<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C>
R.J. REYNOLDS TOBACCO HOLDINGS, INC. R.J. REYNOLDS TOBACCO COMPANY
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
DELAWARE NEW JERSEY
(State or jurisdiction of incorporation or (State or jurisdiction of incorporation or
organization) organization)
6719 2111
(Primary Standard Industrial Classification Code (Primary Standard Industrial Classification Code
Number) Number)
56-0950247 56-0375955
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
401 NORTH MAIN ST. 401 NORTH MAIN ST.
WINSTON-SALEM, NC 27102 WINSTON-SALEM, NC 27102
(336) 741-5000 (336) 741-5000
(Address, including zip code, and telephone number, (Address, including zip code, and telephone number,
including including
area code, of registrant's principal executive offices) area code, of registrant's principal executive offices)
</TABLE>
CHARLES A. BLIXT, ESQ.
GENERAL COUNSEL
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
401 NORTH MAIN ST.
WINSTON-SALEM, NC 27102
(336) 741-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH A COPY TO:
JEFFREY SMALL, ESQ.
JOSEPH A. HALL, ESQ.
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NY 10017
(212) 450-4000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the Securities registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering as
contemplated by Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
7 3/8% Series B Notes due 2003.................... $ 550,000,000 98.83% $ 543,565,000 $151,112
7 3/4% Series B Notes due 2006.................... $ 500,000,000 96.50% $ 482,500,000 $134,135
7 7/8% Series B Notes due 2009.................... $ 200,000,000 95.42% $ 190,840,000 $ 53,054
Guarantees of 7 3/8% Series B Notes due 2003...... (2) (2) (2) (2)
Guarantees of 7 3/4% Series B Notes due 2006...... (2) (2) (2) (2)
Guarantees of 7 7/8% Series B Notes due 2009...... (2) (2) (2) (2)
Total....................................... $1,250,000,000 $1,216,905 $338,301
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee as
provided in Rule 457(f).
(2) Pursuant to Rule 457(n), no registration fee is required with respect to the
Guarantees of the Notes registered hereby.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JULY 16, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
R.J. REYNOLDS TOBACCO HOLDINGS, INC.,
ISSUER
R.J. REYNOLDS TOBACCO COMPANY,
GUARANTOR
OFFER TO EXCHANGE
NOTES THAT ARE REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OF OUR OUTSTANDING
7 3/8% NOTES DUE 2003,
7 3/4% NOTES DUE 2006 AND
7 7/8% NOTES DUE 2009
---------------------
We are offering to issue the new notes to satisfy our obligations contained
in the registration rights agreement entered into when the old notes were sold
in transactions permitted by Rule 144A under the Securities Act and therefore
not registered with the SEC.
The terms of the new notes are identical in all material respects to the
terms of the old notes, except that the new notes have been registered under the
Securities Act, and the transfer restrictions and registration rights relating
to the old notes do not apply to the new notes.
To exchange your old notes for new notes:
- You must complete and send the letter of transmittal that accompanies this
prospectus to the exchange agent by 5:00 p.m., New York time, on
, 1999.
- If your old notes are held in book-entry form at The Depository Trust
Company (DTC), you must instruct DTC through your signed letter of
transmittal that you wish to exchange your old notes for new notes. When
the exchange offer closes, your DTC account will be changed to reflect
your exchange of old notes for new notes.
- Please read the section "The Exchange Offer" beginning on page 75 for
additional information on how to exchange your old notes for new notes.
The notes and the guarantees are general obligations of R.J. Reynolds
Tobacco Holdings, Inc. and R.J. Reynolds Tobacco Company, respectively, and rank
equally with all other existing and future unsecured and unsubordinated
obligations of R.J. Reynolds Tobacco Holdings, Inc. and R.J. Reynolds Tobacco
Company, respectively, including any borrowings under our credit facility.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF RISK FACTORS
AFFECTING US, OUR BUSINESS AND THE NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Where You Can Find More Information........................................................................ 3
Forward-Looking Information................................................................................ 4
Prospectus Summary......................................................................................... 5
Risk Factors............................................................................................... 10
The Reorganization......................................................................................... 15
Use of Proceeds............................................................................................ 15
Selected Historical Financial Data......................................................................... 16
Unaudited Pro Forma Consolidated Condensed Financial Statements............................................ 18
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25
Business................................................................................................... 35
Management................................................................................................. 46
Security Ownership of Significant Beneficial Owners and Management......................................... 60
Description of the Notes................................................................................... 61
The Exchange Offer......................................................................................... 75
Plan of Distribution....................................................................................... 82
Certain U.S. Federal Income Tax Considerations For Non-U.S. Holders........................................ 83
Certain U.S. Federal Income Tax Considerations For U.S. Holders............................................ 84
Validity of the Notes and the Guarantee.................................................................... 84
Experts.................................................................................................... 84
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
Throughout this prospectus, we refer to R.J. Reynolds Tobacco Holdings, Inc.
as "RJR Tobacco Holdings," and we refer to R.J. Reynolds Tobacco Company as "RJR
Tobacco Company." The words "we," "us," "our" and "ours," and related words,
refer to R.J. Reynolds Tobacco Holdings, Inc. and its consolidated subsidiaries,
which include R.J. Reynolds Tobacco Company.
2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
RJR Tobacco Holdings files annual, quarterly and special reports, proxy
statements and other information with the U.S. Securities and Exchange
Commission. RJR Tobacco Holdings' SEC filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. In
addition, because RJR Tobacco Holdings' common stock is listed on the New York
Stock Exchange, reports and other information concerning RJR Tobacco Holdings
can be inspected at the office of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
This prospectus is a part of a registration statement filed by us with the
SEC under the Securities Act. As allowed by SEC rules, this prospectus does not
contain all of the information that you can find in the registration statement
or the exhibits to the registration statement. The SEC allows us to "incorporate
by reference" the information we file with them, which means that we can
disclose important information to you by referring you to those documents. The
information incorporated by reference includes important business and financial
information that is not included in this document and is an important part of
this prospectus, and information that we file later with the SEC will
automatically update and supersede the information in this prospectus. We
incorporate by reference the documents listed below (SEC File No. 1-6388) and
any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d)
of the Exchange Act until the termination of the offering under this prospectus.
(1) Current Reports on Form 8-K dated
April 8, 1999,
April 16, 1999,
May 12, 1999, and
June 14, 1999
(2) Registration Statement on Form 8-A filed May 19, 1999
You may request a copy of these filings at no cost by writing or telephoning
us at the following address:
Corporate Secretary
R.J. Reynolds Tobacco Holdings, Inc.
401 North Main Street
Winston-Salem, North Carolina 27102
Telephone: 336-741-5000
To obtain timely delivery of copies of any such filings, you must make your
request no later than , 1999.
We have not included or incorporated by reference in this prospectus
separate financial statements of RJR Tobacco Company because we do not believe
that those financial statements would be material to noteholders. However, we
have included summarized financial information for RJR Tobacco Company at
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996 in note 15 to RJR Tobacco Holdings' consolidated financial statements
included elsewhere in this prospectus.
3
<PAGE>
FORWARD-LOOKING INFORMATION
Certain statements contained in this prospectus and in the documents
incorporated by reference are forward-looking statements, particularly with
respect to the level of settlement and restructuring-related expenses, the
amount of savings related to restructuring and cost-reduction programs, the
amount of capital expenditures and the impact of litigation settlements,
including the Master Settlement Agreement with state attorneys general and other
settlement agreements. These forward-looking statements reflect our current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including, but not limited to, the effect on financial performance and future
events of competitive pricing for products, the success of new product
innovations, the effects of government regulation, the ratings of our
securities, and litigation, legislative and regulatory developments. Due to
these uncertainties and risks, you are cautioned not to place undue reliance on
the forward-looking statements, which speak only as of the date of this document
or the relevant incorporated document. Some economic, competitive, governmental,
technological, legal and other factors that may affect RJR Tobacco Company's
operations are discussed under "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
4
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE
DOCUMENT CAREFULLY, INCLUDING "RISK FACTORS," THE INFORMATION UNDER "UNAUDITED
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS" AND OUR CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OUR COMPANY
RJR Tobacco Holdings is a holding company that owns 100% of the stock of RJR
Tobacco Company. RJR Tobacco Company is the second largest cigarette
manufacturer in the United States. RJR Tobacco Company had an approximate 24.41%
overall share of retail domestic consumer cigarette sales for the first quarter
of 1999, and an approximate 25.17% overall share in 1998. RJR Tobacco Company's
largest selling cigarette brands include DORAL, WINSTON, CAMEL, SALEM and
VANTAGE. WINSTON, CAMEL and SALEM are its largest selling premium brands, while
DORAL is its largest selling savings brand. RJR Tobacco Company markets its
other brands, including MONARCH, MORE, NOW, BEST VALUE and CENTURY, to meet a
variety of smoker preferences.
STRATEGY
RJR Tobacco Company's primary long-term objective is to increase earnings
and cash flow through selective marketing investments in key brands and
continual improvements in our cost structure and operating efficiency.
RJR Tobacco Company has several new products, product-line extensions and
brand repositionings in process, such as:
- revision of the WINSTON blend and packaging as part of the "No Bull"
campaign,
- revision of the SALEM blend and packaging as well as implementation of the
"It's Not What You Expect" advertising campaign, and
- ECLIPSE, a cigarette currently in test market that reduces second-hand
smoke and ash by primarily heating rather than burning tobacco.
RJR Tobacco Company is in the course of important strategic cost-reduction
projects undertaken in response to the changing business conditions we expect
will result from the Master Settlement Agreement with state attorneys general
and other existing settlement agreements, such as:
- a 15% work force reduction and
- a write-down of one of RJR Tobacco Company's production facilities and
certain other equipment to fair value.
We expect the cost-reduction projects to generate significant annual cost
savings in future years.
THE REORGANIZATION
Nabisco Group Holdings, Inc. (formerly named RJR Nabisco Holdings Corp.) and
RJR Tobacco Holdings have recently completed a series of reorganization
transactions constituting a fundamental restructuring of their businesses and
capital structures. The principal transactions in this reorganization are the
following:
- On May 12, 1999, RJR Tobacco Holdings and RJR Tobacco Company
substantially completed the sale of the international tobacco business to
Japan Tobacco Inc. for $8 billion, including the assumption of
approximately $200 million of net debt. As a result of this sale, RJR
Tobacco
5
<PAGE>
Company's only cigarette market is the United States and its territories,
commonwealths, protectorates and possessions;
- On May 18, 1999, RJR Tobacco Holdings used a portion of the net proceeds
from the international tobacco sale to repurchase approximately $4 billion
of public debt;
- On May 18, 1999, RJR Tobacco Holdings transferred its 80.5% interest in
Nabisco Holdings Corp., together with approximately $1.6 billion in cash
proceeds from the international tobacco sale, to Nabisco Group Holdings
through a merger transaction that is intended to be tax-free;
- On May 7 and May 18, 1999, respectively, RJR Tobacco Holdings entered into
a $1.235 billion revolving credit agreement with a syndicate of commercial
banks and completed a private placement of $1.25 billion in debt
securities (the notes that are subject to the exchange offer described in
this prospectus). RJR Tobacco Company has guaranteed RJR Tobacco Holdings'
obligations under those debt securities and that credit agreement; and
- On June 14, 1999, Nabisco Group Holdings distributed all of the
outstanding RJR Tobacco Holdings common stock to Nabisco Group Holdings
common stockholders in a spin-off transaction that is intended to be
tax-free.
6
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities offered........................... $550,000,000 principal amount of 7 3/8%
Series B notes due 2003.
$500,000,000 principal amount of 7 3/4%
Series B notes due 2006.
$200,000,000 principal amount of 7 7/8%
Series B notes due 2009.
The exchange offer........................... We are offering to issue the new notes in
exchange for a like principal amount of your
old notes. We are offering to issue the new
notes to satisfy our obligations contained in
the registration rights agreement entered
into when the old notes were sold in
transactions permitted by Rule 144A under the
Securities Act and therefore not registered
with the SEC. For procedures for tendering,
see "The Exchange Offer."
Tenders, expiration date, withdrawal......... The exchange offer will expire at 5:00 p.m.
New York City time on , 1999 unless
we extend it. If you decide to exchange your
old notes for new notes, you must acknowledge
that you are not engaging in, and do not
intend to engage in, a distribution of the
new notes. If you decide to tender your old
notes in the exchange offer, you may withdraw
them at any time prior to , 1999.
If we decide for any reason not to accept any
old notes for exchange, your old notes will
be returned to you without expense to you
promptly after the exchange offer expires.
Federal income tax consequences.............. Your exchange of old notes for new notes in
the exchange offer will not result in any
income, gain or loss to you for U.S. federal
income tax purposes.
Use of proceeds.............................. We will not receive any proceeds from the
issuance of the new notes in the exchange
offer.
Exchange agent............................... The Bank of New York is the exchange agent
for the exchange offer.
Failure to tender your old notes............. If your old notes are eligible for exchange
in the exchange offer and you fail to tender
your old notes in the exchange offer, you
will not have any further rights under the
registration rights agreement, including any
right to require us to register your old
notes or to pay you additional interest.
</TABLE>
7
<PAGE>
PLEASE REVIEW THE FOLLOWING REGULATORY REQUIREMENTS IN CONSIDERING WHETHER TO
EXCHANGE OLD NOTES IN THE EXCHANGE OFFER.
Based on interpretations by the SEC's staff, we believe that new notes
issued in exchange for old notes in the exchange offer may be offered for
resale, resold or otherwise transferred by you without registering the new notes
under the Securities Act or delivering a prospectus so long as:
- you are not one of our "affiliates", which is defined in Rule 405 of the
Securities Act;
- you acquire the new notes in the ordinary course of your business;
- unless you are a broker-dealer, you do not have any arrangement or
understanding with any person to participate in the distribution of the
new notes; and
- unless you are a broker-dealer, you are not engaged in, and do not intend
to engage in, a distribution of the new notes.
If you are an affiliate of RJR Tobacco Holdings or RJR Tobacco Company, or
you are engaged in, intend to engage in or have any arrangement or understanding
with respect to, the distribution of new notes acquired in the exchange offer,
you (1) should not rely on our interpretations of the position of the SEC's
staff and (2) must comply with the registration and prospectus delivery
requirements of the Securities Act for any resale transaction.
If you are a broker-dealer and receive new notes for your own account in the
exchange offer:
- you must represent to us that you do not have any arrangement with us or
any of our affiliates to distribute the new notes;
- you must acknowledge to us that you will deliver a prospectus in
connection with any resale of the new notes you receive from us in the
exchange offer. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, you will not be deemed to admit that you
are an "underwriter" within the meaning of the Securities Act; and
- you may use this prospectus, as it may be amended or supplemented, for the
resale of new notes received in exchange for old notes acquired by you as
a result of market-making or other trading activities. For a period of 90
days after the expiration of the exchange offer, we will make this
prospectus available to any broker-dealer for use in connection with any
resale described above.
8
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SUMMARY DESCRIPTION OF THE NEW NOTES
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<S> <C>
Issuer....................................... R.J. Reynolds Tobacco Holdings, Inc.
Guarantors................................... Payment of principal, premium, if any, and
interest is guaranteed by R.J. Reynolds
Tobacco Company. If and when any additional
subsidiaries of RJR Tobacco Holdings become
guarantors of the obligations of RJR Tobacco
Holdings under its new bank credit agreement,
those subsidiaries will also guarantee the
notes.
Interest..................................... Interest is payable in cash on May 15 and
November 15 of each year, beginning November
15, 1999.
Optional redemption.......................... We may redeem any or all notes at any time,
subject to the payment of a "make-whole"
premium as described in "Description of the
Notes".
Ranking...................................... The notes and the guarantees are unsecured
and unsubordinated obligations of RJR Tobacco
Holdings and RJR Tobacco Company,
respectively, and rank equally with all other
existing and future unsecured and
unsubordinated obligations of RJR Tobacco
Holdings and RJR Tobacco Company (except
those obligations preferred by operation of
law). The notes effectively rank junior to
any secured debt of RJR Tobacco Holdings, and
the guarantee effectively ranks junior to any
secured debt of RJR Tobacco Company, in each
case to the extent of the assets securing
such debt. As of March 31, 1999, neither RJR
Tobacco Holdings nor RJR Tobacco Company had
any secured debt outstanding.
Restrictive covenants........................ The indenture governing the notes contains
covenants relating to (1) limitations on
liens, (2) limitations on sale and lease-back
transactions and (3) consolidations, mergers
and transfers of all or substantially all of
our assets. All of these covenants are
subject to a number of important quali-
fications and exceptions.
</TABLE>
RISK FACTORS
See "Risk Factors," immediately following this summary, for a discussion of
certain factors relating to us, our business and an investment in the notes.
9
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW IN ADDITION TO ALL
OTHER INFORMATION PROVIDED IN THIS PROSPECTUS AND INCORPORATED BY REFERENCE IN
THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION.
WE ARE DEPENDENT ON THE DOMESTIC TOBACCO BUSINESS.
We no longer derive revenues from or have any affiliation with the food
businesses of Nabisco, and RJR Tobacco Company's only cigarette market is the
United States and its territories, commonwealths, protectorates and possessions.
RJR Tobacco Company's domestic tobacco business has experienced declining
cigarette sales volumes and market share in recent years and is subject to
extensive litigation settlement payment obligations. If the U.S. cigarette
market continues to contract, we will not have food sales or tobacco sales
abroad to offset these effects. This trend could adversely affect RJR Tobacco
Company's sales volumes, operating income and cash flows, which in turn could
adversely affect our ability to meet payment obligations under the notes.
LAWSUITS MAY AFFECT OUR ABILITY TO PAY INTEREST AND PRINCIPAL ON THE NOTES.
Various legal actions, proceedings and claims arising out of the sale,
distribution, manufacture, development, advertising, marketing and claimed
health effects of cigarettes are pending or may be instituted against RJR
Tobacco Company, its affiliates (including RJR Tobacco Holdings) and its
indemnitees. There has been a noteworthy increase in the number of these cases
pending. As of June 11, 1999, 639 active cases were pending against RJR Tobacco
Company and/or its affiliates or indemnitees in the United States. Punitive
damages, often in amounts ranging into the hundreds of millions, or even
billions of dollars, are specifically pleaded in a number of cases in addition
to compensatory and other damages.
In January 1999, President Clinton announced that the U.S. Department of
Justice is preparing a litigation plan for a lawsuit by the federal government
to recover federal healthcare costs claimed to be associated with cigarette
smoking.
For a discussion of tobacco litigation, see "Business -- Litigation and
Regulation -- Litigation", note 4 to our unaudited consolidated condensed
financial statements as of March 31, 1999 and note 10 to our consolidated
financial statements as of December 31, 1998, included elsewhere in this
prospectus.
RJR TOBACCO COMPANY HAS SUBSTANTIAL PAYMENT OBLIGATIONS UNDER LITIGATION
SETTLEMENT AGREEMENTS.
Under various settlement agreements, including the Master Settlement
Agreement with state attorneys general, RJR Tobacco Company is obligated to pay
amounts that we estimate to be $1.6 billion in 1999 ($316 million of which was
paid as of March 31, 1999) and more than $2 billion per year in subsequent
years. To satisfy its payment obligations under these settlements, RJR Tobacco
Company has raised prices on cigarettes, and the price increases have adversely
affected its sales volumes, operating income and cash flows. These obligations
and consequences may affect our ability to meet payment obligations under the
notes.
THE MASTER SETTLEMENT AGREEMENT AND OTHER SETTLEMENT AGREEMENTS IMPOSE NEW
LIMITATIONS ON ADVERTISING AND MARKETING CIGARETTES THAT COULD HARM RJR
TOBACCO COMPANY'S COMPETITIVE POSITION.
Under the Master Settlement Agreement and other settlement agreements, RJR
Tobacco Company is generally no longer able to use billboard advertising,
cartoon characters, sponsorship of concerts, non-tobacco merchandise bearing its
brand names and various other advertising and marketing techniques that RJR
Tobacco Company has used in the past. These limitations may adversely
10
<PAGE>
affect RJR Tobacco Company's competitive position, sales volumes, operating
income and cash flows, which in turn could adversely affect our ability to meet
payment obligations under the notes.
THE CIGARETTE INDUSTRY IS SUBJECT TO SUBSTANTIAL AND INCREASING REGULATION AND
TAXATION.
A wide variety of federal, state and local laws limits the advertising, sale
and use of cigarettes, and these laws have proliferated in recent years. If this
trend continues, it may have material adverse effects on RJR Tobacco Company's
competitive position, sales volumes, operating income and cash flows, which in
turn could adversely affect our ability to meet payment obligations under the
notes.
In addition, cigarettes are subject to substantial and increasing excise
taxes. The federal excise tax on cigarettes will rise from $.24 per pack to $.34
in 2000, and to $.39 in 2002. President Clinton has proposed a further increase
of $.55 per pack. Additional state excise taxes range from $.025 per pack in
Virginia to $1.00 per pack in Alaska. Increased excise taxes may result in
declines in overall sales volume and shifts by consumers to less expensive
brands. Both of these results could adversely affect RJR Tobacco Company's
operating income and cash flows, which in turn could adversely affect our
ability to meet payment obligations under the notes.
The U.S. Food and Drug Administration has asserted jurisdiction over
cigarettes and adopted regulations that would, among other things, limit
advertising in print to black and white text. The U.S. Court of Appeals for the
Fourth Circuit held in 1998 that the FDA had exceeded its authority by
regulating tobacco products. On April 26, 1999, the U.S. Supreme Court agreed to
hear the FDA's appeal of the Fourth Circuit's ruling. If the Supreme Court holds
that the FDA has authority to regulate cigarettes, the FDA's exercise of
jurisdiction could lead to more expansive FDA-imposed restrictions on cigarette
operations than those set forth in the regulations and could materially
adversely affect RJR Tobacco Company's sales volumes, operating income and cash
flows, and hence our ability to meet payment obligations under the notes.
RJR TOBACCO COMPANY'S MARKET SHARE HAS DECLINED IN RECENT PERIODS.
In 1998, RJR Tobacco Company's share of the U.S. cigarette market declined
to approximately 25.17% from approximately 25.41% in 1997. For the first quarter
of 1999, RJR Tobacco Company's share declined to approximately 24.41%. If this
trend continues, it could adversely affect RJR Tobacco Company's sales volumes,
operating income and cash flows, which in turn could adversely affect our
ability to meet payment obligations under the notes.
THE DOMESTIC CIGARETTE INDUSTRY HAS EXPERIENCED DECLINING SALES IN RECENT
PERIODS.
As a result of the 1997 and 1998 litigation settlements, increases in
regulation and excise taxes, health concerns and other factors, sales of
cigarettes in the United States declined by 4.6% in 1998 compared to 1997 and by
9.6% in the first quarter of 1999 compared to the first quarter of 1998. At
least in part because RJR Tobacco Company's brands are more price sensitive than
those of some of its competitors, its sales volume decreased more significantly
(5.5% in 1998 and 14.4% in the first quarter of 1999) than the industry average.
In addition, price increases may encourage smokers to switch from premium to
savings brands. RJR Tobacco Company's profit margins on the less expensive
savings brands are generally less than its profit margins on the more expensive
premium brands. If these trends continue or accelerate and RJR Tobacco Company
is unable to capture market share from its competitors, its sales volumes,
operating income and cash flows could be adversely affected, which in turn could
adversely affect our ability to meet payment obligations under the notes.
COMPETITION FROM OTHER CIGARETTE MAKERS COULD ADVERSELY AFFECT US.
The cigarette industry is highly competitive. Some of RJR Tobacco Company's
competitors have substantially greater financial, marketing, personnel and other
resources than RJR Tobacco Company
11
<PAGE>
has. This may enable competitors to compete more aggressively in offering retail
discounts. Aggressive discounting can adversely affect RJR Tobacco Company's
sales volumes, operating income and cash flows, which in turn could adversely
affect our ability to meet payment obligations under the notes.
WE MAY BE RESPONSIBLE FOR CERTAIN HISTORICAL LIABILITIES OF THE NABISCO GROUP
HOLDINGS GROUP.
Until the spin-off of RJR Tobacco Holdings by Nabisco Group Holdings, we
were members of the consolidated group of Nabisco Group Holdings (formerly known
as RJR Nabisco Holdings Corp.) for U.S. federal income tax purposes. Each member
of a consolidated group is liable for the U.S. federal income tax liability of
the other members of the group, as well as for pension and benefit funding
liabilities of the other group members. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Cash Flows." We continue to be liable for these Nabisco Group
Holdings liabilities for the period prior to the spin-off.
We, Nabisco Group Holdings and Nabisco have entered into (1) a tax sharing
agreement which generally seeks to allocate tax liabilities ratably based upon
our taxable income and that of Nabisco Group Holdings had we been separate
taxpayers and (2) a distribution agreement which seeks to allocate pension and
benefit funding liabilities. Under these agreements, Nabisco Group Holdings
generally retains the authority to file returns, respond to inquiries and
conduct proceedings on our behalf with respect to consolidated returns for years
beginning before the spin-off. These arrangements may result in conflicts of
interest between Nabisco Group Holdings and ourselves. In addition, if Nabisco
Group Holdings were unable to satisfy its liabilities, we could be responsible
for satisfying them, notwithstanding the existence of the tax sharing agreement
and the distribution agreement.
RJR Tobacco Holdings and Nabisco Group Holdings have received an opinion of
counsel that the spin-off of RJR Tobacco Holdings by Nabisco Group Holdings and
the transfer of RJR Tobacco Holdings' interest in Nabisco to Nabisco Group
Holdings should be tax-free. We did not and do not intend to seek a ruling from
the IRS that these transactions will be tax-free. An opinion of counsel is not
binding on the IRS or the courts, and it is possible that the IRS could seek to
assert claims in connection with the spin-off and Nabisco transfer that would be
material in amount. Our counsel has opined that we should prevail if the IRS
asserted any claims. In the tax sharing agreement, Nabisco Group Holdings agreed
to indemnify us for taxes arising from the spin-off or the Nabisco transfer,
although we would be responsible for taxes if our own act, omission or
misrepresentation caused such tax liability to arise.
OUR BUSINESS AND SYSTEMS MAY BE AFFECTED BY THE YEAR 2000 COMPUTER PROBLEM.
RJR Tobacco Company uses software and related computer technologies
essential to its operations that use two digits rather than four to specify the
year, which could result in a date recognition problem with the transition to
the year 2000. RJR Tobacco Company is currently remedying the year 2000 problem
as it affects the software and business systems that are critical to its
business. If RJR Tobacco Company is not successful in this effort, or third
parties with whom it interfaces are unsuccessful, RJR Tobacco Company could
experience business interruptions that could have a material adverse effect on
its operations. As of March 31, 1999, RJR Tobacco Company had incurred $28
million to be year 2000 compliant. The current estimated cost to complete RJR
Tobacco Company's year 2000 program is an additional $9 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
THE NOTES ARE UNSECURED OBLIGATIONS.
The notes are unsecured and unsubordinated obligations of RJR Tobacco
Holdings and rank equally in right of payment with all other existing and future
unsecured and unsubordinated obligations of RJR Tobacco Holdings. The guarantee
by RJR Tobacco Company is, and guarantees, if any, by any
12
<PAGE>
other subsidiaries of RJR Tobacco Holdings will be, unsecured and unsubordinated
obligations of the relevant guarantor and will rank equally with all other
existing and future unsecured and unsubordinated obligations of each such
guarantor. Neither the notes nor the guarantees are or will be secured by any
assets of RJR Tobacco Holdings or the guarantors. Accordingly, the notes and the
guarantees will effectively rank junior to any secured obligations of RJR
Tobacco Holdings and the guarantors to the extent of the assets securing such
obligations. If RJR Tobacco Holdings or a guarantor becomes insolvent or is
liquidated, or if payment under any secured obligation is accelerated, the
lenders under that secured obligation will be entitled to exercise the remedies
available to a secured lender under applicable law and pursuant to the terms of
the agreement securing that obligation. Any claims of secured lenders with
respect to assets securing their loans will be prior to any claim of the holders
of the notes with respect to those assets. Accordingly, it is possible that
there would be insufficient assets remaining to satisfy noteholders' claims
fully. As of March 31, 1999, on a pro forma basis after giving effect to the
reorganization, the offering and the application of the estimated net proceeds
from the offering, RJR Tobacco Holdings would have had approximately $2.03
billion of total consolidated indebtedness outstanding, including $1.25 billion
outstanding under the notes and approximately $776 million of other
unsubordinated debt, none of which would have been secured. As of March 31,
1999, RJR Tobacco Company had no third-party debt.
FRAUDULENT TRANSFER LAWS MAY LIMIT YOUR RIGHTS AS A NOTEHOLDER.
Federal or state fraudulent transfer laws permit a court, if it makes
certain findings, to:
- avoid all or a portion of the guarantors' obligations under the
guarantees;
- subordinate all or a portion of the guarantees to other obligations of the
guarantors, entitling other creditors to be paid in full before any
payment is made on the guarantees; and
- take other action detrimental to noteholders, including invalidating the
guarantees under some circumstances.
Under federal and state fraudulent transfer laws, in order to take any of
those actions, courts will typically need to find that, when a subsidiary became
a guarantor, the relevant guarantor:
(1) issued the guarantee with the intent of hindering, delaying or
defrauding current or future creditors or
(2) received less than fair consideration or reasonably equivalent value for
incurring the debt represented by the guarantee and
- was insolvent or was rendered insolvent by reason of the issuance
of the guarantee;
- was engaged, or about to engage, in a business or transaction for
which its assets were unreasonably small; or
- intended to incur, or believed (or should have believed) it would
incur, debts beyond its ability to pay as such debts mature.
Different jurisdictions define "insolvency" differently. However, a
guarantor generally would be considered insolvent at the time it issued its
guarantee if:
- the fair market value (or fair saleable value) of its assets is less than
the amount required to pay its total existing debts and liabilities
(including the probable liability for contingent liabilities) as they
become absolute or matured or
- it was incurring debts beyond its ability to pay as such debts mature.
We cannot assure you what standard a court would apply in order to determine
whether a particular guarantor was "insolvent" as of the date its guarantee is
issued. There is a litigation risk that
13
<PAGE>
a court might also determine, regardless of whether the guarantor was insolvent
on the date the guarantee was issued, that payments under the guarantee
constituted fraudulent transfers on another ground.
NO PUBLIC TRADING MARKET FOR THE NOTES EXISTS.
We are offering the new notes to holders of the old notes, which we issued
on May 18, 1999 to a limited number of investors. There is currently no active
trading market for the notes, and it is not possible to predict how the notes
will trade in the secondary market or whether the secondary market will be
liquid or illiquid. If a trading market does develop, the notes may trade at a
discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities and other factors, including economic
conditions and our financial condition, performance and prospects.
14
<PAGE>
THE REORGANIZATION
Nabisco Group Holdings and RJR Tobacco Holdings have recently completed a
series of reorganization transactions constituting a fundamental restructuring
of their businesses and capital structures. The principal transactions in this
reorganization are the following:
- On May 7, 1999, RJR Tobacco Holdings entered into a 30-month $1.235
billion floating rate revolving credit agreement with a syndicate of
commercial banks. RJR Tobacco Company has guaranteed the obligations of
RJR Tobacco Holdings under this credit agreement.
- On May 12, 1999, RJR Tobacco Holdings and RJR Tobacco Company
substantially completed the sale of the international tobacco business to
Japan Tobacco for $8 billion, including the assumption of approximately
$200 million of net debt. As a result of this sale, RJR Tobacco Company's
only cigarette market is the United States and its territories,
commonwealths, protectorates and possessions.
- On May 18, 1999, RJR Tobacco Holdings completed tender offers and consent
solicitations relating to its then outstanding public debt obligations. In
these transactions,
- the bondholders agreed to amend the indentures relating to these
debt obligations to remove substantially all of the restrictive
covenants. Removing these restrictions facilitated the completion
of the international tobacco sale, the spin-off and our new
financing arrangements, which are described below; and
- RJR Tobacco Holdings used a portion of the net proceeds from the
international tobacco sale to repurchase approximately $4 billion
of its public debt.
- On May 18, 1999, RJR Tobacco Holdings completed an offering of $1.25
billion in debt securities (the notes that are subject to the exchange
offer described in this prospectus). RJR Tobacco Company has guaranteed
the obligations of RJR Tobacco Holdings under the indenture relating to
these debt securities. These securities were not registered under the
Securities Act and may not be offered or sold in the United States, absent
registration or an applicable exemption from the registration
requirements. This prospectus relates to our offer to exchange these
securities for securities registered under the Securities Act.
- On May 18, 1999, RJR Tobacco Holdings transferred its approximately 80.5%
interest in Nabisco Holdings Corp., together with approximately $1.6
billion in net cash proceeds from the international tobacco sale, to
Nabisco Group Holdings through a merger transaction.
- On June 14, 1999, Nabisco Group Holdings distributed all of the
outstanding shares of RJR Tobacco Holdings common stock to Nabisco Group
Holdings common stockholders of record as of May 27, 1999. This spin-off
is intended to be tax-free for U.S. federal income tax purposes.
USE OF PROCEEDS
We will not receive any proceeds from the exchange of the notes.
15
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical consolidated financial data presented below as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 are derived from our consolidated financial statements
and accompanying notes, which have been audited by Deloitte & Touche LLP,
independent auditors. The selected historical consolidated financial data
presented below as of December 31, 1996, 1995 and 1994 and for each of the years
in the two-year period ended December 31, 1995 are derived from unaudited
consolidated financial statements not presented or incorporated herein by
reference. The data as of and for the quarters ended March 31, 1999 and 1998 are
derived from our unaudited consolidated condensed financial statements. These
financial statements segregate the account balances and activities of the
international tobacco business and Nabisco and report those account balances and
activities as discontinued operations. You should read this table in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
Net sales.............................. $ 1,693 $ 1,213 $ 5,716 $ 5,044 $ 4,702 $ 4,612 $ 4,730
Income (loss) from continuing
operations........................... 30 (141) (519) 19 226 65 111
PER SHARE DATA:
Basic income (loss) per share from
continuing operations................ .28 (1.30) (4.77) .17 2.08 .60 1.02
Diluted income (loss) per share from
continuing operations................ .28 (1.30) (4.77) .17 2.08 .60 1.02
Average number of common shares
outstanding (in thousands):
Basic................................ 108,691 108,691 108,691 108,691 108,691 108,691 108,691
Diluted.............................. 108,691 108,691 108,691 108,691 108,691 108,691 108,691
BALANCE SHEET DATA
(AT END OF PERIODS)
Total assets........................... $ 19,476 $ 20,184 $ 19,401 $ 20,251 $ 20,747 $ 21,391 $ 22,138
Long-term debt (excluding current
maturities).......................... 4,743 5,013 4,861 4,944 4,928 4,944 4,878
Stockholder's equity................... 9,874 11,067 9,886 11,079 11,669 12,153 11,410
OTHER DATA
Ratio of earnings to fixed charges
(1).................................. 1.6 -- -- 1.5 2.2 1.7 1.5
Deficiency in the coverage of fixed
charges by earnings before fixed
charges (1).......................... -- $ (184) $ (679) -- -- -- --
</TABLE>
- ------------------------------
(1) For purposes of these computations, earnings consist of income before income
taxes and fixed charges. Fixed charges consist of interest on indebtedness,
amortization of debt issuance costs, and that portion of operating rental
expense representative of the interest factor.
During the three months ended March 31, 1998, RJR Tobacco Company recorded
$312 million, $199 million after-tax, for initial, up-front tobacco settlement
costs relating to agreements between RJR Tobacco Company and the Minnesota state
attorney general and Blue Cross and Blue Shield of Minnesota.
During the year ended December 31, 1998, RJR Tobacco Company recorded $1.442
billion, $928 million after-tax, for initial, up-front tobacco settlement and
other related expenses, including the $312 million referred to above, $620
million related to the Master Settlement Agreement with various state attorneys
general, $145 million for the most favored nation adjustments for previously
settled states and $365 million for the rationalization of manufacturing
operations and workforce reductions resulting from the Master Settlement
Agreement.
16
<PAGE>
During the year ended December 31, 1997, RJR Tobacco Company recorded $359
million, $218 million after-tax, for initial, up-front tobacco settlement costs
relating to agreements reached with the Florida, Mississippi and Texas state
attorneys general and in certain class action cases. Also, RJR Tobacco Company
recorded a restructuring charge of $80 million, $52 million after-tax, to
reorganize its operations.
During the year ended December 31, 1995, RJR Tobacco Company recorded a
restructuring charge of $100 million, $65 million after-tax, in connection with
a program to streamline its operations. Also, RJR Tobacco Holdings and Nabisco
completed a debt exchange in that year that resulted in a pre-tax charge by RJR
Tobacco Holdings of approximately $103 million for fees and expenses.
Net sales and costs of products sold exclude excise taxes of $260 million
and $304 million for the three months ended March 31, 1999 and 1998,
respectively, and $1.292 billion, $1.369 billion, $1.401 billion, $1.447 billion
and $1.526 billion for the years ended December 31, 1998, 1997, 1996, 1995 and
1994, respectively.
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma consolidated condensed financial statements reflect
the effects of adjustments to our historical results of operations and financial
condition, using the assumptions described below. You should read the unaudited
pro forma consolidated condensed financial statements in conjunction with our
consolidated financial statements as of December 31, 1998 and 1997 and for each
of the three years in the period ended December 31, 1998 and our unaudited
consolidated condensed financial statements as of March 31, 1999 and for the
three months ended March 31, 1999 and 1998, included elsewhere in this
prospectus.
The unaudited pro forma consolidated condensed statements of income give
effect to the following transactions as if they had occurred on January 1, 1998:
- the issuance by RJR Tobacco Holdings of $1.25 billion in debt securities
at an effective average annual interest rate of 7.829% (the notes that are
subject to the exchange offer described in this prospectus);
- the application of a portion of the net proceeds from the international
tobacco sale to reduce debt and for general corporate purposes;
- the transfer of RJR Tobacco Holdings' interest in Nabisco to Nabisco Group
Holdings;
- the distribution of RJR Tobacco Holdings common stock to Nabisco Group
Holdings stockholders;
- the adjustment to selling, advertising, administrative and general
expenses to reflect the estimated level of administrative expense of RJR
Tobacco Holdings after the completion of the transfer of RJR Tobacco
Holdings' interest in Nabisco to Nabisco Group Holdings and the
distribution;
- the elimination of miscellaneous expenses that will not be incurred after
the spin-off; and
- the tax effects of the foregoing transactions or items.
The unaudited pro forma consolidated condensed balance sheet gives effect to
the pro forma transactions and events described in the first four bullet points,
as well as the transfer to Nabisco Group Holdings of approximately $1.6 billion
of the net cash proceeds from the international tobacco sale, as if they
occurred on March 31, 1999.
Management believes that the assumptions used provide a reasonable basis on
which to present the unaudited pro forma consolidated condensed financial
statements. RJR Tobacco Holdings is providing the unaudited pro forma
consolidated condensed financial statements to you for informational purposes
only. You should not construe them to be indicative of RJR Tobacco Holdings'
results of operations or financial position had the transactions and events
described above been consummated on the dates assumed. These pro forma financial
statements also do not project the results of operations or financial position
for any future period or date.
18
<PAGE>
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RJRTH APPLICATION ADJUSTMENT OF RJRTH PRO
HISTORICAL NOTES(1A) OF PROCEEDS(1B) EXPENSES(1C) FORMA(2)
-------------- ----------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
NET SALES.................................... $ 1,693 $ -- $ -- $ -- $ 1,693
COSTS AND EXPENSES
Cost of products sold...................... 750 -- -- -- 750
Selling, advertising, administrative and
general expenses......................... 673 -- -- (15) 658
Amortization of intangibles................ 92 -- -- -- 92
-------------- --- ----- --- --------------
Operating income............................. 178 -- -- 15 193
Interest and debt expense.................... (105) (25) 87 -- (43)
Other income (expense), net.................. (7) -- -- 7 --
-------------- --- ----- --- --------------
Income (loss) before taxes................... 66 (25) 87 22 150
Provision (benefit) for income taxes (1d).... 36 (9) 31 8 66
-------------- --- ----- --- --------------
Income (loss) from continuing operations..... $ 30 $ (16) $ 56 $ 14 $ 84
-------------- --- ----- --- --------------
-------------- --- ----- --- --------------
Basic income per share from continuing
operations................................. $ .28 $ .77
-------------- --------------
-------------- --------------
Diluted income per share from continuing
operations................................. $ .28 $ .77
-------------- --------------
-------------- --------------
Average number of shares of common stock
outstanding................................ 108,691,347 108,691,347
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME SET
FORTH IN THIS DOCUMENT.
19
<PAGE>
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RJRTH APPLICATION ADJUSTMENT OF RJRTH PRO
HISTORICAL NOTES(1A) OF PROCEEDS(1B) EXPENSES(1C) FORMA(2)
-------------- ----------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
NET SALES.................................... $ 1,213 $ -- $ -- $ -- $ 1,213
COSTS AND EXPENSES
Cost of products sold...................... 318 -- -- -- 318
Selling, advertising, administrative and
general expenses......................... 564 -- -- (14) 550
Tobacco settlement and related expenses.... 312 -- -- -- 312
Amortization of intangibles................ 91 -- -- -- 91
-------------- --- ----- --- --------------
Operating income (loss)...................... (72) -- -- 14 (58)
Interest and debt expense.................... (107) (25) 87 -- (45)
Other income (expense), net.................. (5) -- -- 3 (2)
-------------- --- ----- --- --------------
Income (loss) before taxes................... (184) (25) 87 17 (105)
Provision (benefit) for income taxes (1d).... (43) (9) 31 6 (15)
-------------- --- ----- --- --------------
Income (loss) from continuing operations..... $ (141) $ (16) $ 56 $ 11 $ (90)
-------------- --- ----- --- --------------
-------------- --- ----- --- --------------
Basic income (loss) per share from continuing
operations................................. $ (1.30) $ (.83)
-------------- --------------
-------------- --------------
Diluted income (loss) per share from
continuing operations...................... $ (1.30) $ (.83)
-------------- --------------
-------------- --------------
Average number of shares of common stock
outstanding................................ 108,691,347 108,691,347
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME SET
FORTH IN THIS DOCUMENT.
20
<PAGE>
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RJRTH APPLICATION ADJUSTMENT OF RJRTH PRO
HISTORICAL NOTES(1A) OF PROCEEDS(1B) EXPENSES(1C) FORMA(2)
-------------- ----------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
NET SALES.................................... $ 5,716 $ -- $ -- $ -- $ 5,716
COSTS AND EXPENSES
Cost of products sold...................... 1,353 -- -- -- 1,353
Selling, advertising, administrative and
general expenses......................... 2,780 -- -- (61) 2,719
Tobacco settlement and related expenses.... 1,442 -- -- -- 1,442
Amortization of intangibles................ 366 -- -- -- 366
-------------- --- ----- --- --------------
Operating income (loss)...................... (225) -- -- 61 (164)
Interest and debt expense.................... (426) (98) 348 -- (176)
Other income (expense), net.................. (28) -- -- 28 --
-------------- --- ----- --- --------------
Income (loss) before taxes................... (679) (98) 348 89 (340)
Provision (benefit) for income taxes (1d).... (160) (34) 122 31 (41)
-------------- --- ----- --- --------------
Income (loss) from continuing operations..... $ (519) $ (64) $ 226 $ 58 $ (299)
-------------- --- ----- --- --------------
-------------- --- ----- --- --------------
Basic income (loss) per share from continuing
operations................................. $ (4.77) $ (2.75)
-------------- --------------
-------------- --------------
Diluted income (loss) per share from
continuing operations...................... $ (4.77) $ (2.75)
-------------- --------------
-------------- --------------
Average number of shares of common stock
outstanding................................ 108,691,347 108,691,347
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME SET
FORTH IN THIS DOCUMENT.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(1) The following is a summary of the assumptions and adjustments reflected in
the unaudited pro forma consolidated condensed statements of income:
(a) Adjust historical interest and debt expense, as applicable, based on the
issuance by RJR Tobacco Holdings of $1.25 billion in debt securities at
an effective average annual interest rate of 7.829% (the notes that are
subject to the exchange offer described in this prospectus);
(b) Adjust historical interest and debt expense, as applicable, based on the
application of a portion of the net proceeds from the international
tobacco sale to repay $4.099 billion of outstanding RJR Tobacco Holdings
borrowings, including, among other things, approximately 91% ($4 billion)
of the debt securities that RJR Tobacco Holdings offered to purchase on
April 13, 1999;
(c) Adjust historical selling, advertising, administrative and general
expenses to reflect the estimated level of administrative expense of RJR
Tobacco Holdings after the completion of the transfer of RJR Tobacco
Holdings' interest in Nabisco Holdings Corp. to Nabisco Group Holdings,
the distribution of RJR Tobacco Holdings common stock to Nabisco Group
Holdings stockholders and adjust historical other income (expense), net
to eliminate miscellaneous expenses that would not be incurred after the
completion of the distribution; and
(d) Recognize income taxes on the pro forma adjustments at the U.S.
statutory rate of 35%.
(2) The unaudited pro forma consolidated condensed statements of income do not
give effect to:
- the one-time net gain recognized upon completion of the international
tobacco sale of approximately $3.0 billion for the three months ended
March 31, 1999 and 1998 and for the year ended December 31, 1998, subject
to any post-closing adjustments;
- the one-time loss of approximately $260 million, net of tax, that would be
recognized for each of the quarters ended March 31, 1999 and 1998 and for
the year ended December 31, 1998 for
- the repayment of a portion of the outstanding borrowings of RJR
Tobacco Holdings on a pro forma basis and
- certain other transaction costs;
- the one-time costs and expenses of approximately $100 million after-tax to
eliminate corporate headquarters;
- interest income on the net proceeds from the issuance by RJR Tobacco
Holdings of $1.25 billion in debt securities; and
- the recognition of the cumulative translation account of Nabisco Holdings
Corp. resulting from the transfer of RJR Tobacco Holdings' interest in
Nabisco Holdings Corp. to Nabisco Group Holdings. The amounts recognized
for this cumulative translation account were as follows: first quarter of
1999: $333 million loss; first quarter of 1998: $187 million loss; 1998
year: $225 million loss.
22
<PAGE>
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 1999
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
INTERNATIONAL
RJRTH TOBACCO APPLICATION OF REORGANIZATION
HISTORICAL SALE(1A) NOTES(1B) PROCEEDS(1C) AS ADJUSTED MERGER(1D)
----------- --------------- ----------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents(2).... $ 5 $ 7,800 $ 1,250 $ (5,927) $ 3,128 $ (101)
Accounts and other receivables,
net........................... 46 72 -- -- 118 40
Inventories..................... 527 -- -- -- 527 --
Prepaid expenses and excise
tax........................... 751 -- -- -- 751 (255)
Net assets of discontinued
businesses.................... 5,930 (2,871) -- -- 3,059 (3,059)
----------- ------ ----------- ------- ------------- --------------
Total current assets........ 7,259 5,001 1,250 (5,927) 7,583 (3,375)
Property, plant and equipment,
net............................. 1,101 -- -- -- 1,101 --
Trademarks........................ 3,150 -- -- -- 3,150 --
Goodwill.......................... 7,759 -- -- -- 7,759 --
Other assets and deferred
charges......................... 207 -- -- (14) 193 (40)
----------- ------ ----------- ------- ------------- --------------
Total assets................ $ 19,476 $ 5,001 $ 1,250 $ (5,941) $ 19,786 $ (3,415)
----------- ------ ----------- ------- ------------- --------------
----------- ------ ----------- ------- ------------- --------------
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Short term borrowings........... $ -- $ -- $ -- $ -- $ -- $ --
Accounts payable and accrued
liabilities................... 1,646 -- -- -- 1,646 --
Current maturities of long-term
debt.......................... 123 -- -- (100) 23 --
Income taxes accrued............ 267 2,100 -- -- 2,367 --
----------- ------ ----------- ------- ------------- --------------
Total current liabilities... 2,036 2,100 -- (100) 4,036 --
Long-term debt (less current
maturities)................... 4,743 -- 1,250 (3,999) 1,994 --
Other noncurrent liabilities.... 925 -- -- -- 925 275
Deferred income taxes........... 1,898 (300) -- (5) 1,593 (90)
----------- ------ ----------- ------- ------------- --------------
Total liabilities........... 9,602 1,800 1,250 (4,104) 8,548 185
Commitments and contingencies
Stockholder's equity:
Common stock.................... 1 -- -- -- 1 --
Paid-in capital................. 10,860 -- -- -- 10,860 (188)
Retained earnings (accumulated
deficit)...................... (421) 2,968 -- (1,837) 710 (3,745)
Accumulated other comprehensive
income........................ (566) 233 -- -- (333) 333
----------- ------ ----------- ------- ------------- --------------
Total stockholder's
equity.................... 9,874 3,201 -- (1,837) 11,238 (3,600)
----------- ------ ----------- ------- ------------- --------------
Total liabilities and
stockholder's equity...... $ 19,476 $ 5,001 $ 1,250 $ (5,941) $ 19,786 $ (3,415)
----------- ------ ----------- ------- ------------- --------------
----------- ------ ----------- ------- ------------- --------------
<CAPTION>
RJRTH
PRO FORMA
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents(2).... $ 3,027
Accounts and other receivables,
net........................... 158
Inventories..................... 527
Prepaid expenses and excise
tax........................... 496
Net assets of discontinued
businesses.................... --
-----------
Total current assets........ 4,208
Property, plant and equipment,
net............................. 1,101
Trademarks........................ 3,150
Goodwill.......................... 7,759
Other assets and deferred
charges......................... 153
-----------
Total assets................ $ 16,371
-----------
-----------
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Short term borrowings........... $ --
Accounts payable and accrued
liabilities................... 1,646
Current maturities of long-term
debt.......................... 23
Income taxes accrued............ 2,367
-----------
Total current liabilities... 4,036
Long-term debt (less current
maturities)................... 1,994
Other noncurrent liabilities.... 1,200
Deferred income taxes........... 1,503
-----------
Total liabilities........... 8,733
Commitments and contingencies
Stockholder's equity:
Common stock.................... 1
Paid-in capital................. 10,672
Retained earnings (accumulated
deficit)...................... (3,035)
Accumulated other comprehensive
income........................ --
-----------
Total stockholder's
equity.................... 7,638
-----------
Total liabilities and
stockholder's equity...... $ 16,371
-----------
-----------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET SET FORTH
IN THIS DOCUMENT.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(1) The following is a summary of the assumptions and adjustments reflected in
the unaudited pro forma consolidated condensed balance sheet:
(a) Receipt of the proceeds from the international tobacco sale and
recognition of the cumulative translation account applicable to the
international tobacco business. The international tobacco sale results in
a one-time net gain of approximately $3.0 billion, subject to
post-closing adjustments, after the recognition of a $233 million loss
pertaining to the cumulative translation account;
(b) Receipt of the net proceeds from the issuance by RJR Tobacco Holdings of
$1.25 billion in debt securities (the notes that are subject to the
exchange offer described in this prospectus);
(c) Application of a portion of the net proceeds from the international
tobacco sale to (1) repay $4.099 billion of outstanding RJR Tobacco
Holdings borrowings, including, among other things, approximately 91% ($4
billion) of the debt securities that RJR Tobacco Holdings offered to
purchase on April 13, 1999, and (2) transfer to Nabisco Group Holdings
approximately $1.6 billion of the net cash proceeds through a merger
transaction. As a result of the difference between the cash paid to repay
a portion of outstanding RJR Tobacco Holdings borrowings and the net
carrying value of those borrowings, and after giving effect to the
write-off of related deferred issuance costs of $14 million and certain
other transaction costs, those transactions would result in a one-time
charge on a pro forma basis of approximately $260 million after-tax;
(d) The recognition of a $333 million loss pertaining to the cumulative
translation account of Nabisco Holdings Corp. in connection with the
transfer of RJR Tobacco Holdings' interest in Nabisco Holdings Corp. to
Nabisco Group Holdings, one-time costs and expenses of approximately $100
million after-tax to eliminate corporate headquarters, the capitalization
of $258 million of intercompany accounts and the distribution of RJR
Tobacco Holdings common stock to Nabisco Group Holdings stockholders.
(2) The line item "Cash and cash equivalents" does not reflect the proceeds to
be received by RJR Tobacco Holdings from the international tobacco business for
the settlement of intercompany indebtedness in the ordinary course of business.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION IS BASED ON OUR HISTORICAL FINANCIAL STATEMENTS AND
THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THESE
FINANCIAL STATEMENTS SEGREGATE THE ACCOUNT BALANCES AND ACTIVITIES OF THE
INTERNATIONAL TOBACCO BUSINESS AND NABISCO AND REPORT THOSE ACCOUNT BALANCES AND
ACTIVITIES AS DISCONTINUED OPERATIONS. YOU SHOULD READ THE FOLLOWING DISCUSSION
IN CONJUNCTION WITH THOSE FINANCIAL STATEMENTS AND THE NOTES TO THEM.
OVERVIEW
RJR Tobacco Company is the second largest cigarette manufacturer in the
United States. For the first quarter of 1999, RJR Tobacco Company had an
approximate 24.41% overall share of retail domestic consumer cigarette sales and
an approximate 25.17% overall share for 1998. RJR Tobacco Company's largest
selling cigarette brands include DORAL, WINSTON, CAMEL, SALEM and VANTAGE.
WINSTON, CAMEL and SALEM are its largest selling premium brands, while DORAL is
its largest selling savings brand. RJR Tobacco Company markets its other brands,
including MONARCH, MORE, NOW, BEST VALUE and CENTURY, to meet a variety of
smoker preferences.
LITIGATION AND SETTLEMENTS
Numerous legal actions, proceedings and claims are pending or may be
instituted against RJR Tobacco Company, its affiliates (including RJR Tobacco
Holdings) or its indemnitees that allege damages arising out of the use of or
exposure to RJR Tobacco Company's products. This prospectus describes this
litigation under "Risk Factors" and "Business--Litigation and
Regulation--Litigation" and in note 4 to our unaudited consolidated condensed
financial statements as of March 31, 1999 and note 10 to our consolidated
financial statements as of December 31, 1998, included elsewhere in this
prospectus. We believe that, notwithstanding the quality of defenses available
to us and our affiliates in litigation matters, it is possible that our results
of operations or cash flows in particular quarterly or annual periods could be
materially affected by the ultimate outcome of various pending or future
litigation matters, including litigation costs. Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
In November 1998, RJR Tobacco Company and the other major U.S. cigarette
manufacturers entered into the Master Settlement Agreement with attorneys
general representing most U.S. states, territories and possessions. As described
under "Business--Litigation and Regulation--Litigation", the Master Settlement
Agreement imposes a stream of future payment obligations on RJR Tobacco Company
and the other major U.S. cigarette manufacturers and places significant
restrictions on their ability to market and sell cigarettes in the future. The
Master Settlement Agreement may have a significant negative impact on our
results of operations or cash flows in particular quarterly or annual periods.
We expect the cash payments to be made by RJR Tobacco Company under the Master
Settlement Agreement and other existing settlement agreements in 1999 to be
approximately $1.6 billion, $316 million of which RJR Tobacco Company paid as of
March 31, 1999. In future years, RJR Tobacco Company estimates those payments to
exceed $2.0 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. RJR Tobacco Company cannot
predict the impact on its business, competitive position and results of
operations of the Master Settlement Agreement and the other existing settlement
agreements, the business activity restrictions to which it is subject under
these agreements or the price increases that it may be required to make as a
result of these agreements.
25
<PAGE>
PRICING AND VOLUME
In order to fund its obligations under the Master Settlement Agreement and
the other existing settlement agreements, RJR Tobacco Company implemented a
series of cigarette price increases in 1997 and 1998. As a result, RJR Tobacco
Company's manufacturer's list price increased by an average of $0.70 per pack
from August 1997 to December 1998. Other cigarette manufacturers took similar
steps. In absolute terms, this series of price increases exceeded the net amount
of price increases taken by RJR Tobacco Company over the period from 1981
through July 1997. These price increases, coupled with excise tax increases,
have resulted in lower overall cigarette demand, leading to lower volumes. We
expect these effects to be more pronounced in the premium market, where
operating margins have tended to be higher, compared to the savings market. The
price increases have also stimulated competition among manufacturers to discount
prices at the consumer level. Because RJR Tobacco Company's brands are more
price sensitive than those of some of its competitors, RJR Tobacco Company's
sales volume decreased more significantly--5.5% in 1998 compared to 1997 and
14.4% in the first quarter of 1999 compared to the first quarter of 1998--than
the industry average of 4.6% in 1998 and 9.6% in the first quarter of 1999. We
cannot predict how RJR Tobacco Company's results of operations and financial
condition in future periods will be affected by price increases, demand and
volume reduction, a shift in mix from premium consumption to savings consumption
and competitive discounting. In addition, to the extent some manufacturers,
including RJR Tobacco Company, have significantly discounted prices to offset
the impact of rapid price increases, the full impact of price increases may not
be seen until the second half of 1999 or beyond.
RESULTS OF OPERATIONS
The following table sets forth specific items from the historical financial
statements included elsewhere in this prospectus and shows percentage changes in
those items.
<TABLE>
<CAPTION>
QUARTER ENDED PERCENTAGE CHANGE
MARCH 31, PERCENTAGE YEAR ENDED DECEMBER 31, FROM PRIOR YEAR
-------------------- CHANGE FROM ------------------------------- --------------------
1999 1998 PRIOR QUARTER 1998 1997 1996 1998 1997
--------- --------- ------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN
MILLIONS) (DOLLARS IN MILLIONS)
Net sales.............................. $ 1,693 $ 1,213 39.6% $ 5,716 $ 5,044 $ 4,702 13.3% 7.3%
Cost of products sold (1).............. 750 318 135.8 1,353 1,209 1,186 11.9 1.9
Selling, advertising, administrative
and general expenses................. 673 564 19.3 2,780 2,361 2,095 17.7 12.7
--------- --------- --------- --------- ---------
Operating company contribution (based
on ongoing results).................. 270 331 (18.4) 1,583 1,474 1,421 7.4 3.7
Tobacco settlement and related expenses
(1).................................. -- 312 (100.0) 1,442 359 -- 301.7 n/a
--------- --------- --------- --------- ---------
Operating company contribution......... 270 19 1,321.1 141 1,115 1,421 (87.4) (21.5)
Amortization of intangibles............ 92 91 1.1 366 366 366 -- --
Restructuring expense.................. -- -- -- -- 80 -- (100.0) n/a
--------- --------- --------- --------- ---------
Operating income (loss)................ $ 178 $ (72) 347.2 $ (225) $ 669 $ 1,055 (133.6) (36.6)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) $505 million and $37 million of ongoing settlement expense was recorded in
cost of products sold in the first quarter of 1999 and 1998, respectively,
and $148 million was recorded during the year ended December 31, 1998.
Tobacco settlement and related expenses include only initial, up-front
tobacco settlement and other related expenses.
26
<PAGE>
FIRST QUARTER OF 1999 COMPARED TO FIRST QUARTER OF 1998
NET SALES. Net sales of $1.7 billion in the first quarter of 1999 increased
39.6% from $1.2 billion in the comparable 1998 period. The increase was driven
by higher prices offset in part by lower volumes.
Unit sales volumes for premium brands decreased an average of 14.4%, while
average volume for savings brands decreased 14.5%. Overall industry volume
decreased by 9.6% from the first quarter of 1998 compared to the first quarter
of 1999. Volumes for premium brands could decline at a faster rate than volumes
for savings brands. The mix between RJR Tobacco Company's premium and savings
brands remained steady, with premium shipments representing 61.9% of total
shipments in both the first quarter of 1999 and 1998.
RJR Tobacco Company's overall retail share of market for the first quarter
of 1999 decreased to 24.41% from 25.44% in the first quarter of 1998. RJR
Tobacco Company's premium share for the first quarter of 1999 decreased to
15.54% from 16.47% in the first quarter of 1998, while its savings share for the
first quarter of 1999 decreased to 8.87% from 8.97% in the first quarter of
1998.
COST OF PRODUCTS SOLD. Cost of products sold of $750 million in the first
quarter of 1999 more than doubled from $318 million in the first quarter of
1998. The increase was due primarily to an increase of $468 million in ongoing
settlement costs in the first quarter of 1999.
SELLING, ADVERTISING, ADMINISTRATIVE AND GENERAL EXPENSES. Selling,
advertising, administrative and general expenses of $673 million in the first
quarter of 1999 increased 19.3% from $564 million in the first quarter of 1998.
The increase was due primarily to a 35.3% increase in promotional expense,
chiefly competitive discounts provided directly to retailers and passed through
to the consumer.
TOBACCO SETTLEMENT AND RELATED EXPENSES. 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. Ongoing tobacco settlement costs recorded in the first quarter of
1999 are included in cost of products sold.
PROVISION (BENEFIT) FOR INCOME TAXES. RJR Tobacco Company recorded a tax
provision of $36 million, or a 54.5% effective rate, in the first quarter of
1999 compared to a tax benefit of $43 million, or a 23.4% effective rate,
recorded in the first quarter of 1998. The rate increase is primarily due to the
relative impact of nondeductible goodwill amortization on income (loss) before
income taxes.
1998 COMPARED TO 1997
NET SALES. Net sales of $5.7 billion in 1998 increased 13.3% from $5.0
billion in 1997. The increase was driven by higher prices offset in part by
lower volumes. RJR Tobacco Company's manufacturer's list prices increased in
1998 by approximately $0.64 per pack.
Unit sales volumes for premium brands decreased an average of 6.7%, compared
to an average volume decrease of 3.4% for savings brands. Overall industry
volume decreased by 4.6% from 1997 to 1998. Volumes for premium brands could
decline at a faster rate than volumes for savings brands. Although the mix
between RJR Tobacco Company's premium and savings brands changed only slightly,
with premium shipments representing 62.6% of total shipments in 1998 compared to
63.4% in 1997, the trend away from premium towards savings brands may accelerate
in future periods as price increases are absorbed and premium volumes are
affected to a greater extent than savings volumes.
RJR Tobacco Company's overall retail share of market for 1998 decreased to
25.17% from 25.41% in 1997. RJR Tobacco Company's premium share for 1998
decreased to 16.27% from 16.65% in 1997, while its savings share for 1998
increased to 8.90% from 8.76% in 1997.
27
<PAGE>
COST OF PRODUCTS SOLD. Cost of products sold of $1.4 billion in 1998
increased 11.9% from $1.2 billion in 1997. The increase was due primarily to the
inclusion of $148 million in ongoing settlement costs in 1998, with no
corresponding charge in 1997.
SELLING, ADVERTISING, ADMINISTRATIVE AND GENERAL EXPENSES. Selling,
advertising, administrative and general expenses of $2.8 billion in 1998
increased 17.7% from $2.4 billion in 1997. The increase was due primarily to a
26.8% increase in promotional expense, chiefly competitive discounts provided
directly to retailers and passed through to the consumer.
TOBACCO SETTLEMENT AND RELATED EXPENSES. RJR Tobacco Company recorded $1.4
billion in tobacco settlement and related expenses in 1998 compared to $359
million in 1997. The 1998 expenses relate primarily to amounts payable under the
Master Settlement Agreement with state attorneys general representing most U.S.
states, territories and possessions and other existing settlement agreements.
The 1998 expenses also include (1) $214 million for rationalizing manufacturing
operations, primarily representing a charge to write down the book value of one
of RJR Tobacco Company's production facilities and various equipment to fair
value and (2) $151 million in employee severance and related benefits,
representing a charge for work force reductions totaling approximately 1,300
employees. RJR Tobacco Company took both of these charges in response to the
changing business conditions it expects to result from the Master Settlement
Agreement and other existing settlement agreements. RJR Tobacco Company
anticipates that the 1998 price increases, which were necessary to satisfy its
ongoing obligations under the Master Settlement Agreement and other existing
settlement agreements, may adversely affect volumes and results of operations. A
breakdown of initial, up-front tobacco settlement and other related expenses
recorded in 1998 is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
-------------------
<S> <C>
Master Settlement Agreement............................................... $ 620
Minnesota settlement agreement............................................ 312
"Most favored nation" adjustments for previously settled states........... 145
Rationalization of manufacturing operations............................... 214
Employee severance and related benefits................................... 151
------
$ 1,442
------
------
</TABLE>
RJR Tobacco Company anticipates that cash expenditures related to the
termination of employees will be approximately $100 million, which will be paid
from operations into the year 2000. RJR Tobacco Company expects pre-tax savings
in 1999 and 2000 relating to employee terminations and rationalizing
manufacturing operations to be approximately $75 million and $110 million,
respectively. As of December 31, 1998, RJR Tobacco Company used $268 million of
the accrual as follows: $54 million for severance and related benefits and $214
million for rationalizing manufacturing operations.
As noted above, RJR Tobacco Company recorded ongoing settlement expenses of
$148 million in 1998 relating to other tobacco litigation, principally
settlements involving the attorneys general of Florida, Mississippi and Texas,
in cost of products sold.
RESTRUCTURING EXPENSE. RJR Tobacco Company recorded $80 million in
restructuring expense in 1997, with no corresponding expense in 1998. This
expense consisted of $30 million in employee severance and related benefits, $30
million for rationalizing manufacturing operations and $20 million for contract
termination and other costs. RJR Tobacco Company undertook the 1997
restructuring program to enhance its competitive position and improve its
long-term earnings growth prospects.
The charge for employee severance and related benefits related to work force
reductions of 192 full-time positions and 217 seasonal positions at a
manufacturing facility and in staff-related areas. RJR
28
<PAGE>
Tobacco Company employed the severed employees primarily at its now-closed Brook
Cove, North Carolina stemmery.
The charge for rationalizing manufacturing operations was primarily related
to the closing of the Brook Cove stemmery, which took place in February 1998
after RJR Tobacco Company finished processing tobacco purchased from the 1997
burley crop. Beginning with the 1998 flue-cured crop, RJR Tobacco Company began
contracting with a third party to perform leaf processing. The costs expensed in
connection with exiting this activity included the write-down to fair value of
the building and equipment held for sale, and the write-off of equipment to be
abandoned.
The charge for contract termination and other costs represented the loss on
termination of a contract obligation. During 1997, management decided and
committed to a plan of termination of a leaf supply contract. The loss
represented the shortfall between the contract cost and the amount that was
recovered upon sale of the leaf inventory. RJR Tobacco Company, acting as a
broker, exercised all of its remaining obligations under the leaf supply
contract and transferred title to a third party without taking possession of the
tobacco.
Of the $80 million total restructuring charge, cash outlays will aggregate
approximately $40 million. We expect the program to be substantially completed
in 1999. Pre-tax savings in 1998 were $33 million and, after completion of the
program, we expect them to be approximately $18 million annually. For the year
ended December 31, 1998, RJR Tobacco Company used $63 million of the 1997
tobacco restructuring accruals as follows: $15 million for employee severance
and related benefits, $28 million for rationalizing manufacturing operations,
and $20 million for contract terminations and other costs. Of the charges
applied against the restructuring reserve in 1998, cash expenditures amounted to
$35 million, which were provided from operations.
PROVISION (BENEFIT) FOR INCOME TAXES. A tax benefit of $160 million, at a
23.6% effective rate, was recorded in 1998 compared to a tax provision of $185
million, or a 90.7% effective rate, that was recorded in 1997. The rate decrease
is primarily due to the relative impact of nondeductible goodwill amortization
on income (loss) before income taxes.
1997 COMPARED TO 1996
NET SALES. Net sales of $5.0 billion in 1997 increased 7.3% from $4.7
billion in 1996. The increase was driven by higher prices offset in part by
lower volumes. RJR Tobacco Company's manufacturer's list prices increased in
1997 by approximately $0.12 per pack.
Unit sales volumes for premium brands decreased an average of 1.1%, compared
to an average volume decrease of 3.0% for savings brands. The mix between RJR
Tobacco Company's premium and savings brands changed slightly, with premium
shipments representing 63.4% of total shipments in 1997 compared to 63.0% in
1996. Overall industry volume decreased by 0.6% from 1996 to 1997. RJR Tobacco
Company believes that both its rate and the industry rate of volume decline were
slowed by wholesale trading activity that took place by the end of 1997 in
anticipation of settlement-driven price increases in 1998.
RJR Tobacco Company's overall retail market share for 1997 decreased to
25.41% from 25.90% in 1996. RJR Tobacco Company's premium share for 1997
decreased to 16.65% from 16.81% in 1996, while its savings share for 1997
decreased to 8.76% from 9.09% in 1996.
COST OF PRODUCTS SOLD. Cost of products sold remained flat at $1.2 billion
in 1997 and 1996.
SELLING, ADVERTISING, ADMINISTRATIVE AND GENERAL EXPENSES. Selling,
advertising, administrative and general expenses of $2.4 billion in 1997
increased 12.7% from $2.1 billion in 1996. The increase was due primarily to a
22.0% increase in promotional expense, chiefly competitive discounts.
29
<PAGE>
TOBACCO SETTLEMENT AND RELATED EXPENSES. RJR Tobacco Company recorded $359
million in initial, up-front tobacco settlement and related expenses in 1997,
with no corresponding expense in 1996. The 1997 expense related primarily to
settlements arising from litigation involving the attorneys general of Florida,
Mississippi and Texas.
RESTRUCTURING EXPENSE. RJR Tobacco Company recorded $80 million in
restructuring expense in 1997, with no corresponding expense in 1996. For
discussion of the 1997 expense, see "--1998 Compared to 1997--Restructuring
expense".
PROVISION FOR INCOME TAXES. A tax provision of $185 million, reflecting a
90.7% effective rate, was recorded in 1997 compared to a tax provision of $337
million or a 59.9% effective rate in 1996. The increase in the rate is primarily
due to the relative impact of nondeductible goodwill amortization on income
before income taxes.
PRO FORMA RESULTS OF OPERATIONS
Based on the transactions assumed in the pro forma consolidated financial
statements, operating income for the three months ended March 31, 1999 and 1998
and for the year ended December 31, 1998 would be higher than the corresponding
amounts reflected in the historical results of operations as a result of the
adjustment to reflect the estimated level of administrative expense of RJR
Tobacco Holdings after the completion of the transfer of RJR Tobacco Holdings'
interest in Nabisco and the distribution of RJR Tobacco Holdings common stock.
Interest and debt expense for each period would be substantially lower
compared to the amount included in the historical results of operations
primarily as a result of the application of a portion of the net proceeds from
the international tobacco sale to repay outstanding borrowings assumed in the
pro forma consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
RJR Tobacco Company believes that cash flows from operating activities will
be sufficient for the foreseeable future to enable it to meet its obligations
under the Master Settlement Agreement with attorneys general for most U.S.
states, territories and possessions and other existing settlement agreements, to
fund its required debt-service payments, to fund its budgeted capital
expenditures and to make payments to RJR Tobacco Holdings that will enable RJR
Tobacco Holdings to make its required debt-service payments and to pay dividends
to RJR Tobacco Holdings stockholders. RJR Tobacco Company cannot predict its
cash requirements relating to any future settlements and judgments, including
cash required to bond any appeals, if necessary, and makes no assurance that it
will be able to meet all of those requirements.
DEBT
On May 18, 1999, RJR Tobacco Holdings issued $550 million in principal
amount of 7 3/8% notes due 2003, $500 million in principal amount of 7 3/4%
notes due 2006 and $200 million in principal amount of 7 7/8% notes due 2009.
These notes are subject to the exchange offer described in this prospectus. The
notes are senior unsecured obligations and, unlike RJR Tobacco Holdings' other
nonbank debt, are guaranteed by RJR Tobacco Company. In addition, any other
subsidiaries of RJR Tobacco Holdings that in the future guarantee the $1.235
billion revolving credit facility described in greater detail below will also be
required to guarantee the notes. Subject to specified exceptions, the terms of
the notes restrict the issuance of guarantees by subsidiaries, the pledge of
collateral, sale/ leaseback transactions and the transfer of all or
substantially all of the assets of RJR Tobacco Holdings and its subsidiaries.
30
<PAGE>
On May 7, 1999, RJR Tobacco Holdings entered into a 30-month $1.235 billion
revolving credit facility with a syndicate of banks. RJR Tobacco Holdings can
use the full facility to obtain loans or letters of credit, at its option.
Currently, RJR Tobacco Holdings uses the facility only for letters of credit
with an aggregate stated amount of approximately $450 million. Accordingly, RJR
Tobacco Holdings will have approximately $785 million of availability under the
facility. RJR Tobacco Company has guaranteed RJR Tobacco Holdings' obligations
under the facility. If RJR Tobacco Holdings' new senior unsecured debt is rated
below BBB- by S&P or Baa3 by Moody's, some of its other subsidiaries will have
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 May 18, 1999, RJR Tobacco Holdings completed tender offers and consent
solicitations for most of its outstanding public debt. In these transactions,
RJR Tobacco Holdings used a portion of the proceeds from the international
tobacco sale to repurchase approximately $4 billion of its public debt. After
completion of these transactions and upon completion of the spin-off, RJR
Tobacco Holdings' outstanding debt totals approximately $2.03 billion,
consisting of the $1.25 billion of notes that are subject to the exchange offer
described in this prospectus and that are guaranteed by RJR Tobacco Company,
approximately $378 million of outstanding Eurobonds, and approximately $398
million of public debt.
CASH FLOWS
FIRST QUARTER OF 1999 COMPARED TO FIRST QUARTER OF 1998. Net cash flows
from continuing operating activities were $248 million in the first quarter of
1999 compared to an outflow of $59 million in the first quarter of 1998. The
increase in cash flow primarily reflects increased pricing, the timing of
payments for leaf purchases and other accounts payable, and lower income tax and
restructuring payments, partially offset by an increase in settlement payments
and lower product volume.
In the fourth quarter of 1998, RJR Tobacco Company recorded a $151 million
expense for a work force reduction of approximately 1,300 employees in response
to changing business conditions that we expect to result from the Master
Settlement Agreement signed in November 1998. We expect pre-tax savings in 1999
and 2000 to be approximately $60 million and $95 million, respectively. For the
three months ended March 31, 1999, RJR Tobacco Company made $5 million of
payments, which were applied against the reserve.
Net cash flows used in investing activities were $10 million in the first
quarter of 1999 and the first quarter of 1998.
1998 COMPARED TO 1997. Net cash flows from continuing operating activities
were $367 million in 1998 compared to $628 million in 1997. The decrease
primarily reflects increased tobacco settlement and restructuring payments,
partially offset by higher operating company contribution on an ongoing basis
and lower income tax payments.
Net cash flows used in investing activities were $43 million in 1998
compared to $46 million in 1997. The decrease is due to lower capital
expenditures in 1998, offset by lower proceeds from the sale of various assets
during 1998.
1997 COMPARED TO 1996. Net cash flows from continuing operating activities
were $628 million in 1997 compared to $665 million in 1996. The decrease
reflects tobacco settlement payments in 1997 and a lower benefit in 1997
compared to 1996 from leaf inventory reduction programs in 1996, partially
offset by lower income tax, restructuring and interest payments and higher
operating company contribution on an ongoing basis.
31
<PAGE>
Net cash flows used in investing activities were $46 million in 1997
compared to net cash flows from investing activities of $59 million in 1996. The
decrease in net cash flows from investing activities was due primarily to lower
proceeds from the divestiture of various assets in 1997 compared to 1996.
Free cash flow, another measure used by management to evaluate liquidity and
financial condition, represents cash available for the repayment of debt and
various other corporate purposes like common stock dividends, stock repurchases
and acquisitions. It is essentially net cash flow from operating activities and
investing activities, adjusted for acquisitions and divestitures of businesses.
Free cash flow resulted in an inflow of $226 million in the first quarter of
1999 compared to an outflow of $97 million in the first quarter of 1998 and $313
million for the year ended December 31, 1998 compared to $594 million for the
year ended December 31, 1997. The increase in free cash flow from the first
quarter of 1998 to the first quarter of 1999 is due primarily to the reasons
discussed above for the change in net cash flows from continuing operating
activities. The decrease in free cash flow from 1997 to 1998 primarily reflects
the increase in tobacco settlement and restructuring payments in 1998, partially
offset by the reduction in income tax payments discussed above and higher
operating company contribution, based on ongoing results.
In connection with the spin-off, RJR Tobacco Holdings will assume, subject
to specified exceptions, all U.S. pension liabilities and related assets for
current and former tobacco employees. We anticipate additional cash required
compared to 1998 to fund those liabilities to be approximately $10 million in
1999 and approximately $45 million in each of the years 2000, 2001, 2002 and
2003.
CAPITAL EXPENDITURES
Actual capital expenditures were $10 million for the first quarters of both
1999 and 1998, and $47 million, $57 million and $63 million for the years ended
December 31, 1998, 1997 and 1996, respectively. The level of expenditures
currently planned for 1999 is approximately $50 million. 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 March 31, 1999 and December
31, 1998.
SETTLEMENTS
Total payments in 1998 for all tobacco litigation settlement agreements
currently in effect and their associated costs, including the Master Settlement
Agreement, were $786 million. RJR Tobacco Company funded these payments
primarily by cash flows from operating and financing activities. We expect that
the cash payments to be made by RJR Tobacco Company under these agreements in
1999 will be approximately $1.6 billion ($316 million of which RJR Tobacco
Company paid as of March 31, 1999) to be funded through price increases. In
future years, we estimate payments will exceed $2.0 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 the portions of this document found
under the heading "Risk Factors", "Business-- Litigation and
Regulation--Litigation", note 4 to our unaudited consolidated condensed
financial statements as of March 31, 1999 and note 10 to our consolidated
financial statements as of December 31, 1998, included elsewhere in this
prospectus.
PRO FORMA LIQUIDITY AND FINANCIAL CONDITION
After giving effect to the transactions assumed in the pro forma
consolidated condensed financial statements, we expect RJR Tobacco Holdings to
have long-term debt, excluding current maturities, and total capital, which is
defined as total long-term debt, excluding current maturities, and total
stockholders' equity, of approximately $1.994 billion and $9.63 billion,
respectively.
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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.
As of March 31, 1999, software remediation, which entails modifying existing
programs to make them year 2000 compliant, was approximately 99% complete for
information technology systems. This phase of year 2000 readiness was completed
during the second quarter of 1999. In the case of operating systems with
embedded technology, RJR Tobacco Company has completed these software
remediation efforts.
As of March 31, 1999, software testing following remediation was
approximately 92% complete for information technology systems. RJR Tobacco
Company expects that testing will be completed by the end of the third quarter
of 1999. With respect to operating systems with embedded technology, testing was
approximately 90% complete and RJR Tobacco Company expects it to be completed by
the end of the third quarter of 1999.
As of March 31, 1999, approximately 88% of information technology systems
were compliant and in use. RJR Tobacco Company anticipates the balance to be
completed by the end of the third quarter of 1999. Approximately 89% of
operating systems with embedded technology were compliant and in use. Management
expects all operating systems with embedded technology to be fully year 2000
compliant by the end of the third quarter of 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 March 31,
1999, RJR Tobacco Company had received responses from 99% of identified third
parties, as follows: 84% of identified third parties had confirmed that they are
fully compliant, 14% were not currently compliant but expected to be by the end
of 1999, and 1% will not be in compliance. 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 completed 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 March 31, 1999, RJR Tobacco Company had incurred expenses of $28
million to be year 2000 compliant. The current estimated cost to complete RJR
Tobacco Company's year 2000 program is
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an additional $9 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
MARCH 31, 1999 PROJECT COST
----------------- -----------------
<S> <C> <C>
(DOLLARS IN MILLIONS)
BY SYSTEM TYPE:
Information technology systems............................. $ 26 $ 33
Operating systems with embedded technology................. 2 4
BY WORK PERFORMED:
Remediation................................................ 26 33
Replacement................................................ 2 4
INTERNAL/EXTERNAL:
Internal costs............................................. 20 28
Replacement/contractor costs............................... 8 9
</TABLE>
RJR Tobacco Holdings is primarily dependent on the systems and systems
infrastructure of RJR Tobacco Company. 100% 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows due to adverse changes
in financial market prices and rates. We are exposed to interest rate market
risk. This exposure is directly related to our normal investing and funding
activities. We have established various policies and procedures to manage our
exposure to market risk, including the use of financial derivatives, which are
highly correlated to underlying exposures. We estimate our market risk due to
changes in interest rates utilizing a financial model called Value at Risk.
Value at Risk is a statistical measure of the potential loss in terms of fair
value, cash flows or earnings of market-risk sensitive instruments over a
one-year horizon assuming a 95% confidence interval for changes in market rates
and prices.
INTEREST RATE EXPOSURES
Upon reviewing our derivatives and interest rate instruments, based on the
fair value of market-rate sensitive instruments at year-end, we do not believe
that near-term changes in interest rates will have a material impact on our
future earnings, fair values or cash flows.
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<PAGE>
BUSINESS
GENERAL
RJR Tobacco Holdings is a holding company that owns 100% of the stock of RJR
Tobacco Company. RJR Tobacco Company is the second largest cigarette
manufacturer in the United States. RJR Tobacco Company's largest selling
cigarette brands include DORAL, WINSTON, CAMEL, SALEM, and VANTAGE, and its
other brands, including MONARCH, MORE, NOW, BEST VALUE and CENTURY, are marketed
to meet a variety of smoker preferences. In the first quarter of 1999 and in
1998, RJR Tobacco Company had four of the top ten best selling brands of
cigarettes in the United States (DORAL, WINSTON, CAMEL and SALEM).
Based on data collected by an independent market research firm, RJR Tobacco
Company's overall share of retail domestic consumer cigarette sales during the
first quarter of 1999 was approximately 24.41%, a decrease of approximately one
share point from the first quarter of 1998 and during 1998 was approximately
25.17%, a decrease of approximately one-quarter of a share point from 1997.
During, the first quarter of 1999, the largest domestic cigarette manufacturer,
Philip Morris Incorporated, sold approximately 49.4% of all cigarettes consumed
in the United States.
As a result of the completion of the sale of the international tobacco
business to Japan Tobacco on May 12, 1999, RJR Tobacco Company's business
consists exclusively of the manufacture and sale of cigarettes in the United
States and its territories, commonwealths, protectorates and possessions.
INDUSTRY OVERVIEW
U.S. cigarette shipments have decreased at a compound annual rate of 1.9%
over the past 10 years. From 1995 through 1997, U.S. cigarette sales volume
increased slightly, from 481.4 billion to 482.9 billion units. In the first
quarter of 1999, the industry experienced a 9.6% decline in shipments to 97.8
billion units from 108.2 billion units in the first quarter of 1998. In 1998,
the industry experienced a 4.6% decline in shipments to 460.8 billion units with
substantial price increases (reflecting settlement costs and higher state sales
and excise taxes) responsible for a portion of this volume decline. Since August
1997, wholesale cigarette prices have increased six times (totaling
approximately $0.70 per pack). The most recent $0.45 per pack increase in
November 1998 was implemented to satisfy RJR Tobacco Company's payment
obligations under the Master Settlement Agreement with state attorneys general.
For a detailed discussion of the tobacco litigation and the MSA, see note 4 to
our unaudited consolidated condensed financial statements as of March 31, 1999
and note 10 to our consolidated financial statements as of December 31, 1998,
included elsewhere in this prospectus.
In the first quarter of 1999, the premium and savings segments accounted for
approximately 73.9% and 26.1%, respectively, of the U.S. cigarette industry
volume, versus 72.6% and 27.4%, respectively in the first quarter of 1998. In
1998, the premium and savings segments accounted for approximately 73.0% and
27.0%, respectively, of the U.S. cigarette industry volume, versus 72.3% and
27.7%, respectively in 1997. In the first quarter of 1999 and 1998, the premium
segment represented approximately 61.9% of RJR Tobacco Company's total volume.
The premium segment represented approximately 62.6% of RJR Tobacco Company's
total volume for 1998, compared to 63.4% in 1997. Profit margins on savings
brands tend to be lower than profit margins on premium brands. We cannot predict
the potential adverse impact of price increases on industry volume or RJR
Tobacco Company volume, on the mix between premium and savings sales or on RJR
Tobacco Company's market share.
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The following tables depict the comparative positions of the leading
producers and brands in the industry:
MANUFACTURERS' RETAIL MARKET SHARE
<TABLE>
<CAPTION>
FIRST QUARTER
MANUFACTURER OF 1999 1998 1997 1996 1995
- ----------------------------------------------------------------- --------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Philip Morris.................................................... 49.4% 48.6% 47.7% 46.8% 45.1%
RJR Tobacco Company.............................................. 24.4 25.2 25.4 25.9 27.0
Brown & Williamson/American Brands............................... 13.7 15.0 16.0 17.1 17.8
Lorillard........................................................ 8.9 8.2 7.9 7.8 7.6
Other............................................................ 3.6 3.0 3.0 2.4 2.5
----- --------- --------- --------- ---------
Total............................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
</TABLE>
- ------------------------
Source: IRI/Marlin
TOP 10 BRANDS BY MARKET SHARE--1998
<TABLE>
<CAPTION>
SHARE POINT
BRAND MANUFACTURER TYPE MARKET SHARE CHANGE FROM 1997
- -------------------------------------------------- --------------- ---------- --------------- ---------------------
<S> <C> <C> <C> <C>
MARLBORO.......................................... Philip Morris Premium 33.8% 1.7
DORAL............................................. RJRTC Savings 6.4 0.5
NEWPORT........................................... Lorillard Premium 5.8 0.4
WINSTON........................................... RJRTC Premium 5.6 --
GPC............................................... B&W Savings 5.5 (0.1)
CAMEL............................................. RJRTC Premium 5.3 0.1
BASIC............................................. Philip Morris Savings 4.9 0.1
SALEM............................................. RJRTC Premium 3.4 (0.3)
KOOL.............................................. B&W Premium 3.3 (0.1)
VIRGINIA SLIMS.................................... Philip Morris Premium 2.7 (0.1)
</TABLE>
- ------------------------
Source: IRI/Marlin
STRATEGY
RJR Tobacco Company's primary long-term objective is to increase earnings
and cash flow through selective marketing investments in key brands and
continual improvements in its cost structure and operating efficiency.
RJR Tobacco Company is committed to new product development, product-line
extensions and brand repositioning as sources of growth. In May 1996, RJR
Tobacco Company began test marketing in Chattanooga, Tennessee its ECLIPSE
cigarette. Test markets were expanded in 1997 to include Lincoln, Nebraska and
Atlanta, Georgia. ECLIPSE primarily heats rather than burns tobacco, thereby
substantially reducing second-hand smoke, while leaving virtually no ash, stains
or lingering odor. In 1997, RJR Tobacco Company revised the WINSTON blend and
packaging as part of its "No Bull"
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campaign which has led to the first market share gains for this brand in 25
years. Also in 1997, RJR Tobacco Company introduced CAMEL MENTHOL, KAMEL MENTHE
and RED KAMEL to the CAMEL brand family. Over the last year, RJR Tobacco Company
has revised the SALEM blend and package design to compete more effectively in
the marketplace. These changes were introduced nationally in January 1999.
To improve its cost structure and respond to the changing business
conditions we expect to result from the MSA with state attorneys general and
other existing settlement agreements, RJR Tobacco Company announced in December
1998 a $365 million settlement-related charge to eliminate approximately 1,300
positions (a 15% work force reduction) and a write-down of one of RJR Tobacco
Company's production facilities and certain other equipment to fair value. These
programs are expected to generate significant cost savings in future years.
Pre-tax savings in 1999 and 2000 relating to the employee terminations and the
rationalization of manufacturing operations is expected to be approximately $75
million and $110 million, respectively.
SALES AND MARKETING
RJR Tobacco Company markets its existing brands through various campaigns
designed to strengthen the brands' image among adult smokers and to increase
market share. RJR Tobacco Company designs its marketing programs to build brand
awareness and to add value to the brands by building brand loyalty among current
adult smokers and attracting adult smokers of competing brands.
In 1998 the WINSTON brand, supported by the "No Bull" campaign, gained
market share for the first time in 25 years, despite a fiercely competitive
marketplace. CAMEL continued to be a strong competitor, backed by its new
"Mighty Tasty" advertising campaign and related promotional events. After a year
of successful test-marketing of a new positioning, SALEM introduced the "It's
Not What You Expect" campaign nationally in January 1999. RJR Tobacco Company
believes it is essential to compete in all segments of the cigarette market and
accordingly offers a range of lower-priced brands including DORAL, MONARCH and
BEST VALUE, intended to appeal to more cost-conscious adult smokers. DORAL has
maintained its positive performance trend, achieving significant gains and
growing to an approximately 23.7% share of the savings segment in 1998.
Television and radio advertising for cigarettes is prohibited in the United
States, and, as part of the MSA, RJR Tobacco Company has agreed, along with the
other major cigarette manufacturers, to discontinue the use of billboard
advertising as well as certain other marketing and promotional tools. RJR
Tobacco Company plans to maintain advertising campaigns for its brands in
magazines, at retail cigarette locations and in other adult venues as an
integral part of its strategy to increase loyalty to its brands and to attract
adult smokers of other brands. In addition, RJR Tobacco Company engages in
various promotional campaigns such as "Camel Cash," which enables adult smokers
to purchase goods using coupons from cigarette packages, and direct mail
campaigns for adult smokers. RJR Tobacco Company offers buydown programs to
retailers whereby the retailers receive payments from RJR Tobacco Company that
the retailer is contractually obligated to pass through to consumers as a
discount.
RJR Tobacco Company sells cigarettes principally to distributors and
wholesalers and to certain large retail stores. Most of RJR Tobacco Company's
customers buy on a spot basis rather than under long-term agreements. Except for
McLane Company, Inc. (the largest distributor of cigarettes in the United
States), which represented approximately 16.7% of RJR Tobacco Company's sales in
1998, no RJR Tobacco Company customer accounted for more than 10% of RJR Tobacco
Company's 1998 sales.
Over 1,500 sales personnel oversee RJR Tobacco Company's relationships with
its wholesale and retail customers. These sales personnel monitor inventories,
work with retailers on display and signage and from time to time enter into
discount arrangements with retailers.
37
<PAGE>
MANUFACTURING
RJR Tobacco Company manufactures cigarettes primarily at its Tobaccoville
and Whitaker Park plants in Winston-Salem, NC, both of which it owns.
Tobaccoville is a two million square-foot facility constructed in 1985 with a
current capacity of approximately 110 billion cigarettes per year. The Whitaker
Park complex includes a plant built in 1960, RJR Tobacco Company's Central
Distribution Center, the Bowman Gray Technical Center for research and
development activities and a pilot plant for trial manufacturing of new
products. We believe our cigarette manufacturing facilities are among the most
technologically advanced in the United States.
In connection with the sale to Japan Tobacco of the international tobacco
business, (1) RJR Tobacco Company has entered into a contract to manufacture
cigarettes for delivery to and sale by Japan Tobacco outside the United States,
and (2) Japan Tobacco has entered into a contract to manufacture cigarettes for
delivery to and sale by RJR Tobacco Company in Puerto Rico and the U.S. Virgin
Islands. These contracts will remain in effect until at least December 31, 2001.
Either party may terminate the contract under which RJR Tobacco Company
manufactures cigarettes for Japan Tobacco, effective on December 31, 2001 or on
December 31 of any succeeding year upon one year's notice given by that party.
Upon termination of the contract under which RJR Tobacco Company manufactures
cigarettes for Japan Tobacco, the contract under which Japan Tobacco
manufactures cigarettes for RJR Tobacco Company will automatically terminate.
RAW MATERIALS
In its production of cigarettes, RJR Tobacco Company uses domestic burley
and flue-cured leaf tobacco purchased at domestic auction. RJR Tobacco Company
also purchases oriental tobacco, grown primarily in Turkey and Greece, and
certain other non-domestic tobacco. Tobacco is then aged or "cured" for
approximately two years before it is used in production.
INTELLECTUAL PROPERTY
RJR Tobacco Company owns numerous trademarks, including the brand names of
its cigarettes and their distinctive packaging and display. In addition, RJR
Tobacco Company considers the blends of tobacco that make each of its brands
distinctive to be trade secrets. These trade secrets are generally not the
subject of patents, though certain of RJR Tobacco Company's manufacturing
processes are patented.
In connection with the sale of the international tobacco business, RJR
Tobacco Company sold its trademarks outside the United States and certain of its
patents outside the United States.
All of RJR Tobacco Company's material trademarks are registered with the
U.S. Patent and Trademark Office. Rights in these trademarks in the United
States will last as long as RJR Tobacco Company continues to use the trademarks.
COMPETITION
The markets in which RJR Tobacco Company conducts its business are highly
competitive, with a number of large participants. Philip Morris Incorporated,
RJR Tobacco Company's largest competitor, has significantly greater resources
than RJR Tobacco Company. Competition is conducted on numerous bases, including
brand and packaging recognition, brand loyalty, retail display and promotion,
quality and price. Substantial advertising, merchandising display and
promotional expenditures, including selective discounting, are generally
necessary to maintain or improve a brand's market position.
Increased selling prices and taxes on cigarettes have resulted in additional
price sensitivity of cigarettes at the consumer level and in a proliferation of
discounts and of brands in the savings
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<PAGE>
segment of the market. Generally, sales of cigarettes in the savings segment are
not as profitable as those in the premium segment.
Price discounting is used as a competitive tool in the industry. For
example, over the last five weeks of the first quarter of 1999, Philip Morris
offered discounts of $5.50 per carton or $.55 per pack on Marlboro. RJR Tobacco
Company matched these discounts on CAMEL and WINSTON. Similarly, Brown &
Williamson initiated aggressive discounts on its GPC brand which were matched by
RJR Tobacco Company on DORAL.
TRADE LOADING. Wholesalers began to increase their inventories of
cigarettes in mid-1997 in anticipation that litigation settlements would result
in significant price increases. Wholesale trade inventories of RJR Tobacco
Company products amounted to approximately 3.2 billion cigarettes in November
1998, and at year end had been reduced to approximately 1.9 billion cigarettes.
It is unclear when wholesalers will reduce excess stocks to normal levels.
GREY MARKET. The price difference between cigarettes manufactured for sale
abroad and cigarettes manufactured for U.S. sale has increased, and consequently
a domestic "grey market" has developed in cigarettes manufactured for sale
abroad. These cigarettes compete with the cigarettes RJR Tobacco Company
manufactures for domestic sale. RJR Tobacco Company has taken legal action
against certain distributors and retailers who engage in such practices.
EMPLOYEES
As of December 31, 1998, RJR Tobacco Company had approximately 9,000
employees. None of these employees is unionized. We believe that employee
relations are good.
PROPERTIES
RJR Tobacco Company's executive offices are housed in two buildings (which
RJR Tobacco Company owns) in downtown Winston-Salem. RJR Tobacco Company owns
several other smaller properties, all located in or near Winston-Salem. See
"--Manufacturing" for a description of RJR Tobacco Company's operating
facilities.
LITIGATION AND REGULATION
LITIGATION
TOBACCO LITIGATION--GENERAL. Various legal actions, proceedings and claims
are pending or may be instituted against RJR Tobacco Company, its affiliates
(including RJR Tobacco Holdings) or its 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. There has been
a noteworthy increase in the number of these cases pending. As of June 11, 1999,
639 active cases were pending in the United States against RJR Tobacco Company,
its affiliates or its indemnitees. In connection with the spin-off, RJR Tobacco
Holdings and RJR Tobacco Company have agreed to indemnify Nabisco Group Holdings
for any liability Nabisco Group Holdings incurs arising from tobacco-related
litigation. The plaintiffs in these actions seek recovery on a variety of legal
theories, including strict liability in tort, design defect, negligence, special
duty, voluntary undertaking, breach of warranty, failure to warn, fraud,
misrepresentation, unfair trade practices, conspiracy, aiding and abetting,
unjust enrichment, antitrust, Racketeer Influenced and Corrupt Organization Act,
indemnity, contribution, medical monitoring, common law public nuisance and
civil rights violations. Punitive damages, often in amounts ranging into the
hundreds of millions, or even billions of dollars, are specifically pleaded in a
number of cases in addition to compensatory and other damages.
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<PAGE>
In January of 1999, President Clinton announced that the U.S. Department of
Justice is preparing a litigation plan for a lawsuit by the federal government
to recover federal healthcare costs associated with cigarette smoking, and in
June 1999 he reiterated his commitment to such a lawsuit.
In addition, on December 22, 1998, a now inactive tobacco subsidiary that
was part of the now sold international tobacco business, Northern Brands
International, Inc., 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 fraudulently brought merchandise into
the United States. In the plea agreement, the U.S. Attorney agreed not to bring
additional criminal charges in the Northern District against Northern Brands or
its corporate affiliates (including RJR Tobacco Holdings and RJR Tobacco
Company) for actions (from 1985 through 1998) that are related to those that
gave rise to the agreement. RJR-MacDonald, an operating company in Canada that
is part of the sold international tobacco business, is cooperating with an
investigation now being conducted by the Royal Canadian Mounted Police relating
to the same events that gave rise to the NBI investigation. Under the sale
agreement with Japan Tobacco, RJR Tobacco Holdings and RJR Tobacco Company have
retained certain liabilities that may arise from these events. We cannot predict
whether any other authorities in the United States or Canada will seek to take
further actions with regard to these events.
Trial is underway in a class-action suit pending in Florida, ENGLE V. R.J.
REYNOLDS TOBACCO COMPANY, 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. A jury determination of liability was handed down on July 7, 1999
against RJR Tobacco Company and the other cigarette manufacturer defendants in
the initial phase, which included common issues related to liability, general
causation and a potential award of or entitlement to punitive damages. We expect
that individual liability and damages, if any, will not be determined until a
verdict is reached in one or more trials involving the nine named class
representatives during the second phase. No actual damages would have to be paid
until the end of the trial and the appellate process.
We believe that, notwithstanding the quality of defenses available to RJR
Tobacco Holdings, RJR Tobacco Company and their affiliates in litigation
matters, it is possible that our results of operations or cash flows in
particular quarterly or annual periods could be materially affected by the
ultimate outcome of certain pending litigation matters (including litigation
costs). We are 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.
LITIGATION SETTLEMENT AGREEMENTS. In June 1994, the Mississippi attorney
general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, 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. Following the filing of the MOORE case, most other
states, through their attorneys general and/or other state agencies, sued RJR
Tobacco Company and other U.S. cigarette manufacturers based on similar
theories.
On November 23, 1998, the major U.S. cigarette manufacturers entered into
the Master Settlement Agreement with attorneys general representing each of the
states of the United States (excepting those states with which the manufacturers
had previously concluded settlements), the District of Columbia, Puerto Rico,
Guam, the Virgin Islands, American Samoa and the Northern Marianas (the
"Settling States"). The MSA is subject to judicial approval by the state courts
in which the attorneys general filed suit. As of June 29, 1999, final approval
had been obtained in 42 of the Settling States having percentage shares equal to
54.18% of the percentage shares of payments due. The MSA becomes 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). To the extent
approved, the MSA settles all the healthcare cost recovery
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<PAGE>
actions brought by the Settling States and contains releases of certain
additional present and future claims.
- MONETARY LIABILITIES. In addition to payments made in 1998, the MSA
calls for four annual initial industry payments starting in 2000 of up to
approximately $2.47 billion, $2.5 billion, $2.6 billion and $2.7 billion,
respectively. It also requires perpetual annual industry payments,
increasing from $4.5 billion in April 2000 to $8 billion in 2004 and further
to $9 billion in 2018 and thereafter. Ten additional industry payments of
$861 million are due annually beginning in April 2008. All payments are to
be allocated among the companies on the basis of relative market share and
most are subject to adjustments for changes in sales volume (in units),
inflation and other factors.
The tobacco companies have also agreed to (a) make a one-time payment of
$50 million on March 31, 1999 to establish a fund for enforcement of the MSA
and laws relating to tobacco products and (b) fund activities of the
National Association of Attorneys General relating to the MSA at the cost of
$150,000 per year for ten years.
In addition, the MSA calls for the creation of a national foundation
which would establish public education and other programs and conduct or
sponsor research to reduce youth smoking and to understand and educate the
public about diseases associated with tobacco-product use. The tobacco
companies would fund the establishment of the foundation with 10 annual
payments of $25 million commencing March 31, 1999, further payments of $250
million on March 31, 1999 and $300 million annually thereafter for four
years and additional annual payments of $300 million beginning in 2004 if,
during the year preceding the year when payment is due, participating
manufacturers collectively accounted for at least 99.05% of the cigarette
market. Each of these payments is to be allocated among the companies on the
basis of relative market share. Other than the $25 million annual payments
and the $250 million payment due on March 31, 1999, the payments for the
foundation are subject to adjustments for changes in sales volume (in
units), inflation and other factors.
The manufacturers have also agreed to pay the litigation costs,
including government attorneys' fees, of the offices of the attorneys
general relating to the settled cases and, subject to certain quarterly and
annual payment caps, the costs and fees of outside counsel to the Settling
States. Outside counsel fees are to be determined either by arbitration or
in accordance with a negotiated fee procedure. Awards determined by
arbitration will be paid subject to an aggregate annual cap on arbitrated
attorneys' fees for all these (and certain other) settled cases of $500
million. Fees set by the negotiated fee procedure would be subject to an
annual cap of $250 million, and will not exceed a total of $1.25 billion.
Reimbursement of costs is capped at $150 million for litigation costs,
including government attorneys' fees, of the attorney generals' offices and
at $75 million annually for outside counsels' costs. Payments for attorneys'
fees and costs are to be allocated on a market share basis.
We estimate that the payments to be made by RJR Tobacco Company pursuant
to existing settlements of lawsuits, including the MSA, in 1999 are
approximately $1.6 billion ($316 million of which was paid as of March 31,
1999), and in future years will exceed $2.0 billion per year, but 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.
RJR Tobacco Company has made all payments due March 31, 1999,
predominantly into escrow pending effectiveness of the MSA.
- GROWERS' TRUST. As part of the MSA, the tobacco companies have agreed
to work with tobacco growers to address the possible adverse economic impact
of the MSA on growers. RJR Tobacco Company, with the other major
manufacturers, has agreed in principle to participate in
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<PAGE>
funding a $5.15 billion trust fund to be administered by the tobacco-growing
states. Details of these arrangements have not yet been established but it
is expected that RJR Tobacco Company's payment obligations will be payable
over a number of years and will be subject to adjustments for several
factors, including inflation, U.S. aggregate cigarette volumes and market
share.
- OTHER MSA OBLIGATIONS. The MSA also contains provisions restricting
the marketing of cigarettes. Among these are restrictions or prohibitions on
the use of cartoon characters, brand name sponsorships, brand name
non-tobacco products, outdoor and transit brand advertising, payments for
product placement, free sampling and lobbying. The MSA requires the
dissolution of three industry-sponsored research and advocacy organizations.
The MSA may have a significant negative impact on RJR Tobacco Company's
results of operations or cash flows, which in turn could adversely affect our
ability to meet payment obligations under the notes. The financial effects
depend, among other things, on the impact of increased cigarette prices (needed
to cover the cost of settlement-related payments), proposed marketing
restrictions, increased funding of anti-smoking educational programs, the amount
and kind of additional requirements that may be imposed on the industry by state
and national legislation and regulation and the effect on RJR Tobacco Company's
payment obligations of such variables as inflation, sales volumes, the level of
operating profits and RJR Tobacco Company's competitive position in the
industry. The effect of the MSA, if any, on existing claims, or the number and
type of additional lawsuits filed against RJR Tobacco Company in the future, is
also difficult to predict at this time.
For further discussion of the tobacco litigation, see note 4 to our
unaudited consolidated condensed financial statements as of March 31, 1999 and
note 10 to our consolidated financial statements as of December 31, 1998,
included elsewhere in this prospectus.
OTHER GOVERNMENT REGULATION
The advertising, sale and use of cigarettes have been subject to substantial
regulation by government and health officials for many years. Together with
manufacturers' price increases in recent years and substantial increases in
state and federal excise taxes on cigarettes, these developments have had and
will likely continue to have an adverse effect on cigarette sales.
Cigarettes are subject to substantial excise taxes in the United States. The
federal excise tax per pack of 20 cigarettes is currently $.24. The per pack
federal cigarette excise tax will increase by $.10 in 2000, and by an additional
$.05 in 2002. In his State of the Union address delivered in January 1999,
President Clinton specifically indicated support for a $.55 additional increase
in the federal excise tax. In addition, all states and the District of Columbia
impose excise taxes at levels ranging from $.025 per pack in Virginia to $1.00
per pack in Alaska.
In 1964, the Report of the Advisory Committee to the Surgeon General of the
U.S. Public Health Service concluded that cigarette smoking was a health hazard
of sufficient importance to warrant appropriate remedial action. Since 1966,
federal law has required a warning statement on cigarette packaging. Since 1971,
television and radio advertising of cigarettes has been prohibited in the United
States. Cigarette advertising in other media in the United States is required to
include information with respect to the "tar" and nicotine yield content of
cigarettes, as well as a warning statement.
During the past three decades, various laws affecting the cigarette industry
have been enacted. In 1984, Congress enacted the Comprehensive Smoking Education
Act. Among other things, the Smoking Education Act:
- establishes an interagency committee on smoking and health that is charged
with carrying out a program to inform the public of any dangers to human
health presented by cigarette smoking;
42
<PAGE>
- requires a series of four health warnings to be printed on cigarette
packages and advertising on a rotating basis;
- increases type size and area of the warning required in cigarette
advertisements; and
- requires that cigarette manufacturers provide annually, on a confidential
basis, a list of ingredients used in the manufacture of cigarettes to the
Secretary of Health and Human Services.
The warnings currently required on cigarette packages and advertisements,
other than billboards, are as follows:
- "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart Disease,
Emphysema, And May Complicate Pregnancy";
- "SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious
Risks To Your Health";
- "SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal
Injury, Premature Birth, and Low Birth Weight"; and
- "SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide".
Since the initial report in 1964, the Secretary of Health, Education and
Welfare (now the Secretary of Health and Human Services) and the Surgeon General
have issued a number of other reports which purport to find the nicotine in
cigarettes addictive and to link cigarette smoking and exposure to cigarette
smoke with certain health hazards, including various types of cancer, coronary
heart disease and chronic obstructive lung disease. These reports have
recommended various governmental measures to reduce the incidence of smoking.
In 1992, the federal Alcohol, Drug Abuse and Mental Health Act was signed
into law. This act requires states to adopt a minimum age of 18 for purchases of
tobacco products and to establish a system to monitor, report and reduce the
illegal sale of tobacco products to minors in order to continue receiving
federal funding for mental health and drug abuse programs. In January 1996,
regulations implementing this legislation were announced by the U.S. Department
of Health and Human Services.
The U.S. Food and Drug Administration has promulgated regulations asserting
jurisdiction over cigarettes as "drugs" or "medical devices" under the
provisions of the Food, Drug and Cosmetic Act. These regulations include severe
restrictions on the distribution, marketing and advertising of cigarettes, and
would require the industry to comply with a wide range of labeling, reporting,
recordkeeping, manufacturing and other requirements. The FDA's exercise of
jurisdiction, if not reversed by judicial or legislative action, could lead to
more expansive FDA-imposed restrictions on cigarette operations than those set
forth in the regulations, and could materially adversely affect RJR Tobacco
Company's business, volume, results of operations, cash flows and financial
position. In August 1998, the Court of Appeals for the Fourth Circuit ruled that
the FDA does not have the authority to regulate tobacco products and declared
some of the FDA's regulations invalid. In November 1998, that court denied the
FDA's petition for rehearing. On April 26, 1999, the U.S. Supreme Court agreed
to hear the FDA's appeal of the Fourth Circuit's ruling.
In December 1992, the U.S. Environmental Protection Agency issued a report
that classified environmental tobacco smoke as a Group A (known human)
carcinogen. RJR Tobacco Company and others filed suit to challenge the validity
of the EPA report. On July 17, 1998, a U.S. District Court judge held that the
EPA's classification of environmental tobacco smoke was invalid and vacated
those portions of the report dealing with lung cancer. The EPA has appealed, and
oral argument was held
43
<PAGE>
before the Court of Appeals for the Fourth Circuit on June 7, 1999. We are
awaiting the Court's decision.
In March 1994, the U.S. Occupational Safety and Health Administration
announced proposed regulations that would restrict smoking in the workplace to
designated smoking rooms that are separately exhausted to the outside. Although
we cannot predict the form or timing of any regulations that may be finally
adopted by OSHA, if the proposed regulations are adopted, we expect that many
employers who have not already done so would prohibit smoking in the workplace
rather than make expenditures necessary to establish designated smoking areas to
accommodate smokers. RJR Tobacco Company submitted comments on the proposed
regulations during the comment period which closed in February 1996 but no
regulation has been adopted to date. Because many employers currently do not
permit smoking in the workplace, we cannot predict the effect of any regulations
that may be adopted, but incremental restrictions on smokers could have an
adverse effect on cigarette sales of all manufacturers.
Legislation imposing various restrictions on public smoking has also been
enacted in 48 states and many local jurisdictions, and many employers have
initiated programs restricting or eliminating smoking in the workplace. A number
of states have enacted legislation designating a portion of increased cigarette
excise taxes to fund either anti-smoking programs, health care programs or
cancer research. In addition, educational and research programs addressing
health care issues related to smoking are being funded from industry payments
made or to be made under settlements with state attorneys general. Federal law
prohibits smoking on all domestic airline flights of six hours duration or less,
and the U.S. Interstate Commerce Commission has banned smoking on buses
transporting passengers inter-state. Certain common carriers have imposed
additional restrictions on passenger smoking.
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 invalid. The court granted a preliminary injunction that
enjoined Massachusetts officials from enforcing the law relating to ingredient
reporting, which has been upheld by the Court of Appeals for the First Circuit.
Both the manufacturers and the State 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. After
notice and comment, the Texas Department of Health promulgated regulations that
require both ingredient and nicotine-yield reports to be filed December 1, 1999.
In August 1998, the Massachusetts Department of Health issued regulations
for public comment that would require (beginning July 1, 2000) annual reporting
on a brand-by-brand basis of 43 smoke constituents in both mainstream smoke and
sidestream smoke. RJR Tobacco Company, together with other cigarette
manufacturers, filed comments with the MDOH on October 9, 1998. RJR Tobacco
Company and the other manufacturers believe that the MDOH lacks legal authority
to promulgate these regulations. Nevertheless, RJR Tobacco Company and the other
manufacturers have proposed conducting a cooperative benchmarking study to
address certain MDOH concerns. The MDOH has agreed not to amend or finalize
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
44
<PAGE>
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 is also
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
regulations are scheduled to take effect on August 1, 1999.
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 the effect of new legislation or regulations on RJR Tobacco Company
or the cigarette industry generally, but any new legislation or regulations
could have an adverse effect on RJR Tobacco Company or the cigarette industry
generally.
Tobacco leaf is an agricultural commodity subject to U.S. Government
production controls and price supports that can affect market prices
substantially. The tobacco leaf price support program is subject to
congressional review and may be changed at any time. In December 1994, Congress
enacted the Uruguay Round Agreements Act to replace a domestic content
requirement with a tariff rate quota system that keys tariffs to import volumes.
The tariff rate quotas have been established by the United States with overseas
tobacco producers and became effective on September 13, 1995. Because of the
importance of tobacco leaf as a raw material for RJR Tobacco Company's products,
substantial changes in the regulatory regime applicable to tobacco leaf could
have a material effect on our results of operations and cash flows.
ENVIRONMENTAL MATTERS
RJR Tobacco Company is subject to federal, state and local environmental
laws and regulations concerning the discharge, storage, handling and disposal of
hazardous or toxic substances. Such laws and regulations provide for significant
fines, penalties and liabilities, in certain cases without regard to whether the
owner or operator of the property knew of, or was responsible for, the release
or presence of hazardous or toxic substances. In addition, third parties may
make claims against owners or operators of properties for personal injuries and
property damage associated with releases of hazardous or toxic substances.
Management cannot predict what environmental legislation or regulations will be
enacted in the future or how existing or future laws or regulations will be
administered or interpreted. Management similarly cannot predict the amount of
future expenditures which may be required in order to comply with any
environmental laws or regulations or to satisfy any such claims.
Recently, the EPA has proposed regulations that would impose restrictions on
RJR Tobacco Company's use of certain fumigants used to protect stores of tobacco
from agricultural pests. RJR Tobacco Company may be unable to replace those
fumigants with other cost-effective fumigants and, as a result, could be
required to make significant expenditures to comply with the EPA regulations, or
risk the loss of substantial stores of tobacco to agricultural pests. Management
cannot predict the amount of future expenditures which may be required to comply
with these regulations.
45
<PAGE>
MANAGEMENT
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John T. Chain, Jr.................................... 64 Director of RJR Tobacco Holdings
A.D. Frazier, Jr..................................... 55 Director of RJR Tobacco Holdings
Denise Ilitch........................................ 42 Director of RJR Tobacco Holdings
John G. Medlin, Jr................................... 65 Director of RJR Tobacco Holdings
Nana Mensah.......................................... 46 Director of RJR Tobacco Holdings
Joseph P. Viviano.................................... 61 Director of RJR Tobacco Holdings
Thomas C. Wajnert.................................... 56 Director of RJR Tobacco Holdings
Andrew J. Schindler.................................. 54 Chairman of the Board, President and Chief Executive
Officer of RJR Tobacco Holdings and RJR Tobacco
Company
Kenneth J. Lapiejko.................................. 50 Executive Vice President and Chief Financial Officer
of RJR Tobacco Holdings and RJR Tobacco Company;
Director of RJR Tobacco Company
Charles A. Blixt..................................... 47 Executive Vice President and General Counsel of RJR
Tobacco Holdings and RJR Tobacco Company; Director of
RJR Tobacco Company
Lynn J. Beasley...................................... 41 Executive Vice President--Marketing of RJR Tobacco
Company
Robert R. Gordon, Jr................................. 54 Executive Vice President--Human Resources of RJR
Tobacco Holdings and RJR Tobacco Company; Director of
RJR Tobacco Company
Thomas R. Adams...................................... 48 Senior Vice President and Controller of RJR Tobacco
Holdings and RJR Tobacco Company
Gary T. Burger....................................... 50 Senior Vice President--Research & Development of RJR
Tobacco Company
Lynn L. Lane......................................... 47 Senior Vice President and Treasurer of RJR Tobacco
Holdings and RJR Tobacco Company
James V. Maguire..................................... 48 Senior Vice President--Sales of RJR Tobacco Company
Tommy J. Payne....................................... 42 Senior Vice President--External Relations of RJR
Tobacco Holdings and RJR Tobacco Company
James H. Wilson...................................... 56 Senior Vice President--Operations and Director of RJR
Tobacco Company
McDara P. Folan, III................................. 40 Vice President, Deputy General Counsel and Secretary
of RJR Tobacco Holdings and RJR Tobacco Company
</TABLE>
46
<PAGE>
JOHN T. CHAIN, JR. Gen. (Ret.) Chain has been the Chairman of Thomas Group,
Inc. since May 1998 and has been a member of the board of directors of Thomas
Group since May 1995. He also serves as the President of Quarterdeck Equity
Partners, Inc., an investor in the defense industry. He served as Special
Assistant to the Chairman of Burlington Northern Santa Fe Corporation from
November 1995 to March 1996, and as Executive Vice President of Burlington
Northern from 1991 to November 1995. For more than five years prior to that
time, he served as a General (Commander-in-Chief, the Strategic Air Command) in
the United States Air Force. Gen. Chain is a member of the boards of directors
of Nabisco Group Holdings, Nabisco, Northrop Grumman Corporation, Kemper
Insurance and Thomas Group.
A.D. FRAZIER, JR. Mr. Frazier has been a Director of RJR Tobacco Holdings
since June 14, 1999. He has been President and Chief Executive Officer of
INVESCO, Inc. since April 1997 and was Executive Vice President from November
1996 to April 1997. From March 1991 until November 1996, Mr. Frazier was Chief
Operating Officer of the Atlanta Committee for the Olympic Games. From September
1982 to March 1991 he was Executive Vice President of First Chicago Corporation.
Mr. Frazier is a member of the boards of directors of AMVESCAP, PLC (the parent
company of INVESCO, Inc.), Megallan Health Services, Inc., Apache Corporation
and Rock-Tenn Company. He is also a member of the Georgia Board of Corrections.
DENISE ILITCH. Ms. Ilitch has been a Director of RJR Tobacco Holdings since
June 14, 1999. She has been the Vice Chairwoman of Little Caesar Enterprises,
Inc. since 1997 and has served in a variety of corporate positions with Little
Caesar for more than 20 years. Since 1996, she also has served as the President
of Olympia Development, L.L.C., the Ilitch family's real estate and
entertainment development company in downtown Detroit. In addition, she is
Executive Vice President of Ilitch Ventures, Inc., a privately held company
created in 1999 that owns and manages the Ilitch family's business interests in
the food and entertainment industries (Little Caesar Enterprises, Olympia
Entertainment, Olympia Development, the Detroit Red Wings, the Detroit Tigers,
the Detroit Rockers and Olympia Specialty Foods). Ms. Ilitch also has been
president and owner of her own marketing firm, Bright Lites, Inc. She serves on
the boards of directors of Beauticontrol, Inc., and the Detroit Branch of the
Federal Reserve Bank of Chicago.
JOHN G. MEDLIN, JR. Mr. Medlin is Chairman Emeritus of Wachovia Corporation
and served as its Chairman from 1988 to April 1998 and its Chief Executive
Officer from 1977 until December 1993. Mr. Medlin is a member of the boards of
directors of BellSouth Corporation, Burlington Industries, Inc., Media General,
Inc., National Service Industries, Inc., USAirways Group, Inc. and Wachovia
Corporation. From 1983 until 1998, Mr. Medlin was a member of the Board of
Directors of RJR Nabisco, Inc. and, from 1989 to 1998, he was a member of the
board of directors of Nabisco Group Holdings.
NANA MENSAH. Mr. Mensah has been a Director of RJR Tobacco Holdings since
June 14, 1999. He has served as President and Chief Operating Officer of Long
John Silver's Restaurants, Inc. since 1997. Previously, Mr. Mensah had been
Senior Vice President, Operations and Concept Development of PepsiCo Restaurants
International since 1994. Prior to that time, he was Vice President-Operations
for KFC USA, Inc., from 1990 until 1994, and, from 1988 to 1990, he was Market
Manager/Regional Operations Director of Southland Corporation.
JOSEPH P. VIVIANO. Mr. Viviano has been a Director of RJR Tobacco Holdings
since June 14, 1999. He has served as the Vice Chairman of Hershey Foods
Corporation since January 1999. Previously, Mr. Viviano had been President and
Chief Operating Officer of Hershey Foods Corporation from 1994 through 1998. He
is a member of the boards of directors of Hershey Foods Corporation, Chesapeake
Corporation, Huffy Corporation and Harsco Corporation.
47
<PAGE>
THOMAS C. WAJNERT. Mr. Wajnert has been a Director of RJR Tobacco Holdings
since June 14, 1999. He has been Chairman of Payroll Transfers, Inc. since March
1998, where he is a significant investor and where he served as Chief Executive
Officer from March 1998 to April 1999. Previously, Mr. Wajnert was Chairman of
the Board of Directors from January 1992 until December 1997 and Chief Executive
Officer from November 1984 until December 1997 of AT&T Capital Corporation. Mr.
Wajnert serves on the boards of directors of JLG Industries, Inc., CNL Capital
Corporation and Payroll Transfer, Inc.
ANDREW J. SCHINDLER. Mr. Schindler has served as President and Chief
Executive Officer of RJR Tobacco Company since 1995 and of RJR Tobacco Holdings
since June 14, 1999. He has served as Director of RJR Tobacco Holdings since
June 14, 1999 and of RJR Tobacco Company since 1989, and as Chairman of the
Board of RJR Tobacco Holdings and RJR Tobacco Company since July 2, 1999. Mr.
Schindler joined RJR Tobacco Holdings in 1974. He became Senior Vice
President--Operations in June 1989 and was elected Executive Vice
President--Operations in 1991. In May of 1994, Mr. Schindler became President
and Chief Operating Officer of RJR Tobacco Company. He is a member of the
Advisory Board of the Wachovia Bank of North Carolina, N.A., the North Carolina
School of the Arts Foundation Board, the Wake Forest University Baptist Medical
Center Board of Visitors and the Board of Directors of Winston-Salem Business,
Inc. He is Vice Chairman of the North Carolina Emerging Technology Alliance.
KENNETH J. LAPIEJKO. Mr. Lapiejko has served as Executive Vice President
and Chief Financial Officer of RJR Tobacco Company since June 15, 1999 and of
RJR Tobacco Holdings since June 14, 1999. He has been a Director of RJR Tobacco
Company since 1996. From 1995 until June 15, 1999, he was Senior Vice President,
Chief Financial Officer and Treasurer of RJR Tobacco Company. He has served as a
Director of RJR Tobacco Company since 1996. Mr. Lapiejko joined R.J. Reynolds
Tobacco International as a Senior Financial Analyst in 1977. After holding a
number of positions with RJR Tobacco Company, in 1991 he was promoted to Vice
President of Finance and Accounting. Before joining RJR Tobacco Company in 1977,
Mr. Lapiejko held financial positions with the Glass Container Division and the
International Division of Owens Illinois, Inc.
CHARLES A. BLIXT. Mr. Blixt has been Executive Vice President, General
Counsel and Director of RJR Tobacco Company since 1995 and of RJR Tobacco
Holdings since June 14, 1999. Mr. Blixt joined RJR Tobacco Company as Associate
Counsel-Litigation in 1985. Before joining RJR Tobacco Company, Mr. Blixt served
as counsel for Caterpillar Tractor Co. and Fiat-Allis Construction Machinery,
Inc. Mr. Blixt serves on the Board of Visitors of Salem College and Academy and
the Board of Visitors of Wake Forest University School of Law.
LYNN J. BEASLEY. Ms. Beasley has served as Executive Vice
President--Marketing of RJR Tobacco Company since 1997. Ms. Beasley joined RJR
Tobacco Company in 1982 as a marketing assistant. After holding a number of
positions at RJR Tobacco Company , she became Senior Vice President of the
Winston/Camel business unit in 1993. She was named Senior Vice President of
Brand Marketing for Winston, Camel and Salem in 1995. Prior to joining RJR
Tobacco Company, Ms. Beasley was a research assistant at the University of
Wisconsin. Ms. Beasley serves on the Salem College Board of Visitors. She is a
member of the Senior Services Board.
ROBERT R. GORDON, JR. Mr. Gordon has been Executive Vice President--Human
Resources of RJR Tobacco Company since 1994 and of RJR Tobacco Holdings since
July 2, 1999, and Director of RJR Tobacco Company since 1991. He joined RJR
Tobacco Company in 1967 and became Vice President of Personnel in 1984. In 1988,
he was promoted to Senior Vice President of Personnel of RJR Tobacco Holdings.
48
<PAGE>
THOMAS R. ADAMS. Mr. Adams has been Senior Vice President and Controller of
RJR Tobacco Holdings and RJR Tobacco Company since June 14, 1999. From June 1985
until June 1999, he was a Partner at the accounting firm of Deloitte & Touche
LLP.
GARY T. BURGER. Dr. Burger has served as Senior Vice President--Research
and Development of RJR Tobacco Company since 1996. He joined RJR Tobacco Company
in 1984. In 1990, he was named Vice President of the Research and Development
Product Development & Assessment Group.
LYNN L. LANE. Ms. Lane joined RJR Tobacco Holdings in 1973. She was
promoted to Vice President and Assistant Treasurer of RJR Tobacco Holdings in
1991. In 1995, she was named Vice President and Treasurer of R.J. Reynolds
Tobacco Worldwide. From 1996 until 1999, Ms. Lane was Vice President--Treasury
and Investor Relations of Burlington Industries. In June 1999, she rejoined RJR
Tobacco Company as Senior Vice President and Treasurer and was named Senior Vice
President and Treasurer of RJR Tobacco Holdings.
JAMES V. MAGUIRE. Mr. Maguire has served as Senior Vice President--Sales of
RJR Tobacco Company since 1994. Mr. Maguire joined RJR Tobacco Company in 1973
as a sales representative. After holding a number of positions at RJR Tobacco
Company and other RJR Nabisco subsidiaries, he became Vice President of
Sales/Marketing Development in 1993.
TOMMY J. PAYNE. Mr. Payne joined RJR Tobacco Company in 1988. He was
promoted to Director of Federal Government Affairs in 1989. In 1995, Mr. Payne
was promoted to Vice President--Federal Government Affairs in Washington, D.C.
He assumed his current positions as Senior Vice President-- External Relations
of RJR Tobacco Company in 1998 and of RJR Tobacco Holdings in June 1999.
JAMES H. WILSON. Mr. Wilson has been Senior Vice President--Operations of
RJR Tobacco Company since 1994 and Director of RJR Tobacco Company since 1997.
He joined Reynolds Tobacco in 1962 and was promoted to Vice President of
Manufacturing in 1991.
MCDARA P. FOLAN, III. Mr. Folan joined RJR Tobacco Company and RJR Tobacco
Holdings in June 1999 as Vice President, Deputy General Counsel and Secretary.
From 1987 to 1992, Mr. Folan was an Associate with the law firm of Jones, Day,
Reavis and Pogue in Cleveland, Ohio. Most recently, Mr. Folan served as Vice
President, Secretary and General Counsel for Allen Telecom Inc. in Cleveland,
Ohio.
DIRECTORS' COMPENSATION
Directors of RJR Tobacco Holdings who are not employees of RJR Tobacco
Holdings or its subsidiaries receive an annual retainer fee of $50,000 per year,
plus attendance fees of $1,250 for each meeting, including designated days
during which the Board or a committee of the Board conducts RJR Tobacco
Holdings' business. In addition, those outside directors who are committee
members receive committee attendance fees of $1,250 for each meeting, and
committee chairs each receive a $5,000 annual retainer. RJR Tobacco Holdings
offers outside directors life insurance having a death benefit of up to
$100,000, a matching grants program and supplemental insurance programs. Upon
becoming a director, each outside director receives an option under a stock
option plan to purchase 10,000 shares of RJR Tobacco Holdings common stock. The
options have an exercise price equal to the fair market value of the common
stock on the date of grant. The options are not exercisable for six months
following the date of grant but thereafter are exercisable for ten years from
the date of grant.
In addition, each outside director receives
(1) an annual grant of stock options that is made on the date of the annual
stockholders' meeting determined under a formula set forth in the applicable
plan and
(2) an annual grant of 1,000 deferred common stock units.
49
<PAGE>
The annually granted stock options have a ten-year term and vest over three
years, 33% on the first and second anniversaries of the date of grant and 34% on
the third anniversary. The common stock units are convertible into common stock
or cash on termination of a director's services.
Neither RJR Tobacco Holdings nor RJR Tobacco Company compensates any
directors of either entity who are employees of RJR Tobacco Holdings or any of
its subsidiaries (including RJR Tobacco Company) in their capacity as directors.
EXECUTIVE COMPENSATION
The following pages describe the components of the total compensation of our
five most highly compensated executive officers, as defined under SEC rules, at
the end of the last completed fiscal year.
The bonuses shown represent amounts that the Compensation Committee of the
board of directors of Nabisco Group Holdings (which owned all of the stock of
RJR Tobacco Holdings during the period reported on) and its entire board
approved for each named individual based on the performance of RJR Tobacco
Company for the applicable year.
The long-term compensation shown in the Summary Compensation Table was
provided under NGH's 1990 Long-Term Incentive Plan, which this prospectus refers
to as the LTIP. The LTIP provides for various types of awards such as stock
options, restricted stock, performance unit awards and performance appreciation
rights, as described below. This prospectus also describes below the future
compensation that those individuals may receive under RJR Tobacco Holdings'
and/or NGH's retirement plans or, following termination of employment under
various circumstances, under individual agreements.
SUMMARY COMPENSATION TABLE
The following table presents specific information regarding the compensation
of our five most highly compensated executive officers.
50
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- ---------------------------------------------------------
AGGREGATE SECURITIES
BASE OTHER ANNUAL RESTRICTED UNDERLYING LONG-TERM ALL OTHER
NAME & PRINCIPAL SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS INCENTIVE COMPENSATION
POSITION YEAR ($) ($)(1) ($)(2) ($)(3)(4) AWARDED (#)(4) PAYOUTS ($) ($)(5)
- -------------------- --------- ----------- --------- ------------- ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew J. 1998 $ 616,667 $ 438,000 $ 72,376 $1,192,188 -- $ -- $ 33,246
Schindler......... 1997 575,000 403,000 69,799 -- -- 3,000,000 31,200
PRESIDENT & CHIEF 1996 537,500 465,000 237,474 -- 200,000 709,200 26,358
EXECUTIVE OFFICER
Charles A. Blixt.... 1998 320,000 292,000 58,478 340,625 -- 255,000 14,610
EXECUTIVE VICE 1997 302,500 167,000 48,925 -- -- 345,000 14,745
PRESIDENT AND 1996 255,167 189,000 48,561 -- 15,000 170,000 11,885
GENERAL COUNSEL
Lynn J. Beasley..... 1998 310,000 263,500 57,812 510,938 -- 156,000 13,260
EXECUTIVE VICE 1997 248,408 132,000 50,699 -- -- 525,000 5,642
PRESIDENT-- 1996 199,917 105,000 41,057 -- 9,500 320,000 8,938
MARKETING, RJR
TOBACCO COMPANY
Kenneth J. 1998 285,000 157,000 53,041 272,500 -- 255,000 12,450
Lapiejko.......... 1997 243,833 130,000 51,123 -- -- 525,000 11,665
EXECUTIVE VICE 1996 225,000 145,000 50,069 -- 15,000 225,000 10,410
PRESIDENT AND
CHIEF FINANCIAL
OFFICER
James V. Maguire.... 1998 270,833 151,000 48,949 340,625 -- 278,421 12,665
SENIOR VICE 1997 246,167 138,000 50,334 -- -- 825,000 11,735
PRESIDENT--SALES, 1996 225,833 145,000 51,073 -- 16,000 302,558 10,825
RJR TOBACCO
COMPANY
</TABLE>
- ------------------------------
(1) Except as noted below, the bonus amounts shown for 1998 for all of the named
executive officers reflect annual cash bonus payments that were based on the
performance of RJR Tobacco Company during 1998. The bonus amount shown for
Mr. Blixt includes a $100,000 special bonus, and the bonus amount shown for
Ms. Beasley includes a $77,500 special bonus. The bonus amounts for all of
the named executive officers were supplemented with Performance Notes equal
to 20% of their target bonus. This prospectus describes the Performance
Notes on page 51.
(2) The amounts shown in the table for 1998 include amounts attributable to the
named executive officers' participation in the executive perquisite program
of RJR Tobacco Holdings, which provides them with supplemental insurance, a
leased automobile and an annual allowance of $47,500 for Mr. Schindler;
$40,000 each for Mr. Blixt and Ms. Beasley; and $32,500 each for Messrs.
Lapiejko and Maguire. These individuals may use this allowance to reimburse
miscellaneous expenses and, to the extent not so used, RJR Tobacco Holdings
will pay the remainder in cash. The supplemental insurance consists of
medical, dental, business travel accident and, to the extent elected, life,
spousal life, automobile and personal liability insurance.
(3) All of the named executive officers were granted restricted shares of
Nabisco Group Holdings common stock in 1998. NGH made the grants on February
6, 1998. They are scheduled to vest five years from the date of grant, which
is February 6, 2003. The December 31, 1998 values of restricted NGH stock
holdings for the named executive officers are: Mr. Schindler (35,000
shares), $1,039,045; Mr. Blixt (10,000 shares), $296,870; Ms. Beasley
(15,000 shares), $445,305; Mr. Lapiejko (8,000 shares), $237,496; and Mr.
Maguire (10,000 shares), $296,870. The awards may vest earlier than the date
shown in various circumstances. In connection with the spin-off, holders of
NGH restricted stock received a distribution of one-third of a share of
restricted RJR Tobacco Holdings common stock for every restricted share of
NGH restricted stock. Dividends are paid on the restricted stock to the same
extent as for unrestricted shares.
(4) Denominated in shares of Nabisco Group Holdings common stock. In connection
with the spin-off, options held by RJR Tobacco Holdings employees to
purchase NGH common stock were equitably adjusted into options covering NGH
shares
51
<PAGE>
and options covering RJR Tobacco Holdings shares in a manner intended to
preserve the aggregate benefits under the options.
(5) The amounts shown in the table for 1998 reflect RJR Tobacco Holdings
contributions made on behalf of the named individuals under RJR Tobacco
Holdings' qualified and nonqualified defined contribution plans. The
following is a breakout of the 1998 amounts:
<TABLE>
<CAPTION>
RJR TOBACCO HOLDINGS RJR TOBACCO HOLDINGS
MATCHING CONTRIBUTION CONTRIBUTION
NAME (QUALIFIED PLAN) (NONQUALIFIED PLAN)
- ----------------------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Mr. Schindler........................................ $ 4,800 $ 25,790
Mr. Blixt............................................ 4,800 9,810
Ms. Beasley.......................................... 4,800 8,460
Mr. Lapiejko......................................... 4,800 7,650
Mr. Maguire.......................................... 4,800 7,865
</TABLE>
The amount shown in the table for Mr. Schindler for 1998 also includes
$2,651, in connection with the partial forgiveness of Mr. Schindler's
indebtedness to Nabisco Group Holdings, as discussed below.
LONG-TERM INCENTIVE COMPENSATION
NGH maintained the LTIP to provide executives with long-term
performance-based incentive compensation. NGH has issued stock options,
restricted stock and other performance-based awards under the LTIP to the named
executive officers and to other key employees. NGH did not make any stock option
grants to the named executive officers in 1998.
NGH conditioned numerous options granted in prior years to Mr. Schindler
under the LTIP on his purchase of NGH common stock. In connection with the
purchase of NGH common stock under the LTIP, NGH made a secured loan to Mr.
Schindler in the amount of the purchase price for the purchased shares, plus an
additional amount to pay taxes, if any, due on any taxable income recognized in
connection with those purchases. In February 1998, Mr. Schindler sold the shares
of NGH common stock that were used to secure the outstanding indebtedness of
$343,276 and used the proceeds to repay all but $2,651 of the indebtedness. In
connection with a prior understanding under which Mr. Schindler had earlier
refrained from selling the shares, NGH forgave the shortfall.
The following table provides information relating to the number and value of
shares of NGH common stock subject to options held by the named executive
officers as of December 31, 1998. There were no stock option exercises during
1998 by any of the named individuals. In connection with the spin-off, options
held by RJR Tobacco Holdings employees to purchase NGH common stock were
equitably adjusted into options covering NGH shares and options covering RJR
Tobacco Holdings shares in a manner intended to preserve the aggregate benefits
under the options.
52
<PAGE>
AGGREGATED OPTION VALUES AT FISCAL YEAR-END (12/31/98)
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NGH
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED,
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
HELD AT FY-END (#) HELD AT FY-END ($)(1)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
A. J. Schindler........................................... 287,800 120,000 $ 397,139 $ --
C. A. Blixt............................................... 47,300 5,100 46,754 --
L. J. Beasley............................................. 60,270 3,230 104,793 --
K. J. Lapiejko............................................ 49,700 5,100 66,638 --
J. V. Maguire............................................. 53,560 5,440 61,801 --
</TABLE>
- ------------------------------
(1) Calculated based on the excess of the fair market value on December 31, 1998
of NGH common stock ($29.687) over the option exercise price.
As noted in footnote (1) to the Summary Compensation Table, a portion of the
1998 annual bonus earned by all of the named executive officers is denominated
in the form of Performance Notes. Performance Notes are phantom units whose
value may fluctuate up and down based on attaining financial performance
objectives that are derived from our long-term strategic plan. For 1998, all of
the named executive officers were granted RJR Tobacco Company Performance Notes
with an initial value of $36.00 and a value of $39.08 on December 31, 1998. The
Performance Notes do not vest until December 31, 2000 and will be paid out based
on their value at that time.
The regular annual 1998 long-term incentive grants for all of the named
executive officers were made in the form of performance appreciation rights,
which are appreciation rights on the Performance Notes of NGH or of various
operating subsidiaries and which this document calls PARs. PARs granted to the
named executive officers were a combination of appreciation rights on RJR
Tobacco Company Performance Notes (80%) and NGH Performance Notes (20%). In
connection with the spin-off, the RJR Tobacco Company and NGH Performance Notes,
and subsequently, the PARs, will have a minimum value based on a $34.083 stock
price.
The following table sets forth the Performance Notes and PARs that were
granted to the named executive officers in 1998. Because the future value of
Performance Notes and, consequently, the PARs will depend on NGH's and/or RJR
Tobacco Holdings' performance, there is no minimum or maximum payout amount.
This document includes the values of the Performance Notes and PARs on December
31, 1998 in footnotes to the table.
LONG-TERM INCENTIVE PLAN
AWARDS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
AWARDS
-----------------------------------------------------------------------
PERFORMANCE NOTES/UNITS PERFORMANCE APPRECIATION RIGHTS
-------------------------------------- -------------------------------
PERFORMANCE OR PERFORMANCE OR
OTHER PERIOD NO. OF OTHER PERIOD
UNTIL PERFORMANCE UNTIL
NO. OF PERFORMANCE MATURITY OR APPRECIATION MATURITY OR
NAME NOTES (1) PAYOUT RIGHTS (2) PAYOUT
- ----------------------------------------- ------------------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
A.J. Schindler........................... 2,431 12/31/00 160,000 12/31/02
C.A. Blixt............................... 1,067 12/31/00 70,000 12/31/02
L.J. Beasley............................. 1,033 12/31/00 77,500 12/31/02
K.J. Lapiejko............................ 871 12/31/00 50,000 12/31/02
J.V. Maguire............................. 840 12/31/00 60,000 12/31/02
</TABLE>
- ------------------------------
(1) The December 31, 1998 value of RJR Tobacco Company Performance Notes was
$39.08.
53
<PAGE>
(2) The number of PARs shown in the table for each of the named executive
officers represents a combination of 80% RJR Tobacco Company PARs and 20%
NGH PARs. The PARs have a term of 5 years from the date of grant and vest
over 3 years in accordance with the following schedule: 33% on each of the
first and second December 31 following the date of grant and 34% on the
third December 31 following the date of grant. The December 31, 1998 values
of the PARs were as follows: NGH PARs $7.96; and RJR Tobacco Company PARs
$3.08.
RETIREMENT PLANS
The named executive officers participated in noncontributory defined benefit
retirement plans maintained by NGH or its subsidiaries. Mr. Schindler also
participates in a Supplemental Executive Retirement Plan, which this prospectus
refers to as the SERP. Benefits under the SERP are payable only after a
participant's retirement at a specified retirement age or earlier retirement or
termination in various circumstances. In connection with the spin-off, RJR
Tobacco Holdings assumed the liabilities under the SERP attributable to Mr.
Schindler.
The following table shows the estimated annual benefits payable to Mr.
Schindler upon retirement under the SERP, as described in the preceding
paragraph. The retirement benefits shown are computed before being offset for
Social Security and are based upon retirement at age 60 and the payment of a
single-life annuity to Mr. Schindler.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS
- ------------------------------------
YEARS OF SERVICE
(1)
AVERAGE FINAL ------------------
COMPENSATION (1) 20 OR MORE
- ---------------- ------------------
<S> <C>
$ 900,000 $ 450,000
1,000,000 500,000
1,100,000 550,000
1,200,000 600,000
1,300,000 650,000
</TABLE>
- ------------------------------
(1) For purposes of determining retirement benefits under this table, "Average
Final Compensation" consists of the annualized sum of base salary, bonus in
the year earned and pre-tax contributions to plans maintained under sections
401(k) and 125 of the Internal Revenue Code, and is determined by
considering the 36 consecutive months that yield the highest average
compensation during the participant's last 60 months of service. Mr.
Schindler's Average Final Compensation as of December 31, 1998 was
$1,011,722 and he is expected to have more than 20 years of credited service
at age 60.
54
<PAGE>
We have determined the retirement benefits for Mr. Blixt and Ms. Beasley by
the formula under a noncontributory defined benefit plan maintained by RJR
Tobacco Holdings that has no Social Security offset. The following table shows
the estimated annual single life annuity payable at age 65 under the plan.
ESTIMATED ANNUAL RETIREMENT BENEFITS
<TABLE>
<CAPTION>
YEARS OF SERVICE (1)
-----------------------------------
AVERAGE FINAL COMPENSATION(1) 30 35 40 OR MORE
- --------------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
$300,000................................................. $ 113,611 $ 121,767 $ 128,291
400,000................................................. 152,215 163,089 171,788
500,000................................................. 190,818 204,411 215,286
600,000................................................. 229,422 245,734 258,783
</TABLE>
- ------------------------------
(1) For purposes of determining retirement benefits under this table, "Average
Final Compensation" consists of the annualized sum of base salary, bonus in
the year earned and pre-tax contributions to plans maintained under sections
401(k) and 125 of the Internal Revenue Code, and is determined by
considering the 36 consecutive months that yield the highest average
compensation during the participant's last 60 months of service. Average
Final Compensation as of December 31, 1998 was: for Mr. Blixt $475,222 and
for Ms. Beasley $393,775. Estimated years of credited service, rounded to
the nearest year, at age 65 was for Mr. Blixt, 32 years and, for Ms.
Beasley, 40 years.
We have determined the retirement benefits for Messrs. Lapiejko and Maguire
by the formula under a non-contributory defined benefit plan maintained by RJR
Tobacco Holdings that is subject to an offset for Social Security. The following
table shows the estimated annual single life annuity payable at age 65 under the
plan.
ESTIMATED ANNUAL RETIREMENT BENEFITS
<TABLE>
<CAPTION>
YEARS OF SERVICE (1)
-----------------------------------
AVERAGE FINAL COMPENSATION (1) 30 35 40 OR MORE
- --------------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
$300,000................................................. $ 153,842 $ 179,482 $ 205,122
400,000................................................. 206,342 240,732 275,122
500,000................................................. 258,842 301,982 345,122
600,000................................................. 311,342 363,232 415,122
</TABLE>
- ------------------------------
(1) For purposes of determining retirement benefits under this table, "Average
Final Compensation" consists of the annualized sum of base salary, bonus in
the year earned and pre-tax contributions to plans maintained under sections
401(k) and 125 of the Internal Revenue Code, and is determined by
considering the 60 consecutive months that yield the highest average
compensation during the participant's last 120 months of service. Average
Final Compensation as of December 31, 1998 was for Mr. Lapiejko $377,408 and
for Mr. Maguire $369,917. Estimated years of credited service, rounded to
the nearest year, at age 65 was, for Mr. Lapiejko, 30 years and, for Mr.
Maguire, 40 years.
AGREEMENTS WITH VARIOUS OFFICERS
In October 1988, RJR Tobacco Holdings entered into an agreement with Mr.
Schindler which was amended in December 1988 and June 1999 and supplemented in
December 1995, providing (as amended and supplemented) that if Mr. Schindler's
employment is terminated other than for "cause" or, within twenty-four months
following a "change of control", for "good reason", he will be entitled to an
amount equal to three times his annual salary and target bonus, payable over
three years. In addition, he is entitled to receive retirement credits, welfare
benefits and other perquisites for the same three-year period. Mr. Schindler
also participates in the SERP.
"Cause" includes, generally, criminal conduct, deliberate refusal to perform
employment duties or deliberate misconduct materially damaging to us. A "change
of control" includes specified acquisitions
55
<PAGE>
of 30% or more of the combined voting power of NGH securities, various changes
in the composition of the NGH board of directors, selected mergers or
consolidations of NGH or the disposition of substantially all of the assets of
NGH. "Good reason" includes a material reduction in duties, reduction in pay,
grade or bonus opportunity, reduction in compensation programs or benefits,
relocation or material breach of the arrangement by us.
If a "parachute" excise tax would be imposed on any payments to Mr.
Schindler, Mr. Schindler would also be entitled to tax reimbursement payments.
In addition, upon a change of control, restrictions on restricted stock held by
Mr. Schindler will lapse and all his outstanding stock options under the LTIP
and a predecessor plan will vest and be cashed-out at the higher of the
difference between the option price and the market price or the value of the
options using a specified Black-Scholes methodology. In addition, upon
termination of employment following a change of control, Mr. Schindler's annual
incentive awards would vest PRO RATA and be paid in a lump sum and his PARs
would vest and be paid in a lump sum.
NGH and RJR Tobacco Holdings entered into employment agreements with Mr.
Blixt, Ms. Beasley and Messrs. Lapiejko and Maguire which, in each case, provide
that if the executive's employment is involuntarily terminated other than for
"cause" or if the executive terminates his employment for "good reason", he or
she will receive two years base salary plus bonus, payable over three years,
benefit continuation for three years, and if in effect, coverage under the
executive perquisite plan for three years. "Cause" includes criminal dishonesty,
deliberate misconduct, and deliberate and continual refusal to perform
employment duties or to act in accordance with instructions of the board. "Good
reason" includes a substantial reduction in the executive's responsibilities, a
more than 20% reduction in the executive's salary and annual bonus opportunity
or relocation. Compensation continuance is based on the highest annual rate of
salary in effect during the twelve months immediately before termination and the
current target incentive award opportunity for the calendar year in which
employment terminates.
If there is a change of control of NGH, Mr. Blixt and Ms. Beasley are
entitled to tax reimbursement payments if a "parachute" excise tax is imposed,
reimbursement payments for legal and accounting fees as a result of termination,
and severance as if termination were by RJR Tobacco Holdings without cause or by
the executive with "good reason". Following a change of control, "good reason"
includes a material reduction in the executive's duties, position and reporting
relationship, a reduction in pay grade or bonus opportunity, RJR Tobacco
Holdings' failure to continue in effect any compensation plan in which the
executive participated at the time of the change of control, any action by RJR
Tobacco Holdings which directly or indirectly materially reduces benefits under
its retirement or savings plan or fringe benefits, termination without written
notice by RJR Tobacco Holdings, and relocation.
The parties are amending these contracts to reflect the spin-off.
THE RJR TOBACCO HOLDINGS 1999 LONG TERM INCENTIVE PLAN
On May 12, 1999, RJR Tobacco Holdings adopted, and NGH as the sole
stockholder of RJR Tobacco Holdings approved, the RJR Nabisco, Inc. 1999 Long
Term Incentive Plan, which this prospectus refers to as the RJR LTIP. RJR
Tobacco Holdings established the RJR LTIP to provide it with an effective means
to attract, retain, and motivate key personnel of RJR Tobacco Holdings and its
subsidiaries.
The RJR LTIP provides for the granting of awards to employees of RJR Tobacco
Holdings or its subsidiaries or other individuals who have a unique relationship
with RJR Tobacco Holdings or its subsidiaries, as determined by the compensation
committee of RJR Tobacco Holdings' board of directors. The RJR LTIP will be
administered by the compensation committee or, in lieu of the committee, RJR
Tobacco Holdings' Board of Directors, which is authorized to establish rules and
56
<PAGE>
regulations for administration of the RJR LTIP, to make determinations and
interpretations under the RJR LTIP and to grant awards pursuant to the RJR LTIP.
The RJR LTIP is not subject to any provision of ERISA and is not qualified
under Section 401(a) of the Code.
SHARES AVAILABLE FOR GRANTS. The maximum number of shares of RJR Tobacco
Holdings common stock that RJR Tobacco Holdings may grant in respect of all
awards during the term of the RJR LTIP is 8 million shares plus the additional
shares required to implement the equitable adjustment of options and restricted
shares under the LTIP, which may be adjusted in the event of specified capital
changes as described below. RJR Tobacco Holdings may use shares authorized for
issuance under the RJR LTIP to satisfy its obligations under any other
compensation plans or arrangements. RJR Tobacco Holdings may not grant more than
3 million shares of RJR Tobacco Holdings common stock as "incentive stock
options," subject to adjustment as described below. The aggregate maximum number
of shares of RJR Tobacco Holdings common stock that may be granted as restricted
RJR Tobacco Holdings shares may not exceed 3 million shares, subject to
adjustment as described below. Limitations on other awards are described below.
Shares related to prior grants that are forfeited, terminated, canceled,
expire unexercised, settled in cash, tendered to or retained by RJR Tobacco
Holdings in satisfaction of exercise price obligations or in any other manner
that are not issued as shares of RJR Tobacco Holdings common stock will again
become eligible for grant under the RJR LTIP.
AWARDS. Subject to the terms of the RJR LTIP, the Compensation Committee,
or the entire Board of Directors in lieu of the Compensation Committee, may
grant awards in the amounts and in the forms permitted by the RJR LTIP as it
deems appropriate. The permissible forms of awards under the RJR LTIP are:
- stock options--both incentive stock options and other stock options;
- stock appreciation rights;
- restricted stock;
- performance units; and
- performance shares.
Rights to cash payments in respect of cash dividends paid on RJR Tobacco
Holdings common stock may be a component of RJR LTIP awards. The material terms
and features of the various forms of awards are set forth below.
- STOCK OPTIONS--These are stock options that RJR Tobacco Holdings may grant
as either "incentive stock options" under the restrictions of Section 422
of the Code or as "non-qualified stock options". Generally, stock options
may not have a term of more than fifteen years, or ten years for incentive
stock options, and, except for options granted in connection with the
equitable adjustment of NGH options to reflect the distribution, may not
have an exercise price less than 100% of the fair market value of RJR
Tobacco Holdings common stock on the date that they are granted. Payment
of the option price may be made in cash, shares of RJR Tobacco Holdings
common stock or any combination of the two, as determined by the
Compensation Committee. No participant may receive a grant of stock
options in any calendar year covering more than two million shares of RJR
Tobacco Holdings common stock, plus any unused amount from a prior year.
- STOCK APPRECIATION RIGHTS--These are rights to receive cash or RJR Tobacco
Holdings common stock in an amount equal to the appreciation of shares of
RJR Tobacco Holdings common stock after the date that RJR Tobacco Holdings
grants the stock appreciation rights. Stock
57
<PAGE>
appreciation rights have a base price value equal to the value of a share
of RJR Tobacco Holdings common stock on the date of grant or, if granted
in tandem with stock options, the exercise price of those options. Stock
appreciation rights are granted for no consideration, cannot be exercised
following fifteen years from the date of grant, may be granted in tandem
with options or separately and may be terminated by the compensation
committee. No participant may receive grants of more than two million
stock appreciation rights in any calendar year, plus any unused amount
from a prior year.
- RESTRICTED STOCK--These are shares of RJR Tobacco Holdings common stock,
or units equivalent to RJR Tobacco Holdings common stock, delivered to an
individual generally without payment of consideration that are subject to
restrictions or conditions.
- PERFORMANCE UNITS--These are rights, including performance notes and
performance note appreciation rights, to receive cash payments or RJR
Tobacco Holdings common stock at a future date based upon RJR Tobacco
Holdings' performance during a performance period. The performance factors
may be based on any one or more of the following: price of RJR Tobacco
Holdings common stock or the stock of any affiliate, shareholder return,
return on equity, return on investment, return on capital, return on
invested capital, economic profit, economic value added, net income, cash
net income, free cash flow, earnings per share, cash earnings per share,
operating company contribution or market share. These factors will have a
minimum performance standard below which no amount will be paid and may
have a maximum performance standard above which no additional payments
will be made. The performance period may not exceed 10 years. No
participant may receive payment in respect of any award of performance
units granted for any performance period with a value in excess of $10
million.
- PERFORMANCE SHARES--These are similar to performance units, but RJR
Tobacco Holdings may make the ultimate payments in either cash or shares
of RJR Tobacco Holdings common stock. The value of these units is
determined not only on the basis of RJR Tobacco Holdings' performance
during the interim period, but also upon the price of RJR Tobacco
Holdings' common stock at the end of the period. The performance factors
that the Compensation Committee may select are the same as those available
in respect of performance units and similar conditions relating to minimum
and maximum performance standards and maximum performance periods are
applicable. No participant may receive payment in respect of performance
shares granted for any performance period in excess of 500,000 shares of
RJR Tobacco Holdings common stock or the cash equivalent of that amount.
ADJUSTMENTS, TERMINATION AND AMENDMENT. The total number of shares of RJR
Tobacco Holdings common stock that may be allocated pursuant to awards made
under the RJR LTIP or that may be allocated to any one individual, the
limitations on types of awards, the number of shares of RJR Tobacco Holdings
common stock subject to outstanding options, the exercise price for those
options, the number of outstanding stock appreciation rights, the base value of
those rights, the number of outstanding performance shares and other terms and
conditions of awards may be equitably adjusted by the compensation committee in
the event of specific corporate transactions.
RJR Tobacco Holdings' Board of Directors may terminate or amend the RJR
LTIP, except that no amendment or termination of the RJR LTIP may adversely
affect any participant's rights with respect to previously granted awards
without the consent of that participant, but stock appreciation rights may be
changed or canceled without a participant's consent. Except in the event of
specific corporate transactions, the individual and aggregate limitations on
grants under the RJR LTIP may not be increased, and the exercise price of stock
options and base price of stock appreciation rights may not be reduced, other
than with the approval of RJR Tobacco Holdings' stockholders.
CHANGE OF CONTROL. In the event of a change of control of RJR Tobacco
Holdings, the following will occur:
58
<PAGE>
- stock options will generally become fully vested and exercisable, unless
the Compensation Committee elects to make a cash payment to participants
in lieu of delivery of shares upon exercise equal to the amount determined
pursuant to applicable stock option grant agreements or an amount equal to
the "spread"-- I.E., the excess of the fair market value of RJR Tobacco
Holdings common stock on the date of exercise over the exercise price--
multiplied by the number of shares exercised;
- stock appreciation rights will generally become fully vested and
exercisable;
- restricted stock units will have restrictions removed;
- performance units will become vested PRO RATA based on the number of
months in the performance period before the change of control, and will
have a value equal to the greater of their target value or the value
derived from actual performances as of the change of control; and
- the Compensation Committee will have authority to establish or revise the
terms of grants in a manner that is not adverse to participants.
A change of control includes
(1) specified acquisitions of 30% or more of the combined voting power
of RJR Tobacco Holdings' securities,
(2) specified changes in the composition of the Board, including changes
resulting from a proxy contest,
(3) specified mergers or consolidations of RJR Tobacco Holdings or
(4) the disposition of substantially all of RJR Tobacco Holdings'
assets.
GRANTS. Effective on the date of the spin-off, the RJR Tobacco Holdings
Board of Directors approved grants of RJR Tobacco Holdings restricted shares in
tandem with RJR Tobacco Holdings stock options. Each share of restricted stock
has four tandem stock options with an exercise price equal to the stock price on
the distribution date. These tandem options vest 50% at the end of three years,
25% after four years and 25% after five years. Before vesting, participants
choose to receive either the shares or the options granted in tandem with each
share. The participant forfeits the award not selected.
The awards made to the named executive officers are as follows:
<TABLE>
<CAPTION>
TANDEM GRANTS
----------------------------
EXECUTIVE RESTRICTED SHARES OPTIONS
- --------- ----------------- ---------
<S> <C> <C>
A.J. Schindler...................................................... 85,000 340,000
L.J. Beasley........................................................ 35,000 140,000
C.A. Blixt.......................................................... 35,000 140,000
K.J. Lapiejko....................................................... 35,000 140,000
J.V. Maguire........................................................ 35,000 140,000
</TABLE>
If Mr. Schindler is involuntarily terminated without cause, his restricted
share and stock option grants will vest 50% if the termination is within the
first 3 years and 100% upon a later termination. The grants made to the other
named executive officers will vest PRO RATA upon a termination without cause.
All grants will be fully vested upon a termination without cause following a
change of control.
59
<PAGE>
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND MANAGEMENT
RJR Tobacco Holdings holds, beneficially and of record, all of the
outstanding shares of RJR Tobacco Company common stock. The following table sets
forth information as of July 2, 1999 with respect to the number of shares of RJR
Tobacco Holdings common stock beneficially owned by
- each person or entity that we estimate owns more than five percent of the
outstanding shares of RJR Tobacco Holdings common stock,
- each director of RJR Tobacco Holdings,
- each of the executive officers included in the Summary Compensation Table
under "Management" above and
- all directors and executive officers of RJR Tobacco Holdings as a group.
RJR Tobacco Holdings based this ownership information on company records and
information supplied by the stockholders, including information filed with the
SEC on Schedules 13D and 13G. Except as otherwise noted, the persons named in
the table below have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(2) SHARES
- -------------------------------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS(1)
John T. Chain, Jr. 667 *
A.D. Frazier, Jr. -- *
Denise Ilitch -- *
John G. Medlin, Jr. 2,289 *
Nana Mensah -- *
Joseph P. Viviano -- *
Thomas C. Wajnert -- *
Andrew J. Schindler 269,761 *
Charles A. Blixt 65,445 *
Lynn J. Beasley 72,888 *
Kenneth J. Lapiejko 66,287 *
James V. Maguire 69,639 *
ALL DIRECTORS AND OFFICERS AS A GROUP 657,428 *
OTHER 5% STOCKHOLDERS
Capital Research and Management Company (3) 11,961,670 11.0%
333 South Hope Street
Los Angeles, CA 90071
Ross Financial Corporation (4) 10,721,171 9.9%
P.O. Box 31363-SMB
Grand Cayman, Cayman Islands, B.W.I.
</TABLE>
- ------------------
* Less than 1%
- ------------------------------
(1) The address of each director and named executive officer is c/o R.J.
Reynolds Tobacco Holdings, Inc., 401 North Main Street, Winston-Salem, NC
27102.
(2) For purposes of this table, we have deemed a person to be the "beneficial
owner" of any shares that person has the right to acquire within 60 days.
For purposes of computing the percentage of outstanding shares held by the
persons named above, we have deemed any security that those persons have the
right to acquire within 60 days to be outstanding. However, we have not
deemed that security to be outstanding for the purpose of computing the
percentage ownership of any other person. The number of shares of common
stock beneficially owned includes shares subject to currently exercisable
options in the following amounts:
- 169,603 shares for Mr. Schindler
- 27,112 shares for Mr. Blixt
- 32,855 shares for Ms. Beasley
- 28,354 shares for Mr. Lapiejko
- 30,526 shares for Mr. Maguire
- 390,735 shares for all directors and executive officers as a group
(3) According to the Schedule 13G dated July 9, 1999 filed with the SEC by
Capital Research and Management Company, Capital Research, a registered
investment advisor, is deemed to be the beneficial owner of 11,961,670
shares of common stock as a result of acting as investment advisor to
various registered investment companies.
(4) On June 25, 1999, Ross Financial Corporation filed a Schedule 13G with the
SEC with the information set forth in the table.
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DESCRIPTION OF THE NOTES
The old notes were issued, and the new notes will be issued, under an
indenture dated as of May 15, 1999 among RJR Tobacco Holdings, RJR Tobacco
Company and The Bank of New York, as Trustee.
The following summary highlights selected provisions of the indenture (which
includes the guarantees) and the notes and may not contain all the information
that is important to you. To understand the indenture and the notes fully and
for a complete description of their terms, you should read carefully all of
their provisions. We have filed a copy of the indenture as an exhibit to the
registration statement to which this prospectus relates. See "Where You Can Find
More Information." In addition, this summary is qualified in its entirety by
reference to the Trust Indenture Act of 1939. You can find definitions of
certain capitalized terms used in the following summary under the subheading
"--Certain Definitions." Certain terms contained in this summary but not
capitalized in this summary or defined under the subheading "--Certain
Definitions" are defined in the indenture or the Trust Indenture Act.
The terms of the new notes are identical in all material respects to the
terms of the old notes, except for certain transfer restrictions and
registration rights relating to the old notes. If we do not complete the
exchange offer by February 18, 2000, holders of old notes that have complied
with their obligations under the registration rights agreement will be entitled,
subject to certain exceptions, to additional interest in an amount equal to
0.50% annually. The new notes and the old notes are treated as a single class
for all purposes under the indenture.
BRIEF DESCRIPTION OF THE NOTES
All of the notes:
- are general obligations of RJR Tobacco Holdings;
- are guaranteed by RJR Tobacco Company, and will be guaranteed by any other
subsidiary of RJR Tobacco Company that issues a guarantee of the
obligations of RJR Tobacco Holdings under its new bank credit agreement;
- rank equally with each other and all other existing and future unsecured
and unsubordinated debt of RJR Tobacco Holdings and the guarantors; and
- accrue interest, payable semi-annually, from the date they are issued.
The indenture governing all of the notes also contains the following
covenants:
- liens,
- sale and lease-back transactions and
- consolidations, mergers and transfers of all or substantially all assets.
PRINCIPAL, MATURITY AND INTEREST
The 7 3/8% Series B notes due 2003 will be limited in aggregate principal
amount to $550,000,000, will mature on May 15, 2003 and will bear interest at
the rate of 7 3/8% per year.
The 7 3/4% Series B notes due 2006 will be limited in aggregate principal
amount to $500,000,000, will mature on May 15, 2006 and will bear interest at
the rate of 7 3/4% per year.
The 7 7/8% Series B notes due 2009 will be limited in aggregate principal
amount to $200,000,000, will mature on May 15, 2009 and will bear interest at
the rate of 7 7/8% per year.
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PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee under the indenture will initially act as the paying agent and
registrar for all of the notes. RJR Tobacco Holdings may change the paying agent
or registrar under the indenture without prior notice to the holders of the
relevant series of notes.
OPTIONAL REDEMPTION
RJR Tobacco Holdings may redeem each of the notes in whole at any time or in
part from time to time, at our option, at a redemption price equal to the
greater of
(1) 100% of the principal amount of the applicable series of notes, and
(2) the sum of the present values of the remaining scheduled payments of
principal and interest on the applicable series of notes discounted to the
date of redemption on a semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at the applicable Treasury Rate, plus
12.5 basis points for the notes due 2003, plus 25 basis points for the notes
due 2006 and plus 37.5 basis points for the notes due 2009, plus, with
respect to each of the notes, accrued and unpaid interest on the principal
amount being redeemed to the redemption date.
"Treasury Rate" means, with respect to any redemption date,
(1) the yield, under the heading which represents the average for the
immediately preceding week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication
which is published weekly by the Board of Governors of the Federal Reserve
System and which establishes yields on actively traded U.S. Treasury
securities adjusted to constant maturity under the caption "Treasury
Constant Maturities," for the maturity corresponding to the Comparable
Treasury Issue (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Comparable Treasury Issue will be determined and the
Treasury Rate will be interpolated or extrapolated from such yields on a
straight line basis, rounding to the nearest month) or
(2) if such release (or any successor release) is not published during
the week preceding the calculation date or does not contain such yields, the
rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, calculated using a price for the Comparable
Treasury Issue (expressed as a percentage of its principal amount) equal to
the Comparable Treasury Price for such redemption date. The Treasury Rate
will be calculated on the third Business Day preceding the redemption date.
"Comparable Treasury Issue" means the U.S. Treasury security selected by an
Independent Investment Banker as having a maturity comparable to the remaining
term ("Remaining Life") of the notes to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of such notes.
"Independent Investment Banker" means either Merrill Lynch, Pierce, Fenner &
Smith Incorporated or Morgan Stanley & Co. Incorporated, or, if both firms are
unwilling or unable to select the Comparable Treasury Issue, an independent
investment banking institution of national standing appointed by the Trustee
after consultation with RJR Tobacco Holdings.
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"Comparable Treasury Price" means
(1) the average of five Reference Treasury Dealer Quotations for such
redemption date, after excluding the highest and lowest Reference Treasury
Dealer Quotations, or
(2) if the Independent Investment Banker obtains fewer than five such
Reference Treasury Dealer Quotations, the average of all such quotations.
"Reference Treasury Dealer" means
(1) Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated and their respective successors, provided,
however, that if any of the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"),
we will substitute for such initial purchaser another Primary Treasury
Dealer and
(2) any other Primary Treasury Dealer selected by the Independent
Investment Banker after consultation with RJR Tobacco Holdings.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Independent Investment Banker, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Independent Investment Banker at 5:00 p.m., New York
City time, on the third Business Day preceding such redemption date.
SELECTION AND NOTICE
We will mail notice of any redemption by first-class mail at least 30 but
not more than 60 days before the redemption date fixed for redemption to each
holder of notes to be redeemed at its registered address. If we are redeeming
less than all of the notes at any time, the Trustee will select, not more than
60 days prior to the redemption date, the particular notes or portions thereof
for redemption from the outstanding notes not previously called by such method
as the Trustee deems fair and appropriate.
MANDATORY REDEMPTION
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
RANKING
The notes are unsecured and unsubordinated obligations of RJR Tobaco
Holdings and rank equally with all other existing and future unsecured and
unsubordinated obligations of RJR Tobacco Holdings (except those obligations
preferred by operation of law). The guarantee of RJR Tobacco Company is, and any
other guarantees, when and if issued, will be, unsecured and unsubordinated
obligations of the relevant guarantor and rank equally with all other existing
and future unsecured and unsubordinated obligations of such guarantor (except
those obligations preferred by operation of law). The notes will effectively
rank junior to any secured debt of RJR Tobacco Holdings, and the guarantees will
effectively rank junior to any secured debt of the guarantors, in each case to
the extent of the assets securing such debt.
As of March 31, 1999, on a pro forma basis after giving effect to the
reorganization, the offering and the application of the estimated net proceeds
from the offering, RJR Tobacco Holdings would have had approximately $2.03
billion of total consolidated debt outstanding, including $1.25 billion
outstanding under the notes and approximately $776 million of other
unsubordinated indebtedness, none of which would have been secured. As of March
31, 1999, RJR Tobacco Company had no third-party debt.
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CERTAIN COVENANTS OF RJR TOBACCO HOLDINGS
The following restrictions apply to each series of notes.
RESTRICTIONS ON LIENS
The indenture provides that RJR Tobacco Holdings will not, and will not
permit any Restricted Subsidiary to, mortgage or pledge as security for any
indebtedness any shares of stock, indebtedness or other obligations of a
Subsidiary or any Principal Property of RJR Tobacco Holdings or a Restricted
Subsidiary, whether such shares of stock, indebtedness or other obligations of a
Subsidiary or Principal Property is owned at the date of the indenture or
thereafter acquired, unless RJR secures or causes such Restricted Subsidiary to
secure the outstanding notes equally and ratably with all indebtedness secured
by such mortgage or pledge, so long as such indebtedness shall be so secured.
This covenant does not apply in the case of:
(a) the creation of any mortgage, pledge or other lien or any shares of
stock, indebtedness or other obligations of a Subsidiary or any Principal
Property acquired after the date of the Indenture (including acquisitions by
way of merger or consolidation) by RJR Tobacco Holdings or a Restricted
Subsidiary contemporaneously with such acquisition, or within 120 days
thereafter, to secure or provide for the payment or financing of any part of
the purchase price thereof, or the assumption of any mortgage, pledge or
other lien upon any shares of stock, indebtedness or other obligations of a
Subsidiary or any Principal Property acquired after the date of the
indenture existing at the time of such acquisition, or the acquisition of
any shares of stock, indebtedness or other obligations of a Subsidiary or
any Principal Property subject to any mortgage, pledge or other lien without
the assumption thereof, PROVIDED that every such mortgage, pledge or lien
referred to in this clause (a) shall attach only to the shares of stock,
indebtedness or other obligations of a Subsidiary or any Principal Property
so acquired and fixed improvements thereon;
(b) any mortgage, pledge or other lien on any shares of stock,
indebtedness or other obligations of a Subsidiary or any Principal Property
existing at the date of the indenture;
(c) any mortgage, pledge or other lien on any shares of stock,
indebtedness or other obligations of a Subsidiary or any Principal Property
in favor of RJR Tobacco Holdings or any Restricted Subsidiary;
(d) any mortgage, pledge or other lien on Principal Property being
constructed or improved securing loans to finance such construction or
improvements;
(e) any mortgage, pledge or other lien on shares of stock, indebtedness
or other obligations of a Subsidiary or any Principal Property incurred in
connection with the issuance of tax exempt governmental obligations; and
(f) any renewal of or substitution for any mortgage, pledge or other
lien permitted by any of the preceding clauses (a) through (e), PROVIDED, in
the case of a mortgage, pledge or other lien permitted under clause (a), (b)
or (d), the debt secured is not increased nor the lien extended to any
additional assets.
Notwithstanding the foregoing, RJR Tobacco Holdings or any Restricted
Subsidiary may create or assume liens in addition to those permitted by clauses
(a) through (f), and renew, extend or replace such liens, provided that at the
time of such creation, assumption, renewal, extension or replacement, and after
giving effect thereto, Exempted Debt (as hereinafter defined) does not exceed
10% of Consolidated Net Worth.
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RESTRICTIONS ON SALE AND LEASE-BACK TRANSACTIONS
The indenture provides that RJR Tobacco Holdings will not, and will not
permit any Restricted Subsidiary to, sell or transfer, directly or indirectly,
except to RJR Tobacco Holdings or a Restricted Subsidiary, any Principal
Property as an entirety, or any substantial portion thereof, with the intention
of taking back a lease of such property, except a lease for a period of three
years or less at the end of which it is intended that the use of such property
by the lessee will be discontinued; PROVIDED that RJR Tobacco Holdings or any
Restricted Subsidiary may sell any such Principal Property and lease it back for
a longer period
(a) if RJR Tobacco Holdings or such Restricted Subsidiary would be
entitled, pursuant to the provisions of the indenture described above under
"--Restrictions on Liens," to create a mortgage on the property to be leased
securing Funded Debt in an amount equal to the Attributable Debt (as
hereinafter defined) with respect to such sale and lease-back transaction
without equally and ratably securing the outstanding notes or
(b) if
(1) RJR Tobacco Holdings promptly informs the Trustee of such
transaction,
(2) the net proceeds of such transaction are at least equal to the
fair value (as determined by resolution of the Board of Directors of RJR
Tobacco Holdings) of such property and
(3) RJR Tobacco Holdings causes an amount equal to the net proceeds
of the sale to be applied to the retirement, within 120 days after
receipt of such proceeds, of Funded Debt incurred or assumed by RJR
Tobacco Holdings or a Restricted Subsidiary (including the notes);
PROVIDED further that, in lieu of applying all of or any part of such net
proceeds to such retirement, RJR Tobacco Holdings may, within 75 days
after such sale, deliver or cause to be delivered to the applicable
trustee for cancellation either debentures or notes evidencing Funded
Debt of RJR Tobacco Holdings (which may include the outstanding notes) or
of a Restricted Subsidiary previously authenticated and delivered by the
applicable trustee, and not theretofore tendered for sinking fund
purposes or called for a sinking fund or otherwise applied as a credit
against an obligation to redeem or retire such notes or debentures. If
RJR Tobacco Holdings so delivers debentures or notes to the applicable
trustee with an Officers' Certificate, the amount of cash which RJR
Tobacco Holdings will be required to apply to the retirement of Funded
Debt will be reduced by an amount equal to the aggregate of the then
applicable optional redemption prices (not including any optional sinking
fund redemption prices) of such debentures or notes, or if there are no
such redemption prices, the principal amount of such debentures or notes,
PROVIDED, that in the case of debentures or notes which provide for an
amount less than the principal amount thereof to be due and payable upon
a declaration of the maturity thereof, such amount of cash shall be
reduced by the amount of principal of such debentures or notes that would
be due and payable as of the date of such application upon a declaration
of acceleration of the maturity thereof pursuant to the terms of the
indenture pursuant to which such debentures or notes were issued.
Notwithstanding the foregoing, RJR Tobacco Holdings or any Restricted
Subsidiary may enter into sale and lease-back transactions in addition to those
permitted in this paragraph and without any obligation to retire any outstanding
notes or other Funded Debt, provided that at the time of entering into such sale
and lease-back transactions and after giving effect thereto, Exempted Debt does
not exceed 10% of Consolidated Net Worth.
The indenture does not contain provisions which would afford the holders of
notes protection in the event of a decline in our credit quality resulting from
a change of control transaction, a highly
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leveraged transaction or other similar transactions involving RJR Tobacco
Holdings or RJR Tobacco Company.
GUARANTEES
RJR Tobacco Company will guarantee all of the obligations of RJR Tobacco
Holdings under the notes, and RJR Tobacco Holdings will cause each other
Subsidiary that is or becomes a guarantor under the Bank Credit Agreement to
execute and deliver to the Trustee a guarantee pursuant to which such Subsidiary
will unconditionally guarantee, on a joint and several basis, the full and
prompt payment of the principal of, premium, if any, and interest on the notes
on an unsecured and unsubordinated basis.
The indenture provides that the obligations of each guarantor will be
limited to the maximum amount that, after giving effect to all other contingent
and fixed liabilities of such guarantor (including, without limitation, any
guarantees under the Bank Credit Agreement) and after giving effect to any
collections from or payments made by or on behalf of any other guarantor in
respect of the obligations of such other guarantor under its guarantee or
pursuant to its contribution obligations under the indenture, would cause the
obligations of such guarantor under its guarantee not to constitute a fraudulent
conveyance or fraudulent transfer under federal or state law.
Each guarantor may consolidate with or merge into or sell its assets to us
or another guarantor without limitation. Each guarantor may consolidate with or
merge into or sell all or substantially all its assets to a Person (as defined
below) other than RJR Tobacco Holdings or another guarantor (whether or not
affiliated with the guarantor), except that if the Person surviving any such
merger or consolidation, or the Person to whom such sale is made, is a
Subsidiary of RJR Tobacco Holdings, such Subsidiary shall not be a Foreign
Subsidiary. Upon the sale or disposition of a guarantor (by merger,
consolidation, the sale of its Capital Stock or the sale of all or substantially
all of its assets) to a Person (whether or not an Affiliate of the guarantor)
which is not a Subsidiary of ours, which sale or disposition is otherwise in
compliance with the Indenture, such guarantor will be deemed released from all
its obligations under the indenture and its guarantee and such guarantee will
terminate.
Under the indenture, if a guarantor ceases to be a guarantor under the Bank
Credit Agreement for any reason, such guarantor will be deemed released from all
its obligations under the indenture and its guarantee of the notes and such
guarantee will terminate.
CERTAIN DEFINITIONS
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Attributable Debt" means, when used in connection with a sale and
lease-back transaction, at any date as of which the amount thereof is to be
determined, the product of
(a) the net proceeds from such sale and lease-back transaction
multiplied by
(b) a fraction, the numerator of which is the number of full years of
the term of the lease relating to the property involved in such sale and
lease-back transaction (without regard to any options to renew or extend
such term) remaining at the date of the making of such computation and the
denominator of which is the number of full years of the term of such lease
measured from the first day of such term.
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"Bank Credit Agreement" means the $1.235 billion credit agreement among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., The Chase Manhattan Bank, as
Administrative Agent and the lending institutions named on the signature pages
thereof, as such agreement may be amended, modified, renewed, refunded,
restated, refinanced or replaced from time to time.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any preferred stock,
partnership interests and limited liability company membership interests, but
excluding any debt securities convertible into such equity.
"Consolidated Net Worth" means, at any date of determination, the
consolidated stockholders' equity of RJR Tobacco Holdings, as set forth on the
then most recently available consolidated balance sheet of RJR Tobacco Holdings
and its consolidated Subsidiaries.
"Exempted Debt" means the sum, without duplication, of the following items
outstanding as of the date Exempted Debt is being determined:
(a) indebtedness of RJR Tobacco Holdings and the Restricted Subsidiaries
incurred after the date of the indenture and secured by liens created,
assumed or otherwise incurred or permitted to exist pursuant to the
indenture described above under "Certain Covenants of RJR Tobacco
Holdings--Restrictions on Liens" and
(b) Attributable Debt of RJR Tobacco Holdings and the Restricted
Subsidiaries in respect of all sale and lease-back transactions with regard
to any Principal Property entered into pursuant to the Indenture described
above under "Certain Covenants of RJR Tobacco Holdings--Restrictions on Sale
and Lease-Back Transactions."
"Foreign Subsidiary" means any Subsidiary that is organized under the laws
of a jurisdiction other than the United States of America or any state thereof
or the District of Columbia.
"Funded Debt" means all indebtedness for money borrowed, including purchase
money indebtedness, having a maturity of more than one year from the date of its
creation or having a maturity of less than one year but by its terms being
renewable or extendible, at the option of the obligor in respect thereof, beyond
one year from its creation.
"guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person
(a) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or
(b) entered into for purposes of assuring in any other manner the
obligee of such indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); PROVIDED,
HOWEVER, that the term "guarantee" will not include endorsements for
collection or deposit in the ordinary course of business. The term
"guarantee" used as a verb has a corresponding meaning.
"guarantor" means RJR Tobacco Company and each other Subsidiary of RJR
Tobacco Holdings that is also or becomes a guarantor under the Bank Credit
Agreement, after such time as such Person shall have executed and delivered a
guarantee.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
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"Principal Property" means land, land improvements, buildings and associated
factory and laboratory equipment owned or leased pursuant to a capital lease and
used by RJR Tobacco Holdings or a Restricted Subsidiary primarily for
processing, producing, packaging or storing its products, raw materials,
inventories, or other materials and supplies and located within the United
States of America and having an acquisition cost plus capitalized improvements
in excess of 2% of Consolidated Net Worth, as of the date of such determination,
but not including any such property financed through the issuance of tax exempt
governmental obligations, or any such property that has been determined by
resolution of the Board of Directors of RJR Tobacco Holdings not to be of
material importance to the respective businesses conducted by RJR Tobacco
Holdings or such Restricted Subsidiary effective as of the date such resolution
is adopted.
"Restricted Subsidiary" means any Subsidiary organized and existing under
the laws of the United States of America and the principal business of which is
carried on within the United States of America which owns or is a lessee
pursuant to a capital lease of any Principal Property and in which the
investment of RJR Tobacco Holdings and all its Subsidiaries exceeds 5% of
Consolidated Net Worth as of the date of such determination other than
(a) each Subsidiary the major part of whose business consists of
finance, banking, credit, leasing, insurance, financial services or other
similar operations, or any combination thereof; and
(b) each Subsidiary formed or acquired after the date of the Indenture
for the purpose of acquiring the business or assets of another person and
which does not acquire all or any substantial part of the business or assets
of RJR Tobacco Holdings or any Restricted Subsidiary. However, the Board of
Directors of RJR Tobacco Holdings may declare any such Subsidiary to be a
Restricted Subsidiary. The principal Restricted Subsidiary as of the date of
this prospectus is RJR Tobacco Company.
"Subsidiary" means any corporation of which at least a majority of all
outstanding stock having by the terms thereof ordinary voting power in the
election of directors of such corporation (irrespective of whether or not at the
time stock of any class or classes of such corporation has or might have voting
power by reason of the happening of any contingency) is at the time, directly or
indirectly, owned by RJR Tobacco Holdings, or by one or more Subsidiaries of RJR
Tobacco Holdings or by RJR Tobacco Holdings and one or more Subsidiaries.
RESTRICTIONS ON MERGERS AND SALES OF ASSETS
Nothing contained in the indenture or in the notes will prevent any
consolidation or merger of RJR Tobacco Holdings into any other corporation or
corporations (whether or not affiliated with RJR Tobacco Holdings ), or
successive consolidations or mergers to which RJR Tobacco Holdings or its
successor will be a party, or will prevent any sale, lease or conveyance of the
property of RJR Tobacco Holdings, as an entirety or substantially as an
entirety; PROVIDED that upon any such consolidation, merger, sale, lease or
conveyance to which RJR Tobacco Holdings is a party, other than the transactions
comprising the reorganization as described under "The Reorganization" and in
which RJR Tobacco Holdings is not the surviving corporation, the due and
punctual performance and observance of all of the covenants and conditions of
the indenture and the guarantees to be performed or observed by RJR Tobacco
Holdings and the due and punctual payment of the principal of and interest on
all of the notes and the guarantees, according to their tenor, shall be
expressly assumed by supplemental indenture satisfactory in form to the Trustee,
executed and delivered to the Trustee, by the corporation formed by such
consolidation, or into which RJR Tobacco Holdings shall have been merged, or
which shall have acquired such property.
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EVENTS OF DEFAULT
An event of default with respect to any series of notes is defined under the
indenture in relevant part as being:
(a) default in payment of any principal of the notes of such series when
the same shall become due and payable, either at maturity, upon any
redemption, by declaration or otherwise;
(b) default for 30 days in payment of any interest on any notes of such
series;
(c) default in the payment of any sinking fund installment on the notes
of such series when the same shall become due and payable;
(d) default for 90 days after written notice in the observance or
performance of any other covenant or agreement in respect of the notes of
such series;
(e) certain events of bankruptcy, insolvency or reorganization;
(f) any guarantee ceases to be in full force and effect (except as
contemplated by the terms of the indenture) or any guarantor denies or
disaffirms in writing its obligations under the indenture or its guarantee;
and
(g) any other event of default provided in a supplemental indenture or
board resolution relating to such securities.
The indenture provides that
(a) if an event of default due to the default in payment of principal
of, premium, if any, or any interest on, any series of notes or due to the
default in the performance or breach of any other covenant or warranty of
RJR Tobacco Holdings applicable to the notes of such series but not
applicable to all outstanding notes shall have occurred and be continuing,
either the Trustee or the holders of not less than 25% in principal amount
of the notes of each affected series then outstanding (voting as a single
class) by notice in writing may then declare the principal of all notes of
all such affected series and interest accrued thereon to be due and payable
immediately; and
(b) if an event of default due to a default in the performance of any
other of the covenants or agreements in the indenture applicable to all
outstanding notes or due to certain events of bankruptcy, insolvency and
reorganization of RJR Tobacco Holdings or any other event of default
provided in a supplemental indenture or board resolution relating to the
notes shall have occurred and be continuing, either the Trustee or the
holders of not less than 25% in principal amount of all notes then
outstanding (treated as one class) by notice in writing may declare the
principal of all notes and interest accrued thereon to be due and payable
immediately, but upon certain conditions such declarations may be annulled
and past defaults may be waived (except a continuing default in payment of
principal of, premium, if any, or any interest on such notes) by the holders
of a majority in principal amount of the notes of all affected series then
outstanding.
The indenture contains a provision entitling the Trustee, subject to the
duty of the trustee during a default to act with the required standard of care,
to be indemnified by the holders of notes before proceeding to exercise any
right or power under the indenture at the request of such holders. Subject to
such provisions in the indenture for the indemnification of the Trustee and
certain other limitations, the holders of a majority in aggregate principal
amount of the notes of each affected series then outstanding (with each such
series voting as a separate class) may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
The indenture provides that no holder of notes may institute any action
against RJR Tobacco Holdings under the indenture (except actions for payment of
overdue principal or interest) unless such
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holder previously shall have given to the Trustee written notice of default and
continuance thereof and unless the holders of not less than 25% in aggregate
principal amount of the notes of each affected series then outstanding (treated
as a single class) shall have requested the Trustee to institute such action and
shall have offered the Trustee reasonable indemnity, the Trustee shall not have
instituted such action within 60 days of such request and the Trustee shall not
have received direction inconsistent with such written request by the holders of
a majority in principal amount of the notes of each affected series (treated as
one class).
The indenture contains a covenant that RJR Tobacco Holdings will file
annually, not more than four months after the end of its fiscal year, with the
Trustee a certificate that no default existed or a certificate specifying any
default that existed.
MODIFICATION OF THE INDENTURE
The indenture provides that RJR Tobacco Holdings, the guarantors and the
Trustee may enter into supplemental indentures without the consent of the
holders of notes to:
- secure any notes,
- evidence the assumption by a successor corporation of the obligations of
RJR Tobacco Holdings and the guarantors,
- add covenants for the protection of the holders of one or more series of
notes or to add events of default,
- cure any ambiguity or correct any inconsistency in the Indenture or to
make other changes not materially adverse to the interest of holders of
the notes,
- establish the forms or terms of notes of any series,
- provide for uncertificated notes,
- evidence the acceptance of appointment by a successor trustee,
- add an additional guarantor or
- comply with the Trust Indenture Act.
The indenture also contains provisions permitting RJR Tobacco Holdings, the
guarantors (each when authorized by a board resolution) and the Trustee, with
the consent of the holders of not less than a majority in aggregate principal
amount of notes of all series then outstanding and affected (voting as one
class), to add any provisions to, or change in any manner or eliminate any of
the provisions of, the indenture or modify in any manner the rights of the
holders of the notes of each series so affected; PROVIDED that RJR Tobacco
Holdings and the Trustee may not, without the consent of the holder of each
outstanding note affected thereby,
(a) extend the final maturity of any note, or reduce the principal
amount thereof, or reduce the rate or extend the time of payment of interest
thereon, or reduce any amount payable on the redemption thereof or change
the currency in which the principal thereof (including any amount in respect
of original issue discount), or any interest thereon is payable, or reduce
the amount of the principal of any original issue discount security payable
upon acceleration or provable in bankruptcy, or alter certain provisions of
the indenture relating to the notes issued thereunder not denominated in
U.S. dollars or impair the right to institute suit for the enforcement of
any payment on any note when due or any right of repayment at the option of
the holder of a note or
(b) reduce the aforesaid percentage in principal amount of notes of any
series, the consent of the holders of which is required for any such
modification.
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TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
Upon any transfer or exchange, the registrar and the Trustee may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and RJR Tobacco Holdings may require a holder to pay any taxes
required by law or permitted by the indenture, including any transfer tax or
other similar governmental charge payable in connection therewith. RJR Tobacco
Holdings is not required to transfer or exchange any note selected for
redemption or to transfer or exchange any note for a period of 15 days prior to
a selection of notes to be redeemed. The notes will be issued in registered form
and the registered holder of a note will be treated as the owner of such note
for all purposes.
DEFEASANCE
The indenture provides with respect to each series of notes that, except to
the extent the terms of such series of notes provide otherwise, RJR Tobacco
Holdings and the guarantors, as applicable, may elect
(a) to be released from any and all obligations (except for the
obligations to register the transfer or exchange of the notes of such series
and RJR Tobacco Holdings' rights of optional redemption, to replace
mutilated, destroyed, lost or stolen notes of such series, rights of holders
of notes to receive payments of principal thereof and interest thereon, upon
the original stated due dates therefor (but not upon acceleration), to
maintain an office or agency in respect of the notes of such series and to
hold moneys for payment in trust) with respect to notes of any series for
which the exact amount of principal and interest due can be determined at
the time of the deposit with the Trustee as described below and all the
notes of such series are by their terms to become due and payable within one
year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption
("one-year defeasance"),
(b) to defease and be discharged from any and all obligations with
respect to the notes of such series on the 91(st) day after the deposit with
the Trustee as described below (except for the obligations set forth as
exceptions in the preceding clause (a)) ("legal defeasance") or
(c) to be released from its obligations with respect to the notes of
such series (except for the obligations set forth as exceptions in the
preceding clause (a) and the obligations to compensate and indemnify the
Trustee, to appoint a successor Trustee, to repay certain moneys held by the
Paying Agent and to return certain unclaimed moneys held by the Trustee and
to comply with the Trust Indenture Act) ("covenant defeasance"),
upon the deposit with the Trustee, in trust for such purpose, of cash or, in the
case of notes payable in U.S. dollars, U.S. Government Obligations (as defined
in the indenture) which through the payment of principal and interest in
accordance with their terms will insure the availability of monies sufficient,
or a combination thereof, sufficient in the opinion of a nationally recognized
firm of independent accountants, to pay the principal of, premium, if any, and
any interest on the notes of such series, and any mandatory sinking fund
thereon, on the due date thereof. Such a trust may (except with respect to
one-year defeasance or to the extent the terms of the notes of such series
otherwise provide) only be established, if among other things, RJR Tobacco
Holdings has delivered to the Trustee an opinion of counsel that the holders of
the notes of such series will not recognize income, gain or loss for federal
income tax purposes as a result of such legal defeasance or covenant defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same time as would have been the case if such legal defeasance
or covenant defeasance had not occurred. Such opinion, in the case of legal
defeasance under clause (b) above, must (except to the extent the terms of the
notes of the relevant series otherwise provide) refer to and be based upon a
ruling of the Internal Revenue Service or a change in applicable federal income
tax law occurring after the date of the indenture. If RJR Tobacco
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Holdings exercises its legal defeasance or covenant defeasance option, the
guarantees in effect at such time will terminate.
CONCERNING THE TRUSTEE
The Bank of New York will be the Trustee under the indenture and has been
appointed by RJR Tobacco Holdings as Registrar and Paying Agent with regard to
the notes. The Bank of New York is also an agent and lender under the Bank
Credit Agreement and the depositary for the tender offers described under "The
Reorganization" relating to RJR Tobacco Holdings' public debt obligations.
The indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of RJR Tobacco Holdings, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; PROVIDED, however, if it acquires any conflicting interest
it must either eliminate such conflict within 90 days, apply to the SEC for
permission to continue or resign.
GOVERNING LAW
The indenture, the notes and the guarantees will be governed by, and
construed in accordance with, the laws of the State of New York.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the new notes will be issued in fully
registered form, without coupons. Except as described below, the new notes will
be deposited with, or on behalf of, The Depository Trust Company, New York, New
York, and registered in the name of Cede & Co. as DTC's nominee, in the form of
a registered global note.
The descriptions of the operations and procedures of DTC set forth below are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to change by them. We do not take any responsibility for these operations or
procedures, and investors are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised us that it is
- a limited-purpose trust company organized under the laws of the State of
New York;
- a "banking organization" within the meaning of the New York Banking Law;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, as amended; and
- a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of certificates.
DTC's participants include securities brokers and dealers, banks and trust
companies, clearing corporations and other organizations. Indirect access to
DTC's system is also available to indirect participants such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Investors who
are not participants may beneficially own securities held by or on behalf of DTC
only through participants or indirect participants.
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We expect that pursuant to procedures established by DTC (i) upon deposit of
each global note, DTC will credit, on its book-entry registration and transfer
system, the accounts of participants with an interest in the global note and
(ii) ownership of beneficial interests in the notes will be shown on, and the
transfer of ownership interests thereof will be shown on, and effected only
through, records maintained by DTC (with respect to the interests of
participants) and the participants and the indirect participants (with respect
to the interests of persons other than participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer beneficial interests in the notes
represented by a global note to such persons may be limited. In addition,
because DTC can act only on behalf of its participants, who in turn act on
behalf of persons who hold interests through participants, the ability of a
person having a beneficial interest in the notes represented by a global note to
pledge or transfer such interest to persons or entities that do not participate
in DTC's system, or to otherwise take actions in respect of such interest, may
be affected by the lack of a physical definitive security in respect of such
interest.
So long as DTC or its nominee is the registered owner of a global note, DTC
or such nominee, as the case may be, will be considered the sole legal owner or
holder of the notes represented by the global note for all purposes of such
notes and the indenture. Except as provided below, owners of beneficial
interests in a global note will not be entitled to have the notes represented by
such global note registered in their names, will not receive or be entitled to
receive physical delivery of certificated notes, and will not be considered the
owners or holders thereof under the indenture for any purpose, including with
respect to the giving of any direction, instruction or approval to the Trustee
thereunder. Accordingly, each holder owning a beneficial interest in a global
note must rely on the procedures of DTC and, if such holder is not a participant
or an indirect participant, on the procedures of the participant through which
such holder owns its interest, to exercise any rights of a holder of notes under
the indenture or such global note. We understand that under existing industry
practice, in the event that we request any action of holders of notes, or a
holder that is an owner of a beneficial interest in a global note desires to
take any action that DTC, as the holder of the global note, is entitled to take,
DTC would authorize its participants to take that action and the participants
would authorize holders owning through those participants to take such action or
would otherwise act upon the instruction of those holders. Neither we nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of notes by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to such notes.
Payments with respect to the principal of and premium, if any, additional
interest, if any, and interest on any notes represented by a global note
registered in the name of DTC or its nominee on the applicable record date will
be payable by the Trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the global note representing such notes
under the indenture. Under the terms of the indenture, we and the Trustee may
treat the persons in whose names the notes, including the global notes, are
registered as the owners thereof for the purpose of receiving payment thereon
and for any and all other purposes whatsoever. Accordingly, neither we nor the
Trustee has or will have any responsibility or liability for the payment of such
amounts to owners of beneficial interests in a global note (including principal,
premium, if any, and interest). Payments by the participants and the indirect
participants to the owners of beneficial interests in a global note will be
governed by standing instructions and customary industry practice and will be
the responsibility of the participants or the indirect participants and DTC.
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on and after January 1, 2000, may encounter "year 2000 problems." DTC
has informed its participants and other members of the financial community that
it has developed and is implementing a program so that its systems, as they
relate to the timely payment of distributions (including principal and income
payments) to securityholders,
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book-entry deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting (and will continue to contact)
third-party vendors from whom DTC acquires services to impress upon them the
importance of those services being year 2000 compliant and to determine the
extent of their efforts for year 2000 remediation (and, as appropriate, testing)
of their services. In addition, DTC is in the process of developing contingency
plans it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty, or contract modification of any kind.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the global notes among participants, it is under no obligation
to perform or to continue to perform these procedures, and these procedures may
be discontinued at any time. Neither we nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED NOTES
If
(a) we notify the Trustee in writing that DTC is no longer willing or
able to act as a depositary or DTC ceases to be registered as a clearing
agency under the Exchange Act and a successor depositary is not appointed
within 90 days of such notice or cessation,
(b) we, at our option, notify the Trustee in writing that we elect to
cause the issuance of notes of any series in definitive form under the
indenture or
(c) upon the occurrence of certain other events as provided in the
indenture,
then, upon surrender by DTC of that global note, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by that global note. Upon any such issuance, the Trustee is required
to register the certificated notes in the name of the person or persons to whom
they were issued (or the nominee of any thereof) and cause the same to be
delivered thereto.
Neither we nor the Trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued).
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THE EXCHANGE OFFER
In a registration rights agreement between ourselves and the initial
purchasers of the old notes, we agreed
(1) to file a registration statement on or prior to 120 days after the
closing of the offering of the old notes with respect to an offer to
exchange the old notes for a new issue of debt securities of RJR Tobacco
Holdings registered under the Securities Act, with terms substantially
identical to those of the old notes and
(2) to use our reasonable best efforts to cause the registration
statement to be declared effective by the SEC on or prior to 240 days after
the closing and to complete the exchange offer within 30 business days after
such effectiveness. In certain circumstances, we will be required to provide
a shelf registration statement to cover resales of the old notes by the
holders thereof.
The registration rights agreement provides that, in the event we fail to
satisfy our registration obligations under the registration rights agreement, we
will be required to pay additional interest of 0.50% annually. Upon consummation
of the exchange offer or the effectiveness of the shelf registration statement,
the provision for additional interest on the old notes shall cease. Holders of
old notes who fail to tender their old notes will not have any further rights
under the registration rights agreement to require us to register their notes or
to pay additional interest.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer or the acceptance thereof would not be in compliance with the
jurisdiction's securities or blue sky laws.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
This prospectus and the accompanying letter of transmittal contain the terms
and conditions of the exchange offer. Upon the terms and subject to the
conditions included in this prospectus and in the accompanying letter of
transmittal, which together constitute the exchange offer, we will accept for
exchange old notes which are properly tendered on or prior to the expiration
date, unless you have withdrawn them as permitted below.
- When you tender to us old notes as provided below, our acceptance of the
old notes will constitute a binding agreement between you and us upon the
terms and subject to the conditions in this prospectus and in the
accompanying letter of transmittal.
- For each $1,000 principal amount of old notes surrendered to us in the
exchange offer, we will give you $1,000 principal amount of new notes.
- We will keep the exchange offer open for not less than 30 days, or longer
if required by applicable law, after the date that we first mail notice of
the exchange offer to the holders of the old notes. We are sending this
prospectus, together with the letter of transmittal, on or about the date
of this prospectus to all of the registered holders of old notes at their
addresses listed in the trustee's security register with respect to old
notes.
- The exchange offer expires at 5:00 p.m., New York City time, on
, 1999; PROVIDED, however, that we, in our sole discretion,
may extend the period of time for which the exchange offer is open. The
term "expiration date" means , 1999 or, if extended by us, the
latest time and date to which the exchange offer is extended.
- As of the date of this prospectus, $1,250,000,000 in aggregate principal
amount of the old notes was outstanding. The exchange offer is not
conditioned upon any minimum principal amount of old notes being tendered.
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- Our obligation to accept old notes for exchange in the exchange offer is
subject to the conditions that we describe in the section called "Certain
Conditions to the Exchange Offer" below.
- We expressly reserve the right, at any time, to extend the period of time
during which the exchange offer is open, and thereby delay acceptance of
any old notes, by giving oral or written notice of such extension to the
exchange agent and notice of such extension to the holders as described
below. During any such extension, all old notes previously tendered will
remain subject to the exchange offer and may be accepted for exchange by
us. Any old notes not accepted for exchange for any reason will be
returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the exchange offer.
- We expressly reserve the right to amend or terminate the exchange offer,
and not to accept for exchange any old notes that we have not yet accepted
for exchange, upon the occurrence of any of the conditions of the exchange
offer specified below under "Certain Conditions to the Exchange Offer."
- We will give oral or written notice of any extension, amendment,
termination or non-acceptance described above to holders of the old notes
as promptly as practicable. If we extend the expiration date, we will give
notice by means of a press release or other public announcement no later
than 9:00 a.m., New York City time, on the business day after the
previously scheduled expiration date. Without limiting the manner in which
we may choose to make any public announcement and subject to applicable
law, we will have no obligation to publish, advertise or otherwise
communicate any public announcement other than by issuing a release to the
Dow Jones News Service.
- Holders of old notes do not have any appraisal or dissenters' rights in
connection with the exchange offer.
- Old notes which are not tendered for exchange or are tendered but not
accepted in connection with the exchange offer will remain outstanding and
be entitled to the benefits of the indenture, but will not be entitled to
any further registration rights under the registration rights agreement.
- We intend to conduct the exchange offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder.
- By executing, or otherwise becoming bound by, the letter of transmittal,
you will be making several representations to us. See "--Resales of the
New Notes."
IMPORTANT RULES CONCERNING THE EXCHANGE OFFER
You should note that:
- All questions as to the validity, form, eligibility and acceptance of old
notes tendered for exchange and all questions as to the time of receipt
will be determined by RJR Tobacco Holdings in its sole discretion, which
determination shall be final and binding.
- We reserve the absolute right to reject any and all tenders of any
particular old notes not properly tendered or to not accept any particular
old notes which acceptance might, in our judgment or the judgment of our
counsel, be unlawful.
- We also reserve the absolute right to waive any defects or irregularities
or conditions of the exchange offer as to any particular old notes either
before or after the expiration date, including the right to waive the
ineligibility of any holder who seeks to tender old notes in the exchange
offer. Unless we agree to waive any defect or irregularity in connection
with the tender of old notes for exchange, defects or irregularities must
be cured within such reasonable period of time as we shall determine.
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- Our interpretation of the terms and conditions of the exchange offer as to
any particular old notes either before or after the expiration date shall
be final and binding on all parties.
- Neither RJR Tobacco Holdings, RJR Tobacco Company, the exchange agent nor
any other person shall be under any duty to give notification of any
defect or irregularity with respect to any tender of old notes for
exchange, nor shall any of them incur any liability for failure to give
notification.
PROCEDURES FOR TENDERING OLD NOTES
WHAT TO SUBMIT AND HOW
If you, as the registered holder of an old note, wish to tender your old
notes for exchange in the exchange offer, you must transmit a properly completed
and duly executed letter of transmittal, and all other documents required by the
letter of transmittal, to The Bank of New York at the address set forth below
under "Exchange Agent" on or prior to the expiration date.
In addition, for a valid exchange to take place, one of the following must
occur:
(1) the exchange agent must receive certificates for the old notes along
with the letter of transmittal,
(2) the exchange agent must receive prior to the expiration date a
timely confirmation of a book-entry transfer (what we call a "book-entry
confirmation") of old notes, if that procedure is available, into the
exchange agent's account at DTC pursuant to the procedure for book-entry
transfer described below or
(3) you must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. IF DELIVERY IS BY MAIL, WE
RECOMMEND THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED,
BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO RJR TOBACCO
HOLDINGS OR RJR TOBACCO COMPANY.
HOW TO SIGN YOUR LETTER OF TRANSMITTAL AND OTHER DOCUMENTS
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the old notes surrendered for exchange are
tendered with such letter
(1) by a registered holder of the old notes who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal or
(2) for the account of an eligible institution described below.
If signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, the guarantees must be by one of the
following eligible institutions:
- a firm which is a member of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. or
- a commercial bank or trust company having an office or correspondent in
the United States.
If old notes are registered in the name of a person other than the person
signing the letter of transmittal, the old notes surrendered for exchange must
be endorsed by--or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by us in our sole
discretion, duly executed by--the registered holder with the signature thereon
guaranteed by an eligible institution.
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If the letter of transmittal is signed by a person or persons other than the
registered holder or holders of old notes, such old notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders that appear on the old
notes.
If the letter of transmittal or any old notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers or corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by RJR
Tobacco Holdings, proper evidence satisfactory to RJR Tobacco Holdings of its
authority to so act must be submitted.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes promptly after acceptance of the old
notes. See "Certain Conditions to the Exchange Offer" below. For purposes of the
exchange offer, we shall be deemed to have accepted properly tendered old notes
for exchange when, as and if we have given oral or written notice thereof to the
exchange agent.
In all cases, we will only issue new notes in exchange for old notes that
are accepted for exchange after timely receipt by the exchange agent of:
- certificates for such old notes OR a timely book-entry confirmation of
such old notes into the exchange agent's account at DTC using the
book-entry transfer procedures described below, AND
- a properly completed and duly executed letter of transmittal and all other
required documents.
If we do not accept any tendered old notes for any reason included in the
terms and conditions of the exchange offer or if you submit certificates
representing old notes in a greater principal amount than you wish to exchange,
we will return the unaccepted or non-exchanged old notes without expense to the
tendering holder or, in the case of old notes tendered by book-entry transfer
into the exchange agent's account at DTC using the book-entry transfer
procedures described below, the non-exchanged old notes will be credited to an
account maintained with DTC as promptly as practicable after the expiration or
termination of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at DTC for purposes of the exchange offer promptly after the
date of this prospectus. Any financial institution that is a participant in
DTC's systems may make book-entry delivery of old notes by causing DTC to
transfer such old notes into the exchange agent's account in accordance with
DTC's Automated Tender Offer Program ("ATOP") procedures for transfer. However,
the exchange for the old notes so tendered will only be made after timely
confirmation of the book-entry transfer of old notes into the exchange agent's
account, and timely receipt by the exchange agent of an Agent's Message and any
other documents required by the letter of transmittal. The term "Agent's
Message" means a message, transmitted by DTC and received by the exchange agent
and forming a part of a Book-Entry Confirmation, which states that DTC has
received an express acknowledgment from a Participant tendering old notes that
are the subject of such Book-Entry Confirmation that the Participant has
received and agrees to be bound by the terms of the letter of transmittal, and
that we may enforce such agreement against such Participant. Although delivery
of old notes may be effected through book-entry transfer into the exchange
agent's account at DTC, the letter of transmittal or facsimile thereof, properly
completed and duly executed, with any required signature guarantees and any
other required documents, must in any case be delivered to and received by the
exchange agent at its address set forth under "--Exchange Agent" on or prior to
the expiration date, or the guaranteed delivery procedure set forth below must
be complied with.
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DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of old notes and you want to tender old notes
but your old notes are not immediately available, or time will not permit your
old notes or other required documents to reach the exchange agent before the
expiration date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if
(1) the tender is made through an eligible institution,
(2) prior to the expiration date, the exchange agent receives from that
eligible institution a properly completed and duly executed letter of
transmittal or a facsimile thereof and notice of guaranteed delivery,
substantially in the form provided by us by facsimile transmission, mail or
hand delivery, stating:
- the name and address of the holder of old notes,
- the amount of old notes tendered and
- that the tender is being made by delivering such notice and
guaranteeing that within three New York Stock Exchange trading days after
the date of execution of the notice of guaranteed delivery, the
certificates of all physically tendered old notes, in proper form for
transfer, or a book-entry confirmation, as the case may be, and any other
documents required by the letter of transmittal will be deposited by that
eligible institution with the exchange agent, and
(3) the certificates for all physically tendered old notes, in proper
form for transfer, or a book-entry confirmation, as the case may be, and all
other documents required by the letter of transmittal, are received by the
exchange agent within three New York Stock Exchange trading days after the
date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
You can withdraw your tender of old notes at any time on or prior to the
expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses listed below under
"Exchange Agent." Any such notice of withdrawal must specify:
- the name of the person having tendered the old notes to be withdrawn,
- the old notes to be withdrawn (including the principal amount of such old
notes) and
- if certificates for old notes have been delivered to the exchange agent,
the name in which the old notes are registered, if different from that of
the withdrawing holder.
If certificates for old notes have been delivered or otherwise identified to
the exchange agent, then, prior to the release of the certificates, you must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless you are an eligible institution. If old notes have been
tendered in the procedure for book-entry transfer described above, any note of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawn old notes and otherwise comply with the procedures of DTC.
Please note that all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal will be determined by us,
and our determination shall be final and binding on all
79
<PAGE>
parties. Any old notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer.
If you have properly withdrawn old notes and wish to re-tender them, you may
do so by following one of the procedures described under "Procedures for
Tendering Old Notes" above at any time on or prior to the expiration date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the exchange offer, we will not be
required to accept for exchange, or to issue new notes in exchange for, any old
notes and may terminate or amend the exchange offer, if at any time before the
acceptance of old notes for exchange or the exchange of the new notes for old
notes, the acceptance or issuance would violate applicable law or any
interpretation of the staff of the SEC.
The foregoing condition is for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to it. Our failure at any time to
exercise the foregoing rights shall not be deemed a waiver by us of any of those
rights and each right shall be deemed an ongoing right which may be asserted at
any time and from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
new notes will be issued in exchange for any old notes, if at such time any stop
order shall be threatened or is in effect with respect to the exchange offer of
which this prospectus constitutes a part or the qualification of the indenture
under the Trust Indenture Act.
EXCHANGE AGENT
The Bank of New York has been appointed as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this prospectus or of the
letter of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent, addressed as follows:
Deliver To:
The Bank of New York
101 Barclay Street, Floor 7 East
New York, NY 10286
Attention: Reorganization Section
Telephone:
Facsimile: (212) 815-6339
DELIVERY TO AN ADDRESS OTHER THAN AS LISTED ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS LISTED ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by our officers,
regular employees and affiliates. We will not pay any additional compensation to
any officers and employees who engage in soliciting tenders. We will not make
any payment to brokers, dealers, or others soliciting acceptances of the
exchange offer. However, we will pay the exchange agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith.
The estimated cash expenses to be incurred in connection with the exchange
offer will be paid by us and are estimated in the aggregate to be $ .
80
<PAGE>
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct us
to register new notes in the name of, or request that old notes not tendered or
not accepted in the exchange offer be returned to, a person other than the
registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
RESALES OF THE NEW NOTES
Under existing interpretations of the staff of the SEC contained in several
no-action letters to third parties, the new notes would in general be freely
transferable after the exchange offer without further registration under the
Securities Act. However, any purchaser of old notes who is an "affiliate" of RJR
Tobacco Holdings or who intends to participate in the exchange offer for the
purpose of distributing the new notes
(1) will not be able to rely on the interpretation of the staff of the
SEC,
(2) will not be able to tender its old notes in the exchange offer and
(3) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer
of the notes unless such sale or transfer is made under an exemption from
such requirements.
By executing, or otherwise becoming bound by, the letter of transmittal each
holder of the old notes will represent that:
(1) it is not our "affiliate",
(2) any new notes to be received by it were acquired in the ordinary
course of its business and
(3) unless it is a broker-dealer it has no arrangement with any person
to participate in the distribution (within the meaning of the Securities
Act) of the new notes.
In addition, in connection with any resales of new notes, any broker-dealer
participating in the exchange offer who acquired notes for its own account as a
result of market-making or other trading activities must represent that it does
not have any arrangement with us or our affiliates to distribute the new notes
and must deliver a prospectus meeting the requirements of the Securities Act.
The SEC has taken the position that participating broker-dealers may fulfill
their prospectus delivery requirements with respect to the new notes other than
a resale of an unsold allotment from the original sale of the old notes, with
the prospectus contained in the exchange offer. Under the registration rights
agreement, we are required to allow participating broker-dealers and other
persons, if any, subject to similar prospectus delivery requirements to use this
prospectus as it may be amended or supplemented from time to time, in connection
with the resale of new notes received from us in the exchange offer.
81
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of new notes received from us in the exchange offer. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of new notes received in exchange
for old notes acquired as a result of market-making activities or other trading
activities. We have agreed that we will make this prospectus, as amended or
supplemented, available to any participating broker-dealer for use in connection
with any such resale and participating broker-dealers shall be authorized to
deliver this prospectus for a period not exceeding 90 days after the expiration
date.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of those methods of
resale, at market prices prevailing at the time of resale, at prices related to
prevailing market prices or negotiated prices. Any resale may be made directly
to purchasers or to or through brokers or dealers who may receive compensation
in the form of commissions or concessions from any broker-dealer or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account in the exchange offer and any broker or
dealer that participates in a distribution of such new notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
such resale of new notes and any commission or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that, by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
We will promptly send additional copies of this prospectus and any amendment
or supplement to this prospectus to any participating broker-dealer that
requests such documents in the letter of transmittal. See "The Exchange
Offer--Resales of the New Notes."
82
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following summary describes the material U.S. federal income tax
consequences of the ownership and disposition of the notes to a purchaser of the
notes who is a Non-U.S. Holder (as defined below). This summary is based on the
Internal Revenue Code of 1986, as amended to the date hereof (the "Code"),
administrative pronouncements, judicial decisions and existing and proposed
Treasury Regulations, and interpretations of the foregoing, changes to any of
which subsequent to the date of this offering memorandum may affect the tax
consequences described herein, possibly with retroactive effect.
As used herein, the term "Non-U.S. Holder" means an owner of a note that is,
for U.S. federal income tax purposes, (i) a nonresident alien individual, (ii) a
foreign corporation, (iii) a nonresident alien fiduciary of a foreign estate or
trust or (iv) a foreign partnership, one or more of the members of which is a
nonresident alien individual, a foreign corporation or a nonresident alien
fiduciary of a foreign estate or trust.
PAYMENT OF INTEREST
Subject to the discussion below concerning backup withholding, payments of
interest on the notes by RJR Tobacco Holdings or any paying agent to any
Non-U.S. Holder will not be subject to U.S. federal income tax withholding,
provided that (i) the interest is not effectively connected with the conduct by
such holder of a trade or business in the United States, (ii) such holder does
not own, actually or constructively, 10% or more of the total combined voting
power of all classes of stock of RJR Tobacco Holdings entitled to vote, is not a
controlled foreign corporation related, directly or indirectly, to RJR Tobacco
Holdings through stock ownership, and is not a bank receiving interest described
in Section 881(c)(3)(A) of the Code and (iii) the requirement to certify such
holder's non-U.S. status, as set forth in Section 871(h) or Section 881(c) of
the Code, has been fulfilled with respect to the beneficial owner.
SALE, EXCHANGE OR DISPOSITION OF THE NOTES
Subject to the discussion below concerning backup withholding, a Non-U.S.
Holder of a note will not be subject to U.S. federal income tax on gain realized
on the sale, exchange or other disposition of such note, unless
(i) such holder is an individual who is present in the United States for
183 days or more in the taxable year of disposition, and certain other
conditions are met, or
(ii) such gain is effectively connected with the conduct by such holder
of a trade or business in the United States.
The exchange of old notes for new notes in the exchange offer will not
result in any U.S. federal income tax consequences to holders. When a holder
exchanges an old note for a new note in the exchange offer, the holder will have
the same adjusted basis and holding period in the new note as the holder had in
the old note immediately before the exchange.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, backup withholding tax of 31% will not apply to payments of
interest by RJR Tobacco Holdings or any paying agent thereof on a note if the
certifications required by Sections 871(h) or 881(c) of the Code are received,
provided that RJR Tobacco Holdings or such paying agent, as the case may be,
does not have actual knowledge that the payee is a U.S. person.
Under current Treasury Regulations, payments on the sale, exchange or other
disposition of a note made to or through a foreign office of a foreign broker
generally will not be subject to backup
83
<PAGE>
withholding or information reporting. However, if such broker is, for U.S.
federal income tax purposes, a U.S. person, a controlled foreign corporation, a
foreign person 50% or more of whose gross income is effectively connected with a
U.S. trade or business for a specified three-year period or (generally in the
case of payments made after December 31, 2000) a foreign partnership with
certain connections to the United States, then information reporting will be
required unless the broker has in its records documentary evidence that the
beneficial owner is not a U.S. person and certain other conditions are met or
the beneficial owner otherwise establishes an exemption. Backup withholding may
apply to any payment that such broker is required to report if the broker has
actual knowledge that the payee is a U.S. person. Payments to or through the
U.S. office of a broker will be subject to backup withholding and information
reporting unless the holder satisfies the certification requirements set forth
in Sections 871(h) or 881(c) of the Code and the payor does not have actual
knowledge that the holder is a U.S. person. Recently promulgated Treasury
Regulations, generally effective for payments made after December 31, 2000,
provide certain presumptions under which a Non-U.S. Holder will be subject to
backup withholding and information reporting unless such a holder certifies as
to its non-U.S. status or otherwise establishes an exemption. In addition, the
new Treasury Regulations change certain procedural requirements relating to
establishing a holder's non-U.S. status.
Non-U.S. Holders of notes should consult their tax advisors regarding the
application of information reporting and backup withholding in their particular
situations, the availability of an exemption therefrom, and the procedure for
obtaining such an exemption, if available. Any amounts withheld from a payment
to a Non-U.S. Holder under the backup withholding rules will be allowed as a
credit against such holder's U.S. federal income tax liability and may entitle
such holder to a refund, provided that the required information is furnished to
the U.S. Internal Revenue Service.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The exchange of old notes for new notes in the exchange offer will not
result in any U.S. federal income tax consequences to holders. When a holder
exchanges an old note for a new note in the exchange offer, the holder will have
the same adjusted basis and holding period in the new note as the holder had in
the old note immediately before the exchange.
VALIDITY OF THE NOTES AND THE GUARANTEE
The validity of the notes and guarantee will be passed upon for us by Davis
Polk & Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of RJR Tobacco Holdings as of December
31, 1998 and 1997 and for each of the three years ended December 31, 1998
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Deloitte & Touche LLP, Independent Auditors.................................................................. F-2
Report of Management's Responsibility for Financial Statements......................................................... F-2
Consolidated Statements of Income--Years Ended December 31, 1998, 1997 and 1996........................................ F-3
Consolidated Statements of Cash Flows--Years Ended December 31, 1998, 1997 and 1996.................................... F-4
Consolidated Balance Sheets--December 31, 1998 and 1997................................................................ F-5
Consolidated Statements of Stockholder's Equity and Comprehensive Income--Years Ended December 31, 1998, 1997 and
1996................................................................................................................. F-7
Notes to Consolidated Financial Statements............................................................................. F-8
Unaudited Consolidated Condensed Statements of Income--Three Months Ended March 31, 1999 and 1998...................... F-38
Unaudited Consolidated Condensed Statements of Cash Flows--Three Months Ended March 31, 1999 and 1998.................. F-39
Unaudited Consolidated Condensed Balance Sheets--March 31, 1999 and December 31, 1998.................................. F-40
Notes to Unaudited Consolidated Condensed Financial Statements......................................................... F-41
</TABLE>
F-1
<PAGE>
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
R.J. Reynolds Tobacco Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of R.J.
Reynolds Tobacco Holdings, Inc. and subsidiaries ("RJR Tobacco Holdings") as of
December 31, 1998 and 1997, and the related consolidated statements of income,
cash flows and stockholder's equity and comprehensive income for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of RJR Tobacco Holdings' management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the consolidated financial position of RJR Tobacco
Holdings at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
New York, New York
May 18, 1999 (July 14, 1999 as to notes 10 and 16)
REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management has prepared the financial statements presented in this report in
accordance with generally accepted accounting principles using, where
appropriate, management's best estimates and judgment. Management maintains a
system of internal controls to provide reasonable assurance that RJR Tobacco
Holdings' assets are safeguarded and transactions are executed as authorized and
properly recorded. The system includes established policies and procedures, a
program of internal audits, management reviews and careful selection and
training of qualified personnel.
Through June 14, 1999, the audit committee reviewing the financial
statements of RJR Tobacco Holdings was the audit committee of its parent,
Nabisco Group Holdings Corp., which was comprised solely of outside directors.
The NGH audit committee meets periodically with management, the internal
auditors, and the independent auditors, Deloitte & Touche LLP, to discuss and
address internal accounting control, auditing and financial reporting matters.
Both independent and internal auditors have unrestricted access to the audit
committee. On July 2, 1999, RJR Tobacco Holdings had its first Board Meeting as
an independent public company, in which an audit committee was appointed, also
comprised solely of outside directors.
/s/ ANDREW J. SCHINDLER
- ----------------------------
Chairman of the Board, President and
Chief Executive Officer
/s/ KENNETH J. LAPIEJKO
- ----------------------------
Executive Vice President
and Chief Financial Officer
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
NET SALES*............................................................................... $ 5,716 $ 5,044 $ 4,702
---------- ---------- ----------
Costs and expenses:
Cost of products sold*................................................................. 1,353 1,209 1,186
Selling, advertising, administrative and general expenses.............................. 2,780 2,361 2,095
Tobacco settlement and related expenses (notes 4 and 10)............................... 1,442 359 --
Amortization of trademarks and goodwill................................................ 366 366 366
Restructuring expense (note 3)......................................................... -- 80 --
---------- ---------- ----------
OPERATING INCOME (LOSS)............................................................ (225) 669 1,055
Interest and debt expense................................................................ (426) (433) (462)
Other income (expense), net.............................................................. (28) (32) (30)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................................................. (679) 204 563
Provision (benefit) for income taxes..................................................... (160) 185 337
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................................... (519) 19 226
Income from operations of discontinued businesses, net of income taxes
(note 16).............................................................................. 3 414 440
---------- ---------- ----------
NET INCOME (LOSS).................................................................. $ (516) $ 433 $ 666
---------- ---------- ----------
---------- ---------- ----------
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations........................................... $ (4.77) $ .17 $ 2.08
Income from operations of discontinued businesses.................................. $ .03 $ 3.81 $ 4.05
Net income (loss).................................................................. $ (4.74) $ 3.98 $ 6.13
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations........................................... $ (4.77) $ .17 $ 2.08
Income from operations of discontinued businesses.................................. $ .03 $ 3.81 $ 4.05
Net income (loss).................................................................. $ (4.74) $ 3.98 $ 6.13
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS):
Basic.............................................................................. 108,691 108,691 108,691
Diluted............................................................................ 108,691 108,691 108,691
</TABLE>
- ------------------------
* Excludes excise taxes as follows: 1998--$1.292 billion, 1997--$1.369 billion
and 1996--$1.401 billion.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (516) $ 433 $ 666
Less income from discontinued operations.......................................... (3) (414) (440)
--------- --------- ---------
Income (loss) from continuing operations.......................................... (519) 19 226
--------- --------- ---------
Adjustments to reconcile net income (loss) to net cash flows from operating
activities:
Depreciation and amortization................................................... 498 508 534
Deferred income tax benefit..................................................... (374) (133) (61)
Tobacco settlement and related expenses, net of cash payments................... 803 226 --
Restructuring and restructuring-related expenses, net of cash payments.......... (41) 52 (66)
Other changes that provided (used) cash:
Accounts and notes receivable................................................. (5) 24 34
Inventories................................................................... 106 97 245
Accounts payable and accrued liabilities, including income taxes.............. (94) (166) (276)
Other, net.................................................................... (7) 1 29
--------- --------- ---------
Total adjustments............................................................. 886 609 439
--------- --------- ---------
Net cash flows from continuing operating activities............................. 367 628 665
Net cash flows with discontinued operations..................................... 202 351 526
--------- --------- ---------
Net cash flows from operating activities........................................ 569 979 1,191
--------- --------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures.............................................................. (47) (57) (63)
Divestitures of certain assets.................................................... 4 11 122
--------- --------- ---------
Net cash flows from (used in) investing activities................................ (43) (46) 59
--------- --------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.......................................... -- 345 --
Repayments of long-term debt...................................................... (68) (28) (118)
Increase (decrease) in short-term borrowings...................................... 62 (331) (24)
Dividends paid to NGH............................................................. (607) (834) (1,108)
Other, net........................................................................ 2 -- --
--------- --------- ---------
Net cash flows used in financing activities..................................... (611) (848) (1,250)
--------- --------- ---------
Net change in cash and cash equivalents......................................... (85) 85 --
Cash and cash equivalents at beginning of period.................................... 85 -- --
--------- --------- ---------
Cash and cash equivalents at end of period.......................................... $ -- $ 85 $ --
--------- --------- ---------
--------- --------- ---------
Income taxes paid, net of refunds................................................... $ 250 $ 301 $ 407
Interest paid....................................................................... $ 414 $ 411 $ 436
Tobacco settlement payments......................................................... $ 786 $ 133 $ --
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ -- $ 85
Accounts and notes receivable, net........................................................ 58 52
Inventories:
Finished products....................................................................... 94 100
Leaf tobacco............................................................................ 334 414
Raw materials........................................................................... 26 35
Other................................................................................... 75 86
--------- ---------
Total inventories....................................................................... 529 635
--------- ---------
Prepaid expenses and excise taxes......................................................... 537 190
Net assets of discontinued businesses (note 16)........................................... 5,961 973
--------- ---------
TOTAL CURRENT ASSETS.................................................................. 7,085 1,935
--------- ---------
Property, plant and equipment--at cost:
Land and land improvements.............................................................. 95 103
Buildings and leasehold improvements.................................................... 672 734
Machinery and equipment................................................................. 1,562 1,737
Construction-in-process................................................................. 13 25
--------- ---------
Total property, plant and equipment..................................................... 2,342 2,599
Less accumulated depreciation............................................................... 1,227 1,184
--------- ---------
Property, plant and equipment, net...................................................... 1,115 1,415
--------- ---------
Trademarks, net of accumulated amortization (1998--$1,047, 1997--$942)...................... 3,176 3,281
Goodwill, net of accumulated amortization (1998--$2,579, 1997--$2,319)...................... 7,829 8,086
Other assets and deferred charges........................................................... 196 238
Net assets of discontinued businesses (note 16)............................................. -- 5,296
--------- ---------
$ 19,401 $ 20,251
--------- ---------
--------- ---------
</TABLE>
F-5
<PAGE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings..................................................................... $ 29 $ --
Accounts payable.......................................................................... 53 95
Accrued liabilities....................................................................... 1,511 1,029
Current maturities of long-term debt...................................................... 62 --
Income taxes accrued...................................................................... 165 132
--------- ---------
TOTAL CURRENT LIABILITIES............................................................. 1,820 1,256
--------- ---------
Long-term debt (less current maturities).................................................... 4,861 4,944
Other noncurrent liabilities................................................................ 931 855
Deferred income taxes....................................................................... 1,903 2,117
Commitments and contingencies (note 10)
Stockholder's equity:
Common stock (108,691,347 shares issued and outstanding).................................. 1 1
Paid-in capital........................................................................... 10,861 11,491
Retained earnings (accumulated deficit)................................................... (516) --
Accumulated other comprehensive income (loss):
Cumulative translation adjustment....................................................... (441) (391)
Minimum pension liability............................................................... (19) (22)
--------- ---------
Accumulated other comprehensive income (loss)........................................... (460) (413)
--------- ---------
TOTAL STOCKHOLDER'S EQUITY............................................................ 9,886 11,079
--------- ---------
$ 19,401 $ 20,251
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK* CAPITAL EARNINGS INCOME TOTAL
----------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996.................................... $ 1 $ 11,965 $ 371 $ (184) $ 12,153
Net income.................................................. 666 666
Foreign currency translation, net of tax expense of $17
million................................................... (45) (45)
Minimum pension liability, net of tax benefit of $2
million................................................... (4) (4)
Total comprehensive income..................................
Dividends................................................... (71) (1,037) (1,108)
Other....................................................... 7 7
----------- --------- ----------- ----- ---------
Balance at December 31, 1996.................................. 1 11,901 -- (233) 11,669
Net income.................................................. 433 433
Foreign currency translation, net of tax expense of $12
million................................................... (170) (170)
Minimum pension liability, net of tax benefit of $5
million................................................... (10) (10)
Total comprehensive income..................................
Dividends................................................... (401) (433) (834)
Other....................................................... (9) (9)
----------- --------- ----------- ----- ---------
Balance at December 31, 1997.................................. 1 11,491 -- (413) 11,079
Net loss.................................................... (516) (516)
Foreign currency translation, net of tax benefit of $6
million................................................... (50) (50)
Minimum pension liability, net of tax expense of $1
million................................................... 3 3
Total comprehensive income (loss)...........................
Dividends................................................... (607) (607)
Other....................................................... (23) (23)
----------- --------- ----------- ----- ---------
Balance at December 31, 1998.................................. $ 1 $ 10,861 $ (516) $ (460) $ 9,886
----------- --------- ----------- ----- ---------
----------- --------- ----------- ----- ---------
<CAPTION>
COMPREHENSIVE
INCOME
-----------------
<S> <C>
Balance at January 1, 1996....................................
Net income.................................................. $ 666
Foreign currency translation, net of tax expense of $17
million................................................... (45)
Minimum pension liability, net of tax benefit of $2
million................................................... (4)
-----
Total comprehensive income.................................. $ 617
-----
-----
Dividends...................................................
Other.......................................................
Balance at December 31, 1996..................................
Net income.................................................. $ 433
Foreign currency translation, net of tax expense of $12
million................................................... (170)
Minimum pension liability, net of tax benefit of $5
million................................................... (10)
-----
Total comprehensive income.................................. $ 253
-----
-----
Dividends...................................................
Other.......................................................
Balance at December 31, 1997..................................
Net loss.................................................... $ (516)
Foreign currency translation, net of tax benefit of $6
million................................................... (50)
Minimum pension liability, net of tax expense of $1
million................................................... 3
-----
Total comprehensive income (loss)........................... $ (563)
-----
-----
Dividends...................................................
Other.......................................................
Balance at December 31, 1998..................................
</TABLE>
- ------------------------
* The number of shares of common stock, par value $.01, authorized at December
31, 1998 was 290,000,000. All outstanding common stock was owned by Nabisco
Group Holdings, Inc. at December 31, 1998 and 1997.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of R.J. Reynolds
Tobacco Holdings, Inc. ("RJR Tobacco Holdings") and its wholly owned subsidiary,
R.J. Reynolds Tobacco Company, Inc. ("RJR Tobacco Company").
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The account balances and activities of the international tobacco business
and Nabisco are segregated and reported as discontinued operations in the
accompanying consolidated financial statements. In addition, financial data for
all 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 Nabisco
Group Holdings stockholders. See note 16 for further discussion.
Unless otherwise noted, all dollar amounts presented are in millions.
CASH EQUIVALENTS
Cash equivalents include all short-term, highly liquid investments that are
readily convertible to known amounts of cash and that have original maturities
of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of tobacco
inventories is determined principally under the LIFO method. In accordance with
recognized industry practice, stocks of tobacco, which must be cured for more
than one year, are classified as current assets.
DEPRECIATION AND AMORTIZATION AND VALUATION OF INTANGIBLES
Property, plant and equipment are depreciated by the straight-line method
over the estimated useful lives of the assets.
Goodwill and trademarks are amortized using the straight-line method,
principally over 40 years. Management periodically evaluates the recoverability
of goodwill and trademarks. The carrying value of goodwill and trademarks would
be reduced if it is probable that management's best estimate of future operating
income before amortization of goodwill and trademarks from related operations,
on an undiscounted basis, will be less than the carrying value over the
remaining amortization period.
OTHER INCOME (EXPENSE), NET
Interest income, financing-related fees and other items of a financial
nature are included in "Other income (expense), net".
ADVERTISING AND RESEARCH AND DEVELOPMENT
Advertising and research and development costs are expensed as incurred.
F-8
<PAGE>
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE ARRANGEMENTS
For interest rate swaps, the differential to be paid or received is accrued
and recognized in interest expense and may change as market interest rates
change. If an arrangement is terminated prior to maturity, the gain or loss is
recognized over the remaining original life of the arrangement if the item
hedged remains outstanding, or immediately, if the item hedged does not remain
outstanding. If the arrangement is not terminated prior to maturity, but the
underlying hedged item is no longer outstanding, the interest rate arrangement
is marked to market and any unrealized gain or loss is recognized immediately.
FOREIGN CURRENCY ARRANGEMENTS
Translation gains or losses resulting from foreign-denominated borrowings
that are accounted for as hedges of certain foreign currency net investments
result in charges or credits to the cumulative translation adjustments account
in stockholder's equity.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, RJR Tobacco Holdings adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. SFAS No. 130
established standards for reporting and displaying comprehensive income and its
components. Comprehensive income is defined as the change in stockholder's
equity during a period from transactions from nonowner sources and primarily
includes net income (loss), foreign currency translation adjustments and minimum
pension liability adjustments. The components of comprehensive income are
displayed in the consolidated statements of stockholder's equity. The adoption
of SFAS No. 130 did not have a material effect on the financial position or
results of operations of RJR Tobacco Holdings.
In the fourth quarter of 1998, RJR Tobacco Holdings adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 established standards for the
way in which information about operating segments is reported. SFAS No. 131 also
established standards for related disclosures about products and services,
geographic areas and major customers. See note 13 for disclosures required by
SFAS No. 131. The adoption of SFAS No. 131 did not have a material effect on the
financial position or results of operations of RJR Tobacco Holdings.
RJR Tobacco Holdings also adopted Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits during 1998. SFAS No. 132 standardized the disclosure
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis and eliminates certain requirements from
other accounting standards no longer deemed useful. It does not change the
measurement or recognition of these plans. See note 12 for disclosures required
by SFAS No. 132. The adoption of SFAS No. 132 did not have a material effect on
the financial position or results of operations of RJR Tobacco Holdings.
During 1998, RJR Tobacco Holdings also adopted Statement of Position No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, which requires various costs incurred in connection with
developing or obtaining internal-use software to be capitalized and other costs
to be expensed. The adoption of SOP No. 98-1 had no material effect on the
financial position or results of operations of RJR Tobacco Holdings.
F-9
<PAGE>
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 must be adopted by January 1, 2000, with
early adoption permitted. SFAS No. 133 requires that all derivative financial
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 timing of adoption
or the impact that adoption or subsequent application of SFAS No. 133 will have
on its financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued SOP No. 98-5, Reporting on the
Costs of Start-Up Activities. SOP No. 98-5 establishes standards on accounting
for start-up and organization costs and, in general, requires such costs to be
expensed as incurred. This standard must be adopted on January 1, 1999. RJR
Tobacco Holdings does not expect the adoption of SOP No. 98-5 to have a material
effect on the financial position or results of operations of RJR Tobacco
Holdings.
NOTE 2--RELATED PARTY TRANSACTIONS
Related party transactions consist of intercompany activity between RJR
Tobacco Holdings (including RJR Tobacco Company), Nabisco Group Holdings, Inc.
("NGH" and the former parent of RJR Tobacco Company) and Reynolds International.
RJR Tobacco Company also manufactures products for sale by Reynolds
International in certain markets.
NOTE 3--RESTRUCTURING
RJR Tobacco Company recorded a pre-tax restructuring expense of $80 million,
$52 million after-tax, in the fourth quarter of 1997 to reorganize its tobacco
operations. RJR Tobacco Company implemented the 1997 restructuring program to
enhance its competitive position and improve its long-term earnings growth
prospects.
The components of the $80 million charge were as follows:
<TABLE>
<S> <C>
Employee severance and related benefits.................................... $ 30
Rationalization of manufacturing operations................................ 30
Contract termination and other costs....................................... 20
---
$ 80
---
---
</TABLE>
The employee severance and related benefits pertained to workforce
reductions of 192 full-time positions and 217 seasonal positions at a
manufacturing facility and staff related areas. The severed employees were
primarily employed at the Brook Cove, North Carolina Stemmery which was closed.
The rationalization of certain manufacturing operations primarily relates to the
closing of the Brook Cove, North Carolina Stemmery which took place in February
1998, after the tobacco purchased from the 1997 burley crop had been processed.
Beginning with the 1998 flue-cured crop, RJR Tobacco Company began contracting
with an outside third party to do its leaf processing. The type of costs that
were expensed with respect to the exit of this activity included the write-down
of the building and equipment held for sale to fair value and the write-off of
equipment to be abandoned.
F-10
<PAGE>
NOTE 3--RESTRUCTURING (CONTINUED)
The contract termination and other costs related to management's commitment
in 1997 to a plan of termination of a leaf supply contract at a price below RJR
Tobacco Company's contract price. The loss represents the shortfall between the
contract cost and the amount that was recovered upon the sale of the leaf
inventory. RJR Tobacco Company, acting as a broker, exercised all of its
remaining obligations under a leaf supply contract and immediately transferred
title to a third party without taking possession of the tobacco.
Of the $80 million total tobacco charge, cash outlays will aggregate
approximately $40 million. RJR Tobacco Company expects to complete the program
in late 1999.
For the year ended December 31, 1998, $63 million of the 1997 tobacco
restructuring accruals were utilized as follows: $15 million for employee
severance and related benefits, $28 million for rationalization of manufacturing
operations, and $20 million for contract terminations and other costs. Of the
charges applied against the restructuring reserve in 1998, cash expenditures
amounted to $35 million, which were provided from operations.
NOTE 4--OPERATIONS
RJR Tobacco Company recorded pre-tax charges totaling $1.442 billion during
1998 for tobacco settlement and related expenses as follows:
<TABLE>
<S> <C>
Master Settlement Agreement................................. $ 620
Minnesota settlement agreement.............................. 312
"Most favored nation" adjustments for previously settled
states.................................................... 145
Rationalization of manufacturing operations................. 214
Employee severance and related benefits..................... 151
------
$1,442
------
------
</TABLE>
For a discussion regarding the provisions of the Master Settlement
Agreement, the Minnesota settlement and the most favored nation adjustments see
note 10. The rationalization of manufacturing operations primarily represents a
charge to write-down the book value of one of RJR Tobacco Company's production
facilities and certain equipment in Winston-Salem, North Carolina to fair value.
The employee severance and related benefits expense represents a charge for
workforce reductions totaling approximately 1,300 employees. RJR Tobacco Company
took these charges in response to the changing business conditions that could
result from the Master Settlement Agreement signed in November 1998. RJR Tobacco
Company anticipates that the November price increase, which was necessary to
satisfy its ongoing annual payment obligations under the Master Settlement
Agreement, is likely to affect volume and its results of operations adversely.
RJR Tobacco Company anticipates that cash expenditures related to the
termination of employees will be approximately $100 million and that it will pay
these costs from operations into the year 2000. As of December 31, 1998, RJR
Tobacco Company used $268 million of the accrual as follows: $54 million for
severance and related benefits and $214 million for rationalization of
manufacturing operations.
RJR Tobacco Company recorded pre-tax charges totaling $359 million during
1997 related to settlement agreements reached with the Florida, Mississippi and
Texas state attorneys general and in various class action cases. See note 10 for
a further discussion of these matters.
F-11
<PAGE>
NOTE 5--INVENTORIES
Inventories valued under the LIFO method were approximately $492 million at
December 31, 1998 and $592 million at December 31, 1997. The current cost of
LIFO inventories at December 31, 1998 and 1997 was greater than the amount at
which these inventories were carried on the consolidated balance sheets by $169
million and $151 million, respectively.
For the years ended December 31, 1998, 1997 and 1996, LIFO inventory
liquidations led to increases in net income of approximately $18 million, $14
million and $35 million, respectively. The LIFO liquidations resulted from
programs to reduce tobacco leaf durations consistent with forecasts of future
operating requirements.
NOTE 6--SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS
Short-term borrowings at December 31, 1998 represent domestic commercial
paper and bank borrowings with a weighted average year-end interest rate of
6.4%. There were no such borrowings outstanding at December 31, 1997.
RJR Tobacco Holdings maintained a three-year $2.146 billion revolving credit
facility and a 364-day $212 million credit facility primarily to support
commercial paper issuances. Borrowings under the revolving credit facility bore
interest at rates that varied with the prime rate or LIBOR. Borrowings under the
364-day credit facility bore interest at rates that varied with LIBOR. The
revolving credit agreement was terminated as of May 12, 1999 and the 364-day
facility was terminated on May 18, 1999.
On May 7, 1999, RJR Tobacco Holdings entered into a 30-month $1.235 billion
revolving credit facility, which was effective May 18, 1999 and is available to
support commercial paper issuances. Borrowings under the revolving credit
facility bear interest at rates that vary with the prime rate or LIBOR. RJR
Tobacco Company has guaranteed RJR Tobacco Holdings' obligations under this
revolving credit agreement.
Based on the intention and ability of RJR Tobacco Holdings to continue to
refinance for more than one year the amount of its domestic commercial paper and
revolving credit agreement borrowings through long-term revolving credit
facilities, $33 million of those borrowings were reclassified as long-term debt
at December 31, 1998.
RJR Tobacco Holdings' financing agreements that were in effect at December
31, 1998 contained covenants that generally restricted cumulative common and
preferred dividends and distributions, limited the ability of RJR Tobacco
Holdings and its subsidiaries to incur indebtedness, engage in transactions with
stockholders and affiliates, create liens, sell or dispose of certain assets and
certain subsidiaries' stock, issue certain equity securities and engage in
certain mergers or consolidations.
NOTE 7--ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Payroll and employee benefits................................ $ 243 $ 248
Marketing and advertising.................................... 263 176
Excise taxes................................................. 33 48
Restructuring................................................ 11 71
Tobacco settlement and related accruals...................... 610 177
Accrued interest............................................. 120 125
Other........................................................ 231 184
------ ------
$ 1,511 $ 1,029
------ ------
------ ------
</TABLE>
F-12
<PAGE>
NOTE 8--INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal............................................................. $ 191 $ 283 $ 326
State and other..................................................... 23 35 72
----- ----- -----
214 318 398
----- ----- -----
Deferred:
Federal............................................................. (374) (133) (61)
----- ----- -----
Provision (benefit) for income taxes.................................. $ (160) $ 185 $ 337
----- ----- -----
----- ----- -----
</TABLE>
The components of the deferred income tax liability disclosed on the
consolidated balance sheets included the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Pension and other postretirement liabilities....................................... $ (261) $ (242)
Tobacco settlement related accruals and other accrued liabilities.................. (240) (75)
--------- ---------
Total deferred tax assets.................................................... (501) (317)
--------- ---------
Deferred tax liabilities:
Property and equipment............................................................. 425 451
Trademarks......................................................................... 1,490 1,570
Other.............................................................................. 489 413
--------- ---------
Total deferred tax liabilities............................................... 2,404 2,434
--------- ---------
Net deferred income taxes.................................................... $ 1,903 $ 2,117
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
NOTE 8--INCOME TAXES (CONTINUED)
The differences between the provision (benefit) for income taxes and income
taxes computed at statutory U.S. federal income tax rates are explained as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Income taxes computed at statutory U.S. federal income tax
rates....................................................... $ (238) $ 71 $ 197
State and local income taxes, net of federal tax benefits..... 8 23 47
Goodwill amortization......................................... 91 91 91
Exempt foreign sales corporation earnings..................... (10) -- --
Other items, net.............................................. (11) -- 2
----- ----- -----
Provision (benefit) for income taxes.......................... $ (160) $ 185 $ 337
----- ----- -----
----- ----- -----
Effective tax rate............................................ 23.6% 90.7% 59.9%
----- ----- -----
----- ----- -----
</TABLE>
NOTE 9--LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Short-term borrowings, reclassified.......................................................... $ 33 $ --
6.80-9.25% notes, due 1999 through 2013...................................................... 4,444 4,443
5.375-10% foreign currency debt, due 2000 to 2001............................................ 414 469
Other indebtedness........................................................................... 32 32
Current maturities of long-term debt......................................................... (62) --
--------- ---------
Total long-term debt..................................................................... $ 4,861 $ 4,944
--------- ---------
--------- ---------
</TABLE>
- ------------------------
The payment of long-term debt through December 31, 2003 is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------ ---------
<S> <C>
2000 $ 519
2001 455
2002 908
2003 750
Thereafter 2,229
---------
$ 4,861
---------
---------
</TABLE>
In July 1997, RJR Tobacco Holdings repaid commercial paper borrowings with
proceeds from the issuance of $150 million 8 1/4% notes due 2004 and $200
million 8 1/2% notes due 2007.
On April 13, 1999, RJR Tobacco Holdings offered to purchase up to $4.4
billion of its outstanding debt securities and sought consents from the holders
of those securities to waive covenants that might have prevented some of the
transactions described in note 16. RJR Tobacco Holdings received these consents
as of April 26, 1999 and completed these tender offers on May 18, 1999. In these
offers, RJR Tobacco Holdings repurchased approximately $4 billion of its debt
with a portion of the proceeds from the international tobacco sale described in
note 16. The after-tax loss on the debt repurchase, after giving effect to the
write-off of related deferred issuance costs of $14 million and certain other
transaction costs, was approximately $260 million.
In connection with the reorganization discussed in note 16, on May 18, 1999,
RJR Tobacco Holdings completed a private placement offering to issue $550
million of 7 3/8% notes due 2003, $500 million of 7 3/4% notes due 2006 and $200
million of 7 7/8% notes due 2009. The net proceeds received will be used for
general corporate purposes. RJR Tobacco Company has guaranteed RJR Tobacco
F-14
<PAGE>
NOTE 9--LONG-TERM DEBT (CONTINUED)
Holdings' obligation under the debt securities. These are the notes that are
subject to the exchange offer described in this prospectus. See note 15 for
condensed consolidating financial information, which separates the account
balances and activities of the issuer, the guarantor and the subsidiaries of RJR
Tobacco Holdings and RJR Tobacco Company that are not guarantors of the notes.
The estimated fair value of the consolidated long-term debt of RJR Tobacco
Holdings as of December 31, 1998 and 1997 was approximately $5.0 billion and
$5.2 billion, respectively, based on available market quotes, discounted cash
flows and book values, as appropriate.
RJR Tobacco Holdings manages overall interest rate exposure by adjusting the
mix of floating rate debt and fixed rate debt. As part of managing those
interest rate exposures, RJR Tobacco Holdings may enter into various interest
rate arrangements from time to time.
NOTE 10--COMMITMENTS AND 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 RJR Tobacco Holdings and NGH, among which are 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 1998, 334 new actions
were served against RJR Tobacco Company and/or its affiliates or indemnitees and
183 actions were dismissed or otherwise resolved in favor of RJR Tobacco Company
and/or its affiliates or indemnitees without trial. In recent years, there have
been noteworthy increases in the number of cases pending. On December 31, 1998,
there were 664 active cases pending, as compared with 516 on December 31, 1997
and 234 on December 31, 1996. As of May 14, 1999, 653 active cases were pending
against RJR Tobacco Company and/or its affiliates or indemnitees: 649 in the
United States; one in each of Canada, the Marshall Islands, Nigeria and Puerto
Rico.
The U.S. cases are pending in 41 U.S. states and the District of Columbia,
although four states-- West Virginia, Florida, New York and California--account
for approximately 61% of these cases. The breakdown is as follows: 122 in West
Virginia; 110 in New York; 107 in Florida; 55 in California; 34 in
Massachusetts; 25 in Louisiana; 18 in Texas; 17 in Tennessee; 16 in
Pennsylvania; 15 in the District of Columbia; 11 in New Jersey; ten in Alabama;
nine in each of Illinois and Mississippi; seven in each of Iowa and Ohio; five
in each of Indiana, Maryland, Minnesota, Missouri and Nevada; four in each of
Arkansas, Georgia, Oklahoma and Rhode Island; three in each of Arizona, New
Mexico, Virginia, Washington and Wisconsin; two in each of Colorado, Hawaii,
Kentucky, Michigan, North Carolina, North Dakota, South Carolina, South Dakota
and Utah; and one in each of Kansas, New Hampshire, and Oregon. Of the 649
active U.S. cases, 170 are pending in federal court, 474 in state court and five
in tribal courts. Individual plaintiffs brought most of these cases, 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 on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer
Influenced and Corrupt Organization Act (which this document refers to as 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. Nine of the 653 active cases in the United
States involve alleged non-smokers claiming injuries purportedly resulting from
exposure to environmental tobacco smoke.
F-15
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Fifty-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, African-American smokers claiming their civil
rights have been violated by the sale of menthol cigarettes, purchasers of
cigarettes claiming to have been defrauded and seeking to recover their costs,
and Blue Cross/Blue Shield subscribers seeking reimbursement for premiums paid.
Approximately 103 of the active cases seek, INTER ALIA, recovery of
health-related costs paid for treatment of individuals suffering from diseases
or conditions allegedly related to tobacco use. Nine, brought by entities
administering asbestos liability, seek contribution for the costs of settlements
and judgments.
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 of those claims arising after 1969; the lack of
any defect in the product; assumption of the risk; contributory or comparative
fault; lack of proximate cause; and statutes of limitations or repose; and, when
applicable, additional statutory, equitable, constitutional and other defenses.
RJR Tobacco Holdings and NGH have asserted additional defenses, including
jurisdictional defenses, in many of these cases in which they are named.
INDUSTRY TRIAL RESULTS. Juries have found for plaintiffs in six smoking and
health cases in which RJR Tobacco Company was not a defendant. In one of those
cases, no damages were awarded and the judgment was affirmed on appeal. The jury
awarded plaintiffs $400,000 in another of those cases, CIPOLLONE V. LIGGETT
GROUP, INC., but the award was overturned on appeal and the case was
subsequently dismissed. In the third of those cases, on August 9, 1996, a
Florida jury awarded damages of $750,000 to an individual plaintiff. That case,
CARTER V. BROWN & WILLIAMSON, was overturned on appeal on June 22, 1998. In
another Florida case brought by the same attorney, WIDDICK V. BROWN &
WILLIAMSON, a state court jury awarded the plaintiff approximately $1 million in
compensatory and punitive damages on June 10, 1998. On January 29, 1999, the
Florida Court of Appeals reversed this verdict 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 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, 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 will
appeal 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, a jury in Missouri federal court found that Brown &
Williamson was not liable for the death of the plaintiff.
On May 5, 1997, in an individual case filed against RJR Tobacco Company,
CONNOR V. R. J. REYNOLDS TOBACCO CO., brought by the same attorney who
represented plaintiffs in the CARTER and WIDDICK cases, a Florida state court
jury found no RJR Tobacco Company liability. On October 31, 1997, in still
another case brought by the same attorney, KARBIWNYK V. R. J. REYNOLDS TOBACCO
COMPANY, another Florida state court jury found no RJR Tobacco Company
liability. On March 19, 1998, an Indiana state court jury found for RJR Tobacco
Company, NGH and other defendants in an individual case, DUNN V. RJR NABISCO
HOLDINGS CORP., in which plaintiffs sought damages for the alleged harm caused
to a non-smoker by environmental tobacco smoke. On March 18, 1999, the jury in
an Ohio federal district court found for the defendants, including RJR Tobacco
Company, on all counts in a class-action union trust-fund case, IRONWORKERS
LOCAL 17 V. PHILIP MORRIS. On May 10, 1999, in
F-16
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
NEWCOMB V. R. J. REYNOLDS TOBACCO CO., one of three individual cases in
Tennessee state court which had been consolidated for trial, a state court jury
refused to award damages against RJR Tobacco Company or Brown & Williamson. The
tobacco company defendants in the other two cases were also found to have no
liability. On June 2, 1999, a Mississippi state court jury found in favor of
defendants, including RJR Tobacco Company and RJR Tobacco Holdings, in an
environmental tobacco smoke case, BUTLER V. AMERICAN TOBACCO COMPANY. Finally,
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 COMPANY.
CLASS-ACTION SUITS. In May 1996, in an early class action case, CASTANO V.
AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals overturned the
certification of a purported nationwide class of persons whose claims related to
alleged addiction to tobacco. Since this ruling by the Fifth Circuit, most
purported class-action suits have sought certification of statewide, rather than
nationwide, classes.
Putative class-action suits based on claims similar to those asserted in
CASTANO have been brought 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. A putative class action filed in Tennessee seeks
reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout
the United States. On October 19, 1998, a putative class action was filed in
federal court in Philadelphia, Pennsylvania, on behalf of "all living Black
Americans who have purchased or consumed menthol tobacco products since 1954
(including minors through their legal representatives)" seeking redress of
alleged violations of the plaintiffs' civil rights. 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. Other types of class-action suits have also been filed
in additional jurisdictions and there are also putative class action suits
pending in Canada, Puerto Rico and Nigeria. 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.
Despite the marked increase of purported class actions brought against
tobacco companies, few purported class actions have been certified, or if
certified, have survived on appeal. Most recently, on May 17, 1999, the U.S.
Supreme Court denied plaintiffs' request for review of a circuit court decision
upholding the denial of class certification in a Pennsylvania medical monitoring
case, BARNES V. AMERICAN TOBACCO. On April 12, 1999, in CHAMBERLAIN V. AMERICAN
TOBACCO COMPANY, 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 COMPANY, 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 COMPANY, 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 COMPANY, 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".
Class certification was granted in 1998, however, by a Maryland state court
in RICHARDSON V. PHILIP MORRIS. 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
F-17
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
cessation class of Louisiana residents who were smokers on or before May 24,
1996 (SCOTT V. AMERICAN TOBACCO COMPANY). 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, in October, 1997. The Florida Court of Appeals denied challenges to this
settlement on March 24, 1999 and subsequently denied motions to reconsider.
Trial is underway in a class-action suit pending in Florida, ENGLE V. R.J.
REYNOLDS TOBACCO COMPANY, 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. A jury determination of liability was handed down on July 7, 1999
against RJR Tobacco Company and the other cigarette manufacturer defendants in
the initial phase, which included common issues related to liability, general
causation and a potential award of or entitlement to punitive damages. We expect
that individual liability and damages, if any, will not be determined until a
verdict is reached in one or more trials involving the nine named class
representatives during the second phase. No actual damages would have to be paid
until the end of the trial and the appellate process.
HEALTH-CARE COST RECOVERY CASES. In June 1994, the Mississippi attorney
general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, 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
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.
On November 23, 1998, the major U.S. cigarette manufacturers, including RJR
Tobacco Company, entered into a 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 states and contains releases of various additional
present and future claims.
When judicially approved, the Master Settlement Agreement will release RJR
Tobacco Company and several of its indemnitees, 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. For a
more detailed description of the Master Settlement Agreement, see the portion of
this document under the heading "Business--Litigation and
Regulation--Litigation".
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 June 29, 1999, final
approval was obtained in the requisite number of settling states (42), but those
states' percentage shares comprise only 54.18%, rather than the necessary 80%,
of the payments due.
F-18
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. RJR Tobacco Company
expects to fund these costs through price increases. RJR Tobacco Company
estimates payments in future years to exceed $2.0 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 has been
reached with the government in British Columbia that these separate
constitutional challenges will be litigated prior to the health-care recovery
action. These constitutional challenges are scheduled to be heard by the
Canadian courts in the autumn of 1999.
UNION CASES. Although the Master Settlement Agreement settled some of the
most potentially burdensome healthcare cost recovery actions, other plaintiffs
have brought many other such cases. Approximately 70 lawsuits have been brought
by union trust funds against cigarette manufacturers and others in the past two
years. 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.
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, on
remoteness grounds. Then, a week later, the Second Circuit handed down its
decision in LABORERS LOCAL 17 V. PHILIP MORRIS, 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 on remoteness and
standing grounds. Numerous trial court judges have also dismissed these cases on
remoteness grounds, including most recently, on April 29, 1999, a Minnesota
federal district court in LYONS V. PHILIP MORRIS. Nonetheless, in other federal
circuits, there are still some union cases that have survived motions to dismiss
and that may proceed to trial. On March 31, 1999, a federal district court
denied defendants' motion to dismiss in UTAH LABORERS V. PHILIP MORRIS. One such
case, NORTHWEST LABORERS V. PHILIP MORRIS, is scheduled for trial in a State of
Washington federal district court in September 1999.
The first union case to survive motions to dismiss and go to trial was IRON
WORKERS LOCAL NO. 17 V. PHILIP MORRIS. 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
F-19
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
returned a unanimous verdict for the defendants, including RJR Tobacco Company,
on all surviving counts. On May 11, 1999, the trial court denied plaintiffs'
motion for a new trial.
OTHER HEALTH-CARE COST-RECOVERY AND AGGREGATED CLAIMS PLAINTIFFS. Native
American tribes have filed similar cases, five in tribal courts and one putative
class action in San Diego Superior Court. Four groups of health-care insurers,
as well as a private entity that purported to self insure its employee
health-care programs, have also advanced claims similar to those found in the
union health-care cost recovery actions. Two of these "insurer" cases, WILLIAMS
& DRAKE V. AMERICAN TOBACCO, and REGENCE BLUESHIELD V. PHILIP MORRIS, were
dismissed in their entirety on "remoteness" grounds by federal district courts
in Pennsylvania and Washington respectively. In a third "Insurers" case, GROUP
HEALTH PLAN, INC. V. PHILIP MORRIS, a federal district judge in Minnesota, on
April 29, 1999, dismissed all claims, except a state antitrust claim and a
conspiracy claim. Five foreign countries have also brought health-care
cost-recovery suits against RJR Tobacco Company in U.S. courts. Other cost
recovery suits have been brought by, among others, local governmental
jurisdictions, taxpayers (on behalf of a governmental jurisdiction), a
university and a hospital. Finally, nine 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.
RECENT AND SCHEDULED TRIALS. As of June 11, 1999, there were 5 cases
scheduled for trial in 1999 against RJR Tobacco Company alleging injuries
relating to tobacco. In addition, one case is currently in progress, the ENGLE
case in Florida. Cases against other tobacco company defendants are also
scheduled for trial in 1999 and thereafter. Although trial schedules are subject
to change and many cases are dismissed before trial, it is likely that there
will be an increased number of tobacco cases, 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. In January of 1999, President Clinton announced that
the U.S. Department of Justice is preparing a litigation plan for a lawsuit by
the federal government to recover federal healthcare costs associated with
cigarette smoking, and press reports have indicated that the Justice Department
has engaged a private law firm to assist in such a lawsuit.
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 and Washington, D.C. that relate to the cigarette business. In
addition, 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 is
responding to the subpoena. RJR Tobacco Company is responding 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 distributors.
On December 22, 1998, a now inactive tobacco subsidiary that was part of
Reynolds International's business, Northern Brands International, Inc., 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
F-20
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
practices...." Northern Brands agreed to pay a $10 million forfeiture and a $5.2
million fine and special assessment. In the plea agreement, the U.S. Attorney
agreed not to bring additional criminal charges in the Northern District against
Northern Brands or its corporate affiliates (including NGH, RJR Tobacco
Holdings, RJR Tobacco Company and Reynolds International) for actions (from 1985
through 1998) that are related to those that gave rise to the agreement.
RJR-MacDonald, 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 NBI
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.
ENVIRONMENTAL MATTERS
The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the Environmental Protection Agency and other
governmental agencies under various statutes have resulted in, and will likely
continue to result in, substantial expenditures for pollution control, waste
treatment, plant modification and similar activities. RJR Tobacco Company has
been named a potentially responsible party with third parties under the
Comprehensive Environmental Response, Compensation and Liability Act, which this
document refers to as CERCLA, with respect to several superfund sites. Liability
under CERCLA is joint and several. RJR Tobacco Company has a continuing program
to assure compliance with U.S., state and local environmental laws and
regulations. The costs attributable to compliance with environmental laws and to
resolving these CERCLA matters, is unlikely to have a material adverse effect on
the business or financial condition of RJR Tobacco Company.
In April 1995, NGH was named a potentially responsible party with other
third parties under CERCLA with respect to a superfund site at which a former
subsidiary of RJR Tobacco Holdings had operations. RJR Tobacco Holdings has also
been named in an insurance coverage suit brought by another company named as a
potentially responsible party at this site. In this lawsuit, DEL MONTE FRESH
PRODUCE V. FIREMEN'S FUND INSURANCE, filed August 13, 1997 in the First Circuit
Court of the State of Hawaii, the plaintiff seeks declaratory judgment that it
is entitled to insurance coverage for the site or, in the alternative, that RJR
Tobacco Holdings is obligated to indemnify Del Monte under the terms of the
agreement by which RJR Tobacco Holdings sold that company in 1989. The Fireman's
Fund Insurance Company has filed a motion for summary judgment that has not yet
been heard.
------------------------
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 or indemnitees, including RJR
Tobacco Holdings. 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 increase in litigation and/or in
adverse outcomes for tobacco defendants could have an adverse effect
F-21
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 these actions
and intends to defend these 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 pending
litigation matters, including litigation costs. Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
COMMITMENTS
At December 31, 1998, commitments totalled approximately $400 million,
principally for the purchase of leaf tobacco inventories and other contractual
arrangements.
NOTE 11--STOCK PLANS
NGH's 1989 stock plan provides for grants of options to purchase common
stock of NGH to non-employee directors, directors and key employees. A maximum
of 6,000,000 shares may be issued under this plan. The options granted under the
plan generally vest over three years, are separately exercisable for primarily
ten years from the date of grant and are exercisable at a price that is
generally the fair market value of the stock at the grant date.
NGH's 1990 long-term incentive plan, which this document refers to as the
NGH LTIP, provides for grants of incentive stock options, other stock options,
stock appreciation rights, restricted stock, purchase stock, dividend equivalent
rights, performance units, performance shares and other stock-based grants to
key employees. A maximum of 33,000,000 shares of common stock of NGH may be
issued under the NGH LTIP. The options granted under the plan generally vest
over three years, are exercisable for 10-15 years from date of grant, and are
exercisable at a price that is generally the fair market value of the stock at
the grant date. As of December 31, 1998, purchase stock, stock options other
than incentive stock options, restricted stock and other stock-based grants have
been granted under the LTIP.
Certain RJR Tobacco Holdings and RJR Tobacco Company employees and
non-employee directors were granted stock options under NGH's stock plans.
Options to purchase approximately 17.5 million shares of NGH's common stock were
outstanding at December 31, 1998. At December 31, 1998, options held by current
and former RJR Tobacco Holdings and RJR Tobacco Company employees totaled
approximately 12.4 million. The total number of options granted to RJR Tobacco
Holdings and RJR Tobacco Company employees under NGH's option plans was 0.6
million, 0.6 million and 2.7 million in 1998, 1997 and 1996, respectively.
NGH and its subsidiaries recognize and measure compensation costs related to
employee stock plans utilizing the intrinsic value based method. Had
compensation expense been determined based upon the fair value of awards granted
to RJR Tobacco Holdings and RJR Tobacco Company employees under the plans, net
income (loss) would have been effected by approximately $7 million, $8 million
and $7 million in 1998, 1997 and 1996, respectively. These adjustments are not
necessarily indicative of the effects on net income of future stock-based
awards.
F-22
<PAGE>
NOTE 11--STOCK PLANS (CONTINUED)
The fair value of NGH's options granted to RJR Tobacco Holdings and RJR
Tobacco Company employees was determined using the Black-Scholes option pricing
model with the following weighted-average assumptions used by NGH:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Dividend yield.............................................................................. 5.8% 5.8% 5.3%
Expected volatility......................................................................... 31% 31% 29%
Risk-free interest rate..................................................................... 5.8% 6.4% 6.2%
Expected option life (years)................................................................ 5 5 5
</TABLE>
The weighted average fair value of NGH's stock options granted to RJR
Tobacco Holdings and RJR Tobacco Company employees during 1998, 1997 and 1996
was $7.43, $6.79 and $7.02, respectively.
NOTE 12--RETIREMENT BENEFITS
RJR Tobacco Holdings and RJR Tobacco Company sponsor a number of
non-contributory defined benefit pension plans covering most U.S. employees. RJR
Tobacco Holdings and RJR Tobacco Company also provide certain health and life
insurance benefits for retired employees and their dependents. In 1998, RJR
Tobacco Holdings adopted SFAS No. 132. All of the information is presented
accordingly.
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------- --------------------
AS OF DECEMBER 31 1998 1997 1998 1997
- ------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Obligation at beginning of year.......................................... $ 2,295 $ 2,061 $ 586 $ 527
Service cost............................................................. 42 37 8 7
Interest cost............................................................ 158 149 40 37
Actuarial loss........................................................... 143 208 58 45
Plan amendments.......................................................... 1 (1) -- --
Benefits paid............................................................ (195) (159) (40) (30)
--------- --------- --------- ---------
Obligation at end of year................................................ $ 2,444 $ 2,295 $ 652 $ 586
--------- --------- --------- ---------
--------- --------- --------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year........................... $ 2,009 $ 1,835 $ -- $ --
Actual return on plan assets............................................. 203 261 -- --
Employer contributions................................................... 53 63 40 30
Benefits paid............................................................ (195) (150) (40) (30)
--------- --------- --------- ---------
Fair value of plan assets at end of year................................. $ 2,070 $ 2,009 $ -- $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-23
<PAGE>
NOTE 12--RETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------- --------------------
AS OF DECEMBER 31 1998 1997 1998 1997
- ------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FUNDED STATUS
Funded status............................................................ $ (374) $ (286) $ (652) $ (586)
Unrecognized transition (asset) obligation............................... -- (2) (33) (39)
Unrecognized prior service cost.......................................... (15) (17) -- --
Unrecognized loss........................................................ 189 70 124 66
--------- --------- --------- ---------
Net amount recognized.................................................... $ (200) $ (235) $ (561) $ (559)
--------- --------- --------- ---------
--------- --------- --------- ---------
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost................................................... $ 7 $ 6 $ -- $ --
Accrued benefit liability.............................................. (218) (258) (561) (559)
Intangible asset....................................................... 2 6 -- --
Accumulated other comprehensive income................................. 9 11 -- --
--------- --------- --------- ---------
Net amount recognized.................................................... $ (200) $ (235) $ (561) $ (559)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were approximately $3.58 billion, $3.23 billion, and
$3.05 billion, respectively, as of December 31, 1998 and approximately $3.40
billion, $3.11 billion, and $3.00 billion, respectively, as of December 31,
1997.
The components of net periodic benefit cost are as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------- -------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost................................................. $ 42 $ 37 $ 38 $ 8 $ 7 $ 9
Interest cost................................................ 158 149 145 40 37 35
Expected return on plan assets............................... (178) (162) (151) -- -- --
Amortization of transition asset............................. -- -- -- (7) (6) (7)
Amortization of prior service cost........................... (4) (5) (2) -- -- --
Amortization of net loss..................................... 1 1 2 3 -- --
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost.................................... $ 19 $ 20 $ 32 $ 44 $ 38 $ 37
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The principal pension and postretirement benefit plans used the following
weighted average actuarial assumptions as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Discount rate................................................................... 6.75% 7.00%
Expected return on plan assets.................................................. 9.50% 9.50%
Rate of compensation increase................................................... 5.00% 5.00%
</TABLE>
F-24
<PAGE>
NOTE 12--RETIREMENT BENEFITS (CONTINUED)
The assumed health care cost rate is 6.0% in 1998 and 5.5% in 1999,
declining to 5% by the year 2000 and remaining at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
----------------- -----------------
<S> <C> <C>
Effect on postretirement benefit cost.......................... $ 2 $ (1)
Effect on postretirement benefit obligation.................... 26 (24)
</TABLE>
NOTE 13--ADDITIONAL INFORMATION
RJR Tobacco Company manufactures, markets and sells cigarettes in the United
States and its territories, commonwealths, protectorates and possessions. Its
largest brands include DORAL, WINSTON, CAMEL and SALEM. See note 10 for
information regarding legislation and other matters affecting the domestic
cigarette industry.
The management of RJR Tobacco Holdings has historically evaluated the
performance of its business based upon ongoing Operating Company Contribution,
which this document refers to as OCC. OCC is operating income before
amortization of trademarks and goodwill, restructuring expenses and initial,
upfront tobacco settlement expenses.
See notes 3 and 4 regarding significant non-cash expenses recorded relating
to restructurings and tobacco settlement and related charges affecting RJR
Tobacco Company.
Net sales from one customer of RJR Tobacco Company were approximately 16.7%
of RJR Tobacco Company's consolidated net sales for the year ended December 31,
1998.
SEGMENT PROFIT (LOSS) AND ASSET INFORMATION:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Ongoing OCC:
RJR Tobacco Company............................................................ $ 1,664 $ 1,551 $ 1,493
Corporate...................................................................... (81) (77) (72)
--------- --------- ---------
Consolidated OCC............................................................. $ 1,583 $ 1,474 $ 1,421
--------- --------- ---------
--------- --------- ---------
Depreciation:
RJR Tobacco Company............................................................ $ 130 $ 140 $ 166
Corporate...................................................................... 2 2 2
--------- --------- ---------
Consolidated depreciation.................................................... $ 132 $ 142 $ 168
--------- --------- ---------
--------- --------- ---------
Additions to long-lived assets:
RJR Tobacco Company............................................................ $ 46 $ 57 $ 62
Corporate...................................................................... 1 -- 1
--------- --------- ---------
Consolidated additions to long-lived assets.................................. $ 47 $ 57 $ 63
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
NOTE 13--ADDITIONAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C> <C>
Segment assets:
RJR Tobacco Company............................................................ $ 1,808 $ 2,231
Unallocated intangibles, net(1)................................................ 11,001 11,364
Net assets of discontinued businesses.......................................... 5,961 6,269
Corporate...................................................................... 631 387
--------- ---------
Total segment assets......................................................... $ 19,401 $ 20,251
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Represents unallocated goodwill, trademarks and tradename resulting from the
1989 leveraged buyout of RJR Tobacco Holdings.
A reconciliation of consolidated OCC to consolidated income (loss) before
income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Ongoing OCC...................................................................... $ 1,583 $ 1,474 $ 1,421
Items excluded from OCC:
Goodwill and trademark amortization............................................ (366) (366) (366)
Interest and debt expense...................................................... (426) (433) (462)
Other income (expense), net.................................................... (28) (32) (30)
Tobacco settlement and related expenses........................................ (1,442) (359) --
Restructuring expenses and related costs....................................... -- (80) --
--------- --------- ---------
Income (loss) before income taxes............................................ $ (679) $ 204 $ 563
--------- --------- ---------
--------- --------- ---------
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Advertising expense..................................................................... $ 245 $ 195 $ 137
Research and development expense........................................................ 64 62 65
Rent expense............................................................................ 49 47 41
</TABLE>
F-26
<PAGE>
NOTE 14--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1998(1)
Net sales.................................................................. $ 1,213 $ 1,435 $ 1,531 $ 1,537
Operating income (loss).................................................... (72) 164 325 (642)
Income (loss) from continuing operations................................... (141) (14) 121 (485)
Income (loss) from discontinued operations................................. 133 (100) 49 (79)
Net income (loss).......................................................... (8) (114) 170 (564)
Per share data:(3)
Basic income (loss) per share:
Continuing operations.................................................... (1.30) (.13) 1.11 (4.46)
Operations of discontinued businesses.................................... 1.22 (.92) .45 (.73)
Net income (loss)........................................................ (.08) (1.05) 1.56 (5.19)
Diluted income (loss) per share:
Continuing operations.................................................... (1.30) (.13) 1.11 (4.46)
Operations of discontinued businesses.................................... 1.22 (.92) .45 (.73)
Net income (loss)........................................................ (.08) (1.05) 1.56 (5.19)
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997(2)
Net sales.................................................................. $ 1,114 $ 1,254 $ 1,332 $ 1,344
Operating income........................................................... 282 297 57 33
Income (loss) from continuing operations................................... 69 79 (57) (72)
Income (loss) from discontinued operations................................. 156 181 187 (110)
Net income (loss).......................................................... 225 260 130 (182)
Per share data:(3)
Basic income (loss) per share:
Continuing operations.................................................... .63 .73 (.52) (.66)
Discontinued operations.................................................. 1.44 1.67 1.72 (1.01)
Net income (loss)........................................................ 2.07 2.40 1.20 (1.67)
Diluted income (loss) per share:
Continuing operations.................................................... .63 .73 (.52) (.66)
Discontinued operations.................................................. 1.44 1.67 1.72 (1.01)
Net income (loss)........................................................ 2.07 2.40 1.20 (1.67)
</TABLE>
- --------------------------
(1) The first quarter of 1998 includes $312 million, $199 million after-tax,
related to the agreements reached by RJR Tobacco Company with the state of
Minnesota and Blue Cross and Blue Shield of Minnesota, as well as other
settlement related costs.
The second quarter of 1998 includes $145 million, $97 million after-tax, of
additional tobacco settlement charges relating to certain prior state
settlement agreements.
The fourth quarter of 1998 includes $985 million, $632 million after-tax, of
tobacco settlement and related charges as a result of the Master Settlement
Agreement.
(2) The third quarter of 1997 includes $219 million, $133 million after-tax,
related to the settlement agreements reached by RJR Tobacco Company with the
Florida and Mississippi state attorneys general and in certain class action
cases.
The fourth quarter of 1997 includes $80 million, $52 million after-tax, of
restructuring expense and $140 million, $85 million after-tax, related to
the settlement agreement reached by RJR Tobacco Company with the Texas state
attorney general.
(3) Earnings per share is computed independently for each of the periods
presented; therefore, the sum of the earnings per share amounts for the
quarters may not equal the total for the year.
F-27
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed consolidating financial statements of RJR Tobacco
Holdings include the accounts and activities of RJR Tobacco Holdings (the issuer
of the notes described in this prospectus), RJR Tobacco Company (the guarantor
of the notes) and the subsidiaries of RJR Tobacco Holdings and RJR Tobacco
Company that are not guarantors of the notes and elimination adjustments.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Net sales...................................... $ -- $ 5,663 $ 53 $ -- $ 5,716
Cost of products sold.......................... -- 1,341 12 -- 1,353
Selling, advertising, administrative and
general expenses............................. 27 2,963 (210) -- 2,780
Tobacco settlement and related expenses........ -- 1,442 -- -- 1,442
Amortization of trademarks and goodwill........ -- 260 106 -- 366
--------- ----------- ----- ----- ------
Operating income (loss).................... (27) (343) 145 -- (225)
Interest and debt expense...................... (426) -- -- -- (426)
Intercompany interest income (expense), net.... 951 (955) 4 -- --
Other income (expense), net.................... (28) 59 (59) -- (28)
--------- ----------- ----- ----- ------
Income (loss) before income taxes.......... 470 (1,239) 90 -- (679)
Provision (benefit) for income taxes........... 124 (315) 31 -- (160)
--------- ----------- ----- ----- ------
Income (loss) before equity in income
(loss) from subsidiaries from continuing
operations............................... 346 (924) 59 -- (519)
Equity in income (loss) from subsidiaries from
continuing operations........................ (865) 59 -- 806 --
--------- ----------- ----- ----- ------
Income (loss) from continuing operations... (519) (865) 59 806 (519)
Equity in income (loss) from subsidiaries from
discontinued operations...................... 3 60 -- (63) --
Income from discontinued operations............ -- -- 3 -- 3
--------- ----------- ----- ----- ------
Net income (loss).......................... $ (516) $ (805) $ 62 $ 743 $ (516)
--------- ----------- ----- ----- ------
--------- ----------- ----- ----- ------
</TABLE>
F-28
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Net sales...................................... $ -- $ 4,990 $ 54 $ -- $ 5,044
Cost of products sold.......................... -- 1,196 13 -- 1,209
Selling, advertising, administrative and
general expenses............................. 29 2,515 (183) -- 2,361
Tobacco settlement and related expenses........ -- 359 -- -- 359
Amortization of trademarks and goodwill........ -- 260 106 -- 366
Restructuring expense.......................... -- 80 -- -- 80
--------- ----------- ----- ----- ------
Operating income (loss).................... (29) 580 118 -- 669
Interest and debt expense...................... (433) -- -- -- (433)
Intercompany interest income (expense), net.... 970 (971) 1 -- --
Other income (expense), net.................... (28) 180 (184) -- (32)
--------- ----------- ----- ----- ------
Income (loss) before income taxes.......... 480 (211) (65) -- 204
Provision (benefit) for income taxes........... 165 20 -- -- 185
--------- ----------- ----- ----- ------
Income (loss) before equity in income
(loss) from subsidiaries from continuing
operations............................... 315 (231) (65) -- 19
Equity in income (loss) from subsidiaries from
continuing operations........................ (296) (65) -- 361 --
--------- ----------- ----- ----- ------
Income (loss) from continuing operations... 19 (296) (65) 361 19
Equity in income from subsidiaries from
discontinued operations...................... 414 88 -- (502) --
Income from discontinued operations............ -- -- 414 -- 414
--------- ----------- ----- ----- ------
Net income (loss).......................... $ 433 $ (208) $ 349 $ (141) $ 433
--------- ----------- ----- ----- ------
--------- ----------- ----- ----- ------
</TABLE>
F-29
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Net sales...................................... $ -- $ 4,646 $ 56 $ -- $ 4,702
Cost of products sold.......................... -- 1,173 13 -- 1,186
Selling, advertising, administrative and
general expenses............................. 29 2,141 (75) -- 2,095
Amortization of trademarks and goodwill........ -- 313 53 -- 366
--------- ----------- ----- ----- ------
Operating income (loss).................... (29) 1,019 65 -- 1,055
Interest and debt expense...................... (462) -- -- -- (462)
Intercompany interest income (expense), net.... 988 (988) -- -- --
Other income (expense), net.................... (35) 101 (96) -- (30)
--------- ----------- ----- ----- ------
Income (loss) before income taxes.......... 462 132 (31) -- 563
Provision for income taxes..................... 157 185 (5) -- 337
--------- ----------- ----- ----- ------
Income (loss) before equity in income
(loss) from subsidiaries from continuing
operations............................... 305 (53) (26) -- 226
Equity in income (loss) from subsidiaries from
continuing operations........................ (79) (26) -- 105 --
--------- ----------- ----- ----- ------
Income (loss) from continuing operations... 226 (79) (26) 105 226
Equity in income from subsidiaries from
discontinued operations...................... 440 426 -- (866) --
Income from discontinued operations............ -- -- 440 -- 440
--------- ----------- ----- ----- ------
Net income (loss).......................... $ 666 $ 347 $ 414 $ (761) $ 666
--------- ----------- ----- ----- ------
--------- ----------- ----- ----- ------
</TABLE>
F-30
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)............................ $ (516) $ (805) $ 62 $ 743 $ (516)
Less equity in (income) loss from
subsidiaries from discontinued operations.. (3) (60) -- 63 --
Less income from discontinued operations..... -- -- (3) -- (3)
--------- ----------- --------------- ------------ ------
Income (loss) from continuing operations..... (519) (865) 59 806 (519)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization.............. 2 390 106 -- 498
Deferred income tax benefit................ (47) (290) (37) -- (374)
Equity in (income) loss from subsidiaries,
net of income taxes...................... 865 (59) -- (806) --
Tobacco settlement and related expenses,
net of cash payments..................... -- 803 -- -- 803
Restructuring and restructuring-related
expenses, net of cash payments........... -- (41) -- -- (41)
Other changes that provided (used) cash:
Accounts and notes receivable.............. 3 (11) 3 -- (5)
Inventories................................ -- 106 -- -- 106
Accounts payable and accrued liabilities,
including income taxes................... (85) (9) -- -- (94)
Other, net................................. (34) 26 1 -- (7)
--------- ----------- --------------- ------------ ------
Total adjustments.......................... 704 915 73 (806) 886
Net cash flows from continuing operating
activities................................. 185 50 132 -- 367
Net cash flows with discontinued operations.. 159 39 4 -- 202
--------- ----------- --------------- ------------ ------
Net cash flows from operating activities..... 344 89 136 -- 569
--------- ----------- --------------- ------------ ------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures......................... (1) (46) -- -- (47)
Divestitures of certain assets............... -- 4 -- -- 4
--------- ----------- --------------- ------------ ------
Net cash flows used in investing
activities............................... (1) (42) -- -- (43)
--------- ----------- --------------- ------------ ------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Repayments of long-term debt................. (68) -- -- -- (68)
Increase in short-term borrowings............ 62 -- -- -- 62
Dividends paid to NGH........................ (607) -- -- -- (607)
Other, net................................... 170 (32) (136) -- 2
--------- ----------- --------------- ------------ ------
Cash flows used in financing activities.... (443) (32) (136) -- (611)
--------- ----------- --------------- ------------ ------
Net change in cash and cash equivalents.... (100) 15 -- -- (85)
Cash and cash equivalents at beginning of
period..................................... 140 (55) -- -- 85
--------- ----------- --------------- ------------ ------
Cash and cash equivalents at end of period... $ 40 $ (40) $ -- $ -- $ --
--------- ----------- --------------- ------------ ------
--------- ----------- --------------- ------------ ------
</TABLE>
F-31
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)............................ $ 433 $ (208) $ 349 $ (141) $ 433
Less equity in (income) loss from
subsidiaries from discontinued operations.. (414) (88) -- 502 --
Less income from discontinued operations..... -- -- (414) -- (414)
--------- ----------- --------------- ------------ ------
Income (loss) from continuing operations..... 19 (296) (65) 361 19
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization.............. 3 399 106 -- 508
Deferred income tax expense (benefit)...... 7 (106) (34) -- (133)
Equity in (income) loss from subsidiaries,
net of income taxes...................... 296 65 -- (361) --
Tobacco settlement and related expenses,
net of cash payments..................... -- 226 -- -- 226
Restructuring and restructuring-related
expenses, net of cash payments........... -- 52 -- -- 52
Other changes that provided (used) cash:
Accounts and notes receivable.............. 23 (2) 3 -- 24
Inventories................................ -- 97 -- -- 97
Accounts payable and accrued liabilities,
including income taxes................... (19) (108) (39) -- (166)
Other, net................................. 15 (30) 16 -- 1
--------- ----------- --------------- ------------ ------
Total adjustments.......................... 325 593 52 (361) 609
Net cash flows from continuing operating
activities................................. 344 297 (13) -- 628
Net cash flows with discontinued operations.. 515 (173) 9 -- 351
--------- ----------- --------------- ------------ ------
Net cash flows from operating activities..... 859 124 (4) -- 979
--------- ----------- --------------- ------------ ------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures......................... -- (57) -- -- (57)
Divestitures of certain assets............... -- 11 -- -- 11
--------- ----------- --------------- ------------ ------
Net cash flows used in investing
activities............................... -- (46) -- -- (46)
--------- ----------- --------------- ------------ ------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... 345 -- -- -- 345
Repayments of long-term debt................. (28) -- -- -- (28)
Decrease in short-term borrowings............ (331) -- -- -- (331)
Dividends paid to NGH........................ (834) -- -- -- (834)
Other, net................................... 80 (84) 4 -- --
--------- ----------- --------------- ------------ ------
Cash flows from (used in) financing
activities............................... (768) (84) 4 -- (848)
--------- ----------- --------------- ------------ ------
Net change in cash and cash equivalents.... 91 (6) -- -- 85
Cash and cash equivalents at beginning of
period..................................... 49 (49) -- -- --
--------- ----------- --------------- ------------ ------
Cash and cash equivalents at end of period... $ 140 $ (55) $ -- $ -- $ 85
--------- ----------- --------------- ------------ ------
--------- ----------- --------------- ------------ ------
</TABLE>
F-32
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income (loss)........................... $ 666 $ 347 $ 414 $ (761) $ 666
Less equity in (income) loss from
subsidiaries from discontinued
operations................................ (440) (426) -- 866 --
Less income from discontinued operations.... -- -- (440) -- (440)
--------- ----------- --------------- ------------ ------------
Income (loss) from continuing operations.... 226 (79) (26) 105 226
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Depreciation and amortization............. 2 479 53 -- 534
Deferred income tax benefit............... (8) (33) (20) -- (61)
Equity in (income) loss from subsidiaries,
net of income taxes..................... 79 26 -- (105) --
Restructuring and restructuring-related
expenses, net of cash payments............ -- (66) -- -- (66)
Other changes that provided (used) cash:
Accounts and notes receivable............. 18 8 8 -- 34
Inventories............................... -- 244 1 -- 245
Accounts payable and accrued liabilities,
including income taxes.................. (73) (212) 9 -- (276)
Other, net................................ 72 22 (65) -- 29
--------- ----------- --------------- ------------ ------------
Total adjustments......................... 90 468 (14) (105) 439
Net cash flows from continuing operating
activities................................ 316 389 (40) -- 665
Net cash flows with discontinued
operations................................ 606 (84) 4 -- 526
--------- ----------- --------------- ------------ ------------
Net cash flows from operating activities.... 922 305 (36) -- 1,191
--------- ----------- --------------- ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING
ACTIVITIES:
Capital expenditures........................ (1) (62) -- -- (63)
Divestitures of certain assets.............. -- 122 -- -- 122
--------- ----------- --------------- ------------ ------------
Net cash flows from (used in) investing
activities.............................. (1) 60 -- -- 59
--------- ----------- --------------- ------------ ------------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Repayments of long-term debt................ (118) -- -- -- (118)
Increase in short-term borrowings........... (24) -- -- -- (24)
Dividends paid to NGH....................... (1,108) -- -- -- (1,108)
Other, net.................................. 259 (295) 36 -- --
--------- ----------- --------------- ------------ ------------
Cash flows from (used in) financing
activities.............................. (991) (295) 36 -- (1,250)
--------- ----------- --------------- ------------ ------------
Net change in cash and cash equivalents... (70) 70 -- -- --
Cash and cash equivalents at beginning of
period.................................... 119 (119) -- -- --
--------- ----------- --------------- ------------ ------------
Cash and cash equivalents at end of period.. $ 49 $ (49) $ -- $ -- $ --
--------- ----------- --------------- ------------ ------------
--------- ----------- --------------- ------------ ------------
</TABLE>
F-33
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Cash and cash equivalents.................... $ 40 $ (40) $ -- $ -- $ --
Accounts and notes receivable, net........... -- 58 -- -- 58
Inventories.................................. -- 529 -- -- 529
Prepaid expenses and excise taxes............ 475 62 -- -- 537
Investment in subsidiaries from discontinued
businesses................................. 5,961 2,788 -- (8,749) --
Net assets of discontinued businesses........ -- -- 5,961 -- 5,961
--------- ----------- ------- ------------ ------------
Total current assets......................... 6,476 3,397 5,961 (8,749) 7,085
Property, plant and equipment, net........... 3 1,112 -- -- 1,115
Trademarks, net.............................. -- -- 3,176 -- 3,176
Goodwill, net................................ 6 7,823 -- -- 7,829
Other assets and deferred charges............ 78 118 -- -- 196
Intercompany note receivable................. 10,073 -- 177 (10,250) --
Intercompany receivable (payable), net....... 2,244 (4) (2,240) -- --
Investment in subsidiaries from continuing
operations................................. (2,998) 2 -- 2,996 --
--------- ----------- ------- ------------ ------------
Total assets................................. $ 15,882 $ 12,448 $ 7,074 $ (16,003) $ 19,401
--------- ----------- ------- ------------ ------------
--------- ----------- ------- ------------ ------------
Short-term borrowings........................ $ 29 $ -- $ -- $ -- $ 29
Accounts payable............................. -- 53 -- -- 53
Accrued liabilities.......................... 160 1,351 -- -- 1,511
Current maturities of long-term debt......... 62 -- -- -- 62
Income taxes accrued......................... 313 (148) -- -- 165
--------- ----------- ------- ------------ ------------
Total current liabilities.................... 564 1,256 -- -- 1,820
Long-term debt (less current maturities)..... 4,861 -- -- -- 4,861
Intercompany note payable.................... -- 10,250 -- (10,250) --
Other noncurrent liabilities................. 44 887 -- -- 931
Deferred income taxes........................ 527 265 1,111 -- 1,903
Common stock................................. 1 200 -- (200) 1
Paid-in capital.............................. 10,861 1,785 6,354 (8,139) 10,861
Retained earnings (accumulated deficit)...... (516) (1,981) -- 1,981 (516)
Accumulated other comprehensive income:
Cumulative translation adjustment.......... (441) (214) (391) 605 (441)
Minimum pension liability.................. (19) -- -- -- (19)
--------- ----------- ------- ------------ ------------
Total stockholder's equity................. 9,886 (210) 5,963 (5,753) 9,886
--------- ----------- ------- ------------ ------------
Total liabilities and stockholder's equity... $ 15,882 $ 12,448 $ 7,074 $ (16,003) $ 19,401
--------- ----------- ------- ------------ ------------
--------- ----------- ------- ------------ ------------
</TABLE>
F-34
<PAGE>
NOTE 15--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
ISSUER GUARANTOR NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Cash and cash equivalents.................... $ 140 $ (55) $ -- $ -- $ 85
Accounts and notes receivable, net........... 3 47 2 -- 52
Inventories.................................. -- 635 -- -- 635
Prepaid expenses and excise taxes............ 111 79 -- -- 190
Investment in subsidiaries from discontinued
businesses................................. 973 983 -- (1,956) --
Net assets of discontinued businesses........ -- -- 973 -- 973
--------- ----------- ------- ------------ ------------
Total current assets......................... 1,227 1,689 975 (1,956) 1,935
Property, plant and equipment, net........... 5 1,410 -- -- 1,415
Trademarks, net.............................. -- -- 3,281 -- 3,281
Goodwill, net................................ 3 8,083 -- -- 8,086
Other assets and deferred charges............ 125 113 -- -- 238
Intercompany note receivable................. 10,275 -- 20 (10,295) --
Intercompany receivable (payable), net....... 2,213 (61) (2,152) -- --
Investment in subsidiaries from continuing
operations................................. (2,179) 2 -- 2,177 --
Investment in subsidiaries from discontinued
businesses................................. 5,296 1,853 -- (7,149) --
Net assets of discontinued businesses........ -- -- 5,296 -- 5,296
--------- ----------- ------- ------------ ------------
Total assets................................. $ 16,965 $ 13,089 $ 7,420 $ (17,223) $ 20,251
--------- ----------- ------- ------------ ------------
--------- ----------- ------- ------------ ------------
Accounts payable............................. $ 2 $ 93 $ -- $ -- $ 95
Accrued liabilities.......................... 169 860 -- -- 1,029
Income taxes accrued......................... 115 17 -- -- 132
--------- ----------- ------- ------------ ------------
Total current liabilities.................... 286 970 -- -- 1,256
Long-term debt (less current maturities)..... 4,944 -- -- -- 4,944
Intercompany note payable.................... -- 10,295 -- (10,295) --
Other noncurrent liabilities................. 82 773 -- -- 855
Deferred income taxes........................ 574 394 1,149 -- 2,117
Common stock................................. 1 200 -- (200) 1
Paid-in capital.............................. 11,491 1,792 6,612 (8,404) 11,491
Retained earnings (accumulated deficit)...... -- (1,114) -- 1,114 --
Accumulated other comprehensive income:
Cumulative translation adjustment.......... (391) (221) (341) 562 (391)
Minimum pension liability.................. (22) -- -- -- (22)
--------- ----------- ------- ------------ ------------
Total stockholder's equity................. 11,079 657 6,271 (6,928) 11,079
--------- ----------- ------- ------------ ------------
Total liabilities and stockholder's equity... $ 16,965 $ 13,089 $ 7,420 $ (17,223) $ 20,251
--------- ----------- ------- ------------ ------------
--------- ----------- ------- ------------ ------------
</TABLE>
F-35
<PAGE>
NOTE 16--SUBSEQUENT EVENTS
DISCONTINUED OPERATIONS
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. The sale was substantially completed on May
12, 1999. Under the terms of the agreement, Japan Tobacco acquired substantially
all of the business including intellectual property rights of the international
tobacco business, including the international rights to the CAMEL, WINSTON and
SALEM brand names. Proceeds from the sale have been used to reduce the debt of
RJR Tobacco Holdings and for general corporate purposes. RJR Tobacco Holdings
expects that this debt reduction will substantially strengthen the financial
position of RJR Tobacco Holdings and RJR Tobacco Company.
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 Nabisco's operating
subsidiaries. Under the plan, the separation was accomplished by the transfer of
RJR Tobacco Holdings' 80.5% interest in Nabisco, together with approximately
$1.6 billion in after-tax proceeds from the international tobacco sale, to NGH
through a merger transaction that is intended to be tax-free and which occurred
on May 18, 1999, followed by a spin-off to NGH stockholders of shares in RJR
Tobacco Holdings that is intended to be tax-free.
On May 12, 1999, NGH's board of directors approved the spin-off, which
occurred on June 14, 1999. NGH will continue to exist as a holding company,
owning 80.5% of Nabisco. Nabisco Group Holdings Corp. and Nabisco will each
continue to trade as separate companies on The New York Stock Exchange and
shares of RJR Tobacco Holdings, as the owner of 100% of RJR Tobacco Company,
will also trade separately.
The operating results of the international tobacco business and Nabisco are
segregated and reported as discontinued operations in the accompanying
consolidated financial statements. Prior period financial statements have been
reclassified to conform to the current year presentation.
Summarized operating results of the discontinued operations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales.................................................... $ 11,321 $ 12,013 $ 12,361
Provision for income taxes................................... 179 381 282
Net income................................................... 3 414 440
</TABLE>
Assets and liabilities of the discontinued businesses are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C> <C>
Current assets............................................... $ 3,357 $ 3,659
Property, plant and equipment, net........................... 4,183 4,524
Trademarks and goodwill, net................................. 7,710 8,277
Other assets and deferred charges............................ 227 215
Current liabilities.......................................... (2,685) (2,686)
Long-term debt (less current maturities)..................... (3,794) (4,512)
Minority interest in Nabisco................................. (752) (812)
Deferred income taxes........................................ (1,195) (1,343)
Other noncurrent liabilities................................. (1,090) (1,053)
--------- ---------
Net assets of discontinued businesses...................... $ 5,961 $ 6,269
--------- ---------
--------- ---------
</TABLE>
------------------------
F-36
<PAGE>
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
F-37
<PAGE>
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
NET SALES*....................................................................... $ 1,693 $ 1,213
-------------- --------------
Costs and expenses:
Cost of products sold* (note 1)................................................ 750 318
Selling, advertising, administrative and general expenses...................... 673 564
Tobacco settlement and related expenses (notes 1 and 4)........................ -- 312
Amortization of trademarks and goodwill........................................ 92 91
-------------- --------------
OPERATING INCOME (LOSS)...................................................... 178 (72)
Interest and debt expense........................................................ (105) (107)
Other income (expense), net...................................................... (7) (5)
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES............................................ 66 (184)
Provision (benefit) for income taxes............................................. 36 (43)
-------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS..................................... 30 (141)
Income from operations of discontinued businesses, net of income taxes........... 65 133
-------------- --------------
NET INCOME (LOSS).............................................................. $ 95 $ (8)
-------------- --------------
-------------- --------------
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations....................................... $ .28 $ (1.30)
Income from operations of discontinued businesses.............................. $ .60 $ 1.22
Net income (loss).............................................................. $ .88 $ (.08)
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations....................................... $ .28 $ (1.30)
Income from operations of discontinued businesses.............................. $ .60 $ 1.22
Net income (loss).............................................................. $ .88 $ (.08)
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS):
Basic.......................................................................... 108,691 108,691
Diluted........................................................................ 108,691 108,691
</TABLE>
- ------------------------
* Excludes excise taxes of $260 million and $304 million for the three months
ended March 31, 1999 and 1998, respectively.
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
F-38
<PAGE>
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 95 $ (8)
Less income from discontinued operations....................................... (65) (133)
------- -------
Income (loss) from continuing operations....................................... 30 (141)
------- -------
Adjustments to reconcile net income (loss) to net cash flows from
(used in) operating activities:
Depreciation and amortization.............................................. 121 126
Deferred income tax benefit................................................ (46) (48)
Changes in working capital items, net...................................... 462 (261)
Initial, upfront tobacco settlement and related expenses, net of cash
payments................................................................. (316) 265
Other, net................................................................. (3) --
------- -------
Total adjustments........................................................ 218 82
------- -------
Net cash flows from (used in) continuing operating activities................ 248 (59)
Net cash flows with discontinued operations.................................. (171) (111)
------- -------
Net cash flows from (used in) operating activities........................... 77 (170)
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures........................................................... (10) (10)
------- -------
Net cash flows used in investing activities.................................. (10) (10)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings................................... (62) 95
------- -------
Net cash flows from (used in) financing activities........................... (62) 95
------- -------
Net change in cash and cash equivalents...................................... 5 (85)
Cash and cash equivalents at beginning of period................................. -- 85
------- -------
Cash and cash equivalents at end of period....................................... $ 5 $ --
------- -------
------- -------
Income taxes paid, net of refunds................................................ $ -- $ 84
Interest paid.................................................................... $ 125 $ 124
Tobacco settlement payments...................................................... $ 316 $ 47
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
F-39
<PAGE>
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 5 $ --
Accounts and notes receivable, net.......................................... 46 58
Inventories................................................................. 527 529
Prepaid expenses and excise taxes........................................... 751 537
Net assets of discontinued businesses (note 5).............................. 5,930 5,961
------- -------
TOTAL CURRENT ASSETS.................................................... 7,259 7,085
------- -------
Property, plant and equipment, net............................................ 1,101 1,115
Trademarks, net............................................................... 3,150 3,176
Goodwill, net................................................................. 7,759 7,829
Other assets and deferred charges............................................. 207 196
------- -------
$ 19,476 $ 19,401
------- -------
------- -------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings....................................................... $ -- $ 29
Accounts payable and accrued liabilities.................................... 1,646 1,564
Current maturities of long-term debt........................................ 123 62
Income taxes accrued........................................................ 267 165
------- -------
TOTAL CURRENT LIABILITIES............................................... 2,036 1,820
------- -------
Long-term debt (less current maturities)...................................... 4,743 4,861
Other noncurrent liabilities.................................................. 925 931
Deferred income taxes......................................................... 1,898 1,903
Contingencies (note 4)
Stockholder's equity:
Common stock (108,691,347 shares issued and outstanding).................... 1 1
Paid-in capital............................................................. 10,860 10,861
Retained earnings (accumulated deficit)..................................... (421) (516)
Accumulated other comprehensive income (loss)............................... (566) (460)
------- -------
TOTAL STOCKHOLDER'S EQUITY............................................ 9,874 9,886
------- -------
$ 19,476 $ 19,401
------- -------
------- -------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
F-40
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- INTERIM REPORTING
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of RJR Tobacco
Holdings and its wholly-owned subsidiary, RJR Tobacco Company.
In management's opinion, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods presented. You should read the consolidated condensed financial
statements in conjunction with the restated consolidated financial statements
and footnotes of RJR Tobacco Holdings for the year ended December 31, 1998.
For interim reporting purposes, specific costs and expenses are charged to
operations in proportion to the estimated total annual amount expected to be
incurred.
The account balances and activities of the international tobacco business
and Nabisco are segregated and reported as discontinued operations in the
accompanying consolidated condensed financial statements. In addition, financial
data for all 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 Nabisco Group Holdings stockholders. See note 5 for further discussion.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 1, 1999, RJR Tobacco Holdings adopted SOP No. 98-5, Reporting on
the Costs of Start-Up Activities. 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
issued SFAS No. 133, which must be adopted by January 1, 2000, with early
adoption permitted. 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 timing of adoption or the impact that
adoption or subsequent application of SFAS No. 133 will have on its financial
position or results of operations.
COMPREHENSIVE INCOME
Total comprehensive income for the three months ended March 31, 1999 and
1998 was $(11) million and $(8) million, respectively. Total comprehensive
income includes net income (loss), foreign currency translation adjustments and
minimum pension liability adjustments.
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. For the three months ended March 31, 1999, $3 million of the
restructuring accruals were utilized for employee severance and related
benefits. All of the charges applied against the reserve were cash expenditures.
F-41
<PAGE>
NOTE 1 -- INTERIM REPORTING (CONTINUED)
TOBACCO SETTLEMENT AND RELATED EXPENSES
In the first quarter of 1998, RJR Tobacco Company recorded $312 million,
$199 million after-tax, for initial, upfront 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. Ongoing tobacco settlement
costs recorded in the first quarter 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 which will likely result from the multi-state
settlement agreement signed in November 1998. For the three months ended March
31, 1999, RJR Tobacco Company incurred $5 million of payments, which were
applied against the reserve.
NOTE 2 -- INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Finished products............................................... $ 95 $ 94
Leaf tobacco.................................................... 326 334
Raw materials................................................... 24 26
Other........................................................... 82 75
------ ------
$ 527 $ 529
------ ------
------ ------
</TABLE>
NOTE 3 -- ADDITIONAL INFORMATION
RJR Tobacco Company's management evaluates the performance of its business
based upon ongoing OCC. OCC is operating income before amortization of
trademarks and goodwill, restructuring expenses and other items deemed unusual
by management. These items include initial, upfront tobacco settlement and
related costs in 1998.
SEGMENT PROFIT (LOSS) INFORMATION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1999 1998
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Ongoing OCC:
RJR Tobacco Company....................................................................... $ 290 $ 351
Corporate................................................................................. (20) (20)
--------- ---------
Consolidated OCC........................................................................ $ 270 $ 331
--------- ---------
--------- ---------
</TABLE>
A reconciliation of consolidated OCC to consolidated income before income
taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1999 1998
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Ongoing OCC................................................................................. $ 270 $ 331
Items excluded from OCC:
Goodwill and trademark amortization....................................................... (92) (91)
Interest and debt expense................................................................. (105) (107)
Other income (expense), net............................................................... (7) (5)
Tobacco settlement and related expenses................................................... -- (312)
--------- ---------
Income (loss) before income taxes....................................................... $ 66 $ (184)
--------- ---------
--------- ---------
</TABLE>
F-42
<PAGE>
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,
among which are 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 first quarter of 1999, 35 new actions were served
against RJR Tobacco Company and/or its affiliates or indemnitees, as against 72
in the first quarter of 1998, and 49 actions were dismissed or otherwise
resolved in favor of RJR Tobacco Company and/or its affiliates or indemnitees
without trial. In recent years, there have been noteworthy increases in the
number of cases pending. On March 31, 1999, there were 647 active cases pending,
as compared with 550 on March 31, 1998 and 278 on March 31, 1997. As of May 14,
1999, 653 active cases were pending against RJR Tobacco Company and/or its
affiliates or indemnitees: 649 in the United States; one in each of Canada, the
Marshall Islands, Nigeria and Puerto Rico.
The U.S. cases are pending in 41 U.S. states and the District of Columbia,
although four states -- West Virginia, Florida, New York and California --
account for approximately 61% of these cases. The breakdown is as follows: 122
in West Virginia; 110 in New York; 107 in Florida; 55 in California; 34 in
Massachusetts; 25 in Louisiana; 18 in Texas; 17 in Tennessee; 16 in
Pennsylvania; 15 in the District of Columbia; 11 in New Jersey; ten in Alabama;
nine in each of Illinois and Mississippi; seven in each of Iowa and Ohio; five
in each of Indiana, Maryland, Minnesota, Missouri and Nevada; four in each of
Arkansas, Georgia, Oklahoma and Rhode Island; three in each of Arizona, New
Mexico, Virginia, Washington and Wisconsin; two in each of Colorado, Hawaii,
Kentucky, Michigan, North Carolina, North Dakota, South Carolina, South Dakota
and Utah; and one in each of Kansas, New Hampshire, and Oregon. Of the 649
active U.S. cases, 170 are pending in federal court, 474 in state court and five
in tribal courts. 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 on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, antitrust, 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. Nine of the 653 active cases in the United
States involve alleged non-smokers claiming injuries purportedly resulting from
exposure to environmental tobacco smoke. Fifty-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, African-American smokers
claiming their civil rights have been violated by the sale of menthol
cigarettes, purchasers of cigarettes claiming to have been defrauded and seeking
to recover their costs and Blue Cross/Blue Shield subscribers seeking
reimbursement for premiums paid. Approximately 103 of the active cases seek,
INTER ALIA, recovery of health-related costs paid for treatment of individuals
suffering from diseases or conditions allegedly related to tobacco use. Nine,
brought by entities administering asbestos liability, seek contribution for the
costs of settlements and judgments.
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; and statutes of limitations or repose; and, when
applicable,
F-43
<PAGE>
NOTE 4 -- CONTINGENCIES (CONTINUED)
additional statutory, equitable, constitutional and other defenses. RJR Tobacco
Holdings and NGH have asserted additional defenses, including jurisdictional
defenses, in many of these cases in which they are named.
INDUSTRY TRIAL RESULTS. Juries have found for plaintiffs in six smoking and
health cases in which RJR Tobacco Company was not a defendant. In one of these
cases, no damages were awarded and the judgment was affirmed on appeal. The jury
awarded plaintiffs $400,000 in another of these cases, CIPOLLONE V. LIGGETT
GROUP, INC., but the award was overturned on appeal and the case was
subsequently dismissed. In the third of these cases, on August 9, 1996, a
Florida jury awarded damages of $750,000 to an individual plaintiff. That case,
CARTER V. BROWN & WILLIAMSON, was overturned on appeal on June 22, 1998. In
another Florida case brought by the same attorney, WIDDICK V. BROWN &
WILLIAMSON, a state court jury awarded the plaintiff approximately $1 million in
compensatory and punitive damages on June 10, 1998. On January 29, 1999, the
Florida Court of Appeals reversed this verdict 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 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, 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 will
appeal 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, a jury in Missouri federal court found that Brown &
Williamson was not liable for the death of the plaintiff.
On May 5, 1997, in an individual case filed against RJR Tobacco Company,
CONNOR V. R. J. REYNOLDS TOBACCO CO., brought by the same attorney who
represented plaintiffs in the CARTER and WIDDICK cases, a Florida state court
jury found no RJR Tobacco Company liability. On October 31, 1997, in still
another case, KARBIWNYK V. R. J. REYNOLDS TOBACCO COMPANY, brought by the same
attorney, another Florida state court jury found no RJR Tobacco Company
liability. On March 19, 1998, an Indiana state court jury found for RJR Tobacco
Company, NGH and other defendants in an individual case, DUNN V. RJR NABISCO
HOLDINGS CORP., in which plaintiffs sought damages for the alleged harm caused
to a non-smoker by environmental tobacco smoke. On March 18, 1999, the jury in
an Ohio federal district court found for the defendants, including RJR Tobacco
Company, on all counts in a class-action union trust-fund case, IRONWORKERS
LOCAL 17 V. PHILIP MORRIS. On May 10, 1999 in NEWCOMB V. R. J. REYNOLDS TOBACCO
CO., one of three individual cases in Tennessee state court which had been
consolidated for trial, a state-court jury refused to award damages against RJR
Tobacco Company or Brown & Williamson. The tobacco company defendants in the
other two cases were found to have no liability. Finally, on June 2, 1999, a
Mississippi state court jury found in favor of defendants, including RJR Tobacco
Company and RJR Tobacco Holdings, in an environmental tobacco smoke case, BUTLER
V. AMERICAN TOBACCO COMPANY. Finally, 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 COMPANY.
CLASS-ACTION SUITS. In May 1996, in an early class action case, CASTANO V.
AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals overturned the
certification of a purported nationwide class of persons whose claims related to
alleged addiction to tobacco. Since this ruling by the Fifth Circuit, most
purported class-action suits have sought certification of statewide, rather than
nationwide, classes.
F-44
<PAGE>
NOTE 4 -- CONTINGENCIES (CONTINUED)
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. A putative class action filed in Tennessee seeks
reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout
the United States. On October 19, 1998, a putative class action was filed in
federal court in Philadelphia, Pennsylvania, on behalf of "all living Black
Americans who have purchased or consumed menthol tobacco products since 1954
(including minors through their legal representatives)" seeking redress of
alleged violations of the plaintiffs' civil rights. 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. Other types of class-action suits have also been filed
in additional jurisdictions and there are also putative class action suits
pending in Canada, Puerto Rico and Nigeria. 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.
Despite the marked increase of purported class actions brought against
tobacco companies, few purported class actions have been certified, or if
certified, have survived on appeal. Most recently, 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. On April 12, 1999, in CHAMBERLAIN V. AMERICAN TOBACCO COMPANY,
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 COMPANY, 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 COMPANY, 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 COMPANY, 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".
Class certification was granted in 1998 by a Maryland state court in
RICHARDSON V. PHILIP MORRIS. 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 COMPANY). 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, in
October, 1997. The Florida Court of Appeals denied challenges to this settlement
on March 24, 1999 and subsequently denied motions to reconsider.
Trial is underway in a class-action suit pending in Florida, ENGLE V. R.J.
REYNOLDS TOBACCO COMPANY, 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. A jury determination of liability was handed down on July 7, 1999
against RJR Tobacco Company and the other cigarette manufacturer defendants in
the initial phase, which included common issues related to liability, general
causation and a potential award of or entitlement to punitive damages. We expect
that individual liability and damages, if any, will not be determined until a
verdict is reached in one or more trials involving the nine named class
representatives during the second phase. No actual damages would have to be paid
until the end of the trial and the appellate process.
F-45
<PAGE>
NOTE 4 -- CONTINGENCIES (CONTINUED)
HEALTH-CARE COST RECOVERY CASES. In June 1994, the Mississippi attorney
general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, 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
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 states and contains releases of various additional
present and future claims.
When judicially approved, 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 June 29, 1999, final
approval was obtained in the requisite number of settling states (42), but those
states' percentage shares comprise only 54.18%, 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 and will be funded
through price increases. RJR Tobacco Company estimates payments in future years
to exceed $2.0 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 has been
reached with the government in British Columbia that these separate
constitutional challenges will be litigated prior to the health-care recovery
action. These constitutional challenges are scheduled to be heard by the
Canadian courts in the autumn 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. Approximately 70 lawsuits
have been brought by union trust funds against cigarette
F-46
<PAGE>
NOTE 4 -- CONTINGENCIES (CONTINUED)
manufacturers and others in the past two years. 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.
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, on
remoteness grounds. Then, a week later, the Second Circuit handed down its
decision in LABORERS LOCAL 17 V. PHILIP MORRIS, 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 on remoteness and
standing grounds. Numerous trial court judges have also dismissed these cases on
remoteness grounds, including most recently, on April 29, 1999, a federal
district court in Minnesota in LYONS V. PHILIP MORRIS. Nonetheless, in other
federal circuits, there are still some union cases that have survived motions to
dismiss and that may proceed to trial. Most recently, on March 31, 1999, a
federal district court denied defendants' motion to dismiss in UTAH LABORERS V.
PHILIP MORRIS. One such case, NORTHWEST LABORERS V. PHILIP MORRIS, is scheduled
for trial in a State of Washington federal district court in September 1999.
The first union case to survive motions to dismiss and go to trial was IRON
WORKERS LOCAL NO. 17 V. PHILIP MORRIS. 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.
OTHER HEALTH-CARE COST RECOVERY AND AGGREGATED CLAIMS PLAINTIFFS. Native
American tribes have filed similar cases, five in tribal courts and one putative
class action in San Diego Superior Court. Four groups of health-care insurers,
as well as a private entity that purported to self insure its employee
health-care programs, have also advanced claims similar to those found in the
union health-care cost recovery actions. Two of these "insurer" cases, WILLIAMS
& DRAKE V. AMERICAN TOBACCO and REGENCE BLUESHIELD V. PHILIP MORRIS, were
dismissed in their entirety on "remoteness" grounds by federal district courts
in Pennsylvania and Washington, respectively. In a third "insurers" case, GROUP
HEALTH PLAN, INC. V. PHILIP MORRIS, a federal district judge in Minnesota, on
April 29, 1999, dismissed all claims, except a state antitrust claim and a
conspiracy claim. Five foreign countries have also brought health-care cost
recovery suits against RJR Tobacco Company in U.S. courts. Other cost recovery
suits have been brought by, among others, local governmental jurisdictions,
taxpayers (on behalf of a governmental jurisdiction), a university and a
hospital. Finally, nine 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.
F-47
<PAGE>
NOTE 4 -- CONTINGENCIES (CONTINUED)
RECENT AND SCHEDULED TRIALS. As of June 11, 1999, there were 5 cases
scheduled for trial in 1999 against RJR Tobacco Company alleging injuries
relating to tobacco. In addition, one case is currently in progress, the ENGLE
case in Florida. Cases against other tobacco company defendants are also
scheduled for trial in 1999 and thereafter. Although trial schedules are subject
to change and many cases are dismissed before trial, it is likely that there
will be an increased number of tobacco cases, 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. In January of 1999, President Clinton announced that
the U.S. Department of Justice is preparing a litigation plan for a lawsuit by
the federal government to recover federal healthcare costs associated with
cigarette smoking, and press reports have indicated that the Justice Department
has engaged a private law firm to assist in such a lawsuit.
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 and Washington, D.C. that relate to the cigarette business. In
addition, 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 is
responding to the subpoena. RJR Tobacco Company is also responding 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.
On December 22, 1998, a now inactive tobacco subsidiary that was part of
Reynolds International's business, Northern Brands International, Inc., 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. . . ." Northern Brands agreed to pay a $10 million
forfeiture and a $5.2 million fine and special assessment. In the plea
agreement, the U.S. Attorney agreed not to bring additional criminal charges in
the Northern District against Northern Brands or its corporate affiliates,
including NGH, RJR Tobacco Holdings, RJR Tobacco Company and Reynolds
International, for actions from 1985 through 1998 that are related to those that
gave rise to the agreement. RJR-MacDonald, 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.
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.
F-48
<PAGE>
NOTE 4 -- CONTINGENCIES (CONTINUED)
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 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 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 -- 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. The sale was substantially completed on May 12,
1999. Under the terms of the agreement, Japan Tobacco acquired substantially all
of the business including intellectual property rights of the international
tobacco business, including 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 RJR Tobacco Holdings expects that this debt reduction
will substantially strengthen the financial position of RJR Tobacco Holdings and
RJR Tobacco Company.
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 Holdings Corp. Under the plan, the separation was accomplished by the
transfer of RJR Tobacco Holdings' 80.5% interest in Nabisco, together with
approximately $1.6 billion in after-tax proceeds from the international tobacco
sale, to NGH through a merger transaction that is intended to be tax-free and
which occurred on May 18, 1999, followed by a spin-off to NGH stockholders of
shares in RJR Tobacco Holdings that is intended to be tax-free.
On May 12, 1999, NGH's board of directors approved the spin-off, which
occurred on June 14, 1999. NGH will continue to exist as a holding company,
owning 80.5% of Nabisco. Nabisco Group Holdings Corp. and Nabisco will each
continue to trade as separate companies on the New York Stock Exchange and
shares of RJR Tobacco Holdings, as the owner of 100% of RJR Tobacco Company,
will also trade separately.
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
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 $4 billion of its debt with a portion of the proceeds from
the sale of the international tobacco business.
F-49
<PAGE>
NOTE 5 -- THE REORGANIZATION (CONTINUED)
On May 7, 1999, RJR Tobacco Holdings entered into a $1.235 billion floating
rate revolving credit agreement with a syndicate of commercial banks and on May
18, 1999, RJR Tobacco Holdings completed a private placement offering of $1.25
billion in debt securities (the notes that are subject to the exchange offer
described in this prospectus). The net proceeds received will be used for
general corporate purposes. RJR Tobacco Company has guaranteed RJR Tobacco
Holdings' obligations under the revolving credit agreement and the debt
securities.
The operating results of the international tobacco business and Nabisco are
segregated and reported as discontinued operations in the accompanying
consolidated condensed financial statements. Prior period financial statements
have been reclassified to conform to the current year presentation.
Summarized operating results of the discontinued operations are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales.................................................................. $ 2,528 $ 2,734
Provision for income taxes................................................. 48 76
Net income................................................................. 65 133
</TABLE>
Assets and liabilities of the discontinued businesses are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Current assets...................................................... $ 3,407 $ 3,357
Property, plant and equipment, net.................................. 4,079 4,183
Trademarks and goodwill, net........................................ 7,618 7,710
Other assets and deferred charges................................... 219 227
Current liabilities................................................. (2,498) (2,685)
Long-term debt (less current maturities)............................ (3,887) (3,794)
Minority interest in Nabisco........................................ (727) (752)
Deferred income taxes............................................... (1,187) (1,195)
Other noncurrent liabilities........................................ (1,094) (1,090)
----------- ------------
Net assets of discontinued businesses............................. $ 5,930 $ 5,961
----------- ------------
----------- ------------
</TABLE>
F-50
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
INDEMNIFICATION OF DIRECTORS
RJR TOBACCO HOLDINGS
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any of its directors or officers who was or is a party, or is
threatened to be made a party, to any third party proceeding by reason of the
fact that such person is or was a director or officer of the corporation,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reason to believe that such person's conduct was unlawful. In
a derivative action, I.E., one by or in the right of a corporation, the
corporation is permitted to indemnify directors and officers against expenses
(including attorneys' fees) actually and reasonably incurred by them in
connection with the defense or settlement of an action or suit if they acted in
good faith and in a manner that they reasonably believed to be in or not opposed
to the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant directors or
officers are fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
Expenses, including attorneys' fees, incurred by any such person in
defending any such action, suit or proceeding may be paid or reimbursed by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt by it of an undertaking of such person to repay such
expenses if it shall ultimately be determined that such person is not entitled
to be indemnified by the corporation.
Delaware law does not permit a corporation to indemnify persons against
judgments in actions brought by or in the right of the corporation unless the
Delaware Court of Chancery approves the indemnification.
RJR Tobacco Holdings' certificate of incorporation provides that each person
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, because that person is or was an RJR Tobacco
Holdings director or officer or is or was serving at RJR Tobacco Holdings'
request as a director or officer of another entity, shall be indemnified and
held harmless by RJR Tobacco Holdings to the fullest extent permitted by
Delaware law. This right to indemnification also includes the right to be paid
by RJR Tobacco Holdings the expenses incurred in connection with that proceeding
in advance of its final disposition to the fullest extent authorized by Delaware
law. This right to indemnification is a contract right. RJR Tobacco Holdings'
certificate of incorporation authorizes its Board of Directors to indemnify any
of RJR Tobacco Holdings' employees or agents to the extent approved by the Board
of Directors and authorized under Delaware law.
RJR Tobacco Holdings intends to purchase and maintain insurance on behalf of
any person who is or was one of its directors, officers, employees or agents, or
is or was serving at the request of RJR Tobacco Holdings as a director, officer,
employee or agent of another entity against any liability asserted against him
or her and incurred by him or her in that capacity, or arising out of his or her
status as such, whether or not RJR Tobacco Holdings would have the power or the
obligation to indemnify him or her against that liability under the provisions
of the certificate of incorporation of RJR Tobacco Holdings.
II-1
<PAGE>
RJR TOBACCO COMPANY
Section 14A:3-5 of the Business Corporation Act of the State of New Jersey
("NJBCA") permits a New Jersey corporation to indemnify its directors, officers,
employees and agents against expenses and liability for such person's acts taken
in his or her capacity as a director, officer, employee or agent of the
corporation if such actions were taken in good faith and in a manner which he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal proceeding, if he or she had no
reasonable cause to believe his or her conduct was unlawful.
Article V of RJR Tobacco Company's Bylaws provides that RJR Tobacco Company
shall indemnify all past and present directors, officers, employees or other
agents of RJR Tobacco Company under substantially all the circumstances
permissible under the NJBCA.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- ------------------ ---------------------------------------------------------------------------------- -----------
<S> <C> <C>
2.1 Distribution Agreement dated as of May 12, 1999 among RJR Nabisco Holdings Corp.,
RJR Nabisco, Inc. and R. J. Reynolds Tobacco Company (incorporated herein by
reference to Exhibit 2.1 of the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc.
filed May 19, 1999).
3(a)(1) Restated Certificate of Incorporation of R.J. Reynolds Tobacco Holdings, Inc.
(incorporated herein by reference to Exhibit 3.1 of the Form 8-K of R.J. Reynolds
Tobacco Holdings, Inc. dated June 14, 1999).
3(a)(2) Restated Certificate of Incorporation of R.J. Reynolds Tobacco Company.
3(b)(1) Bylaws of R.J. Reynolds Tobacco Holdings, Inc. (incorporated herein by reference
to Exhibit 3.2 of the Form 8-K of R.J. Reynolds Tobacco Holdings, Inc. dated June
14, 1999).
3(b)(2) Bylaws of R.J. Reynolds Tobacco Company.
4.1 Indenture, dated as of May 15, 1999, among RJR Nabisco, Inc., R.J. Reynolds
Tobacco Company and The Bank of New York, as Trustee (incorporated herein by
reference to Exhibit 10.2 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc.
filed May 19, 1999).
4.2 Registration Rights Agreement, dated as of May 18, 1999, among RJR Nabisco, Inc.,
R.J. Reynolds Tobacco Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and the other initial purchasers
of the old notes.
4.3 Amended and Restated Indenture, dated as of July 24, 1995, between RJR Nabisco,
Inc. and The Bank of New York (incorporated herein by reference to Exhibit 4.1 to
the Quarterly Report on Form 10-Q of RJR Nabisco, Inc. for the three months ended
June 30, 1995).
4.4 First Supplemental Indenture and Waiver dated as of April 27, 1999 between RJR
Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture
dated as of July 24, 1995 between RJR Nabisco, Inc. and The Bank of New York as
successor trustee (incorporated herein by reference to Exhibit 10.3 to the Form
8-A of R.J. Reynolds Tobacco Holdings, Inc. filed May 19, 1999).
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
4.5 Second Supplemental Indenture and Waiver dated as of April 27, 1999 between RJR
Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture
dated as of May 18, 1992 between RJR Nabisco, Inc. and The Bank of New York as
successor trustee, as amended by the Form of First Supplemental Indenture and
Waiver thereto dated as of June 2, 1995 (incorporated herein by reference to
Exhibit 10.4 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc. filed May 19,
1999).
5 Opinion of Davis Polk & Wardwell regarding the validity of the securities being
registered.
10.1 Tax Sharing Agreement dated as of June 14, 1999 among RJR Nabisco Holdings Corp.,
R.J. Reynolds Tobacco Holdings, Inc., R.J. Reynolds Tobacco Company and Nabisco
Holdings Corp. (incorporated herein by reference to Exhibit 10.1 to the Form 8-K
of R.J. Reynolds Tobacco Holdings, Inc. dated June 14, 1999).
10.2 Guarantee dated as of May 18, 1999 by R. J. Reynolds Tobacco Company to the
holders and to The Bank of New York, as trustee, in connection with the Indenture
dated as of May 15, 1999 among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company
and The Bank of New York as trustee (incorporated herein by reference to Exhibit
10.6 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc. filed May 19, 1999).
10.3 Credit Agreement dated as of May 7, 1999, among RJR Nabisco, Inc., RJR Nabisco
Holdings Corp. and the lending institutions listed and to be listed from time to
time on Annex 1 (incorporated herein by reference to Exhibit 10.5 to the Form 8-A
of R.J. Reynolds Tobacco Holdings, Inc. filed May 19, 1999).
10.4 Form of Subsidiary Guaranty by R. J. Reynolds Tobacco Company to the creditors
defined therein, in connection with the Credit Agreement dated as of May 7, 1999,
among RJR Nabisco, Inc., RJR Nabisco Holdings Corp. and the lending institutions
listed and to be listed from time to time on Annex 1 (incorporated herein by
reference to Exhibit 10.7 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc.
filed May 19, 1999).
10.5 Purchase Agreement dated as of March 9, 1999, as amended and restated as of May
11, 1999, among R.J. Reynolds Tobacco Company, RJR Nabisco, Inc. and Japan Tobacco
Inc. (incorporated herein by reference to Exhibit 2.1 to the Form 8-K of R.J.
Reynolds Tobacco Holdings, Inc. dated May 12, 1999).
10.6 Settlement Agreement dated August 25, 1997, between the State of Florida and
settling defendants in The State of Florida v. American Tobacco Company
(incorporated herein by reference to Exhibit 2 to the Form 8-K of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. dated August 25, 1997).
10.7 Settlement Agreement dated January 16, 1998, between the State of Texas and
settling defendants in the State of Texas v. American Tobacco Company
(incorporated herein by reference to Exhibit 2 to the Form 8-K of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. dated January 16, 1998).
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
10.8 Settlement Agreement and Release in re: The State of Minnesota, et al., v. Phillip
Morris, et al., by and among the State of Minnesota, Blue Cross and Blue Shield of
Minnesota and the various tobacco-company defendants named therein, dated as of
May 8, 1998 (incorporated herein by reference to Exhibit 99.1 to the Quarterly
Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the
fiscal quarter ended March 31, 1998 (the "First Quarter 1998 Form 10-Q")).
10.9 Settlement Agreement and Stipulation for Entry of Consent Judgement in re: The
State of Minnesota, et al., v Phillip Morris, et al., by and among the State of
Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco-company
defendants named therein, dated as of May 8, 1998 (incorporated herein by
reference to Exhibit 99.2 to the First Quarter 1998 Form 10-Q).
10.10 Form of Consent Judgement by Judge Kenneth J. Fitzpatrick, Judge of District Court
in re: The State of Minnesota, et al., v. Phillip Morris, et al. (incorporated
herein by reference to Exhibit 99.3 to the First Quarter 1998 Form 10-Q).
10.11 Agreement to Pay State of Minnesota Attorneys' Fees and Costs by and among the
State of Minnesota and various tobacco companies, dated as of May 8, 1998
(incorporated herein by reference to Exhibit 99.4 to the First Quarter 1998 Form
10-Q).
10.12 Agreement to Pay Blue Cross and Blue Shield of Minnesota Attorneys' Fees and Costs
by and among Blue Cross and Blue Shield of Minnesota and various tobacco
companies, dated as of May 8, 1998 (incorporated herein by reference to Exhibit
99.5 to the First Quarter 1998 Form 10-Q).
10.13 Mississippi Fee Payment Agreement, dated as of July 2, 1998, by and among Phillip
Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco
Corporation and (collectively, the "Mississippi Defendants"), the State of
Mississippi ("Mississippi") and Mississippi's private counsel named therein (the
"Mississippi Counsel") in connection with Moore v. The American Tobacco Company,
et al., Mississippi Litigation No. 94-1429 (the "Mississippi Action")
(incorporated herein by reference to Exhibit 99.1 to the Quarterly Report on Form
10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter
ended June 30, 1998 (the "Second Quarter 1998 Form 10-Q")).
10.14 Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order,
dated July 2, 1998 by and among the Mississippi defendants, Mississippi and the
Mississippi Counsel in connection with the Mississippi Action (incorporated herein
by reference to Exhibit 99.2 to the Second Quarter 1998 Form 10-Q).
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
10.15 Texas Fee Payment Agreement, dated as of July 24, 1998, by and among Phillip
Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco
Corporation, Lorillard Tobacco Company and United States Tobacco Company
(collectively, the "Texas Defendants"), the State of Texas ("Texas") and Texas'
private counsel named therein (the "Texas Counsel") in connection with Texas v.
The American Tobacco Company, et al., Texas Litigation No. 5-96CV-91 (the "Texas
Action") (incorporated herein by reference to Exhibit 99.3 to the Second Quarter
1998 Form 10-Q).
10.16 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree,
dated July 24, 1998 by and among the Texas Defendants, Texas and the Texas private
counsel in connection with the Texas Action (incorporated herein by reference to
Exhibit 99.4 to the Second Quarter 1998 Form 10-Q).
10.17 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree,
dated September 11, 1998 by an among the State of Florida and the tobacco
companies named therein (incorporated herein by reference to Exhibit 99.1 to the
Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp and RJR Nabisco, Inc.
for the fiscal quarter ended September 30, 1998 (the "Third Quarter 1998 Form
10-Q")).
10.18 Florida Fee Payment Agreement, dated September 11, 1998, by and among the State of
Florida, various Florida counsel and the tobacco companies named therein
(incorporated herein by reference to Exhibit 99.2 to the Third Quarter 1998 Form
10-Q).
10.19 Form of MFN Escrow Agreement by and among the State of Florida, the tobacco
companies named therein and a bank acting as escrow agent (incorporated herein by
reference to Exhibit 99.31 to the Third Quarter 1998 Form 10-Q).
10.20 Master Settlement Agreement (the "MSA") dated November 23, 1998, between the
Settling States named in the MSA and the Participating Manufacturers also named
therein (incorporated herein by reference to Exhibit 4 to the Form 8-K of RJR
Nabisco Holdings Corp. and RJR Nabisco, Inc.).
12 Computation of Ratio of Earnings to Fixed Charges/Deficiency in the Coverage of
Fixed Charges by Earnings Before Fixed Charges.
23(a) Consent of Deloitte & Touche LLP.
23(b) Consent of Davis Polk & Wardwell (included in the opinion filed as Exhibit 5 to
this Registration Statement).
24 Powers of Attorney.
*25 Statement of Eligibility of The Bank of New York.
27.1 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the year ended
December 31, 1998.
27.2 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the year ended
December 31, 1997.
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
27.3 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the year ended
December 31, 1996.
27.4 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the three months
ended March 31, 1999.
27.5 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the three months
ended March 31, 1998.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Clients.
99.4 Form of Letter to Nominees.
99.5 Form of Instructions to Registered Holder and/or Book-Entry Transfer Participant
from Owner.
</TABLE>
* To be filed by amendment.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by a registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the securities being
registered, such registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Forsyth, State of North
Carolina, on July 16, 1999.
<TABLE>
<S> <C> <C>
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
(Registrant)
By: /s/ Andrew J. Schindler
----------------------------------------
Name: Andrew J. Schindler
Title: President and Chief Executive
Officer
</TABLE>
------------------------
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ --------------
<C> <S> <C>
Chairman of the Board,
/s/ ANDREW J. SCHINDLER President and Chief
- ------------------------------ Executive July 16, 1999
Andrew J. Schindler Officer
Executive Vice President
/s/ KENNETH J. LAPIEJKO and Chief Financial Officer
- ------------------------------ (principal financial July 16, 1999
Kenneth J. Lapiejko officer)
Senior Vice President and
/s/ THOMAS R. ADAMS Controller
- ------------------------------ (principal accounting July 16, 1999
Thomas R. Adams officer)
*
- ------------------------------ Director July 16, 1999
John T. Chain, Jr.
*
- ------------------------------ Director July 16, 1999
A.D. Frazier, Jr.
*
- ------------------------------ Director July 16, 1999
Denise Ilitch
*
- ------------------------------ Director July 16, 1999
John G. Medlin, Jr.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ --------------
<C> <S> <C>
*
- ------------------------------ Director July 16, 1999
Nana Mensah
*
- ------------------------------ Director July 16, 1999
Joseph P. Viviano
*
- ------------------------------ Director July 16, 1999
Thomas C. Wajnert
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: */s/ MCDARA P. FOLAN, III
---------------------------
McDara P. Folan, III
pursuant to powers of
attorney filed as part of
this registration statement
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Forsyth, State of North
Carolina, on July 16, 1999.
<TABLE>
<S> <C> <C>
R.J. REYNOLDS TOBACCO COMPANY
(Registrant)
By: /s/ Andrew J. Schindler
----------------------------------------
Name: Andrew J. Schindler
Title: President and Chief Executive
Officer
</TABLE>
------------------------
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ --------------
<C> <S> <C>
Chairman of the Board,
/s/ ANDREW J. SCHINDLER President and Chief
- ------------------------------ Executive July 16, 1999
Andrew J. Schindler Officer
Executive Vice President,
Chief
/s/ KENNETH J. LAPIEJKO Financial Officer and
- ------------------------------ Director July 16, 1999
Kenneth J. Lapiejko (principal financial
officer)
Senior Vice President and
/s/ THOMAS R. ADAMS Controller
- ------------------------------ (principal accounting July 16, 1999
Thomas R. Adams officer)
/s/ CHARLES A. BLIXT
- ------------------------------ Director July 16, 1999
Charles A. Blixt
/s/ ROBERT R. GORDON, JR.
- ------------------------------ Director July 16, 1999
Robert R. Gordon, Jr.
*
- ------------------------------ Director July 16, 1999
James H. Wilson
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: */s/ MCDARA P. FOLAN, III
---------------------------
McDara P. Folan, III
pursuant to powers of
attorney filed as part of
this registration statement
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- ------------------ ---------------------------------------------------------------------------------- -----------
<S> <C> <C>
2.1 Distribution Agreement dated as of May 12, 1999 among RJR Nabisco Holdings Corp.,
RJR Nabisco, Inc. and R. J. Reynolds Tobacco Company (incorporated herein by
reference to Exhibit 2.1 of the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc.
filed May 19, 1999).
3(a)(1) Restated Certificate of Incorporation of R.J. Reynolds Tobacco Holdings, Inc.
(incorporated herein by reference to Exhibit 3.1 of the Form 8-K of R.J. Reynolds
Tobacco Holdings, Inc. dated June 14, 1999).
3(a)(2) Restated Certificate of Incorporation of R.J. Reynolds Tobacco Company.
3(b)(1) Bylaws of R.J. Reynolds Tobacco Holdings, Inc. (incorporated herein by reference
to Exhibit 3.2 of the Form 8-K of R.J. Reynolds Tobacco Holdings, Inc. dated June
14, 1999).
3(b)(2) Bylaws of R.J. Reynolds Tobacco Company.
4.1 Indenture, dated as of May 15, 1999, among RJR Nabisco, Inc., R.J. Reynolds
Tobacco Company and The Bank of New York, as Trustee (incorporated herein by
reference to Exhibit 10.2 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc.
filed May 19, 1999).
4.2 Registration Rights Agreement, dated as of May 18, 1999, among RJR Nabisco, Inc.,
R.J. Reynolds Tobacco Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and the other initial purchasers
of the old notes.
4.3 Amended and Restated Indenture, dated as of July 24, 1995, between RJR Nabisco,
Inc. and The Bank of New York (incorporated herein by reference to Exhibit 4.1 to
the Quarterly Report on Form 10-Q of RJR Nabisco, Inc. for the three months ended
June 30, 1995).
4.4 First Supplemental Indenture and Waiver dated as of April 27, 1999 between RJR
Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture
dated as of July 24, 1995 between RJR Nabisco, Inc. and The Bank of New York as
successor trustee (incorporated herein by reference to Exhibit 10.3 to the Form
8-A of R.J. Reynolds Tobacco Holdings, Inc. filed May 19, 1999).
4.5 Second Supplemental Indenture and Waiver dated as of April 27, 1999 between RJR
Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture
dated as of May 18, 1992 between RJR Nabisco, Inc. and The Bank of New York as
successor trustee, as amended by the Form of First Supplemental Indenture and
Waiver thereto dated as of June 2, 1995 (incorporated herein by reference to
Exhibit 10.4 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc. filed May 19,
1999).
5 Opinion of Davis Polk & Wardwell regarding the validity of the securities being
registered.
10.1 Tax Sharing Agreement dated as of June 14, 1999 among RJR Nabisco Holdings Corp.,
R.J. Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company and Nabisco
Holdings Corp. (incorporated herein by reference to Exhibit 10.1 to the Form 8-K
of R.J. Reynolds Tobacco Holdings, Inc. dated June 14, 1999).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.2 Guarantee dated as of May 18, 1999 by R. J. Reynolds Tobacco Company to the
holders and to The Bank of New York, as trustee, in connection with the Indenture
dated as of May 15, 1999 among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company
and The Bank of New York as trustee (incorporated herein by reference to Exhibit
10.6 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc. filed May 19, 1999).
10.3 Credit Agreement dated as of May 7, 1999, among RJR Nabisco, Inc., RJR Nabisco
Holdings Corp. and the lending institutions listed and to be listed from time to
time on Annex 1 (incorporated herein by reference to Exhibit 10.5 to the Form 8-A
of R.J. Reynolds Tobacco Holdings, Inc. filed May 19, 1999).
10.4 Form of Subsidiary Guaranty by R. J. Reynolds Tobacco Company to the creditors
defined therein, in connection with the Credit Agreement dated as of May 7, 1999,
among RJR Nabisco, Inc., RJR Nabisco Holdings Corp. and the lending institutions
listed and to be listed from time to time on Annex 1. (incorporated herein by
reference to Exhibit 10.7 to the Form 8-A of R.J. Reynolds Tobacco Holdings, Inc.
filed May 19, 1999).
10.5 Purchase Agreement dated as of March 9, 1999, as amended and restated as of May
11, 1999, among R.J. Reynolds Tobacco Company, RJR Nabisco, Inc. and Japan Tobacco
Inc. (incorporated herein by reference to Exhibit 2.1 to the Form 8-K of R.J.
Reynolds Tobacco Holdings, Inc. dated May 12, 1999).
10.6 Settlement Agreement dated August 25, 1997, between the State of Florida and
settling defendants in The State of Florida v. American Tobacco Company
(incorporated herein by reference to Exhibit 2 to the Form 8-K of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. dated August 25, 1997).
10.7 Settlement Agreement dated January 16, 1998, between the State of Texas and
settling defendants in the State of Texas v. American Tobacco Company
(incorporated herein by reference to Exhibit 2 to the Form 8-K of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. dated January 16, 1998).
10.8 Settlement Agreement and Release in re: The State of Minnesota, et al., v. Phillip
Morris, et al., by and among the State of Minnesota, Blue Cross and Blue Shield of
Minnesota and the various tobacco-company defendants named therein, dated as of
May 8, 1998 (incorporated herein by reference to Exhibit 99.1 to the Quarterly
Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the
fiscal quarter ended March 31, 1998 (the "First Quarter 1998 Form 10-Q")).
10.9 Settlement Agreement and Stipulation for Entry of Consent Judgement in re: The
State of Minnesota, et al., v Phillip Morris, et al., by and among the State of
Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco-company
defendants named therein, dated as of May 8, 1998 (incorporated herein by
reference to Exhibit 99.2 to the First Quarter 1998 Form 10-Q).
10.10 Form of Consent Judgement by Judge Kenneth J. Fitzpatrick, Judge of District Court
in re: The State of Minnesota, et al., v. Phillip Morris, et al. (incorporated
herein by reference to Exhibit 99.3 to the First Quarter 1998 Form 10-Q).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.11 Agreement to Pay State of Minnesota Attorneys' Fees and Costs by and among the
State of Minnesota and various tobacco companies, dated as of May 8, 1998
(incorporated herein by reference to Exhibit 99.4 to the First Quarter 1998 Form
10-Q).
10.12 Agreement to Pay Blue Cross and Blue Shield of Minnesota Attorneys' Fees and Costs
by and among Blue Cross and Blue Shield of Minnesota and various tobacco
companies, dated as of May 8, 1998 (incorporated herein by reference to Exhibit
99.5 to the First Quarter 1998 Form 10-Q).
10.13 Mississippi Fee Payment Agreement, dated as of July 2, 1998, by and among Phillip
Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco
Corporation and (collectively, the "Mississippi Defendants"), the State of
Mississippi ("Mississippi") and Mississippi's private counsel named therein (the
"Mississippi Counsel") in connection with Moore v. The American Tobacco Company,
et al., Mississippi Litigation No. 94-1429 (the "Mississippi Action")
(incorporated herein by reference to Exhibit 99.1 to the Quarterly Report on Form
10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter
ended June 30, 1998 (the "Second Quarter 1998 Form 10-Q")).
10.14 Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order,
dated July 2, 1998 by and among the Mississippi defendants, Mississippi and the
Mississippi Counsel in connection with the Mississippi Action (incorporated herein
by reference to Exhibit 99.2 to the Second Quarter 1998 Form 10-Q).
10.15 Texas Fee Payment Agreement, dated as of July 24, 1998, by and among Phillip
Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco
Corporation, Lorillard Tobacco Company and United States Tobacco Company
(collectively, the "Texas Defendants"), the State of Texas ("Texas") and Texas'
private counsel named therein (the "Texas Counsel") in connection with Texas v.
The American Tobacco Company, et al., Texas Litigation No. 5-96CV-91 (the "Texas
Action") (incorporated herein by reference to Exhibit 99.3 to the Second Quarter
1998 Form 10-Q).
10.16 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree,
dated July 24, 1998 by and among the Texas Defendants, Texas and the Texas private
counsel in connection with the Texas Action (incorporated herein by reference to
Exhibit 99.4 to the Second Quarter 1998 Form 10-Q).
10.17 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree,
dated September 11, 1998 by an among the State of Florida and the tobacco
companies named therein (incorporated herein by reference to Exhibit 99.1 to the
Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp and RJR Nabisco, Inc.
for the fiscal quarter ended September 30, 1998 (the "Third Quarter 1998 Form
10-Q")).
10.18 Florida Fee Payment Agreement, dated September 11, 1998, by and among the State of
Florida, various Florida counsel and the tobacco companies named therein
(incorporated herein by reference to Exhibit 99.2 to the Third Quarter 1998 Form
10-Q).
10.19 Form of MFN Escrow Agreement by and among the State of Florida, the tobacco
companies named therein and a bank acting as escrow agent (incorporated herein by
reference to Exhibit 99.31 to the Third Quarter 1998 Form 10-Q).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.20 Master Settlement Agreement (the "MSA") dated November 23, 1998, between the
Settling States named in the MSA and the Participating Manufacturers also named
therein (incorporated herein by reference to Exhibit 4 to the Form 8-K of RJR
Nabisco Holdings Corp. and RJR Nabisco, Inc.)
12 Computation of Ratio of Earnings to Fixed Charges/Deficiency in the Coverage of
Fixed Charges by Earnings Before Fixed Charges.
23(a) Consent of Deloitte & Touche LLP.
23(b) Consent of Davis Polk & Wardwell (included in the opinion filed as Exhibit 5 to
this Registration Statement).
24 Powers of Attorney.
*25 Statement of Eligibility of The Bank of New York.
27.1 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the year ended
December 31, 1998.
27.2 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the year ended
December 31, 1997.
27.3 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the year ended
December 31, 1996.
27.4 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the three months
ended March 31, 1999.
27.5 R.J. Reynolds Tobacco Holdings, Inc. Financial Data Schedule for the three months
ended March 31, 1998.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Clients.
99.4 Form of Letter to Nominees.
99.5 Form of Instructions to Registered Holder and/or Book-Entry Transfer Participant
from Owner.
</TABLE>
* To be filed by amendment.
<PAGE>
EXHIBIT 3(A)(2)
RESTATED CERTIFICATE OF INCORPORATION
OF
R. J. REYNOLDS TOBACCO COMPANY
R. J. REYNOLDS TOBACCO COMPANY, a corporation organized and existing under
the laws of the State of New Jersey, pursuant to Section 14A:9-5 of the New
Jersey Business Corporation Act, does hereby adopt the following Restated
Certificate of Incorporation:
CERTIFICATE OF INCORPORATION
OF
R. J. REYNOLDS TOBACCO COMPANY
FIRST: The name of the Corporation is
"R. J. REYNOLDS TOBACCO COMPANY."
SECOND: The address of the registered office of the Corporation in the State
of New Jersey is One Exchange Place, Jersey City, New Jersey. The name of the
Corporation's registered agent at such address is First Jersey National Bank.
THIRD: The purpose of the Corporation is to engage in any activity within
the purposes for which corporations may be organized under the New Jersey
Business Corporation Act.
FOURTH: The authorized capital stock of the Corporation consists of 200,000
shares of Common Stock of the par value of One Thousand Dollars ($1,000) each.
FIFTH: The number of Directors constituting the current Board of Directors
of the Corporation is thirteen (13), and the name and addresses of such
Directors are as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
- ---------------------------------- --------------------------------------------------------------------
<S> <C>
Jacques E. Borin 12-14, Chemin Rieu, 1211 Geneva 17, Switzerland
Wm. D. Hobbs 401 N. Main St., Winston-Salem, N.C.
W. Stuart Leake 401 N. Main St., Winston-Salem, N.C.
David S. Peoples 401 N. Main St., Winston-Salem, N.C.
Joseph H. Sherrill 401 N. Main St., Winston-Salem, N.C.
G.D. Smith 401 N. Main St., Winston-Salem, N.C.
William S. Smith 401 N. Main St., Winston-Salem, N.C.
Zachary Smith 401 N. Main St., Winston-Salem, N.C.
Colin Stokes 401 N. Main St., Winston-Salem, N.C.
J.H. Stone 401 N. Main St., Winston-Salem, N.C.
Charles A. Tucker 401 N. Main St., Winston-Salem, N.C.
Edward A. Vassallo 401 N. Main St., Winston-Salem, N.C.
Chas. B. Wade, Jr. 401 N. Main St., Winston-Salem, N.C.
</TABLE>
SIXTH: Meetings of the Board of Directors need not be held in the State of
New Jersey, but may be held in such place or places in any other State, or
States, as the By-Laws of the Corporation may from time to time provide. The
Corporation may, through its Board of Directors, acquire and
<PAGE>
undertake the whole or any part of the business, property, assets, contracts and
liabilities of any person, firm, or corporation, if the same are, in their
judgment, useful in the business of the Corporation.
The Board of Directors shall have the power by vote of a majority of all the
Directors, and without assent or vote of the stockholders, to make, alter, amend
and rescind the By-Laws of the Corporation, to fix the amount to be reserved as
working capital, and to fix what number of Directors shall constitute a quorum
of the Board.
SEVENTH: The existence of the Corporation shall continue perpetually.
IN WITNESS WHEREOF, R. J. Reynolds Tobacco Company has caused this Restated
Certificate to be signed by Wm. D. Hobbs, its President, this 15th day of
August, 1973.
R. J. REYNOLDS TOBACCO COMPANY
______________________________________
Wm. D. Hobbs, President
<PAGE>
EXHIBIT 3(B)(2)
BYLAWS
OF
R. J. REYNOLDS TOBACCO COMPANY
AS AMENDED THROUGH JUNE 24, 1996
ARTICLE I.
MEETINGS OF STOCKHOLDERS
SECTION 1.01 ANNUAL. The annual meeting of the stockholders shall be held
on such date and at such place and time as the Board of Directors shall fix.
SECTION 1.02 SPECIAL. Special meetings of the stockholders may be called by
the President or by the Board of Directors and shall be held on such date and at
such place and time as he or they may fix.
SECTION 1.03 NOTICE. Written notice of the time, place and purpose or
purposes of each meeting of stockholders shall be given not less than 10 days
nor more than 60 days before each meeting, to each stockholder of record
entitled to vote at the meeting.
SECTION 1.04 QUORUM. Holders of shares entitled to cast a majority of the
votes at a meeting shall constitute a quorum at such meeting. If no quorum be
present at any meeting, a majority in interest of the stockholders present in
person or by proxy may adjourn, from time to time, without notice other than by
announcement at the meeting, until holders of shares requisite to constitute a
quorum shall attend. At any such adjourned meeting, at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally noticed.
SECTION 1.05 VOTING. At all meetings of the stockholders, each stockholder
entitled to vote may vote personally or by proxy. The instrument authorizing a
proxy to act at any meeting shall be filed with the Secretary.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01 NUMBER AND TERM. The business of the Company shall be managed
by and under the direction of a Board of Directors. The number of Directors
shall be such number as may from time to time be fixed by the President, but in
no event shall the number be less than three or more than ten Directors.
Directors shall be elected to hold office until the annual meeting of the
stockholders next following their election and until their successors are
elected and shall qualify.
SECTION 2.02 RESIGNATION. Any Director may resign at any time by giving
written notice to the President or the Secretary. Unless otherwise stated in
such notice of resignation, acceptance thereof by the Board shall not be
necessary to make it effective. Any resignation shall take effect at the time
specified therein or, in the absence of such specification, it shall take effect
upon receipt.
SECTION 2.03 VACANCIES. Any vacancy or newly-created Directorship on the
Board shall be filled by a majority vote of the Directors then in office,
although less than a quorum, or by the sole remaining Director, and any
Directors so chosen shall hold office until the next annual meeting of the
stockholders and until his successor shall be elected and shall qualify.
SECTION 2.04 ANNUAL MEETING. As soon as practicable after the annual
meeting of the stockholders (or any action in lieu thereof), an annual meeting
of the Board of Directors shall be held at such place as may be designated by
the President for the purpose of election of officers and the transaction of
such other business as may come before the meeting. Notice of such meeting need
not be given.
SECTION 2.05 REGULAR MEETING. Regular meetings of the Board of Directors
may be held at such time and place as shall from time to time be determined by
the President. After there has been such
<PAGE>
determination and notice thereof has been given to each member of the Board of
Directors, regular meetings may be held without further notices being given.
SECTION 2.06 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be held at such place as the President may specify on the call of the
President on personal, telephoned or telegraphic notice by the Secretary or an
Assistant Secretary of the date, time and place of such meeting.
SECTION 2.07 QUORUM. One third of the Directors in office shall constitute
a quorum for the transaction of business; but if no quorum be present the
Director or Directors present may adjourn any meeting from time to time, until a
quorum shall be present. All questions coming before the Directors shall be
determined by a majority vote of the Directors present, except as the Statutes
of New Jersey, the Certificate of Incorporation of these Bylaws otherwise
provide.
SECTION 2.08 ACTION OF DIRECTORS WITHOUT A MEETING. Subject to the
provisions of the New Jersey Business Corporation Act, any action required or
permitted to be taken pursuant to authorization voted at a meeting of the Board
of Directors or any committee thereof may be taken without a meeting if all
members of the Board of such committee consent thereto in writing.
SECTION 2.09 EXECUTIVE COMMITTEE. The Board of Directors, by resolution
adopted by a majority of the entire Board, may appoint from among its members an
Executive Committee of three or more members, which shall include the President.
The Executive Committee, when the Board of Directors is not in session, shall
have and may exercise all the authority of the Board of Directors, including the
authority to declare dividends upon the stock of the Company, except that the
Executive Committee shall not:
(a) make, alter or repeal any Bylaw;
(b) elect or appoint any Director, or remove any officer or Director;
(c) submit to the stockholders any action that pursuant to the Statutes of
New Jersey requires the stockholders' approval; or
(d) amend or appeal any resolution theretofore adopted by the Board of
Directors which by its terms is amendable or repealable only by the
Board.
A majority of the members of the Executive Committee shall constitute a quorum.
Minutes shall be kept of any and all proceedings of the Executive Committee,
which shall be reported to the next succeeding meeting of the Board of Directors
where they shall be recorded upon the records of the Board of Directors as the
proceedings of the Executive Committee.
SECTION 2.10 OTHER COMMITTEES. The Board of Directors, by resolution
adopted by a majority of the entire Board, may appoint from among its members
one or more other committees, each to consist of at least three members and to
be authorized, by the resolution appointing the members thereof, to have and
exercise all the authority of the Board of Directors in respect of the matters
specified in such resolution, except that such committee shall not be authorized
to exercise any function which the Executive Committee may not exercise. A
majority of such committee shall constitute a quorum. Actions taken at a meeting
of any such committee shall be reported to the next succeeding meeting of the
Board of Directors. The Board of Directors may appoint other committees, whose
members may, but need not be, Directors, to perform administrative and
ministerial functions, not requiring action by the Board of Directors, with
respect to the business and affairs of the Company to recommend action to the
Board of Directors. Any such other committees shall not be deemed committees of
the Board of Directors and shall perform such duties as the Board of Directors,
or any officer of the Company designed by the Board of Directors, may from time
to time direct.
ARTICLE III.
OFFICERS
SECTION 3.01 GENERALLY. The officers of the Company shall be elected by the
Board of Directors and shall consist of a President, a Secretary, a Treasurer, a
Chairman of the Executive Committee of the Board of Directors (if there be such
a committee) and other such additional officers with such titles
<PAGE>
as the Board of Directors shall determine. Any number of offices may be held by
the same person. The President and the Chairman of the Executive Committee of
the Board of Directors shall each be a member of the Board of Directors.
SECTION 3.02. TERM. The officers elected by the Board of Directors shall
hold their offices respectively until the next annual meeting, and until their
successors shall be elected and shall qualify. Any officer may be removed at any
time by the Board of Directors.
SECTION 3.03. VACANCIES. If any vacancy shall occur among the officers of
the Company, such vacancy may be filled by the Board of Directors.
SECTION 3.04. APPOINTED OFFICERS AND AGENTS. The Board of Directors may
from time to time appoint such other officers and agents as they may deem
advisable.
SECTION 3.05 AUTHORITY AND DUTIES. Each of the officers of the Company
shall have authority and shall perform such duties as may be specified by the
Board of Directors from time to time, or as may be customarily incident to their
respective offices. In the absence or incapacitation of the President, the
Chairman of the Executive Committee of the Board of Directors shall have all the
power and authority of the President, and in the absence or incapacitation of
the President and the Chairman of the Executive Committee of the Board of
Directors, the Executive Vice President who is a Director having the longest
tenure as such officer shall have and exercise all powers of the President.
ARTICLE IV.
SHARES OF STOCK AND CERTIFICATES
SECTION 4.01 CERTIFICATES. Every stockholder shall be entitled to have a
certificate or certificates signed by the President and by the Treasurer or one
of the Assistant Treasurers, certifying the number of shares owned by him. The
certificates of each class of stock shall be numbered consecutively.
SECTION 4.02 TRANSFER OF OWNERSHIP. Transfers of stock shall be made on the
books of the Company upon surrender of the certificate therefor, and a written
assignment of the shares evidenced thereby.
ARTICLE V.
INDEMNIFICATION
SECTION 5.01 DEFINITIONS. As used in this Article:
(a) 'corporate agent' means any person who is or was a director, officer,
employee or agent of the Company and any other person who is or was a
director, officer, trustee, employee or agent of any other enterprise,
servicing as such at the request of the Company or the legal
representative of such director, officer, trustee, employee or agent;
(b) 'other enterprise' means any domestic or foreign company, other than the
Company, and any partnership, joint venture, sole proprietorship, trust
or other enterprise, whether or not for profit, served by a corporate
agent;
(c) 'expenses' means reasonable costs, disbursements and counsel fees;
(d) 'liabilities' means amounts paid or incurred in satisfaction of
settlements, judgments, fines and penalties; and
(e) 'proceeding' means any pending, threatened or completed civil, criminal,
administrative or arbitrative action, suit or proceeding, and any appeal
therein, and any inquiry or investigation which could lead to such
action, suit or proceeding.
SECTION 5.02 PROCEEDINGS NOT BY OR IN THE RIGHT OF THE COMPANY. The Company
shall indemnify a corporate agent against his expenses and liabilities in
connection with any proceeding involving the corporate agent by reason of his
being or having been such a corporate agent, other than a proceeding by or in
the right of the Company if:
<PAGE>
(a) such corporate agent acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company;
and
(b) with respect to any criminal proceeding, such corporate agent had no
reasonable cause to believe his conduct was unlawful.
The termination of any proceeding judgment, order, settlement, conviction or
upon a plea of nolo contendere, or its equivalent, shall not of itself create a
presumption that such corporate agent did not meet the applicable standards of
conduct set forth in paragraphs (a) and (b) of this Section.
SECTION 5.03 PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company
shall indemnify a corporate agent against his expenses in connection with any
proceeding by or in the right of the Company to procure a judgment in its favor
which involves the corporate agent by reason of his being or having been such
corporate agent, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. However,
in such proceeding no indemnification shall be provided in respect of any claim,
issue or matter as to which such corporate agent shall have been adjudged to be
liable for negligence or misconduct, unless and only to the extent that the
Superior Court or the court in which such proceeding was brought shall determine
upon application that despite the adjudication of the liability, but in view of
all circumstances of the case, such corporate agent is fairly and reasonably
entitled to indemnity for such expenses as the Superior Court or such other
court shall deem proper.
SECTION 5.04 CORPORATE AGENT SUCCESSFUL IN PROCEEDING. The Company shall
indemnify a corporate agent against expenses to the extent that such corporate
agent has been successful on the merits or otherwise in any proceeding referred
to in Section 5.02 and 5.03 of this Article or in defense of any claim, issue or
matter therein.
SECTION 5.05 PROCEDURE FOR INDEMNIFICATION. Any indemnification under
Section 5.02 of this Article and, unless ordered by a court, under Section 5.03
of this Article, may be made by the Company only as authorized in a specific
case upon a determination that indemnification is proper in the circumstances
because the corporate agent met the applicable standard of conduct set forth in
Section 5.02 or Section 5.04. Such determination shall be made:
(a) by the Board of Directors or a committee thereof acting by a majority
vote of a quorum consisting of Directors who were not parties to or
otherwise involved in the proceeding; or
(b) if such a quorum is not obtainable, or even if obtainable and such
quorum of the Board of Directors or committee by a majority vote of the
disinterested Directors so directs, by independent legal counsel, in a
written opinion, such counsel to be designated by the Board of Directors;
or
(c) by the stockholders having general voting rights.
SECTION 5.06 EXPENSES PAYABLE IN ADVANCE. Expenses incurred by a corporate
agent in connection with a proceeding may be paid the Company in advance of the
final disposition of the proceeding if authorized in the manner provided in
Section 5.05 upon receipt of an undertaking by or on behalf of the corporate
agent to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified as provided in this Article.
SECTION 5.07 RIGHTS NOT EXCLUSIVE. The indemnification provided by this
Article shall not exclude any other rights to which a corporate agent may be
entitled under the Certificate of Incorporation, these Bylaws or any agreement,
vote of stockholders or otherwise.
ARTICLE VI
AMENDMENTS
These Bylaws may be altered, amended or repealed by the Board of Directors.
<PAGE>
Exhibit 4.2
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated May 18, 1999
among
RJR NABISCO, INC.
R.J. REYNOLDS TOBACCO COMPANY
and
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
& the other Initial Purchasers
set forth on Schedule I
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into May 18, 1999, among RJR Nabisco, Inc., a Delaware corporation (the
"Company"), R.J. Reynolds Tobacco Company, a New Jersey corporation ("RJRT"),
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated and the other Initial Purchasers set forth on Schedule I attached
hereto (the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated May
10, 1999, among the Company, RJRT and the Initial Purchasers (the "Purchase
Agreement"), which provides for the sale by the Company to the Initial
Purchasers of an aggregate of $550,000,000 principal amount of the Company's 7
3/8% Notes Due 2003, $500,000,000 principal amount of the Company's 7 3/4% Notes
Due 2006 and $200,000,000 principal amount of the Company's 7 7/8% Notes Due
2009 (collectively the "Notes"). The Notes will be unconditionally guaranteed on
a senior unsecured basis by RJRT (the "Guarantee", and together with the Notes,
the "Securities"). In order to induce the Initial Purchasers to enter into the
Purchase Agreement, the Company and RJRT have agreed to provide to the Initial
Purchasers and their direct and indirect transferees the registration rights set
forth in this Agreement. The execution of this Agreement is a condition to the
closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"1933 ACT" shall mean the Securities Act of 1933, as amended from
time to time.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"ADDITIONAL INTEREST" shall have the meaning set forth in Section
2(f) hereof.
"BANK CREDIT AGREEMENT" means the Credit Agreement dated as of May 7,
1999 among the Company, RJRT, as guarantor, RJR Nabisco Holdings Corp., The
Chase Manhattan Bank, as administrative agent and the lending institutions
named on the signature pages thereof, as such agreement may be amended,
modified, renewed, refunded, restated, refinanced or replaced from time to
time.
"CLOSING DATE" shall mean the Closing Date as defined in the Purchase
Agreement.
"COMPANY" shall have the meaning set forth in the preamble and shall
also include the Company's successors.
<PAGE>
2
"DEPOSITARY" shall mean The Depository Trust Company, or any other
depositary appointed by the Company, PROVIDED, HOWEVER, that such
depositary must have an address in the Borough of Manhattan, in the City of
New York.
"EFFECTIVENESS DEADLINE" shall have the meaning set forth in
Section 2(a) hereof.
"EXCHANGE DATES" shall have the meaning set forth in Section 2(a)
hereof.
"EXCHANGE OFFER" shall mean the exchange offer by the Company of
Exchange Securities for Registrable Securities pursuant to Section 2(a)
hereof.
"EXCHANGE OFFER REGISTRATION" shall mean a registration under the
1933 Act effected pursuant to Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another
appropriate form) and all amendments and supplements to such registration
statement, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"EXCHANGE SECURITIES" shall mean securities issued by the Company,
RJRT and the other Guarantors, if any, under the Indenture containing terms
identical to the Securities (except for references to certain interest rate
provisions, restrictions on transfers and restrictive legends), and to be
offered to Holders of Securities in exchange for Securities pursuant to the
Exchange Offer.
"GUARANTEE" shall have the meaning set forth in the preamble.
"GUARANTOR" shall mean RJRT and each other Subsidiary of the Company
that is or becomes a guarantor under the Bank Credit Agreement, after such
time as such Person shall have executed and delivered a guarantee.
"HOLDER" shall mean the Initial Purchasers, for so long as they own
any Registrable Securities, and each of their successors, assigns and
direct and indirect transferees who become owners of Registrable Securities
under the Indenture; PROVIDED that for purposes of Sections 4 and 5 of this
Agreement, the term "Holder" shall include Participating Broker-Dealers (as
defined in Section 4(a)).
"INDENTURE" shall mean the Indenture relating to the Securities dated
as of May 15, 1999 among the Company, RJRT, and The Bank of New York, as
trustee, and as the same may be modified, amended or supplemented from time
to time in accordance with the terms thereof.
<PAGE>
3
"INITIAL PURCHASER" or "INITIAL PURCHASERS" shall have the meaning
set forth in the preamble.
"MAJORITY HOLDERS" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Registrable Securities; PROVIDED
that whenever the consent or approval of Holders of a specified percentage
of Registrable Securities is required hereunder, Registrable Securities
held by the Company or any of its affiliates (as such term is defined in
Rule 405 under the 1933 Act, "AFFILIATES") (other than the Initial
Purchasers or subsequent Holders of Registrable Securities if such
subsequent holders are deemed to be such affiliates solely by reason of
their holding of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of
such required percentage or amount.
"PARTICIPATING BROKER-DEALER" shall have the meaning set forth in
Section 4(a) hereof.
"PERSON" shall mean an individual, partnership, limited liability
company, corporation, trust or unincorporated organization, or a government
or agency or political subdivision thereof.
"PROSPECTUS" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a
prospectus supplement with respect to the terms of the offering of any
portion of the Registrable Securities covered by a Shelf Registration
Statement, and by all other amendments and supplements to such prospectus,
and in each case including all material incorporated by reference therein.
"PURCHASE AGREEMENT" shall have the meaning set forth in the
preamble.
"REGISTRABLE SECURITIES" shall mean the Securities; PROVIDED,
HOWEVER, that the Securities shall cease to be Registrable Securities (i)
when a Registration Statement with respect to such Securities shall have
been declared effective under the 1933 Act and such Securities shall have
been exchanged or disposed of pursuant to such Registration Statement, (ii)
when such Securities have been sold pursuant to Rule 144(k) (or any similar
provision then in force, but not Rule 144A) under the 1933 Act, (iii) when
such Securities shall have ceased to be outstanding or (iv) the Exchange
Offer is consummated (except in the case of Securities purchased from the
Company and RJRT and continuously held by the Initial Purchasers).
"REGISTRATION DEFAULT" shall have the meaning set forth in
Section 2(f) hereof.
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance by the Company and RJRT with this Agreement,
including without
<PAGE>
4
limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. registration and filing fees, (ii) all fees and
expenses incurred in connection with compliance with state securities or
blue sky laws (including reasonable fees and disbursements of counsel for
any underwriters or Holders in connection with blue sky qualification of
any of the Exchange Securities or Registrable Securities), (iii) all
expenses of any Persons in preparing or assisting in preparing, word
processing, printing and distributing any Registration Statement, any
Prospectus, any amendments or supplements thereto, any underwriting
agreements, securities sales agreements and other documents relating to the
performance of and compliance with this Agreement, (iv) all fees and
expenses (other than the fees of any counsel retained by any Person other
than the Company and RJRT) incurred in connection with the listing, if any,
of any of the Registrable Securities on any securities exchange or
exchanges, (v) all rating agency fees, (vi) all fees and disbursements
(other than the fees of any counsel retained by any Person other than the
Company and RJRT) relating to the qualification of the Indenture under
applicable securities laws, (vii) the fees and disbursements of the Trustee
and any escrow agent or custodian and its counsel, (viii) the fees and
disbursements of counsel for the Company and RJRT and, in the case of a
Shelf Registration Statement, the reasonable fees and disbursements of one
counsel for the Holders (which counsel shall be selected by the Majority
Holders and which counsel may also be counsel for the Initial Purchasers
and which counsel must be Simpson Thacher & Bartlett or other counsel
reasonably acceptable to the Company) and (ix) the fees and disbursements
of the independent public accountants of the Company, including the
expenses of any special audits or "cold comfort" letters required by or
incident to such performance and compliance, but excluding fees and
expenses of counsel to the underwriters (other than fees and expenses set
forth in clause (ii) above) or the Holders and underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition
of Registrable Securities by a Holder.
"REGISTRATION STATEMENT" shall mean any registration statement of the
Company and RJRT that covers any of the Exchange Securities or Registrable
Securities pursuant to the provisions of this Agreement and all amendments
and supplements to any such Registration Statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"SEC" shall mean the Securities and Exchange Commission or any
successor agency or government body performing the functions currently
performed by the United States Securities and Exchange Commission.
"SHELF REGISTRATION" shall mean a registration effected pursuant to
Section 2(b) hereof.
<PAGE>
5
"SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration
statement of the Company and RJRT pursuant to the provisions of Section
2(b) of this Agreement which covers all of the Registrable Securities (but
no other securities unless approved by the Holders whose Registrable
Securities are covered by such Shelf Registration Statement) on an
appropriate form under Rule 415 under the 1933 Act, or any similar rule
that may be adopted by the SEC, and all amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"SUBSIDIARY" means any corporation of which at least a majority of
all outstanding stock having by the terms thereof ordinary voting power in
the election of directors of such corporation (irrespective of whether or
not at the time stock of any class or classes of such corporation has or
might have voting power by reason of the happening of any contingency) is
at the time, directly or indirectly, owned by the Company, or by one or
more Subsidiaries of the Company or by the Company and one or more
Subsidiaries.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. " 77aaa-77bbb)
as in effect on the date of this Agreement; PROVIDED, HOWEVER, that, in the
event the Trust Indenture Act of 1939 is amended after such date, "TIA"
means, to the extent required by any such amendments, the Trust Indenture
Act of 1939 as so amended.
"TRUSTEE" shall mean the trustee with respect to the Securities under
the Indenture.
"UNDERWRITER" shall have the meaning set forth in Section 3 hereof.
"UNDERWRITTEN REGISTRATION" or "UNDERWRITTEN OFFERING" shall mean a
registration in which Registrable Securities are sold to an Underwriter for
reoffering to the public.
2. REGISTRATION UNDER THE 1933 ACT.
(a) The Company and RJRT agree that they will, for the benefit of the
Holders, at the Company's cost, (A) prepare and, as soon as practicable but not
later than 120 days following the Closing Date, file with the SEC an Exchange
Offer Registration Statement on an appropriate form under the 1933 Act with
respect to a proposed Exchange Offer and the issuance and delivery to the
Holders, in exchange for the Registrable Securities of a like principal amount
of Exchange Securities, (B) use each of its reasonable best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the 1933
Act within 240 days of the Closing Date (the "Effectiveness Deadline"), (C) use
each of its reasonable best efforts to keep the Exchange Offer Registration
Statement effective until the closing of the Exchange Offer and (D) use each of
its and their reasonable best efforts to cause the Exchange Offer to be
consummated as promptly as practicable, but in any event prior to 30 business
days after the Effectiveness Deadline. The Exchange Securities will be issued
under the Indenture. As soon as
<PAGE>
6
practicable, upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall commence the Exchange Offer, it being the objective
of such Exchange Offer to enable each Holder eligible and electing to exchange
Registrable Securities for Exchange Securities (assuming that such Holder is
eligible under the rules, regulations and interpretations of the SEC and the
Staff to participate in the Exchange Offer and (a) is not an Affiliate of the
Company or RJRT, (b) is not a broker-dealer tendering Registrable Securities
acquired directly from the Company or RJRT for its own account, (c) acquired the
Exchange Securities in the ordinary course of such Holder's business and (d) has
no arrangements or understandings with any Person to participate in the Exchange
Offer for the purpose of distributing the Exchange Securities) to transfer such
Exchange Securities from and after their receipt without any limitations or
restrictions under the 1933 Act and under state securities or blue sky laws.
The Company shall commence the Exchange Offer by sending the related
exchange offer Prospectus and accompanying documents to each Holder stating, in
addition to such other disclosures as are required by applicable law:
(i) that the Exchange Offer is being made pursuant to this
Registration Rights Agreement and that all Registrable Securities validly
tendered by eligible Holders will be accepted for exchange;
(ii) the dates of acceptance for exchange (which shall be a
period of at least 20 business days from the date such notice is mailed, or
longer, if required by applicable law) (the "Exchange Dates");
(iii) that any Registrable Security not tendered will remain
outstanding and continue to accrue interest, but will not retain any rights
under this Registration Rights Agreement;
(iv) that Holders electing to have a Registrable Security
exchanged pursuant to the Exchange Offer will be required to surrender such
Registrable Security, together with the enclosed letters of transmittal, to
the institution and at the address (located in the Borough of Manhattan,
The City of New York) specified in the notice prior to the close of
business on the last Exchange Date; and
(v) that Holders will be entitled to withdraw their election,
not later than the close of business on the last Exchange Date, by sending
to the institution and at the address (located in the Borough of Manhattan,
The City of New York) specified in the notice a telegram, telex, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Registrable Securities delivered for exchange and a statement
that such Holder is withdrawing his election to have such Securities
exchanged.
<PAGE>
7
As soon as practicable after the last Exchange Date, the Company
shall:
(i) accept for exchange Registrable Securities or portions
thereof tendered and not validly withdrawn pursuant to the Exchange Offer;
and
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Registrable Securities or portions thereof so accepted for
exchange by the Company and issue, and cause the Trustee to promptly
authenticate and send to each Holder, an Exchange Security equal in
principal amount to the principal amount of the Registrable Securities
surrendered by such Holder.
The Company and RJRT shall use each of its best efforts to complete
the Exchange Offer as provided above and shall comply with the applicable
requirements of the 1933 Act, the 1934 Act and other applicable laws and
regulations in connection with the Exchange Offer. Interest on each Exchange
Security will accrue from the last date on which interest was paid on the
Registrable Securities surrendered in exchange therefor or, if no interest has
been paid on the Registrable Securities, from the date of original issuance. The
Exchange Offer shall not be subject to any conditions, other than (i) that the
Exchange Offer, or the making of any exchange by a Holder, does not violate
applicable law or any applicable interpretation of the staff of the SEC (the
"Staff"), (ii) the due tendering of Registrable Securities in accordance with
the Exchange Offer, (iii) that each Holder of Registrable Securities exchanged
in the Exchange Offer shall have represented that all Exchange Securities to be
received by it shall be acquired in the ordinary course of its business and that
at the time of the consummation of the Exchange Offer it shall have no
arrangement or understanding with any person to participate in the distribution
(within the meaning of the 1933 Act) of the Exchange Securities and shall have
made such other representations as may be reasonably necessary under applicable
SEC or Staff rules, regulations or interpretations to render the use of Form S-4
or other appropriate form under the 1933 Act available and (iv) that no action
or proceeding shall have been instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer which, in the
judgment of the Company or RJRT, would reasonably be expected to impair the
ability of the Company to proceed with the Exchange Offer. The Company shall
inform the Initial Purchasers of the names and addresses of the Holders to whom
the Exchange Offer is made, and the Initial Purchasers shall have the right to
contact such Holders and otherwise facilitate the tender of Registrable
Securities in the Exchange Offer.
(b) If (i) because of any change in law or regulation or applicable
interpretations thereof by the Staff, the Company is not permitted to effect the
Exchange Offer as contemplated hereby, (ii) the Exchange Offer is not
consummated within 30 business days after the Effectiveness Deadline, (iii) any
Initial Purchaser so requests with respect to notes not eligible to be exchanged
for Exchange Notes in the Exchange Offer, (iv) any applicable law or
interpretations do not permit any Holder of Registrable Securities to
participate in the Exchange Offer, (v) any Holder of Registrable Securities that
participates in the Exchange Offer does not receive freely transferable Exchange
Notes in exchange for tendered Registrable Securities, or
<PAGE>
8
(vi) the Company so elects, then the Company and RJRT shall use each of its
reasonable best efforts to file, or cause to be filed, as soon as practicable
after such determination and thereafter shall use each of its reasonable best
efforts to cause to be declared effective as promptly as practicable a Shelf
Registration Statement providing for the sale by the Holders of all of the
Registrable Securities. Each of the Company and RJRT agrees to use its
reasonable best efforts to keep the Shelf Registration Statement continuously
effective in order to permit the Prospectus forming part thereof to be usable by
Holders for a period of two years from the date the Shelf Registration Statement
is declared effective by the SEC, or for such shorter period that will terminate
when all Registrable Securities covered by the Shelf Registration Statement have
been sold pursuant to the Shelf Registration Statement or cease to be
outstanding or otherwise to be Registrable Securities. Each of the Company and
RJRT further agrees to to supplement or amend the Shelf Registration Statement
if required by the rules, regulations or instructions applicable to the
registration form used for such Shelf Registration Statement or by the 1933 Act
or by any other rules and regulations thereunder for shelf registration or if
reasonably requested by a Holder with respect to information relating to such
Holder, and to use its best efforts to cause any such amendment to become
effective and such Shelf Registration Statement to become usable as soon as
thereafter practicable. Each of the Company and RJRT agrees to furnish to the
Holders of Registrable Securities copies of any such supplement or amendment
promptly upon request after its being used or filed with the SEC.
Notwithstanding any other provisions hereof, each of the Company and
RJRT will use its best efforts to ensure that (i) any Shelf Registration
Statement and any amendment thereto and any Prospectus forming part thereof and
any supplement thereto complies in all material respects with the 1933 Act and
the rules and regulations thereunder, (ii) any Shelf Registration Statement and
any amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(iii) any Prospectus forming part of any Shelf Registration Statement, and any
supplement to such Prospectus (as amended or supplemented from time to time),
does not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) The Company and RJRT shall pay all Registration Expenses in
connection with the registration pursuant to Section 2(a) and Section 2(b). Each
Holder shall pay all underwriting discounts and commissions and transfer taxes,
if any, relating to the sale or disposition of such Holder's Registrable
Securities pursuant to the Shelf Registration Statement.
(d) (i) Each of the Company and RJRT will be deemed not to have used
its reasonable best efforts to cause the Exchange Offer Registration Statement
or the Shelf Registration Statement, as the case may be, to become, or to
remain, effective during the requisite period if either the Company or RJRT
voluntarily takes any action that would, or omits to take any action which
omission would, result in any such Registration Statement not being declared
effective or in the Holders of Registrable Securities covered thereby not being
able to
<PAGE>
9
exchange or offer and sell such Registrable Securities during that period as and
to the extent contemplated hereby, unless such action is required by applicable
law.
(ii) An Exchange Offer Registration Statement pursuant to
Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b)
hereof will not be deemed to have become effective unless it has been declared
effective by the SEC; PROVIDED, HOWEVER, that, if, after it has been declared
effective, the offering of Registrable Securities pursuant to a Shelf
Registration Statement is interfered with by any stop order, injunction or other
order or requirement of the SEC or any other governmental agency or court, such
Registration Statement will be deemed not to have become effective during the
period of such interference until the offering of Registrable Securities
pursuant to such Registration Statement may legally resume.
(e) Without limiting the remedies available to the Initial Purchasers
and the Holders, the Company and RJRT acknowledge that any failure by each of
the Company or RJRT to comply with its obligations under Section 2(a) and
Section 2(b) hereof may result in material irreparable injury to the Initial
Purchasers or the Holders for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuries precisely and that, in
the event of any such failure, the Initial Purchasers or any Holder may obtain
such relief as may be required to specifically enforce the obligations of each
of the Company and RJRT under Section 2(a) and Section 2(b) hereof.
(f) Additional cash interest ("Additional Interest") will accrue on
the Registrable Securities at the rate of 0.50% per annum, from and including
the date on which any Registration Default (as defined below) shall occur to but
excluding the date on which all Registration Defaults are cured, if
(i) the Exchange Offer Registration Statement is not filed with
the SEC on or prior to 120 days after the Closing Date or
the Shelf Registration Statement is not filed with the SEC
on or prior to 120 days after the date the Company and RJRT
are required to file the same;
(ii) the Exchange Offer Registration Statement is not declared
effective within 240 days after the Closing Date or the
Shelf Registration Statement is not declared effective
within 240 days after the date the Company and RJRT are
required to file the same;
(iii) the Exchange Offer, if commenced, is not consummated on or
prior to 30 business days after the Effectiveness Deadline;
or
(iv) the Shelf Registration Statement is filed and declared
effective within the required time period but shall
thereafter cease to be effective (at any time
<PAGE>
10
that the Company and RJRT are obligated to maintain the
effectiveness thereof) without being succeeded within 90
days by an additional Registration Statement filed and
declared effective
(each such registration default referred to in sub-paragraphs (i), (ii),
(iii) and (iv) above, a "Registration Default").
Additional Interest shall be paid to Holders of Registrable
Securities in the same manner as interest payments on the Securities on
semi-annual payment dates which correspond to interest payment dates for the
Securities. Following the cure of all Registration Defaults, the accrual of
Additional Interest will cease and Additional Interest will no longer be
payable. The Company shall notify the Trustee within three business days after
the occurrence of each and every Registration Default.
3. REGISTRATION PROCEDURES.
In connection with the obligations of the Company and RJRT with
respect to the Registration Statements pursuant to Section 2(a) and Section 2(b)
hereof, the Company and RJRT shall:
(a) prepare and file with the SEC a Registration Statement, within
the relevant time period specified in Section 2, on the appropriate form
under the 1933 Act, which form (x) shall be selected by the Company and (y)
shall, in the case of a Shelf Registration, be available for the sale of
the Registrable Securities by the selling Holders thereof and (z) shall
comply as to form in all material respects with the requirements of the
applicable form and include all financial statements required by the SEC to
be filed therewith, and use its reasonable best efforts to cause such
Registration Statement to become effective and remain effective in
accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary to keep such
Registration Statement effective for the applicable period and cause each
Prospectus to be supplemented by any required prospectus supplement and, as
so supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to
keep each Prospectus current during the period described under Section 4(3)
and Rule 174 under the 1933 Act that is applicable to transactions by
brokers or dealers with respect to the Registrable Securities or Exchange
Securities;
(c) in the case of a Shelf Registration, (i) notify each Holder of
Registrable Securities, at least five business days prior to filing, that a
Shelf Registration Statement with respect to the Registrable Securities is
being filed and advising such Holders that the distribution of Registrable
Securities will be made in accordance with the method selected by the
Majority Holders participating in the Shelf Registration; (ii) furnish to
<PAGE>
11
each Holder of Registrable Securities, to counsel for the Initial
Purchasers, to counsel for the Holders and to each Underwriter of an
Underwritten Offering of Registrable Securities, if any, without charge, as
many copies of each Prospectus, including each preliminary Prospectus, and
any amendment or supplement thereto and such other documents as such Holder
or Underwriter may reasonably request, including financial statements and
schedules and, if the Holder or Underwriter so requests, all exhibits in
order to facilitate the public sale or other disposition of the Registrable
Securities; and the Company and RJRT consent to the use of such Prospectus
and any amendment or supplement thereto in accordance with applicable law
by each of the selling Holders of Registrable Securities and any such
Underwriters in connection with the offering and sale of the Registrable
Securities covered by and in the manner described in such Prospectus or any
amendment or supplement thereto in accordance with applicable law;
(d) use each of its reasonable best efforts to register or qualify
the Registrable Securities under all applicable state securities or "blue
sky" laws of such jurisdictions as any Holder of Registrable Securities
covered by a Registration Statement and each Underwriter of an Underwritten
Offering of Registrable Securities shall reasonably request in writing at
least 5 business days before the applicable Registration Statement is
declared effective by the SEC, to cooperate with such Holders in connection
with any filings required to be made with the National Association of
Securities Dealers, Inc. and do any and all other acts and things which may
be reasonably necessary or advisable to enable such Holder to consummate
the disposition in each such jurisdiction of such Registrable Securities
owned by such Holder; PROVIDED, HOWEVER, that neither the Company nor RJRT
shall be required to (i) qualify as a foreign corporation or as a dealer in
securities in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(d), (ii) file any general consent to service
of process or (iii) subject itself to taxation in any such jurisdiction if
it is not so subject;
(e) in the case of a Shelf Registration, notify each Holder of
Registrable Securities, counsel for the Holders and counsel for the Initial
Purchasers promptly and, if requested by any such Holder or counsel,
confirm such advice in writing (i) when a Registration Statement has become
effective and when any post-effective amendment thereto has been filed and
becomes effective, (ii) of any request by the SEC or any state securities
authority for amendments and supplements to a Registration Statement and
Prospectus or for additional information after the Registration Statement
has become effective, (iii) of the issuance by the SEC or any state
securities authority of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that
purpose, (iv) if, between the effective date of a Registration Statement
and the closing of any sale of Registrable Securities covered thereby, the
representations and warranties of the Company or RJRT contained in any
underwriting agreement, securities sales agreement or other similar
agreement, if any, relating to such offering pursuant to a Shelf
Registration cease to be true and correct in all material respects, (v) of
the happening of any event during the period a Shelf Registration
<PAGE>
12
Statement is effective which makes any statement made in such Registration
Statement or the related Prospectus untrue in any material respect or which
requires the making of any changes in such Registration Statement or
Prospectus in order to make the statements therein not misleading, (vi) of
the receipt by the Company or RJRT of any notification with respect to the
suspension of the qualification of the Registrable Securities or the
Exchange Securities, as the case may be, for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose and (vii)
of any determination by the Company or RJRT that a post-effective amendment
to a Registration Statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the
earliest possible moment and provide immediate notice to each Holder of the
withdrawal of any such order;
(g) in the case of a Shelf Registration, furnish to each Holder of
Registrable Securities, without charge, at least one conformed copy of each
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules (without documents incorporated therein
by reference or exhibits thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the selling
Holders of Registrable Securities to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and
not bearing any restrictive legends and enable such Registrable Securities
to be in such denominations (consistent with the provisions of the
Indenture) and registered in such names as the selling Holders may
reasonably request at least one business day prior to the closing of any
sale of Registrable Securities;
(i) in the case of a Shelf Registration, upon the occurrence of any
event contemplated by Section 3(e) (v) hereof, as promptly as practicable
after the occurrence of such an event, use each of its reasonable best
efforts to prepare and file with the SEC a supplement or post-effective
amendment to a Registration Statement or the related Prospectus or any
document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the
Registrable Securities, such Prospectus will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The Company and RJRT agree to notify the Holders
to suspend use of the Prospectus as promptly as practicable after the
occurrence of such an event, and the Holders hereby agree to suspend use of
the Prospectus until the Company and RJRT have amended or supplemented the
Prospectus to correct such misstatement or omission;
<PAGE>
13
(j) a reasonable time prior to the filing of any Registration
Statement, any Prospectus, any amendment to a Registration Statement or
amendment or supplement to a Prospectus or any document which is to be
incorporated by reference into a Registration Statement or a Prospectus
after initial filing of a Registration Statement, provide copies of such
document to the Initial Purchasers and their counsel (and, in the case of a
Shelf Registration Statement, the Holders and their counsel) and make such
of the representatives of the Company and RJRT as shall be reasonably
requested by the Initial Purchasers or their counsel (and, in the case of a
Shelf Registration Statement, the Holders or their counsel) available for
discussion of such document, and shall not at any time file or make any
amendment to the Registration Statement, any Prospectus or any amendment of
or supplement to a Registration Statement or a Prospectus or any document
which is to be incorporated by reference into a Registration Statement or a
Prospectus, of which the Initial Purchasers and their counsel (and, in the
case of a Shelf Registration Statement, the Holders and their counsel)
shall not have previously been advised and furnished a copy or to which the
Initial Purchasers or their counsel (and, in the case of a Shelf
Registration Statement, the Holders or their counsel) shall reasonably
object;
(k) obtain a CUSIP number for all Exchange Securities or Registrable
Securities, as the case may be, not later than the effective date of a
Registration Statement, and provide the Trustee with printed certificates
for the Exchange Securities or the Registrable Securities, as the case may
be, in a form eligible for deposit with the Depositary;
(l) cause the Indenture to be qualified under the Trust Indenture Act
of 1939, as amended (the "TIA"), in connection with the registration of the
Exchange Securities or Registrable Securities, as the case may be,
cooperate with the Trustee and the Holders to effect such changes to the
Indenture as may be required for the Indenture to be so qualified in
accordance with the terms of the TIA and execute, and use each of its
reasonable best efforts to cause the Trustee to execute, all documents as
may be required to effect such changes and all other forms and documents
required to be filed with the SEC to enable the Indenture to be so
qualified in a timely manner;
(m) in the case of a Shelf Registration, make available for
inspection by a representative of the Holders of the Registrable
Securities, any Underwriter participating in any disposition pursuant to
such Shelf Registration Statement, and attorneys and accountants designated
by the Holders, at reasonable times and in a reasonable manner, all
financial and other records, pertinent documents and properties of the
Company and RJRT, and cause the respective officers, directors and
employees of the Company and RJRT to supply all information reasonably
requested by any such representative, Underwriter, attorney or accountant
in connection with a Shelf Registration Statement;
<PAGE>
14
(n) in the case of a Shelf Registration, use each of its reasonable
best efforts to cause all Registrable Securities to be listed on any
securities exchange or any automated quotation system on which similar
securities issued by the Company are then listed if requested by the
Majority Holders, to the extent such Registrable Securities satisfy
applicable listing requirements;
(o) use each of its reasonable best efforts to cause the Exchange
Securities or Registrable Securities, as the case may be, to be rated by
two nationally recognized statistical rating organizations (as such term is
defined in Rule 436(g)(2) under the 1933 Act);
(p) if reasonably requested by any Holder of Registrable Securities
covered by a Registration Statement, (i) promptly incorporate in a
Prospectus supplement or post-effective amendment such information with
respect to such Holder as such Holder reasonably requests to be included
therein and (ii) make all required filings of such Prospectus supplement or
such post-effective amendment as soon as the Company has received
notification of the matters to be incorporated in such filing; and
(q) in the case of a Shelf Registration and upon the request of
Holders of at least $300,000,000 million aggregate principal amount, enter
into such customary agreements and take all such other actions in
connection therewith (including those requested by a Majority of the
Holders of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities including, but
not limited to, an Underwritten Offering and in such connection, (i) to the
extent possible, make such representations and warranties to the Holders
and any Underwriters of such Registrable Securities with respect to the
business of the Company and each of its subsidiaries, the Registration
Statement, Prospectus and documents incorporated by reference or deemed
incorporated by reference, if any, in each case, in form, substance and
scope as are customarily made by issuers to underwriters in underwritten
offerings and confirm the same if and when customarily requested, (ii)
obtain opinions of counsel to the Company and RJRT (which counsel and
opinions, in form, scope and substance, shall be reasonably satisfactory to
the Holders and such Underwriters and their respective counsel, it being
understood that any attorney in the regular employ of the Company or RJRT
shall be presumed to be satisfactory) addressed to each selling Holder and
Underwriter of Registrable Securities, covering the matters customarily
covered in opinions requested in underwritten offerings, (iii) obtain "cold
comfort" letters from the independent certified public accountants of the
Company (and, if necessary, any other certified public accountant of any
subsidiary of the Company and RJRT, or of any business acquired by the
Company or RJRT for which financial statements and financial data are or
are required to be included in the Registration Statement) addressed to
each selling Holder and Underwriter of Registrable Securities, such letters
to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters in connection with underwritten
offerings, and (iv) deliver such documents and certificates
<PAGE>
15
as may be reasonably requested by the Holders of a majority in principal
amount of the Registrable Securities being sold or the Underwriters, and
which are customarily delivered in underwritten offerings, to evidence the
continued validity of the representations and warranties of the Company and
RJRT made pursuant to clause (i) above and to evidence compliance with any
customary conditions contained in an underwriting agreement.
In the case of a Shelf Registration Statement, the Company and RJRT
may require each Holder of Registrable Securities to furnish to them such
information regarding the Holder and the proposed distribution by such Holder of
such Registrable Securities as the Company and RJRT may from time to time
reasonably request in writing, failing which the Company may elect not to
include such Holders' Registrable Securities in such Shelf Registration
Statement.
In the case of a Shelf Registration Statement, each Holder agrees
that, upon receipt of any notice from the Company or RJRT of the happening of
any event of the kind described in Section 3(e)(v) hereof, such Holder will
forthwith discontinue disposition of Registrable Securities pursuant to a
Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if
so directed by the Company, such Holder will deliver to the Company (at its
expense) all copies in its possession, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice. If the Company shall give any
such notice to suspend the disposition of Registrable Securities pursuant to a
Registration Statement, the Company and RJRT shall extend the period during
which the Registration Statement shall be maintained effective pursuant to this
Agreement by the number of days during the period from and including the date of
the giving of such notice to and including the date when the Holders shall have
received copies of the supplemented or amended Prospectus necessary to resume
such dispositions. The Company may give any such notice only twice during any
365 day period and any such suspensions may not exceed 60 days for each
suspension and there may not be more than two suspensions in effect during any
365 day period.
The Holders of Registrable Securities covered by a Shelf Registration
Statement who desire to do so may sell such Registrable Securities in an
Underwritten Offering. In any such Underwritten Offering, the investment banker
or investment bankers and manager or managers (the "Underwriters") that will
administer the offering will be selected by the Majority Holders of the
Registrable Securities included in such offering, subject to the reasonable
approval of the Company.
4. PARTICIPATION OF BROKER-DEALERS IN EXCHANGE OFFER.
(a) The Staff has taken the position that any broker-dealer that
receives Exchange Securities for its own account in the Exchange Offer in
exchange for Securities that
<PAGE>
16
were acquired by such broker-dealer as a result of market-making or other
trading activities (a "Participating Broker-Dealer"), may be deemed to be an
"underwriter" within the meaning of the 1933 Act and must deliver a prospectus
meeting the requirements of the 1933 Act in connection with any resale of such
Exchange Securities.
The Company and RJRT understand that it is the Staff's position that
if the Prospectus contained in the Exchange Offer Registration Statement
includes a plan of distribution containing a statement to the above effect and
the means by which Participating Broker-Dealers may resell the Exchange
Securities, without naming the Participating Broker-Dealers or specifying the
amount of Exchange Securities owned by them, such Prospectus may be delivered by
Participating Broker-Dealers to satisfy their prospectus delivery obligation
under the 1933 Act in connection with resales of Exchange Securities for their
own accounts, so long as the Prospectus otherwise meets the requirements of the
1933 Act.
(b) In light of the above, notwithstanding the other provisions of
this Agreement, the Company and RJRT agree that the provisions of this Agreement
as they relate to a Shelf Registration shall also apply to an Exchange Offer
Registration to the extent, and with such reasonable modifications thereto as
may be, reasonably requested by the Initial Purchasers or by one or more
Participating Broker-Dealers, in each case as provided in clause (ii) below, in
order to expedite or facilitate the disposition of any Exchange Securities by
Participating Broker-Dealers consistent with the positions of the Staff recited
in Section 4(a) above; PROVIDED that:
(i) the Company and RJRT shall not be required to amend or
supplement the Prospectus contained in the Exchange Offer Registration
Statement, as would otherwise be contemplated by Section 3(i), for a period
exceeding 90 days after the last Exchange Date (as such period may be
extended pursuant to the penultimate paragraph of Section 3 of this
Agreement) and Participating Broker-Dealers shall not be authorized by the
Company and RJRT to deliver and shall not deliver such Prospectus after
such period in connection with the resales contemplated by this Section 4;
and
(ii) the application of the Shelf Registration procedures set
forth in Section 3 of this Agreement to an Exchange Offer Registration, to
the extent not required by the positions of the Staff or the 1933 Act and
the rules and regulations thereunder, will be in conformity with the
reasonable request to the Company by the Initial Purchasers or with the
reasonable request in writing to the Company by one or more broker-dealers
who certify to the Initial Purchasers and the Company in writing that they
anticipate that they will be Participating Broker-Dealers; and PROVIDED
FURTHER that, in connection with such application of the Shelf Registration
procedures set forth in Section 3 to an Exchange Offer Registration, the
Company shall be obligated (x) to deal only with one entity representing
the Participating Broker-Dealers, which shall be any of the Initial
Purchasers unless they elect not to act as such representatives, (y) to pay
the reasonable fees and expenses of only one counsel representing the
Participating Broker-Dealers, which shall be counsel to the Initial
Purchasers unless such counsel elects not to so act and (z) to
<PAGE>
17
cause to be delivered only one, if any, "cold comfort" letter with respect
to the Prospectus in the form existing on the last Exchange Date and with
respect to each subsequent amendment or supplement, if any, effected during
the period specified in clause (i) above.
(c) The Initial Purchasers shall have no liability to any Holder with
respect to any request that it may make pursuant to Section 4(b) above.
5. INDEMNIFICATION AND CONTRIBUTION.
(a) Each of the Company and RJRT, jointly and severally, agree to
indemnify and hold harmless the Initial Purchasers, each Holder and each Person,
if any, who controls any Initial Purchaser or any Holder within the meaning of
either Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under
common control with, or is controlled by, any Initial Purchaser or any Holder,
from and against all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred by the Initial
Purchaser, any Holder or any such controlling or affiliated Person in connection
with defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement (or any amendment thereto) pursuant to which Exchange
Securities or Registrable Securities were registered under the 1933 Act,
including all documents incorporated therein by reference, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
caused by any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (as amended or supplemented if the Company or RJRT
shall have furnished any amendments or supplements thereto), or caused by any
omission or alleged omission to state therein a material fact necessary to make
the statements therein in light of the circumstances under which they were made
not misleading, except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or omission or alleged untrue statement
or omission based upon information relating to the Initial Purchasers or any
Holder furnished to the Company or RJRT in writing by the Initial Purchasers or
any selling Holder expressly for use therein PROVIDED that the foregoing
indemnity agreement with respect to any preliminary Prospectus shall not inure
to the benefit of any Initial Purchaser, each Holder and each Person, if any,
who controls any Initial Purchaser or any Holder within the meaning of either
Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under common
control with, or is controlled by, any Initial Purchaser or any Holder from whom
the person asserting any such losses, claims, damages or liabilities purchased
Securities, or any person controlling such Initial Purchaser, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Initial Purchaser, to such person at or prior to the written confirmation
of the sale of the Securities to such person, and if the Prospectus (as so
amended or supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities. In connection with any Underwritten Offering
permitted by Section 3, the Company and RJRT will also indemnify the
Underwriters, if any, selling brokers, dealers and similar securities industry
professionals participating in the distribution, their officers and directors
and each Person who
<PAGE>
18
controls such Persons (within the meaning of the 1933 Act and the 1934 Act) to
the same extent as provided above with respect to the indemnification of the
Holders, if requested in connection with any Registration Statement.
(b) Each Holder agrees, severally and not jointly, to indemnify and
hold harmless the Company, RJRT, the other Initial Purchasers and the other
selling Holders, and each of their respective directors, officers who sign the
Registration Statement and each Person, if any, who controls the Company, RJRT,
any other Initial Purchaser and any other selling Holder within the meaning of
either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same
extent as the foregoing indemnity from the Company and RJRT to the Initial
Purchasers and the Holders, but only with reference to information relating to
such Holder furnished to the Company or RJRT in writing by such Holder expressly
for use in any Registration Statement (or any amendment thereto) or any
Prospectus (or any amendment or supplement thereto).
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any Person in respect of which indemnity may be
sought pursuant to either paragraph (a) or paragraph (b) above, such Person (the
"indemnified party") shall promptly notify the Person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the fees and expenses of more than one separate
firm (in addition to any local counsel) for the Initial Purchasers and all
Persons, if any, who control any Initial Purchaser within the meaning of either
Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the fees and
expenses of more than one separate firm (in addition to any local counsel) for
the Company, RJRT, each of its directors, its officers who sign the Registration
Statement and each Person, if any, who controls the Company and RJRT within the
meaning of either such Section and (c) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Holders and all
Persons, if any, who control any Holders within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as they are
incurred. In such case involving the Initial Purchasers and Persons who control
the Initial Purchasers, such firm shall be designated in writing by the Initial
Purchasers. In such case involving the Holders and such Persons who control
Holders, such firm shall be
<PAGE>
19
designated in writing by the Majority Holders. In all other cases, such firm
shall be designated by the Company. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but,
if settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party for such fees and expenses of
counsel in accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which such indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(d) If the indemnification provided for in paragraph (a) or paragraph
(b) of this Section 5 is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities, then each indemnifying
party under such paragraph, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party or parties on the one hand and of the indemnified party or parties on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company, RJRT and the Holders shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, RJRT or by the
Holders and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Holders'
respective obligations to contribute pursuant to this Section 5(d) are several
in proportion to the respective principal amount of Registrable Securities of
such Holder that were registered pursuant to a Registration Statement.
(e) The Company, RJRT and each Holder agree that it would not be just
or equitable if contribution pursuant to this Section 5 were determined by PRO
RATA allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in paragraph (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 5, no Holder shall be required to
<PAGE>
20
indemnify or contribute any amount in excess of the amount by which the total
price at which Registrable Securities were sold by such Holder exceeds the
amount of any damages that such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 5 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
The indemnity and contribution provisions contained in this Section 5
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
the Initial Purchasers, any Holder or any Person controlling any Initial
Purchaser or any Holder, or by or on behalf of the Company, RJRT, each of its
officers or directors or any Person controlling the Company or RJRT, (iii)
acceptance of any of the Exchange Securities and (iv) any sale of Registrable
Securities pursuant to a Shelf Registration Statement.
6. MISCELLANEOUS.
(a) RULE 144 AND RULE 144A. For so long as the Company is subject to
the reporting requirements of Section 13 or 15 of the 1934 Act, the Company
covenants that it will file the reports required to be filed by it under the
1933 Act and Section 13(a) or 15(d) of the 1934 Act and the rules and
regulations adopted by the SEC thereunder. If the Company ceases to be so
required to file such reports, the Company covenants that it will upon the
request of any Holder of Registrable Securities (a) make publicly available such
information as is necessary to permit sales pursuant to Rule 144 under the 1933
Act, (b) deliver such information to a prospective purchaser as is necessary to
permit sales pursuant to Rule 144A under the 1933 Act and it will take such
further action as any Holder of Registrable Securities may reasonably request,
and (c) take such further action that is reasonable in the circumstances, in
each case, to the extent required from time to time to enable such Holder to
sell its Registrable Securities without registration under the 1933 Act within
the limitation of the exemptions provided by (i) Rule 144 under the 1933 Act, as
such Rule may be amended from time to time, (ii) Rule 144A under the 1933 Act,
as such Rule may be amended from time to time, or (iii) any similar rules or
regulations hereafter adopted by the SEC. Upon the request of any Holder of
Registrable Securities, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor RJRT has
entered into, and on or after the date of this Agreement will not enter into,
and will ensure that the other Guarantors, if any, will not enter into, any
agreement which is inconsistent with the rights granted to the Holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders of
the other issued and outstanding
<PAGE>
21
securities of the Company or RJRT under any such agreements.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company and RJRT have obtained the written consent
of Holders of at least a majority in aggregate principal amount of the
outstanding Registrable Securities affected by such amendment, modification,
supplement, waiver or consent; PROVIDED, HOWEVER, that no amendment,
modification, supplement, waiver or consent to any departure from the provisions
of Section 5 hereof shall be effective as against any Holder of Registrable
Securities unless consented to in writing by such Holder.
(d) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 6(d), which address initially is, with respect to the Initial
Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the
Company or RJRT, initially at the Company's address set forth in the Purchase
Agreement and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 6(d).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telescoped; and on
the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; PROVIDED that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Securities
in violation of the terms of the Purchase Agreement. If any transferee of any
Holder shall acquire Registrable Securities, in any manner, whether by operation
of law or otherwise, such Registrable Securities shall be held subject to all of
the terms of this Agreement, and by taking and holding such Registrable
Securities such Person shall be conclusively deemed to have agreed to be bound
by and to perform all of the terms and provisions of this Agreement and such
Person shall be entitled to receive the benefits hereof. The Initial Purchasers
(in their capacity as Initial Purchasers) shall have no liability or obligation
to the Company or RJRT with respect to any failure by a Holder to comply with,
or any breach by any Holder of, any of the
<PAGE>
22
obligations of such Holder under this Agreement.
(f) RESTRICTION ON RESALES. Until the expiration of two years after
the original issuance of the Securities, the Company and RJRT, and the other
Guarantors, if any, will not, and will cause their Affiliates, including the
other Guarantors, if any, not to, resell any Securities which are "restricted
securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act)
that have been reacquired by any of them and shall immediately upon any purchase
of any such Securities submit such Securities to the Trustee for cancellation.
(g) THIRD PARTY BENEFICIARY. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company and RJRT, on
the one hand, and the Initial Purchasers, on the other hand, and shall have the
right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder.
(h) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(i) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(J) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK.
(k) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
<PAGE>
23
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
RJR NABISCO, INC.
By: /s/ Francis X. Suozzi
--------------------------------
Name: Francis X. Suozzi
Title: Senior Vice President and
Treasurer
R.J. REYNOLDS TOBACCO COMPANY
By: /s/ Kenneth J. Lapiejko
--------------------------------
Name: Kenneth J. Lapiejko
Title: Senior Vice President,
Chief Financial Officer and
Treasurer
Confirmed and accepted as of
the date first above written, on behalf and
themselves and the other Initial Purchasers
set forth on Schedule I hereto:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By: /s/ John D. Fallon
--------------------------------
Name: John D. Fallon
Title: Vice President
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Michael Fusco
--------------------------------
Name: Michael Fusco
Title: Vice President
<PAGE>
Schedule 1
OTHER INITIAL PURCHASERS
ABN AMRO Incorporated
Barclays Capital Inc.
BNY Capital Markets, Inc.
Chase Securities Inc.
Credit Lyonnais Securities (USA) Inc.
Credit Suisse First Boston Corporation
Deutsche Bank Securities Inc.
HSBC Securities, Inc.
Salomon Smith Barney Inc.
Scotia Capital Markets (USA), Inc.
<PAGE>
EXHIBIT 5
July , 1999
R.J. Reynolds Tobacco Holdings, Inc.
R.J. Reynolds Tobacco Company
401 North Main Street
Winston-Salem, North Carolina 27102
Ladies and Gentlemen:
We have acted as special counsel to R.J. Reynolds Tobacco Holdings, Inc., a
Delaware corporation (the "Company") and R. J. Reynolds Tobacco Company, a New
Jersey corporation (the "Guarantor"), in connection with the Company's offer
(the "Exchange Offer") to exchange its 7 3/8% Series B Notes due 2003 for any
and all of its outstanding 7 3/8% Notes due 2003, its 7 3/4% Series B Notes due
2006 for any and all of its outstanding 7 3/4% Notes due 2006 and its 7 7/8%
Series B Notes due 2009 for any and all of its outstanding 7 7/8% Notes due
2009. The Company's outstanding 7 3/8% Notes due 2003, 7 3/4% Notes due 2006 and
7 7/8% Notes due 2009 are hereinafter referred to as the "Old Notes" and the
Company's 7 3/8% Series B Notes due 2003, 7 3/4% Series B Notes due 2006 and
7 7/8% Series B Notes due 2009 are hereinafter referred to as the "New Notes".
The Old Notes were issued, and it is proposed that the New Notes be issued,
under an Indenture (the "Indenture") dated as of May 15, 1999 among the Company,
the Guarantor and The Bank of New York, as Trustee.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of public
officials and other instruments as we have deemed necessary or advisable for the
purpose of rendering this opinion.
Upon the basis of the foregoing and assuming the due authorization,
execution and delivery of the Indenture by the parties thereto, we are of the
opinion that (1) the New Notes, when authorized, executed, authenticated and
delivered in exchange for the Old Notes in accordance with the terms of the
Indenture and the Exchange Offer, will be valid and binding obligations of the
Company enforceable in accordance with their terms, except (x) as such
enforcement may be limited by bankruptcy, insolvency, fraudulent conveyance or
similar laws affecting creditors' rights generally, (y) as such enforcement may
be limited by general principles of equity, regardless of whether enforcement is
sought in a proceeding at law or in equity and (z) to the extent that a waiver
of rights under any usury or stay law may be unenforceable and (2) the guarantee
by the Guarantor of the Company's obligations under the New Notes, when the New
Notes have been authorized, executed, authenticated and delivered in exchange
for the Old Notes in accordance with the terms of the Indenture and the Exchange
Offer, and when such guarantee has been authorized and endorsed on the New Notes
as provided in the Indenture, will be a valid and binding obligation of the
Guarantor enforceable in accordance with its terms, except (x) as such
enforcement may be limited by bankruptcy, insolvency, fraudulent conveyance or
similar laws affecting creditors' rights generally, (y) as such enforcement may
be limited by general principles of equity, regardless of whether enforcement is
sought in a proceeding at law or in equity and (z) to the extent that a waiver
of rights under any usury or stay law may be unenforceable.
We are members of the Bar of the State of New York and the foregoing opinion
is limited to the laws of the State of New York and the federal laws of the
United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
registration statement on Form S-4 filed by the Company and the Guarantor with
the Securities and Exchange Commission relating to the Exchange Offer. We also
consent to the reference to us under the caption "Validity of the Notes and the
Guarantees" in the prospectus contained in such registration statement.
This opinion is rendered solely to you in connection with the above matter.
This opinion may not be relied upon by you for any other purpose or relied upon
by or furnished to any other person without our prior written consent except
that The Bank of New York, as Exchange Agent for the Exchange Offer, may rely
upon this opinion as if it were addressed directly to it.
Very truly yours,
<PAGE>
EXHIBIT 12
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES / DEFICIENCY
IN THE COVERAGE OF FIXED CHARGES BY EARNINGS BEFORE FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
Earnings before fixed charges:
Income (loss) before income taxes.................... $ 66 $ (184) $ (679) $ 204 $ 563 $ 348 $ 310
Interest and debt expense............................ 105 107 426 433 462 484 651
Interest portion of rental expense................... 4 4 16 16 14 14 14
--------- --------- --------- --------- --------- --------- ---------
Earnings before fixed charges.......................... $ 175 $ (73) $ (237) $ 653 $ 1,039 $ 846 $ 975
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Fixed charges:
Interest and debt expense............................ $ 105 $ 107 $ 426 $ 433 $ 462 $ 484 $ 651
Interest portion of rental expense................... 4 4 16 16 14 14 14
--------- --------- --------- --------- --------- --------- ---------
Total fixed charges.................................... $ 109 $ 111 $ 442 $ 449 $ 476 $ 498 $ 665
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of earnings to fixed charges..................... 1.6 -- -- 1.5 2.2 1.7 1.5
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Deficiency in the coverage of fixed charges by earnings
before fixed charges................................. -- $ (184) $ (679) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of R.J. Reynolds Tobacco
Holdings, Inc. on Form S-4 of our report dated May 18, 1999 (July 14, 1999 as to
notes 10 and 16), appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected Historical
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, NY
July 14, 1999
<PAGE>
EXHIBIT 24
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below hereby constitutes and appoints CHARLES A. BLIXT, GUY M. BLYNN AND MCDARA
P. FOLAN, III, and each of them, his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the S-4
Registration Statement and any and all amendments (including post-effective
amendments) and supplements to the S-4 Registration Statement regarding the
Series B Notes of R.J. Reynolds Tobacco Holdings, Inc., and the related
Guarantee of R.J. Reynolds Tobacco Company, and to file the same, with all the
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite or necessary to be done, as fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virture hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 2, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S> <C>
Chairman of the Board,
/s/ ANDREW J. SCHINDLER President, Chief
- ------------------------------ Executive Officer and
Andrew J. Schindler Director
Executive Vice President
/s/ KENNETH J. LAPIEJKO and Chief Financial
- ------------------------------ Officer
Kenneth J. Lapiejko (principal financial
officer)
Senior Vice President and
/s/ THOMAS R. ADAMS Controller
- ------------------------------ (principal accounting
Thomas R. Adams officer)
/s/ JOHN T. CHAIN, JR.
- ------------------------------ Director
John T. Chain, Jr.
/s/ A. D. FRAZIER, JR.
- ------------------------------ Director
A. D. Frazier, Jr.
/s/ DENISE ILITCH
- ------------------------------ Director
Denise Ilitch
/s/ JOHN G. MEDLIN, JR.
- ------------------------------ Director
John G. Medlin, Jr.
/s/ NANA MENSAH
- ------------------------------ Director
Nana Mensah
/s/ JOSEPH P. VIVIANO
- ------------------------------ Director
Joseph P. Viviano
/s/ THOMAS C. WAJNERT
- ------------------------------ Director
Thomas C. Wajnert
</TABLE>
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below hereby constitutes and appoints CHARLES A. BLIXT, GUY M. BLYNN AND MCDARA
P. FOLAN, III, and each of them, his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign the S-4
Registration Statement and any and all amendments (including post-effective
amendments) and supplements to the S-4 Registration Statement regarding the
Series B Notes of R.J. Reynolds Tobacco Holdings, Inc., and the related
Guarantee of R.J. Reynolds Tobacco Company, and to file the same, with all the
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite or necessary to be done, as fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virture hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 2, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ----------------------------------------
<C> <S> <C>
/s/ ANDREW J. SCHINDLER Chairman of the Board,
------------------------------------------- President and Chief Executive
Andrew J. Schindler Officer
/s/ KENNETH J. LAPIEJKO Executive Vice President, Chief
------------------------------------------- Financial Officer and Director
Kenneth J. Lapiejko (principal financial officer)
/s/ THOMAS R. ADAMS
------------------------------------------- Senior Vice President and Controller
Thomas R. Adams (principal accounting officer)
/s/ CHARLES A. BLIXT
------------------------------------------- Director
Charles A. Blixt
/s/ ROBERT R. GORDON, JR.
------------------------------------------- Director
Robert R. Gordon, Jr.
/s/ JAMES H. WILSON
------------------------------------------- Director
James H. Wilson
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJR'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> R.J. REYNOLDS TOBACCO HOLDINGS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 58
<ALLOWANCES> 0
<INVENTORY> 529
<CURRENT-ASSETS> 7,085
<PP&E> 2,342
<DEPRECIATION> (1,227)
<TOTAL-ASSETS> 19,401
<CURRENT-LIABILITIES> 1,820
<BONDS> 4,861
0
0
<COMMON> 1
<OTHER-SE> 9,885
<TOTAL-LIABILITY-AND-EQUITY> 19,401
<SALES> 5,716
<TOTAL-REVENUES> 5,716
<CGS> 2,795
<TOTAL-COSTS> 2,795
<OTHER-EXPENSES> 366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 426
<INCOME-PRETAX> (679)
<INCOME-TAX> (160)
<INCOME-CONTINUING> (519)
<DISCONTINUED> 3
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (516)
<EPS-BASIC> (4.74)
<EPS-DILUTED> (4.74)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJR'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> R.J. REYNOLDS TOBACCO HOLDINGS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 85
<SECURITIES> 0
<RECEIVABLES> 52
<ALLOWANCES> 0
<INVENTORY> 635
<CURRENT-ASSETS> 1,935
<PP&E> 2,599
<DEPRECIATION> (1,184)
<TOTAL-ASSETS> 20,251
<CURRENT-LIABILITIES> 1,256
<BONDS> 4,944
0
0
<COMMON> 1
<OTHER-SE> 11,078
<TOTAL-LIABILITY-AND-EQUITY> 20,251
<SALES> 5,044
<TOTAL-REVENUES> 5,044
<CGS> 1,568
<TOTAL-COSTS> 1,568
<OTHER-EXPENSES> 446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 433
<INCOME-PRETAX> 204
<INCOME-TAX> 185
<INCOME-CONTINUING> 19
<DISCONTINUED> 414
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433
<EPS-BASIC> 3.98
<EPS-DILUTED> 3.98
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJR'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> R.J. REYNOLDS TOBACCO HOLDINGS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 75
<ALLOWANCES> 0
<INVENTORY> 732
<CURRENT-ASSETS> 1,766
<PP&E> 2,585
<DEPRECIATION> (1,118)
<TOTAL-ASSETS> 20,747
<CURRENT-LIABILITIES> 1,145
<BONDS> 4,928
0
0
<COMMON> 1
<OTHER-SE> 11,668
<TOTAL-LIABILITY-AND-EQUITY> 20,747
<SALES> 4,702
<TOTAL-REVENUES> 4,702
<CGS> 1,186
<TOTAL-COSTS> 1,186
<OTHER-EXPENSES> 366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462
<INCOME-PRETAX> 563
<INCOME-TAX> 337
<INCOME-CONTINUING> 226
<DISCONTINUED> 440
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 666
<EPS-BASIC> 6.13
<EPS-DILUTED> 6.13
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRQACTED FROM RJR'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> R.J. REYNOLDS TOBACCO HOLDINGS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 46
<ALLOWANCES> 0
<INVENTORY> 527
<CURRENT-ASSETS> 7,259
<PP&E> 2,349
<DEPRECIATION> 1,248
<TOTAL-ASSETS> 19,476
<CURRENT-LIABILITIES> 2,036
<BONDS> 4,743
0
0
<COMMON> 1
<OTHER-SE> 9,873
<TOTAL-LIABILITY-AND-EQUITY> 19,476
<SALES> 1,693
<TOTAL-REVENUES> 1,693
<CGS> 750
<TOTAL-COSTS> 750
<OTHER-EXPENSES> 92
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 66
<INCOME-TAX> 36
<INCOME-CONTINUING> 30
<DISCONTINUED> 65
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95
<EPS-BASIC> .88
<EPS-DILUTED> .88
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJR'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> R.J. REYNOLDS TOBACCO HOLDINGS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 42
<ALLOWANCES> 0
<INVENTORY> 636
<CURRENT-ASSETS> 2,085
<PP&E> 2,607
<DEPRECIATION> 1,209
<TOTAL-ASSETS> 20,184
<CURRENT-LIABILITIES> 1,123
<BONDS> 5,013
0
0
<COMMON> 1
<OTHER-SE> 11,066
<TOTAL-LIABILITY-AND-EQUITY> 20,184
<SALES> 1,213
<TOTAL-REVENUES> 1,213
<CGS> 630
<TOTAL-COSTS> 630
<OTHER-EXPENSES> 91
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> (184)
<INCOME-TAX> (43)
<INCOME-CONTINUING> (141)
<DISCONTINUED> 133
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
OFFER TO EXCHANGE
7 3/8% SERIES B NOTES DUE 2003
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 3/8% NOTES DUE 2003
7 3/4% SERIES B NOTES DUE 2006
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 3/4% NOTES DUE 2006
7 7/8% SERIES B NOTES DUE 2009
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 7/8% NOTES DUE 2009
PURSUANT TO THE PROSPECTUS
DATED , 1999
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON , UNLESS THE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT DELIVERY OR HAND:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
Floor 7 East Floor 7 East
New York New York 10286 New York New York 10286
Attn: Attn:
TO CONFIRM BY TELEPHONE OR FOR INFORMATION: FACSIMILE TRANSMISSIONS:
(212) 815- (212) 815-6339
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Old Notes (as
defined below) if Old Notes are to be forwarded herewith. If tenders of Old
Notes are to be made by book-entry transfer to an account maintained by The Bank
of New York (the "Exchange Agent") at The Depository Trust Company ("DTC")
pursuant to the procedures set forth in "The Exchange Offer--Book-Entry
Transfer" in the
<PAGE>
Prospectus and in accordance with the Automated Tender Offer Program ("ATOP")
established by DTC, a tendering holder will become bound by the terms and
conditions hereof in accordance with the procedures established under ATOP.
Holders of Old Notes whose certificates (the "certificates") for such Old
Notes are not immediately available or who cannot deliver their certificates and
all other required documents to the Exchange Agent on or prior to the expiration
date (as defined in the Prospectus) or who cannot complete the procedures for
book-entry transfer on a timely basis, must tender their Old Notes according to
the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures" in the Prospectus. SEE INSTRUCTION 1. DELIVERY OF DOCUMENTS
TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
Any holder of Old Notes participating in the exchange offer for the purpose
of participating in a distribution of the New Notes to be acquired in the
exchange offer cannot rely on the position of the Staff of the Division of
Corporation Finance of the Securities and Exchange Commission enunciated in
EXXON CAPITAL HOLDINGS CORPORATION (available April 13, 1989) or similar letters
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Any broker-dealer who holds Old Notes acquired for its own account as a
result of market-making activities or other trading activities, and who receives
New Notes in exchange for such Old Notes pursuant to the exchange offer, may be
a statutory underwriter and must deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such New Notes.
2
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
ALL TENDERING HOLDERS COMPLETE THIS BOX:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED
- -------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED
HOLDER(S) OLD NOTES TENDERED
(PLEASE FILL IN, IF BLANK) (ATTACH ADDITIONAL LIST IF NECESSARY)
- -------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF
PRINCIPAL OLD NOTES
AMOUNT TENDERED
CERTIFICATE OF OLD (IF LESS THAN
NUMBER(S)* NOTES* ALL)**
<S> <C> <C> <C>
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
Total
Amount
Tendered
- -------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Old Notes may be tendered in whole or in part in denominations of $1,000 and
integral multiples thereof. All Old Notes held shall be deemed tendered
unless a lesser number is specified in this column.
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution ______________________________________________
DTC Account Number _________________________________________________________
Transaction Code Number ____________________________________________________
/ / CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) _______________________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Name of Institution which Guaranteed _______________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution ______________________________________________
DTC Account Number _________________________________________________________
Transaction Code Number ____________________________________________________
3
<PAGE>
/ / CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
/ / CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
___________________________________________________________________
4
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to R.J. Reynolds Tobacco Holdings, Inc., a
Delaware corporation (the "Company"), the principal amount of the Company's
7 3/8% Notes due 2003, 7 3/4% Notes due 2006 or 7 7/8% Notes due 2009 (the "Old
Notes") specified above in exchange for a like aggregate principal amount of the
Company's 7 3/8% Series B Notes due 2003, 7 3/4% Series B Notes due 2006 or
7 7/8% Series B Notes due 2009 (the "New Notes"), upon the terms and subject to
the conditions set forth in the Prospectus dated , 1999 (as the same
may be amended or supplemented from time to time, the "Prospectus"), receipt of
which is acknowledged, and in this Letter of Transmittal (which, together with
the Prospectus, constitute the "Exchange Offer"). The Exchange Offer has been
registered under the Securities Act of 1933, as amended (the "Securities Act").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent is also acting as agent of the Company in connection with the
Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), subject only to the right of withdrawal described in
the Prospectus, to (i) deliver certificates for Old Notes to the Company
together with all accompanying evidences of transfer and authenticity to, or
upon the order of, the Company, upon receipt by the Exchange Agent, as the
undersigned's agent, of the New Notes to be issued in exchange for such Old
Notes, (ii) present certificates for such Old Notes for transfer, and to
transfer the Old Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD NOTES
TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE COMPANY
WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND CLEAR OF
ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD NOTES
TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED HEREBY,
AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE REGISTRATION
RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE
EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the certificates representing such Old Notes. The
certificate number(s) and the Old Notes that the undersigned wishes to tender
should be indicated in the appropriate boxes above.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if certificates are submitted for more Old Notes than are
tendered or accepted for exchange, certificates for such unaccepted or
nonexchanged Old Notes will be returned (or, in the case of Old Notes tendered
by book-entry transfer, such Old Notes will be credited to an account maintained
at DTC), without expense to the tendering holder, promptly following the
expiration or termination of the Exchange Offer.
5
<PAGE>
The undersigned understands that tenders of Old Notes pursuant to any one of
the procedures described in "The Exchange Offer--Procedures for Tendering Old
Notes" in the Prospectus and in the instructions hereto will, upon the Company's
acceptance for exchange of such tendered Old Notes, constitute a binding
agreement between the undersigned and the Company upon the terms and subject to
the conditions of the Exchange Offer. In all cases in which a Participant elects
to accept the Exchange Offer by transmitting an express acknowledgment in
accordance with the established ATOP procedures, such Participant shall be bound
by all of the terms and conditions of this Letter of Transmittal. The
undersigned recognizes that, under certain circumstances set forth in the
Prospectus, the Company may not be required to accept for exchange any of the
Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the New Notes be issued
in the name(s) of the undersigned or, in the case of a book-entry transfer of
Old Notes, that such New Notes be credited to the account indicated above
maintained at DTC. If applicable, substitute certificates representing Old Notes
not exchanged or not accepted for exchange will be issued to the undersigned or,
in the case of a book-entry transfer of Old Notes, will be credited to the
account indicated above maintained at DTC. Similarly, unless otherwise indicated
under "Special Delivery Instructions," please deliver New Notes to the
undersigned at the address shown below the undersigned's signature.
By tendering Old Notes and executing, or otherwise becoming bound by, this
letter of transmittal, the undersigned hereby represents and agrees that
(i) the undersigned is not an "affiliate" of the Company,
(ii) any New Notes to be received by the undersigned are being acquired in
the ordinary course of its business, and
(iii) the undersigned is not engaged in, and does not intend to engage in, a
distribution of the New Notes.
By tendering Old Notes pursuant to the exchange offer and executing, or
otherwise becoming bound by, this letter of transmittal, a holder of Old Notes
which is a broker-dealer represents and agrees, consistent with certain
interpretive letters issued to third parties by the Staff of the Division of
Corporation Finance of the Securities and Exchange Commission, that (a) such Old
Notes held by the broker-dealer are held only as a nominee or (b) such Old Notes
were acquired by such broker-dealer for its own account as a result of
market-making activities or other trading activities and it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes (provided that, by so acknowledging and by delivering a
prospectus, such broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act).
The Company has agreed that, subject to the provisions of the Registration
Rights Agreement, the prospectus, as it may be amended or supplemented from time
to time, may be used by a participating broker-dealer (as defined below) in
connection with resales of New Notes received in exchange for Old Notes, where
such Old Notes were acquired by such participating broker-dealer for its own
account as a result of market-making activities or other trading activities, for
a period ending 90 days after the expiration date (subject to extension under
certain limited circumstances) or, if earlier, when all such New Notes have been
disposed of by such participating broker-dealer. In that regard, each broker
dealer who acquired Old Notes for its own account as a result of market-making
or other trading activities (a "participating broker-dealer"), by tendering such
Old Notes and executing, or otherwise becoming bound by, this letter of
transmittal, agrees that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained in the prospectus untrue in any material respect or which causes the
prospectus to omit to state a material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading or of the occurrence of certain other events specified
in the Registration Rights Agreement,
6
<PAGE>
such participating broker-dealer will suspend the sale of New Notes pursuant to
the prospectus until the Company has amended or supplemented the prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to the participating broker-dealer or the Company has
given notice that the sale of the New Notes may be resumed, as the case may be.
If the Company gives such notice to suspend the sale of the New Notes, it shall
extend the 90-day period referred to above during which participating
broker-dealers are entitled to use the prospectus in connection with the resale
of New Notes by the number of days during the period from and including the date
of the giving of such notice to and including the date when participating
broker-dealers shall have received copies of the supplemented or amended
prospectus necessary to permit resales of the New Notes or to and including the
date on which the Company has given notice that the sale of New Notes may be
resumed, as the case may be.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
7
<PAGE>
- --------------------------------------------------------------------------------
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) for the Old Notes hereby tendered or on a security position
listing, or by any person(s) authorized to become the registered holder(s)
by endorsements and documents transmitted herewith. If signature is by an
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary or representative capacity,
please set forth the signer's full title. See Instruction 5.
____________________________________________________________________________
(SIGNATURE(S) OF HOLDER(S))
Date _________________________________________________________________, 1999
Name(s)_____________________________________________________________________
____________________________________________________________________________
(PLEASE PRINT)
Capacity: __________________________________________________________________
(INCLUDE FULL TITLE)
Address ____________________________________________________________________
____________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number _____________________________________________
____________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S))
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
Authorized Signature _______________________________________________________
Name _______________________________________________________________________
____________________________________________________________________________
(PLEASE PRINT)
Date _________________________________________________________________, 1999
Capacity or Title __________________________________________________________
Name of Firm _______________________________________________________________
Address ____________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number _____________________________________________
----------------------------------------------------------------------------
8
<PAGE>
-----------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the New Notes are to be issued in the name of
someone other than the registered holder of the Old Notes whose name(s)
appear(s) above.
Issue New Notes to:
Name _______________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
Address ____________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(INCLUDE ZIP CODE)
__________________________________________________________________________
(TAXPAYER IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
- ------------------------------------------------------
- ------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if New Notes are to be sent to someone other than
the registered holder of the Old Notes whose name(s) appear(s) above, or to
such registered holder(s) at an address other than that shown above.
Mail New Notes To:
Name _______________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
Address ____________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(INCLUDE ZIP CODE)
__________________________________________________________________________
(TAXPAYER IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
-----------------------------------------------------------
9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed if certificates are to
be forwarded herewith. If tenders are to be made pursuant to the procedures for
tender by book-entry transfer set forth in "The Exchange Offer--Book-Entry
Transfer" in the Prospectus and in accordance with ATOP established by DTC, a
tendering holder will become bound by the terms and conditions hereof in
accordance with the procedures established under ATOP. Certificates, or timely
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC, as well as this Letter of Transmittal (or facsimile
thereof), if required, properly completed and duly executed, with any required
signature guarantees, must be received by the Exchange Agent at one of its
addresses set forth herein on or prior to the expiration date. Old Notes may be
tendered in whole or in part in the principal amount of $1,000 and integral
multiples of $1,000.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes and this Letter
of Transmittal to the Exchange Agent on or prior to the expiration date or (iii)
who cannot complete the procedures for delivery by book-entry transfer on a
timely basis, may tender their Old Notes by properly completing and duly
executing a Notice of Guaranteed Delivery pursuant to the guaranteed delivery
procedures set forth in "The Exchange Offer-- Guaranteed Delivery Procedures" in
the Prospectus. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution (as defined below); (ii) a properly completed
and duly executed Letter of Transmittal (or facsimile) thereof and Notice of
Guaranteed Delivery, substantially in the form made available by the Company,
must be received by the Exchange Agent on or prior to the expiration date; and
(iii) the certificates (or a book-entry confirmation (as defined in the
Prospectus)) representing all tendered Old Notes, in proper form for transfer,
must be received by the Exchange Agent within three New York Stock Exchange
trading days after the date of execution of such Notice of Guaranteed Delivery,
all as provided in "The Exchange Offer--Guaranteed Delivery Procedures" in the
Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
telegram, telex, facsimile or mail to the Exchange Agent, and must include a
guarantee by an Eligible Institution in the form set forth in such Notice. For
Old Notes to be properly tendered pursuant to the guaranteed delivery procedure,
the Exchange Agent must receive a Notice of Guaranteed Delivery on or prior to
the expiration date. As used herein and in the Prospectus, "Eligible
Institution" means a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc. or
a commercial bank or trust company having an office or correspondent in the
United States.
THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER. IF
SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, BE USED. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD
NOTES SHOULD BE SENT TO THE COMPANY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), or any Agent's Message in lieu thereof, waives any right to
receive any notice of the acceptance of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any participant in
DTC whose name appears on a security position listing as the owner of the
Old Notes) of Old Notes tendered herewith, unless such holder(s) has
completed
10
<PAGE>
either the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" above, or
(ii) such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Old Notes" is inadequate, the certificate number(s) and/or the
principal amount of Old Notes and any other required information should be
listed on a separate signed schedule which is attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Notes will be
accepted only in the principal amount of $1,000 and integral multiples thereof.
If less than all the Old Notes evidenced by any certificate submitted are to be
tendered, fill in the principal amount of Old Notes which are to be tendered in
the box entitled "Principal Amount of Old Notes Tendered (if less than all)." In
such case, new certificate(s) for the remainder of the Old Notes that were
evidenced by your old certificate(s) will only be sent to the holder of the Old
Note, promptly after the expiration date. All Old Notes represented by
certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the expiration date. In order for a withdrawal to be
effective on or prior to that time, a written notice of withdrawal must be
timely received by the Exchange Agent at one of its addresses set forth above or
in the Prospectus on or prior to the expiration date. Any such notice of
withdrawal must specify the name of the person who tendered the Old Notes to be
withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes) and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for the Old Notes
have been delivered or otherwise identified to the Exchange Agent, then prior to
the release of such certificates, the withdrawing holder must submit the serial
numbers of the particular certificates for the Old Notes to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution, unless such holder is an Eligible Institution. If Old Notes have
been tendered pursuant to the procedures for book-entry transfer set forth in
the Prospectus under "The Exchange Offer--Book-Entry Transfer," any notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Old Notes and otherwise comply with the procedures of
such facility. Old Notes properly withdrawn will not be deemed validly tendered
for purposes of the Exchange Offer, but may be retendered at any time on or
prior to the expiration date by following one of the procedures described in the
Prospectus under "The Exchange Offer--Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at DTC pursuant to the book-entry procedures described in the Prospectus under
"The Exchange Offer--Book-Entry Transfer" such Old Notes will be credited to an
account maintained with DTC for the Old Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Old
Notes tendered hereby, the signature(s) must correspond exactly with the name(s)
as written on the face of the certificate(s) without alteration, enlargement or
any change whatsoever.
11
<PAGE>
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of certificates.
If this Letter of Transmittal or any certificates or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company of such persons' authority
to so act must be submitted.
When this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes listed and transmitted hereby, no endorsement(s) of certificate(s) or
written instrument or instruments of transfer or exchange are required unless
New Notes are to be issued in the name of a person other than the registered
holder(s). Signature(s) on such certificate(s) or written instrument or
instruments of transfer or exchange must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Old Notes listed, the certificates must be endorsed
or accompanied by a written instrument or instruments of transfer or exchange,
in satisfactory form as determined by the Company in its sole discretion and
executed by the registered holder(s), in either case signed exactly as the name
or names of the registered holder(s) appear(s) on the certificates. Signatures
on such certificates or written instrument or instruments of transfer or
exchange must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if New Notes are to be sent to someone other than the signer of
this Letter of Transmittal or to an address other than that shown above, the
appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Old Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Old Notes, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right, in its
sole discretion, to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Notes either before or after the
expiration date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer as to any particular Old Notes either
before or after the expiration date (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with the tender of
Old Notes for exchange must be cured within such reasonable period of time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address and
telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
12
<PAGE>
9. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate(s)
representing Old Notes have been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be instructed as to the
steps that must be taken in order to replace the certificate(s). This Letter of
Transmittal and related documents cannot be processed until the procedures for
replacing lost, destroyed or stolen certificate(s) have been followed.
10. SECURITY TRANSFER TAXES. Holders who tender their Old Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith, except that holders who instruct the Company to register New Notes in
the name of or request that Old Notes not tendered or not accepted in the
Exchange Offer to be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF),
OR AN AGENT'S MESSAGE IN LIEU THEREOF, AND ALL OTHER REQUIRED
DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT
ON OR PRIOR TO THE EXPIRATION DATE.
13
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
7 3/8% NOTES DUE 2003
7 3/4% NOTES DUE 2006
7 7/8% NOTES DUE 2009
OF
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
This Notice of Guaranteed Delivery or one substantially equivalent hereto
must be used to accept the Exchange Offer (as defined below) if (i) certificates
for the Company's (as defined below) 7 3/8% Notes due 2003, 7 3/4% Notes due
2006 or 7 7/8% Notes due 2009 (collectively, the "Old Notes") are not
immediately available, (ii) Old Notes, the Letter of Transmittal and any other
documents required by the Letter of Transmittal cannot be delivered to The Bank
of New York (the "Exchange Agent") on or prior to the Expiration Date (as
defined in the Prospectus referred to below) or (iii) the procedures for
book-entry transfer cannot be completed on a timely basis. This Notice of
Guaranteed Delivery may be delivered by hand or sent by facsimile transmission,
overnight courier, telex, telegram or mail to the Exchange Agent. See "The
Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus dated
, 1999 (which, together with the related Letter of Transmittal, constitutes
the "Exchange Offer") of R.J. Reynolds Tobacco Holdings, Inc., a Delaware
corporation (the "Company") and R.J. Reynolds Tobacco Company.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
BY HAND OR OVERNIGHT FACSIMILE TRANSMISSIONS: BY REGISTERED OR CERTIFIED
DELIVERY: (Eligible Institutions Only) MAIL:
The Bank of New York The Bank of New York
101 Barclay Street (212) 815- 101 Barclay Street
Floor 7 East Floor 7 East
New York New York 10286 To Confirm by Telephone New York New York 10286
Attn: or for Information Call: Attn:
(212) 815-
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA A
FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL.
<PAGE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States, hereby guarantees to deliver to the Exchange
Agent, at one of its addresses set forth above, either the certificates for all
physically tendered Old Notes, in proper form for transfer, or confirmation of
the book-entry transfer of such Old Notes to the Exchange Agent's account at The
Depository Trust Company ("DTC"), pursuant to the procedures for book-entry
transfer set forth in the Prospectus, in either case together with any other
documents required by the Letter of Transmittal, within three New York Stock
Exchange trading days after the date of execution of this Notice of Guaranteed
Delivery.
The undersigned acknowledges that it must deliver the Old Notes tendered
hereby to the Exchange Agent within the time period set forth above and that
failure to do so could result in a financial loss to the undersigned.
<TABLE>
<S> <C>
Name of Firm:
(AUTHORIZED SIGNATURE)
Address: Title:
Name:
(ZIP CODE) (PLEASE TYPE OR PRINT)
Area Code and Telephone Number: Date:
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. ACTUAL
SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND FULLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
<PAGE>
EXHIBIT 99.3
OFFER TO EXCHANGE
7 3/8% SERIES B NOTES DUE 2003
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 3/8% NOTES DUE 2003
7 3/4% SERIES B NOTES DUE 2006
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 3/4% NOTES DUE 2006
7 7/8% SERIES B NOTES DUE 2009
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 7/8% NOTES DUE 2009
OF
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
To Our Clients:
Enclosed is a Prospectus, dated , 1999, of R.J. Reynolds Tobacco
Holdings, Inc., a Delaware corporation (the "Company") and R.J. Reynolds Tobacco
Company, a New Jersey corporation, and a related Letter of Transmittal (which
together constitute the "Exchange Offer") relating to the offer by the Company
to exchange its 7 3/8% Series B Notes due 2003 for a like principal amount of
its issued and outstanding 7 3/8% Notes due 2003, its 7 3/4% Series B Notes due
2006 for a like principal amount of its issued and outstanding 7 3/4% Notes due
2006 and its 7 7/8% Series B Notes due 2009 for a like principal amount of its
issued and outstanding 7 7/8% Notes due 2009, pursuant to an offering registered
under the Securities Act of 1933, as amended (the "Securities Act"), upon the
terms and subject to the conditions set forth in the Exchange Offer. The Series
B Notes are hereinafter referred to as the "New Notes" and the issued and
outstanding Notes referred to above are hereinafter referred to as the "Old
Notes."
PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON , 1999, UNLESS EXTENDED.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
We are the holder of record and/or participant in the book-entry transfer
facility of Old Notes held by us for your account. A tender of such Old Notes
can be made only by us as the record holder and/or participant in the book-entry
transfer facility and pursuant to your instructions. The Letter of Transmittal
is furnished to you for your information only and cannot be used by you to
tender Old Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of the
Old Notes held by us for your account pursuant to the terms and conditions of
the Exchange Offer. We also request that you confirm that we may on your behalf
make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the holder is not an "affiliate" of the
Company, (ii) any New Notes to be received by the holder are being acquired in
the ordinary course of its business, and (iii) the holder is not engaged in, and
does not intend to engage in, a distribution of the New Notes. If the tendering
holder is a broker-dealer that will receive New Notes for its own account in
exchange for Old Notes, we will represent on behalf of such broker-dealer that
the Old Notes to be exchanged for the New Notes were acquired by it as a result
of
<PAGE>
market-making activities or other trading activities, and acknowledge on behalf
of such broker-dealer that it will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such New Notes. By
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes, such broker-dealer is not deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
Very truly yours,
<PAGE>
EXHIBIT 99.4
OFFER TO EXCHANGE
7 3/8% SERIES B NOTES DUE 2003
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 3/8% NOTES DUE 2003
7 3/4% SERIES B NOTES DUE 2006
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 3/4% NOTES DUE 2006
7 7/8% SERIES B NOTES DUE 2009
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
7 7/8% NOTES DUE 2009
OF
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
To Registered Holders and The Depository
Trust Company Participants:
Enclosed are the materials listed below relating to the offer by R.J.
Reynolds Tobacco Holdings, Inc., a Delaware corporation (the "Company"), to
exchange its 7 3/8% Series B Notes due 2003 for a like principal amount of its
issued and outstanding 7 3/8% Notes due 2003, its 7 3/4% Series B Notes due 2006
for a like principal amount of its issued and outstanding 7 3/4% Notes due 2006
and its 7 7/8% Series B Notes due 2009 for a like principal amount of its issued
and outstanding 7 7/8% Notes due 2009, pursuant to an offering registered under
the Securities Act of 1933, as amended (the "Securities Act"), upon the terms
and subject to the conditions set forth in the Prospectus, dated , 1999 of
the Company and R.J. Reynolds Tobacco Company, a New Jersey corporation (the
"Guarantor"), and the related Letter of Transmittal (which together constitute
the "Exchange Offer"). The Series B Notes are hereinafter referred to as the
"New Notes" and the issued and outstanding Notes referred to above are
hereinafter referred to as the "Old Notes."
Enclosed herewith are copies of the following documents:
1. Prospectus dated , 1999;
2. Letter of Transmittal;
3. Notice of Guaranteed Delivery;
4. Instruction to Registered Holder and/or Book-Entry Transfer Participant
from Owner; and
5. Letter which may be sent to your clients for whose account you hold Old
Notes in your name or in the name of your nominee, to accompany the
instruction form referred to above, for obtaining such client's
instruction with regard to the Exchange Offer.
WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE EXCHANGE
OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS
EXTENDED.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
<PAGE>
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company and the Guarantor that (i) the holder is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, and (iii) the holder is not
engaged in, and does not intend to engage in, a distribution of the New Notes.
If the tendering holder is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes, you will represent on behalf of such
broker-dealer that the Old Notes to be exchanged for the New Notes were acquired
by it as a result of market-making activities or other trading activities, and
acknowledge on behalf of such broker-dealer that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes. By acknowledging that it will deliver and by delivering a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes, such broker-dealer is not deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The enclosed Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Owner contains an authorization by the beneficial owners of the
Old Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer or to
any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 10 of the enclosed
Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
THE BANK OF NEW YORK
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE
AGENT OF R.J. REYNOLDS TOBACCO HOLDINGS, INC., R.J. REYNOLDS TOBACCO COMPANY OR
THE BANK OF NEW YORK OR AUTHORIZE YOU TO USE ANY DOCUMENT OR MAKE ANY STATEMENT
ON THEIR BEHALF IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE DOCUMENTS
ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
<PAGE>
EXHIBIT 99.5
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
R.J. REYNOLDS TOBACCO HOLDINGS, INC.
7 3/8% NOTES DUE 2003
7 3/4% NOTES DUE 2006
7 7/8% NOTES DUE 2009
(THE "OLD NOTES")
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated ,
1999 (the "Prospectus") of R.J. Reynolds Tobacco Holdings, Inc., a Delaware
corporation (the "Company") and R.J. Reynolds Tobacco Company, a New Jersey
corporation, and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer"). Capitalized terms used but not defined herein have the meanings
ascribed to them in the Prospectus or the Letter of Transmittal.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Old Notes held by you for the account of the
undersigned.
The aggregate face amount of the Old Notes held by you for the account of
the undersigned is (fill in amount):
$____________ of the 7 3/8% Notes due 2003
$____________ of the 7 3/4% Notes due 2006
$____________ of the 7 7/8% Notes due 2009
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
/ / To TENDER the following Old Notes held by you for the account of the
undersigned (insert principal amount of Old Notes to be tendered, if any):
$____________ of the 7 3/8% Notes due 2003
$____________ of the 7 3/4% Notes due 2003
$____________ of the 7 7/8% Notes due 2003
/ / NOT to TENDER any Old Notes held by you for the account of the undersigned.
If the undersigned instructs you to tender the Old Notes held by you for the
account of the undersigned, it is understood that you are authorized to make, on
behalf of the undersigned (and the undersigned, by its signature below, hereby
makes to you), the representations and warranties contained in the Letter of
Transmittal that are to be made with respect to the undersigned as a beneficial
owner, including but not limited to the representations, that (i) the holder is
not an "affiliate" of the Company, (ii) any New Notes to be received by the
holder are being acquired in the ordinary course of its business, and (iii) the
holder is not engaged in, and does not intend to engage in, a distribution of
the New Notes. If the undersigned is a broker-dealer that will receive New Notes
for its own account in exchange for Old Notes, it represents that such Old Notes
were acquired as a result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act of 1933, as amended (the "Securities Act") in
connection with any resale of such New Notes. By acknowledging that it will
deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes, such
broker-dealer is not deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
<PAGE>
SIGN HERE
Name of beneficial owner(s): ___________________________________________________
Signature(s): __________________________________________________________________
Name(s) (please print): ________________________________________________________
Address: _______________________________________________________________________
Telephone Number: ______________________________________________________________
Taxpayer Identification or Social Security Number: _____________________________
________________________________________________________________________________
Date: __________________________________________________________________________
