -------
OPERATING INCOME 224 325 479 417
Interest and debt expense 43 105 225 321
Other expense, net (35) (4) (27) 26
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 216 224 281 70
Provision for income taxes 120 103 194 104
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS 96 121 87 (34)
Discontinued operations:
Income (loss) from operations of discontinued businesses,
net of income taxes (Note 2) (9) 49 76 82
Gain (loss) on discontinued businesses, net of income
taxes (Note 2) (212) - 2,436 -
------- ------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (125) 170 2,599 48
Extraordinary item - loss on early extinguishment of debt,
net of income taxes (Note 2) - - (250) -
------- ------- ------- -------
NET INCOME (LOSS) $ (125) $ 170 $ 2,349 $ 48
======= ======= ======= =======
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.88 $ 1.11 $ 0.80 $ (.31)
Income (loss) from discontinued operations (2.03) .45 23.12 .75
Extraordinary loss - - (2.30) -
------- ------- ------- -------
Net income (loss) $ (1.15) $ 1.56 $ 21.62 $ .44
======= ======= ======= =======
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.88 $ 1.11 $ 0.80 $ (.31)
Income (loss) from discontinued operations (2.03) .45 23.10 .75
Extraordinary loss - - (2.30) -
------- ------- ------- -------
Net income (loss) $ (1.15) $ 1.56 $ 21.60 $ .44
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN
THOUSANDS):
Basic 108,589 108,691 108,661 108,691
Diluted 108,810 108,691 108,761 108,691
</TABLE>
- ---------------------
* Excludes excise taxes of $310 million and $339 million for the three months
ended September 30, 1999 and 1998, respectively, and $888 million and $979
million for the nine months ended September 30, 1999 and 1998, respectively.
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
-------- ------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 2,349 $ 48
Less income from discontinued operations 2,512 82
------- -----
Subtotal (163) (34)
------- -----
Adjustments to reconcile to net cash flows from (used in)
continuing operating activities:
Depreciation and amortization 364 374
Deferred income tax benefit (195) (118)
Extraordinary loss on early extinguishment of debt 384 -
Changes in working capital items, net (27) 332
Initial, up-front tobacco settlement and related
expenses, net of cash payments (472) 228
Headquarters close-down and related charges, net of
cash 21 -
Other, net - (23)
------- -----
Total adjustments 75 793
------- -----
Net cash flows from (used in) continuing operating
activities (88) 759
Net cash flows from discontinued operations 116 12
------- -----
Net cash flows from operating activities 28 771
------- -----
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures (30) (30)
Net proceeds from the sale of the international tobacco
business 7,760 -
Other, net (24) 2
------- -----
Net cash flows from (used in) investing activities 7,706 (28)
------- -----
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,244 -
Repayments of long-term debt (4,450) (68)
Decrease in short-term borrowing (62) -
Transfer and payments to former parent (1,968) (307)
Other, net 5 (243)
------- -----
Net cash flows used in financing activities (5,231) (618)
------- -----
Net change in cash and cash equivalents 2,503 125
Cash and cash equivalents at beginning of period - 85
------- -----
Cash and cash equivalents at end of period $ 2,503 $ 210
======= =====
Income taxes paid, net of refunds $ 1,873 $ 273
Interest paid $ 271 $ 326
Tobacco settlement and related expense payments $ 517 $ 229
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,503 $ -
Accounts and notes receivable, net 120 58
Inventories (Note 3) 448 529
Prepaid excise taxes and other 406 537
Net assets of discontinued businesses (Note 2) - 5,961
------- -------
Total current assets 3,477 7,085
Property, plant and equipment, net 1,082 1,115
Trademarks, net 3,097 3,176
Goodwill, net 7,639 7,829
Other assets and deferred charges 208 196
------- -------
$15,503 $19,401
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - $ 29
Accounts payable and accrued liabilities 3,094 1,564
Current maturities of long-term debt 42 62
Income taxes accrued 635 165
------- -------
Total current liabilities 3,771 1,820
Long-term debt (less current maturities) 1,983 4,861
Other noncurrent liabilities 1,091 931
Deferred income taxes 1,448 1,903
Contingencies (Note 4)
Stockholders' equity (Note 5):
Common stock (109,631,397 shares issued at September 30,
1999) 1 1
Paid-in capital 7,369 10,861
Retained earnings (accumulated deficit) (125) (516)
Accumulated other comprehensive income (loss):
Cumulative currency translation adjustment (2) (441)
Other (6) (19)
------- -------
Accumulated other comprehensive income (loss) (8) (460)
Other stockholders' equity (27) -
------- -------
Total stockholders' equity 7,210 9,886
------- -------
$15,503 $19,401
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - INTERIM REPORTING
Basis of Presentation
The condensed consolidated financial statements include the accounts of
R.J. Reynolds Tobacco Holdings, Inc. ("RJR Tobacco Holdings") and its
subsidiaries, including R.J. Reynolds Tobacco Company ("RJR Tobacco Company").
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, and in management's opinion, contain all
adjustments, consisting only of normal recurring items, necessary for a fair
statement of the results for the periods presented. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The results for the
interim periods ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
The account balances and activities of the international tobacco business
and Nabisco Holdings Corp. ("Nabisco") are segregated and reported as
discontinued operations in the accompanying condensed consolidated financial
statements. In addition, financial data for all prior periods has been restated
to give effect to the number of shares issued in connection with the
distribution of RJR Tobacco Holdings common stock to the stockholders of its
former parent, Nabisco Group Holdings Corp. ("NGH" - formerly RJR Nabisco
Holdings Corp.). See Note 2 for further discussion. The condensed consolidated
financial statements should be read in conjunction with the restated
consolidated financial statements and footnotes of RJR Tobacco Holdings for the
year ended December 31, 1998 included in the information statement as Exhibit
99.1 of the Form 8-A of RJR Tobacco Holdings filed May 19, 1999.
Recently Adopted Accounting Pronouncement
On January 1, 1999, RJR Tobacco Holdings adopted Statement of Position
("SOP") No. 98-5, Reporting on the Costs of Start-Up Activities, issued by the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("AcSEC"). SOP No. 98-5 established standards on accounting
for start-up and organization costs and, in general, requires such costs to be
expensed as incurred. The adoption of SOP No. 98-5 did not have a material
effect on RJR Tobacco Holdings' financial position or results of operations.
Recently Issued Accounting Pronouncements
During the second quarter of 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, which must be
adopted by January 1, 2000, with early adoption permitted. In June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, which
amended SFAS No. 133 to delay its effective date one year. SFAS No. 133 requires
that all derivative instruments be recorded on the consolidated balance sheet at
their fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. RJR Tobacco Holdings has not yet determined the impact, if
any, that adoption of SFAS No. 133 will have on its financial position or
results of operations.
Comprehensive Income
Total comprehensive income (loss) for the three months ended September 30,
1999 and 1998 was $(127) million and $166 million, respectively. Total
comprehensive income for the nine months ended September 30, 1999 and 1998 was
$2.3 billion and $13 million, respectively. Total comprehensive income
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
includes net income (loss), foreign currency translation adjustments and minimum
pension liability adjustments.
Tobacco Settlement and Related Expenses
In the three months ended September 30, 1999, RJR Tobacco Company recorded
$40 million, $24 million after-tax, for initial, up-front costs related to the
tobacco growers settlement.
In the first quarter of 1998, RJR Tobacco Company recorded $312 million,
$199 million after-tax, for initial, up-front tobacco settlement costs relating
to the agreements between RJR Tobacco Company and the Minnesota state attorney
general and Blue Cross and Blue Shield of Minnesota. In the second quarter of
1998, RJR Tobacco Company recorded $145 million, $97 million after-tax, for
additional initial, up-front tobacco settlement costs under a "most favored
nation" agreement with Florida, Mississippi and Texas. Ongoing tobacco
settlement costs recorded during the first nine months of 1999 are included in
cost of products sold.
In the fourth quarter of 1998, RJR Tobacco Company recorded a $151 million
expense for a workforce reduction of approximately 1,300 employees in response
to changing business conditions resulting from the multi-state settlement
agreement signed in November 1998. Cash outlays will approximate $100 million.
Pre-tax savings during the first nine months of 1999 were approximately $39
million. During 1998, $54 million of the reserve was utilized, and for the nine
months ended September 30, 1999, RJR Tobacco Company incurred $30 million of
cash payments, which were applied against the reserve, resulting in a reserve
balance of approximately $67 million.
Restructuring Expense
In the fourth quarter of 1997, RJR Tobacco Company recorded a pre-tax
restructuring expense of $80 million, $52 million after-tax, to reorganize its
operations. Cash outlays will approximate $40 million. The charge included $30
million for severance and related benefits, $30 million for the rationalization
of manufacturing operations and $20 million for contract terminations and other
costs. Pre-tax savings in 1998 were $33 million, and for the nine months ended
September 30, 1999 were $14 million. During 1997, $5 million of the accrual was
utilized for employee severance and related benefits and $2 million was utilized
for rationalization of manufacturing operations. During 1998, $63 million of the
accrual was utilized as follows: $15 million for employee severance and related
benefits, $28 million for rationalization of manufacturing operations and $20
million for contract termination and other costs. For the nine months ended
September 30, 1999, $6 million of the remaining restructuring accrual was
utilized for employee severance and related benefits and $2 million of the
accrual was reversed to reflect lower-than-anticipated total costs, resulting in
a remaining reserve balance of approximately $2 million. During 1999, $6 million
of the charges applied against the reserve were cash expenditures.
Headquarters Close-Down and Related Charges
In the second quarter of 1999, RJR Tobacco Holdings recorded a charge of
$143 million, $93 million after-tax, to reflect the elimination of its New York
corporate headquarters. Total cash expenditures related to this charge were $122
million. The elimination of headquarters resulted from a series of
reorganization transactions completed during the second quarter, which are
described in Note 2, that fundamentally changed its business and capital
structure. Approximately $127 million of the charge is for employee severance
and related benefits pertaining to the elimination of all functions at the New
York headquarters (approximately 100 employees). The employment of these
individuals was terminated on June 14, 1999, at which time RJR Tobacco Holdings
satisfied its obligation in full. The remainder of the charge was primarily
related to contractual lease termination payments and the write-off of leasehold
improvements and abandoned equipment. For the three and nine months ended
September 30, 1999, pre-tax savings were approximately $15 million.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
Earnings Per Share
Basic and diluted earnings per share ("EPS") were calculated using the
following (dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (125) $ 170 $ 2,349 $ 48
Weighted average shares used in (in
thousands):
Basic EPS 108,589 108,691 108,661 108,691
Effect of incremental dilutive
shares:
Stock options 185 - 88 -
Restricted stock 36 - 12 -
-------- -------- -------- --------
Diluted EPS 108,810 108,691 108,761 108,691
======== ======== ======== ========
</TABLE>
NOTE 2 - THE REORGANIZATION
On March 9, 1999, RJR Tobacco Holdings and RJR Tobacco Company entered into
a definitive agreement to sell the international tobacco business for
approximately $8 billion, including the assumption of approximately $200 million
of net debt, to Japan Tobacco Inc. ("Japan Tobacco"). The sale was substantially
completed on May 12, 1999 and, after post-closing adjustments during the third
quarter of 1999, resulted in a net gain of $2.76 billion, after income taxes of
$1.86 billion. Under the terms of the agreement, Japan Tobacco acquired
substantially all of the business, including intellectual property rights of the
international tobacco business, which included the international rights to the
CAMEL, WINSTON and SALEM brand names. Proceeds from the sale have been used to
reduce debt and for general corporate purposes.
Also on March 9, 1999, NGH announced that its Board of Directors had
approved a plan to separate the domestic tobacco business conducted by RJR
Tobacco Company, from the food business conducted by operating subsidiaries of
Nabisco. The separation was accomplished on May 18, 1999 by the transfer of RJR
Tobacco Holdings' 80.5% interest in Nabisco, together with approximately $1.6
billion in after-tax proceeds from the sale of the international tobacco
business, to NGH through a merger transaction, followed by a spin-off to NGH
stockholders of shares in RJR Tobacco Holdings. An additional $193 million of
the proceeds from the sale of the international tobacco business was transferred
by RJR Tobacco Holdings to NGH prior to the spin-off in satisfaction of certain
liabilities paid by NGH on RJR Tobacco Holdings' behalf. The merger transaction
and subsequent spin-off are intended to be tax-free. In connection with the
merger transaction, a loss of approximately $322 million was recognized related
to the cumulative translation account of Nabisco. This loss is netted against
the gain on discontinued operations for the nine months ended September 30,
1999.
On May 12, 1999, NGH's Board of Directors approved the spin-off, which
occurred on June 14, 1999. NGH continues to exist as a holding company, owning
80.5% of Nabisco. Nabisco Group Holdings Corp. (symbol: NGH) and Nabisco
(symbol: NA) each continues to trade as separate companies on the New York Stock
Exchange. Shares of RJR Tobacco Holdings, the owner of 100% of RJR Tobacco
Company, began trading separately on June 15, 1999 (symbol: RJR).
RJR Tobacco Holdings, RJR Tobacco Company and NGH entered into several
agreements governing the relationships among the parties after the distribution
of RJR Tobacco Holdings' shares to NGH stockholders, including certain tax
matters, indemnification rights and obligations and other matters.
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
On April 13, 1999, RJR Tobacco Holdings offered to purchase substantially
all of its outstanding debt securities and sought consents from the holders of
those securities to waive covenants that might have prevented some of the
reorganization transactions described above. These consents were received as of
April 26, 1999. The tender offers were completed on May 18, 1999, which resulted
in RJR Tobacco Holdings repurchasing approximately $4 billion of its debt with a
portion of the proceeds from the sale of the international tobacco business. As
a result, RJR Tobacco Holdings recognized an extraordinary loss from the early
extinguishment of debt of approximately $384 million, $250 million after-tax.
On May 7, 1999, RJR Tobacco Holdings entered into a $1.235 billion floating
rate revolving credit agreement with a syndicate of commercial banks. Under the
revolving credit agreement, RJR Tobacco Holdings had $460 million in letters of
credit and no borrowings outstanding as of September 30, 1999. On May 18, 1999,
RJR Tobacco Holdings completed a private placement offering of $1.25 billion in
debt securities. The net proceeds received were used for general corporate
purposes. RJR Tobacco Company has guaranteed RJR Tobacco Holdings' obligations
under the revolving credit agreement and the debt securities. If RJR Tobacco
Holdings' new senior unsecured debt is rated below BBB- by Standard & Poor's
Ratings Services or Baa3 by Moody's Investors Service, Inc., some of its other
subsidiaries will be required to guarantee the facility. If RJR Tobacco Holdings
falls below these thresholds for both of those rating agencies, RJR Tobacco
Holdings and the guarantors will have to pledge their assets to secure their
obligations. The credit agreement also limits RJR Tobacco Holdings' ability to
pay dividends, repurchase stock, incur indebtedness, engage in transactions with
affiliates, create liens, acquire, sell or dispose of specific assets and engage
in specified mergers or consolidations. On July 16, 1999, RJR Tobacco Holdings
filed a registration statement, that became effective October 8, 1999, in order
to issue publicly registered notes ("Exchange Notes") in exchange for the
private placement notes. The terms of the Exchange Notes are identical to the
terms of the private placement notes, except that the transfer restrictions and
registration rights relating to the private placement notes do not apply to the
Exchange Notes.
In connection with the reorganization, the assets and liabilities of the
retirement plan for employees of RJR Nabisco, Inc. (the "old plan") were split
into two new plans. One new plan covers employees and former employees of RJR
Tobacco Holdings (the "RJR Plan") and the other new plan covers employees and
former employees of Nabisco and NGH.
The split of the assets and liabilities of the old plan was in accordance
with a May 20, 1999 agreement between the Pension Benefit Guaranty Corporation
("PBGC"), RJR Tobacco Company and NGH. Based on this agreement and as required
by Section 414(I) of the Internal Revenue Code, the assets of the old plan were
allocated in proportion to the benefit obligations of each of the respective new
plans. This methodology resulted in a different allocation of old plan assets
than had been reflected in the historical allocation to the tobacco business,
which resulted in an increase in the RJR Plan assets of approximately $155
million and an increase in benefit obligations of approximately $20 million. The
impact of this change, a decrease in the unfunded pension liability of $135
million, will be recognized in net periodic benefit costs over future periods.
As a result, periodic benefit cost for 1999 is expected to decrease by
approximately $7 million.
The PBGC agreement described above also required contributions of $58
million in each of the five years beginning in 1999, as well as contribution of
the RJR Plan's normal cost beginning in 2000 through the end of the agreement.
The normal cost to be contributed in 2000 is expected to be approximately $23
million. The agreement is expected to continue for five years; however, there
are certain circumstances under which it could be extended. The PBGC agreement
also requires a $116 million letter of credit with respect to these
contributions.
In connection with the reorganization, 17,065,066 options held by employees
to purchase NGH common stock were equitably adjusted into 5,456,114 options
covering RJR shares and 18,354,932 options covering NGH shares in a manner
intended to preserve the aggregate benefits under the options.
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
The operating results of the international tobacco business until the date
of sale, May 12, 1999, are segregated and reported as discontinued operations in
the accompanying condensed consolidated financial statements. Nabisco's
operating results through May 18, 1999, the date of the merger transaction, are
segregated and reported as discontinued operations in the accompanying condensed
consolidated financial statements. Prior period financial statements have been
restated to conform to the current year presentation.
Summarized operating results of the discontinued operations were as follows
(dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
----- ------- ------ ------
<S> <C> <C> <C> <C>
Net sales $ - $2,797 $3,827 $8,388
Provision for income taxes (53) 83 34 102
</TABLE>
Assets and liabilities of the discontinued businesses were as follows
(dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Current assets $ 3,357
Property, plant and equipment, net 4,183
Trademarks and goodwill, net 7,710
Other assets and deferred charges 227
Current liabilities (2,685)
Long-term debt (less current maturities) (3,794)
Minority interest in Nabisco (752)
Deferred income taxes (1,195)
Other noncurrent liabilities (1,090)
-------
Net assets of discontinued businesses $ 5,961
=======
</TABLE>
NOTE 3 - INVENTORIES
The major classes of inventories were as follows (dollars in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished products $ 92 $ 94
Leaf tobacco 254 334
Raw materials 25 26
Other 77 75
---- ----
$448 $529
==== ====
</TABLE>
NOTE 4 - CONTINGENCIES
TOBACCO LITIGATION
Overview. Various legal actions, proceedings and claims are pending or may
be instituted against RJR Tobacco Company or its affiliates or indemnitees,
including those claiming that lung cancer and other diseases as well as
addiction have resulted from the use of, or exposure to, RJR Tobacco Company's
tobacco products. During the third quarter of 1999, 32 new actions were served
on RJR Tobacco Company and/or its affiliates or indemnitees, including NGH, as
compared to 81 in the third quarter of 1998, and 91 actions were dismissed or
otherwise resolved in favor of RJR Tobacco Company and/or its affiliates or
indemnitees without trial. On September 30, 1999, there were 561 active cases
pending, as compared with
10
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
614 on September 30, 1998 and 483 on September 30, 1997. As of October 27, 1999,
559 active cases were pending against RJR Tobacco Company and/or its affiliates
or indemnitees: 554 in the United States; 3 in Canada; and 1 in each of the
Marshall Islands and Puerto Rico.
The U.S. cases are pending in 41 states and the District of Columbia. The
breakdown is as follows: 110 in New York; 109 in West Virginia; 41 in
Massachusetts; 39 in Florida; 34 in California; 25 in Louisiana; 23 in Texas; 16
in the District of Columbia; 15 in Pennsylvania; 13 in Alabama; 12 in Tennessee;
9 in each of Illinois, Mississippi and New Jersey; 8 in Iowa; 6 in each of
Missouri, New Mexico, Nevada and Ohio; 4 in each of Arkansas, Arizona, Georgia,
Indiana, Maryland and Minnesota; 3 in each of Colorado, Oklahoma, Washington and
Wisconsin; 2 in each of Hawaii, Michigan, North Carolina, North Dakota, New
Hampshire, Rhode Island, South Carolina, South Dakota and Utah; and 1 in each of
Connecticut, Kansas, Kentucky and Oregon. Of the 554 active cases in the United
States, 148 are pending in federal court, 400 in state court, and 6 in tribal
court. Most of these cases were brought by individual plaintiffs, but a
significant number, discussed below, seek recovery on behalf of third parties or
large classes of claimants.
Theories Of Recovery. The plaintiffs in these actions seek recovery
pursuant to 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 Organizations Act ("RICO"),
indemnity, medical monitoring and common law public nuisance. In a number of
cases, plaintiffs specifically plead punitive damages, often in amounts ranging
into the hundreds of millions or even billions of dollars, in addition to
compensatory and other damages. Six of the 554 active cases in the United States
involve alleged non-smokers claiming injuries purportedly resulting from
exposure to environmental tobacco smoke. Forty-nine 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, persons making claims based
on alleged exposure to environmental tobacco smoke, purchasers of cigarettes
claiming to have been defrauded and seeking to recover their costs, and Blue
Cross and Blue Shield subscribers seeking reimbursement for premiums paid.
Approximately 78 of the active cases seek, among other things, recovery of
health-related costs paid for treatment of individuals suffering from diseases
or conditions allegedly related to tobacco use. Eight, brought by entities
administering asbestos liability, seek contribution for alleged overpayments in
settlements and judgments, to the extent tobacco use, not asbestos exposure,
allegedly was the cause of the personal injuries at issue.
Defenses. The defenses raised by RJR Tobacco Company 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 of any
defect in the product; assumption of the risk; contributory or comparative
fault; lack of proximate cause; statutes of limitations or repose; and, when
applicable, additional statutory, equitable, constitutional and other defenses.
RJR Tobacco Holdings has asserted additional defenses, including jurisdictional
defenses, in many of the cases in which it is named.
Industry Trial Results. Juries have found for plaintiffs in nine smoking
and health cases in which RJR Tobacco Company was not a defendant, although, to
date, no damages have been paid and most of the verdicts have been overturned on
appeal. Most recently, on November 1, 1999, the Florida Supreme Court heard the
plaintiff's appeal in Carter v. Brown & Williamson Tobacco Corp., a case in
which a Florida Appeal Court had reversed a jury's 1996 verdict in favor of the
plaintiff in the amount of $750,000. In another Florida case, Widdick v. Brown &
Williamson Tobacco Corp., a Florida Court of Appeal on January 29, 1999,
reversed a jury verdict in favor of the plaintiff in the amount of approximately
$1 million in compensatory and punitive damages and ordered a new trial in a
different location (Palm Beach County). On February 9-10, 1999, in Henley v.
Philip Morris, Inc., a San Francisco state court jury awarded an individual
smoker $1.5 million in compensatory damages and $50 million in punitive damages.
Philip Morris moved to have this verdict set aside or reduced. On April 16,
1999, the trial judge reduced
11
<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
the punitive damages award to $25 million, but otherwise denied Philip Morris'
motions. Philip Morris is appealing the verdict. On March 30, 1999, in Williams
v. Philip Morris, Inc., an Oregon state court jury returned a verdict against
Philip Morris in the amount of $1.5 million in compensatory damages and $79
million in punitive damages. Although the judge in this case has reduced the
punitive damages to $32 million, Philip Morris is appealing this verdict as
well. The most recent verdict in a non-RJR Tobacco Company individual case was
announced on May 13, 1999. In that case, Steele v. Brown & Williamson Tobacco
Corp., a jury in Missouri federal court found that Brown & Williamson was not
liable for the death of the plaintiff.
RJR Tobacco Company ultimately has prevailed in every case that has gone to
trial. In this quarter, on July 9, 1999, a Louisiana state court jury found in
favor of RJR Tobacco Company and Brown & Williamson, as successor to American
Tobacco Company, in an individual smoker case, Gilboy v. American Tobacco Co.
Class-Action Suits. In May 1996, in an early class action case, Castano v.
American Tobacco Co., 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 against RJR Tobacco Company, and in some cases RJR
Tobacco Holdings, in state and, in a few instances, federal courts in Alabama,
Arkansas, California, the District of Columbia (D.C. court), Florida, Hawaii,
Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, New Mexico, Nevada, New Jersey, New York, North Carolina,
Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia,
and West Virginia. In addition, a putative class action filed in Tennessee seeks
reimbursement of Blue Cross and Blue Shield premiums paid by subscribers
throughout the United States, and a purported class action suit against RJR
Tobacco Company in New Jersey claims that the marketing of "lights" and
"ultralight" cigarettes is deceptive. Plaintiffs have made similar claims in
other lawsuits elsewhere. Other types of class-action suits also have been filed
in additional jurisdictions, including a putative class action suit pending in
Canada. Most of these suits assert claims on behalf of classes of individuals
who claim to be addicted, injured, or at greater risk of injury by the use of
tobacco or exposure to environmental tobacco smoke, or are the legal survivors
of those persons.
Few class action complaints have been certified, or if certified, have
survived on appeal. On May 17, 1999, the U.S. Supreme Court declined review of a
circuit court decision upholding the denial of class certification in a
Pennsylvania medical monitoring case, Barnes v. American Tobacco Co. On April
12, 1999, in Chamberlain v. American Tobacco Co., a federal district court in
Ohio refused to certify a class of "nicotine-dependent" Ohio residents. On April
13, 1999, in Avallone v. American Tobacco Co., a state court judge in New Jersey
refused to certify a purported class of casino workers exposed to environmental
tobacco smoke. On June 21, 1999, in Geiger v. American Tobacco Co., a New York
State court refused to certify a class of New York State residents who were
alleged to have contracted lung and throat cancer as a result of cigarette
smoking. On June 29, 1999, in Clay v. American Tobacco Co., a federal district
court in Illinois refused to certify a class of persons in 46 states who, "as
children, purchased and smoked cigarettes designed, manufactured, promoted or
sold by the defendants". On July 21, 1999, in Hansen v. American Tobacco Co., a
federal district court in Arkansas refused to certify an Arkansas state-wide
class consisting of smokers claiming to have tobacco-related disease. On July
23, 1999, in Reed v. Philip Morris, Inc., a District of Columbia superior court
judge entered an opinion and order refusing to certify as a class residents of
the District of Columbia claiming to have tobacco-related disease. On September
21, 1999, a federal district court judge in Pennsylvania dismissed the Brown v.
Philip Morris, Inc. complaint. This potential class action alleged, among other
things, violations of plaintiffs' civil rights in the marketing and sale of
menthol cigarettes. Finally, on October 26, 1999, the New York Court of Appeals
affirmed a ruling by a lower court decertifying five smoker class actions,
including Hoskins v. R. J. Reynolds Tobacco Co., and dismissing each case.
12
<PAGE> 13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
Class certification was granted in 1998 by a Maryland state court in
Richardson v. Philip Morris, Inc. The Maryland Court of Appeals is reviewing
that decision. In addition, on November 5, 1998, a Louisiana state appeals court
affirmed the certification of a medical monitoring and/or smoking cessation
class of Louisiana residents who were smokers on or before May 24, 1996 (Scott
v. American Tobacco Co.). On February 26, 1999, the Louisiana Supreme Court
denied the defendants' petition for writ of certiorari and/or review. Finally,
defendants settled another class-action suit, Broin v. Philip Morris, Inc., in
October, 1997. The Florida Court of Appeal denied challenges to this settlement
on March 24, 1999, and subsequently denied motions to reconsider. On September
7, 1999, the Florida Supreme Court dismissed all proceedings, and the settlement
and judgment became final.
Trial continues in Engle v. R.J. Reynolds Tobacco Co., in which a class
consisting of Florida residents or their survivors who claim to have diseases or
medical conditions caused by their alleged "addiction" to cigarettes has been
certified. The trial is divided into three phases. On July 7, 1999, the jury
found against RJR Tobacco Company and the other cigarette manufacturer
defendants in the initial phase, which included common issues related to certain
elements of liability, general causation and a potential award of or entitlement
to punitive damages. The second phase of the trial, which currently consists of
the claims of two of the named class representatives, began on November 1, 1999.
In addition, the trial court has ordered that the jury shall determine punitive
damages, if any, on a class-wide basis if there is a finding of liability in
either of the two cases being tried in phase two. RJR Tobacco Company and
certain other defendants appealed this order to the Florida Third District Court
of Appeal, which left the order intact. On October 29, 1999, RJR Tobacco Company
and certain other defendants filed a petition asking the Florida Supreme Court
to review the appropriateness of determining punitive damages on a class-wide
basis. On November 3, 1999, the Florida Supreme Court agreed to address the
issue and asked for further briefing by the parties. The third phase will
address all other class members' claims in individual trials before separate
juries.
Compensatory damages, if any, would not have to be paid to any plaintiff
until the end of his or her trial and the appellate process. As currently
structured, punitive damages, if any, will not be awarded to any individual
plaintiff until the completion of both the second and third phases of Engle. RJR
Tobacco Company does not believe it would be necessary to post bond to stay
execution of any judgment awarding punitive damages until a judgment is entered
awarding punitive damages to an individual plaintiff. However, in a worst case
scenario, at the end of the second phase, the court could enter a judgment for
punitive damages on behalf of the entire class in an amount not capable of being
bonded, resulting in the possible execution of the judgment before it could be
reviewed on appeal. RJR Tobacco Company believes that the entry of a judgement
for punitive damages on behalf of the entire class would be contrary to U.S. and
Florida law and will take all appropriate actions to prevent this scenario from
occurring.
Health-Care Cost Recovery Cases. On September 22, 1999, the U.S. Department
of Justice brought an action in the United States District Court for the
District of Columbia against various industry members, including RJR Tobacco
Company. The government seeks to recover federal funds expended in providing
health care to smokers who have developed diseases and injuries alleged to be
smoking-related and, in addition, seeks, pursuant to the federal RICO statute,
disgorgement of profits the government contends were earned as a consequence of
a RICO racketeering "enterprise." An unfavorable resolution of this action could
have a significant adverse effect on the financial condition of RJR Tobacco
Holdings and RJR Tobacco Company.
In June 1994, the Mississippi attorney general brought an action, Moore v.
American Tobacco Co., against various industry members, including RJR Tobacco
Company. This case was brought on behalf of the State to recover state funds
paid for healthcare and medical and other assistance to state citizens suffering
from diseases and conditions allegedly related to tobacco use. By making the
State the plaintiff in the case and basing its claims on economic loss rather
than personal injury, the State sought to avoid the defenses otherwise available
against an individual plaintiff. Following the filing of the Moore case, most
other states, through their attorneys general and/or other state agencies, sued
RJR Tobacco Company and
13
<PAGE> 14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
other U.S. cigarette manufacturers based on similar theories. The cigarette
manufacturer defendants, including RJR Tobacco Company, settled the first four
of these cases scheduled to come to trial, those of Mississippi, Florida, Texas
and Minnesota, by separate agreements between the state and those manufacturers
in each case.
On November 23, 1998, the major U.S. cigarette manufacturers, including RJR
Tobacco Company, entered into the Master Settlement Agreement with attorneys
general representing the remaining 46 states, the District of Columbia, Puerto
Rico, Guam, the Virgin Islands, American Samoa and the Northern Marianas. The
Master Settlement Agreement settles all the health-care cost recovery actions
brought by the settling jurisdictions and contains releases of various
additional present and future claims.
In each state where final approval has been obtained, the Master Settlement
Agreement will release RJR Tobacco Company and several of its indemnitees and
RJR Tobacco Holdings and NGH from: (1) all claims of the settling states, and
their respective political subdivisions and other recipients of state
health-care funds, relating to past conduct arising out of the use, sale,
distribution, manufacture, development, advertising, marketing or health effects
of, the exposure to, or research, statements or warnings about, tobacco
products; and (2) all monetary claims relating to future conduct arising out of
the use of, or exposure to, tobacco products that have been manufactured in the
ordinary course of business.
The Master Settlement Agreement is scheduled to become effective on the
earlier of June 30, 2000 or the date on which final approval of the settlement
has been obtained in courts of 80% of the settling states, both by number and
percentage share of the settlement payments due. As of October 27, 1999, final
approval was obtained in the requisite number, 42, of settling states, but those
states' percentage shares comprise 79.7%, rather than the necessary 80%, of the
payments due.
Payments for all tobacco litigation settlement agreements currently in
effect, including the Master Settlement Agreement and four individual state
settlements, will be approximately $1.6 billion in 1999 to be funded through
price increases. RJR Tobacco Company estimates payments in future years to
exceed $2 billion per year, but these payments will be subject to adjustments
based upon, among other things, the volume of cigarettes sold by RJR Tobacco
Company, RJR Tobacco Company's market share and inflation.
On April 20, 1999, the Canadian Province of British Columbia brought a
case, similar to the U.S. attorney-general cases, against RJR Tobacco Company
and other Canadian and U.S. tobacco companies and their parent companies,
including RJR Tobacco Holdings, in British Columbia Provincial Court. This
lawsuit relies heavily upon recently enacted legislation in British Columbia
which is being separately challenged by Canadian tobacco companies. An agreement
was reached with the government in British Columbia to litigate the separate
constitutional challenges prior to the health-care recovery action. On October
22, 1999, a hearing was held on the constitutional challenges, and a decision is
anticipated by the end of 1999.
Union Cases. Although the Master Settlement Agreement settled some of the
most potentially burdensome health-care cost recovery actions, many other such
cases have been brought by other types of plaintiffs. As of October 27, 1999
approximately 42 lawsuits by union trust funds against cigarette manufacturers
and others are pending. The funds seek recovery of payments made by them for
medical expenses of their participants' union members and their dependents
allegedly injured by cigarettes. The claims in these cases are almost identical,
and more than 30 of the cases purport to be class actions on behalf of all union
trust funds in a particular state.
The defendants in these actions argue, among other things, the settled law
that one who pays an injured person's medical expenses is legally too remote to
maintain an action against the person allegedly responsible for the injury. In
addition, they argue that the traditional subrogation remedy cannot be
supplanted by a direct right of action for the trust fund that strips defendants
of the defenses they would ordinarily have against the allegedly injured
individual.
14
<PAGE> 15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
In the first of these cases to be considered by a federal court of appeals,
on March 29, 1999, the Third Circuit Court of Appeals affirmed a district court
ruling dismissing a case, Steamfitters Local Union 420 v. Philip Morris, Inc. on
remoteness grounds. On September 27, 1999, the plaintiffs in this case filed a
petition for writ of certiorari with the United States Supreme Court. On April
9, 1999, the Second Circuit handed down its decision in Laborers Local 17 v.
Philip Morris, Inc., reversing a district court's decision and remanding the
case for dismissal, again on remoteness grounds. On July 14, 1999, the U.S.
Court of Appeals for the Ninth Circuit affirmed the district court's dismissal
in Oregon Laborers v. Philip Morris, Inc. on remoteness and standing grounds.
Numerous trial court judges also have dismissed these cases on remoteness
grounds, including, on July 22, 1999, a federal district court in Washington in
Northwest Laborers-Employees Health & Security Trust Fund v. Philip Morris,
Inc., and, on September 28, 1999, an Arkansas district court in Arkansas
Carpenters Health & Welfare Fund v. Philip Morris, Inc. Nonetheless, some union
(or other third party payor) cases have survived motions to dismiss and may
proceed to trial. Most recently, on August 2, 1999, a federal district court in
New York denied defendants' motions to dismiss in two separate cases heard
together -- National Asbestos Workers Medical Fund v. Philip Morris, Inc. and
Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris, Inc.
The first union case to survive motions to dismiss and go to trial was Iron
Workers Local No. 17 v. Philip Morris, Inc. This case, in which a class of
approximately 111 union trust funds was certified by a federal district court in
Ohio, went to trial on February 22, 1999 on the counts that survived motions to
dismiss: state and federal RICO claims and civil conspiracy claims. The federal
RICO claim was dismissed during the trial, and after the conclusion of
plaintiffs' case, the court directed a verdict dismissing RJR Tobacco Holdings
and NGH from the case. On March 18, 1999, the jury in this case returned a
unanimous verdict for the defendants, including RJR Tobacco Company, on all
remaining counts. On May 11, 1999, the trial court judge denied plaintiffs'
motion for a new trial. Plaintiffs appealed this ruling to the Sixth Circuit
Court of Appeals. However, on October 4, 1999, plaintiffs withdrew their appeal
and voluntarily dismissed their case.
Other Health-Care Cost Recovery and Aggregated Claims Plaintiffs. Native
American tribes have filed similar cases, six in tribal courts and one class
action in San Diego Superior Court. Five groups of health-care insurers, as well
as a private entity that purported to self insure its employee health-care
programs, also have advanced claims similar to those found in the union
health-care cost recovery actions. Two of these "insurer" cases, Williams &
Drake v. American Tobacco Co. and Regence Blueshield v. Philip Morris, Inc.,
were dismissed in their entirety on remoteness grounds by federal district
courts in Pennsylvania and Washington. These cases are on appeal in the Third
and Ninth Circuits, respectively. In a third case, Group Health Plan, Inc. v.
Philip Morris, Inc., a federal district judge in Minnesota, on April 29, 1999,
dismissed all claims, except a state antitrust claim and a conspiracy claim.
Other cost recovery suits have been brought by, among others, foreign
countries, local governmental jurisdictions, taxpayers (on behalf of a
governmental jurisdiction), a university and a hospital. Most recently, on
November 4, 1999, in Allegheny General Hospital v. Philip Morris, Inc., the U.S.
District Court for the Western District of Pennsylvania dismissed a third-party
payor lawsuit filed against the tobacco industry by a number of hospital and
health-care facilities.
Finally, eight actions have been filed against RJR Tobacco Company by
asbestos companies and/or asbestos-related trust funds based on the theory that
the plaintiffs "overpaid" claims brought against them to the extent that tobacco
use, not asbestos exposure, was the cause of the alleged personal injuries for
which they paid compensation. One of those cases, Falise v. American Tobacco
Co., was dismissed on November 2, 1999, due to a lack of subject matter
jurisdiction by the United States District Court for the Eastern District of New
York.
Recent and Scheduled Trials. As of October 27, 1999, there was one case
scheduled for trial before year end 1999 against RJR Tobacco Company alleging
injuries relating to tobacco. In addition, the Engle
15
<PAGE> 16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
case in Florida is currently in progress. Additional cases against other tobacco
company defendants are also scheduled for trial before year end 1999. Cases
against RJR Tobacco Company, as well as other tobacco company defendants, are
scheduled for trial in 2000. 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, some involving claims for possibly billions
of dollars, against RJR Tobacco Company and RJR Tobacco Holdings coming to trial
over the next year.
Other Developments. On April 9, 1999, a class action complaint, A.D. Bedell
Wholesale Co. v. Philip Morris, Inc., was filed on behalf of cigarette
wholesalers and distributors against RJR Tobacco Company, Philip Morris and
Brown & Williamson in the U.S. District Court for the District of Pennsylvania
alleging violations of the federal antitrust laws based, in large part, on the
Master Settlement Agreement.
RJR Tobacco Company is aware of grand jury investigations being conducted
in New York, North Carolina and Pennsylvania that relate to the cigarette
business. In that connection, RJR Tobacco Company received a document subpoena,
dated September 17, 1998, from a federal grand jury convened in the Eastern
District of Pennsylvania by the Antitrust Division of the Department of Justice.
RJR Tobacco Company understands that the grand jury is investigating possible
violations of the antitrust laws related to tobacco leaf buying practices. RJR
Tobacco Company has responded to that subpoena. RJR Tobacco Company has also
responded to document subpoenas dated February 5 and March 10, 1999, arising
from a grand jury investigation being conducted in the Western District of New
York into the actions of some cigarette retailers and a distributor. RJR Tobacco
Company is responding to a document subpoena dated July 7, 1999, arising from a
grand jury investigation being conducted in the Eastern District of North
Carolina regarding the export sales practices related to RJR Tobacco Company's
former international tobacco business. By letter dated September 30, 1999, RJR
Tobacco Company was informed by the U.S. Department of Justice that the criminal
investigation of the company by the Department and a grand jury sitting in the
District of Columbia is now completed and closed.
On December 22, 1998, Northern Brands International, Inc. ("Northern
Brands"), a now inactive tobacco subsidiary that was part of the business of
R.J. Reynolds International B.V. ("Reynolds International"), a former
Netherlands subsidiary of RJR Tobacco Company recently sold to Japan Tobacco,
Inc. on May 12, 1999, entered into a plea agreement with the United States
Attorney for the Northern District of New York. Northern Brands was charged with
aiding and abetting certain customers who brought merchandise into the United
States "by means of false and fraudulent practices...." RJR-MacDonald, Inc.,
Reynolds International's operating company in Canada, is cooperating with an
investigation now being conducted by the Royal Canadian Mounted Police relating
to the same events that gave rise to the Northern Brands investigation.
Management cannot predict whether any other authorities in the United States or
Canada will seek to take further actions with regard to these events. Although
the international tobacco business was sold, RJR Tobacco Company retained
certain liabilities relating to events disclosed above.
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 RJR Tobacco Company or its affiliates, including RJR Tobacco Holdings,
or indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if those
rulings are not final, could adversely affect the litigation against RJR Tobacco
Company or its affiliates or indemnitees and could encourage an increase in the
number of those 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 Master Settlement
Agreement referred to above. These developments may negatively affect the
outcomes of tobacco-related legal actions and encourage the institution of
additional similar litigation.
Although it is impossible to predict the outcome of these events on pending
litigation and the rate at which new lawsuits are filed against RJR Tobacco
Company and RJR Tobacco Holdings, a significant
16
<PAGE> 17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
increase in litigation and/or in adverse outcomes for tobacco defendants could
have an adverse effect on any one or all of these entities. RJR Tobacco Company
and RJR Tobacco Holdings each believes that it has a number of valid defenses to
any of those actions and intends to defend those actions vigorously.
RJR Tobacco Holdings believes that, notwithstanding the quality of defenses
available to it and RJR Tobacco Company in litigation matters, it is possible
that the results of operations or cash flows of RJR Tobacco Holdings in
particular quarterly or annual periods or RJR Tobacco Holdings' financial
condition could be materially affected by the ultimate outcome of pending
litigation matters, including bonding and 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 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the nine months ended September 30,
1999 are as follows (dollars in millions):
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
EARNINGS OTHER OTHER TOTAL
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS' STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL DEFICIT) INCOME (LOSS) EQUITY EQUITY INCOME
------ ------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 1 $10,861 $ (516) $(460) $ - $ 9,886
Net income - - 2,349 - - 2,349 $2,349
Currency translation
adjustment - - - (88) - (88) (88)
------
Total comprehensive income $2,261
======
Dividends declared - (85) - - - (85)
Items related to
international tobacco
business (see Note 2) - - - 218 - 218
Merger transaction* - (3,435) (1,958) 322 - (5,071)
Exercise of stock options - 4 - - - 4
Restricted stock award - 23 - - (32) (9)
Restricted stock
amortization - - - - 5 5
Other - 1 - - - 1
--- ------- ------- ----- ---- -------
Balance at September 30,
1999 $ 1 $ 7,369 $ (125) $ (8) $(27) $ 7,210
=== ======= ======= ===== ==== =======
</TABLE>
- ---------------------
* Transfer of RJR Tobacco Holdings' 80.5% interest in Nabisco, together with a
portion of the proceeds from the sale of the international tobacco business,
to NGH (see Note 2).
NOTE 6 - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
RJR Tobacco Holdings has not presented separate financial statements and
other disclosures concerning RJR Tobacco Company because management has
determined that such information is not material to holders of the Exchange
Notes. RJR Tobacco Company is a wholly-owned subsidiary of RJR Tobacco Holdings,
and has fully and unconditionally guaranteed the Exchange Notes.
The following condensed consolidating financial statements of RJR Tobacco
Holdings include the accounts and activities of RJR Tobacco Holdings, the issuer
of the Exchange Notes, RJR Tobacco Company, the guarantor of the Exchange Notes,
and the subsidiaries of RJR Tobacco Holdings and RJR Tobacco Company that are
not guarantors of the Exchange Notes and elimination adjustments.
17
<PAGE> 18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1999
Net sales $ - $1,974 $ 17 $ - $1,991
Cost of products sold - 839 3 - 842
Selling, advertising, administrative and
general expenses 4 868 (76) - 796
Amortization of trademarks and goodwill - 65 26 - 91
Interest and debt expense 43 - - - 43
Other expense, net 5 81 (83) - 3
------ ------ ------ ------- ------
INCOME (LOSS) BEFORE INCOME TAXES (52) 121 147 - 216
Provision for income taxes - 48 72 - 120
Equity income from subsidiaries from continuing
operations 148 75 - (223) -
------ ------ ------ ------- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 96 148 75 (223) 96
Income (loss) from discontinued operations 68 (386) 97 - (221)
Equity income (loss) from subsidiaries from
discontinued operations (289) 97 - 192 -
------ ------ ------ ------- ------
NET INCOME (LOSS) $ (125) $ (141) $ 172 $ (31) $ (125)
====== ====== ====== ======= ======
QUARTER ENDED SEPTEMBER 30, 1998
Net sales $ - $1,519 $ 12 $ - $1,531
Cost of products sold - 346 (1) - 345
Selling, advertising, administrative and
general expenses 20 805 (55) - 770
Amortization of trademarks and goodwill - 65 26 - 91
Interest and debt expense 105 - - - 105
Other expense, net (229) 218 7 - (4)
------ ------ ------ ------- ------
INCOME BEFORE INCOME TAXES 104 85 35 - 224
Provision for income taxes 7 75 21 - 103
Equity income (loss) from subsidiaries from
continuing operations 24 14 - (38) -
------ ------ ------ ------- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 121 24 14 (38) 121
Income from discontinued operations - - 49 - 49
Equity income (loss) from subsidiaries from
discontinued operations 49 5 - (54) -
------ ------ ------ ------- ------
NET INCOME (LOSS) $ 170 $ 29 $ 63 $ (92) $ 170
====== ====== ====== ======= ======
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net sales $ - $5,550 $ 41 $ - $5,591
Cost of products sold - 2,430 5 - 2,435
Selling, advertising, administrative and
general expenses 43 2,393 (214) - 2,222
Amortization of trademarks and goodwill - 195 79 - 274
Headquarters close-down and related charges 143 - - - 143
Interest and debt expense 225 - - - 225
Other expense, net (377) 502 (114) - 11
------ ------ ------ ------- ------
INCOME (LOSS) BEFORE INCOME TAXES (34) 30 285 - 281
Provision for income taxes 14 71 109 - 194
Equity income from subsidiaries from continuing
operations 135 176 - (311) -
------ ------ ------ ------- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 87 135 176 (311) 87
Income (loss) from discontinued operations (509) 1,166 1,855 - 2,512
Equity income from subsidiaries from
discontinued operations 3,021 1,855 - (4,876) -
------ ------ ------ ------- ------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM 2,599 3,156 2,031 (5,187) 2,599
Extraordinary item - loss on early
extinguishment of debt, net of income taxes (250) - - - (250)
------ ------ ------ ------- ------
NET INCOME (LOSS) $2,349 $3,156 $2,031 $(5,187) $2,349
====== ====== ====== ======= ======
</TABLE>
18
<PAGE> 19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net sales $ - $4,141 $ 38 $ - $4,179
Cost of products sold - 1,004 6 - 1,010
Selling, advertising, administrative and
general expenses 61 2,142 (182) - 2,021
Tobacco settlement and related expenses - 457 - - 457
Amortization of trademarks and goodwill - 195 79 - 274
Interest and debt expense 321 - - - 321
Other expense, net (687) 650 63 - 26
----- ------ ----- ----- ------
INCOME (LOSS) BEFORE INCOME TAXES 305 (307) 72 - 70
Provision for (benefit from) income taxes 78 1 25 - 104
Equity income (loss) from subsidiaries from
continuing operations (261) 47 - 214 -
----- ------ ----- ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS (34) (261) 47 214 (34)
Income from discontinued operations - - 82 - 82
Equity income from subsidiaries from
discontinued operations 82 155 - (237) -
----- ------ ----- ----- ------
NET INCOME (LOSS) $ 48 $ (106) $ 129 $ (23) $ 48
===== ====== ===== ===== ======
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- --------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Cash flows from (used in) operating activities $ (42) $ (273) $ 343 $ - $ 28
Cash flows from (used in) investing
activities: -
Net proceeds from the sale of the
international tobacco business (35) 2,611 5,184 - 7,760
Other, net - (30) (24) - (54)
------- ------ ------- ---- -------
Net cash flows from (used in) investing
activities (35) 2,581 5,160 - 7,706
Cash flows from (used in) financing
activities:
Proceeds from issuance of long-term debt 1,244 - - - 1,244
Repayments of long-term debt (4,450) - - - (4,450)
Transfer and payments to former parent (1,968) - - - (1,968)
Intercompany transfer 5,281 (295) (4,986) - -
Other, net (57) - - - (57)
------- ------ ------- ---- -------
Net cash flows from (used in) financing
activities 50 (295) (4,986) - (5,231)
------- ------ ------- ---- -------
Net change in cash and cash equivalents (27) 2,013 517 - 2,503
Cash and cash equivalents at beginning of
period 40 (40) - - -
------- ------ ------- ---- -------
Cash and cash equivalents at end of period $ 13 $1,973 $ 517 $ - $ 2,503
======= ====== ======= ==== =======
NINE MONTHS ENDED SEPTEMBER 30, 1998
Cash flows from operating activities $ 359 $ 290 $ 122 $ - $ 771
Cash flows used in investing activities - (28) - - (28)
Cash flows used in financing activities: - -
Repayments of long-term debt, net (68) - - - (68)
Dividends paid to NGH (307) - - - (307)
Other, net 122 (243) (122) - (243)
------- ------ ------- ---- -------
Net cash flows used in financing
activities (253) (243) (122) - (618)
------- ------ ------- ---- -------
Net change in cash and cash equivalents 106 19 - - 125
Cash and cash equivalents at beginning of
period 140 (55) - - 85
------- ------ ------- ---- -------
Cash and cash equivalents at end of period $ 246 $ (36) $ - $ - $ 210
======= ====== ======= ==== =======
</TABLE>
19
<PAGE> 20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------- --------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1999
ASSETS
Cash and cash equivalents $ 13 $ 1,973 $ 517 $ - $ 2,503
Other current assets 18 590 366 - 974
Trademarks, net - - 3,097 - 3,097
Goodwill, net - 7,639 - - 7,639
Other noncurrent assets 10,178 8,082 8,416 (25,386) 1,290
------- ------- ------- -------- -------
Total assets $10,209 $18,284 $12,396 $(25,386) $15,503
======= ======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 212 $ 2,560 $ 999 $ - $ 3,771
Noncurrent liabilities 2,787 5,198 1,134 (4,597) 4,522
Stockholders' equity 7,210 10,526 10,263 (20,789) 7,210
------- ------- ------- -------- -------
Total liabilities and stockholders'
equity $10,209 $18,284 $12,396 $(25,386) $15,503
======= ======= ======= ======== =======
DECEMBER 31, 1998
ASSETS
Net assets of discontinued businesses $ - $ - $ 5,961 $ - $ 5,961
Other current assets 6,476 3,397 - (8,749) 1,124
Trademarks, net - - 3,176 - 3,176
Goodwill, net 6 7,823 - - 7,829
Other noncurrent assets 9,400 1,228 (2,063) (7,254) 1,311
------- ------- ------- -------- -------
Total assets $15,882 $12,448 $ 7,074 $(16,003) $19,401
======= ======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 564 $ 1,256 $ - $ - $ 1,820
Noncurrent liabilities 5,432 11,402 1,111 (10,250) 7,695
Stockholders' equity 9,886 (210) 5,963 (5,753) 9,886
------- ------- ------- -------- -------
Total liabilities and stockholders'
equity $15,882 $12,448 $ 7,074 $(16,003) $19,401
======= ======= ======= ======== =======
</TABLE>
NOTE 7 - SUBSEQUENT EVENT
On November 2, 1999, the Board of Directors of RJR Tobacco Holdings
authorized the repurchase of shares of its common stock, par value of $.01 per
share, from time to time in the open market, with an aggregate cost to RJR
Tobacco Holdings of up to $125 million. The stock repurchases will be funded by
cash flows from operating and financing activities. The timing of repurchases
and the number of shares ultimately repurchased will depend upon market
conditions. As of November 10, 1999, RJR Tobacco Holdings had repurchased
110,700 shares of its common stock, with an aggregate cost of approximately $2.4
million.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJR Tobacco Holdings. It should be read
in conjunction with the financial information included in the Condensed
Consolidated Financial Statements.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- PERCENTAGE --------------- PERCENTAGE
1999 1998 CHANGE 1999 1998 CHANGE
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,991 $1,531 30.0% $5,591 $4,179 33.8%
Cost of products sold(1) 842 345 144.1 2,435 1,010 141.1
Selling, advertising, administrative and
general expenses 796 770 3.4 2,222 2,021 9.9
Tobacco settlement and related expenses(1) 40 - n/a 40 457 (91.2)
------ ------ ------ ------
Operating company contribution 313 416 (24.8) 894 691 14.0
Amortization of trademarks and goodwill 91 91 - 274 274 -
Restructuring expense (2) - n/a (2) - n/a
Headquarters close-down and related charges - - n/a 143 - n/a
------ ------ ------ ------
Operating income $ 224 $ 325 (31.1) $ 479 $ 417 14.9
====== ====== ====== ======
</TABLE>
- ---------------------
(1) $564 million and $38 million of ongoing settlement expense was recorded in
cost of products sold in the third quarter of 1999 and 1998, respectively,
and $1.6 billion and $113 million was recorded during the nine months ended
September 30, 1999 and 1998, respectively. Tobacco settlement and related
expenses include only initial, up-front tobacco settlement and other related
expenses.
Net sales. Net sales of $2.0 billion and $5.6 billion for the three and
nine months ended September 30, 1999 increased 30% and 33.8%, respectively, from
the comparable prior year periods. The increase in both comparative periods was
driven by price increases in the latter half of 1998 and in the third quarter of
1999, primarily in response to increased settlement costs. This favorable
pricing variance of $625 million for the third quarter and $1.9 billion for the
nine-month period was partly offset by lower volumes, $176 million for the third
quarter and $511 million for the nine-month period.
These recent price increases, in response to litigation settlements, have
adversely impacted the shipment volume of RJR Tobacco Company, and the industry
in general. RJR Tobacco Company's shipment volume during the third quarter of
1999 of 25.5 billion units, excluding Puerto Rico volume of approximately 400
million units, declined 11.6% from the prior year quarter, while industry volume
declined 9.3%. Volume, excluding Puerto Rico shipments, declined 12.8% during
the first nine months of 1999 versus the prior year period, while industry
volume declined 9.8%. RJR Tobacco Company's full-price shipments represented
63.2% and 63.8% of total shipments in the third quarters of 1999 and 1998,
respectively, and 62.4% and 62.7% in the nine months ended September 30, 1999
and 1998, respectively. Industry-wide full-price shipments represented 73.2% and
73.9% of total shipments in the third quarters of 1999 and 1998, respectively,
and 73.4% and 73.3% for the first nine months of 1999 and 1998, respectively.
Compared to the third quarter of 1998, the 1999 third quarter shipment
volume for CAMEL, excluding the non-filter style, was down 4.2%, but
outperformed the industry full-price decline of 10.2%. CAMEL shipment volume was
down 7.7% for the nine months of 1999 versus the 1998 period, while the industry
full-price decline was 9.6%. Shipments of the WINSTON styles supported by the
"No Bull" repositioning declined 17.6% and 14.6% during the three- and
nine-month periods ended September 30, 1999, respectively, from the prior year
periods. WINSTON's performance has been impacted by the unprecedented
settlement-related price increases and the price sensitivity among its franchise
smokers. Consequently, new programs are under development to enhance the loyalty
among WINSTON's adult
21
<PAGE> 22
smokers. SALEM shipments were down 11.1% and 13% for the three- and nine-month
periods ended September 30, 1999, respectively, compared to the prior year
periods. Volume for DORAL, the industry's leading savings brand, was down 11.6%
from the third quarter of 1998, and down 13.5% in the first nine months of 1999.
DORAL's performance reflected the savings industry decline of 10.3% during 1999,
and was also impacted by increased activity from competitive deep discount
brands in 1999.
RJR Tobacco Company's overall retail share of market for the third quarter
of 1999 decreased to 24.05% from 24.96% in the third quarter of 1998, and was
relatively stable from its 24.08% share in the second quarter of 1999. RJR
Tobacco Company's full-price share decreased to 15.29% during the third quarter
of 1999, from 16.15% in the prior year quarter, but increased from 15.17% in the
second quarter of 1999. The third quarter strength is primarily attributable to
WINSTON and CAMEL, two of RJR Tobacco Company's full-price investment brands.
RJR Tobacco Company continues to introduce new initiatives for its investment
brands, such as CAMEL's new "Pleasure to Burn" campaign launched in October
1999. RJR Tobacco Company's SALEM brand, the other full-price investment brand,
has consistently maintained its share during the last six months. RJR Tobacco
Company's savings share of market declined slightly to 8.76% from 8.80% in the
prior year quarter. For the first nine months of 1999, RJR Tobacco Company's
retail share of market decreased to 24.18% compared to 25.24% in 1998. Its full-
price share decreased to 15.33% for the first nine months of 1999 compared to
16.34% in 1998, while its savings share declined slightly to 8.85% from 8.89%.
Cost of products sold. Cost of products sold of $842 million in the third
quarter of 1999 increased $497 million from the third quarter of 1998, primarily
due to an increase of $526 million in ongoing settlement costs. Cost of products
sold of $2.4 billion in the first nine months of 1999 increased $1.4 billion
from 1998, primarily due to an increase of $1.5 billion in ongoing settlement
costs.
Selling, advertising, administrative and general expenses. Selling,
advertising, administrative and general expenses of $796 million for the third
quarter of 1999 increased $26 million, or 3.4%, from the comparable prior year
quarter. For the first nine months of 1999, selling, advertising, administrative
and general expenses of $2.2 billion increased 9.9% from the prior year period.
These increases over prior year periods were primarily due to increased
promotional expense, composed mainly of competitive discounts provided directly
to retailers and passed through to the consumer, partly offset by lower
corporate expense.
Tobacco settlement and related expenses. In the three and nine months ended
September 30, 1999, RJR Tobacco Company recorded $40 million, $24 million
after-tax, for initial, up-front costs related to the tobacco growers
settlement.
In the nine-month period ended September 30, 1998, RJR Tobacco Company
recorded initial, up-front tobacco settlement costs of $312 million relating to
the agreements between RJR Tobacco Company and the Minnesota state attorney
general and Blue Cross and Blue Shield of Minnesota, and $145 million under a
"most favored nation" agreement with Florida, Mississippi and Texas.
In the fourth quarter of 1998, RJR Tobacco Company recorded a $151 million
expense for a workforce reduction of approximately 1,300 employees in response
to changing business conditions resulting from the multi-state settlement
agreement signed in November 1998. Cash outlays will approximate $100 million.
Pre-tax savings in 1999 and 2000 are expected to be approximately $60 million
and $79 million, respectively. Pre-tax savings during the first nine months of
1999 were approximately $39 million. During 1998, $54 million of the reserve was
utilized, and for the nine months ended September 30, 1999, RJR Tobacco Company
incurred $30 million of cash payments, which were applied against the reserve,
resulting in a reserve balance of approximately $67 million. See Note 1 to the
Condensed Consolidated Financial Statements.
Operating company contribution. Operating company contribution decreased
24.8% to $313 million for the third quarter of 1999 and increased 14% to $894
million for the first nine months of 1999. The decrease in the quarter is
primarily due to higher ongoing and initial, up-front settlement costs, lower
22
<PAGE> 23
volumes and increased competitive discounts, partly offset by increased pricing.
The increase in the nine-month comparative period is primarily due to higher
initial, up-front settlement costs during 1998.
Restructuring expense. In the fourth quarter of 1997, RJR Tobacco Company
recorded a pre-tax restructuring expense of $80 million to reorganize its
operations. Cash outlays will approximate $40 million. The charge included $30
million for severance and related benefits, $30 million for the rationalization
of manufacturing operations and $20 million for contract terminations and other
costs. Pre-tax savings in 1998 were $33 million, and for the nine months ended
September 30, 1999 were $14 million. After completion of this program, pre-tax
savings are expected to be approximately $18 million annually. During 1997, $5
million of the accrual was utilized for employee severance and related benefits
and $2 million was utilized for rationalization of manufacturing operations.
During 1998, $63 million of the accrual was utilized as follows: $15 million for
employee severance and related benefits, $28 million for rationalization of
manufacturing operations and $20 million for contract termination and other
costs. For the nine months ended September 30, 1999, $6 million of the remaining
restructuring accrual was utilized for employee severance and related benefits
and $2 million of the accrual was reversed to reflect lower-than-anticipated
costs, resulting in a reserve balance of approximately $2 million. During 1999,
$6 million of the charges applied against the reserve were cash expenditures.
Headquarters close-down and related charges. During the second quarter of
1999, RJR Tobacco Holdings recorded a charge of $143 million in connection with
the elimination of its New York corporate headquarters. Total cash expenditures
related to this charge were $122 million. Approximately $127 million of the
charge is for employee severance and related benefits pertaining to the
elimination of all functions previously performed at the holding company. The
remainder of the charge was primarily related to contractual lease termination
payments and the write-off of leasehold improvements and abandoned equipment.
The anticipated annual cash savings from the elimination of the New York
headquarters is approximately $60 million. See Note 1 to the Condensed
Consolidated Financial Statements.
Interest and debt expense. Interest and debt expense of $43 million in the
third quarter of 1999 decreased $62 million, or 59%, from the third quarter of
1998. For the first nine months of 1999, interest and debt expense of $225
million decreased $96 million from the prior year period. The decreases in the
periods resulted from the repurchase of approximately $4 billion of debt, partly
offset by the issuance of $1.25 billion of debt. See Note 2 to the Condensed
Consolidated Financial Statements.
Other expense, net. Other expense, net decreased $31 million and $53
million from the prior year quarter and nine-month period, respectively,
primarily due to interest income of $44 million and $75 million earned in the
three and nine months ended September 30, 1999, respectively. The interest
income is related to the temporary investment of proceeds from the sale of the
international tobacco business in the second quarter of 1999, net of taxes being
paid during the second half of 1999. After the fourth quarter of 1999 tax
payment, management anticipates interest income will be approximately $15
million per quarter. See Note 2 to the Condensed Consolidated Financial
Statements.
Provision for income taxes. RJR Tobacco Company recorded a tax provision of
$120 million, or an effective rate of 55.6%, in the third quarter of 1999
compared to $103 million, or an effective rate of 46%, recorded in the third
quarter of 1998. The effective tax rates exceed the federal statutory rate of
35% primarily due to the impact of certain nondeductible items, including
goodwill amortization, and to a lesser extent, state taxes.
DISCONTINUED OPERATIONS
Total results of discontinued operations decreased approximately $270
million in the third quarter of 1999 compared to the third quarter of 1998 and
increased approximately $2.4 billion for the first nine months of 1999 compared
to the 1998 period. The increase between the nine-month periods was primarily
due to the gain on the sale of the international tobacco business in May of
1999, partially offset by the loss on the recognition of Nabisco's cumulative
translation adjustment account. The decrease in the third quarter of 1999
reflects adjustments, primarily taxes, other than income, related to the gain on
the sale of the international tobacco business. See Note 2 to the Condensed
Consolidated Financial Statements.
23
<PAGE> 24
EXTRAORDINARY LOSS
An extraordinary loss of approximately $384 million, $250 million
after-tax, was incurred during the nine months ended September 30, 1999 in
connection with the repurchase of approximately $4 billion of debt securities.
See Note 2 to the Condensed Consolidated Financial Statements.
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. 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 27,
became effective in February 1997. Implementation of the remaining regulations,
which prohibit or impose stringent limits on a broad range of sales and
marketing practices, was stayed by the U.S. District Court for the Middle
District of North Carolina (Coyne Beahm v. FDA) pending appeal of denial of
motions for summary judgment by RJR Tobacco Company and others in the tobacco
industry. On August 14, 1998, the U.S. Court of Appeals for the Fourth Circuit
reversed a portion of the District Court ruling and held that the FDA did not
have the authority to regulate tobacco products. On April 26, 1999, the United
States Supreme Court agreed to hear the FDA's appeal of the Fourth Circuit's
ruling. Oral arguments are scheduled for December 1, 1999. RJR Tobacco Company
is unable to predict the ultimate outcome of this litigation. If the ruling by
the Fourth Circuit is reversed, and if the regulations go into effect, they
could have an adverse effect on cigarette sales and RJR Tobacco Company.
In December 1992, the U.S. Environmental Protection Agency (the "EPA")
issued a report entitled, "Respiratory Health Effects of Passive Smoking: Lung
Cancer and Other Disorders," which classified environmental tobacco smoke as a
Group A (known human) carcinogen. On June 22, 1993, RJR Tobacco Company and
others filed suit in the U.S. District Court for the Middle District of North
Carolina (Flue-Cured Stabilization Corp. v. EPA) to challenge the validity of
the EPA report. On July 17, 1998, the court's ruling on the plaintiffs' motion
for summary judgment found that the EPA's classification of environmental
tobacco smoke was invalid, and vacated those portions of the EPA report dealing
with lung cancer. The government appealed this ruling to the U.S. Court of
Appeals for the Fourth Circuit where oral argument was heard in June 1999.
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 quantitative order, a trade-secret disclosure that RJR Tobacco
Company believes could damage the competitive position of its brands. RJR
Tobacco Company, together with other cigarette manufacturers, filed suit in the
U.S. District Court for the District of Massachusetts seeking to have the
statute declared null and void and to restrain Massachusetts officials from
enforcing it. A similar suit was filed by manufacturers of smokeless tobacco
products. The court granted a preliminary injunction that enjoined Massachusetts
officials from enforcing the law relating to ingredient reporting. Massachusetts
appealed that decision, which was affirmed by the Court of Appeals for the First
Circuit. Both the manufacturers and Massachusetts are now seeking summary
judgment from the district court. The case has been briefed and argued.
In 1997, Texas enacted legislation very similar to the Massachusetts law,
except that the Texas statute authorizes confidentiality of trade secrets. The
Texas Department of Health promulgated regulations that currently require both
ingredient and nicotine-yield reports to be filed by December 1, 1999. There are
pending proposed changes to the regulations which are expected to become final
by the end of 1999.
In 1997, the Minnesota legislature enacted a requirement that manufacturers
of tobacco products sold in Minnesota report annually the presence of five
substances in each brand of their products in its
24
<PAGE> 25
"unburned" and "burned" states. RJR Tobacco Company complied with this
requirement on February 15, 1999.
In August 1998, the Massachusetts Department of Health (the "DOH") issued
regulations for public comment that would require annual reporting, beginning
July 1, 2000, on a brand-by-brand basis of 43 smoke constituents in both
mainstream smoke and sidestream smoke. RJR Tobacco Company and the other
manufacturers believe that the DOH lacks legal authority to promulgate these
proposed regulations. Nevertheless, RJR Tobacco Company and the other
manufacturers proposed conducting a cooperative benchmarking study to address
certain DOH concerns. The benchmarking study will obtain smoke constituent
information on a representative number of cigarette brand styles. The DOH has
agreed not to finalize or amend these regulations until it has reviewed the
results of the manufacturers study.
On May 21, 1999, RJR Tobacco Company, Lorillard Tobacco Company, Brown &
Williamson Tobacco Corporation and Philip Morris, Inc. filed separate lawsuits
in the U.S. District Court for the District of Massachusetts to enjoin
implementation of certain Massachusetts Attorney General regulations concerning
the advertisement and display of tobacco products. The regulations go beyond
those required by the Master Settlement Agreement. RJR Tobacco Company is
challenging regulations that ban all self-service cigarette sales; prohibit
cigarette manufacturers from offering promotional items tied to cigarette sales;
prohibit mail distribution of cigarettes in exchange for coupons and proofs of
purchase; and prohibit point-of-sale advertising less than five feet above the
ground in any retail outlet that is not limited to adults only. RJR Tobacco
Company also is challenging the regulation that bans all cigarette advertising
(other than a black-and-white sign reading "Tobacco Products Sold Here") visible
within 1,000 feet of any public playground, public park or school. This
provision would effectively ban outdoor advertising in all but the most rural
areas of the state. RJR Tobacco Company believes that it has strong arguments
that the regulations violate constitutional provisions concerning free speech,
equal protection, due process, the Commerce Clause and federal preemption. The
Massachusetts Attorney General has postponed implementation of the regulations
until February 2000, when the trial of this matter is scheduled to occur. On
October 20, 1999, the Massachusetts Attorney General proposed amendments to
these regulations, exempting certain age-restricted venues from the self-service
and sampling restrictions and permitting the distribution of non-branded
merchandise provided in conjunction with the sale of cigarettes.
The price differential between cigarettes manufactured for sale abroad and
cigarettes manufactured for U.S. sale has increased, and consequently a domestic
"gray market" has developed in cigarettes manufactured for sale abroad. These
cigarettes compete with the cigarettes RJR Tobacco Company manufactures for
domestic sale. Twenty-four states have enacted legislation prohibiting the sale
and distribution of gray market cigarettes. Similarly, federal legislation
prohibiting the sale and distribution of gray market cigarettes becomes
effective on January 1, 2000. In addition, RJR Tobacco Company has taken legal
action against certain distributors and retailers who engage in such practices.
It is not possible to determine what additional federal, state or local
legislation or regulations relating to smoking or cigarettes will be enacted or
to predict any resulting effect thereof on RJR Tobacco Company or the cigarette
industry generally, but such legislation or regulations could have a material
effect on RJR Tobacco Company or the cigarette industry generally.
For a description of certain litigation affecting RJR Tobacco Company and
its affiliates, including the effects on results of operations of certain
attorney general agreements, see Note 4 to the Consolidated Condensed Financial
Statements.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
On January 1, 1999, RJR Tobacco Holdings adopted SOP No. 98-5, Reporting on
the Costs of Start-Up Activities, issued by the AcSEC. SOP No. 98-5 established
standards on accounting for start-up and organization costs and, in general,
requires such costs to be expensed as incurred. The adoption of SOP No. 98-5 did
not have a material effect on RJR Tobacco Holdings' financial position or
results of operations.
25
<PAGE> 26
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the second quarter of 1998, the FASB issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, which must be adopted by
January 1, 2000, with early adoption permitted. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, which
amended SFAS No. 133 to delay its effective date one year. SFAS No. 133 requires
that all derivative instruments be recorded on the consolidated balance sheet at
their fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. RJR Tobacco Holdings has not yet determined the impact, if
any, that adoption of SFAS No. 133 will have on its financial position or
results of operations.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows used in continuing operating activities were $88 million in
the first nine months of 1999 compared to $759 million from continuing operating
activities in the comparable 1998 period. The decrease in cash flow primarily
reflects an increase in payments related to settlement payments (see Note 1 to
the Condensed Consolidated Financial Statements), the close-down of the New York
headquarters (see Note 1 to the Condensed Consolidated Financial Statements) and
lower shipment volume partly offset by increased pricing.
Net cash flows from investing activities were $7.7 billion in the first
nine months of 1999 compared to an outflow of $28 million for the prior year
period. The increase is primarily due to the proceeds received from the sale of
the international tobacco business.
Cash flows used in financing activities were $5.2 billion and $618 million
for the nine months ended September 30, 1999 and 1998, respectively. The
increase in funds used was primarily due to the early extinguishment of
approximately $4 billion in debt and transfers and payments of approximately $2
billion made to RJR Tobacco Holdings' former parent company, partially offset by
proceeds from the issuance of $1.25 billion of private placement debt.
On November 2, 1999, the Board of Directors of RJR Tobacco Holdings
authorized the repurchase of shares of its common stock, par value of $.01 per
share, from time to time in the open market, with an aggregate cost to RJR
Tobacco Holdings of up to $125 million. The stock repurchases will be funded by
cash flows from operations. The timing of repurchases and the number of shares
ultimately repurchased will depend upon market conditions. As of November 10,
1999, RJR Tobacco Holdings had repurchased 110,700 shares of its common stock,
with an aggregate cost of approximately $2.4 million.
At present, the principal sources of liquidity for RJR Tobacco Company's
business and operating needs are internally generated funds from its operations
and available borrowings through RJR Tobacco Holdings. RJR Tobacco Holdings
anticipates that it will be able to meet its debt service obligations and to pay
dividends with cash flow from RJR Tobacco Company's operations and from its
available borrowings, although no assurance can be given in this regard.
Debt
On April 13, 1999, RJR Tobacco Holdings offered to purchase substantially
all of its outstanding debt securities and sought consents from the holders of
those securities to waive covenants that might have prevented some of the
reorganization transactions described in the Notes to the Condensed Consolidated
Financial Statements. These consents were received as of April 26, 1999. The
tender offers were completed on May 18, 1999, which resulted in RJR Tobacco
Holdings repurchasing approximately $4 billion of its debt with a portion of the
proceeds from the sale of the international tobacco business. As a result, RJR
Tobacco Holdings recognized an extraordinary loss from the early extinguishment
of debt of approximately $384 million, $250 million after-tax.
26
<PAGE> 27
On May 7, 1999, RJR Tobacco Holdings entered into a $1.235 billion floating
rate revolving credit agreement with a syndicate of commercial banks. At
September 30, 1999, RJR Tobacco Holdings had approximately $460 million in
letters of credit and no borrowings outstanding under the revolving credit
agreement. RJR Tobacco Holdings also had additional letters of credit
outstanding of approximately $2.8 million as of September 30, 1999. On May 18,
1999, RJR Tobacco Holdings completed a private placement offering of $1.25
billion in debt securities. The net proceeds received were used for general
corporate purposes. RJR Tobacco Company has guaranteed RJR Tobacco Holdings'
obligations under the revolving credit agreement and the debt securities. If RJR
Tobacco Holdings' new senior unsecured debt is rated below BBB- by Standard &
Poor's Ratings Services or Baa3 by Moody's Investors Service, Inc., some of its
other subsidiaries will be required to guarantee the facility. If RJR Tobacco
Holdings falls below these thresholds for both of those rating agencies, RJR
Tobacco Holdings and the guarantors will have to pledge their assets to secure
their obligations. The credit agreement also limits RJR Tobacco Holdings'
ability to pay dividends, repurchase stock, incur indebtedness, engage in
transactions with affiliates, create liens, acquire, sell or dispose of specific
assets and engage in specified mergers or consolidations. On July 16, 1999, RJR
Tobacco Holdings filed a registration statement, that became effective October
8, 1999, in order to issue the Exchange Notes in exchange for the private
placement notes. The Exchange Notes are identical to the terms of the private
placement notes, except that the transfer restrictions and registration rights
relating to the private placement notes do not apply to the Exchange Notes.
Dividends
On July 28, 1999, the Board of Directors of RJR Tobacco Holdings declared a
quarterly cash dividend of $.775 per common share, or $3.10 per common share on
an annualized basis. The dividend was paid on October 1, 1999 to stockholders of
record as of September 10, 1999.
Capital Expenditures
Capital expenditures were $30 million in each of the nine month periods
ended September 30, 1999 and 1998. The level of expenditures currently planned
for 1999 is approximately $50 million to be funded from operations. Management
expects that its capital expenditure program will continue at a level sufficient
to support the strategic and operating needs of RJR Tobacco Company. There were
no material long-term commitments for capital expenditures as of September 30,
1999.
Settlement and Related Expenses
Total estimated payments in 1999 for all tobacco litigation settlement
agreements currently in effect and their associated costs, including the Master
Settlement Agreement, will be approximately $1.6 billion, funded primarily by
cash flows from operating activities through price increases. As of September
30, 1999, $517 million has been paid. In future years, estimated payments will
exceed $2 billion per year. However, these payments will be subject to, among
other things, the volume of cigarettes sold by RJR Tobacco Company, RJR Tobacco
Company's market share and inflation adjustments. For further discussion of the
potential impact of litigation issues and various litigation settlements, see
Note 4 to the Condensed Consolidated Financial Statements.
YEAR 2000
The year 2000 issue stems from computer applications that were written
using two digits rather than four digits to define the applicable year. The
issue is whether computer systems will properly interpret date-sensitive
information when the year changes to 2000.
RJR Tobacco Company has inventoried, assessed and developed detailed plans
for required systems modifications or replacements of all information technology
systems and operating systems with embedded technology, which include, but are
not limited to, process control, automated factory/assembly lines, environmental
safety, quality control and facilities.
27
<PAGE> 28
As of September 30, 1999, software remediation, which entails modifying
existing programs to make them year 2000 compliant, was complete for both
mainframe information technology systems and operating systems with embedded
technology. Key departmental applications were 98% remediated as of September
30, 1999.
As of September 30, 1999, software testing following remediation was
complete for mainframe information technology systems and operating systems with
embedded technology. Testing was 98% complete as of September 30, 1999 for key
departmental applications.
All mainframe information technology systems and operating systems with
embedded technology were year 2000 compliant and in use by the end of October
1999.
RJR Tobacco Company is also in contact with suppliers, vendors, service
providers and customers to assess the potential impact on operations if they are
not successful in converting their systems in a timely manner. As of September
30, 1999, RJR Tobacco Company had received responses from all identified key
third parties, as follows: 85% of identified third parties had confirmed that
they are fully compliant, 14% were not currently compliant but expect to be by
the end of 1999, and 1% will not be in compliance and alternative suppliers have
been identified. RJR Tobacco Company continues to monitor the status of year
2000 efforts for those third parties that have been identified as critical and
contingency plans specific to those third parties have been developed.
RJR Tobacco Company's systems risk management program includes emergency
backup and recovery procedures to be followed in the event of failure of a
business-critical system. RJR Tobacco Company has expanded these procedures to
include additional procedures for potential year 2000 issues. In addition,
contingency plans to protect the business from year 2000-related interruptions
have been developed, which include development of backup procedures,
identification of alternate suppliers and possible increases in inventory
levels. The possible consequences of RJR Tobacco Company or key third parties
not being fully year 2000 compliant include temporary plant closings, delays in
the delivery of products or receipt of supplies, invoice and collection errors
and inventory obsolescence. RJR Tobacco Company believes its year 2000
implementation plan, including contingency measures, will be complete in all
material respects by the end of 1999, thereby reducing the possible material
adverse effects of the year 2000 issue on RJR Tobacco Company's business,
results of operations and financial condition.
As of September 30, 1999, RJR Tobacco Company had incurred expenses of $32
million to be year 2000 compliant. The current estimated cost to complete RJR
Tobacco Company's year 2000 program is an additional $4 million. The table below
sets forth a breakdown of current and estimated expenses associated with the
year 2000 issue:
<TABLE>
<CAPTION>
TOTAL COST AS OF ESTIMATED TOTAL
SEPTEMBER 30, 1999 PROJECT COST
------------------ ---------------
<S> <C> <C>
BY SYSTEM TYPE:
Information technology systems $28 $32
Operating systems with embedded technology 4 4
BY WORK PERFORMED:
Remediation 29 32
Replacement 3 4
INTERNAL/EXTERNAL:
Internal costs 23 27
Replacement/contractor costs 9 9
</TABLE>
RJR Tobacco Holdings is primarily dependent on the systems and systems
infrastructure of RJR Tobacco Company. All of RJR Tobacco Holdings' information
technology systems that are separately maintained are in compliance and in use.
RJR Tobacco Holdings has no operating systems with embedded technology for which
it is not dependent on RJR Tobacco Company's systems. RJR Tobacco Holdings has
been in contact with third parties that it does not have in common with RJR
Tobacco Company, all of which expect to be in compliance by the end of 1999.
28
<PAGE> 29
------------------------
Statements included in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations" which are not historical in
nature are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements regarding RJR Tobacco Holdings' future performance and
financial results are subject to certain risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements, including, among others, the substantial and
increasing regulation and taxation of the cigarette industry; various legal
actions, proceedings and claims arising out of the sale, distribution,
manufacture, development, advertising, marketing and claimed health effects of
cigarettes that are pending or may be instituted against RJR Tobacco Holdings or
its subsidiaries; the substantial payment obligations of RJR Tobacco Company,
and limitations on the advertising and marketing of cigarettes, under various
litigation settlement agreements; the recent decline in sales in the domestic
cigarette industry; competition from other cigarette manufacturers; competitive
pricing for products; the success of new product innovations and acquisitions;
the ratings of RJR Tobacco Holdings' securities; the level of savings associated
with the reorganization of the businesses of RJR Tobacco Holdings, anticipated
lower interest expense and increased interest income; and the successful
discovery and correction of potential "Year 2000" computer sensitive problems by
both RJR Tobacco Holdings and its subsidiaries and their key suppliers and
customers. 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.
29
<PAGE> 30
PART II
ITEM 1. LEGAL PROCEEDINGS
TOBACCO-RELATED LITIGATION
Overview. Various legal actions, proceedings and claims are pending or may
be instituted against RJR Tobacco Company or its affiliates or indemnitees,
including those claiming that lung cancer and other diseases as well as
addiction have resulted from the use of, or exposure to, RJR Tobacco Company's
tobacco products. During the third quarter of 1999, 32 new actions were served
against RJR Tobacco Company and/or its affiliates or indemnitees, including NGH,
as compared to 81 in the third quarter of 1998, and 91 actions were dismissed or
otherwise resolved in favor of RJR Tobacco Company and/or its affiliates or
indemnitees without trial. On September 30, 1999, there were 561 active cases
pending, as compared with 614 on September 30, 1998 and 483 on September 30,
1997. As of October 27, 1999, 559 active cases were pending against RJR Tobacco
Company and/or its affiliates or indemnitees: 554 in the United States; 3 in
Canada; and 1 in each of the Marshall Islands and Puerto Rico.
The U.S. cases are pending in 41 states and the District of Columbia. The
breakdown is as follows: 110 in New York; 109 in West Virginia; 41 in
Massachusetts; 39 in Florida; 34 in California; 25 in Louisiana; 23 in Texas; 16
in the District of Columbia; 15 in Pennsylvania; 13 in Alabama; 12 in Tennessee;
9 in each of Illinois, Mississippi and New Jersey; 8 in Iowa; 6 in each of
Missouri, New Mexico, Nevada and Ohio; 4 in each of Arkansas, Arizona, Georgia,
Indiana, Maryland and Minnesota; 3 in each of Colorado, Oklahoma, Washington and
Wisconsin; 2 in each of Hawaii, Michigan, North Carolina, North Dakota, New
Hampshire, Rhode Island, South Carolina, South Dakota and Utah; and 1 in each of
Connecticut, Kansas, Kentucky and Oregon. Of the 554 active cases in the United
States, 148 are pending in federal court, 400 in state court, and 6 in tribal
court. Most of these cases were brought by individual plaintiffs, but a
significant number, discussed below, seek recovery on behalf of third parties or
large classes of claimants.
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 RJR Tobacco Company or its affiliates (including RJR Tobacco Holdings)
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 RJR Tobacco
Company or its affiliates or indemnitees and could encourage an increase in the
number of such claims. There has been a number of political, legislative,
regulatory and other developments relating to the tobacco industry and cigarette
smoking that have received wide media attention, 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 RJR Tobacco
Company and RJR Tobacco Holdings, a significant increase in litigation and/or is
adverse outcomes for tobacco defendants could have an adverse effect on either
or both of these entities. RJR Tobacco Company and RJR Tobacco Holdings each
believe that they have a number of valid defenses to any such actions and intend
to defend such actions vigorously.
RJR Tobacco Holdings believes that, notwithstanding the quality of defenses
available to it and RJR Tobacco Company in litigation matters, it is possible
that the results of operations or cash flows of RJR Tobacco Holdings in
particular quarterly or annual periods or the financial condition of RJR Tobacco
Holdings could be materially affected by the ultimate outcome of certain pending
litigation matters, including bonding and 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. 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."
30
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
10.1 Form of 1999 Performance Appreciation Rights Agreement under
R.J. Reynolds Tobacco Holdings, Inc. 1999 Long Term
Incentive Plan between R.J. Reynolds Tobacco Holdings, Inc.
and the grantee named therein.
10.2 Form of Tandem Restricted Stock/Stock Option Agreement dated
June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc.
and the grantee named therein.
10.3 Form of Tandem Restricted Stock/Stock Option Agreement dated
June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc.
and Andrew J. Schindler.
10.4 Form of Tandem Restricted Stock/Stock Option Agreement dated
July 28, 1999, between R.J. Reynolds Tobacco Holdings, Inc.
and the grantee named therein.
10.5 Form of Change of Control Letter Agreement between R.J.
Reynolds Tobacco Holdings, Inc. and the executive officer
named therein.
10.6 Form of Special Severance Benefits Letter Agreement between
R.J. Reynolds Tobacco Company and the executive officer
named therein.
10.7 Form of Amendment to Special Severance Benefits Letter
Agreement between R.J. Reynolds Tobacco Company and the
executive officer named therein.
10.8 Amendment dated June 7, 1999, to the Employment Agreement
dated October 31, 1988, and previously amended as of
December 20, 1988, between RJR Nabisco, Inc. (now known as
R.J. Reynolds Tobacco Holdings, Inc.) and Andrew J.
Schindler.
10.9 Cash Retention Grant Letter Agreement dated August 17, 1999,
between R.J. Reynolds Tobacco Company and Andrew J.
Schindler.
10.10 Amendment No. 1 dated September 29, 1999, to the Amended and
Restated Master Trust Agreement dated June 14, 1999, between
R.J. Reynolds Tobacco Company and Wachovia Bank, N.A., as
trustee, and accepted by R.J. Reynolds Tobacco Holdings,
Inc.
10.11 Amendment No. 1 dated November 1, 1999, to the Amended and
Restated R.J. Reynolds Tobacco Company Defined Benefit
Master Trust Agreement dated June 14, 1999, between R.J.
Reynolds Tobacco Company and The Chase Manhattan Bank, N.A.,
as trustee, and consented to by R.J. Reynolds Tobacco
Holdings, Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule for the Nine Months ended September
30, 1999.
27.2 Financial Data Schedule for the Nine Months ended September
30, 1998.
</TABLE>
(b) Reports on Form 8-K
On September 24, 1999, RJR Tobacco Holdings filed a Current Report on Form
8-K dated September 22, 1999, setting forth dates related to stockholder
proposals for its 2000 Annual Meeting of Stockholders.
31
<PAGE> 32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
(Registrant)
/s/ KENNETH J. LAPIEJKO
--------------------------------------
Kenneth J. Lapiejko
Executive Vice President and Chief
Financial Officer
Date: November 12, 1999
32
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
10.1 Form of 1999 Performance Appreciation Rights Agreement under
R.J. Reynolds Tobacco Holdings, Inc. 1999 Long Term
Incentive Plan between R.J. Reynolds Tobacco Holdings, Inc.
and the grantee named therein.
10.2 Form of Tandem Restricted Stock/Stock Option Agreement dated
June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc.
and the grantee named therein.
10.3 Form of Tandem Restricted Stock/Stock Option Agreement dated
June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc.
and Andrew J. Schindler.
10.4 Form of Tandem Restricted Stock/Stock Option Agreement dated
July 28, 1999, between R.J. Reynolds Tobacco Holdings, Inc.
and the grantee named therein.
10.5 Form of Change of Control Letter Agreement between R.J.
Reynolds Tobacco Holdings, Inc. and the executive officer
named therein.
10.6 Form of Special Severance Benefits Letter Agreement between
R.J. Reynolds Tobacco Company and the executive officer
named therein.
10.7 Form of Amendment to Special Severance Benefits Letter
Agreement between R.J. Reynolds Tobacco Company and the
executive officer named therein.
10.8 Amendment dated June 7, 1999, to the Employment Agreement
dated October 31, 1988, and previously amended as of
December 20, 1988, between RJR Nabisco, Inc. (now known as
R.J. Reynolds Tobacco Holdings, Inc.) and Andrew J.
Schindler.
10.9 Cash Retention Grant Letter Agreement dated August 17, 1999,
between R.J. Reynolds Tobacco Company and Andrew J.
Schindler.
10.10 Amendment No. 1 dated September 29, 1999, to the Amended and
Restated Master Trust Agreement dated June 14, 1999, between
R.J. Reynolds Tobacco Company and Wachovia Bank, N.A., as
trustee, and accepted by R.J. Reynolds Tobacco Holdings,
Inc.
10.11 Amendment No. 1 dated November 1, 1999, to the Amended and
Restated R.J. Reynolds Tobacco Company Defined Benefit
Master Trust Agreement dated June 14, 1999, between R.J.
Reynolds Tobacco Company and The Chase Manhattan Bank, N.A.,
as trustee, and consented to by R.J. Reynolds Tobacco
Holdings, Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule for the Nine Months ended September
30, 1999.
27.2 Financial Data Schedule for the Nine Months ended September
30, 1998.
</TABLE>
33
<PAGE> 1
EXHIBIT 10.1
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
1999 LONG TERM INCENTIVE PLAN
PERFORMANCE APPRECIATION RIGHTS AGREEMENT
DATE OF GRANT: (Date)
1. Grant. Pursuant to the R.J. Reynolds Tobacco Holdings, Inc.
1999 Long Term Incentive Plan (the "Plan"), R.J. Reynolds Tobacco Holdings,
Inc. ("RJR") hereby grants the following Performance Appreciation Rights
("Appreciation Rights") to
(Name)
("YOU", OR THE "GRANTEE")
subject to the terms and conditions of the Plan and this Agreement (the
"Agreement"):
(Number) APPRECIATION RIGHTS
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 RJR in an amount (the "Payment Value") equal to the
excess of the Revised Value at the time of exercise over the Initial Value. The
Initial Value is $29.00. The Revised 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 a Revised Value as
of December 31 of the preceding year using Performance Measures and Valuation
Formulas determined by the Committee. The Committee will set a Revised Value
only once each year, so the Revised Value will remain unchanged during the
year. The Committee will provide a written notice (the "Valuation Notice")
setting forth the Revised Value and the Payment Value for Appreciation Rights
promptly after the Committee completes each valuation.
(c) In general, the Payment Value for each Appreciation
Right will be based on the Revised Value in effect at the time of exercise.
However, for exercises within 30 days of the date the Committee makes its
regular annual determination of new Revised 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
Revised Values in effect for the year of exercise or the Revised Values in
effect for the immediately preceding year.
(d) In the event of a Change of Control, the Payment
Value of each Appreciation Right will be not less than the excess of the
Closing Price of the RJR Common Stock on the date of the Change of Control over
$29.00.
1
<PAGE> 2
(e) As a result of the spin-off distribution of RJR
Common Stock by RJR Nabisco Holdings Corp. to its stockholders, the Payment
Value of each Appreciation Right shall be not less than $34.083.
4. Vesting.
Subject to Section 5 below, 33% of the Appreciation Rights
will vest on each of December 31, 1999 and 2000 and 34% will vest on December
31, 2001, provided in each case that you remain actively employed by RJR 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, 1999 to (ii) 36. For purposes of this
Agreement only, the partial or complete months from January 1, 1999 to your
initial date of employment shall be included in the calculation of clause (i)
of this Section 5(b).
(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.
(d) If your employment is terminated by your Employer
with 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'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 10 years of
service.
(g) "Termination of Active Employment" as used herein
means termination from active employment; it does not mean termination of pay
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
2
<PAGE> 3
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
(i) criminal conduct, (ii) deliberate and continual refusal to perform
employment duties on substantially a full time basis, (iii) deliberate and
continual refusal to act in accordance with any specific lawful instructions of
an authorized officer or employee more senior than you, or (iv) 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 of your employment by you 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 RJR, in the manner prescribed by the Committee, which
specifies the number of Appreciation Rights being exercised.
(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 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 Appreciation Rights
is processed, RJR will pay you, in cash, an amount equal to the 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, RJR
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
dividends, spinoff or other event. Any adjustment made by the Committee shall
be final and binding upon you, RJR and all other interested persons; provided,
however, that the Committee may not make any such adjustments or revisions that
are adverse to you without your prior written consent.
3
<PAGE> 4
9. Taxes.
Any taxes required by federal, state or local laws to be
withheld by RJR in respect of the grant or exercise of Appreciation Rights
hereunder shall be paid to RJR by you by the time such taxes are required to be
paid or deposited by RJR. You hereby authorize the necessary withholding by RJR
to satisfy such tax withholding obligations prior to delivery of the Payment
Value.
10. Miscellaneous.
(a) Administration and Interpretation. In consideration
of the Appreciation Rights granted hereunder, 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 interpretations
and determinations made by the Committee shall be final, conclusive and binding
upon the Grantee, RJR 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 RJR.
(b) Amendment. 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 written consent.
(c) No Right to Employment. Neither the execution and
delivery of this Agreement nor the Appreciation Rights evidenced by this
Agreement shall constitute or be evidence of any agreement or understanding,
express or implied, on the part of RJR or it subsidiaries to employ you for any
specific period or in any particular capacity and shall not prevent RJR or its
subsidiaries from terminating your employment at any time with or without Cause
(as defined in Section 5(h) of this Agreement).
(d) No Transfer. 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) Notices. Except to the extent that you receive
different instructions from RJR, you should send notices concerning this
Agreement and the Appreciation Rights to The Secretary, R.J. Reynolds Tobacco
Holdings, Inc., P. O. Box 2866, Winston-Salem, NC 27102-2866. RJR will send any
notices to your office or to your address as shown on the records of RJR or its
subsidiaries.
(f) Application of Laws. All aspects of the Appreciation
Rights evidenced by this Agreement shall be subject to all applicable laws,
rules and regulations and to such approvals of any government agencies as may
be required.
4
<PAGE> 5
(g) GOVERNING LAW. 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, R.J. Reynolds Tobacco Holdings, Inc. and the
Grantee have executed this Agreement as of the Date of Grant.
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
By:
--------------------------------
Authorized Signatory
- ----------------------------------------
GRANTEE
Grantee's Taxpayer Identification Number:
- ----------------------------------------
Date:
----------------------------------
Grantee's Home Address:
- ----------------------------------------
- ----------------------------------------
5
<PAGE> 1
EXHIBIT 10.2
R.J. REYNOLDS TOBACCO HOLDINGS INC.
1999 LONG TERM INCENTIVE PLAN
TANDEM RESTRICTED STOCK/STOCK OPTION
AGREEMENT
----------------------------------
DATE OF GRANT: June 15, 1999
W I T N E S S E T H
1. Tandem Restricted Stock and Option Grant.
Pursuant to the provisions of the 1999 Long Term Incentive Plan (the
"Plan") R.J. Reynolds Tobacco Holdings, Inc. (the "Company") on the above date
has granted, and this Agreement evidences the grant to
(THE "GRANTEE")
(FIRST NAME) (LAST NAME)
subject to the terms and conditions which follow and the terms and conditions
of the Plan, of a grant of
(A) A TOTAL OF (NUMBER) SHARES OF COMMON STOCK OF THE COMPANY (THE
"RESTRICTED STOCK GRANT"), AND, IN TANDEM,
(B) THE RIGHT AND OPTION TO PURCHASE FROM THE COMPANY A TOTAL OF
(NUMBER) SHARES OF COMMON STOCK OF THE COMPANY ("COMMON
STOCK"), AT THE EXERCISE PRICE OF $32.4375 PER SHARE, THE
CLOSING PRICE OF A SHARE OF COMMON STOCK ON THE DATE OF GRANT
(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
below shall have the meaning set forth in the Plan, unless otherwise indicated.
2. Terms of Restricted Stock Grant.
(a) 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 shares of 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 Section 2(b) of
this Agreement on the shares of Common Stock granted hereunder lapse. The
Grantee acknowledges and agrees that, alternatively, the shares of Common Stock
granted hereunder may be in book-entry form
<PAGE> 2
with instructions from the Company to the Company's transfer agent that such
shares shall remain restricted until the restrictions imposed by Section 2(b) of
this Agreement on such shares lapse.
(b) Restrictions on Transfer of Stock. The shares of Common Stock
granted hereunder may not be sold, tendered, assigned, transferred, pledged or
otherwise encumbered prior to the earliest of:
(i) June 15, 2002, for 50% of the shares,
June 15, 2003, for an additional 25% of the shares,
June 15, 2004, for an additional 25% of the shares;
(ii) the date of the Grantee's Retirement (as defined in
this Section 2(b));
(iii) the earlier of (x) 60 days after the date of the
Grantee's Permanent Disability (as defined in the
Company's Long Term Disability Plan) or (y) receipt
of written notice by the Company that the Grantee
has declined to make the Section 3 Election (as
defined in Section 3(a) of this Agreement) pursuant
to Section (3)(a)(v) of this Agreement, for 100% of
the shares;
(iv) the earlier of (x) 60 days after the date of the
Grantee's death or (y) receipt of written notice by
the Company that the Grantee's representative has
declined to make the Section 3 Election pursuant to
Section (3)(a)(v) of this Agreement, for 100% of the
shares; or
(v) the earlier of (x) 60 days after the date of a
Change of Control or (y) receipt of written notice
by the Company that the Grantee has declined to make
the Section 3 Election pursuant to Section
(3)(a)(vi) of this Agreement, for 100% of the
shares.
For purposes of this Agreement, the term "Retirement" shall mean
retirement at age 65 or over, or early retirement at age 55 or over with the
approval of the Chief Executive Officer of the Company, which approval
specifically states the number or percentage of shares with respect to which
the restrictions referred to in this Section 2(b) will lapse.
Upon the earlier of (i) 60 days after the involuntary termination of
the Grantee's employment with the Company or a subsidiary of the Company
without Cause (as defined in Section 4(d) of this Agreement) (an "Involuntary
Termination") or (ii) receipt of written notice by the Company that the Grantee
has declined to make the Section 3 Election pursuant to Section (3)(a)(vii) of
this Agreement, the restrictions imposed by
<PAGE> 3
this Section 2(b) will lapse with respect to that number of shares of Common
Stock which is equal to (x) the product of (A) the total number of shares of
Common Stock granted to the Grantee under this Agreement and (B) a fraction,
the numerator of which is the number of whole or partial months between the
Date of Grant and date of the Grantee's Termination of Employment (as defined
in Section 2(c) of this Agreement) and the denominator of which is 60, minus
(y) the number of shares of Common Stock granted to the Grantee under this
Agreement as to which the restrictions set forth in this Section 2(b) have
lapsed prior to such involuntary termination of employment.
At the time the restrictions imposed by this Section 2(b) shall lapse
upon any of the shares of Common Stock granted to the Grantee under this
Agreement, provided that the Grantee shall not have made a Section 3 Election
with respect to such shares, the appropriate number of shares of Common Stock
shall be delivered to the Grantee without a restrictive legend on any Common
Stock certificate, or, if such shares are held in book-entry form, the
Company's transfer agent shall be instructed to remove the restrictions on such
shares.
(c) Forfeiture of Stock. Upon the earlier of a Section 3 Election or
the Grantee's Termination of Employment, subject to the provisions of Section
2(b) in the case of an Involuntary Termination, the Grantee shall forfeit all
right, title and interest in and to the shares of Common Stock still subject to
the restrictions set forth in Section 2(b)(i) of this Agreement (or the portion
thereof to which such Section 3 Election relates, as the case may be) and to
any dividends to be paid thereafter on such shares. Such forfeited shares of
Common Stock shall revert to the Company and shall not become transferable by
the Grantee or anyone claiming through the Grantee. For purposes of this
Agreement, the term "Termination of Employment" shall mean the termination of
the Grantee's active employment with the Company or a subsidiary of the
Company; it does not mean the termination of the Grantee's 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.
(d) Dividends. If the Grantee is a shareholder of record on any
applicable record date, he shall receive any dividends on the shares of Common
Stock granted hereunder when paid regardless of whether the restrictions
imposed by Section 2(b) of this Agreement hereof have lapsed.
(e) Voting. If the Grantee is a shareholder of record on any
applicable record date, he shall have the right to vote the shares of Common
Stock granted hereunder regardless of whether the restrictions imposed by
Section 2(b) of this Agreement hereof have lapsed.
(f) Registration. The shares of Common Stock granted hereunder may
be offered and sold by the Grantee only if such shares are 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
<PAGE> 4
executing this Agreement, the Grantee (i) agrees not to offer or sell the
shares of Common Stock granted hereunder unless and until such shares are
registered for resale under the 1933 Act or an exemption from registration is
available, (ii) represents that he accepts such shares of 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 shares of Common Stock.
3. Option Terms
(a) Elections. The Option shall be exercisable only if and to the
extent the Grantee makes one or more of the following elections (each, a
"Section 3 Election") in accordance with the following terms and conditions,
and any further procedures which may be established by the Company from time to
time:
(i) During the period from March 15, 2002 until May 15, 2002, the
Grantee may elect to cancel up to 50% of the Restricted Stock Grant in exchange
for the right to exercise the Option with respect to the same percentage of
shares of Common Stock covered by the Option.
(ii) During the period from March 15, 2003 until May 15, 2003, the
Grantee may elect to cancel up to 25% of the Restricted Stock Grant in exchange
for the right to exercise the Option with respect to the same percentage of
shares of Common stock covered by the Option.
(iii) During the period from March 15, 2004 until May 15, 2004, the
Grantee may elect to cancel up to 25% of the Restricted Stock Grant in exchange
for the right to exercise the Option with respect to the same percentage of
shares of Common Stock covered by the Option.
(iv) In the event the date of the Grantee's Retirement occurs prior to
June 15, 2004, during the period of 60 days commencing 90 days prior to the
date of the Grantee's Retirement, the Grantee may elect to cancel the portion
of his Restricted Stock Grant that will no longer be subject to the
restrictions set forth in Section 2(b) of this Agreement as a result of the
Grantee's Retirement in exchange for the right to exercise a corresponding
portion of the Option.
(v) In the event of the date of the Grantee's Permanent Disability or
death occurs prior to June 15, 2004, during the period of 60 days commencing on
the date of the Grantee's Permanent Disability or death, as applicable, the
Grantee (or upon his death, his representative) may elect to cancel the portion
of his Restricted Stock Grant still subject to the restrictions set forth in
Section 2(b) of this Agreement immediately prior to the date of the Grantee's
Permanent Disability, or death, as applicable, in exchange for the right to
exercise a corresponding portion of the Option.
<PAGE> 5
(vi) In the event of a Change of Control which occurs prior to June
15, 2004, during the period of 60 days commencing on the date of such Change of
Control, the Grantee may elect to cancel the portion of his Restricted Stock
Grant still subject to the restrictions set forth in Section 2(b) of this
Agreement immediately prior to the date of such Change of Control in exchange
for the right to exercise a corresponding portion of the Option.
(vii) In the event of an Involuntary Termination (as defined in
Section 2(b) of this Agreement) that occurs prior to June 15, 2004, during the
period of 60 days commencing on the date of such Involuntary Termination, the
Grantee may elect to cancel the portion of his Restricted Stock Grant that will
no longer be subject to the restrictions set forth in Section 2(b) of this
Agreement as a result of such Involuntary Termination in exchange for the right
to exercise a corresponding portion of the Option.
Upon the Grantee making any of the foregoing Section 3 Elections, the portion
of the Option subject to such Section 3 Election shall become exercisable on
the date that the restrictions set forth in Section 2(b) of this Agreement on
the corresponding portion of the Restricted Stock Grant would have lapsed.
(b) Exercise of Option. Shares subject to the Option may be purchased
by giving the 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 Grantee 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 Grantee to sell the
shares exercised on the open market through a duly registered broker-dealer
with which the Company makes an arrangement for the sale of such shares under
the Plan. This method is known as the "broker-dealer exercise method" and is
subject to the terms and conditions set forth herein, in the Plan and in
guidelines established by the Committee. The Option shall be deemed to be
exercised simultaneously with the sale of the shares by the broker-dealer. If
the shares purchased upon the exercise of an Option or a portion thereof cannot
be sold for a price equal to or greater than the full exercise price plus
direct costs of the sales, then there is no exercise of the Option. Election of
this method authorizes the Company to deliver shares to the broker-dealer and
authorizes the broker-dealer to sell such shares on the open market. The
broker-dealer will remit proceeds of the sale to the Company which will remit
net proceeds to the Grantee after repayment of the borrowing, deduction of
costs, if any, and withholding of taxes. The Grantee's borrowing from the
Company on an open account shall be a personal obligation of the Grantee 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
<PAGE> 6
exercise of the Option or portion thereof, title to the shares shall pass to
the Grantee 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 Grantee agrees that if this
broker-dealer exercise method under this paragraph is used, the Grantee
promises unconditionally to pay the Company the full balance in his open
account at any time upon demand. Grantee also agrees to pay interest on the
account balance at the AFR for short-term loans from and after demand.
(b) Expiration of Option.
(i) The Option shall expire or terminate and may not be
exercised to any extent by the Grantee after the first to occur of the
following events:
(x) 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
(y) immediately upon the Optionee's Termination of
Employment for Cause (as defined in Section 4(d) of this Agreement).
(ii) Upon the Grantee's failure to make a Section 3
Election during the designated period with respect to a portion of the
Restricted Stock Grant, that portion of the tandem Option to which such Section
3 Election, if made, would have related, shall immediately terminate and have
no force or effect.
4. General Provisions
(a). No Right to Employment. Neither the execution and delivery of
this Agreement nor the tandem awards 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 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 (as defined in Section 4(d) of this Agreement).
(b) Change in Common Stock or Corporate Structure. In the event of any
stock split, spin-of, stock dividend, extraordinary cash dividend, stock
combination or reclassification, recapitalization or merger, change in control,
or similar event, the Committee shall make an appropriate adjustment to the
exercise price of the Option or to the number or kind of shares or other
consideration covered by this Agreement or to which the Option, or portions
thereof then unexercised, shall be exercisable, and such other revisions to
this Agreement as it deems are equitably required. Any adjustment or revision
made by the Committee shall be final and binding on the Grantee, the Company
and all other interested persons; provided; however, that the Committee may not
make any such adjustments or revisions that are adverse to the Grantee without
his written consent.
<PAGE> 7
(c) Application of Laws. All aspects of the tandem awards evidenced by
this Agreement shall be subject to all applicable laws, rules and regulations
and to such approvals of any governmental agencies as may be required.
(d) Termination for Cause. If the Grantee has an employment or
severance agreement, employment shall be deemed to have been terminated for
"Cause" only as such terms is defined in the employment or severance agreement.
If the Grantee does not have an employment or severance agreement that defines
the term "Cause", the Grantee's employment shall be deemed to have been
terminated for "Cause" if the termination results from the Grantee's: (i)
criminal conduct; (ii) deliberate continual refusal to perform employment
duties on substantially a full time basis; (iii) deliberate and continual
refusal to act in accordance with any specific lawful instructions of an
authorized officer or employee more senior than the Grantee; or (iv) deliberate
misconduct which could be materially damaging to the Company or any of its
business operations without a reasonable good faith belief by the Grantee that
such conduct was in the best interests of the Company. A termination of
employment shall not be deemed for Cause hereunder unless the senior personnel
executive of the Company shall confirm that any such termination is for Cause.
Any voluntary termination of employment by the Grantee in anticipation of an
involuntary termination of employment for Cause shall be deemed to be a
termination of employment for Cause.
(e) Taxes.
(i) Any taxes required by federal, state or local laws to be withheld
by the Company on the Date of Grant or the delivery of unrestricted shares of
Common Stock pursuant to the Restricted Stock Grant 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 number of shares of Common Stock to satisfy the
withholding prior to the delivery of unrestricted shares of Common Stock.
(ii) Any taxes required by federal, state, or local laws to be
withheld by the Company upon exercise by the Grantee of the tandem Option shall
be paid to the Company before delivery of shares of Common Stock is made to the
Grantee. When the tandem 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.
(f) Notices. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, R.J. Reynolds Tobacco Holdings, Inc., Post
Office Box 2866, Winston-Salem, NC, 27102-2866, 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.
(g) Administration and Interpretation. In consideration of the
Restricted Stock Grant and the Option 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
<PAGE> 8
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.
(h) GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and
the Grantee have executed this Agreement as of the Date of Grant first above
written.
R.J. REYNOLDS TOBACCO HOLDINGS INC.
By:
-------------------------------
Authorized Signatory
- -----------------------------------------
Grantee
Grantee's Taxpayer Identification Number:
- -----------------------------------------
Grantee's Home Address:
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
<PAGE> 1
EXHIBIT 10.3
R.J. REYNOLDS TOBACCO HOLDINGS INC.
1999 LONG TERM INCENTIVE PLAN
TANDEM RESTRICTED STOCK/STOCK OPTION
AGREEMENT
----------------------------------------
DATE OF GRANT: June 15, 1999
W I T N E S S E T H
1. Tandem Restricted Stock and Option Grant.
Pursuant to the provisions of the 1999 Long Term Incentive Plan (the
"Plan") R.J. Reynolds Tobacco Holdings, Inc. (the "Company") on the above date
has granted, and this Agreement evidences the grant to
ANDREW J. SCHINDLER (THE "GRANTEE")
subject to the terms and conditions which follow and the terms and conditions
of the Plan, of a grant of
(A) A TOTAL OF 85,000 SHARES OF COMMON STOCK OF THE COMPANY (THE
"RESTRICTED STOCK GRANT"), AND, IN TANDEM,
(B) THE RIGHT AND OPTION TO PURCHASE FROM THE COMPANY A TOTAL OF
340,000 SHARES OF COMMON STOCK OF THE COMPANY ("COMMON
STOCK"), AT THE EXERCISE PRICE OF $32.4375 PER SHARE, THE
CLOSING PRICE OF A SHARE OF COMMON STOCK ON THE DATE OF GRANT
(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
below shall have the meaning set forth in the Plan, unless otherwise indicated.
2. Terms of Restricted Stock Grant.
(a) 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 shares of 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 Section 2(b) of
this Agreement on the shares of Common Stock granted hereunder lapse. The
Grantee acknowledges and agrees that, alternatively, the shares of Common Stock
granted hereunder may be in book-entry form with instructions from the Company
to the Company's transfer agent that such shares
<PAGE> 2
shall remain restricted until the restrictions imposed by Section 2(b) of this
Agreement on such shares lapse.
(b) Restrictions on Transfer of Stock. The shares of Common Stock
granted hereunder may not be sold, tendered, assigned, transferred, pledged or
otherwise encumbered prior to the earliest of:
(i) June 15, 2002, for 50% of the shares,
June 15, 2003, for an additional 25% of the shares,
June 15, 2004, for an additional 25% of the shares;
(ii) the date of the Grantee's Retirement (as defined in
this Section 2(b));
(iii) the earlier of (x) 60 days after the date of the
Grantee's Permanent Disability (as defined in the
Company's Long Term Disability Plan) or (y) receipt
of written notice by the Company that the Grantee
has declined to make the Section 3 Election (as
defined in Section 3(a) of this Agreement) pursuant
to Section (3)(a)(v) of this Agreement, for 100% of
the shares;
(iv) the earlier of (x) 60 days after the date of the
Grantee's death or (y) receipt of written notice by
the Company that the Grantee's representative has
declined to make the Section 3 Election pursuant to
Section (3)(a)(v) of this Agreement, for 100% of the
shares; or
(v) the earlier of (x) 60 days after the date of a
Change of Control or (y) receipt of written notice
by the Company that the Grantee has declined to make
the Section 3 Election pursuant to Section
(3)(a)(vi) of this Agreement, for 100% of the
shares.
For purposes of this Agreement, the term "Retirement" shall mean
retirement at age 65 or over, or early retirement at age 55 or over with the
approval of the Board of Directors of the Company, which approval specifically
states the number or percentage of shares with respect to which the
restrictions referred to in this Section 2(b) will lapse.
Upon the earlier of (i) 60 days after the involuntary termination of
the Grantee's employment with the Company or a subsidiary of the Company
without Cause (as defined in Section 4(d) of this Agreement) (an "Involuntary
Termination") or (ii) receipt of written notice by the Company that the Grantee
has declined to make the Section 3 Election pursuant to Section 3(a)(vii) of
this Agreement, the restrictions imposed by this Section 2(b) will lapse as to
50% of the shares of Common Stock granted to the Grantee pursuant to this
Agreement if such Involuntary Termination occurs on or before June 14,
<PAGE> 3
2002, and will lapse as to 100% of such shares if such Involuntary Termination
occurs after June 14, 2002.
At the time the restrictions imposed by this Section 2(b) shall lapse
upon any of the shares of Common Stock granted to the Grantee under this
Agreement, provided that the Grantee shall not have made a Section 3 Election
with respect to such shares, the appropriate number of shares of Common Stock
shall be delivered to the Grantee without a restrictive legend on any Common
Stock certificate, or, if such shares are held in book-entry form, the
Company's transfer agent shall be instructed to remove the restrictions on such
shares.
(c) Forfeiture of Stock. Upon the earlier of a Section 3 Election or
the Grantee's Termination of Employment, subject to the provisions of Section
2(b) in the case of an Involuntary Termination, the Grantee shall forfeit all
right, title and interest in and to the shares of Common Stock still subject to
the restrictions set forth in Section 2(b)(i) of this Agreement (or the portion
thereof to which such Section 3 Election relates, as the case may be) and to
any dividends to be paid thereafter on such shares. Such forfeited shares of
Common Stock shall revert to the Company and shall not become transferable by
the Grantee or anyone claiming through the Grantee. For purposes of this
Agreement, the term "Termination of Employment" shall mean the termination of
the Grantee's active employment with the Company or a subsidiary of the
Company; it does not mean the termination of the Grantee's 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.
(d) Dividends. If the Grantee is a shareholder of record on any
applicable record date, he shall receive any dividends on the shares of Common
Stock granted hereunder when paid regardless of whether the restrictions
imposed by Section 2(b) of this Agreement hereof have lapsed.
(e) Voting. If the Grantee is a shareholder of record on any
applicable record date, he shall have the right to vote the shares of Common
Stock granted hereunder regardless of whether the restrictions imposed by
Section 2(b) of this Agreement hereof have lapsed.
(f) Registration. The shares of Common Stock granted hereunder may be
offered and sold by the Grantee only if such shares are 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 shares of Common Stock granted
hereunder unless and until such shares are registered for resale under the 1933
Act or an exemption from registration is available, (ii) represents that he
accepts such shares of 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
<PAGE> 4
that he or his beneficiary, on request, will be obligated to repeat these
representations in writing prior to any future delivery of such shares of
Common Stock.
3. Option Terms
(a) Elections. The Option shall be exercisable only if and to the
extent the Grantee makes one or more of the following elections (each, a
"Section 3 Election") in accordance with the following terms and conditions,
and any further procedures which may be established by the Company from time to
time:
(i) During the period from March 15, 2002 until May 15,
2002, the Grantee may elect to cancel up to 50% of the Restricted Stock Grant
in exchange for the right to exercise the Option with respect to the same
percentage of shares of Common Stock covered by the Option.
(ii) During the period from March 15, 2003 until May 15,
2003, the Grantee may elect to cancel up to 25% of the Restricted Stock Grant
in exchange for the right to exercise the Option with respect to the same
percentage of shares of Common stock covered by the Option.
(iii) During the period from March 15, 2004 until May 15,
2004, the Grantee may elect to cancel up to 25% of the Restricted Stock Grant
in exchange for the right to exercise the Option with respect to the same
percentage of shares of Common Stock covered by the Option.
(iv) In the event the date of the Grantee's Retirement
occurs prior to June 15, 2004, during the period of 60 days commencing 90 days
prior to the date of the Grantee's Retirement, the Grantee may elect to cancel
the portion of his Restricted Stock Grant that will no longer be subject to the
restrictions set forth in Section 2(b) of this Agreement as a result of the
Grantee's Retirement in exchange for the right to exercise a corresponding
portion of the Option.
(v) In the event of the date of the Grantee's Permanent
Disability or death occurs prior to June 15, 2004, during the period of 60 days
commencing on the date of the Grantee's Permanent Disability or death, as
applicable, the Grantee (or upon his death, his representative) may elect to
cancel the portion of his Restricted Stock Grant still subject to the
restrictions set forth in Section 2(b) of this Agreement immediately prior to
the date of the Grantee's Permanent Disability, or death, as applicable, in
exchange for the right to exercise a corresponding portion of the Option.
(vi) In the event of a Change of Control which occurs
prior to June 15, 2004, during the period of 60 days commencing on the date of
such Change of Control, the Grantee may elect to cancel the portion of his
Restricted Stock Grant still subject to the restrictions set forth in Section
2(b) of this Agreement immediately prior to
<PAGE> 5
the date of such Change of Control in exchange for the right to exercise a
corresponding portion of the Option.
(vii) In the event of an Involuntary Termination (as
defined in Section 2(b) of this Agreement) that occurs prior to June 15, 2004,
during the period of 60 days commencing on the date of such Involuntary
Termination, the Grantee may elect to cancel the portion of his Restricted
Stock Grant that will no longer be subject to the restrictions set forth in
Section 2(b) of this Agreement as a result of such Involuntary Termination in
exchange for the right to exercise a corresponding portion of the Option.
Upon the Grantee making any of the foregoing Section 3 Elections, the portion
of the Option subject to such Section 3 Election shall become exercisable on
the date that the restrictions set forth in Section 2(b) of this Agreement on
the corresponding portion of the Restricted Stock Grant would have lapsed.
(b) Exercise of Option. Shares subject to the Option may be purchased
by giving the 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 Grantee 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 Grantee to
sell the shares exercised on the open market through a duly registered
broker-dealer with which the Company makes an arrangement for the sale of such
shares under the Plan. This method is known as the "broker-dealer exercise
method" and is subject to the terms and conditions set forth herein, in the
Plan and in guidelines established by the Committee. The Option shall be deemed
to be exercised simultaneously with the sale of the shares by the
broker-dealer. If the shares purchased upon the exercise of an Option or a
portion thereof cannot be sold for a price equal to or greater than the full
exercise price plus direct costs of the sales, then there is no exercise of the
Option. Election of this method authorizes the Company to deliver shares to the
broker-dealer and authorizes the broker-dealer to sell such shares on the open
market. The broker-dealer will remit proceeds of the sale to the Company which
will remit net proceeds to the Grantee after repayment of the borrowing,
deduction of costs, if any, and withholding of taxes. The Grantee's borrowing
from the Company on an open account shall be a personal obligation of the
Grantee 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 Grantee 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.
<PAGE> 6
The Grantee agrees that if this broker-dealer exercise method under this
paragraph is used, the Grantee promises unconditionally to pay the Company the
full balance in his open account at any time upon demand. Grantee also agrees
to pay interest on the account balance at the AFR for short-term loans from and
after demand.
(b) Expiration of Option.
(i) The Option shall expire or terminate and may not be
exercised to any extent by the Grantee after the first to occur of the
following events:
(x) 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
(y) immediately upon the Optionee's Termination of
Employment for Cause (as defined in Section 4(d) of this Agreement).
(ii) Upon the Grantee's failure to make a Section 3
Election during the designated period with respect to a portion of the
Restricted Stock Grant, that portion of the tandem Option to which such Section
3 Election, if made, would have related, shall immediately terminate and have
no force or effect.
4. General Provisions
(a). No Right to Employment. Neither the execution and delivery of
this Agreement nor the tandem awards 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 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 (as defined in Section 4(d) of this Agreement).
(b) Change in Common Stock or Corporate Structure. In the event of any
stock split, spin-of, stock dividend, extraordinary cash dividend, stock
combination or reclassification, recapitalization or merger, change in control,
or similar event, the Committee shall make an appropriate adjustment to the
exercise price of the Option or to the number or kind of shares or other
consideration covered by this Agreement or to which the Option, or portions
thereof then unexercised, shall be exercisable, and such other revisions to
this Agreement as it deems are equitably required. Any adjustment or revision
made by the Committee shall be final and binding on the Grantee, the Company
and all other interested persons; provided; however, that the Committee may not
make any such adjustments or revisions that are adverse to the Grantee without
his written consent.
(c) Application of Laws. All aspects of the tandem awards evidenced by
this Agreement shall be subject to all applicable laws, rules and regulations
and to such approvals of any governmental agencies as may be required.
<PAGE> 7
(d) Termination for Cause. If the Grantee has an employment or
severance agreement, employment shall be deemed to have been terminated for
"Cause" only as such terms is defined in the employment or severance agreement.
If the Grantee does not have an employment or severance agreement that defines
the term "Cause", the Grantee's employment shall be deemed to have been
terminated for "Cause" if the termination results from the Grantee's: (i)
criminal conduct; (ii) deliberate continual refusal to perform employment
duties on substantially a full time basis; (iii) deliberate and continual
refusal to act in accordance with any specific lawful instructions of an
authorized officer or employee more senior than the Grantee; or (iv) deliberate
misconduct which could be materially damaging to the Company or any of its
business operations without a reasonable good faith belief by the Grantee that
such conduct was in the best interests of the Company. A termination of
employment shall not be deemed for Cause hereunder unless the senior personnel
executive of the Company shall confirm that any such termination is for Cause.
Any voluntary termination of employment by the Grantee in anticipation of an
involuntary termination of employment for Cause shall be deemed to be a
termination of employment for Cause.
(e) Taxes.
(i) Any taxes required by federal, state or local laws to be
withheld by the Company on the Date of Grant or the delivery of unrestricted
shares of Common Stock pursuant to the Restricted Stock Grant 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 number of shares of Common Stock to satisfy the
withholding prior to the delivery of unrestricted shares of Common Stock.
(ii) Any taxes required by federal, state, or local laws to be
withheld by the Company upon exercise by the Grantee of the tandem Option shall
be paid to the Company before delivery of shares of Common Stock is made to the
Grantee. When the tandem 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.
(f) Notices. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, R.J. Reynolds Tobacco Holdings, Inc., Post
Office Box 2866, Winston-Salem, NC, 27102-2866, 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.
(g) Administration and Interpretation. In consideration of the
Restricted Stock Grant and the Option 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
<PAGE> 8
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.
(h) GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and
the Grantee have executed this Agreement as of the Date of Grant first above
written.
R.J. REYNOLDS TOBACCO HOLDINGS INC.
By:
-------------------------------
Authorized Signatory
Grantee
Grantee's Taxpayer Identification Number:
- ----------------------------------------
Grantee's Home Address:
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
<PAGE> 1
EXHIBIT 10.4
R.J. REYNOLDS TOBACCO HOLDINGS INC.
1999 LONG TERM INCENTIVE PLAN
TANDEM RESTRICTED STOCK/STOCK OPTION
AGREEMENT
-------------------------------------
DATE OF GRANT: July 28, 1999
W I T N E S S E T H
1. Tandem Restricted Stock and Option Grant.
Pursuant to the provisions of the 1999 Long Term Incentive Plan (the
"Plan") R.J. Reynolds Tobacco Holdings, Inc. (the "Company") on the above date
has granted, and this Agreement evidences the grant to
(NAME) (THE "GRANTEE")
subject to the terms and conditions which follow and the terms and conditions
of the Plan, of a grant of
(A) A TOTAL OF (NUMBER) SHARES OF COMMON STOCK OF THE COMPANY
(THE "RESTRICTED STOCK GRANT"), AND, IN TANDEM,
(B) THE RIGHT AND OPTION TO PURCHASE FROM THE COMPANY A TOTAL OF
(NUMBER) SHARES OF COMMON STOCK OF THE COMPANY ("COMMON
STOCK"), AT THE EXERCISE PRICE OF $27.50 PER SHARE, THE
CLOSING PRICE OF A SHARE OF COMMON STOCK ON THE DATE OF GRANT
(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
below shall have the meaning set forth in the Plan, unless otherwise indicated.
2. Terms of Restricted Stock Grant.
(a) 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 shares of 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 Section 2(b) of
this Agreement on the shares of Common Stock granted hereunder lapse. The
Grantee acknowledges and agrees that, alternatively, the shares of Common Stock
granted hereunder may be in book-entry form
<PAGE> 2
with instructions from the Company to the Company's transfer agent that such
shares shall remain restricted until the restrictions imposed by Section 2(b)
of this Agreement on such shares lapse.
(b) Restrictions on Transfer of Stock. The shares of Common Stock
granted hereunder may not be sold, tendered, assigned, transferred, pledged or
otherwise encumbered prior to the earliest of:
(i) July 28, 2002, for 50% of the shares,
July 28, 2003, for an additional 25% of the shares,
July 28, 2004, for an additional 25% of the shares;
(ii) the date of the Grantee's Retirement (as defined in
this Section 2(b));
(iii) the earlier of (x) 60 days after the date of the
Grantee's Permanent Disability (as defined in the
Company's Long Term Disability Plan) or (y) receipt
of written notice by the Company that the Grantee
has declined to make the Section 3 Election (as
defined in Section 3(a) of this Agreement) pursuant
to Section (3)(a)(v) of this Agreement, for 100% of
the shares;
(iv) the earlier of (x) 60 days after the date of the
Grantee's death or (y) receipt of written notice by
the Company that the Grantee's representative has
declined to make the Section 3 Election pursuant to
Section (3)(a)(v) of this Agreement, for 100% of the
shares; or
(v) the earlier of (x) 60 days after the date of a
Change of Control or (y) receipt of written notice
by the Company that the Grantee has declined to make
the Section 3 Election pursuant to Section
(3)(a)(vi) of this Agreement, for 100% of the
shares.
For purposes of this Agreement, the term "Retirement" shall mean
retirement at age 65 or over, or early retirement at age 55 or over with the
approval of the Chief Executive Officer of the Company, which approval
specifically states the number or percentage of shares with respect to which
the restrictions referred to in this Section 2(b) will lapse.
Upon the earlier of (i) 60 days after the involuntary termination of
the Grantee's employment with the Company or a subsidiary of the Company
without Cause (as defined in Section 4(d) of this Agreement) (an "Involuntary
Termination") or (ii) receipt of written notice by the Company that the Grantee
has declined to make the Section 3 Election pursuant to Section (3)(a)(vii) of
this Agreement, the restrictions imposed by
<PAGE> 3
this Section 2(b) will lapse with respect to that number of shares of Common
Stock which is equal to (x) the product of (A) the total number of shares of
Common Stock granted to the Grantee under this Agreement and (B) a fraction,
the numerator of which is the number of whole or partial months between the
Date of Grant and date of the Grantee's Termination of Employment (as defined
in Section 2(c) of this Agreement) and the denominator of which is 60, minus
(y) the number of shares of Common Stock granted to the Grantee under this
Agreement as to which the restrictions set forth in this Section 2(b) have
lapsed prior to such involuntary termination of employment.
At the time the restrictions imposed by this Section 2(b) shall lapse
upon any of the shares of Common Stock granted to the Grantee under this
Agreement, provided that the Grantee shall not have made a Section 3 Election
with respect to such shares, the appropriate number of shares of Common Stock
shall be delivered to the Grantee without a restrictive legend on any Common
Stock certificate, or, if such shares are held in book-entry form, the
Company's transfer agent shall be instructed to remove the restrictions on such
shares.
(c) Forfeiture of Stock. Upon the earlier of a Section 3 Election or
the Grantee's Termination of Employment, subject to the provisions of Section
2(b) in the case of an Involuntary Termination, the Grantee shall forfeit all
right, title and interest in and to the shares of Common Stock still subject to
the restrictions set forth in Section 2(b)(i) of this Agreement (or the portion
thereof to which such Section 3 Election relates, as the case may be) and to
any dividends to be paid thereafter on such shares. Such forfeited shares of
Common Stock shall revert to the Company and shall not become transferable by
the Grantee or anyone claiming through the Grantee. For purposes of this
Agreement, the term "Termination of Employment" shall mean the termination of
the Grantee's active employment with the Company or a subsidiary of the
Company; it does not mean the termination of the Grantee's 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.
(d) Dividends. If the Grantee is a shareholder of record on any
applicable record date, he shall receive any dividends on the shares of Common
Stock granted hereunder when paid regardless of whether the restrictions
imposed by Section 2(b) of this Agreement hereof have lapsed.
(e) Voting. If the Grantee is a shareholder of record on any
applicable record date, he shall have the right to vote the shares of Common
Stock granted hereunder regardless of whether the restrictions imposed by
Section 2(b) of this Agreement hereof have lapsed.
(f) Registration. The shares of Common Stock granted hereunder may be
offered and sold by the Grantee only if such shares are 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
<PAGE> 4
executing this Agreement, the Grantee (i) agrees not to offer or sell the
shares of Common Stock granted hereunder unless and until such shares are
registered for resale under the 1933 Act or an exemption from registration is
available, (ii) represents that he accepts such shares of 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 shares of Common Stock.
3. Option Terms
(a) Elections. The Option shall be exercisable only if and to the
extent the Grantee makes one or more of the following elections (each, a
"Section 3 Election") in accordance with the following terms and conditions,
and any further procedures which may be established by the Company from time to
time:
(i) During the period from April 28, 2002 until June 28,
2002, the Grantee may elect to cancel up to 50% of the Restricted Stock Grant
in exchange for the right to exercise the Option with respect to the same
percentage of shares of Common Stock covered by the Option.
(ii) During the period from April 28, 2003 until June 28,
2003, the Grantee may elect to cancel up to 25% of the Restricted Stock Grant
in exchange for the right to exercise the Option with respect to the same
percentage of shares of Common stock covered by the Option.
(iii) During the period from April 28, 2004 until June 28,
2004, the Grantee may elect to cancel up to 25% of the Restricted Stock Grant
in exchange for the right to exercise the Option with respect to the same
percentage of shares of Common Stock covered by the Option.
(iv) In the event the date of the Grantee's Retirement occurs
prior to July 28, 2004, during the period of 60 days commencing 90 days prior
to the date of the Grantee's Retirement, the Grantee may elect to cancel the
portion of his Restricted Stock Grant that will no longer be subject to the
restrictions set forth in Section 2(b) of this Agreement as a result of the
Grantee's Retirement in exchange for the right to exercise a corresponding
portion of the Option.
(v) In the event of the date of the Grantee's Permanent
Disability or death occurs prior to June 15, 2004, during the period of 60 days
commencing on the date of the Grantee's Permanent Disability or death, as
applicable, the Grantee (or upon his death, his representative) may elect to
cancel the portion of his Restricted Stock Grant still subject to the
restrictions set forth in Section 2(b) of this Agreement immediately prior to
the date of the Grantee's Permanent Disability, or death, as applicable, in
exchange for the right to exercise a corresponding portion of the Option.
<PAGE> 5
(vi) In the event of a Change of Control which occurs prior
to July 28, 2004, during the period of 60 days commencing on the date of such
Change of Control, the Grantee may elect to cancel the portion of his
Restricted Stock Grant still subject to the restrictions set forth in Section
2(b) of this Agreement immediately prior to the date of such Change of Control
in exchange for the right to exercise a corresponding portion of the Option.
(vii) In the event of an Involuntary Termination (as defined
in Section 2(b) of this Agreement) that occurs prior to July 28, 2004, during
the period of 60 days commencing on the date of such Involuntary Termination,
the Grantee may elect to cancel the portion of his Restricted Stock Grant that
will no longer be subject to the restrictions set forth in Section 2(b) of this
Agreement as a result of such Involuntary Termination in exchange for the right
to exercise a corresponding portion of the Option.
Upon the Grantee making any of the foregoing Section 3 Elections, the portion
of the Option subject to such Section 3 Election shall become exercisable on
the date that the restrictions set forth in Section 2(b) of this Agreement on
the corresponding portion of the Restricted Stock Grant would have lapsed.
(b) Exercise of Option. Shares subject to the Option may be purchased
by giving the 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 Grantee 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 Grantee to sell the
shares exercised on the open market through a duly registered broker-dealer
with which the Company makes an arrangement for the sale of such shares under
the Plan. This method is known as the "broker-dealer exercise method" and is
subject to the terms and conditions set forth herein, in the Plan and in
guidelines established by the Committee. The Option shall be deemed to be
exercised simultaneously with the sale of the shares by the broker-dealer. If
the shares purchased upon the exercise of an Option or a portion thereof cannot
be sold for a price equal to or greater than the full exercise price plus
direct costs of the sales, then there is no exercise of the Option. Election of
this method authorizes the Company to deliver shares to the broker-dealer and
authorizes the broker-dealer to sell such shares on the open market. The
broker-dealer will remit proceeds of the sale to the Company which will remit
net proceeds to the Grantee after repayment of the borrowing, deduction of
costs, if any, and withholding of taxes. The Grantee's borrowing from the
Company on an open account shall be a personal obligation of the Grantee 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
<PAGE> 6
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 Grantee 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 Grantee agrees that if this
broker-dealer exercise method under this paragraph is used, the Grantee
promises unconditionally to pay the Company the full balance in his open
account at any time upon demand. Grantee also agrees to pay interest on the
account balance at the AFR for short-term loans from and after demand.
(b) Expiration of Option.
(i) The Option shall expire or terminate and may not be
exercised to any extent by the Grantee after the first to occur of the
following events:
(x) 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
(y) immediately upon the Optionee's Termination of Employment
for Cause (as defined in Section 4(d) of this Agreement).
(ii) Upon the Grantee's failure to make a Section 3 Election
during the designated period with respect to a portion of the Restricted Stock
Grant, that portion of the tandem Option to which such Section 3 Election, if
made, would have related, shall immediately terminate and have no force or
effect.
4. General Provisions
(a). No Right to Employment. Neither the execution and delivery of
this Agreement nor the tandem awards 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 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 (as defined in Section 4(d) of this Agreement).
(b) Change in Common Stock or Corporate Structure. In the event of any
stock split, spin-of, stock dividend, extraordinary cash dividend, stock
combination or reclassification, recapitalization or merger, change in control,
or similar event, the Committee shall make an appropriate adjustment to the
exercise price of the Option or to the number or kind of shares or other
consideration covered by this Agreement or to which the Option, or portions
thereof then unexercised, shall be exercisable, and such other revisions to
this Agreement as it deems are equitably required. Any adjustment or revision
made by the Committee shall be final and binding on the Grantee, the Company
and all other interested persons; provided; however, that the Committee may not
make
<PAGE> 7
any such adjustments or revisions that are adverse to the Grantee without his
written consent.
(c) Application of Laws. All aspects of the tandem awards evidenced by
this Agreement shall be subject to all applicable laws, rules and regulations
and to such approvals of any governmental agencies as may be required.
(d) Termination for Cause. If the Grantee has an employment or
severance agreement, employment shall be deemed to have been terminated for
"Cause" only as such terms is defined in the employment or severance agreement.
If the Grantee does not have an employment or severance agreement that defines
the term "Cause", the Grantee's employment shall be deemed to have been
terminated for "Cause" if the termination results from the Grantee's: (i)
criminal conduct; (ii) deliberate continual refusal to perform employment
duties on substantially a full time basis; (iii) deliberate and continual
refusal to act in accordance with any specific lawful instructions of an
authorized officer or employee more senior than the Grantee; or (iv) deliberate
misconduct which could be materially damaging to the Company or any of its
business operations without a reasonable good faith belief by the Grantee that
such conduct was in the best interests of the Company. A termination of
employment shall not be deemed for Cause hereunder unless the senior personnel
executive of the Company shall confirm that any such termination is for Cause.
Any voluntary termination of employment by the Grantee in anticipation of an
involuntary termination of employment for Cause shall be deemed to be a
termination of employment for Cause.
(e) Taxes.
(i) Any taxes required by federal, state or local laws to be
withheld by the Company on the Date of Grant or the delivery of unrestricted
shares of Common Stock pursuant to the Restricted Stock Grant 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 number of shares of Common Stock to satisfy the
withholding prior to the delivery of unrestricted shares of Common Stock.
(ii) Any taxes required by federal, state, or local laws to
be withheld by the Company upon exercise by the Grantee of the tandem Option
shall be paid to the Company before delivery of shares of Common Stock is made
to the Grantee. When the tandem 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.
(f) Notices. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, R.J. Reynolds Tobacco Holdings, Inc., Post
Office Box 2866, Winston-Salem, NC, 27102-2866, 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.
(g) Administration and Interpretation. In consideration of the
Restricted Stock
<PAGE> 8
Grant and the Option 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.
(h) GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and
the Grantee have executed this Agreement as of the Date of Grant first above
written.
R.J. REYNOLDS TOBACCO HOLDINGS INC.
By:-----------------------------------
Authorized Signatory
- -------------------------------------------
Grantee
Grantee's Taxpayer Identification Number:
- -------------------------------------------
Grantee's Home Address:
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE> 1
EXHIBIT 10.5
October 25, 1999
(Name)
Re: CHANGE OF CONTROL
Dear (Name):
In addition to your other contractual arrangements with R.J. Reynolds
Tobacco Holdings, Inc. (the "Company") and its affiliates, in the event of a
Change of Control of the Company (as such Change of Control is defined in the
Company's 1999 Long Term Incentive Plan) (the "1999 LTIP"), the following shall
occur:
1. The Company shall hold you harmless from any golden parachute tax
imposed by any federal, state or local taxing authority as a result
of any of the payments made from the Company. In the event that it is
determined that any payment or distribution by the Company to or for
you (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue 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 from the Company 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 retain an amount
of the Excise Tax Adjustment Payment equal to the Excise Tax imposed
upon the Payments. You agree to cooperate fully with the Company in
any protester appeal by the Company in the event of the imposition of
golden parachute tax.
2. If you are terminated without Cause (as defined in your Tandem
Restricted Stock/Stock Option Agreements issued under the 1999 LTIP)
following such Change of Control, the Company shall 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 any 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.
3. During the 24-month period following a Change of Control, you shall
be entitled to terminate your employment for Good Reason and receive
the severance arrangements under your contractual arrangements with
the Company as if you had been terminated by the Company without
Cause. For purposes of this Agreement, "Good Reason" shall mean,
without your express written consent, any of the following occurring
following a Change of Control:
<PAGE> 2
A. a material reduction in your duties, 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 Company's 1999 LTIP and the Company's Annual Incentive Award Plan (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 the retirement or savings plans
of the Company (unless such reduction is required by law) 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 written notice of termination given to you not less than thirty
(30) or more than sixty (60) days prior to the date of termination; provided
further that for purposes of this Agreement, no such purported termination
shall be effective;
F. any material breach by the Company or its affiliates of any provision
of this Agreement or any other of your contractual arrangements with the
Company or its affiliates; or
G. requiring you to be based at any office or location more than 35 miles
from the office or location at which you were based immediately prior to such
Change of Control, except for travel reasonably required in the performance of
your responsibilities.
4. In consideration of this Agreement, you and the Company agree that
this Agreement supersedes and replaces in its entirety the Agreement
between you and RJR Nabisco Holdings Corp. and RJR Nabisco, Inc.
dated ____________.
Please indicate your acceptance of the terms of this Agreement by signing this
letter below and returning it to Bob Gordon. A copy will be provided to you.
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
By: /s/Robert G. Gordon, Jr.
--------------------------------------------
Executive Vice President - Human Resources
Agreed as of this ___ day
of October, 1999.
- -------------------------------------
(Name)
<PAGE> 1
(DATE)
(NAME)
RE: SPECIAL SEVERANCE BENEFITS
EXHIBIT 10.6
Dear (NAME):
As consideration for you entering into the Non-Competition, Non-Disclosure of
Confidential Information and Commitment to Provide Assistance Agreement,
attached hereto and made a part of this document effective on the date that you
sign this agreement, you shall be eligible for special severance benefits, the
terms and conditions of which are set out below:
- - If, during the course of your employment with the Company or one of its
affiliates, defined for this purpose as the date that you sign this
agreement, you are involuntary terminated for any reason other than Cause
(as defined in the Company's Long Term Incentive Plan), you will receive
two years' pay (defined as base pay and target bonus at the time of
termination), payable over three years, and full employee benefits
coverage for three years, and if the Company's executive perquisite plan
is still in effect, coverage under the executive perquisite plan according
to its terms and conditions for three years. These special severance
benefits replace any compensation or benefits under the Company's standard
Salary and Benefit Continuation Program ("SBC"). It is intended that you
would not receive any less than the SBC obligation would provide, and the
rules that determine eligibility for payment under SBC apply to this
program.
- - In further consideration for this special severance benefit, and should an
involuntary separation ever occur, the Company will expect your
cooperation in transitioning your responsibilities, and will ask you,
prior to the payment of any benefits, to sign a letter containing a
release of claims and a reaffirmation of the attached Non-Competition and
Non-Disclosure of Confidential Information Agreement.
- - Except for the Company's obligation to provide you with the severance
defined above, you acknowledge and agree that nothing contained in this
Agreement obligates the Company (i) to employ you for any specific term or
(ii) to grant you any short term or long term incentive awards under the
plans and programs of the Company or its affiliates.
Robert R. Gordon, Jr.
Executive Vice President-Human Resources -----------------------------
Date
Attachment
Acknowledged and Accepted:
- ---------------------------------------- -----------------------------
(Name) Date
<PAGE> 2
NON-COMPETITION,
NON-DISCLOSURE OF CONFIDENTIAL INFORMATION,
AND COMMITMENT TO PROVIDE ASSISTANCE
AGREEMENT
I, (Name), acknowledging the special retirement and severance benefits made
available to me in conjunction with my offer of employment with R. J. Reynolds
Tobacco Company as consideration for entering into this Non-Competition,
Non-Disclosure of Confidential Information and Commitment to Provide Assistance
Agreement, do hereby agree to each of the following:
- - I will not, without the prior written consent of the company, use,
divulge, disclose or make accessible to any other person, firm,
partnership or corporation or other entity any confidential information
pertaining to the businesses of R. J. Reynolds Tobacco Company, or any of
its affiliates, except (A) while employed by the company in the business
of and for the benefit of the company or (B) 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 me to divulge, disclose or make accessible such
information. For purposes of this agreement, "Confidential Information"
shall mean non-public information concerning R. J. Reynolds Tobacco
Company or any of it's affiliates data, strategic business plans, product
development data (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 I know have become publicly available through a breach of
fiduciary duty or any confidentiality agreement).
- - During the period commencing on the date of my employment with R. J.
Reynolds Tobacco Company and ending three years after my date of
termination for any reason from R. J. Reynolds Tobacco Company, or any of
its affiliates, I covenant and agree that (A) I will not directly or
indirectly (whether as owner, partner, consultant, employee, or
otherwise), engage in any of the "major businesses" in which R. J.
Reynolds Tobacco Company, or any of its affiliates, are engaged and (B) I
will not, on my own behalf or on behalf of any person, firm or company,
directly or indirectly for a period of 12 months following my termination,
offer employment to any person who was, at the time of my termination,
employed by R. J. Reynolds Tobacco Company, or any of its affiliates.
"Major businesses" for this purpose are the major business segments of R.
J. Reynolds Tobacco Company, or any of its affiliates dealing in the
manufacture, sale or marketing of tobacco and smoking products or products
deemed to be in competition with smoking products, including but not
limited to those developed, marketed or intended to be used as part of
smoking cessation programs, or as tobacco or smoking substitutes. I and
the company agree that 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.
<PAGE> 3
(Name)
Non-Competition, Non-Disclosure of
Confidential Information, And Commitment
to Provide Assistance Agreement
Page 2
- - I agree that:
a) I 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) I will promptly
notify the Company if I receive any requests from anyone other than an
employee or agent of the Company for information regarding the Company
which could reasonably be construed as being proprietary, non-public or
confidential or if I become aware of any potential claim or proposed
litigation against the Company. c) I 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, I 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 and I will
bear no cost for same. e) If I am required by law to provide sworn
testimony regarding any Company-related matter and if I require legal
counsel to represent and protect my interests (in addition to the
Company-designated legal counsel provided for under subparagraph (d)
herein), the Company will reimburse me for any legal expenses (including,
but not limited to, the costs of any attorney reasonably acceptable to me
and the Company, which acceptance by the Company shall not be unreasonably
withheld) and other out-of-pocket expenses I may incur in relation to such
testimony. f) I will cooperate with the Company's attorneys to assist
their efforts, especially on matters I have been privy to, holding all
privileged attorney-client matters in strictest confidence unless ordered
to do otherwise by a court of competent jurisdiction or a committee of the
Congress of the United States or of a state legislature. I understand that
I will be reimbursed for travel, food, lodging or similar out-of-pocket
expense incurred at the Company's request in discharging any of my
obligations under this Agreement.
- - I agree that any breach of the covenants contained in this agreement would
irreparably injure R. J. Reynolds Tobacco Company and/or its affiliates.
Accordingly, the company may, in addition to pursuing any other remedies
that it may have in law or in equity, obtain an injunction against me from
any court having jurisdiction over the matter, restraining any further
violation of this agreement by me.
Understood and Agreed to:
- ---------------------------------------- ------------------------
(Name) Date
<PAGE> 1
EXHIBIT 10.7
October 25, 1999
(Name)
Re: SPECIAL SEVERANCE BENEFITS
Dear (Name):
Pursuant to a letter agreement dated ______________ (the "Letter
Agreement"), the Company agreed to provide you with special severance benefits
"[i]f, during the course of your employment with the Company or one of its
affiliates, you are involuntarily terminated for any reason other than Cause
(as defined in your Stock Option Agreements issued under the RJR Nabisco
Holdings Corp. 1990 Long Term Incentive Plan)." As a result of the spinoff of
R.J. Reynolds Tobacco Holdings, Inc. from Nabisco Group Holdings Corp. on June
14, 1999, the definition of "Cause" should be amended to refer to the Tandem
Restricted Stock/Stock Option Agreements issued under the R.J. Reynolds Tobacco
Holdings, Inc. 1999 Long Term Incentive Plan. Accordingly, the Letter Agreement
hereby is amended by deleting the clause "Cause (as defined in your Stock
Option Agreements issued under the RJR Nabisco Holdings. Corp. 1990 Long Term
Incentive Plan)" and inserting therefor the following language: "Cause (as
defined in your Tandem Restricted Stock/Stock Option Agreements issued under
the R.J. Reynolds Tobacco Holdings, Inc. Long Term Incentive Plan (the "1999
LTIP"))."
In addition, the Letter Agreement hereby is amended by adding the
following explanatory language regarding a deemed involuntary termination of
your employment without Cause by the Company:
- Involuntary termination of your employment without Cause
shall be deemed to occur if you voluntarily terminate your
employment after: (i) the total amount of your base salary
and targeted awards under the 1999 LTIP and the Annual
Incentive Award Plan (or successor plans) is at any time
reduced by more than 20% without your consent, provided,
however, that nothing herein shall be construed to guarantee
your target award if performance is below target, (ii) your
responsibilities are substantially reduced in importance
without your consent, or (iii), you are at any time required
as a condition of continued employment to relocate more than
35 miles from your then current place of employment without
your consent. Unless you provide written notification of your
non-consent to any of the events in (i), (ii) or (iii) above
within 90 days after the occurrence of such events, you shall
be deemed to have consented to the occurrence of such event
or events and no deemed involuntary termination shall occur.
If you provide written notice of your non-consent to any of
the events in (i), (ii) or (iii) above within 90 days after
the occurrence of such events, your employment by the Company
shall be deemed to have been involuntarily terminated after
receipt of such written notice by the Company.
<PAGE> 2
Please indicate your agreement to the terms of this Amendment by
signing this Amendment below and returning it to Bob Gordon. A copy will be
provided to you.
R. J. REYNOLDS TOBACCO COMPANY
By: /s/Robert R. Gordon, Jr.
---------------------------------------------
Executive Vice President - Human Resources
Agreed as of this ___ day of October, 1999.
- ------------------------------------
(Name)
<PAGE> 1
EXHIBIT 10.8
AMENDMENT TO THE EMPLOYMENT AGREEMENT DATED OCTOBER 31, 1988 AND PREVIOUSLY
AMENDED AS OF DECEMBER 20, 1988, BETWEEN RJR NABISCO, INC. AND ANDREW J.
SCHINDLER (THE "EXECUTIVE").
WHEREAS, the Executive and RJR Nabisco, Inc. entered into an
employment agreement (the "Employment Agreement") originally dated October 31,
1988 and subsequently amended as of December 20, 1988, which addresses the
compensation security to be provided to the Executive in the event his
employment with RJR Nabisco, Inc. is involuntarily terminated without Cause;
and
WHEREAS, on May 18, 1999, RJR Nabisco, Inc. was renamed R.J. Reynolds
Tobacco Holdings, Inc. ("RJR"); and
WHEREAS, in order to provide the Executive with continued incentives
to remain in the services of RJR, and to reflect the Executive's additional
responsibilities as Chief Executive Officer of RJR, RJR desires to amend the
Employment Agreement to enhance the Executive's compensation security in the
event his employment with RJR or a subsidiary is involuntarily terminated
without Cause.
NOW, THEREFORE, the parties hereby agree to amend Section 5(b)(i) of
the Employment Agreement, effective June 14, 1999, to read as follows:
(b) Cash Compensation. The Executive will be entitled to cash
compensation equal to three (3) years pay, calculated as
described below, payable in equal monthly installments over
the three (3) year Compensation period. The aggregate cash
compensation will be calculated as three times the sum of (a)
plus (b), where (a) is the Executive's highest annual rate of
base salary in effect during the twelve (12) month period
prior to his involuntary termination and (b) is the target
amount of his award under the Company's Annual Incentive
Award Plan (or successor Short-Term Incentive Plan) for the
calendar year in which his employment terminated (or, if
greater, the amount of such award for the next preceding
calendar year of full-time employment).
IN WITNESS WHEREOF, RJR, by its duly authorized officer, and the
Executive have executed this amendment as of this ____ day of _____, 1999.
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
By: /s/Stephen F. Goldstone
---------------------------------
/s/ Andrew J. Schindler
- -------------------------------------------
Executive
Executive's Taxpayer Identification Number:
- -------------------------------------------
Executive's Home Address:
- -------------------------------------------
- -------------------------------------------
<PAGE> 1
EXHIBIT 10.9
August 17, 1999
Mr. Andrew J. Schindler
Chairman and Chief Executive Officer
R.J. Reynolds Tobacco Company
Winston-Salem, NC 27102-2959
Dear Andy:
This letter constitutes formal confirmation to you of the provisions of the
cash retention grant approved by the Board of Directors of RJR Nabisco, Inc.,
(which has since been renamed R.J. Reynolds Tobacco Holdings, Inc.) ("RJRTH")
on May 12, 1999:
1. If you remain actively employed by R.J. Reynolds Tobacco Company
or an affiliated company (the "Company") until June 14, 2002
(payment date number one), you will be paid $1,800,000 from an
irrevocable "retention" trust (the "trust") established by an
agreement dated May 13, 1998 between RJRTH and Wachovia Bank,
N.A.
Funds within the trust have been designated for this payment.
2. If you remain actively employed by the Company until June 14,
2003 (payment date number two), you will be paid an additional
amount of $900,000 from the trust.
Funds within the trust will be designated for payment number two
on June 15, 2000.
3. If you remain actively employed by the company until June 14,
2004 (payment date number three), you will be paid an additional
amount of $900,000 from the trust.
Funds within the trust will be designated for payment number
three on June 15, 2001.
All three of the payments described above will come from the trust and you will
have no recourse to RJRTH or the Company.
If your employment terminates before any of the payment dates specified above,
the following rules will apply to the unpaid payments:
- If you voluntarily terminate employment (including retirement)
or if your employment is terminated for "cause," you will
forfeit all rights to any of the yet unpaid payments described
above.
- If your employment is terminated because of your death or
permanent disability, you (or your estate) will receive the
entire amount of any of the yet unpaid payments described above.
- If your employment is involuntarily terminated without "Cause"
before June 15, 2002, you will be vested in a payment of
$1,800,000. A pro-rata portion of the payment will be made from
the trust and the balance will be paid by the Company. The
pro-rata payment from the trust will be equal to the product of
(i) $1,800,000 and (ii) a fraction, the numerator of which is
the number of days between June 15, 1999 and the date you cease
active employment and the denominator of which is 1095 days.
<PAGE> 2
- If your employment is involuntarily terminated without "Cause"
on or after June 15, 2002, but before June 15, 2004, you will be
vested in a net payment of $3,600,000 less the amount of any
payments that have previously been made from the trust. A
portion of the net payment will be paid from the trust on a
pro-rata basis and the Company will pay the balance. The amount
of the net payment that will be paid from the trust will be
calculated as follows:
- In the case of payment number two described above, the
payment from the trust will be the product of (i) $900,000
and (ii) a fraction, the numerator of which is the number
of days not to exceed 1095 between June 15, 2000 and the
date you cease active employment and the denominator of
which is 1095 days; and
- In the case of payment number three described above, the
payment from the trust will be the product of (i) $900,000
and (ii) a fraction, the numerator of which is the number
of days not to exceed 1095 between June 15, 2001 and the
date you cease active employment and the denominator of
which is 1095 days.
- If your employment is involuntarily terminated following a "Change of
Control," you will be vested in a payment from the trust of
$3,600,000 less the amount of payments one, two or three described
above that have previously been paid from the trust
- "Cause" shall have the definition set out in your employment
agreement originally dated October 31, 1998 and subsequently amended
as of December 20, 1988 and as of June 14, 1999.
- "Change of Control" shall have the definition set out in the RJRTH
1999 Long Term Incentive Plan.
Attached to this letter is a copy of the actual recommendation presented to and
approved by the Board of Directors on May 12, 1999.
Sincerely,
/s/Robert R. Gordon, Jr.
Attachment
Understood and Accepted as Herein Described
- ------------------------------------- -----------------------------
/s/Andrew J. Schindler Date
<PAGE> 3
VI-A GRADES B AND ABOVE
- - In addition to the compensation noted on the preceding page, the following
Special Incentive Grants are proposed to be made as soon as practicable
following the spin-off.
- - Cash Retention Grant
- A Special Cash Retention Grant is proposed for Mr. Schindler equal to
two times his annual cash compensation (i.e. $3.6m). The grant would
be fully paid if he remains employed for 5 years: 50% would be paid
at the end of year three and 25% each at the end of years four and
five. It is anticipated that the grant will be funded through the
Retention Trust.
- - Stock Grants
- Grants will be in the form of RJRTH restricted stock in tandem with
RJRTH stock options. Prior to vesting, participants choose to receive
either the shares or the options granted in tandem with each share.
The award not selected is forfeited.
- Each share of restricted stock has four tandem stock options with an
exercise price equal to the stock price on the grant date.
- Awards best 50% at the end of three years, 25% after four years and
25% after five years.
Proposed Stock Grants (assuming 1/3 share of RJRTH for each RN share) are
as follows:
<TABLE>
<CAPTION>
TANDEM
------
EXECUTIVE SHARES OPTIONS
--------- ------ -------
<S> <C> <C>
Andrew J. Schindler 85,000 340,000
Lynn L. Beasley 35,000 140,000
Charles A. Blixt 35,000 140,000
Kenneth J. Lapiejko 35,000 140,000
James V. Maguire 35,000 140,000
</TABLE>
If Mr. Schindler is involuntarily terminated without cause, his cash and stock
grants will vest as follows: if the termination is within the first 3 years -
50% vesting; if the termination is afterwards - 100% vesting. The other stock
grants will vest pro-rata. Grants will be fully vested upon termination
following a change of control.
It is recommended that the Committee approve the Special Incentive Grants
described above.
<PAGE> 1
EXHIBIT 10.10
AMENDMENT NO. 1
TO THE
DEFINED CONTRIBUTION MASTER TRUST AGREEMENT
THIS AMENDMENT NO. 1 to the amended and restated Master Trust
Agreement dated June 14, 1999 (the "Master Trust Agreement") between Wachovia
Bank, N.A. and R. J. Reynolds Tobacco Company ("RJRT") made and entered into
this 29th day of September, 1999, by RJRT and with the consent of Wachovia
Bank, N.A., as trustee (the "Trustee");
W I T N E S S E T H:
WHEREAS, as of October 1, 1979, a master trust agreement was entered
into among Wachovia Bank and Trust Company, N.A., RJRT, a predecessor to RJR
Nabisco, Inc., and various other employers to provide for a trust for certain
defined contribution pension plans; and
WHEREAS, the Master Trust Agreement has been amended from time to
time, most recently as of June 14, 1999 to reflect the spin-off by RJR Nabisco
Holdings Corp. of RJR Nabisco, Inc. (now renamed R.J. Reynolds Tobacco
Holdings, Inc.); and
WHEREAS, RJRT and its parent company, R.J. Reynolds Tobacco Holdings,
Inc. (the "Company"), desire to reflect the change in plan sponsorship and in
the designated party to the Master Trust Agreement from RJRT to the Company;
and
WHEREAS, pursuant to Section 19 of the Master Trust Agreement, the
Chief Financial Officer of RJRT, as agent for RJRT, may amend the Master Trust
Agreement;
NOW, THEREFORE, the Master Trust Agreement is hereby amended as
follows effective as of June 14, 1999:
1.
R.J. Reynolds Tobacco Holdings, Inc. is substituted in the place of
RJRT as a party to the Master Trust Agreement and in each provision thereof
referring to RJRT or the "Company," including, without limitation, in Section
3.
Page 1 of 2
<PAGE> 2
2.
R. J. Reynolds Tobacco Company remains subject to the Master Trust
Agreement as an affiliated company of R.J. Reynolds Tobacco Holdings, Inc. and,
as appropriate, a plan sponsor of one or more plans subject to the Master Trust
Agreement.
3.
The Master Trust Agreement shall be named the "R. J. Reynolds Defined
Contribution Master Trust Agreement".
4.
Except as provided herein, the provisions of the Master Trust
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 1
to be executed by their duly authorized corporate officers as of the day and
year first written above.
R. J. REYNOLDS TOBACCO COMPANY
By: /s/ Kenneth J. Lapiejko
-----------------------------
Title: Chief Financial Officer
---------------------------
ACCEPTED: ACCEPTED:
TRUSTEE:
R. J. REYNOLDS TOBACCO
HOLDINGS, INC. WACHOVIA BANK. N.A.
By: /s/ Kenneth J. Lapiejko By: /s/ Jane B. Fisher
---------------------------- ------------------------------
Title: Chief Financial Officer Title: Senior Vice President\
------------------------ Group Executive
---------------------------
Page 2 of 2
<PAGE> 1
EXHIBIT 10.11
AMENDMENT NO. 1
TO THE
R. J. REYNOLDS TOBACCO COMPANY
DEFINED BENEFIT MASTER TRUST AGREEMENT
THIS AMENDMENT NO. 1 to the amended and restated R. J. Reynolds
Tobacco Company Defined Benefit Master Trust Agreement dated June 14, 1999 (the
"Master Trust Agreement") between R. J. Reynolds Tobacco Company ("RJRT") and
The Chase Manhattan Bank, N.A., is made and entered into this 1st day of
November, 1999, by the RJR Pension Investment Committee, with the consent of
The Chase Manhattan Bank, N.A., as trustee (the "Trustee"), RJRT, and R.J.
Reynolds Tobacco Holdings, Inc.;
W I T N E S S E T H:
WHEREAS, the Master Trust Agreement was entered into between The Chase
Manhattan Bank and RJRT to reflect the spinoff by RJR Nabisco Holdings Corp. of
RJR Nabisco, Inc., as of June 14, 1999; and
WHEREAS, RJRT and its parent company, R.J. Reynolds Tobacco Holdings,
Inc. (the "Company"), which was formerly called RJR Nabisco, Inc., desire to
reflect a change in plan sponsorship and in the designated party to the Master
Trust Agreement from RJRT to the Company; and
WHEREAS, pursuant to Section 22 of the Master Trust Agreement, the
Board of Directors of the Company, or the RJR Pension Investment Committee
acting on its behalf, has the authority to amend the Master Trust Agreement by
notice to the Trustee;
NOW, THEREFORE, the Master Trust Agreement is hereby amended as
follows effective as of June 14, 1999:
1.
R.J. Reynolds Tobacco Holdings, Inc. is substituted in the place of
RJRT as a party to the Master Trust Agreement and in each provision thereof
referring to RJRT or the "Company," including, without limitation, in Section
1(i).
2.
R. J. Reynolds Tobacco Company remains subject to the Master Trust
Agreement as an affiliated company of R.J. Reynolds Tobacco Holdings, Inc.,
and, as appropriate, as a plan sponsor of one or more plans subject to the
Master Trust Agreement.
Page 1 of 2
<PAGE> 2
3.
The name of the Master Trust Agreement is changed to "R. J. Reynolds
Defined Benefit Master Trust Agreement".
4.
Schedule A of the Master Trust Agreement, which names the plans
participating in the master trust, is amended to reflect the change in the name
of the Retirement Plan for Employees of R. J. Reynolds Tobacco Company to "R.
J. Reynolds Retirement Plan".
5.
Except as provided herein, the provisions of the Master Trust
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 1
to be executed by their duly authorized corporate officers as of the day and
year first written above.
RJR PENSION INVESTMENT COMMITTEE
By: /s/ Kenneth J. Lapiejko
-------------------------------
Title: EVP/CFO
----------------------------
ACCEPTED: ACCEPTED:
TRUSTEE:
R.J. REYNOLDS TOBACCO
HOLDINGS, INC. THE CHASE MANHATTAN BANK, N.A.
By: /s/ Charles A. Blixt By: /s/ Kenneth W. Baumann
-------------------------------- -------------------------------
Title: EVP & General Counsel Title: Vice President
----------------------------- ----------------------------
ACCEPTED:
R. J. REYNOLDS TOBACCO COMPANY
By: /s/ Charles A. Blixt
--------------------------------
Title: EVP & General Counsel
-----------------------------
Page 2 of 2
<PAGE> 1
EXHIBIT 12.1
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Earnings before fixed charges:
Income from continuing operations before income
taxes................................................. $281
Interest and debt expense.............................. 225
Interest portion of rental expense..................... 12
----
Earnings before fixed charges............................... $518
====
Fixed charges:
Interest and debt expense.............................. $225
Interest portion of rental expense..................... 12
----
Total fixed charges............................... $237
====
Ratio of earnings to fixed charges.......................... 2.2
====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF R. J. REYNOLDS TOBACCO FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,503
<SECURITIES> 0
<RECEIVABLES> 120
<ALLOWANCES> 0
<INVENTORY> 448
<CURRENT-ASSETS> 3,477
<PP&E> 2,326
<DEPRECIATION> 1,244
<TOTAL-ASSETS> 15,503
<CURRENT-LIABILITIES> 3,880
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 7,100
<TOTAL-LIABILITY-AND-EQUITY> 15,503
<SALES> 5,591
<TOTAL-REVENUES> 5,591
<CGS> 2,435
<TOTAL-COSTS> 2,435
<OTHER-EXPENSES> 455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> 281
<INCOME-TAX> 194
<INCOME-CONTINUING> 87
<DISCONTINUED> 2,512
<EXTRAORDINARY> (250)
<CHANGES> 0
<NET-INCOME> 2,349
<EPS-BASIC> 21.62
<EPS-DILUTED> 21.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF R. J. REYNOLDS TOBACCO FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 210
<SECURITIES> 0
<RECEIVABLES> 45
<ALLOWANCES> 0
<INVENTORY> 517
<CURRENT-ASSETS> 7,404
<PP&E> 2,573
<DEPRECIATION> 1,232
<TOTAL-ASSETS> 20,039
<CURRENT-LIABILITIES> 1,505
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 10,782
<TOTAL-LIABILITY-AND-EQUITY> 20,039
<SALES> 4,179
<TOTAL-REVENUES> 4,179
<CGS> 1,010
<TOTAL-COSTS> 1,010
<OTHER-EXPENSES> 731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321
<INCOME-PRETAX> 70
<INCOME-TAX> 104
<INCOME-CONTINUING> (34)
<DISCONTINUED> 82
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48
<EPS-BASIC> .44
<EPS-DILUTED> .44
</TABLE>
