AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1994
REGISTRATION NO. 33-52381
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RJR NABISCO HOLDINGS CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3490602
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 258-5600
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
LAWRENCE R. RICCIARDI, ESQ.
RJR NABISCO HOLDINGS CORP.
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 258-5600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPY TO:
CHARLES I. COGUT, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS (Subject to Completion)
Issued March 16, 1994
300,000,000 Shares
RJR Nabisco Holdings Corp.
SERIES C DEPOSITARY SHARES
EACH REPRESENTING ONE-TENTH OF A SHARE
OF SERIES C CONVERSION PREFERRED STOCK
(Preferred Equity Redemption Cumulative StockTM--PERCSTM)
(Par Value $.01 Per Share)
(Subject to Conversion into Shares of
Common Stock, Par Value $.01 Per Share)
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Each of the Series C Depositary Shares (the "Depositary Shares") represents
ownership of one-tenth of a share of Series C Conversion Preferred Stock of RJR
Nabisco Holdings Corp., a Delaware corporation ("Holdings" or the "Company"), to
be deposited with First Chicago Trust Company of New York, as Depositary, and
entitles the owner to all of the proportionate rights, preferences and
privileges of the Series C Conversion Preferred Stock represented thereby. The
shares of Series C Conversion Preferred Stock are referred to herein as
Preferred Equity Redemption Cumulative Stock (the "PERCS").
The proportionate annual dividend rate for each Depositary Share is
$ (based on the annual dividend rate for each PERCS of $ ) and
the proportionate liquidation preference of each Depositary Share (based on the
liquidation preference of the PERCS) is equal to the sum of (i) the per share
price to public shown below and (ii) one-tenth of the amount of accrued and
unpaid dividends on each of the PERCS, and no more. Dividends are cumulative and
are payable quarterly in arrears on the th day of each ,
, and , commencing , 1994.
On , 1997 (the "Mandatory Conversion Date"), each of the
outstanding Depositary Shares will automatically convert into (i) one share of
Common Stock, par value $.01 per share ("Common Stock"), of the Company
(equivalent to ten shares for each PERCS) (or, following certain events, such
other consideration as described herein), subject to adjustment in certain
events, and (ii) the right to receive on such date an amount in cash equal to
all accrued and unpaid dividends thereon. Automatic conversion of the
outstanding Depositary Shares (and the PERCS) into Common Stock or a
substantially equivalent PERCS-type security may also occur upon certain mergers
or consolidations of the Company, as more fully described herein. See
"Description of Capital Stock--Series C PERCS--Mandatory Conversion,"
"--Antidilution Provisions" and "--Effects of Mergers or Consolidations."
At any time or from time to time prior to the Mandatory Conversion Date, the
Company may call the outstanding PERCS (and thereby the Depositary Shares), in
whole or in part, for redemption. Upon any such redemption, each owner of
Depositary Shares will receive, in exchange for each Depositary Share so called,
shares of Common Stock (or, following certain events, such other consideration
as described herein) having a market value initially equal to $
(equivalent to $ for each PERCS), declining by $ (equivalent
to $ for each PERCS) on each day following the date of issue of the
PERCS to $ (equivalent to $ for each PERCS) on ,
1997, and equal to $ (equivalent to $ for each PERCS)
thereafter (the "Call Price"), plus an amount in cash equal to all proportionate
accrued and unpaid dividends thereon. The Call Price is subject to reduction in
certain circumstances. For a detailed description of the terms of the PERCS and
the Depositary Shares, see "Description of Capital Stock--Series C PERCS" and
"Description of Series C Depositary Shares."
The opportunity for equity appreciation afforded by an investment in the
Depositary Shares (and the PERCS) is limited because the Company may, at its
option, call the PERCS (and thereby the Depositary Shares) at any time prior to
the Mandatory Conversion Date at the Call Price, and may be expected to do so
prior to the Mandatory Conversion Date if, among other things, the market price
of the Common Stock has theretofore exceeded the Call Price for the Depositary
Shares (equivalent to one-tenth of the Call Price for the PERCS). Because the
price of the Common Stock is subject to market fluctuations, the value of the
Common Stock received by an owner of Depositary Shares upon conversion of the
PERCS (and thereby the Depositary Shares) may be more or less than the amount
paid for the Depositary Shares offered hereby.
The Common Stock is listed on the New York Stock Exchange under the symbol
RN. The closing sale price of the Common Stock on the New York Stock Exchange on
March 10, 1994 was $6.25 per share.
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APPLICATION HAS BEEN MADE TO LIST THE DEPOSITARY SHARES ON THE NEW YORK STOCK
EXCHANGE.
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SEE "CERTAIN SIGNIFICANT CONSIDERATIONS" FOR A DISCUSSION OF THE IMPACT ON
HOLDERS OF DEPOSITARY SHARES OF CERTAIN POTENTIAL TRANSACTIONS AND OTHER
IMPORTANT CONSIDERATIONS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE $ A SERIES C DEPOSITARY SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) THE COMPANY(3)
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Per Depositary Share.... $ $ $
Total(4)................ $ $ $
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(1) Plus a proportionate amount of the accrued dividends on the PERCS, if
any, from the date of issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deduction of expenses payable by the Company estimated at
$1,400,000.
(4) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
45,000,000 additional Depositary Shares at the Price to Public less
Underwriting Discounts and Commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in
full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Holdings will be $ , $ and
$ , respectively. See "Underwriters."
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The Depositary Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters named herein and subject to approval of certain
legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is
expected that delivery of the receipts for the Depositary Shares will be made on
or about , 1994 at the office of Morgan Stanley & Co. Incorporated,
New York, New York, against payment therefor in New York funds.
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MORGAN STANLEY & CO. SMITH BARNEY SHEARSON INC.
Incorporated
, 1994
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. NO ACTION HAS BEEN OR WILL BE
TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT
A PUBLIC OFFERING OF THE SHARES OF THE SECURITIES OFFERED HEREBY OR POSSESSION
OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT
PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE
POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE SECURITIES OFFERED HEREBY AND THE DISTRIBUTION OF THIS
PROSPECTUS.
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TABLE OF CONTENTS
PAGE
------
Incorporation of Certain Documents by Reference.............. ..... 2
Summary............................................................ 3
Use of Proceeds.................................................... 12
Certain Significant Considerations................................. 12
Capitalization..................................................... 15
Selected Historical Consolidated Financial Data.................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 18
Description of Capital Stock....................................... 29
Description of Series C Depositary Shares.......................... 46
Federal Income Tax Considerations.................................. 49
Underwriters....................................................... 52
Legal Matters...................................................... 53
Experts............................................................ 53
Available Information.............................................. 53
Index to Financial Statements...................................... 54
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE DEPOSITARY
SHARES, THE COMMON STOCK OR THE DEPOSITARY SHARES REPRESENTING THE COMPANY'S
SERIES A CONVERSION PREFERRED STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR CERTAIN OTHER EXCHANGES OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated herein by reference is the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, which has been filed by the
Company with the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (File No.
1-10215).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Copies of the documents incorporated herein by reference (excluding
exhibits unless such exhibits are specifically incorporated by reference into
such documents) may be obtained upon written or oral request without charge by
persons, including beneficial owners, to whom this Prospectus is delivered.
Requests should be made to RJR Nabisco, Inc., Attention: Investor Relations
Department, 1301 Avenue of the Americas, New York, New York 10019, telephone
number (212) 258-5600.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information contained in this Prospectus. As used
herein, "Holdings" or the "Company" means RJR Nabisco Holdings Corp. and its
consolidated subsidiaries, unless the context otherwise requires. Unless
indicated otherwise, the information contained in this Prospectus assumes that
the Underwriters do not exercise their over-allotment option. Unless otherwise
defined herein, capitalized terms used in this Summary have the respective
meanings ascribed to them elsewhere in this Prospectus.
THE COMPANY
The operating subsidiaries of the Company owned through its subsidiary RJR
Nabisco, Inc. ("RJRN") comprise one of the largest tobacco and food companies in
the world. In the United States, the tobacco business is conducted by R.J.
Reynolds Tobacco Company ("RJRT"), the second largest manufacturer of
cigarettes, and the packaged foods business is conducted by the Nabisco Foods
Group ("Nabisco"), the largest manufacturer and marketer of cookies and
crackers. Tobacco operations outside the United States are conducted by R.J.
Reynolds Tobacco International, Inc. ("Tobacco International") and food
operations outside the United States and Canada are conducted by Nabisco
International, Inc. ("Nabisco International"). Together, RJRT's and Tobacco
International's tobacco products are sold around the world under a variety of
brand names. Food products are sold in the United States, Canada, Latin America
and certain other international markets.
Domestic Tobacco. RJRT's largest selling cigarette brands in the United
States include WINSTON, DORAL, SALEM, CAMEL, MONARCH and BEST VALUE. RJRT's
other cigarette brands, including VANTAGE, MORE, NOW, STERLING, MAGNA and
CENTURY, are marketed to meet a variety of smoker preferences. All RJRT brands
are marketed in a variety of styles. A primary long-term objective of RJRT is to
increase earnings and cash flow through selective marketing investments in its
key brands and continual improvements in its cost structure and operating
efficiency. Marketing programs for full-price brands are designed to build brand
awareness and add value to the brands in order to retain current adult smokers
and attract adult smokers of competitive brands. RJRT believes it is essential
to compete in all segments of the cigarette market, and accordingly offers a
range of lower-priced brands intended to appeal to more cost-conscious adult
smokers. Based on data collected for RJRT by an independent market research
firm, RJRT had an overall share of retail consumer cigarette sales during 1993
of 29.8%, an increase of approximately one share point from 1992.
International Tobacco. Tobacco International operates in over 160 markets
around the world and is the second largest of two international cigarette
producers that have significant positions in the American Blend segment of the
international tobacco market. Tobacco International markets over 55 brands of
which WINSTON, CAMEL and SALEM, all American Blend cigarettes, are its
international leaders. Tobacco International has strong brand presence in
Western Europe and is well established in its other key markets in the Middle
East/Africa, Asia and Canada. Tobacco International is aggressively pursuing
development opportunities in Eastern Europe and the former Soviet Union.
Nabisco Foods Group. Nabisco's domestic operations represent one of the
largest packaged food businesses in the world. Through its domestic divisions,
Nabisco manufacturers and markets cookies, crackers, snack foods, hard roll and
bite-size candy, gum, nuts, hot cereals, margarine, pet foods, dry-mix dessert
products and other grocery products under established and well-known trademarks,
including OREO, CHIPS AHOY!, NEWTONS, RITZ, PREMIUM, LIFE SAVERS, PLANTERS, A.1,
GREY POUPON, MILK-BONE, ORTEGA, CREAM OF WHEAT, FLEISCHMANN'S and BLUE BONNET.
Nabisco Biscuit Company ("Nabisco Biscuit") is the largest manufacturer and
marketer in the United States cookie and cracker industry with the nine top
selling brands, each of
3
<PAGE>
which had annual sales of over $100 million in 1993. Overall, in 1993, Nabisco
Biscuit had a 39% share of the domestic cookie industry sales, more than double
the share of its closest competitor, and a 55% share of the domestic cracker
industry sales, more than three times the share of its closest competitor. In
1992, Nabisco Biscuit became the leading manufacturer and marketer of no
fat/reduced fat cookies and crackers with the introduction of the SNACKWELL'S
line. In 1993, the SNACKWELL'S brand recorded over $200 million in sales to
become the sixth largest cookie/cracker brand in the United States. On the basis
of the most recent data available, LIFE SAVERS is the largest selling hard roll
candy in the United States, with an approximately 25% share of the hard roll
candy category and PLANTERS nuts are the clear leader in the packaged nut
category, with a market share of more than five times that of its nearest
competitor.
Nabisco International. Nabisco International is a leading producer of
powdered dessert and drink mixes, biscuits, baking powder and other grocery
items, industrial yeast and bakery ingredients in many of the 17 Latin American
countries in which it has operations. During 1993, Nabisco International
significantly increased its presence in Europe through the acquisition of a 50%
interest in each of Royal Brands S.A. in Spain and Royal Brands Portugal.
Nabisco International has contractual arrangements pursuant to which it expects
to acquire the remaining 50% of such businesses in 1994.
RJRN was acquired in 1989 by an indirect, wholly owned subsidiary of the
Company (the "Acquisition") at the direction of Kohlberg Kravis Roberts & Co.,
L.P. ("KKR"). Prior to the Acquisition, RJRN was a publicly held corporation.
KKR is a private investment firm organized as a Delaware limited partnership.
See "Certain Significant Considerations--KKR Ownership."
The principal executive office of the Company is located at 1301 Avenue of
Americas, New York, New York 10019; its telephone number is (212) 258-5600.
4
<PAGE>
DESCRIPTION OF THE DEPOSITARY SHARES AND THE PERCS*
The PERCS are shares of Series C Conversion Preferred Stock of the Company
and rank senior to the Company's Common Stock. The PERCS convert automatically
into shares of Common Stock on the Mandatory Conversion Date. Automatic
conversion of the outstanding PERCS will also occur upon certain mergers or
consolidations of the Company. In addition, the Company has the option to call
the PERCS, in whole or in part, at any time or from time to time prior to the
Mandatory Conversion Date, for redemption with the Call Price being paid in
shares of Common Stock.
Each Depositary Share represents ownership of one-tenth of a PERCS to be
deposited with First Chicago Trust Company of New York, as Depositary, and
entitles the owner to all of the proportionate rights, preferences and
privileges of the PERCS represented thereby (including the dividend, voting,
liquidation and other rights thereof). See "Description of Series C Depositary
Shares."
GENERAL
The PERCS are an equity security of the Company designed to provide
investors with a dividend-paying equity security, whereas the Company does not
currently pay dividends on the Common Stock. The annual dividend rate on the
PERCS is $ per share (equivalent to $ per Depositary
Share).
Unlike the Common Stock, however, the PERCS limit an investor's ability to
participate in appreciation of the Common Stock because the PERCS may be called
for redemption by the Company at any time prior to the Mandatory Conversion Date
at the predetermined Call Price. If the PERCS are not called for redemption by
the Company prior to the Mandatory Conversion Date, they will automatically
convert into shares of Common Stock and owners of Depositary Shares will receive
shares of Common Stock on a one-for-one basis (subject to adjustment for certain
events as more fully described herein). The Company may be expected to call the
PERCS for redemption prior to the Mandatory Conversion Date if, among other
reasons, the market price for the Common Stock has theretofore exceeded the Call
Price for the Depositary Shares (equivalent to one-tenth of the Call Price for
the PERCS), in which event owners of Depositary Shares will receive shares of
Common Stock on a less than one-for-one basis, based on the then Current Market
Price (as defined herein) of the Common Stock with respect to such redemption.
DIVIDENDS
The owners of Depositary Shares are entitled to receive, when, as and if
dividends on the PERCS are declared by the board of directors of the Company out
of funds legally available therefor, cumulative preferential cash dividends from
the issue date of the PERCS, accruing at the rate per share of $ per annum
or $ per quarter for each of the Depositary Shares (equivalent to $
per annum or $ per quarter for each PERCS), payable quarterly in
arrears on the th day of each , , and
or, if any such date is not a business day, on the next succeeding
business day. The first dividend payment will be paid on , 1994.
Dividends will cease to accrue in respect of the PERCS on the Mandatory
Conversion Date or on the date of their earlier redemption or conversion.
Accrued and unpaid dividends will not bear interest. See "Description of Capital
Stock--Series C PERCS--Dividends."
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* "Preferred Equity Redemption Cumulative Stock" and "PERCS" are trademarks of
Morgan Stanley & Co. Incorporated in connection with its investment banking
services.
5
<PAGE>
MANDATORY CONVERSION OF PERCS
On the Mandatory Conversion Date, each outstanding PERCS will convert
automatically into (i) ten shares of Common Stock (equivalent to one share of
Common Stock for each Depositary Share), subject to adjustment in the event of
certain stock dividends or distributions, subdivisions, splits, combinations,
exchanges, conversions, issuances of certain rights or warrants or distributions
of certain securities or assets with respect to the Common Stock (including
certain transactions set forth in "Certain Significant Considerations--Event
Risk") and in the event of a merger or consolidation of the Company with or into
a wholly owned subsidiary of the Company (the "Common Equivalent Rate"), plus
(ii) the right to receive an amount in cash equal to all accrued and unpaid
dividends on such PERCS (the "Mandatory Conversion"). See "Description of
Capital Stock--Series C PERCS-- Mandatory Conversion," "--Antidilution
Provisions" and "--Effects of Mergers or Consolidations." This Mandatory
Conversion, however, is subject to the Company's right to call all or a portion
of the outstanding PERCS prior to the Mandatory Conversion Date as described
below. See "Description of Capital Stock--Series C PERCS--Right to Call."
In addition, in connection with a merger or consolidation of the Company
(other than a merger or consolidation of the Company with or into a wholly owned
subsidiary of the Company) that results in the conversion or exchange of Common
Stock into, or the right to receive, other securities or other property (whether
of the Company or any other entity), then (subject to certain limitations as
described in "Description of Capital Stock--Series C PERCS--Effects of Mergers
or Consolidations" and subject to applicable call or conversion provisions),
each PERCS will, at the option of the Company:
(1) automatically convert immediately prior to the effectiveness of
the merger or consolidation into (i) shares of Common Stock at the then
existing Common Equivalent Rate, plus (ii) the right to receive an amount
in cash equal to all accrued and unpaid dividends on such share of PERCS to
and including the Settlement Date (as defined herein), plus (iii) the right
to receive an amount of cash initially equal to $ (equivalent to
$ for each Depositary Share), declining by $
(equivalent to $ for each Depositary Share) on each day
following the date of issue of the PERCS (computed on the basis of a
360-day year of twelve 30-day months) to $ (equivalent to
$ for each Depositary Share) on , 1997, and equal
to zero thereafter, in each case determined with reference to the
Settlement Date; provided, that the number of shares of Common Stock
issuable pursuant to clause (i) above shall be reduced, if necessary, so
that the value (based upon the Current Market Price of a share of Common
Stock on the Settlement Date) of the consideration described in clauses
(i) and (iii) above does not exceed the Call Price (as defined herein) on
the Settlement Date and provided, further, that the Company may, at its
option, deliver on the Settlement Date, in lieu of some or all of the cash
consideration described in clauses (ii) and (iii) above, shares of Common
Stock based upon the Current Market Price of a share of Common Stock
determined as of the Settlement Date; or
(2) remain outstanding after the merger or consolidation or represent
the right to receive in such merger or consolidation a substantially
equivalent security of the Company or of the entity (which may be the
Company) issuing the consideration in such merger or consolidation (the
"Issuing Entity"); provided that upon call or conversion of the PERCS or
any such other security, the PERCS or such security will be exchanged for
common equity of the Issuing Entity at an adjusted common equivalent rate.
See "Certain Significant Considerations--Event Risk" and "Description of Capital
Stock--Series C PERCS--Effects of Mergers or Consolidations."
If the Company elects any of the options referred to in subparagraph (2)
above, each holder of PERCS will have the right (the "Holder Opt-Out Right") to
elect that, in lieu of such holder's PERCS being subject to such options, such
holder's PERCS will automatically convert, in whole (but not in part),
immediately prior to the
6
<PAGE>
effectiveness of the merger or consolidation, into (i) shares of Common Stock at
the Common Equivalent Rate in effect immediately prior to such merger or
consolidation (as such number of shares shall be reduced, if necessary, so that
the value of such shares does not exceed the Call Price on the Settlement
Date), plus (ii) the right to receive an amount in cash (which may, at the
option of the Company, be payable in shares of Common Stock based upon the
Current Market Price of a share of Common Stock as of the Settlement Date) equal
to all accrued and unpaid dividends on the PERCS to and including the Settlement
Date.
The existence of the option set forth in subparagraph (1) above may have
the effect of deterring certain takeovers to the extent the premiums described
in clause (iii) of such option require the payment of additional consideration.
If the Company elects any of the options set forth in subparagraph (2) above,
however, no such premium will be payable to the holders of PERCS (or the
Depositary Shares) as a result of the merger or consolidation. In addition, as a
result of the foregoing provisions, holders of PERCS (and thereby holders of
Depositary Shares) may be subject to certain material U.S. Federal income tax
consequences. See "Federal Income Tax Considerations-- Other Sales or
Exchanges."
Because the price of the Common Stock is subject to market fluctuations,
the value of the Common Stock received by an owner of Depositary Shares upon
Mandatory Conversion of the PERCS on the Mandatory Conversion Date or upon the
effectiveness of certain mergers or consolidations of the Company may be more or
less than the amount paid for the Depositary Shares offered hereby. In addition,
under circumstances where the PERCS convert to Common Stock in connection with a
merger or consolidation, the opportunity for PERCS holders to receive the
benefit of any appreciation of the Common Stock may be limited because the value
at the Settlement Date of the Common Stock into which PERCS would convert
(including the value of any applicable premium) is limited to the Call Price at
the Settlement Date.
The holders of PERCS have no right to require conversion of their PERCS,
except in connection with the Holder Opt-Out Right or as set forth below with
respect to an Optional Tender Offer Conversion.
OPTIONAL TENDER OFFER CONVERSION
If the Company has recommended acceptance of (or has expressed no opinion
and is remaining neutral toward) a tender offer which would result in the
ownership by the bidder (or an affiliate of the bidder) of more than 50% of the
then outstanding Common Stock of the Company, then prior to the expiration of
such tender offer the Company will give notice to each holder of PERCS that such
holder may, at its option, convert (an "Optional Tender Offer Conversion") its
PERCS (and thereby the Depositary Shares), in whole (but not in part), into
shares of Common Stock at the Common Equivalent Rate in effect at the close of
business on the day prior to the date of expiration or termination of such
tender offer (the "Tender Offer Measurement Date"); provided that the number of
shares of Common Stock issuable upon such conversion will be reduced if
necessary, so that the value of such shares, based upon the Current Market Price
of a share of Common Stock as of the Tender Offer Measurement Date, does not
exceed the Call Price on the Tender Offer Measurement Date. The existence of the
Optional Tender Offer Conversion may have the effect of deterring certain tender
offers for Common Stock because additional shares of Common Stock would be able
to participate in such a tender offer, thereby requiring the payment of
additional consideration. See "Description of Capital Stock--Series C
PERCS--Optional Tender Offer Conversion." In addition, the opportunity of the
PERCS holders who make an Optional Tender Offer Conversion to receive the
benefit of any appreciation of the Common Stock may be limited because the value
of the Common Stock into which the PERCS convert on the Conversion Date (as
defined herein) is limited to the Call Price at such date.
7
<PAGE>
RIGHT TO CALL PERCS
At any time or from time to time prior to the Mandatory Conversion Date,
the Company may call, in whole or in part, the outstanding PERCS (and thereby
the Depositary Shares) for redemption. Upon any such redemption, each owner of
Depositary Shares will receive in exchange for each Depositary Share so called,
(i) shares of Common Stock (or, following certain events, such other
consideration as described herein) having a market value, initially equal to
$ (equivalent to $ for each PERCS), declining by
$ (equivalent to $ for each PERCS) on each day following
the date of issue of the PERCS (computed on the basis of a 360-day year of
twelve 30-day months) to $ (equivalent to $ for each
PERCS) on , 1997, and equal to $ (equivalent to
$ for each PERCS) thereafter (the "Call Price"), which Call Price is
subject to reduction, in certain circumstances, plus (ii) an amount in cash
equal to accrued and unpaid dividends for each of the Depositary Shares redeemed
to and including the date of redemption. See "Description of Capital
Stock--Series C PERCS--Right to Call."
The opportunity for equity appreciation afforded by an investment in the
Depositary Shares (and the PERCS) is limited because the Company may, at its
option, call the PERCS and thereby the Depositary Shares at any time prior to
the Mandatory Conversion Date at the Call Price (payable in shares of Common
Stock) plus an amount in cash equal to accrued and unpaid dividends, and may be
expected to do so prior to the Mandatory Conversion Date if, among other things,
the market price for the Common Stock has theretofore exceeded the Call Price
for the Depositary Shares (equivalent to one-tenth of the Call Price for the
PERCS). If the Company elects to call the PERCS (and thereby the Depositary
Shares), the equity appreciation, exclusive of accrued and unpaid dividends,
realized on an investment in the Depositary Shares will, for any owner of
Depositary Shares called by the Company, be equal to the excess, if any, of (i)
the value of the Common Stock received in payment of the Call Price (the Call
Price, subject to reduction, for the Depositary Shares being $
initially, declining thereafter to $ as indicated above), over (ii)
the price paid by such owner for such Depositary Shares (the initial price to
public being $ and the price thereafter being subject to market
fluctuations).
LIQUIDATION PREFERENCE
The PERCS rank senior to the Company's Common Stock and on a parity with
the Company's outstanding shares of Series A Conversion Preferred Stock (the
"Series A PERCS"), Series B Cumulative Preferred Stock (the "Series B Preferred
Stock") and ESOP Convertible Preferred Stock (the "ESOP Preferred Stock") upon
liquidation. The liquidation preference of each PERCS will be in an amount equal
to the sum of (i) ten times the price to public per Depositary Share set forth
on the cover page of this Prospectus (equivalent to a liquidation preference per
Depositary Share of the price to public set forth on the cover page of this
Prospectus) and (ii) all accrued and unpaid dividends thereon, and no more. See
"Description of Capital Stock--Series C PERCS--Liquidation Rights."
VOTING RIGHTS
The holders of PERCS shall have the right, voting together with the holders
of Common Stock (and any other capital stock of the Company entitled to vote
together with the Common Stock, including the Series A PERCS and the ESOP
Preferred Stock) as one class, to vote in the election of directors and upon
each other matter coming before any meeting of the stockholders on the basis
initially of one vote (equal to one-tenth of the Common Equivalent Rate) for
each PERCS (initially equivalent to one-tenth vote for each Depositary Share)
held; provided that the holders of PERCS will not be entitled to vote on any
increase or decrease in the number of authorized shares of any class or classes
of stock. In the event dividends payable on all series of Preferred Stock,
including the PERCS, shall be in arrears for six quarterly periods, the holders
of PERCS, together with the holders of all other outstanding series of the
Preferred Stock entitled to vote thereon, shall be entitled to elect two
8
<PAGE>
additional directors to the board of directors of the Company until all
cumulative dividends on all series of Preferred Stock, including the PERCS, have
been paid or declared and set aside for payment; provided that such directors do
not exceed 25% of the total board of directors of the Company; and provided,
further, that such holders shall be entitled to elect at least one director
notwithstanding the foregoing proviso. The owners of Depositary Shares will be
entitled to direct the voting of the underlying PERCS. See "Description of
Capital Stock--Series C PERCS--Voting Rights" and "Description of Series C
Depositary Shares--Voting PERCS."
LISTING
Application has been made to list the Depositary Shares on the New York
Stock Exchange (the "NYSE").
CERTAIN SIGNIFICANT CONSIDERATIONS
PROSPECTIVE INVESTORS ARE URGED TO READ THE SECTION ENTITLED "CERTAIN
SIGNIFICANT CONSIDERATIONS" FOR A DISCUSSION OF THE IMPACT ON HOLDERS OF
DEPOSITARY SHARES OF CERTAIN POTENTIAL TRANSACTIONS AND OTHER IMPORTANT
CONSIDERATIONS RELATING TO THE COMPANY, THE DEPOSITARY SHARES, THE PERCS AND THE
COMMON STOCK.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data presented below as of
December 31, 1993 and 1992 and for each of the years in the three-year period
ended December 31, 1993 for the Company were derived from the historical
consolidated financial statements of the Company and notes thereto (the
"Consolidated Financial Statements") set forth herein, which have been audited
by Deloitte & Touche, independent auditors. In addition, the summary historical
consolidated financial data as of December 31, 1991, 1990 and 1989, for the year
ended December 31, 1990 and for the period from February 9, 1989 through
December 31, 1989 for the Company and for the period from January 1, 1989
through February 8, 1989 for RJRN were derived from the consolidated financial
statements of the Company and RJRN as of December 31, 1991, 1990 and 1989, for
the year ended December 31, 1990 and for each of the periods within the one-year
period ended December 31, 1989, not presented herein, which have been audited by
Deloitte & Touche, independent auditors. The historical data should be read in
conjunction with the Consolidated Financial Statements set forth herein. The
summary pro forma financial data has been calculated as indicated in the
corresponding footnotes and is unaudited.
<TABLE><CAPTION>
COMPANY RJRN
-------------------------------------------------------- -----------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE
AMOUNTS) 1993 1992 1991 1990 1989
--------- --------- --------- --------- -------------------------
2/9 TO 12/31 1/1 TO 2/8
------------ -----------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales.................................. $ 15,104 $ 15,734 $ 14,989 $ 13,879 $ 12,114 $ 650
Depreciation of property, plant and
equipment................................ 448 455 441 450 417 32
Amortization of trademarks and goodwill.... 625 616 609 608 557 10
Restructuring expense...................... 730 106 -- -- -- --
Operating income(1)........................ 1,378 2,898 2,934 2,818 2,040 13
Interest expense........................... (1,190) (1,429) (2,113) (3,000) (2,893) (44)
Amortization of debt issuance costs........ (19) (20) (104) (176) (447) --
Income (loss) from continuing operations... (3) 776 368 (462) (975) (197)
Income (loss) from operations of
discontinued businesses, net of income
taxes(2)................................. -- -- -- -- (1) 24
Extraordinary item--(loss) gain on early
extinguishments of debt, net of income
taxes.................................... (142) (477) -- 33 -- --
Net income (loss).......................... (145) 299 368 (429) (976) (173)
Preferred stock dividends.................. 68 31 173 50 -- 4
Net income (loss) applicable to common
stock.................................... (213) 268 195 (479) (976) (177)
PER SHARE DATA
Income (loss) from continuing operations
per common and common equivalent share
Historical............................... $ (0.05) $ 0.55 $ 0.22 $ (1.19) $ (3.21) $ (0.89)
Pro forma(3)............................. $ (0.02) -- -- -- -- --
Dividends per share
Series A Preferred Stock(4).............. 3.34 3.34 0.49 -- -- --
Pro forma(3)
Series A Preferred Stock(4)............ 3.34 -- -- -- -- --
Series C Preferred Stock(3)............ 4.84 -- -- -- -- --
OTHER DATA
Ratio of earnings to fixed charges and
preferred dividends(5)................... -- 1.6 1.1 -- -- --
Deficiency in the coverage of fixed charges
and preferred dividends by earnings
before fixed charges and preferred
dividends(5)
Historical............................... $ 264 -- -- $ 490 $ 1,143 $ 266
Pro Forma(3)............................. 419 -- -- -- -- --
(Continued)
</TABLE>
10
<PAGE>
(Continued from preceding page)
<TABLE><CAPTION>
COMPANY RJRN
-------------------------------------------------------- -----------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE
AMOUNTS) 1993 1992 1991 1990 1989
--------- --------- --------- --------- -------------------------
2/9 TO 12/31 1/1 TO 2/8
------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT END OF PERIODS)
Working capital............................ $ 202 $ 730 $ 165 $ (1,089) $ 106 --
Total assets............................... 31,295 32,041 32,131 32,915 36,412 --
Total debt................................. 12,448 14,218 14,531 18,918 25,159 --
Redeemable preferred stock(6).............. -- -- -- 1,795 -- --
Stockholders' equity(7).................... 9,070 8,376 8,419 2,494 1,237 --
Book value per common share and Series A
Depositary Share outstanding................. 6.73 6.23 6.32 4.30 4.02 --
</TABLE>
- ---------------
(1) The 1992 amount includes a gain of $98 million on the sale of the
ready-to-eat cold cereal business.
(2) The 1989 amount for the Company included $237 million of interest expense
allocated to discontinued operations.
(3) The 1993 pro forma amount assumes the issuance of 300 million Depositary
Shares at an assumed offering price of $6.25 per Depositary Share (equal to
the Closing Price of the Common Stock on the NYSE on March 10, 1994) as of
January 1, 1993 and the application of the net proceeds of the offering,
estimated at $1.819 billion (after estimated underwriting discounts and
commissions and offering expenses), temporarily to repay indebtedness
outstanding as of January 1, 1993 under RJRN's revolving credit facilities
(the average outstanding 1993 indebtedness under these facilities was $1.725
billion) and to invest the remaining funds in short-term liquid investments,
resulting in adjustments to historical interest expense ($51 million) and
interest income ($17 million) (at annual rates of 3.97% and 3.14%,
respectively). In addition, income taxes have been recognized on the pro
forma amounts at the U.S. statutory rate of 35%. Each share of Series C
Preferred Stock is assumed to bear cumulative cash dividends at a rate of
$4.84 (equivalent to $.484 per Depositary Share) per annum. The summary pro
forma financial information is provided for informational purposes only and
should not be construed to be indicative of the results of operations of the
Company had the offering occurred on January 1, 1993 and does not project
the results of operations for any future date or period.
(4) On November 8, 1991, the Company issued 52,500,000 shares of Series A PERCS
and sold 210,000,000 $.835 depositary shares (the "Series A Depositary
Shares"). Each Series A Depositary Share represents a one-quarter ownership
interest in a share of Series A PERCS. Each share of Series A PERCS bears
cumulative cash dividends at a rate of $3.34 per annum and is payable
quarterly in arrears on the 15th day of each February, May, August and
November. Because Series A PERCS mandatorily convert into Common Stock on
November 15, 1994, dividends on shares of Series A PERCS are reported
similar to common equity dividends.
(5) For purposes of these computations, earnings before fixed charges and
preferred dividends consist of income (loss) from continuing operations
before provision (benefit) for income taxes plus fixed charges. Earnings
before fixed charges and the resulting calculation of deficiency in the
coverage of fixed charges and preferred dividends by earnings before fixed
charges and preferred dividends for 1993 includes amortization of trademarks
and goodwill in the amount of $625 million. Fixed charges consist of
interest on indebtedness, amortization of debt issuance costs and that
portion of operating rental expense representative of the interest factor.
Also, for purposes of these computations, preferred stock dividends have
been increased to present the equivalent pre-tax amount.
(6) On December 16, 1991, an amendment to the Amended and Restated Certificate
of Incorporation of the Company was filed which deleted the provisions
providing for the mandatory redemption of the redeemable preferred stock of
the Company on November 1, 2015. Accordingly, such securities were presented
as a component of the Company's stockholders' equity as of December 31, 1992
and 1991. Such securities were redeemed on December 6, 1993 (see Note 12 to
the Consolidated Financial Statements).
(7) The Company's stockholders' equity at December 31 of each year from 1993 to
1989 includes non-cash expenses related to accumulated trademark and
goodwill amortization of $3.015 billion, $2.390 billion, $1.774 billion,
$1.165 billion and $557 million, respectively. (See Note 13 to the
Consolidated Financial Statements.)
See Notes to Consolidated Financial Statements.
11
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to the Company from the sale of the Depositary
Shares will be approximately $1.819 billion (approximately $2.092 billion if the
Underwriters' over-allotment option is exercised in full). The net proceeds may
be used for general corporate purposes which may include refinancings of
indebtedness, working capital, capital expenditures, acquisitions and
repurchases and redemptions of securities. In addition, such proceeds may be
used to facilitate one or more significant corporate transactions, such as a
joint venture, merger, acquisition, divestiture, asset swap, spin-off and/or
recapitalization, that would result in the separation of the tobacco and food
businesses of the Company. See "Certain Significant Considerations--Event Risk."
As of the date hereof, the specific uses of proceeds have not been determined.
Pending such uses, proceeds will be used to repay indebtedness under RJRN's
revolving credit facilities or for short-term liquid investments.
CERTAIN SIGNIFICANT CONSIDERATIONS
EVENT RISK
Management currently is reviewing and expects to continue to review various
corporate transactions, including, but not limited to, joint ventures, mergers,
acquisitions, divestitures, asset swaps, spin-offs and recapitalizations.
Although the Company has discussed and continues to discuss various transactions
with third parties, no assurance may be given that any transaction will be
announced or completed. It is likely that the Company's tobacco and food
businesses would be separated should certain of the foregoing transactions be
consummated. If the tobacco and food businesses of the Company are separated, it
is the Company's intention that the PERCS, upon conversion or redemption, would
be converted into, or exchanged for, shares of a tobacco business. With respect
to certain anti-dilution and other applicable provisions, see "Description of
Capital Stock--Series C PERCS-- Mandatory Conversion," "--Antidilution
Provisions," "--Effects of Mergers or Consolidations" and "Federal Income Tax
Considerations."
TOBACCO-RELATED LEGISLATION, LITIGATION AND OTHER CONCERNS
RJRT is the second largest cigarette manufacturer in the United States, and
in the year ended December 31, 1993, RJRT's domestic tobacco business comprised
approximately 33% of the Company's net sales and approximately 42% of the
Company's operating income from continuing operations before corporate expenses,
amortization of trademarks and goodwill and restructuring expense. Domestic
cigarette industry retail unit sales have declined in the last three calendar
years at an average rate of approximately 2.5% per year. The Company believes
that the decline is due to a number of factors, including manufacturers' price
increases in recent years, excise tax increases, asserted adverse health effects
of smoking, diminishing social acceptance of smoking and governmental and
private restrictions on smoking. For many years the advertising, sale and use of
cigarettes has been under attack by government and health officials in the
United States and in other countries, principally due to claims that cigarette
smoking is harmful to health. This attack has resulted in a number of
substantial restrictions on the marketing, advertising and use of cigarettes,
diminishing social acceptability of smoking and activities by anti-smoking
groups designed to inhibit cigarette sales, the form and content of cigarette
advertising and the testing and introduction of new cigarette products. Together
with substantial increases in state and federal excise taxes on cigarettes, this
has had and will likely continue to have an adverse effect on cigarette sales.
In addition, the Clinton Administration and members of Congress have
introduced bills in Congress that would significantly increase the federal
excise tax on cigarettes, eliminate the deductibility of a portion of the cost
of tobacco advertising, ban smoking in public buildings and workplaces, add
additional health warnings on cigarette packaging and advertising and further
restrict the marketing of tobacco products.
12
<PAGE>
In January 1993, the U.S. Environmental Protection Agency released a report
on the respiratory effects of environmental tobacco smoke ("ETS") which
concludes that ETS is a known human lung carcinogen in adults; and in children
causes increased respiratory tract disease and middle ear disorders and
increases the severity and frequency of asthma. In September 1991, the U.S.
Occupational Safety and Health Administration issued a Request for Information
relating to indoor air quality, including ETS, in occupational settings.
During February 1994, the Commissioner of the U.S. Food and Drug
Administration (the "FDA"), which historically has refrained from asserting
jurisdiction over most cigarette products, stated that he intended to cause the
FDA to work with the U.S. Congress to resolve the regulatory status of
cigarettes under the Food, Drug and Cosmetic Act. RJRT is unable to predict the
outcome of any efforts by the Commissioner to influence Congressional action or
the likelihood that the FDA would assert jurisdiction over cigarettes. Were the
FDA to assert jurisdiction in a manner that materially restricts the
availability of cigarettes to consumers, it would likely have a significant
adverse effect on RJRT and Holdings.
It is not possible to determine what additional federal, state or local
legislation or regulations relating to smoking or cigarettes will be enacted or
to predict any resulting effect thereof on RJRT, Tobacco International or the
cigarette industry generally but such legislation or regulations could have an
adverse effect on RJRT, Tobacco International or the cigarette industry
generally.
In addition, various legal actions, proceedings and claims are pending or
may be instituted against RJRT or its affiliates or indemnitees, including those
claiming that lung cancer and other diseases have resulted from the use of or
exposure to RJRT's tobacco products. Litigation is subject to many
uncertainties, and it is possible that some of the legal actions, proceedings or
claims could be decided against RJRT or its affiliates or indemnitees.
Determinations of liability or adverse rulings against other cigarette
manufacturers that are defendants in similar actions, even if such rulings are
not final, could adversely affect the litigation against RJRT and its affiliates
or indemnitees and increase the number of such claims. Although it is impossible
to predict the outcome of such events or their effect on RJRT, a significant
increase in litigation activities could have an adverse effect on RJRT. RJRT
believes that it has a number of valid defenses to any such actions, and intends
to defend vigorously all such actions. The Company believes that the ultimate
outcome of all pending tobacco litigation matters should not have a material
adverse effect on the financial position of the Company; however, it is possible
that the results of operations or cash flows of the Company in a particular
quarterly or annual period could be materially affected by the ultimate outcome
of certain pending litigation matters. For an additional discussion of
legislation and litigation relating to the cigarette industry and RJRT, see
"Business-- Tobacco--Legislation and Other Matters Affecting the Cigarette
Industry" and "--Litigation Affecting the Cigarette Industry" in the Company's
Annual Report on Form 10-K, which is incorporated into this Prospectus by
reference.
COMPETITIVE ACTIVITY
Competitive initiatives by RJRT's largest competitor in the U.S. cigarette
market together with RJRT's and other competitors' marketplace responses to
these initiatives resulted in significant marketplace instability during the
second and third quarters of 1993. The costs of responding to these competitive
initiatives and the resulting decrease in list prices for full-price cigarette
brands were primarily responsible for a sharp decline in RJRT's 1993 operating
company contribution. Although some improved stability and trends occurred in
the marketplace during the second half of 1993, the Company is unable to predict
whether this will continue. Depressed profit margins for RJRT are expected to
continue until such time as the competitive environment improves and operating
costs are further reduced. For additional information concerning this
competitive activity, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Tobacco--1993 Competitive Activity" set
forth in this Prospectus and "Business--Other Matters--Competition" in the
Company's Annual Report on Form 10-K, which is incorporated into this Prospectus
by reference.
13
<PAGE>
LEVERAGE AND DEBT SERVICE
The Company, together with its subsidiaries, had, at December 31, 1993, a
ratio of consolidated debt to total stockholders' equity of 1.4-to-1.
Although the Company has significantly reduced its consolidated
indebtedness and improved its consolidated debt-to-equity ratio since the
Acquisition, the indebtedness and debt-to-equity ratio of the Company and its
subsidiaries continue to have the effect, generally, of restricting the
flexibility of the Company and its subsidiaries in responding to changing
business and economic conditions insofar as they affect the financial condition
and financing requirements of the Company and its subsidiaries. Moreover, the
terms governing the indebtedness incurred in connection with the financing of
the Acquisition, and certain refinancings related thereto, impose significant
operating and financial restrictions on the Company and its subsidiaries. These
restrictions limit the ability of the Company and its subsidiaries to incur
indebtedness, engage in transactions with stockholders and affiliates, create
liens, sell certain assets and certain subsidiaries' stock, engage in certain
mergers or consolidations and make investments in unrestricted subsidiaries and
pay dividends. See "Description of Capital Stock-- Contractual Restrictions on
Payment of Dividends."
HOLDING COMPANY STRUCTURE
The Company's cash flow and consequent ability to meet its obligations
under its indebtedness and to pay dividends on the PERCS are substantially
dependent upon the earnings and cash flow available after debt service of RJRN
and the availability of such earnings and cash flows to the Company by way of
dividends, distributions, loans and other advances. The PERCS are junior in
right of payment to all existing and future liabilities and obligations (whether
or not for borrowed money) of the Company (other than the Series A PERCS, the
Series B Preferred Stock and the ESOP Preferred Stock, which are on a parity
with the PERCS, and any other preferred stock of the Company which by its terms
is on a parity with or junior to the PERCS), and is structurally subordinate to
all existing and future liabilities and obligations (whether or not for borrowed
money) of RJRN and its subsidiaries, but senior to the Company's Common Stock.
As of December 31, 1993, total current liabilities and long-term debt of the
Company's subsidiaries were approximately $15.9 billion.
KKR OWNERSHIP
As of February 28, 1994, an aggregate of approximately 46.2% (or 38.3% on a
fully diluted basis), without giving effect to the offering of the PERCS, of the
total voting power of the Company was held by two limited partnerships, of which
KKR Associates, an affiliate of KKR, is the sole general partner (the "Common
Stock Partnerships"). After giving effect to the offering of the PERCS,
approximately 45.1% of the total voting power of the Company would be held by
the Common Stock Partnerships (or 31.0% on a fully diluted basis assuming
conversion of all the Company's convertible securities (including the PERCS)
into Common Stock). In addition, eight of the seventeen directors of the Company
are partners or executives of KKR.
14
<PAGE>
CAPITALIZATION
The table below sets forth, as of December 31, 1993, the historical
capitalization of the Company and as adjusted for the sale of the Depositary
Shares and the assumed application of the net proceeds therefrom temporarily to
repay indebtedness under RJRN's revolving credit facilities and to invest the
remaining funds in short-term liquid investments. The as adjusted information is
provided for informational purposes only and should not be construed to be
indicative of the financial position of the Company had the offering occurred on
December 31, 1993 and does not project the financial position for any future
date or period.
DECEMBER 31, 1993
------------------------
HISTORICAL AS ADJUSTED
----------- -----------
(AMOUNTS IN MILLIONS)
Current debt....................................... $ 443 $ 443
Long-term debt(1).................................. 12,005 11,677
----------- -----------
Total debt.................................. 12,448 12,120
----------- -----------
Stockholders' equity:
ESOP convertible preferred stock................. 249 249
Series A conversion preferred stock.............. 2 2
Series B cumulative preferred stock.............. 1,250 1,250
Series C conversion preferred stock (PERCS)...... -- 3
Common Stock..................................... 11 11
Paid-in capital.................................. 8,778 10,594
Retained earnings (accumulated deficit).......... (883) (883)
Receivable from ESOP............................. (211) (211)
Other stockholders' equity....................... (126) (126)
----------- -----------
Total stockholders' equity.................. 9,070 10,889
----------- -----------
Total capitalization........................ $ 21,518 $ 23,009
----------- -----------
----------- -----------
- ---------------
(1) Includes amounts under the 1991 Credit Agreement (as defined herein). At
December 31, 1993, approximately $6.2 billion of the $6.5 billion available
thereunder was unused. At December 31, 1993 availability of the unused
portion is reduced by $456 million for the extension of letters of credit.
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1993 and 1992 and for each of the years in the three-year period ended December
31, 1993 for the Company was derived from the Consolidated Financial Statements
set forth herein, which have been audited by Deloitte & Touche, independent
auditors. In addition, the selected consolidated financial data as of December
31, 1991, 1990 and 1989, for the year ended December 31, 1990 and for the period
from February 9, 1989 through December 31, 1989 for the Company and for the
period from January 1, 1989 through February 8, 1989 for RJRN were derived from
the consolidated financial statements of the Company and RJRN as of December 31,
1991, 1990 and 1989, for the year ended December 31, 1990 and for each of the
periods within the one-year period ended December 31, 1989, not presented
herein, which have been audited by Deloitte & Touche, independent auditors. The
data should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information set forth herein.
<TABLE><CAPTION>
COMPANY RJRN
-------------------------------------------------------- -----------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE
AMOUNTS) 1993 1992 1991 1990 1989
--------- --------- --------- --------- -------------------------
2/9 TO 12/31 1/1 TO 2/8
------------ -----------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales.................................. $ 15,104 $ 15,734 $ 14,989 $ 13,879 $ 12,114 $ 650
--------- --------- --------- --------- ------------ -----------
Cost of products sold...................... 6,640 6,326 6,088 5,652 5,241 332
Selling, advertising, administrative and
general expenses......................... 5,731 5,788 5,358 4,801 4,276 295
Amortization of trademarks and goodwill.... 625 616 609 608 557 10
Restructuring expense...................... 730 106 -- -- -- --
--------- --------- --------- --------- ------------ -----------
Operating income(1)...................... 1,378 2,898 2,934 2,818 2,040 13
Interest expense........................... (1,190) (1,429) (2,113) (3,000) (2,893) (44)
Amortization of debt issuance costs........ (19) (20) (104) (176) (447) --
Change in control costs.................... -- -- -- -- -- (247)
Other income (expense), net................ (58) 7 (69) (44) 169 15
--------- --------- --------- --------- ------------ -----------
Income (loss) from continuing operations
before income taxes.......................... 111 1,456 648 (402) (1,131) (263)
Provision (benefit) for income taxes....... 114 680 280 60 (156) (66)
--------- --------- --------- --------- ------------ -----------
Income (loss) from continuing
operations................................... (3) 776 368 (462) (975) (197)
Income (loss) from operations of
discontinued businesses, net of income
taxes(2)..................................... -- -- -- -- (1) 24
Extraordinary item (loss) gain on early
extinguishment of debt, net of income
taxes........................................ (142) (477) -- 33 -- --
--------- --------- --------- --------- ------------ -----------
Net income (loss).......................... (145) 299 368 (429) (976) (173)
Preferred stock dividends.................. 68 31 173 50 -- 4
--------- --------- --------- --------- ------------ -----------
Net income (loss) applicable to common
stock........................................ $ (213) $ 268 $ 195 $ (479) $ (976) $ (177)
--------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- ------------ -----------
PER SHARE DATA
Income (loss) from continuing operations
per common and common equivalent share... $ (0.05) $ 0.55 $ 0.22 $ (1.19) $ (3.21) $ (0.89)
Dividends per share of Series A Preferred
Stock(3)..................................... 3.34 3.34 0.49 -- -- --
OTHER DATA
Ratio of earnings to fixed charges and
preferred dividends(4)....................... -- 1.6 1.1 -- -- --
Deficiency in the coverage of fixed charges
and preferred dividends by earnings
before fixed charges and preferred
dividends(4)................................. $ 264 -- -- $ 490 $ 1,143 $ 266
BALANCE SHEET DATA
(AT END OF PERIODS)
Working capital............................ $ 202 $ 730 $ 165 $ (1,089) $ 106 --
Total assets............................... 31,295 32,041 32,131 32,915 36,412 --
Total debt................................. 12,448 14,218 14,531 18,918 25,159 --
Redeemable preferred stock(5).............. -- -- -- 1,795 -- --
Stockholders' equity(6).................... 9,070 8,376 8,419 2,494 1,237 --
</TABLE>
(Footnotes on following page)
16
<PAGE>
(Footnotes for preceding page)
- ---------------
(1) The 1992 amount includes a gain of $98 million on the sale of the
ready-to-eat cold cereal business.
(2) The 1989 amount for the Company included $237 million of interest expense
allocated to discontinued operations.
(3) On November 8, 1991, the Company issued 52,500,000 shares of Series A PERCS
and sold 210,000,000 Series A Depositary Shares. Each Series A Depositary
Share represents a one-quarter ownership interest in a share of Series A
PERCS. Each share of Series A PERCS bears cumulative cash dividends at a
rate of $3.34 per annum and is payable quarterly in arrears on the 15th day
of each February, May, August and November. Because Series A PERCS
mandatorily converts into Common Stock by November 15, 1994, dividends on
shares of Series A PERCS are reported similar to common equity dividends.
(4) For purposes of these computations, earnings before fixed charges and
preferred dividends consist of income (loss) from continuing operations
before provision (benefit) for income taxes plus fixed charges. Income
(loss) from continuing operations before provision (benefit) for income
taxes includes amortization of trademarks and goodwill and depreciation
expense. Fixed charges consist of interest on indebtedness, amortization of
debt issuance costs and that portion of operating rental expense
representative of the interest factor. Also, for purposes of these
computations, preferred stock dividends have been increased to present the
equivalent pre-tax amount.
(5) On December 16, 1991, an amendment to the Amended and Restated Certificate
of Incorporation of the Company was filed which deleted the provisions
providing for the mandatory redemption of the redeemable preferred stock of
the Company on November 1, 2015. Accordingly, such securities were presented
as a component of the Company's stockholders' equity as of December 31, 1992
and 1991. Such securities were redeemed on December 6, 1993 (see Note 12 to
the Consolidated Financial Statements).
(6) The Company's stockholders' equity at December 31 of each year from 1993 to
1989 includes non-cash expenses related to accumulated trademark and
goodwill amortization of $3.015 billion, $2.390 billion, $1.774 billion,
$1.165 billion and $557 million, respectively. (See Note 13 to the
Consolidated Financial Statements.)
See Notes to Consolidated Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RJRN's operating subsidiaries comprise one of the largest tobacco and food
companies in the world. In the United States, the tobacco business is conducted
by RJRT, the second largest manufacturer of cigarettes, and the packaged food
business is conducted by Nabisco, the largest manufacturer and marketer of
cookies and crackers. Tobacco operations outside the United States are conducted
by Tobacco International and food operations outside the United States and
Canada are conducted by Nabisco International.
The following is a discussion and analysis of the consolidated financial
condition and results of operations of Holdings, the parent company of RJRN. The
discussion and analysis should be read in connection with the historical
financial information included in the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Summarized financial data for Holdings is as follows:
<TABLE><CAPTION>
% CHANGE FROM
PRIOR YEAR
------------------------
1993 1992 1991 1993 1992
--------- --------- --------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Sales:
RJRT..................................................... $ 4,949 $ 6,165 $ 5,861 (20)% 5%
Tobacco International.................................... 3,130 2,862 2,679 9% 7%
--------- --------- ---------
Total Tobacco............................................ 8,079 9,027 8,540 (11)% 6%
Total Food............................................... 7,025 6,707 6,449 5% 4%
--------- --------- ---------
$ 15,104 $ 15,734 $ 14,989 (4)% 5%
--------- --------- ---------
--------- --------- ---------
Operating Company Contribution(1):
RJRT..................................................... $ 1,200 $ 2,112 $ 2,226 (43)% (5)%
Tobacco International.................................... 644 575 500 12% 15%
--------- --------- ---------
Total Tobacco............................................ 1,844 2,687 2,726 (31)% (1)%
Total Food............................................... 995 947 920 5% 3%
Headquarters............................................. (106) (112) (103) 5% (9)%
--------- --------- ---------
$ 2,733 $ 3,522 $ 3,543 (22)% (1)%
--------- --------- ---------
--------- --------- ---------
Operating Income:
RJRT..................................................... $ 480 $ 1,704 $ 1,860 (72)% (8)%
Tobacco International.................................... 413 537 462 (23)% 16%
--------- --------- ---------
Total Tobacco............................................ 893 2,241 2,322 (60)% (3)%
Total Food............................................... 624 769 715 (19)% 8%
Headquarters............................................. (139) (112) (103) (24)% (9)%
--------- --------- ---------
$ 1,378 $ 2,898 $ 2,934 (52)% (1)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
(Footnotes on following page)
18
<PAGE>
INDUSTRY SEGMENTS
The percentage contributions of each of Holdings' industry segments to net
sales and operating company contribution during the last five years were as
follows:
<TABLE><CAPTION>
1993 1992 1991 1990 1989(3)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales:
Total Tobacco.......................................... 53% 57% 57% 58% 55%
Total Food............................................. 47 43 43 42 45
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Operating Company Contribution(1)(2):
Total Tobacco.......................................... 65% 74% 75% 77% 73%
Total Food............................................. 35 26 25 23 27
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- ---------------
(1) Operating income before amortization of trademarks and goodwill and
exclusive of restructuring expenses (RJRT: 1993-$355 million, 1992-$43
million; Tobacco International: 1993-$189 million, 1992-$0; Total Food:
1993-$153 million, 1992-$63 million; Headquarters: 1993-$33 million, 1992-
$0) and a 1992 gain ($98 million) on the sale of Holdings' ready-to-eat cold
cereal business as discussed below.
(2) Contributions by industry segments were computed without effects of
Headquarters' expenses.
(3) Includes predecessor period January 1, 1989 through February 8, 1989.
TOBACCO
Holdings' tobacco business is conducted by RJRT and Tobacco International.
1993 vs. 1992. Holdings' worldwide tobacco business experienced continued
net sales growth in its international business that was more than offset by a
significant sales decline in the domestic business, resulting in reported net
sales of $8.08 billion in 1993, a decline of 11% from the 1992 level of $9.03
billion. Operating company contribution for the worldwide tobacco business of
$1.84 billion in 1993 declined 31% from the 1992 level of $2.69 billion,
reflecting sharp reductions for the domestic business which were partially
offset by gains in the international business. Operating income for the
worldwide tobacco business in 1993 of $893 million declined 60% from $2.24
billion in 1992, reflecting the lower operating company contribution and a $544
million restructuring expense in 1993 versus a restructuring expense of $43
million in 1992. The 1993 restructuring expense includes expenses to streamline
both the domestic and international operations by the reduction of personnel in
administration, manufacturing and sales functions, as well as rationalization of
manufacturing and office facilities.
Net sales for RJRT amounted to $4.95 billion in 1993, a decline of 20% from
the 1992 level, reflecting the impact of industry-wide price reductions and
price discounting on higher price brands, a higher proportion of sales from
lower price brands and an overall volume decline of approximately 3.6%. The 1993
decrease in overall volume resulted from a decline in the full-price segment
that more than offset growth in the lower price segment. The growth in lower
price brands was slowed in the second half of 1993 by net price reductions on
full-price brands. RJRT's operating company contribution was $1.20 billion in
1993, a 43% decline from the 1992 level of $2.11 billion, primarily due to the
lower net sales and a higher proportion of sales from the lower margin segment,
offset in part by lower operating expenses. RJRT's operating income was $480
million in 1993, a decline of 72% from $1.7 billion in 1992. The decline in
operating income reflected the lower RJRT operating company contribution as well
as a restructuring expense of $355 million in 1993 which is significantly higher
than the $43 million restructuring expense recorded in 1992.
Tobacco International recorded net sales of $3.13 billion in 1993, an
increase of 9% from the 1992 level, due to higher volume in all regions of
business, the expansion of markets through ventures in Eastern Europe and
Turkey, contract sales to the Russian Republic, favorable pricing in certain
regions
19
<PAGE>
and a change in fiscal year end, which more than offset unfavorable currency
developments in Western Europe. Tobacco International's operating company
contribution rose to $644 million in 1993, an increase of 12% compared to the
prior year due to higher volume and pricing which was offset in part by higher
operating expenses and to a lesser extent foreign currency developments. Tobacco
International's operating income was $413 million for 1993, a decline of 23%
from the 1992 level. The decline in operating income reflects a restructuring
expense of $189 million in 1993 that more than offset the increase in operating
company contribution.
1993 Competitive Activity. During recent years, the lower price segment of
the domestic cigarette market has grown significantly and the full price segment
has declined. The shifting of smokers of full price brands to lower price brands
adversely affects RJRT's earnings since lower price brands are generally less
profitable than full price brands. Although the difference in profitability is
often substantial, it varies greatly depending on marketing and promotion levels
and the terms of sale. Accordingly, RJRT has in recent years experienced
substantial increased volume in the lower price segment, but the earnings
attributable to these sales have not been sufficient to offset decreased
earnings from declining sales of RJRT's full price brands.
In April 1993, RJRT's largest competitor announced a shift in strategy
designed to gain share of market while sacrificing short-term profits. The
competitor's tactics included increased promotional spending and temporary price
reductions on its largest cigarette brand, followed several months later by list
price reductions on all its full-price and mid-price brands. RJRT defended its
major full-price brands during the period of temporary price reductions and, to
remain competitive in the marketplace, also reduced list prices on all its
full-price and mid-price brands in August 1993. The cost of defensive price
promotions and the impact of lower list prices were primarily responsible for
the sharp drop in RJRT's 1993 operating company contribution.
Currently, the domestic cigarette market has consolidated list prices for
cigarettes from four or more tiers into two tiers, with price competition being
conducted principally through trade and retail promotion on a brand-by-brand
basis. The resulting effects from increased list prices on lower price brands
and reduced promotional spending by RJRT on its full price brands have not been
sufficient to offset the effect of decreased list prices on RJRT's full price
brands. This has resulted in lower aggregate profit margins for RJRT. These
depressed margins are expected to continue until such time as the competitive
environment improves and operating costs are further reduced.
Although some improvement to the stability of the competitive environment
has occurred in the fourth quarter of 1993, RJRT cannot predict if or when any
further improvement to the competitive environment will occur or whether such
stability will continue. In addition, growth in lower price brands was slowed in
the second half of 1993 due to net price reductions on full price brands. RJRT
is unable to predict whether this trend will continue. RJRT's domestic cigarette
volume of non-full price brands as a percentage of total domestic volume was 44%
in 1993, 35% in 1992 and 25% in 1991 versus 37%, 30% and 25%, respectively, for
the domestic cigarette market.
1993 Governmental Activity. Legislation recently enacted restricts the use
of imported tobacco in cigarettes manufactured in the United States and is
expected to increase RJRT's future raw material cost. In addition, the Clinton
Administration and members of Congress have introduced bills in Congress that
would significantly increase the federal excise tax on cigarettes, eliminate the
deductibility of a portion of the cost of tobacco advertising, ban smoking in
public buildings and workplaces, add additional health warnings on cigarette
packaging and advertising and further restrict the marketing of tobacco
products. It is not possible to determine what additional federal, state or
local legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on RJRT, Tobacco
International or the cigarette industry generally but such legislation or
regulations could have an adverse effect on RJRT, Tobacco International or the
cigarette industry generally.
1992 vs. 1991. Net sales for RJRT rose 5% from 1991 to $6.17 billion in
1992 as higher unit selling prices and volume were offset in part by a higher
proportion of sales from lower price brands. Overall
20
<PAGE>
volume for the 1992 year increased 3% from the prior year as a result of gains
in the lower price segment more than offsetting a decline in the full price
segment. RJRT's operating company contribution in 1992 was $2.11 billion, a 5%
decline from the prior year. The decline in operating company contribution was
primarily due to the higher proportion of sales of lower margin brands and
higher marketing and selling expenditures, which when combined more than offset
the effect of higher unit selling prices and volume. RJRT's operating income of
$1.70 billion in 1992 declined 8% from the prior year as a result of the decline
in operating company contribution as well as a $43 million charge incurred in
connection with a restructuring plan, the purpose of which was to improve
productivity by realigning operations in the sales, manufacturing, research and
development, and administrative areas.
Tobacco International recorded net sales of $2.86 billion in 1992, an
increase of 7% from 1991. Excluding contract sales to the Russian Republic, for
which there were major shipments in 1991, Tobacco International would have
reported an increase in net sales in 1992 of 10%. The sales increase is a result
of volume gains in Eastern Europe (where the company made several acquisitions),
Asia and the Middle East, favorable currency developments and higher selling
prices that more than offset lower volume in Western Europe. Operating company
contribution and operating income for 1992 rose 15% and 16%, respectively, from
the prior year to $575 million and $537 million. The increase in operating
company contribution and operating income was due to higher volume, favorable
currency developments and higher selling prices offset in part by a higher
proportion of sales in the lower margin segment.
For a description of certain litigation affecting RJRT and its affiliates,
see Note 11 to the Consolidated Financial Statements.
FOOD
Holdings' food business is conducted by Nabisco, which comprises Nabisco
Biscuit, the LifeSavers Division, the Planters Division, the Specialty Products
Company, the Fleischmann's Division, the Food Service Division and Nabisco
Brands Ltd, (collectively the "North American Group") and Nabisco International.
1993 vs. 1992. Nabisco reported net sales of $7.03 billion in 1993, an
increase of 5% from 1992. Excluding the 1992 operating results of the
ready-to-eat cold cereal business, which was sold at the end of that year, net
sales in 1993 increased 9% from 1992, resulting from higher volume, sales from
recently acquired businesses and modest price increases in both the North
American Group and Nabisco International. The North American Group volume
increase was primarily attributable to the success of new product introductions
in the U.S., including the Snackwell's line of low fat/fat free cookies and
crackers, Fat Free Newtons, Life Savers Gummi Savers candy and Planters'
stand-up bag line of peanuts and snacks. Nabisco International's net sales
increased as a result of the 1993 acquisitions in Spain and Peru and higher
volume and prices from its Latin American businesses.
Nabisco operating company contribution of $995 million in 1993 was 5%
higher than the 1992 amount. Excluding the 1992 operating results of the
ready-to-eat cold cereal business, operating company contribution increased 14%,
with the North American Group up 13% and Nabisco International up 18%. The North
American Group increase was primarily due to the gain in net sales, savings from
productivity programs, and contributions from the recently acquired businesses,
offset in part by higher expenses for consumer marketing programs. Nabisco
International increased operating company contribution through acquisitions and
gains in net sales.
21
<PAGE>
Nabisco's operating income was $624 million in 1993, a decrease of 19% from
1992, as a result of the $153 million restructuring expense in 1993, which was
significantly higher than the restructuring expense of $63 million recorded in
1992, that more than offset the gain in operating company contribution.
Excluding the 1992 operating results of the ready-to-eat cold cereal business
and the related gain on its sale, as well as the restructuring expenses in both
1993 and 1992, Nabisco's operating income was up 16% as a result of the increase
in operating company contribution. The 1993 restructuring expense primarily
consists of expenses related to the reorganization and downsizing of
manufacturing and sales functions which will reduce personnel costs, both
domestically and internationally, in order to improve productivity and, to a
lesser extent, the rationalization of facilities.
1992 vs. 1991. Nabisco reported net sales of $6.71 billion in 1992, an
increase of 4% from 1991. The increase primarily results from higher volume and
pricing in the Latin American subsidiaries and the addition of recently acquired
businesses in Mexico and Brazil. Net sales for the North American Group were
relatively flat, as higher unit selling prices and volume in U.S. cookie and
selected grocery products, including new products and product varieties, were
offset by lower sales in the balance of the food lines as a result of restrained
consumer spending. Nabisco's operating company contribution increased 3% from
1991 to $947 million in 1992 as a result of the increase in net sales in Latin
America. Operating company contribution in the North American Group was about
even with last year reflecting the modest net sales performance in 1992. Margins
in the North America Group were maintained in 1992 as a result of productivity
gains offsetting the industry trends toward higher trade promotion spending.
Nabisco's 1992 operating income, which included a restructuring expense of $63
million, as well as a gain of $98 million on the sale of the ready-to-eat cold
cereal business, rose 8% from 1991 to $769 million as a result of the increase
in 1992 operating company contribution. The $63 million charge was incurred in
connection with a restructuring plan, the purpose of which was to reduce costs
and improve productivity by realigning sales operations and implementing a
voluntary separation program.
RESTRUCTURING EXPENSE
Holdings recorded a pre-tax restructuring expense of $730 million in the
fourth quarter of 1993 ($467 million after-tax) related to a program announced
on December 7, 1993. Such restructuring program was undertaken in response to a
changing consumer product business environment and is expected to streamline
operations and improve profitability. Implementation of the program, although
begun in the latter part of 1993, will primarily occur in 1994. Approximately
75% of the restructuring program will require cash outlays which will occur
primarily in 1994 and early 1995. As an offset to the cash outlays, Holdings
expects annual after-tax cash savings of approximately $250 million.
The cost of providing severance pay and benefits for the reduction of
approximately 6,000 employees throughout the domestic and international food and
tobacco businesses is approximately $400 million of the charge and is primarily
a cash expense. The workforce reduction was undertaken in order to establish
fundamental changes to the cost structure of the domestic tobacco business in
the face of acute competitive activity in that business and to take advantage of
cost savings opportunities in other businesses through process efficiency
improvements. Legislation enacted during the third quarter of 1993 stipulates
that, effective January 1, 1994, financial penalties will be assessed against
manufacturers if cigarettes produced in the United States do not contain at
least 75% (by weight) of domestically grown flue cured and burly tobaccos. As a
result, the domestic and international tobacco businesses accrued approximately
$70 million of related restructuring charges resulting from a reassessment of
raw material sourcing and production arrangements. In addition, a shift in
pricing strategy designed to gain share of market by RJRT's largest competitor
has resulted in a redeployment of spending and changes in sales and distribution
strategies resulting in a restructuring charge of approximately $80 million
primarily related to contract termination costs. Abandonment of leases related
to the above changes in the businesses results in approximately $60 million of
restructuring charges. The remainder
22
<PAGE>
of the charge, approximately $120 million, represents non-cash costs to
rationalize and close manufacturing and sales facilities in both the tobacco and
food businesses to facilitate cost improvements.
INTEREST EXPENSE
1993 vs. 1992. Consolidated interest expense of $1.19 billion in 1993
decreased 17% from 1992, primarily as a result of the refinancings of debt that
were completed during 1992 and 1993, lower debt levels from the application of
net proceeds from the issuance of preferred stock in 1993 and lower effective
interest rates and the impact of declining market interest rates in 1993.
1992 vs. 1991. Consolidated interest expense of $1.43 billion in 1992
decreased 32% from 1991, primarily due to the refinancings completed during 1991
and 1992, lower effective interest rates and the impact of declining market
interest rates in 1992.
INCOME TAXES
Effective January 1, 1993, Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. SFAS
No. 109 superseded Statement of Financial Accounting Standards No. 96, the
method of accounting for income taxes previously followed by the Registrants.
The adoption of SFAS No. 109 did not have a material impact on the financial
statements of either Holdings or RJRN.
Holdings' provision for income taxes for 1993 was increased by $96 million
as a result of the enactment of certain federal tax legislation during the third
quarter of 1993 which increased federal corporate income tax rates to 35% from
34%, retroactively to January 1, 1993. The components of this increase to
Holdings' provision for income taxes included an $86 million non-cash charge
resulting primarily from the remeasurement of the balance of deferred federal
income taxes at the date of enactment of the new federal tax legislation for the
change in the income tax rates, and a $10 million charge resulting from the
increase in current federal income taxes accrued for the change in the income
tax rates and other effects of the new tax legislation. Also during 1993,
Holdings' provision for income taxes was decreased by a $108 million credit
resulting from a remeasurement of the balance of deferred income taxes for a
change in estimate of the basis of certain deferred tax amounts relating
primarily to international operations.
NET INCOME
1993 vs. 1992. Holdings reported a net loss of $145 million in 1993, a
decrease of $444 million from 1992. Included in Holdings' 1993 net loss is an
after-tax extraordinary loss of $142 million related to the repurchases of high
cost debt during 1993 and an after-tax restructuring expense of $467 million.
Excluding the extraordinary loss and restructuring expense recorded in 1993,
Holdings would have reported net income of $464 million in 1993. Excluding a
similar after-tax extraordinary loss and an after-tax restructuring expense of
$477 million and $66 million, respectively, in 1992, as well as a 1992 after-tax
gain on the sale of Holdings' ready-to-eat cold cereal business of $30 million,
Holdings would have reported net income of $812 million in 1992. The decrease in
net income in 1993 from 1992 after such exclusions is due to the lower operating
income offset in part by lower interest expense.
1992 vs. 1991. Holdings' net income of $299 million in 1992 includes an
after-tax extraordinary loss of $477 million related to the repurchases of high
cost debt during 1992. However, after excluding the extraordinary loss, Holdings
would have reported net income of $776 million for 1992, an increase of $408
million over last year, primarily as a result of significantly lower interest
expense. Net income in 1991 was reduced by $28 million of net charges included
in "Other income (expense), net" as a result of the write-off of $109 million of
unamortized debt issuance costs and the recognition of $144 million of
23
<PAGE>
unrealized losses from interest rate hedges related to the refinancing of
existing credit lines, partially offset by a $225 million credit for a change in
estimated postretirement health care liabilities.
Holdings' net income (loss) applicable to its common stock for 1993, 1992
and 1991 of $(213) million, $268 million and $195 million, respectively,
includes a deduction for preferred stock dividends of $68 million, $31 million
and $173 million, respectively.
Effective January 1, 1993, RJRN adopted Statement of Financial Accounting
Standards No. 112 ("SFAS No. 112"), Employers' Accounting for Postemployment
Benefits. Under SFAS No. 112, RJRN is required to accrue the costs for
preretirement postemployment benefits provided to former or inactive employees
and recognize an obligation for these benefits. The adoption of SFAS No. 112 did
not have a material impact on the financial statements of either Holdings or
RJRN.
LIQUIDITY AND FINANCIAL CONDITION
DECEMBER 31, 1993
Holdings continued to generate significant free cash flow in 1993, although
at a lower level than in 1992. Free cash flow, which represents cash available
for the repayment of debt and certain other corporate purposes before the
consideration of any debt and equity financing transactions, acquisition
expenditures and divestiture proceeds, was $1.0 billion for 1993 and $1.6
billion for 1992. The lower level of free cash flow for 1993 primarily reflects
lower operating company contribution in the domestic tobacco business, higher
capital expenditures for tobacco manufacturing facilities in Eastern Europe and
Turkey and for Nabisco Biscuit facilities and higher taxes paid, offset in part
by lower inventory levels in the domestic tobacco business, higher sales of
receivables, and a decrease in interest paid.
The components of free cash flow are as follows:
<TABLE><CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1993 1992
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
OPERATING INCOME........................................................................... $ 1,378 $ 2,898
Amortization of intangibles.............................................................. 625 616
Restructuring expense, net of a 1992 gain from the sale of the ready-to-eat cold cereal
business................................................................................... 730 8
--------- ---------
OPERATING COMPANY CONTRIBUTION............................................................. 2,733 3,522
Depreciation and other amortization...................................................... 524 530
Increase in operating working capital.................................................... (121) (196)
Capital expenditures..................................................................... (615) (519)
Change in other assets and liabilities................................................... (21) (298)
--------- ---------
OPERATING CASH FLOW*....................................................................... 2,500 3,039
Taxes paid............................................................................... (332) (116)
Interest paid............................................................................ (912) (1,102)
Dividends paid........................................................................... (241) (214)
Other, net............................................................................... 19 31
--------- ---------
FREE CASH FLOW............................................................................. $ 1,034 $ 1,638
--------- ---------
--------- ---------
</TABLE>
- ---------------
* Operating cash flow, which is used as an internal measurement for evaluating
business performance, includes, in addition to net cash flow from (used in)
operating activities as recorded in the Consolidated Statement of Cash Flows,
proceeds from the sale of capital assets less capital expenditures, and is
adjusted to exclude income taxes paid and items of a financial nature (such as
interest paid, interest income, and other miscellaneous financial income or
expense items).
24
<PAGE>
In 1993, Holdings and RJRN continued to enter into a series of transactions
designed to refinance long-term debt, lower debt levels and lower interest
costs, thereby improving the consolidated debt cost and maturity structure.
These transactions included the issuance of preferred stock and the repurchase
and redemption of certain debt obligations with funds provided from the issuance
of debt securities (including medium-term notes), borrowings under Holdings' and
RJRN's credit agreement, dated as of December 1, 1991, as amended (the "1991
Credit Agreement"), and free cash flow, as well as RJRN's management of interest
rate exposure through swaps, options, caps and other interest rate arrangements.
As a result of these transactions and lower market interest rates during 1993,
Holdings reduced the effective interest rate on its consolidated long-term debt
from 8.7% at December 31, 1992 to 8.4% at December 31, 1993. Future effective
interest rates may vary as a result of RJRN's ongoing management of interest
rate exposure and changing market interest rates as well as refinancing
activities and changes in the ratings assigned to RJRN's debt securities by
independent rating agencies.
One of Holdings' current financial objectives is to achieve a
capitalization ratio of 43% over time. Holdings' capitalization ratio was 44.5%
at December 31, 1993. The capitalization ratio, which is intended to measure
Holdings' long-term debt (including current maturities) as a percentage of total
capital, is calculated by dividing (i) Holdings' long-term debt by (ii) the sum
of Holdings' total equity, consolidated long-term debt, deferred income taxes
and certain other long-term liabilities.
Certain of Holdings' other current financial objectives, which are all
based on income before extraordinary items excluding after-tax amortization of
trademarks and goodwill and referred to below as cash net income, are to achieve
a 20% return on year beginning common stockholders' equity, a 2.7 interest and
preferred stock dividend coverage ratio and a trendline average annual earnings
per share growth of 15% over time.
The 20% return on year beginning common stockholders' equity objective,
which is intended to measure the return to Holdings' common equity holders on
the net assets employed in the business, is calculated by dividing (i) cash net
income (after deducting preferred stock dividends) by (ii) total stockholders'
equity at the beginning of the year exclusive of preferred stockholders' equity
interest. For purposes of calculating the return on year beginning common
stockholders' equity, Series A PERCS and similar convertible preferred stock
securities, if any, are considered common equity and the related dividends
thereon are considered common dividends. The 2.7 interest and preferred stock
dividend coverage ratio objective, which is intended to measure Holdings'
ability to service its annual interest and preferred stock dividend payments, is
calculated by dividing (i) operating income before amortization of trademarks
and goodwill and depreciation by (ii) the sum of cash interest expense and
preferred stock dividends. The trendline average annual earnings per share
growth of 15% as adjusted for after-tax amortization of trademarks and goodwill,
is intended to measure Holdings' ability to achieve a certain level of earnings
per share growth over time.
At December 31, 1993, Holdings had an outstanding total debt level (notes
payable and long-term debt, including current maturities) and a total capital
level (total debt and total stockholders' equity) of approximately $12.4 billion
and $21.5 billion, respectively, each of which is lower than the corresponding
amounts at December 31, 1992. Holdings' ratio of total debt to total
stockholders' equity at December 31, 1993 improved to 1.4-to-1 versus 1.7-to-1
at December 31, 1992. RJRN's ratio of total debt to common equity at December
31, 1993 was 1.3-to-1, compared with 1.6-to-1 at December 31, 1992. Total
current liabilities and long-term debt of RJRN's subsidiaries was approximately
$3.4 billion at December 31, 1993 and 1992.
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Management believes that the improvement to Holdings' and its subsidiaries'
financial structure since 1991 has enhanced its ability to take advantage of
opportunities to further improve its capital and/or cost structure. Management
expects that it will continue to consider opportunities as they arise. Such
opportunities, if pursued, could involve further acquisitions from time to time
of substantial amounts of securities of Holdings or its subsidiaries through
open market purchases, redemptions, privately negotiated transactions, tender or
exchange offers or otherwise and/or the issuance from time to time of additional
securities by Holdings or its subsidiaries. Acquisitions of securities at prices
above their book value, together with the accelerated amortization of deferred
financing fees attributable to the acquired securities, would reduce reported
net income, depending upon the extent of such acquisitions. Nonetheless,
Holdings' and its subsidiaries' ability to take advantage of such opportunities
is subject to restrictions in the 1991 Credit Agreements and Holdings' and
RJRN's credit agreement, dated as of April 5, 1993, as amended (the "1993 Credit
Agreement", and together with the 1991 Credit Agreement, the "Credit
Agreements"), and in certain of their debt indentures. For a discussion of
recent developments affecting the tobacco business and the potential effect on
RJRT's cash flow, see "Results of Operations--Tobacco."
In addition, management currently is reviewing and expects to continue to
review various corporate transactions, including, but not limited to, joint
ventures, mergers, acquisitions, divestitures, asset swaps, spin-offs and
recapitalizations. Although Holdings has discussed and continues to discuss
various transactions with third parties, no assurance may be given that any
transaction will be announced or completed. It is likely that Holdings' tobacco
and food businesses would be separated should certain of the foregoing
transactions be consummated.
During 1993, RJRN issued $750 million principal amount of 8% Notes due
2000, $500 million principal amount of 8 3/4% Notes due 2005 and $500 million
principal amount of 9 1/4% Debentures due 2013. Also during 1993, RJRN issued
medium-term notes maturing in the years 1995-1998 having an aggregate initial
offering price of approximately $230 million. The net proceeds from the sale of
debt securities and the sale of 50,000,000 depositary shares at $25 per share
issued in connection with the issuance of Series B Cumulative Preferred Stock
have been or will be used for general corporate purposes, which include
refinancings of indebtedness, working capital, capital expenditures,
acquisitions and repurchases and redemptions of securities. Pending such uses,
proceeds may be used to repay indebtedness under RJRN's revolving credit
facilities or for short-term liquid investments.
A portion of the net proceeds collected from the sale of Holdings'
ready-to-eat cold cereal business was used on February 5, 1993 to redeem $216
million principal amount of RJRN's 9 3/8% Sinking Fund Debentures due 2016 at a
price of $1,065.63 for each $1,000 principal amount of such debentures, plus
accrued and unpaid interest thereon.
The 1991 Credit Agreement is a $6.5 billion revolving bank credit facility
that provides for the issuance of up to $800 million of irrevocable letters of
credit. Availability under the 1991 Credit Agreement is reduced by an amount
equal to the stated amount of such letters of credit outstanding, by commercial
paper borrowings in excess of $1 billion and by amounts borrowed under such
facility. At December 31, 1993, approximately $456 million stated amount of
letters of credit was outstanding and $328 million was borrowed under the 1991
Credit Agreement. Accordingly, the amount available under the 1991 Credit
Agreement at December 31, 1993 was $5.72 billion.
On April 5, 1993, Holdings and RJRN entered into the 1993 Credit Agreement,
which matures on April 4, 1994 and provides a back-up line of credit to support
commercial paper issuances of up to $1 billion. Availability thereunder is
reduced by an amount equal to the aggregate amount of commercial
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paper outstanding. At December 31, 1993, approximately $913 million of
commercial paper was outstanding. Accordingly, $87 million was available under
the 1993 Credit Agreement at December 31, 1993. Holdings and RJRN expect to
obtain bank consent to extend the maturity date of the 1993 Credit Agreement for
an additional 364 days.
The aggregate of consolidated indebtedness and interest rate arrangements
subject to fluctuating interest rates approximated $5.5 billion at December 31,
1993. This represents an increase of $800 million from the year end 1992 level
of $4.7 billion, primarily due to Holdings' on-going management of its interest
rate exposure.
As a result of the general decline in market interest rates compared with
the high interest cost on certain of Holdings' consolidated debt obligations,
the estimated fair value amount of Holdings' long-term debt reflected in its
Consolidated Balance Sheets at December 31, 1993 and 1992 exceeded the carrying
amount (book value) of such debt by approximately $400 million and $1.1 billion,
respectively. For additional disclosures concerning the fair value of Holdings'
consolidated indebtedness as well as the fair value of its interest rate
arrangements at December 31, 1993 and 1992, see Notes 10 and 11 to the
Consolidated Financial Statements.
Capital expenditures were $615 million, $519 million and $459 million for
1993, 1992 and 1991, respectively. The current level of expenditures planned for
1994 is expected to be approximately $600 million (approximately 60% Food and
40% Tobacco), which will be funded primarily by cash flows from operating
activities. Management expects that its capital expenditure program will
continue at a level sufficient to support the strategic and operating needs of
Holdings' businesses.
Holdings has operations in many countries, utilizing 35 functional
currencies in its foreign subsidiaries and branches. Significant foreign
currency net investments are located in Germany, Canada, Hong Kong, Brazil and
Spain. Changes in the strength of these countries' currencies relative to the
U.S. dollar result in direct charges or credits to equity for
non-hyperinflationary countries and direct charges or credits to the income
statement for hyperinflationary countries. Translation gains or losses,
resulting from foreign-denominated borrowings that are accounted for as hedges
of certain foreign currency net investments, also result in charges or credits
to equity. Holdings also has significant exposure to foreign exchange sale and
purchase transactions in currencies other than its functional currency. The
exposures include the U.S. dollar, German mark, Japanese yen, Swiss franc, Hong
Kong dollar, Singapore dollar and cross-rate exposure among the French franc,
British pound, Italian lira and the German mark. Holdings manages these
exposures to minimize the effects of foreign currency transactions on its cash
flows.
Certain financing agreements to which Holdings is a party and debt
instruments of RJRN directly or indirectly restrict the payment of dividends by
Holdings. The Credit Agreements, which contain restrictions on the payment of
cash dividends or other distributions by Holdings in excess of certain specified
amounts, and the indentures relating to certain of RJRN's debt securities, which
contain restrictions on the payment of cash dividends or other distributions by
RJRN to Holdings in excess of certain specified amounts, or for certain
specified purposes, effectively limit the payment of dividends on the Common
Stock. In addition, the declaration and payment of dividends is subject to the
discretion of the board of directors of Holdings and to certain limitations
under Delaware law. The Credit Agreements and the indentures under which certain
debt securities of RJRN have been issued also impose certain operating and
financial restrictions on Holdings and its subsidiaries. These restrictions
limit the ability of Holdings and its subsidiaries to incur indebtedness, engage
in transactions with stockholders and affiliates, create liens, sell certain
assets and certain subsidiaries' stock, engage in
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certain mergers or consolidations and make investments in unrestricted
subsidiaries. As a result of the increased competitive conditions in the
domestic cigarette market and in order to provide Holdings with additional
flexibility under certain financial ratios contained in the Credit Agreements,
Holdings obtained an amendment to such Credit Agreements during October 1993.
Holdings and RJRN believe that they are currently in compliance with all
covenants and restrictions in the Credit Agreements and their other
indebtedness.
On February 24, 1994, Holdings filed a Registration Statement on Form S-3
for a proposed offering of 300 million depositary shares, each representing a
one-tenth ownership interest in a share of a newly created new series of
Preferred Equity Redemption Cumulative Stock ("PERCS"). Each depositary share
would mandatorily convert in three years into one share of Common Stock, subject
to adjustment and subject to earlier conversion or redemption under certain
circumstances. Any net proceeds of a PERCS offering may be used for general
corporate purposes which may include refinancings of indebtedness, working
capital, capital expenditures, acquisitions and repurchases or redemptions of
securities. In addition, such proceeds may be used to facilitate one or more
significant corporate transactions, such as a joint venture, merger,
acquisition, divestiture, asset swap, spin-off and/or recapitalization, that
would result in the separation of the tobacco and food businesses of Holdings.
As of March 16, 1994, the specific uses of proceeds have not been determined.
Pending such uses, any proceeds would be used to repay indebtedness under RJRN's
revolving credit facilities or for short-term liquid investments.
ENVIRONMENTAL MATTERS
RJRN has been engaged in a continuing program to assure compliance with
U.S. Government and various state and local government laws and regulations
concerning the protection of the environment. Certain subsidiaries of the
Registrants have been named "potentially responsible parties" with third parties
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") with respect to approximately fifteen sites. Although it is difficult
to identify precisely the portion of capital expenditures or other costs
attributable to compliance with environmental laws and the Company cannot
reasonably estimate the cost of resolving the above-mentioned CERCLA matters,
the Company does not expect such expenditures or costs to have a material
adverse effect on its financial condition.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 2,200,000,000
shares of common stock, par value $.01 per share (the "Common Stock"), and
150,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). As of February 28, 1994, 1,138,468,832 shares of Common Stock were
outstanding. As of such date, 68,126,577 shares of Preferred Stock were
outstanding, of which 52,500,000 shares were Series A PERCS, 50,000 shares were
Series B Preferred Stock and 15,576,577 shares were ESOP Preferred Stock.
The following is a description of the terms of the capital stock of the
Company. This description does not purport to be complete and is qualified in
its entirety by reference to the Company's Amended and Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), and the form of
Certificate of Designation authorizing the PERCS (the "Certificate of
Designation"), each of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is incorporated by reference
herein.
COMMON STOCK
Each share of Common Stock is entitled to one vote at all meetings of
stockholders of the Company for the election of directors of the Company and on
all other matters. Dividends may be paid to the holders of Common Stock when, as
and if declared by the board of directors of the Company out of funds legally
available therefor. The Common Stock has no preemptive or similar rights.
Holders of Common Stock are not liable to further call or assessment. Upon
liquidation, dissolution or winding up of the affairs of the Company, any assets
remaining after provision for payment of creditors (and any liquidation
preference of any outstanding preferred stock) would be distributed pro rata
among holders of the Common Stock. The Company has never paid any cash dividends
on shares of the Common Stock. The Credit Agreements restrict cash dividends and
other distributions on Common Stock. The indentures relating to subordinated
debentures (the "RJRN Subordinated Debentures") of RJRN (the "RJRN Subordinated
Debenture Indentures") and the indenture relating to certain senior notes (the
"Senior Notes") of RJRN (the "Senior Note Indenture") restrict dividends or
distributions to the Company from RJRN and its subsidiaries which could
otherwise be used for the payment of cash dividends on the Common Stock by the
Company. When applicable restrictions on the payment of dividends permit or when
such restrictions cease, the timing, amount and form of dividends, if any, will
depend, among other things, upon the Company's results of operations, financial
condition, cash requirements, prospects and other factors deemed relevant by the
board of directors of the Company. See "Certain Significant
Considerations--Holding Company Structure" and "Description of Capital
Stock--Contractual Restrictions on Payment of Dividends."
The Common Stock is listed on the NYSE.
First Chicago Trust Company of New York is the registrar and transfer agent
for the Common Stock.
SERIES C PERCS
Pursuant to the Certificate of Incorporation, the board of directors of the
Company has adopted resolutions authorizing the issuance of a series of PERCS
out of the Company's authorized and unissued Preferred Stock. Upon issuance, the
PERCS will be fully paid and nonassessable. The holders of PERCS will have no
preemptive rights.
Rank. With respect to dividend rights and rights upon liquidation,
dissolution or winding up, the PERCS rank (i) senior to all classes of Common
Stock, and to all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank junior to the PERCS
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(collectively referred to as "Junior Securities"); (ii) on a parity with the
Series A PERCS, the Series B Preferred Stock and the ESOP Preferred Stock and
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the PERCS
(collectively referred to as "Parity Securities"); and (iii) junior to all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank senior to the PERCS (collectively referred to
as "Senior Securities").
Dividends. The owners of Depositary Shares (each of which represent
one-tenth of a share of PERCS) are entitled to receive, when, as and if
dividends on the PERCS are declared by the board of directors of the Company out
of funds legally available therefor, cumulative preferential cash dividends from
the issue date of the PERCS, accruing at the rate per share of $ per annum
or $ per quarter for each Depositary Share (equivalent to $ per annum or
$ per quarter for each PERCS), payable quarterly in arrears on the th day
of each , , and or, if any such date is not a
business day, on the next succeeding business day. The first dividend payment
will be paid on , 1994. Dividends will cease to accrue in respect
of the PERCS on the Mandatory Conversion Date or on the date of their earlier
redemption or conversion. Dividends (or cash amounts equal to accrued and unpaid
dividends) payable on the PERCS for any period shorter than a quarterly dividend
period will be computed on the basis of a 360-day year of twelve 30-day months.
Dividends on the PERCS will accrue whether or not the Company has earnings,
whether or not there are funds legally available for the payment of such
dividends and whether or not such dividends are declared. Accrued and unpaid
dividends will not bear interest.
Payment of dividends on the PERCS is subject to certain contractual
restrictions. See "Contractual Restrictions on Payment of Dividends" below.
So long as any PERCS are outstanding, no full dividends may be declared by
the board of directors of the Company or paid or set apart for the payment by
the Company on any Parity Securities for any period unless full cumulative
dividends have been or contemporaneously are declared and paid or declared and a
sum set apart sufficient for such payment on the PERCS through the most recent
dividend payment date. When dividends have not been paid or set apart in full
upon the PERCS and any other Parity Securities, all dividends declared upon the
PERCS and any Parity Securities shall be declared pro rata so that the amount of
dividends declared per share on the PERCS and such Parity Securities shall in
all cases bear to each other the same ratio that accrued dividends per share on
the PERCS and such Parity Securities bear to each other. Unless full cumulative
dividends, if any, accrued on all outstanding PERCS have been or
contemporaneously are declared and paid or declared and a sum set apart
sufficient for such payment through the most recent dividend payment date, no
dividend shall be declared or paid or set aside for payment or other
distribution declared or made upon the Common Stock or upon any other Junior
Securities (other than a dividend or distribution paid in shares of, or
warrants, rights or options exercisable for or convertible into, Common Stock or
any other Junior Securities), nor shall any Common Stock nor any other Junior
Securities be redeemed, purchased or otherwise retired for any consideration,
nor may any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such securities, by the Company, except by
conversion into or exchange in Junior Securities (other than purchases and
redemptions pursuant to or in accordance with employee stock subscription
agreements entered into between the Company and its or its subsidiaries'
directors, officers and key employees). Holders of the PERCS shall not be
entitled to any dividends, whether payable in cash, property or stock, in excess
of full cumulative dividends as herein provided.
First Chicago Trust Company of New York is the registrar, transfer agent
and dividend disbursing agent for the PERCS.
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Mandatory Conversion. On the Mandatory Conversion Date, each outstanding
PERCS will convert automatically into shares of Common Stock and the right to
receive an amount in cash equal to all accrued and unpaid dividends on such
PERCS, subject to earlier conversion and to the right of the Company to call the
PERCS prior to Mandatory Conversion, as described below. Upon Mandatory
Conversion, each PERCS will be converted into shares of Common Stock at the
Common Equivalent Rate (as described below) in effect on such date. The "Common
Equivalent Rate" is initially ten shares of Common Stock for each PERCS
(equivalent to one share of Common Stock for each Depositary Share).
Because the price of the Common Stock is subject to market fluctuations,
the value of the Common Stock received by a holder of PERCS upon Mandatory
Conversion of the PERCS on the Mandatory Conversion Date may be more or less
than the amount paid for the PERCS.
The Company will at all times reserve and keep available, free from
pre-emptive rights, out of the aggregate of its authorized but unissued Common
Stock or its issued Common Stock held in its treasury or both, for the purpose
of effecting the Mandatory Conversion of the PERCS, the full number of shares of
Common Stock then deliverable upon the Mandatory Conversion of all outstanding
PERCS.
Antidilution Provisions. The Certificate of Incorporation contains
antidilution provisions which provide that in the event the Company (a) pays a
dividend or makes a distribution with respect to Common Stock in shares of
Common Stock, (b) subdivides or splits its outstanding shares of Common Stock
into a greater number of shares, (c) combines its outstanding shares of Common
Stock into a smaller number of shares, or (d) issues by reclassification of its
shares of Common Stock any shares of common stock of the Company, then the
Common Equivalent Rate in effect immediately prior thereto shall be adjusted so
that the holder of a share of PERCS shall be entitled to receive on the
conversion thereof the number of shares of common stock of the Company which
such holder would have owned or been entitled to receive after the happening of
any of the events described above had such share of PERCS been converted at the
Common Equivalent Rate in effect immediately prior to such event or on any
record date with respect thereto.
In addition, if the Company issues rights or warrants to all holders of
Common Stock entitling them (for a period not exceeding 45 days from the date of
issuance) to acquire shares of Common Stock at a price per share less than the
Current Market Price of the Common Stock on the record date for the
determination of stockholders entitled to receive such rights or warrants, then
the Common Equivalent Rate shall be adjusted by multiplying the Common
Equivalent Rate in effect immediately prior to the date of issuance of such
rights or warrants by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding on such date of issuance, plus the number of
additional shares of Common Stock to be acquired pursuant to such rights or
warrants, and of which the denominator shall be the number of shares of Common
Stock outstanding on such date of issuance, plus the number of shares of Common
Stock which the aggregate offering price of the total number of shares of Common
Stock to be acquired pursuant to such rights or warrants would purchase at the
Current Market Price.
The Certificate of Incorporation also provides that if the Company pays a
dividend or makes a distribution to all holders of its Common Stock of evidences
of its indebtedness, other securities or other assets (including shares of
capital stock of the Company (other than Common Stock) and including shares of
capital stock of a subsidiary of the Company but excluding any distributions and
dividends referred to in the first paragraph of this section and any cash
dividends), or issues to all holders of its Common Stock rights or warrants to
subscribe for or purchase any of its securities (other than those referred to in
the second paragraph of this section), then, at the option of the Company, the
Company will either:
(1) adjust the Common Equivalent Rate by multiplying the Common
Equivalent Rate in effect on the record date for such distribution by a
fraction, of which the numerator shall be the
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Current Market Price per share of the Common Stock on the record date for
the determination of stockholders entitled to receive such dividend or
distribution, and of which the denominator shall be such Current Market
Price per share of Common Stock less the fair value (as determined by the
board of directors of the Company, whose determination shall be conclusive)
as of such record date of the portion of the securities or assets so
distributed, or of such rights or warrants, applicable to one share of
Common Stock (the "Distribution Fair Value") (provided that the Company
will not be permitted to elect the option described in this subparagraph
(1) if (a) the determination of fair value of such securities, assets,
rights or warrants by the board of directors of the Company applicable
to one share of Common Stock is greater than or equal to 95% of such
Current Market Price per share of Common Stock, in each case as of such
record date or (b) the day on which such record date is first fixed
by the board of directors of the Company is less than twenty-one
consecutive trading days prior to such record date); or
(2) distribute, at the time such dividend, distribution or issuance is
made to holders of the Common Stock, to each holder of PERCS the kind and
amount of such securities or assets of the Company as such holder would
have been entitled to receive had conversion into shares of Common Stock
occurred immediately prior to the record date for such dividend or
distribution.
If the Distribution Fair Value of the shares or other units of securities
or assets distributed with respect to each share of PERCS pursuant to
subparagraph (2) above would, as of the record date related to such
distribution, exceed the Call Price as of such record date, the amount of
shares or other units of securities or assets to be distributed with respect to
each share of PERCS will be reduced so that the Distribution Fair Value thereof
equals the Call Price on such record date.
Section 305 of the Internal Revenue Code of 1986, as amended (the "Code"),
provides that certain stock or rights distributions or similar transactions with
respect to the stockholders of the Company may be taxable to such stockholders
unless a full adjustment is made to the conversion ratio of any convertible
securities (such as the PERCS) to reflect such distributions. The Company will
be entitled to make additional upward adjustments in the Common Equivalent Rate,
as it in its sole discretion may determine to be advisable, in order that any
stock dividends, subdivision of shares, distribution of rights to purchase stock
or securities, or distribution of securities convertible into or exchangeable
for stock (or any transaction which could be treated as any of the foregoing
transactions pursuant to Section 305) hereafter made by the Company to its
stockholders will not be taxable pursuant to Section 305. All adjustments to the
Common Equivalent Rate will be calculated to the nearest 1/100th of a share of
Common Stock. See "Certain Significant Considerations--Event Risk" and "Federal
Income Tax Consequences."
Effects of Mergers or Consolidations. In addition, in connection with a
merger or consolidation of the Company (other than a merger or consolidation of
the Company with or into a wholly owned subsidiary of the Company) that results
in the conversion or exchange of Common Stock into, or the right to receive,
other securities or other property (whether of the Company or any other entity)
("Merger Consideration") (any such merger or consolidation, a "Merger or
Consolidation"), then (subject to the limitations described below, the
Holder-Opt Out Right referred to below and applicable call or conversion
provisions), each PERCS will, at the option of the Company:
(1) automatically convert immediately prior to the effectiveness of
the Merger or Consolidation into (i) shares of Common Stock at the Common
Equivalent Rate in effect immediately prior to such Merger or
Consolidation, plus (ii) the right to receive an amount in cash equal to
all accrued and unpaid dividends on such share of PERCS to and including
the business day immediately prior to the effective date of the Merger or
Consolidation (the "Settlement Date"), plus (iii) the right to receive an
amount of cash initially equal to $ (equivalent to $
for each Depositary Share), declining by $ (equivalent to
$ for each Depositary Share) on each day following the date of
issue of the PERCS (computed on the basis of a 360-day year of twelve
30-day months) to $ (equivalent to $ for each
Depositary Share) on , 1997, and equal to zero thereafter, in
each case determined with reference to the Settlement Date; provided, that
the number of shares of Common
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Stock issuable pursuant to clause (i) above shall be reduced, if necessary,
so that the value (based upon the Current Market Price of a share of Common
Stock on the Settlement Date) of the aggregate consideration described in
clauses (i) and (iii) above does not exceed the Call Price on the
Settlement Date; and provided, further, that the Company may, at its
option, deliver on the Settlement Date, in lieu of some or all of the cash
consideration described in clauses (ii) and (iii) above, shares of Common
Stock based upon the Current Market Price of a share of Common Stock
determined as of the Settlement Date (the option set forth in this
subparagraph (1) being hereinafter referred to as the "Common Conversion
Option"); or
(2) at the option of the Company (a) remain outstanding after the
Merger or Consolidation, provided that the agreement with respect to such
Merger or Consolidation requires that the entity (which may be the Company
and which may be a U.S. or a non-U.S. entity) issuing the Merger
Consideration (the "Issuing Entity") will be obligated to exchange on or
before the Mandatory Conversion Date shares of common equity of the Issuing
Entity for the PERCS (the "Existing PERCS Option"), (b) represent the right
to receive in exchange therefor one share or other unit of a security
(whether debt or equity) ("Issuing Entity PERCS") of the Issuing Entity (or
depositary receipts representing such security) having terms "substantially
equivalent" to the PERCS (except that upon call or conversion such security
will convert into common equity of such Issuing Entity) (the "Issuing
Entity PERCS Conversion Option") or (c) represent the right to receive in
exchange therefor one share of a series of Preferred Stock of the Company
(or depositary receipts representing such Preferred Stock) ("New PERCS")
having terms "substantially equivalent" to the PERCS (except that on
call or conversion such New PERCS will be exchanged for common
equity of the Issuing Entity) (the "Company PERCS Conversion Option"). The
initial common equivalent rate on the Issuing Entity PERCS or the New PERCS
shall be equal to, or the Common Equivalent Rate on the PERCS shall be
adjusted to equal, the Common Equivalent Rate on the PERCS in effect
immediately prior to the Merger or Consolidation adjusted to reflect the
ratio by which shares of common equity of the Issuing Entity in the Merger
or Consolidation are exchanged for one share of Common Stock.
If the Company elects any of the options referred to in subparagraph (2)
above, each holder of PERCS will have the right (the "Holder Opt-Out Right") to
elect that, in lieu of such holder's PERCS being subject to such option, such
holder's PERCS will automatically convert, in whole (but not in part),
immediately prior to the effectiveness of the Merger or Consolidation into (i)
shares of Common Stock at the Common Equivalent Rate in effect immediately prior
to such Merger or Consolidation (provided that the number of shares of Common
Stock issuable upon such conversion shall be reduced, if necessary, so that the
value of such shares, based upon the Current Market Price of a share of Common
Stock as of the Settlement Date, does not exceed the Call Price on the
Settlement Date), plus (ii) the right to receive an amount of cash (which may,
at the option of the Company, be payable in shares of Common Stock based upon
the Current Market Price of a share of Common Stock as of the Settlement Date)
equal to all accrued and unpaid dividends on the PERCS to and including the
Settlement Date. In order to exercise the Holder Opt-Out Right, a holder of
PERCS must deliver a properly completed and duly executed written notice of
election, specifying such information as may be required by the Certificate of
Designation or the Company, to the Company generally not later than the day
prior to the effectiveness of the Merger or Consolidation, surrender the
certificate for such shares of PERCS and pay any applicable transfer or similar
tax payable in respect of any registration of transfer involved in the issue or
delivery of shares of Common Stock in a name other than that of the registered
holder of the PERCS. The Depositary Shares are subject to conversion upon the
same terms and conditions (including those as to notice to the owners of
Depositary Shares) as the PERCS held by the Depositary, adjusted to reflect the
fact that ten Depositary Shares are the equivalent of one share of PERCS. See
"Description of Series C Depositary Shares--Call or Conversion of Depositary
Shares."
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Notwithstanding the Company's election of any of the options referred to in
subparagraph (2) above, if the Merger Consideration (excluding consideration in
connection with fractional shares or the exercise of appraisal rights) consists
of both common equity of the Issuing Entity (or any depositary receipts
representing such common equity) ("Issuing Entity Common Equity") and property
which is not Issuing Entity Common Equity ("Non-Common Equity Merger
Consideration"), then, in addition to having the rights arising out of the
Company's election of such option, such holder will be entitled to receive, at
the time Merger Consideration is distributed to holders of Common Stock, an
amount of Non-Common Equity Merger Consideration equal to the amount of
Non-Common Equity Merger Consideration that such holder would have been entitled
to receive in the Merger or Consolidation had (i) such holder's PERCS been
converted into shares of Common Stock at the Common Equivalent Rate in effect
immediately prior to the Merger or Consolidation and (ii) such shares of Common
Stock been exchanged in the Merger or Consolidation for the amount of Merger
Consideration which would have given a holder of Common Stock the maximum number
of shares of Issuing Entity Common Equity available pursuant to the agreement
applicable to such Merger or Consolidation with respect to any share of Common
Stock in such Merger or Consolidation; provided that if the Call Price per share
of PERCS on the Settlement Date is less than the fair value of such Non-Common
Equity Merger Consideration per share of PERCS (as determined by the board of
directors of the Company, whose determination shall be conclusive) as of the
Settlement Date (the "Non-Common Equity Fair Value"), then the amount of
Non-Common Equity Merger Consideration that a holder of PERCS will be entitled
to receive with respect to each PERCS will be reduced so that the Non-Common
Equity Fair Value thereof equals the Call Price on the Settlement Date. If the
Merger Consideration consists solely of Non-Common Equity Merger Consideration,
the Company must elect the Common Conversion Option described in subparagraph
(1) above.
If the Company elects the Issuing Entity PERCS Conversion Option and the
Issuing Entity is a non-U.S. corporation or other non-U.S. entity, the Issuing
Entity PERCS may be considered "substantially equivalent" to the PERCS
notwithstanding that, among other things (i) a holder of Issuing Entity PERCS is
not entitled to the dividend received deduction under Section 243 or Section 245
of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) the tax
treatment of a holder of Issuing Entity PERCS differs from the tax treatment of
a holder of PERCS, including by reason of a future change in U.S. law, (iii) the
Issuing Entity PERCS do not provide voting rights to the holders thereof to the
same extent as the PERCS, so long as the Issuing Entity PERCS provide voting
rights with respect to such securities to the fullest extent permitted by the
law applicable to such securities, (iv) the Issuing Entity PERCS do not provide
that any or all cash payments will be made in U.S. dollars so long as such
payments may not be made in U.S. dollars under applicable law, provided that the
amount of currency other than U.S. dollars payable on any given date is adjusted
(based on the noon U.S. buying rate for such currency for cable transfers quoted
in the City of New York on the business day next preceding such payment, as
certified for customs purposes by the Federal Reserve Bank of New York) to equal
the number of U.S. dollars which would have been payable on such date if payment
had been permitted to be made in U.S. dollars, or (v) the Issuing Entity is
prohibited by its certificate of incorporation or by-laws (or equivalent
constituent documents) or by the laws of the jurisdiction of its establishment
from issuing Issuing Entity PERCS that automatically convert into common equity,
so long as the terms of such Issuing Entity PERCS (or other agreements relating
thereto) provide for conversion into common equity not later than the same date
as such automatic conversion would have occurred and in a manner which gives a
holder thereof substantially the same rights as if such Issuing Entity PERCS had
automatically converted. The Company will not elect the Issuing Entity PERCS
Conversion Option if the Issuing Entity is a non-U.S. corporation or other
non-U.S. entity, unless provision is made in the Issuing Entity PERCS to gross
up the amount paid to U.S. persons (who supply appropriate certification that
they are U.S. persons) in respect of any withholding taxes imposed thereon.
If the Company elects the Company PERCS Conversion Option, the New PERCS
may be considered "substantially equivalent" notwithstanding that, among other
things, the New PERCS lack voting rights equivalent to the PERCS. In addition,
if the Company elects the Existing PERCS Option,
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then, without a vote of holders of the PERCS, the Company may amend the
Certificate of Designation (i) to limit the voting rights of holders subsequent
to the Merger or Consolidation and (ii) to make any incidental and conforming
modifications necessary to implement such option.
The existence of the Common Conversion Option may have the effect of
deterring certain takeovers to the extent the premiums described in clause (iii)
of such option require the payment of additional consideration. If the Company
elects any of the Issuing Entity PERCS Conversion Option, the Company PERCS
Conversion Option or the Existing PERCS Option, however, no such premium will be
payable to the holders of PERCS as a result of the Merger or Consolidation. In
addition, as a result of the foregoing provisions, holders of PERCS (and thereby
holders of Depositary Shares) may be subject to certain material U.S. federal
income tax consequences. See "Federal Income Tax Considerations--Other Sales or
Exchanges."
Because the price of the Common Stock is subject to market fluctuations,
the value of the shares of Common Stock received by a holder of PERCS upon the
effectiveness of a Merger or Consolidation, if any, may be more or less than the
amount paid for the PERCS. In addition, under circumstances where the PERCS
convert to Common Stock in connection with a Merger or Consolidation, the
opportunity for PERCS holders to receive the benefit of any appreciation of the
Common Stock may be limited because the value at the Settlement Date of the
Common Stock into which PERCS would convert (including the value of any
applicable premium) is limited to the Call Price at the Settlement Date.
In the event of a conversion or exchange of the Common Stock into, or the
right to receive, other securities or property of the Company or a wholly owned
subsidiary of the Company (in each case other than in connection with a Merger
or Consolidation) or in the event of a merger or consolidation of the Company
with or into a wholly owned subsidiary of the Company that results in the
conversion or exchange of the Common Stock into, or the right to receive, other
securities or other property (whether of the Company or any other entity), then
the PERCS will thereafter no longer be subject to conversion or redemption into
shares of Common Stock, but instead will be subject to conversion or redemption
into the kind and amount of securities or other property which the holder of
such PERCS would have owned immediately after such conversion or exchange or
merger or consolidation if such PERCS had been converted or redeemed into shares
of Common Stock immediately before the effective time of such conversion or
exchange or merger or consolidation. If any such conversion or exchange or
merger or consolidation shall have occurred and either (x) the Company (or its
successor) exercises the Common Conversion Option upon any succeeding Merger or
Consolidation or its right to call the PERCS as described below or (y) one
or more holders of PERCS exercise its Holder Opt-Out Right or an Optional
Tender Offer Conversion described below, then the Company (or its successor)
will deliver, in lieu of any Common Stock which would have been delivered, such
kind of securities or other property with an aggregate market price determined
as of the relevant date.
The holders of PERCS have no right to require conversion of their PERCS
except in connection with the Holder Opt-Out Right or as set forth below with
respect to an Optional Tender Offer Conversion.
Optional Tender Offer Conversion. If pursuant to the rules promulgated
under the Exchange Act the Company has recommended acceptance of (or has
expressed no opinion and is remaining neutral toward) a tender offer which would
result in the ownership by the bidder (or an affiliate of the bidder) of more
than 50% of the then outstanding Common Stock of the Company (a "Recommended
Tender Offer"), then prior to the expiration of such Recommended Tender Offer
the Company will give notice to each holder of PERCS that such holder may, at
its option, convert (an "Optional Tender Offer Conversion) its PERCS, in whole
(but not in part), into shares of Common Stock at the Common Equivalent Rate in
effect at the close of business on the day prior to the date of expiration or
termination of such Recommended Tender Offer (the "Tender Offer Measurement
Date"); provided that the number of shares of Common Stock issuable upon such
conversion will be reduced, if necessary, so that the value of such shares,
based upon the Current Market Price of a share of Common Stock as of
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the Tender Offer Measurement Date, does not exceed the Call Price on the Tender
Offer Measurement Date.
In order to convert shares of PERCS pursuant to an Optional Tender Offer
Conversion, a holder of PERCS must deliver a properly completed and duly
executed written notice of election, specifying such information as may be
required by the Certificate of Designation or the Company, to the Company on
or prior to the Tender Offer Measurement Date, surrender the certificate for
such shares of PERCS and pay any applicable transfer or similar tax payable in
respect of any registration of transfer involved in the issue or delivery of
shares of Common Stock in a name other than that of the registered holder of
the PERCS. The Depositary Shares are subject to conversion upon the same terms
and conditions (including those as to notice to the owners of Depositary Shares)
as the PERCS held by the Depositary, adjusted to reflect the fact that ten
Depositary Shares are the equivalent of one share of PERCS. See "Description of
Series C Depositary Shares--Call or Conversion of Depositary Shares."
Conversion shall be deemed to have been effected at the close of business
on the date (the "Conversion Date") of the expiration or termination of such
Recommended Tender Offer. Immediately upon conversion, the rights of the holders
of the PERCS shall cease and the persons entitled to receive the shares of
Common Stock upon the conversion of such PERCS shall be treated for all purposes
as having become the beneficial owners of such shares of Common Stock.
As promptly as practicable after the Conversion Date, the Company shall
deliver or cause to be delivered, to or upon the written order of the holder of
the surrendered shares of PERCS, a certificate or certificates representing the
number of fully paid and nonassessable shares of Common Stock into which such
shares of PERCS have been converted.
The existence of the Optional Tender Offer Conversion may have the effect
of deterring certain tender offers for Common Stock, because additional shares
of Common Stock would be able to participate in such a tender offer, thereby
requiring the payment of additional consideration. In addition, the opportunity
of the PERCS holders who make an Optional Tender Offer Conversion to receive the
benefit of any appreciation of the Common Stock may be limited because the value
of the Common Stock into which the PERCS convert on the Conversion Date is
limited to the Call Price at the Tender Offer Measurement Date.
Right to Call. At any time or from time to time prior to the Mandatory
Conversion Date, the Company shall have the right to call, in whole or in part,
the outstanding PERCS for redemption at a redemption price equal to the Call
Price plus an amount equal to accrued and unpaid dividends to and including the
date of redemption. The portion of the redemption price equal to the Call Price
shall be paid in shares of Common Stock and the remainder in cash. Upon such
call, the Company shall deliver to the holders thereof in exchange for each
PERCS a number of shares of Common Stock equal to the Call Price of the PERCS in
effect on the redemption date, divided by the Current Market Price of the Common
Stock determined as of the second trading date immediately preceding the Notice
Date, plus an amount in cash equal to any accrued and unpaid dividends. The Call
Price of each PERCS is initially $ (equivalent to $ for each
Depositary Share); declining by $ (equivalent to $ for each
Depositary Share) on each day following the date of issue of the PERCS (computed
on the basis of a 360-day year of twelve 30-day months) to $ (equivalent to
$ for each Depositary Share) on , 1997 and will be
equal to $ (equivalent to $ for each Depositary Share)
thereafter; provided that if the Company distributes shares or other units of
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securities or assets as provided in subparagraph (2) of the third paragraph of
"--Antidilution Provisions" above or if Non-Common Equity Merger Consideration
is distributed in connection with a Merger or Consolidation as provided in
"--Effects of Mergers or Consolidations" above, then, (i) in the case of the
distribution described in subparagraph (2) of the third paragraph of
"--Antidilution Provisions" above, from and after the close of business on the
record date related to such distribution, the Call Price per share for any day
shall be reduced by the Distribution Fair Value of such shares or other units of
securities or assets and (ii) in the case of the distribution of Non-Common
Equity Merger Consideration, from and after the close of business on the
Settlement Date related to the Merger or Consolidation, the Call Price per share
for any day shall be reduced by the Non-Common Equity Fair Value of such
Non-Common Equity Consideration; provided further that in no event shall the
effect of the foregoing proviso be to reduce the Call Price per share to an
amount less than $0.01.
The opportunity for equity appreciation afforded by an investment in the
Depositary Shares (and the PERCS) is limited because the Company may, at its
option, call the PERCS (and thereby the Depositary Shares) at any time prior to
the Mandatory Conversion Date at the Call Price (payable in shares of Common
Stock) plus an amount in cash equal to accrued and unpaid dividends, and may be
expected to do so prior to the Mandatory Conversion Date if, among other things,
the market price for the Common Stock has theretofore exceeded the Call Price
for the Depositary Shares (equivalent to one-tenth of the Call Price for the
PERCS). If the Company elects to call the PERCS (and thereby the Depositary
Shares), the equity appreciation, exclusive of accrued and unpaid dividends,
realized on an investment in the Depositary Shares will, for any owner of
Depositary Shares called by the Company, be equal to the excess, if any, of (i)
the value of the Common Stock received in payment of the Call Price (the Call
Price for the Depositary Shares, subject to reduction under certain
circumstances, being $ initially, declining to $
thereafter as indicated above), over (ii) the price paid by such holder for such
Depositary Shares (the initial price to public being $ and the price
thereafter being subject to market fluctuations). Because the number of shares
of Common Stock to be delivered in payment of the Call Price will be determined
on the basis of the market price of the Common Stock prior to the notice of the
call, the value of the shares of Common Stock to be delivered may be more or
less than the Call Price on the date of delivery.
Notwithstanding the foregoing, if the Company elects the Existing PERCS
Option, then, from and after the effective time of the Merger or Consolidation,
the PERCS will no longer be subject to conversion or redemption into shares of
Common Stock, but instead will be subject to exchange, only into the common
equity of the Issuing Entity. If the Company elects the Existing PERCS Option
and either (x) the Company exercises the Common Conversion Option upon any
succeeding Merger or Consolidation or its right to call the PERCS following
such Merger of Consolidation or (y) one or more of the holders of PERCS exercise
its Holder Opt-Out Right or an Optional Tender Offer Conversion in either case
upon any succeeding Merger or Consolidation, the Company will deliver, in lieu
of any Common Stock which would have been delivered, common equity of the
Issuing Entity with an aggregate market price determined as of the relevant
date.
Certain Definitions. The terms "Current Market Price" and "Notice Date" are
defined as follows:
The term "Current Market Price" per share of the Common Stock on any
date of determination means, except as otherwise specifically provided, the
average of the daily regular way closing prices (with any relevant due bill
attached) as reported on the NYSE Consolidated Tape for the twenty
consecutive trading days ending on and including such date of
determination; provided, however, that, for purposes of a call pursuant to
the first paragraph of "Right to Call" above, the Current Market Price
shall be determined over the five consecutive trading days ending on and
including the date of determination unless the closing price of the
Common Stock as reported on the NYSE Consolidated Tape on the trading day
next following such five-day period (the "next-day closing price") is
less than 95% of said average closing price, in which event the Current
Market Price per share of Common Stock on such date of determination will
be the next-day closing price; and provided, further, that, with respect
to any redemption, conversion or antidilution adjustment of the PERCS, if
any event that results in an adjustment of the Common Equivalent Rate
occurs during the period beginning on the first day of the applicable
determination period and ending on the applicable redemption or conversion
date, the Current
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Market Price as determined pursuant to the foregoing will be appropriately
adjusted to reflect the occurrence of such event. Notwithstanding the
foregoing, from and after the effective time of a Merger or Consolidation
in connection with which the Company elected the Existing PERCS Option, the
Company PERCS Conversion Option or the Issuing Entity PERCS Conversion
Option, if Issuing Entity Common Equity is not traded on the NYSE, "Current
Market Price" will be (i) determined by reference to the principal trading
market on which Issuing Entity Common Equity is traded and (ii) converted,
if necessary, into U.S. dollars by reference to the spot rate at noon local
time in the relevant market at which, in accordance with the normal
banking
procedures, U.S. dollars could be purchased with such currency from major
banks located in New York City or London, England.
The term "Notice Date" with respect to any notice given by the Company
in connection with a call or conversion of the PERCS means the commencement
of the mailing of such notice to the holders of PERCS in accordance with
"Notice to Holders of PERCS" below.
Fractional Shares. No fractional shares of Common Stock will be issued upon
redemption or conversion of the PERCS. In lieu of any fractional share otherwise
issuable in respect of all PERCS of any holder which are redeemed or converted
on any redemption or conversion date, such holder shall be entitled to receive,
at the Company's election, either (a) an amount in cash equal to the same
fraction of the Current Market Price of the Common Stock determined as of the
second trading day immediately preceding the relevant Notice Date or (b) a cash
payment equal to such holder's proportionate interest in the net proceeds
(following the deduction of applicable transaction costs) from the sale promptly
by an agent, on behalf of such holders, of shares of Common Stock representing
the aggregate of such fractional shares. See "Description of Series C Depositary
Shares--Call or Conversion of Depositary Shares."
Notice to Holders of PERCS. The Company will provide notice of any call or
conversion (other then an Optional Tender Offer Conversion) of the PERCS or the
election of any of the options described in the first paragraph of "--Effects of
Mergers or Consolidations" above, to holders of record of PERCS (1) to be called
or converted not less than 30 nor more than 60 days prior to the date fixed for
call or conversion or (2) in the case of the election of any of the options
described in the first paragraph of "--Effects of Mergers or Consolidations"
above, at least 30 days prior to the anticipated effective date of the Merger or
Consolidation; provided that if the timing of the effectiveness of a Merger or
Consolidation makes it impracticable to provide at least 30 days notice, the
Company shall provide the notice as soon as practicable prior to such
effectiveness, and provided that the Company will be under no obligation to
notify any holder of any extension of such effective date. Such notice shall
specify the Current Market Price (if then determinable) to be used to calculate
the number of shares of Common Stock to be delivered, if any; whether the
Company is exercising any option to deliver shares of Common Stock in lieu of
cash; whether such notice is being delivered as a result of a Merger or
Consolidation; and, if applicable, what option the Company is exercising with
respect to the PERCS and that if the Company elects the Issuing Entity PERCS
Conversion Option, the Company PERCS Conversion Option or the Existing PERCS
Option that the holder shall be entitled to exercise the Holder Opt-Out Right
in the manner described in "Effects of Mergers and Consolidations" above.
Such notice shall be provided by mailing notice of such call or conversion to
the holders of PERCS to be called or converted or, in the case of an election
of any of the options described in the first paragraph of "--Effects of Mergers
or Consolidations" above, to all holders of PERCS. Each holder of PERCS to be
called or converted shall surrender the certificates evidencing such PERCS to
the Company at the place designated in such notice and shall be entitled to
receive certificates for shares of Common Stock and any funds payable upon call
or conversion as described above following such surrender and following the
date of such call or conversion. If fewer than all the outstanding PERCS are to
be called, the PERCS to be called shall be selected by the Company from
outstanding PERCS by lot or pro rata (as nearly as may be practicable without
creating fractional shares) or by any other method determined by the board of
directors of the Company in its sole discretion to be equitable. The Depositary
Shares are subject to call, conversion or exchange upon the same terms and
conditions (including those as to notice to the owners
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of Depositary Shares and as to selection of Depositary Shares to be called if
fewer than all of the outstanding Depositary Shares are to be called) as the
PERCS held by the Depositary, adjusted to reflect the fact that ten Depositary
Shares are the equivalent of one share of PERCS. See "Description of Series C
Depositary Shares--Call or Conversion of Depositary Shares."
The Company will provide notice of an Optional Tender Offer Conversion to
holders of record of the PERCS not less than fifteen business days prior to the
expiration of such tender offer. Such notice shall specify the date of
expiration (as of the date of such notice) of such Recommended Tender Offer and
that if such holders elects to convert its PERCS into shares of Common Stock,
dividends on such PERCS will cease to accrue dividends on the date they are
converted. If the date of expiration of the Recommended Tender Offer is
extended, the Company will be under no obligation to notify any holder of PERCS
of such extension.
The holders of PERCS at the close of business on a dividend payment record
date will be entitled to receive the dividend payable on such PERCS on the
corresponding dividend payment date notwithstanding the call or conversion
thereof (except that holders of PERCS called for redemption or to be converted
on a date occurring between such record date and the dividend payment date shall
not be entitled to receive such dividend on such dividend payment date but
instead will receive accrued and unpaid dividends to such date or the related
Settlement Date, as the case may be) or the Company's default in payment of the
dividend due. Except as provided above, the Company will make no payment or
allowance for unpaid dividends, whether or not in arrears, on called or
converted PERCS or for dividends on the shares of Common Stock issued upon call
or conversion.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of PERCS then
outstanding shall be entitled to be paid out of the assets of the Company
available for distribution to its stockholders, after payment or provision for
payment of the debts and other liabilities of the Company and any Senior
Securities, an amount per PERCS in cash equal to the sum of (i) ten times the
price to public per Depositary Share set forth on the cover page of this
Prospectus (equivalent to a liquidation preference per Depositary Share of the
price to public set forth on the cover page of this Prospectus) and (ii) all
accrued and unpaid dividends thereon to the date of liquidation, dissolution or
winding up, before any payment shall be made or any assets distributed to the
holders of any of the Junior Securities. If the assets of the Company are not
sufficient to pay in full the liquidation payments payable to the holders of
outstanding PERCS and any other Parity Securities, the holders of PERCS and any
other Parity Securities shall share ratably in any distribution of assets in
accordance with the amount which would be payable on such distribution if the
amounts to which the holders of outstanding PERCS and the holders of outstanding
shares of such Parity Securities are entitled were paid in full. After payment
of the full amount of the liquidation distribution to which they are entitled,
the holders of PERCS will not be entitled to any further participation in any
distribution of assets of the Company. Neither the sale, transfer or lease of
all or any part of the assets of the Company nor the consolidation or merger of
the Company with one or more corporations shall be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of the Company.
The Certificate of Incorporation does not contain any language requiring
funds to be set aside to protect the liquidation preference of the PERCS,
although such liquidation preference will be substantially in excess of the par
value of the PERCS. In addition, the Company is not aware of any provision of
the Delaware General Corporation Law (the "GCL") or any controlling decision of
the courts of the State of Delaware (the state of incorporation of the Company)
that requires a restriction upon the surplus of the Company solely because the
liquidation preference of the PERCS will exceed its par value. Consequently,
there will be no restriction upon the surplus of the Company solely because the
liquidation preference of the PERCS will exceed the par value and there will be
no remedies available to holders of the PERCS before or after the payment of any
dividend, other than in connection with the liquidation of the Company, solely
by reason of the fact that such dividend would reduce the surplus of the Company
to an amount less than the difference between the liquidation preference of the
PERCS and its par value.
Voting Rights. Holders of PERCS will have the right, voting together with
the holders of Common Stock (and any other capital stock of the Company entitled
to vote together with the Common Stock, including the Series A PERCS and the
ESOP Preferred Stock) as one class, to vote in the election of directors and
upon each other matter coming before any meeting of the stockholders on the
basis initially of one vote (equal to one-tenth of the Common Equivalent Rate)
for each share of PERCS (initially equivalent to one-tenth vote for each
Depositary Share) held; provided, however, that the
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holders of PERCS will not be entitled to vote on any increase or decrease in the
number of authorized shares of any class or classes of stock. The Certificate of
Incorporation also provides that in the event that dividends on all series of
Preferred Stock, including the PERCS, are in arrears and unpaid for six
quarterly periods, the board of directors of the Company will be increased by
two directors and the holders of PERCS, together with the holders of all other
outstanding series of the Preferred Stock entitled to vote thereon, will be
entitled to elect two directors of the expanded board of directors, provided
such directors do not exceed 25% of such total board of directors of the Company
and provided, further, that such holders shall be entitled to elect at least one
director notwithstanding the foregoing proviso. Such voting rights will continue
until such time as all dividends in arrears have been paid or declared and set
aside for payment. While such holders are entitled to elect two directors, they
shall not be entitled to participate with the holders of Common Stock in the
election of any other directors, but would continue to vote with the holders of
Common Stock upon each other matter coming before any meeting of the
stockholders. After giving effect to the offering, the PERCS will have % of
the total voting power of the Company.
In addition, the Certificate of Incorporation provides that the Company
will not authorize a new class of Parity Securities without the affirmative vote
or consent of holders of a majority of the then outstanding shares of PERCS and
any other series of Preferred Stock of the Company entitled to vote thereon then
outstanding, voting or consenting, as the case may be, together as one class,
and that the Company will not authorize a new class of Senior Securities without
the affirmative vote or consent of holders of at least two-thirds of the then
outstanding PERCS and any other series of Preferred Stock of the Company
entitled to vote thereon then outstanding voting or consenting, as the case may
be, together as one class. Except for amendments contemplated by the Company's
exercise of the Existing PERCS Option as described under "--Effects of Mergers
and Consolidations" above, the Certificate of Incorporation also provides that
the Company may not amend the Certificate of Incorporation so as to affect
materially and adversely the specified rights, preferences, privileges or voting
rights of the Preferred Stock without the affirmative vote or consent of the
holders of at least two-thirds of the then outstanding PERCS and any other
series of Preferred Stock of the Company entitled to vote thereon then
outstanding, voting or consenting, as the case may be, together as one class.
These voting rights with respect to the PERCS will terminate if the Company has
given notice of any call or conversion of all outstanding PERCS and the shares
of Common Stock and any necessary funds required for such call or conversion
have been deposited in trust for such call or conversion. The Certificate of
Incorporation also provides that (a) except as set forth above, the creation,
authorization or issuance of any shares of Junior Securities, Parity Securities
or Senior Securities, including the designation of series thereof within the
existing class of Preferred Stock, (b) the creation of any indebtedness of any
kind of the Company or (c) the increase or decrease in the amount of authorized
capital stock of any class, including any Preferred Stock, shall not require the
consent of the holders of PERCS and shall not be deemed to affect materially and
adversely the rights, preferences, privileges or voting rights of PERCS.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment to the Certificate of Incorporation, whether or
not entitled to vote thereon by the Certificate of Incorporation, if the
amendment would increase or decrease the par value of the shares of such class
or alter or change the powers, preferences, or special rights of the shares of
such class so as to affect them adversely. Pursuant to the Certificate of
Incorporation, the holders of a majority of the outstanding shares of Common
Stock may, however, increase or decrease (but not below the number of shares of
such class then outstanding) the aggregate number of authorized shares of
Preferred Stock without the vote of holders of Preferred Stock.
Reissuance. PERCS redeemed for or converted into Common Stock or otherwise
acquired by the Company will assume the status of authorized but unissued
Preferred Stock and may thereafter be reissued in the same manner as other
authorized but unissued Preferred Stock.
Listing. Application has been made to list the Depositary Shares on the
NYSE.
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OTHER PREFERRED STOCK
Series A PERCS. Each share of Series A PERCS is entitled to receive, when,
as and if declared by the board of directors of the Company, out of funds
legally available therefor, cumulative cash dividends at a rate of $3.34 per
annum, payable quarterly in arrears. Each share of Series A PERCS will
mandatorily convert into four shares of Common Stock of the Company on November
15, 1994, subject to adjustment in certain events. In addition, each share of
Series A PERCS may be redeemed by the Company, in whole or in part, at any time
at a redemption price to be paid in shares of Common Stock, plus accrued and
unpaid dividends. The optional redemption price declines from $64.82 per share
by $.009218 on each day following November 8, 1991 to $55.36 on September 15,
1994, and is $54.80 thereafter.
Immediately prior to the effectiveness of a Merger or Consolidation of the
Company, each outstanding Series A PERCS will convert automatically into (i)
shares of Common Stock at a rate, which currently is four shares of Common Stock
for each Series A PERCS, in effect immediately prior to such Merger or
Consolidation, plus (ii) the right to receive an amount in cash equal to all
accrued and unpaid dividends on such Series A PERCS to and including the
Settlement Date, plus (iii) the right to receive an amount of cash initially
equal to $10.02, declining by $.009218 on each day following November 8, 1991 to
$.56 on September 15, 1994, and equal to zero thereafter, unless sooner
redeemed. At the option of the Company, it may deliver on the Settlement Date in
lieu of some or all of the cash consideration described in clauses (ii) and
(iii) of the preceding sentence, shares of Common Stock.
Holders of Series A PERCS have voting rights which are generally consistent
with those of the holders of the PERCS.
Series B Preferred Stock. Each share of Series B Preferred Stock is
entitled to receive, when, as and if declared by the board of directors of the
Company, out of funds legally available therefor, cumulative preferential cash
dividends at the rate per annum of 9.25%, payable quarterly in arrears. On and
after August 19, 1998, the Company, at its option upon not less than 30 nor more
than 60 days' notice, may redeem shares of the Series B Preferred Stock, as a
whole or in part, at any time, at a redemption price equivalent to $25,000 per
share, plus accrued and unpaid dividends thereon to the date fixed for
redemption, without interest, to the extent the Company will have funds legally
available therefor.
The Series B Preferred Stock has no stated maturity and is not subject to
any sinking fund or mandatory redemption. The Series B Preferred Stock is not
convertible into, or exchangeable for, shares of any other class or series of
stock of the Company.
The holders of the Series B Preferred Stock do not have any voting rights,
except as otherwise provided by law and under certain other limited
circumstances.
ESOP Preferred Stock. Each share of ESOP Preferred Stock is entitled to
receive, when, as and if declared by the board of directors of the Company, out
of funds legally available therefor, cumulative cash dividends at a rate of
7.8125% of stated value per annum ($1.25 per annum) at least until April 10,
1999, payable semi-annually in arrears. Each share of ESOP Preferred Stock is
convertible into one share of Common Stock, subject to adjustment in certain
events. The ESOP Preferred Stock is redeemable at the option of the Company, in
whole or in part, at any time on or after April 10, 1999, at an initial optional
redemption price of $16.25 per share, declining thereafter on an annual basis in
the amount of $.125 a year to $16 per share on April 10, 2001, plus accrued and
unpaid dividends. Under certain other circumstances, the ESOP Preferred Stock is
subject to redemption at any time. Holders of ESOP Preferred Stock have voting
rights which are generally consistent with those of the holders of the PERCS.
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CONTRACTUAL RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company is subject to various contractual restrictions on its ability
to pay dividends on its Preferred Stock and Common Stock.
Under the Credit Agreements, if no event of default exists thereunder in
the case of clauses (i), (iii) and (iv) below, the Company may (i) declare and
pay regularly scheduled dividends on its preferred or preference stock
outstanding on December 9, 1991, in the case of the 1991 Credit Agreement, and
April 5, 1993, in the case of the 1993 Credit Agreement, when and as scheduled
at dividend rates not exceeding those in effect on December 19, 1991, in the
case of the 1991 Credit Agreement, and April 5, 1993, in the case of the 1993
Credit Agreement; (ii) issue shares of Common Stock upon the exercise of any
warrants or options or upon the conversion or redemption of any convertible or
redeemable preferred stock, and in connection with any such exercise, conversion
or redemption, the Company may pay cash in lieu of issuing fractional shares of
Common Stock; (iii) repurchase shares of Common Stock (and/or options or
warrants in respect thereof) pursuant to and in accordance with the terms of,
management and/or employee stock plans; (iv) declare and pay, or otherwise
effect, any other cash dividend or other dividend or distribution, or repurchase
or redeem any capital stock, provided that the aggregate amount of such other
dividends or distributions, repurchases or redemptions, when added to all
dividends or distributions, repurchases or redemptions, made in accordance with
this clause (iv) after December 19, 1991, in the case of the 1991 Credit
Agreement, and January 1, 1992, in the case of the 1993 Credit Agreement, will
not exceed an amount equal to the sum of (x) 50% of the sum of (A) consolidated
net income of the Company and its subsidiaries for the period (taken as one
accounting period) from January 1, 1992 to the last day of the last fiscal
quarter of the Company then ended plus (B) all losses from debt retirement
deducted in determining consolidated net income of the Company and its
subsidiaries for the period referred to in clause (A) above plus (y) the
aggregate cash proceeds (net of underwriting discounts and commissions) received
by the Company after March 22, 1993, in the case of the 1991 Credit Agreement,
and April 5, 1993, in the case of the 1993 Credit Agreement, from issuances of
its equity securities; (v) issue and exchange shares of any class or series of
Common Stock now or hereafter outstanding for shares of any other class or
series of Common Stock now or hereafter outstanding and (vi) in connection with
any reclassification of Common Stock and any exchange permitted by clause (v)
above, pay cash in lieu of issuing fractional shares of any class or series of
Common Stock. The Company believes that the dividend restrictions set forth in
the Credit Agreements will not prevent the Company from paying the dividends it
intends to pay on the PERCS.
The RJRN Subordinated Debenture Indentures and the Senior Note Indenture,
by containing restrictions on the payment of cash dividends or the making of
other distributions by RJRN to the Company in excess of certain specified
amounts and for certain specified purposes, also effectively limit the payment
of dividends on the Common Stock or any Preferred Stock. The restrictions in
these indentures have the effect of prohibiting the payment of dividends or the
making of other payments or distributions by RJRN in respect of its Capital
Stock (as defined in the RJRN Subordinated Debenture Indentures and the Senior
Note Indenture) if, at the time of such payment (x) a default under such
indentures shall have occurred and be continuing, (y) RJRN, after giving effect
to such payment, could not incur at least $1.00 of additional Indebtedness (as
defined in the RJRN Subordinated Debenture Indentures and the Senior Note
Indenture) by virtue of meeting certain fixed charge coverage ratios as set
forth in the restrictions on Indebtedness in such indentures or (z) after giving
effect to such payment, the aggregate amount expended for all Restricted
Payments (as hereinafter defined) subsequent to September 30, 1990 (December 31,
1990, in the case of the Senior Note Indenture) shall exceed the sum of (1) 25%
(50% in the case of the Senior Note Indenture excluding the cash dividends
referred to in (3) below) of the aggregate Consolidated Net Operating Income (as
hereinafter defined) of RJRN accrued on a cumulative basis subsequent to
December 31, 1990, plus (2) the aggregate net proceeds received by RJRN from the
issuance and sale (other than to a subsidiary (as defined in the RJRN
Subordinated Debenture Indentures and the Senior Note Indenture)) after December
31, 1990, of
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RJRN's Capital Stock (other than Redeemable Stock (as defined in the RJRN
Subordinated Debenture Indentures and the Senior Note Indenture)), including the
issuance or sale for cash after December 31, 1990, or upon the conversion after
December 31, 1990, of any Indebtedness of RJRN (which Indebtedness is, by its
terms, convertible into Capital Stock (other than Redeemable Stock) of RJRN) or
from the exercise after December 31, 1990 of any options, warrants or other
rights to acquire Capital Stock (other than Redeemable Stock) of RJRN plus (3)
in the case of the Senior Note Indenture, the aggregate net proceeds received by
RJRN from capital contributions made to RJRN after December 31, 1990 plus $250
million plus the amount of all cash dividends from an Unrestricted Subsidiary
(as defined in the Senior Note Indenture) after December 31, 1990, minus (4) the
aggregate amount of certain payments made with respect to minority interests
previously made by all Subsidiaries of RJRN; provided, however, that
notwithstanding the foregoing restrictions, (a) such indentures do not prevent
the payment of dividends by RJRN on RJRN's common stock, following public
offerings of RJRN's or the Company's common stock, of up to 6% per annum of the
net proceeds received by RJRN in such public offering or, in the case of public
offerings by the Company, up to 6% per annum of the amount of proceeds
contributed down to RJRN as common equity and (b) the RJRN Subordinated
Debenture Indentures permit loans, advances, dividends and distributions by RJRN
to the Company to the extent necessary to permit the Company to pay cash
dividends on the Common Stock on and after May 1, 1993, up to $100 million per
annum limited to an aggregate of $250 million, provided no default under such
indentures shall have occurred and be continuing or occur and be continuing as a
consequence thereof.
As used herein:
"Restricted Payments" means (i) the declaration or payment of any
dividend or the making of any distribution on RJRN's Capital Stock or to
holders of RJRN's Capital Stock (other than dividends or distributions
payable in RJRN's common stock or in shares of RJRN's Capital Stock) or the
making of any loans or advances to the holders of RJRN's Capital Stock or
to the Company or the purchase of Capital Stock of the Company, (ii) the
purchase, redemption or acquisition or retirement for value by RJRN or any
of its Subsidiaries of any such Capital Stock (or options, warrants or
other rights to acquire such Capital Stock) or Capital Stock or any other
security of a direct or indirect parent of RJRN, (iii) the redemption,
repurchase, defeasance (including, but not limited to, in substance or
legal defeasance) or the acquisition or retirement for value by RJRN or any
of its Subsidiaries prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment, of Indebtedness of RJRN that is pari passu
or subordinate (whether pursuant to its terms or by operation of law) in
right of payment to the RJRN Subordinated Debentures under the RJRN
Subordinated Debenture Indentures or subordinate (whether pursuant to its
terms or by operation of law) in right of payment to the Senior Notes under
the Senior Note Indenture and which was scheduled to mature (after giving
effect to any and all options to extend the maturity thereof) on or after
the maturity date of the RJRN Subordinated Debentures or the Senior Notes,
as the case may be (after giving effect to any and all options to extend
the maturity thereof) (except, in the case of the Senior Notes, certain
permitted redemptions, repurchases, defeasances, acquisitions or
retirements for value of the subordinated Indebtedness of RJRN) or (iv) the
making of any Investment in any Unrestricted Subsidiary in excess of the
Minimum Permitted Investment (as such terms are defined, respectively, in
the RJRN Subordinated Debenture Indentures and the Senior Note Indenture).
"Consolidated Net Operating Income" of any person means, for any
period, the aggregate Consolidated Net Income of such person and its
Subsidiaries for such period, determined on a consolidated basis in
accordance with generally accepted accounting principles, adjusted by
excluding (to the extent not otherwise excluded in calculating Consolidated
Net Income) the net extraordinary gain or the net extraordinary loss, as
the case may be, during such period and including, in the case of the RJRN
Subordinated Debenture Indentures, the amount of all
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dividends received by RJRN or its Subsidiaries from an Unrestricted
Subsidiary in excess of the amount of all Investments made by RJRN in such
Unrestricted Subsidiary.
"Consolidated Net Income" of any person means, for any period, the net
income (or loss) of such person and its Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles, provided that there shall be excluded (i) the net
income (or loss) of any person that is not a Subsidiary of such person in
which any other person (other than such person or any of its Subsidiaries)
has a joint interest, except to the extent of the amount of dividends or
other distributions actually paid to such person or any of its Subsidiaries
by such other person during such period, (ii) except to the extent
includible pursuant to the foregoing clause (i), the net income (or loss)
of any other person accrued prior to the date it becomes a Subsidiary of
such person or is merged into or consolidated with such person or any of
its Subsidiaries or such other person's assets are acquired by such person
or any of its Subsidiaries, (iii) the net income of any Subsidiary to the
extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time
permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary and (iv) any gains or losses
attributable to Asset Sales (as defined in the RJRN Subordinated Debenture
Indentures and the Senior Note Indenture) on an after-tax basis (in the
case of the Senior Note Indenture).
In determining "Consolidated Net Income" the RJRN Subordinated Debenture
Indentures and the Senior Note Indenture specify that generally accepted
accounting principles applicable to RJRN for 1988 fiscal year shall apply,
without giving effect to (i) certain adjustments required or permitted by
Accounting Principles Board Opinions Nos. 16 and 17 in respect of the
Acquisition and the related financings, (ii) the effects of any "carryover
basis" accounting required by generally accepted accounting principles, (iii)
the amortization of certain goodwill and intangible assets consummated prior to
the tender offer for RJRN's shares of Common Stock ended February 9, 1989 and
(iv) the amortization or write-off of certain expenses in respect of the
Acquisition and the related financing and debt issued prior to the Acquisition.
RJRN believes that it has and will continue to have sufficient Restricted
Payment capacity under the RJRN Subordinated Debenture Indentures and the Senior
Note Indenture for it to fund the dividends that the Company intends to pay on
the PERCS.
CERTAIN STATUTORY AND BY-LAW PROVISIONS
The Company is currently, and following the consummation of the offering
will be, subject to the "business combination" statute of the GCL. In general,
Section 203 of the GCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless (a) prior to such date the board of
directors of the corporation approved either the "business combination" or the
transaction which resulted in the stockholder becoming an "interested
stockholder," (b) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned (i) by persons who are directors and
also officers and (ii) employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer, or (c) on or subsequent
to such date the "business combination" is approved by the board of directors
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the "interested stockholder." A "business combination" includes
mergers, stock or asset sales and other transactions resulting in a financial
benefit to the "interested stockholders." An "interested stockholder" is a
person who, together with affiliates and
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associates, owns (or if such person is an affiliate or associate of the
corporation within three years, did own) 15% or more of the corporation's voting
stock.
The Company's By-laws establish an advance notice procedure for
stockholders to make nominations of candidates for election as directors, or to
bring other business before an annual meeting of stockholders of the Company.
The By-laws provide that only persons who are nominated by, or at the direction
of, the board of directors of the Company or any committee designated by the
board of directors of the Company, or by a stockholder who has given timely
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of the
Company. The By-laws also provide that in order to properly submit any business
to an annual meeting of stockholders, a stockholder must give timely written
notice to the Secretary of the Company of such stockholder's intention to bring
such business before such meeting. Generally, for notice of stockholder
nominations or other business to be made at an annual meeting to be timely under
the By-laws, such notice must be received by the Company (i) not less than 120
days nor more than 150 days before the first anniversary date of the Company's
proxy statement in connection with the last annual meeting of stockholders or
(ii) if no annual meeting was held in the previous year or the date of the
applicable annual meeting has been changed by more than 30 days from the date
contemplated at the time of the previous year's proxy statement, not less than a
reasonable time, as determined by the board of directors of the Company, prior
to the date of the applicable annual meeting. Under the By-laws, a stockholder's
notice must also contain certain information specified in the By-laws.
The provisions described above may have the effect of delaying stockholder
actions with respect to certain business combinations and the election of new
members of the board of directors of the Company. As such, the provisions could
have the effect of discouraging open market purchases of Common Stock because
they may be considered disadvantageous by a stockholder who desires to
participate in a business combination or elect a new director.
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DESCRIPTION OF SERIES C DEPOSITARY SHARES
Each Depositary Share represents one-tenth of a share of Series C
Conversion Preferred Stock deposited under the Deposit Agreement, dated as of
, 1994 (the "Deposit Agreement") between the Company and First
Chicago Trust Company of New York, as depositary (the "Depositary"). Subject to
the terms of the Deposit Agreement, each owner of a Depositary Share is
entitled, proportionately, to all the rights, preferences and privileges of the
PERCS represented thereby (including dividend, voting and liquidation rights),
and subject, proportionately, to all of the limitations of the PERCS represented
thereby contained in the Certificate of Designation for the PERCS, summarized
under "Description of Capital Stock--Series C PERCS."
The Depositary Shares are evidenced by depositary receipts issued pursuant
to the Deposit Agreement (the "Depositary Receipts"). The following summary of
the terms and provisions of the Depositary Shares does not purport to be
complete and is subject to, and qualified in its entirety by, the Deposit
Agreement (which contains the form of Depositary Receipt), which is an exhibit
to the Registration Statement. Copies of the Deposit Agreement are available for
inspection at the Corporate Office (as defined in the Deposit Agreement) of the
Depositary.
ISSUANCE OF DEPOSITARY RECEIPTS
Immediately following the issuance of the PERCS by the Company, the Company
will deposit the PERCS with the Depositary, which will then execute and deliver
the Depositary Receipts to the Company. The Company will, in turn, deliver the
Depositary Receipts to the Underwriters. Depositary Receipts will only be issued
evidencing whole Depositary Shares.
WITHDRAWAL OF PERCS
Upon surrender of Depositary Receipts at the principal office of the
Depositary, upon payment of any unpaid amount due the Depositary, and subject to
the terms of the Deposit Agreement, the owner of the Depositary Shares evidenced
thereby is entitled to delivery of the number of whole shares of PERCS and all
money and other property, if any, represented by such Depositary Shares. Partial
shares of PERCS will not be issued. If the Depositary Receipts delivered by the
holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares representing the number of whole shares of PERCS to be
withdrawn, the Depositary will deliver to such holder at the same time a new
Depositary Receipt evidencing such excess number of Depositary Shares. Holders
of PERCS thus withdrawn will not thereafter be entitled to deposit such shares
under the Deposit Agreement or to receive Depositary Receipts evidencing
Depositary Shares therefor.
CALL OR CONVERSION OF DEPOSITARY SHARES
As described under "Description of Capital Stock--Series C PERCS--Mandatory
Conversion-- Effects of Mergers or Consolidations," "--Optional Tender Offer
Conversion" and "--Right to Call," the PERCS are subject (i) to conversion on
the Mandatory Conversion Date, (ii) to the right of the Company to call the
PERCS, at the Company's option, for redemption and (iii) to conversion upon or
in connection with certain mergers or consolidations of the Company and in
connection with certain tender offers. The Depositary Shares are subject to
call, conversion or exchange upon the same terms and conditions (including as to
notice to the owners of Depositary Shares and as to selection of Depositary
Shares to be called if fewer than all the outstanding Depositary Shares are to
be called) as the PERCS held by the Depositary using securities received by the
Depositary, except that the number of shares of such securities received upon
call or conversion of each Depositary Share will be equal to one-tenth of the
number of shares received upon redemption or conversion of each PERCS. To the
extent that Depositary Shares are redeemed for or converted into shares of
securities and all of such shares cannot be distributed to the record holders of
Depositary Receipts without creating fractional interests in such shares, the
Depositary may, with the consent of the Company, adopt such method as it deems
equitable and practicable for the purpose of effecting such distribution,
including the sale (at public or private
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sale) of such shares representing in the aggregate such fractional interest at
such places and upon such terms as it may deem proper, and the net proceeds of
any such sale shall be distributed or made available for distribution to such
record holders that would otherwise have received fractional interests in such
shares. The amount distributed in the foregoing cases will be reduced by any
amounts required to be withheld by the Company or the Depositary on account of
taxes or otherwise required pursuant to law, regulation or court process.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the PERCS represented by the Depositary
Shares to the record holders of Depositary Receipts in proportion to the number
of Depositary Shares owned by such holders on the relevant record date, which
will be the same date as the record date fixed by the Company for the PERCS. The
Depositary, however, will distribute only such amount as can be distributed
without attributing to any Depositary Share a fraction of one cent, and any
balance not so distributed will be added to and treated as part of the next sum
received by the Depositary for distribution to record holders of Depositary
Receipts then outstanding.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Receipts
entitled thereto, in proportion, as nearly as may be practicable, to the number
of Depositary Shares owned by such holders on the relevant record date, unless
the Depositary determines (after consultation with the Company) that it is not
feasible to make such distribution, in which case the Depositary may (with the
approval of the Company) adopt any other method for such distribution as it
deems appropriate, including the sale of such property and distribution of the
net proceeds from such sale to such holders.
VOTING PERCS
Promptly upon receipt of notice of any meeting at which the holders of
PERCS represented by such holders' Depositary Shares are entitled to vote or any
solicitation of consents in respect of the PERCS, the Depositary will mail the
information contained in such notice of meeting or consent solicitation, as the
case may be, to the record holders of Depositary Receipts as of the record date
for such meeting. Each such record holder of Depositary Receipts will be
entitled to instruct the Depositary as to the exercise of the voting rights or
the delivery of consents with respect to the number of PERCS represented by such
holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote or deliver a consent with respect to the number of PERCS
represented by such Depositary Shares in accordance with such instructions, and
the Company intends to take all action which may be deemed necessary by the
Depositary in order to enable the Depositary to do so. The Depositary will
abstain from voting or delivering consents with respect to the PERCS to the
extent it does not receive specific written instructions from the holders of
Depositary Receipts.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time and from time to time be
amended by agreement between the Company and the Depositary. However, any
amendment which imposes or increases any fees, taxes, or charges upon holders of
Depositary Receipts (other than taxes and other governmental charges, fees and
other expenses payable by such holders as stated under "Charges of Depositary"),
or which otherwise prejudices any substantial existing right of holders of
Depositary Receipts, will not take effect as to outstanding Depositary Receipts
until the expiration of 30 days after notice of such amendment has been mailed
to the record holders of outstanding Depositary Receipts. Every holder of an
outstanding Depositary Receipt at the time any such amendment becomes effective
will be deemed, by continuing to hold such Depositary Receipt, to consent and
agree to such amendment and to be bound by the Deposit Agreement as amended
thereby. No such amendment may impair the right, subject to the terms of the
Deposit Agreement, of any owner of any Depositary Shares to surrender the
Depositary Receipt
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evidencing such Depositary Shares with instructions to the Depositary to deliver
to the holder PERCS and all money and other property, if any, represented
thereby, except in order to comply with mandatory provisions of applicable law.
The Deposit Agreement may be terminated by the Company or the Depositary
only if (i) all outstanding Depositary Shares have been redeemed or converted or
(ii) there has been a final distribution in respect of the PERCS in connection
with any liquidation, dissolution or winding up of the Company and such
distribution has been made to all the holders of Depositary Shares. In the event
the Deposit Agreement is terminated, the Company will use its best efforts to
list the PERCS on the NYSE or any other national securities exchange on which
the Common Stock is listed.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
PERCS and the initial issuance of the Depositary Shares, any redemption or
conversion of the PERCS and all withdrawals of the PERCS by owners of Depositary
Shares. Holders of Depositary Receipts will pay transfer, income and other taxes
and governmental charges and certain other charges as are provided in the
Deposit Agreement to be for their accounts. In certain circumstances, the
Depositary may refuse to transfer Depositary Shares, may withhold dividends and
distributions and sell the Depositary Shares evidenced by such Depositary
Receipt if such charges are not paid.
MISCELLANEOUS
The Company will deliver to the Depositary all annual and quarterly reports
to stockholders and other communications which the Company is required to
furnish to the holders of PERCS by law, by the rules of the NYSE or by the
Certificate of Incorporation or Certificate of Designation relating to the
PERCS. Currently, only the rules of the NYSE require the delivery of annual and
quarterly reports to stockholders. The Depositary will forward to the holders of
Depositary Receipts and will make available for inspection by holders of
Depositary Receipts at the principal office of the Depositary, and at such other
places as it may from time to time deem advisable, any such reports and
communications received from the Company.
Neither the Depositary nor the Company assumes any obligation or will be
subject to any liability under the Deposit Agreement to holders of Depositary
Receipts other than for its negligence, bad faith or willful misconduct. Neither
the Depositary nor the Company will be liable if it is prevented or delayed by
law or any circumstance beyond its control in performing its obligations under
the Deposit Agreement. The obligations of the Company and the Depositary under
the Deposit Agreement will be limited to performance in good faith of their
duties thereunder, and they will not be obligated to prosecute or defend any
legal proceeding in respect of any Depositary Shares or PERCS unless
satisfactory indemnity is furnished. The Company and the Depositary may rely on
written advice of counsel or accountants, on information provided by holders of
Depositary Receipts or other persons believed in good faith to be competent to
give such information and on documents believed to be genuine and to have been
signed or presented by the proper party or parties.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 45 days after delivery of the notice for
resignation or removal and must be a bank or trust company having its principal
office in the United States of America and having a combined capital and surplus
of at least $50,000,000.
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FEDERAL INCOME TAX CONSIDERATIONS
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), counsel to the Company ("Counsel"), is of the opinion that the
following discussion sets forth the material anticipated federal income tax
consequences of the ownership and disposition of the Depositary Shares and the
PERCS represented thereby. Prospective investors should note, however, that
stock with terms closely comparable to those of the PERCS has not been the
subject of any regulations, rulings or judicial decision. There can be no
assurance that the Internal Revenue Service (the "Service") will take a similar
view as to any of the tax consequences described below. No ruling has been or
will be requested from the Service on any tax matters relating to the PERCS.
This summary is based upon the provisions of the Code, the regulations,
administrative rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. This summary does not purport to deal with all aspects of
federal income taxation that may be relevant to an investor's decision to
purchase Depositary Shares and it is not intended to be applicable to all
categories of investors, some of which, such as dealers in securities, banks,
insurance companies, tax-exempt organizations and foreign persons, may be
subject to special rules. In addition, the summary is limited to persons that
will hold the Depositary Shares and any PERCS or Common Stock received in
exchange therefor as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code. ALL PROSPECTIVE PURCHASERS OF
PERCS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF
DEPOSITARY SHARES.
OVERVIEW
Subject to the full discussion below, which qualifies, and should be read
in conjunction with, the following overview, the principal federal income tax
considerations with respect to the ownership and disposition of the PERCS are as
follows:
Dividends. Dividends paid on the PERCS out of the Company's current or
accumulated earnings and profits (if any) will qualify for the 70%
intercorporate dividends-received deduction, subject to the minimum holding
period (generally at least 46 days) and other applicable requirements.
Effect of Dividends on Tax Basis. While the issue is not free from doubt,
original corporate holders of the PERCS should not be required to reduce their
tax basis in the PERCS pursuant to Section 1059 of the Code in respect of any
dividends-received deductions relating to regular quarterly dividends on the
PERCS paid currently.
Call for or Mandatory Conversion into Common Stock. Gain or loss generally
will not be recognized by an owner upon a call of the PERCS solely for Common
Stock or Mandatory Conversion of the PERCS solely into shares of Common Stock.
Call Premium. While the issue is not free from doubt, owners should not be
required to include in income prior to receipt any call premium which may be
payable with respect to the PERCS.
DEPOSITARY SHARES
The tax treatment for the owners of the Depositary Shares will be the same
as the tax treatment for the owners of the PERCS as described below. In
addition, no gain or loss will be recognized upon the withdrawal of the PERCS in
exchange for Depositary Shares pursuant to the Deposit Agreement, an owner's tax
basis in the withdrawn PERCS will be the same as the tax basis in the Depositary
Shares surrendered therefor, and such owner's holding period for the withdrawn
PERCS will include the period during which the owner held the surrendered
Depositary Shares.
49
<PAGE>
DIVIDENDS
Counsel believes that dividends paid on the PERCS out of the Company'
current or accumulated earnings and profits (if any) will be taxable as ordinary
income and will qualify for the 70% intercorporate dividends-received deduction
subject to the minimum holding period (generally at least 46 days) and other
applicable requirements. Under certain circumstances, a corporate holder may be
subject to the alternative minimum tax with respect to the amount of its
dividends-received deduction. Dividends in excess of the Company's current and
accumulated earnings and profits will be taxed first as a tax-free return of
capital to the extent of the holder's basis in its PERCS, and thereafter as
capital gain from the sale or exchange of the PERCS. Such gain will be long-term
or short-term capital gain depending on the holder's holding period for the
PERCS. The amount of the Company's earnings and profits (if any) will depend
upon the Company's future actions and financial performance, and cannot
presently be determined.
Under certain circumstances, a corporation that receives an "extraordinary
dividend," as defined in Section 1059(c) of the Code, is required to reduce its
stock basis by the non-taxed portion of such dividend. Generally, regular
quarterly dividends paid currently (i.e., dividends not accumulated beyond the
dividend payment date) to an original holder of the PERCS will not constitute
extraordinary dividends under Section 1059(c). In addition, under Section
1059(f), any dividend with respect to "disqualified preferred stock" is treated
as an "extraordinary dividend." However, Counsel believes that the PERCS will
not constitute "disqualified preferred stock," although the issue is not free
from doubt.
REDEMPTION PREMIUM
Under certain circumstances, Section 305(c) of the Code requires that the
excess of the redemption price of preferred stock over its issue price be
includable in income, prior to receipt, as a constructive dividend. However,
Counsel believes that Section 305(c) does not currently apply to stock with
terms such as those of the PERCS, although the issue is not free from doubt.
CALL OR CONVERSION INTO COMMON STOCK
Gain or loss will generally not be recognized by a holder upon call of the
PERCS for shares of Common Stock or conversion of the PERCS into shares of
Common Stock if no cash or other property is received. Income may be recognized,
however, to the extent cash or Common Stock is received in payment of dividends
in arrears. In addition, a holder who receives cash in lieu of a fractional
share will be treated as having received such share and (i) exchanged it for
cash in a transaction subject to Section 302 of the Code and related provisions
if such cash is received directly from the Company, or alternatively (ii)
recognized gain or loss from the sale of the fractional share if such share is
disposed of by an agent appointed by the Company to sell such share on behalf of
a holder. A holder who receives cash (other than any cash in lieu of a
fractional share or cash in payment of dividends in arrears) or other property
or both from the Company in addition to Common Stock upon the call or conversion
of the PERCS will not recognize loss (if any), and will recognize gain (if any),
on such call or conversion, but not in excess of the sum of such cash and the
value of such other property. The measure of such a holder's gain will be the
excess (if any) of the sum of such cash and the value of such other property
plus the value of the shares of Common Stock received over such holder's basis
in the called or converted PERCS. Depending upon the facts and circumstances,
any gain may be treated in whole or in part as a dividend. Any such dividend to
a corporate holder may constitute (and may cause other dividends, including
regular dividends, to constitute) an "extraordinary dividend" under Section 1059
of the Code.
Generally, a holder's basis in the Common Stock received upon the call or
conversion of the PERCS (other than shares, if any, taxed as a dividend upon
receipt) will equal the basis of the called or converted PERCS, plus the amount
of gain (if any) recognized, minus the sum of cash and the value of other
property received (if any), and the holding period of such Common Stock will
include the holding period of the called or converted PERCS.
50
<PAGE>
OTHER SALES OR EXCHANGES
A holder will generally recognize gain or loss upon a sale or exchange of
PERCS, including upon a Merger or Consolidation measured by the difference,
if any, between the amount realized upon such sale or exchange and the holder's
tax basis in the PERCS. However, gain or loss realized as a result of certain
mergers or consolidations may not be recognized for Federal income tax purposes,
or gain realized, if any, may be recognized only in part. If a PERCS holder
receives stock or securities as a result of a merger or consolidation, the tax
treatment of such stock or securities may differ from, and be less favorable
than, the tax treatment of the PERCS.
ADJUSTMENT OF CONVERSION RATE
Certain adjustments to the Common Equivalent Rate to reflect the Company's
issuance of certain rights, warrants, evidences of indebtedness, securities or
other assets to holders of Common Stock may result in constructive distributions
taxable as dividends to the holders of the PERCS. Similarly, if instead of
adjusting the Common Equivalent Rate upon such an issuance the Company elects at
such time to alter the consideration receivable by the holders of the PERCS upon
conversion to include the assets such holders would have been entitled to
receive if conversion had occurred prior to the record date for such issuance,
the alteration may result in constructive distributions taxable as dividends to
the holders of the PERCS. Further, if instead of adjusting the Common Equivalent
Rate upon such issuance or altering the consideration receivable by the holders
of PERCS upon conversion, the Company elects to distribute assets currently to
the holders of the PERCS, such distribution may be taxable as a dividend to the
holders of the PERCS. Any of the actual or constructive dividends described in
this paragraph may constitute (and may cause other dividends, including regular
dividends, to constitute) extraordinary dividends to corporate holders (see
"Dividends" above).
BACKUP WITHHOLDING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31% on dividends and certain consideration received upon the call or
conversion of the PERCS. Generally, backup withholding applies only when the
taxpayer fails to furnish or certify a proper Taxpayer Identification Number or
when the taxpayer is notified by the Service that he has failed to report
payments of interest and dividends properly. Holders should consult their tax
advisors regarding their qualification for exemption from backup withholding and
the procedure for obtaining any applicable exemption.
CERTAIN UNITED STATES WITHHOLDING TAX CONSEQUENCES
Dividends received by a nonresident alien individual, foreign corporation,
foreign partnership, foreign estate or foreign trust (a "non-U.S. person") will
be subject to U.S. federal withholding tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty, unless such dividends are
effectively connected with the conduct of a trade or business of the holder in
the United States, in which case the dividends will be subject to regular U.S.
federal income tax plus, in the case of a corporate holder, a possible
additional "branch profits" tax. All non-U.S. persons are urged to consult their
tax advisors regarding the consequences of the purchase, ownership and
disposition of PERCS, including the requirements for claiming a reduction in
withholding tax under an applicable income tax treaty.
51
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally and
not jointly agreed to purchase, and the Company has agreed to sell to the
Underwriters, severally and not jointly, the respective number of Depositary
Shares set forth opposite their names below:
NUMBER OF
DEPOSITARY
NAME SHARES
- ----------------------------------------------------- --------------
Morgan Stanley & Co. Incorporated....................
Smith Barney Shearson Inc............................
--------------
Total........................................... 300,000,000
--------------
--------------
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Depositary Shares are subject
to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are committed to take and pay for all of the
Depositary Shares offered hereby (other than those covered by the over-allotment
option) if any are taken.
The Underwriters propose to offer part of the Depositary Shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price which represents a concession not in excess
of $ per Depositary Share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per Depositary
Share to Underwriters or to certain other dealers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 45,000,000 additional
Depositary Shares at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase additional Depositary Shares solely for the
purpose of covering over-allotments, if any, incurred in the sale of the
Depositary Shares offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional Depositary Shares as the
number set forth next to such Underwriter's name in the preceding table bears to
300,000,000.
The Company has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for Common Stock for a period of 180 days after the date of
this Prospectus, subject to certain exceptions. Certain limited partnerships of
which KKR Associates, an affiliate of KKR, is the sole general partner, shall
agree that, subject to certain exceptions, without the prior written consent of
Morgan Stanley & Co. Incorporated, they will not offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for Common Stock for a period of 180 days after the date of
this Prospectus.
The Company and the Underwriters have agreed to indemnity each other
against certain liabilities, including liabilities under the Securities Act of
1933.
From time to time certain Underwriters and their affiliates have rendered
investment banking and other advisory services to the Company.
52
<PAGE>
LEGAL MATTERS
The validity of the Depositary Shares, the PERCS and the Common Stock
offered hereby will be passed upon for the Company by Jo-Ann Ford, Vice
President and Assistant General Counsel of the Company, and will be passed upon
for the Underwriters by Davis Polk & Wardwell, New York, New York. Simpson
Thacher & Bartlett (a partnership which includes professional corporations), New
York, New York, counsel to the Company, will pass upon certain material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the Depositary Shares and the PERCS and certain legal matters
with respect to the liquidation preference of the PERCS. Ms. Ford owns and has
options to purchase shares of Common Stock which represent less than 0.1% of the
currently outstanding shares of Common Stock. A member of Simpson Thacher &
Bartlett owns shares of Common Stock which represent less than 0.1% of the
currently outstanding shares of Common Stock. Davis Polk & Wardwell has in the
past provided, and continues to provide, legal services to the Company and its
affiliates.
EXPERTS
The consolidated financial statements of the Company and RJRN as of
December 31, 1993 and 1992 and for each of the three years in the period ended
December 31, 1993 included and incorporated by reference herein in this
Prospectus have been audited by Deloitte & Touche, independent auditors, as
stated in their reports, which are included and incorporated by reference
herein, and have been so included and incorporated by reference herein in
reliance upon such reports given upon the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and also are available for inspection and copying at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and
other information also can be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005, on which exchange certain
of the Company's securities are listed.
This Prospectus constitutes a part of a Registration Statement filed by the
Company with the Commission under the Securities Act of 1933, as amended. This
Prospectus omits certain of the information contained in the Registration
Statement in accordance with the rules and regulations of the Commission.
Reference is hereby made to the Registration Statement and related exhibits for
further information with respect to the Company. Statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
--------------
Report of Deloitte & Touche, Independent Auditors............. F-1
Summary of Significant Accounting Policies.................. F-2
Consolidated Statements of Income and Retained Earnings--
Years Ended December 31, 1993, 1992 and 1991.............. F-3
Consolidated Statements of Cash Flows--Years Ended
December 31, 1993, 1992 and 1991.......................... F-4
Consolidated Balance Sheets--December 31, 1993 and 1992..... F-5
Notes to Consolidated Financial Statements.................. F-6-F-32
54
<PAGE>
REPORT OF DELOITTE & TOUCHE, INDEPENDENT AUDITORS
RJR Nabisco Holdings Corp.:
RJR Nabisco, Inc.:
We have audited the accompanying consolidated balance sheets of RJR Nabisco
Holdings Corp. ("Holdings") and RJR Nabisco, Inc. ("RJRN") as of December 31,
1993 and 1992, and the related consolidated statements of income and retained
earnings and cash flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the companies'
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
misstatements. 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Holdings and RJRN
at December 31, 1993 and 1992, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
New York, New York
February 1, 1994 (except with respect
to the subsequent event discussed in
Note 17, as to which the date is
February 24, 1994)
F-1
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED FINANCIAL STATEMENTS
The Summary of Significant Accounting Policies below and the notes to
consolidated financial statements on pages F-6 through F-32 are integral parts
of the accompanying consolidated financial statements of RJR Nabisco Holdings
Corp. ("Holdings") and RJR Nabisco, Inc. ("RJRN" and, collectively with
Holdings, the "Registrants") (the "Consolidated Financial Statements").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This Summary of Significant Accounting Policies is presented to assist in
understanding the Consolidated Financial Statements included in this report.
These policies conform to generally accepted accounting principles.
Consolidation
Consolidated Financial Statements include the accounts of each Registrant
and its subsidiaries.
Cash Equivalents
Cash equivalents include all short-term, highly liquid investments that are
readily convertible to known amounts of cash and so near maturity that they
present an insignificant risk of changes in value because of changes in interest
rates.
Inventories
Inventories are stated at the lower of cost or market. Various methods are
used for determining cost. The cost of U.S. tobacco inventories is determined
principally under the LIFO method. The cost of remaining inventories is
determined under the FIFO, specific lot and weighted average methods. In
accordance with recognized trade practice, stocks of tobacco, which must be
cured for more than one year, are classified as current assets.
Depreciation
Property, plant and equipment are depreciated principally by the
straight-line method.
Trademarks and Goodwill
Values assigned to trademarks are based on appraisal reports and are
amortized on the straight-line method over a 40 year period. Goodwill is also
amortized on the straight-line method over a 40 year period.
Other Income (Expense), Net
Interest income, gains and losses on foreign currency transactions and
other financial items are included in "Other income (expense), net".
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income
Taxes, and are calculated for each Registrant on a separate return basis.
Postretirement Benefits Other Than Pensions
Postretirement benefits other than pensions are accounted for under the
provisions of Statement of Financial Accounting Standards No. 106 ("SFAS No.
106"), Employers' Accounting for Postretirement Benefits Other Than Pensions.
Postemployment Preretirement Benefits
Postemployment preretirement benefits are accounted for under the
provisions of Statement of Financial Accounting Standards No. 112 ("SFAS No.
112"), Employers' Accounting for Postemployment Benefits.
Excise Taxes
Excise taxes are excluded from "Net sales" and "Cost of products sold".
Reclassifications and Restatements
Certain reclassifications have been made to prior years' amounts to conform
to the 1993 presentation.
F-2
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
----------------------- ----------------------- ---------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
------------ --------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES (NOTE 1)............................... $ 15,104 $ 15,104 $ 15,734 $ 15,734 $ 14,989 $ 14,989
------------ --------- ------------ --------- ---------- ---------
Costs and expenses (Note 1):
Cost of products sold.......................... 6,640 6,640 6,326 6,326 6,088 6,088
Selling, advertising, administrative and
general expenses............................. 5,731 5,723 5,788 5,776 5,358 5,345
Amortization of trademarks and goodwill........ 625 625 616 616 609 609
Restructuring expense.......................... 730 730 106 106 -- --
------------ --------- ------------ --------- ---------- ---------
OPERATING INCOME.......................... 1,378 1,386 2,898 2,910 2,934 2,947
Interest expense (Notes 8 and 10)................ (1,190) (1,167) (1,429) (1,340) (2,113) (2,030)
Amortization of debt issuance costs.............. (19) (19) (20) (19) (104) (110)
Other income (expense), net (Note 1)............. (58) (88) 7 (75) (69) (157)
------------ --------- ------------ --------- ---------- ---------
Income before income taxes................ 111 112 1,456 1,476 648 650
Provision for income taxes (Note 3).............. 114 116 680 693 280 301
------------ --------- ------------ --------- ---------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... (3) (4) 776 783 368 349
Extraordinary item--loss on early extinguishments
of debt, net of income taxes (Note 4).......... (142) (135) (477) (464) -- --
------------ --------- ------------ --------- ---------- ---------
NET INCOME (LOSS)......................... (145) (139) 299 319 368 349
Less preferred stock dividends................... 68 -- 31 -- 173 --
------------ --------- ------------ --------- ---------- ---------
Net income (loss) applicable to common
stock................................. (213) (139) 268 319 195 349
Retained earnings (accumulated deficit) at
beginning of period............................ (738) (320) (1,037) (639) (1,405) (988)
Add preferred stock dividends charged to paid-in
capital........................................ 68 -- 31 -- 173 --
------------ --------- ------------ --------- ---------- ---------
RETAINED EARNINGS (ACCUMULATED DEFICIT) AT END OF
PERIOD (NOTE 13)............................... $ (883) $ (459) $ (738) $ (320) $ (1,037) $ (639)
------------ --------- ------------ --------- ---------- ---------
------------ --------- ------------ --------- ---------- ---------
Net income (loss) per common and common
equivalent share:
Income (loss) before extraordinary item........ $ (.05) -- $ 0.55 -- $ 0.22 --
Extraordinary item............................. (.10) -- (0.35) -- -- --
------------ --------- ------------ --------- ---------- ---------
Net income (loss)......................... $ (.15) -- $ 0.20 -- $ 0.22 --
------------ --------- ------------ --------- ---------- ---------
------------ --------- ------------ --------- ---------- ---------
Dividends per share of Series A Preferred Stock
(Note 12)...................................... $ 3.34 -- $ 3.34 -- $ 0.49 --
Average number of common and common equivalent
shares outstanding (in thousands)(Note 2)...... 1,349,196 -- 1,363,549 -- 887,622 --
------------ --------- ------------ --------- ---------- ---------
------------ --------- ------------ --------- ---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
-------------------- -------------------- --------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES (NOTE 5).. $ 1,769 $ 1,604 $ 2,307 $ 2,455 $ 1,971 $ 1,981
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures............................. (615) (615) (519) (519) (459) (459)
Proceeds from dispositions of businesses......... 450 450 -- -- 98 98
Acquisition of businesses........................ (128) (128) (385) (385) -- --
Other, net....................................... 32 32 11 11 20 20
--------- --------- --------- --------- --------- ---------
Net cash flows from (used in) investing
activities................................... (261) (261) (893) (893) (341) (341)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt......... 25,747 25,747 19,179 19,179 7,079 7,079
Repayments of long-term debt..................... (28,031) (27,483) (20,622) (20,371) (11,597) (11,597)
Increase (decrease) in notes payable............. (24) (24) (25) (25) 46 46
Proceeds from issuance of common stock and
exercise of warrants........................... 9 -- 1 -- 1,300 --
Proceeds from issuance of Series A Preferred
Stock.......................................... -- -- -- -- 2,126 --
Proceeds from issuance of Series B Preferred
Stock.......................................... 1,250 -- -- -- -- --
Financing and advisory fees paid................. (48) (9) (35) (33) (227) (81)
Capital contributions from/issuance of common
stock to parent................................ -- 1,214 -- -- -- 3,454
Dividends paid to parent......................... -- (48) -- (278) -- --
Preferred stock dividends paid................... (241) -- (214) -- (205) --
Repurchase of Preferred Stock.................... (105) -- -- -- -- --
Repurchases and cancellations of common stock,
stock options and warrants..................... (1) -- (89) -- (4) --
Other, net--including intercompany transfers..... 62 (621) 62 (363) (12) (191)
--------- --------- --------- --------- --------- ---------
Net cash flows from (used in) financing
activities................................... (1,382) (1,224) (1,743) (1,891) (1,494) (1,290)
--------- --------- --------- --------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents.................................. (10) (10) (6) (6) (25) (25)
--------- --------- --------- --------- --------- ---------
Net change in cash and cash equivalents........ 116 109 (335) (335) 111 325
Cash and cash equivalents at beginning of period... 99 96 434 431 323 106
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of period......... $ 215 $ 205 $ 99 $ 96 $ 434 $ 431
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE><CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
-------------------- --------------------
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 5)....................................... $ 215 $ 205 $ 99 $ 96
Accounts and notes receivable, net (Notes 1 and 5)....................... 856 847 1,356 1,333
Inventories (Note 6)..................................................... 2,700 2,700 2,776 2,776
Prepaid expenses and excise taxes........................................ 374 374 345 345
--------- --------- --------- ---------
TOTAL CURRENT ASSETS................................................ 4,145 4,126 4,576 4,550
--------- --------- --------- ---------
Property, plant and equipment--at cost..................................... 7,166 7,166 6,515 6,515
Less accumulated depreciation.............................................. (1,998) (1,998) (1,657) (1,657)
--------- --------- --------- ---------
Net property, plant and equipment (Note 7)............................... 5,168 5,168 4,858 4,858
--------- --------- --------- ---------
Trademarks, net of accumulated amortization of $1,223 and $972,
respectively............................................................. 8,727 8,727 8,959 8,959
Goodwill, net of accumulated amortization of $1,767 and $1,395,
respectively............................................................. 12,851 12,851 13,062 13,062
Other assets and deferred charges.......................................... 404 400 586 581
--------- --------- --------- ---------
$ 31,295 $ 31,272 $ 32,041 $ 32,010
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 8)................................................... $ 301 $ 301 $ 298 $ 298
Accounts payable......................................................... 515 515 401 401
Accrued liabilities (Note 9)............................................. 2,751 2,705 2,468 2,425
Current maturities of long-term debt (Note 10)........................... 142 142 379 351
Income taxes accrued (Note 3)............................................ 234 234 300 300
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES........................................... 3,943 3,897 3,846 3,775
--------- --------- --------- ---------
Long-term debt (less current maturities) (Note 10)......................... 12,005 12,005 13,541 13,054
Other noncurrent liabilities............................................... 2,503 2,353 2,203 2,859
Deferred income taxes (Note 3)............................................. 3,774 3,701 4,075 3,978
Commitments and contingencies (Note 11)....................................
Stockholders' equity (Notes 12, 13 and 17):
Redeemable convertible preferred stock--4,032,968 shares issued and
outstanding at December 31, 1992....................................... -- -- 101 --
ESOP convertible preferred stock--15,573,973 and 15,625,000 shares issued
and outstanding at December 31, 1993 and 1992, respectively........... 249 -- 250 --
Series A convertible preferred stock--52,500,000 shares issued and
outstanding at December 31, 1993 and 1992.............................. 2 -- 2 --
Series B preferred stock--50,000 shares issued and outstanding at
December 31, 1993...................................................... 1,250 -- -- --
Common stock--1,138,011,292 and 1,134,648,542 shares issued and
outstanding at December 31, 1993 and 1992, respectively............... 11 -- 11 --
Paid-in capital.......................................................... 8,778 9,877 9,048 8,711
Cumulative translation adjustments....................................... (102) (102) (47) (47)
Retained earnings (accumulated deficit).................................. (883) (459) (738) (320)
Receivable from ESOP..................................................... (211) -- (227) --
Loans receivable from employees.......................................... (18) -- (24) --
Unamortized value of restricted stock.................................... (6) -- -- --
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY.......................................... 9,070 9,316 8,376 8,344
--------- --------- --------- ---------
$ 31,295 $ 31,272 $ 32,041 $ 32,010
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--OPERATIONS
Net sales and cost of products sold exclude excise taxes of $3.757 billion,
$3.560 billion and $3.715 billion for 1993, 1992 and 1991, respectively.
Operating income in the fourth quarter of 1993 was reduced by a $730
million restructuring expense for a program initiated at the domestic tobacco
operations ($355 million), the international tobacco operations ($189 million),
the food operations ($153 million) and Headquarters ($33 million). Such
restructuring program was undertaken in response to a changing consumer product
business environment and is expected to streamline operations and improve
profitability. Implementation of the program, although begun in the latter part
of 1993, will primarily occur in 1994. Approximately 75% of the restructuring
program will require cash outlays which will occur primarily in 1994 and early
1995. As an offset to the cash outlays, Holdings expects annual after-tax cash
savings of approximately $250 million.
The cost of providing severance pay and benefits for the reduction of
approximately 6,000 employees throughout the domestic and international food and
tobacco businesses is approximately $400 million of the charge and is primarily
a cash expense. The workforce reduction was undertaken in order to establish
fundamental changes to the cost structure of the domestic tobacco business in
the face of acute competitive activity in that business and to take advantage of
cost savings opportunities in other businesses through process efficiency
improvements. Legislation enacted during the third quarter of 1993 stipulates
that, effective January 1, 1994, financial penalties will be assessed against
manufacturers if cigarettes produced in the United States do not contain at
least 75% (by weight) of domestically grown flue cured and burly tobaccos. As a
result, the domestic and international tobacco businesses accrued approximately
$70 million of related restructuring charges resulting from a reassessment of
raw material sourcing and production arrangements. In addition, a shift in
pricing strategy designed to gain share of market by RJRT's largest competitor
has resulted in a redeployment of spending and changes in sales and distribution
strategies resulting in a restructuring charge of approximately $80 million
primarily related to contract termination costs. Abandonment of leases related
to the above changes in the businesses results in approximately $60 million of
restructuring charges. The remainder of the charge, approximately $120 million,
represents non-cash costs to rationalize and close manufacturing and sales
facilities in both the tobacco and food businesses to facilitate cost
improvements.
During the fourth quarter of 1992, operating income was reduced by a net
charge of $8 million as a result of a $106 million restructuring expense
recorded at the tobacco operations ($43 million) and the food operations ($63
million), partially offset by a $98 million gain recognized from the sale of
Holdings' ready-to-eat cold cereal business for $456 million in cash, prior to
post-closing adjustments. The restructuring expense was incurred in connection
with a restructuring plan at the tobacco operations, the purpose of which was to
improve productivity by realigning operations in the sales, manufacturing,
research and development, and administrative areas and a restructuring plan at
the food operations, the purpose of which was to reduce costs and improve
productivity by realigning sales operations and implementing a previously
announced voluntary separation program. The receivable established at December
31, 1992 for the sale of the ready-to-eat cold cereal business was collected on
January 4, 1993, except for certain escrow amounts which were subsequently
collected.
During the fourth quarter of 1991, net income was reduced by $28 million of
net charges included in "Other income (expense), net" as a result of the
write-off of $109 million of unamortized debt issuance costs and the recognition
of $144 million of unrealized losses from interest rate hedges related
F-6
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--OPERATIONS--(CONTINUED)
to the refinancing of the bank credit agreement of RJR Nabisco Capital Corp.
("Capital") dated as of January 31, 1989 (as amended, the "1989 Credit
Agreement") and the repayment of the $2.25 billion bank credit facility (as
amended, the "1990 Credit Agreement"), partially offset by a $225 million credit
for a change in estimated postretirement health care liabilities.
NOTE 2--EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock and Series A Depositary Shares (hereinafter defined) outstanding
during the period and common stock assumed to be outstanding to reflect the
effect of dilutive warrants and options. Holdings' other potentially dilutive
securities are not included in the earnings per share calculation because the
effect of excluding interest and dividends on such securities for the period
would exceed the earnings allocable to the common stock into which such
securities would be converted. Accordingly, Holdings' earnings per share and
fully diluted earnings per share are the same.
NOTE 3--INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------------------ ------------------------ ------------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal.......................................... $ 295 $ 366 $ 165 $ 115 $ 53 $ 20
Foreign and other................................ 169 169 216 216 206 202
----------- ----------- ----------- ----------- ----------- -----------
464 535 381 331 259 222
----------- ----------- ----------- ----------- ----------- -----------
Deferred:
Federal.......................................... (298) (367) 300 363 17 75
Foreign and other................................ (52) (52) (1) (1) 4 4
----------- ----------- ----------- ----------- ----------- -----------
(350) (419) 299 362 21 79
----------- ----------- ----------- ----------- ----------- -----------
Provision for income taxes......................... $ 114 $ 116 $ 680 $ 693 $ 280 $ 301
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
F-7
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INCOME TAXES--(CONTINUED)
The components of the deferred income tax liability disclosed on the
Consolidated Balance Sheet at December 31, 1993 included the following:
<TABLE><CAPTION>
DECEMBER 31, 1993
----------------------
HOLDINGS RJRN
----------- ---------
<S> <C> <C>
Deferred tax assets:
Pension liabilities.............................................................. $ (123) $ (123)
Other postretirement liabilities................................................. (342) (342)
Restructure and other accrued liabilities........................................ (325) (325)
----------- ---------
Total deferred tax assets................................................ (790) (790)
----------- ---------
Deferred tax liabilities:
Property and equipment........................................................... 1,154 1,154
Trademarks....................................................................... 2,913 2,913
Other............................................................................ 465 392
----------- ---------
Total deferred tax liabilities........................................... 4,532 4,459
----------- ---------
Net deferred tax liabilities before valuation allowance............... 3,742 3,669
Valuation allowance.............................................................. 32 32
----------- ---------
Net deferred income taxes........................................................ $ 3,774 $ 3,701
----------- ---------
----------- ---------
</TABLE>
Pre-tax income (loss) before extraordinary item for domestic and foreign
operations is shown in the following table:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
---------------------- ---------------------- ----------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Domestic (includes U.S. exports)................... $ (169) $ (168) $ 1,052 $ 1,072 $ 285 $ 287
Foreign............................................ 280 280 404 404 363 363
----------- --------- ----------- --------- ----------- ---------
Pre-tax income..................................... $ 111 $ 112 $ 1,456 $ 1,476 $ 648 $ 650
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
F-8
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INCOME TAXES--(CONTINUED)
The differences between the provision for income taxes and income taxes
computed at statutory U.S. federal income tax rates are explained as follows:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
---------------------- ---------------------- ----------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at statutory
U.S. federal income tax rates...... $ 39 $ 39 $ 495 $ 502 $ 220 $ 221
State taxes, net of federal ben-
efit............................... 23 23 54 54 60 57
Goodwill amortization................ 125 125 122 122 121 121
March 1991 Exchange Offer............ -- -- -- -- (104) (104)
Asset sale........................... -- -- 33 33 -- --
Federal rate change impact on
deferred income taxes................ 86 86 -- -- -- --
Change in estimate of the basis of
certain deferred tax amounts....... (108) (108) -- -- -- --
Taxes on foreign operations at rates
different than statutory U.S.
federal rate......................... (14) (14) 15 15 7 7
FSC income exclusion................. (14) (14) (10) (10) (5) (5)
Other items, net..................... (23) (21) (29) (23) (19) 4
----------- --------- ----------- --------- ----------- ---------
Provision for income taxes........... $ 114 $ 116 $ 680 $ 693 $ 280 $ 301
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Effective tax rate................... 102.7% 103.8% 46.7% 47.0% 43.2% 46.3%
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
At December 31, 1993, there was $1.242 billion of accumulated and
undistributed income of foreign subsidiaries. These earnings are intended by
management to be reinvested abroad indefinitely. Accordingly, no applicable U.S.
federal deferred income taxes or foreign withholding taxes have been provided
nor is a determination of the amount of unrecognized U.S. federal deferred
income taxes practicable.
At December 31, 1993, Holdings had cumulative minimum tax credit
carryforwards for U.S. federal tax purposes of $64 million.
Effective January 1, 1993, Holdings and RJRN adopted SFAS No. 109. SFAS No.
109 superseded Statement of Financial Accounting Standards No. 96, the method of
accounting for income taxes previously followed by the Registrants. The adoption
of SFAS No. 109 did not have a material impact on the financial statements of
either Holdings or RJRN.
Holdings' provision for income taxes for 1993 was increased by $96 million
as a result of the enactment of certain federal tax legislation during the third
quarter of 1993 which increased federal corporate income tax rates to 35% from
34%, retroactively to January 1, 1993. The components of this
F-9
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INCOME TAXES--(CONTINUED)
increase to Holdings' provision for income taxes included an $86 million
non-cash charge resulting primarily from the remeasurement of the balance of
deferred federal income taxes at the date of enactment of the new federal tax
legislation for the change in the income tax rates, and a $10 million charge
resulting from the increase in current federal income taxes accrued for the
change in the income tax rates and other effects of the new tax legislation.
Also during 1993, Holdings' provision for income taxes was decreased by a $108
million credit resulting from a remeasurement of the balance of deferred income
taxes for a change in estimate of the basis of certain deferred tax amounts
relating primarily to international operations.
During 1993, $101 million of previously recognized deferred income tax benefits
for operating loss carryforwards ($36 million), minimum tax credit carryforwards
($44 million) and other carryforward items ($21 million) were realized for U.S.
federal tax purposes.
NOTE 4--EXTRAORDINARY ITEM
The extinguishments of debt of Holdings and RJRN resulted in the following
extraordinary losses:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1992
---------------------- ----------------------
HOLDINGS RJRN HOLDINGS RJRN
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Cash paid in excess of net carrying amount (book value) of debentures
extinguished........................................................... $ (206) $ (196) $ (636) $ (616)
Write-off of debt issuance costs......................................... (12) (12) (40) (40)
----------- --------- ----------- ---------
Extraordinary item--loss on early extinguishments of debt before income
taxes.................................................................. (218) (208) (676) (656)
Benefit for income taxes................................................. 76 73 199 192
----------- --------- ----------- ---------
Extraordinary item--loss on early extinguishments of debt, net of income
taxes.................................................................. $ (142) $ (135) $ (477) $ (464)
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
F-10
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION
A reconciliation of net income (loss) to net cash flows from operating
activities follows:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
---------------------- ---------------------- ----------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)............................... $ (145) $ (139) $ 299 $ 319 $ 368 $ 349
----------- --------- ----------- --------- ----------- ---------
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation of property, plant and
equipment.................................... 448 448 455 455 441 441
Amortization (principally intangibles)....... 701 701 691 691 683 683
Deferred income tax provision (benefit)...... (350) (419) 299 362 21 79
Non-cash interest expense.................... 276 254 434 356 787 703
Amortization of debt issuance costs.......... 19 19 20 19 104 110
Extraordinary item--loss on early
extinguishments of debt.................... 218 208 676 656 -- --
Gain on sale of ready-to-eat cold cereal
business................................... -- -- (98) (98) -- --
(Increase) decrease in accounts and notes
receivable................................. 75 84 (180) (180) (161) (139)
(Increase) decrease in inventories........... 80 80 (102) (102) (23) (23)
(Increase) decrease in prepaid expenses and
excise taxes............................... (37) (37) (53) (53) 5 5
(Increase) decrease in other assets and
deferred charges........................... (4) 43 (186) (185) 54 57
Increase (decrease) in accounts payable and
accrued liabilities........................ 308 312 70 84 (279) (290)
Increase (decrease) in income taxes
accrued.................................... (53) 54 38 128 (90) (125)
Increase (decrease) in other noncurrent
liabilities................................ 215 24 (110) (96) 10 15
Other, net................................... 18 (28) 54 99 51 116
----------- --------- ----------- --------- ----------- ---------
Total adjustments....................... 1,914 1,743 2,008 2,136 1,603 1,632
----------- --------- ----------- --------- ----------- ---------
Net cash flows from operating activities..... $ 1,769 $ 1,604 $ 2,307 $ 2,455 $ 1,971 $ 1,981
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
Cash payments for income taxes and interest were as follows:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------------------ ---------------------- ----------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
----------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income taxes paid, net of refunds................... $ 408 $ 408 $ 116 $ 116 $ 368 $ 368
Interest paid....................................... $ 912 $ 912 $ 1,102 $ 1,102 $ 1,397 $ 1,397
</TABLE>
F-11
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION--(CONTINUED)
Cash equivalents at December 31, 1993 and 1992, valued at cost (which
approximates market value), totaled $215 million and $99 million, respectively,
and consisted principally of domestic and Eurodollar time deposits and
certificates of deposit.
At December 31, 1993 and 1992, cash of $62 million and $63 million,
respectively, was held in escrow as collateral for letters of credit issued in
connection with certain foreign currency debt.
On February 7, 1990, RJRN entered into an arrangement in which it agreed to
sell for cash substantially all of its domestic trade accounts receivable
generated during a five-year period to a financial institution. Pursuant to
amendments entered into in 1992, the length of the receivable program was
extended an additional year. The accounts receivable have been and will continue
to be sold with limited recourse at purchase prices reflecting the rate
applicable to the cost to the financial institution of funding its purchases of
accounts receivable and certain administrative costs. During 1993, 1992 and
1991, total proceeds of approximately $8.2 billion, $8.5 billion and $8.7
billion, respectively, were received by RJRN in connection with this
arrangement. At December 31, 1993 and 1992, the accounts receivable balance has
been reduced by approximately $437 million and $352 million, respectively, due
to the receivables sold.
For information regarding certain non-cash financing activities, see Notes
10 and 12 to the Consolidated Financial Statements.
NOTE 6--INVENTORIES
The major classes of inventory are shown in the table below:
<TABLE><CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
Finished products....................................................... $ 771 $ 730
Leaf tobacco............................................................ 1,458 1,501
Raw materials........................................................... 208 222
Other................................................................... 263 323
------------- -------------
$ 2,700 $ 2,776
------------- -------------
------------- -------------
</TABLE>
At December 31, 1993 and 1992, approximately $1.4 billion of inventory was
valued under the LIFO method. The current cost of LIFO inventories at December
31, 1993 and 1992 was greater than the amount at which these inventories were
carried on the Consolidated Balance Sheets by $284 million and $277 million,
respectively.
For the years ended December 31, 1993, 1992 and 1991, net income was
increased by $6 million, $4 million, and $9 million, respectively, as a result
of LIFO inventory liquidations. The LIFO liquidations resulted from programs to
reduce leaf durations consistent with forecasts of future operating
requirements.
F-12
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment were as follows:
<TABLE><CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
Land and land improvements.............................................. $ 308 $ 277
Buildings and leasehold improvements.................................... 1,771 1,682
Machinery and equipment................................................. 4,624 4,086
Construction-in-process................................................. 463 470
------------- -------------
7,166 6,515
Less accumulated depreciation........................................... (1,998) (1,657)
------------- -------------
Net property, plant and equipment.................................. $ 5,168 $ 4,858
------------- -------------
------------- -------------
</TABLE>
NOTE 8--NOTES PAYABLE
Notes payable consisted of the following:
<TABLE><CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
--------------- ---------------
<S> <C> <C>
Notes payable to foreign banks.......................................... $ 301 $ 280
Foreign commercial paper................................................ -- 18
------ ------
$ 301 $ 298
------ ------
------ ------
</TABLE>
NOTE 9--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE><CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
Marketing and advertising............................................... $ 643 $ 645
Payroll and employee benefits........................................... 325 291
Excise taxes............................................................ 226 322
Accrued interest........................................................ 260 236
Restructuring........................................................... 377 124
Other................................................................... 920 850
------------- -------------
$ 2,751 $ 2,468
------------- -------------
------------- -------------
</TABLE>
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE
Interest expense consisted of the following:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Cash interest................................................. $ 914 $ 995 $ 1,326
Non-cash interest............................................. 276 434 787
------------- ------------- -------------
$ 1,190 $ 1,429 $ 2,113
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-13
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
Long-term debt consisted of the following:
<TABLE><CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------ ----------------------
DUE DUE DUE DUE
WITHIN AFTER WITHIN AFTER
ONE YEAR ONE YEAR(1) ONE YEAR ONE YEAR
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
RJRN Debt:
7 3/8-9 3/8% Debentures with annual sinking fund payments through
2017 (net of $160 million and $162 million of such debentures
held by RJRN on December 31, 1993 and 1992, respectively, for
future sinking fund requirements, and $137 million of such
debentures held by Holdings on December 31, 1992)............... $ -- $ 1,464 $ 216 $ 1,572
5.09-10.5% Notes, due 1995 through 2013............................ -- 6,631 100 4,655
5.375-10%, Foreign Currency Debt, due 1994 to 2001................. 123 472 -- 605
1991 Credit Agreement, variable interest (varies with prime rate
and LIBOR--weighted average interest rate of 3.94% at December
31, 1993), due December 31, 1996(2)............................. -- 328 -- 2,831
Commercial paper(3)................................................ -- 913 -- 571
Other indebtedness................................................. 19 247 35 239
Subordinated Debentures:
15% Subordinated Debentures, net of discount of $18 million and $27
million at December 31, 1993 and 1992, respectively, effective
interest rate of 15.88%, interest payable-in-kind or cash, at
the option of RJRN, until May 15, 1994, cash payment thereafter,
sinking fund requirements beginning 1999, due 2001.............. -- 280 -- 423
Subordinated Discount Debentures, net of discount of $133 million
and $495 million at December 31, 1993 and 1992, respectively,
effective interest rate of 15.88%, interest payable-in-kind
until May 15, 1994, cash payment thereafter, sinking fund
requirements beginning 1999, due 2001........................... -- 1,393 -- 1,799
Other Subordinated Debentures, fixed rate of 13 1/2%, due 2001..... -- 277 -- 359
----------- ----------- ----------- ---------
RJRN(4)....................................................... 142 12,005 351 13,054
</TABLE>
F-14
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
<TABLE><CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------ ----------------------
DUE DUE DUE DUE
WITHIN AFTER WITHIN AFTER
ONE YEAR ONE YEAR(1) ONE YEAR ONE YEAR
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Holdings Debt:
Converting Debentures, fixed rate of 17 3/8%, interest
payable-in-kind or cash at Holdings' option through May 1, 1999,
cash payment thereafter, convertible into Holdings' Common Stock
on April 30, 1993, otherwise due 2009........................... -- -- -- 413
11.68% ESOP participation.......................................... -- -- 28 74
----------- ----------- ----------- ---------
Holdings...................................................... $ 142 $ 12,005 $ 379 $ 13,541
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
</TABLE>
- ---------------
(1) The payment of debt through December 31, 1998 is due as follows (in
millions): 1995--$617; 1996--$465; 1997--$70 and 1998--$1,714.
(2) RJRN maintains a revolving credit facility of $6.5 billion of which $6.2
billion was unused at December 31, 1993. At December 31, 1993, availability
of the unused portion is reduced by $456 million for the extension of
irrevocable letters of credit which support the principal and interest on
certain existing foreign debt of RJRN and its subsidiaries. A commitment fee
of 1/4% per annum is payable on the unused portion of the facility.
(3) RJRN maintains a back-up line of credit to support commercial paper
issuances of up to $1 billion. Commercial paper outstanding in excess of $1
billion is supported by the 1991 Credit Agreement.
(4) As a result of RJRN's management of its interest rate exposure through
swaps, options, caps, and other interest rate arrangements, the effective
interest rate on certain debt may differ from that disclosed in the table.
------------------------
During 1991, Holdings entered into the following refinancing transactions:
(i) the repayment on March 11, 1991 of the aggregate principal amount
outstanding of a subordinated promissory note held by a limited partnership
affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR") plus accrued and
unpaid interest thereon for a total of approximately $468 million in cash from
borrowings under the revolving credit portion of the 1989 Credit Agreement, (ii)
the issuance by Capital on April 25, 1991 of $1.5 billion principal amount of 10
1/2% Senior Notes due 1998 (the "10 1/2% Senior Notes") (the "Senior Note
Offering") and the repayment of a portion of the amount outstanding under the
1990 Credit Agreement with a portion of the net proceeds from the Senior Note
Offering equal to approximately $731 million in cash, (iii) the redemption on
June 3, 1991 of 100% of the aggregate principal amount of all outstanding
Subordinated Exchange Debentures Due 2007 of RJR Nabisco Holdings Group, Inc.
("Group") equal to approximately $1.86 billion plus accrued and unpaid interest
thereon to the redemption date with (a) an additional portion of the net
proceeds from the Senior Note Offering and (b) the entire net proceeds from the
issuance by Holdings on April 18, 1991 of 115,000,000 shares of common stock of
Holdings, par value $.01 per share (the "Common Stock") at $11.25 per share,
(iv) open market purchases of certain of Capital's debentures totalling
approximately $128 million with the remaining net proceeds from the Senior Note
Offering, (v) the exchange by Holdings of 3.8 shares of Common Stock for each of
the 67,997,769 shares of Cumulative Convertible Preferred Stock (the "Preferred
Stock") exchanged pursuant to an exchange offer commenced on November 7, 1991
and completed on December 7, 1991, (vi) the issuance by Holdings on November 8,
1991 of 52,500,000 shares of Series A Conversion Preferred Stock, par value .01
per share ("Series A Preferred Stock") of Holdings and the sale of 210,000,000
$ .835 depositary shares ("Series A Depositary
F-15
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
Shares") at $10.125 per Series A Depositary Share in connection with such
issuance (the "Series A Preferred Stock Offering"), (vii) the repayment of the
aggregate amount outstanding under the 1990 Credit Agreement, the repayment of a
portion of the amount outstanding under the 1989 Credit Agreement and the
redemption of certain notes of RJRN with the net proceeds from the Series A
Preferred Stock Offering equal to approximately $2.1 billion and (viii) the
repayment by Capital on December 19, 1991 of the aggregate amount outstanding
under the working capital facility, revolving credit facility and term loan
portions of the 1989 Credit Agreement with approximately $3.3 billion in cash
from borrowings under a $6.5 billion bank credit facility (as amended, the "1991
Credit Agreement").
On May 15, 1992, Capital merged with and into its wholly-owned subsidiary,
RJRN. As a result of the merger, Group became the direct parent of RJRN and RJRN
assumed all of the obligations of Capital under the 1991 Credit Agreement and
with respect to the following debt securities: Subordinated Discount Debentures
due May 15, 2001 (the "Subordinated Discount Debentures"); 15% Payment-in-Kind
Subordinated Debentures due May 15, 2001 (the "15% Subordinated Debentures"); 13
1/2% Subordinated Debentures due May 15, 2001 (the "13 1/2% Subordinated
Debentures" and, collectively with the Subordinated Discount Debentures and the
15% Subordinated Debentures, the "Subordinated Debentures"); 10 1/2% Senior
Notes; 8.30% Senior Notes due April 15, 1999 (the "8.30% Senior Notes"); and
8.75% Senior Notes due April 15, 2004 (the "8.75% Senior Notes" and,
collectively with the 8.30% Senior Notes, the "1992 Senior Notes"). Prior to
this merger, RJRN had guaranteed all of Capital's obligations with respect to
such indebtedness, and the financial statements of RJRN had reflected such
indebtedness and all debt related costs.
On December 17, 1992, Group merged with and into its wholly-owned
subsidiary, RJRN.
Also during 1992, Holdings entered into the following refinancing
transactions: (i) the redemption on February 15, 1992 of $250 million principal
amount of Capital's Subordinated Floating Rate Notes due 1999 (the "Subordinated
Floating Rate Notes") at a price of $1,005 for each $1,000 principal amount of
Subordinated Floating Rate Notes plus accrued and unpaid interest thereon, (ii)
the early extinguishments by Capital of approximately $1 billion aggregate
principal amount of certain of Capital's subordinated debentures in a privately
negotiated transaction (the "1992 Capital Debenture Repurchase") for
approximately $995 million in cash, consisting of $165 million aggregate
principal amount of its 15% Subordinated Debentures, $85 million aggregate
principal amount of its 13 1/2% Subordinated Debentures and $750 million
aggregate principal amount (approximately $550 million accreted amount) of its
Subordinated Discount Debentures, (iii) the issuance by Capital on April 9, 1992
of $600 million principal amount of 8.30% Senior Notes and $600 million
principal amount of 8.75% Senior Notes and the application of substantially all
of the net proceeds from the issuance of the 1992 Senior Notes to repay a
portion of the funds temporarily drawn under the 1991 Credit Agreement for the
redemption of the Subordinated Floating Rate Notes and for the 1992 Capital
Debenture Repurchase, (iv) the retirement on May 15, 1992 of $225 million
aggregate principal amount of Capital's Subordinated Extendible Reset Debentures
due May 15, 1991 (the "Subordinated Reset Debentures") at a price of $1,010 for
each $1,000 principal amount of Subordinated Reset Debentures plus accrued and
unpaid interest thereon with the remaining proceeds available from the 1992
Senior Notes plus temporary borrowings under the 1991 Credit Agreement, which
were repaid with proceeds of medium-term notes and (v) the additional
repurchases during 1992 for approximately $1.822 billion in cash of certain of
RJRN's subordinated debentures consisting of $690 million aggregate principal
amount of its 15% Subordinated Debentures, $81 million aggregate principal
amount of its 13 1/2%
F-16
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
Subordinated Debentures and $941 million aggregate principal amount
(approximately $728 million accreted amount) of its Subordinated Discount
Debentures. The principal or accreted amount of the debentures in item (v) was
refinanced with proceeds of debt securities maturing in the years 1999-2004. The
purchase of most of such amount had been temporarily funded with borrowings
under the 1991 Credit Agreement. Also during 1992, Holdings repurchased $126
million aggregate principal amount (approximately $209 million including accrued
interest) of its Senior Converting Debentures due 2009 (the "Converting
Debentures") for $229 million in cash, and RJRN repurchased $229 million
aggregate principal amount of various other debentures for $240 million in cash.
The funds for the repurchase of Converting Debentures and various other
debentures of RJRN and for a portion of the purchase price of the Subordinated
Debentures in item (v) were provided from the issuance of medium-term notes
maturing in the years 1995-1997, borrowings under the 1991 Credit Agreement and
cash flow from operations.
During 1993, RJRN repurchased for approximately $1.0 billion in cash
certain of its subordinated debentures consisting of $153 million aggregate
principal amount of its 15% Subordinated Debentures, $82 million aggregate
principal amount of its 13 1/2% Subordinated Debentures and $768 million
aggregate principal amount (approximately $671 million accreted amount) of its
Subordinated Discount Debentures. The principal or accreted amounts of such
debentures was refinanced from proceeds of debt securities maturing after 1998,
including debt securities issued during 1993. The purchase of most of such
amount had been temporarily funded with borrowings under the 1991 Credit
Agreement.
The remaining portion of the ESOP participation was repurchased on January
15, 1993 for cash, plus accrued and unpaid interest thereon.
Holdings redeemed on May 1, 1993, 100% of the aggregate principal amount of
its outstanding Converting Debentures at a price of $1,000 for each $1,000
principal amount of Converting Debentures, plus accrued and unpaid interest
thereon, for the period from February 9, 1989 through April 30, 1993, of $937.54
for each $1,000 principal amount of Converting Debentures.
During 1993, RJRN issued $750 million principal amount of 8% Notes due
2000, $500 million principal amount of 8 3/4% Notes due 2005 and $500 million
principal amount of 9 1/4% Debentures due 2013. Also during 1993, RJRN issued
medium-term notes maturing in the years 1995-1998 having an aggregate initial
offering price of approximately $230 million. The net proceeds from the sale of
debt securities and the Series B Preferred Stock Offering (as hereinafter
defined) have been or will be used for general corporate purposes, which include
refinancings of indebtedness, working capital, capital expenditures,
acquisitions and repurchases and redemptions of securities. Pending such uses,
proceeds may be used to repay indebtedness under RJRN's revolving credit
facilities or for short-term liquid investments.
A portion of the net proceeds collected from the sale of Holdings'
ready-to-eat cold cereal business was used on February 5, 1993 to redeem $216
million principal amount of RJRN's 9 3/8% Sinking Fund Debentures due 2016 (the
"9 3/8% Debenture") at a price of $1,065.63 for each $1,000 principal amount of
9 3/8% Debentures, plus accrued and unpaid interest thereon.
On April 5, 1993, the Registrants entered into a credit agreement (as
amended, the "1993 Credit Agreement" and together with the 1991 Credit
Agreement, the "Credit Agreements"), which matures on April 4, 1994 and provides
a back-up line of credit to support commercial paper issuances of up to $1
billion. Availability thereunder is reduced by an amount equal to the aggregate
amount of commercial
F-17
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
paper outstanding. At December 31, 1993, approximately $913 million of
commercial paper was outstanding. Accordingly, $87 million was available under
the 1993 Credit Agreement at December 31, 1993. Holdings and RJRN expect to
obtain bank consent to extend the maturity date of the 1993 Credit Agreement for
an additional 364 days.
Based on RJRN's intention and ability to continue to refinance, for more
than one year, the amount of its commercial paper borrowings outstanding either
in the commercial paper market or with additional borrowings under the 1991
Credit Agreement, the commercial paper borrowings have been included under
"Long-term debt".
As permitted by the governing indenture, RJRN intends to pay in cash the
May 15, 1994 interest payment due on its 15% Subordinated Debentures.
Accordingly, the interest accrued thereon as of December 31, 1993 has been
included in "Accrued liabilities".
Certain financing agreements to which Holdings is a party and debt
instruments of RJRN directly or indirectly restrict the payment of dividends by
Holdings. The Credit Agreements, which contain restrictions on the payment of
cash dividends or other distributions by Holdings in excess of certain specified
amounts, and the indentures relating to certain of RJRN's debt securities, which
contain restrictions on the payment of cash dividends or other distributions by
RJRN to Holdings in excess of certain specified amounts, or for certain
specified purposes, effectively limit the payment of dividends on the Common
Stock. In addition, the declaration and payment of dividends is subject to the
discretion of the board of directors of Holdings and to certain limitations
under Delaware law. The Credit Agreements and the indentures under which certain
debt securities of RJRN have been issued also impose certain operating and
financial restrictions on Holdings and its subsidiaries. These restrictions
limit the ability of Holdings and its subsidiaries to incur indebtedness, engage
in transactions with stockholders and affiliates, create liens, sell certain
assets and certain subsidiaries' stock, engage in certain mergers or
consolidations and make investments in unrestricted subsidiaries.
The estimated fair value of Holdings' consolidated long-term debt as of
December 31, 1993 and 1992 was approximately $12.4 billion and $14.9 billion,
respectively, based on available market quotes, discounted cash flows and book
values, as appropriate. The estimated fair value exceeded the carrying amount of
Holdings' long-term debt by approximately $400 million and $1.1 billion at
December 31, 1993 and 1992, respectively, as a result of the general decline in
market interest rates compared with the higher interest cost on certain of
Holdings' debt obligations. Considerable judgment was required in interpreting
market data to develop the estimates of fair value. In addition, the use of
different market assumptions and/or estimation methodologies may have had a
material effect on the estimated fair value amounts. Accordingly, the estimated
fair value of Holdings' consolidated long-term debt as of December 31, 1993 and
1992 is not necessarily indicative of the amounts that Holdings could realize in
a current market exchange.
NOTE 11--COMMITMENTS AND CONTINGENCIES
Various legal actions, proceedings and claims are pending or may be
instituted against R. J. Reynolds Tobacco Company ("RJRT") or its affiliates or
indemnities, including those claiming that lung cancer and other diseases have
resulted from the use of or exposure to RJRT's tobacco products. During 1993, 16
new actions were filed or served against RJRT and/or its affiliates or
indemnities and 18 such actions were dismissed or otherwise resolved in favor of
RJRT and/or its
F-18
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
affiliates or indemnities. A total of 35 such actions in the United States, one
in Puerto Rico and one against RJRT's Canadian subsidiary were pending on
December 31, 1993. As of February 7, 1994, 35 active cases were pending against
RJRT and/or its affiliates or indemnities, 33 in the United States, one in
Puerto Rico and one in Canada. Four of the 33 active cases in the United States
involve alleged non-smokers claiming injuries resulting from exposure to
environmental tobacco smoke. One of such cases is currently scheduled for trial
on September 5, 1994 and if tried, will be the first such case to reach trial.
One of the active cases is alleged to be a class action on behalf of a purported
class of 60,000 individuals.
The plaintiffs in these actions seek recovery on a variety of legal
theories, including strict liability in tort, design defect, negligence, breach
of warranty, failure to warn, fraud, misrepresentation and conspiracy. Punitive
damages, often in amounts totalling many millions of dollars, are specifically
pleaded in 20 cases in addition to compensatory and other damages. The defenses
raised by RJRT and/or its affiliates, where applicable, include preemption by
the Federal Cigarette Labeling and Advertising Act, as amended (the "Cigarette
Act") of some or all such claims arising after 1969; the lack of any defect in
the product; assumption of the risk; comparative fault; lack of proximate cause;
and statutes of limitations or repose. Juries have found for plaintiffs in two
smoking and health cases, but in one such case, which has been appealed by both
parties, no damages were awarded. The jury awarded plaintiffs $400,000 in the
other such case, Cipollone v. Liggett Group, Inc., et. al., which award was
overturned on appeal and the case was subsequently dismissed.
On June 24, 1992, the United States Supreme Court in Cipollone held that
claims that tobacco companies failed to adequately warn of the risks of smoking
after 1969 and claims that their advertising and promotional practices
undermined the effect of warnings after that date were preempted by the
Cigarette Act. The Court also held that claims of breach of express warranty,
fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's
decision was announced through a plurality opinion, and further definition of
how Cipollone will apply to other cases must await rulings in those cases.
Certain legislation proposed in recent years in Congress, among other
things, would eliminate any such preemptive effect on common law damage actions
for personal injuries. RJRT is unable to predict whether such legislation will
be enacted, if so, in what form, or whether such legislation would be intended
by Congress to apply retroactively. The Supreme Court's Cipollone decision
itself, or the passage of such legislation, could increase the number of cases
filed against cigarette manufacturers, including RJRT.
RJRT understands that a grand jury investigation being conducted in the
Eastern District of New York is examining possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research-USA,
Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this
investigation.
RJRT recently received a civil investigative demand from the U.S.
Department of Justice requesting broad documentary information from RJRT.
Although the request appears to focus on tobacco industry activities in
connection with product development efforts, it also requests general
information concerning contacts with competitors. RJRT is unable to predict the
outcome of this investigation.
Litigation is subject to many uncertainties, and it is possible that some
of the legal actions, proceedings or claims could be decided against RJRT or its
affiliates or indemnities. Determinations of
F-19
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
liability or adverse rulings against other cigarette manufacturers that are
defendants in similar actions, even if such rulings are not final, could
adversely affect the litigation against RJRT and its affiliates or indemnities
and increase the number of such claims. Although it is impossible to predict the
outcome of such events or their effect on RJRT, a significant increase in
litigation activities could have an adverse effect on RJRT. RJRT believes that
it has a number of valid defenses to any such actions, including but not limited
to those defenses based on preemption under the Cipollone decision, and RJRT
intends to defend vigorously all such actions.
The Registrants believe that the ultimate outcome of all pending litigation
matters should not have a material adverse effect on either of the Registrants'
financial position; however, it is possible that the results of operations or
cash flows of the Registrants in a particular quarterly or annual period could
be materially affected by the ultimate outcome of certain pending litigation
matters. Management is unable to derive a meaningful estimate of the amount or
range of such possible loss in any particular quarterly or annual period or in
the aggregate.
COMMITMENTS
At December 31, 1993, other commitments totalled approximately $556
million, principally for minimum operating lease commitments, the purchase of
machinery and equipment and other contractual arrangements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT CONCENTRATIONS
OF CREDIT RISK
Certain financial instruments with off-balance sheet risk have been entered
into by the RJRN to manage its interest rate and foreign currency exposures.
Interest Rate Arrangements
At December 31, 1993 and 1992, RJRN had outstanding interest rate swaps,
options, caps and other interest rate arrangements with financial institutions
having a total notional principal amount of $5.7 billion and $5.2 billion,
respectively. The arrangements at December 31, 1993 mature as follows:
1994--$2.7 billion; 1995--$1.1 billion; 1996--$1.1 billion; 1997--$450 million
and 1998 $350 million, respectively. The estimated fair value of these
arrangements as of December 31, 1993 and 1992 was favorable by approximately $37
million and unfavorable by approximately $1 million, respectively, based on
calculations from independent third parties for similar arrangements.
Because interest rate swaps and purchased options and other interest rate
arrangements effectively hedge interest rate exposures, the differential to be
paid or received is accrued and recognized in interest expense as market
interest rates change. If an arrangement is terminated prior to maturity, then
the realized gain or loss is recognized over the remaining original life of the
agreement if the hedged item remains outstanding, or immediately, if the
underlying hedged instrument does not remain outstanding. If the arrangement is
not terminated prior to maturity, but the underlying hedged instrument is no
longer outstanding, then the unrealized gain or loss on the related interest
rate swap, option, cap or other interest rate arrangement is recognized
immediately. In addition, for written options and other similar interest rate
arrangements that are entered into to manage interest rate exposure, changes in
market value of such instruments would result in the current recognition of any
related gains or losses.
F-20
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Foreign Currency Arrangements
At December 31, 1993 and 1992, RJRN had outstanding forward foreign
exchange contracts with banks to purchase or sell an aggregate notional
principal amount of $476 million and $566 million, respectively. The estimated
fair value of these arrangements as of December 31, 1993 and 1992 was favorable
by approximately $3 million and $4 million, respectively, based on calculations
from independent third parties for similar arrangements.
The forward foreign exchange contracts and other hedging arrangements
entered into by RJRN generally mature at the time the hedged foreign currency
transactions are settled. Gains or losses on forward foreign currency
transactions are determined by changes in market rates and are generally
included at settlement in the basis of the underlying hedged transaction. To the
extent that the foreign currency transaction does not occur, gains and losses
are recognized immediately.
The above interest rate and foreign currency arrangements entered into by
RJRN involve, to varying degrees, elements of market risk as a result of
potential changes in future interest and foreign currency exchange rates. To the
extent that the financial instruments entered into remain outstanding as
effective hedges of existing interest rate and foreign currency exposure, the
impact of such potential changes in future interest and foreign currency
exchange rates on the financial instruments entered into would offset the
related impact on the items being hedged. Also, RJRN may be exposed to credit
losses in the event of non-performance by the counterparties to these financial
instruments. However, RJRN continually monitors its positions and the credit
rating of its counterparties and therefore, does not anticipate any
non-performance.
There are no significant concentrations of credit risk with any individual
counterparties or groups of counterparties as a result of any financial
instruments entered into including those financial instruments discussed above.
F-21
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL
The changes in Common Stock and paid-in capital are shown as follows:
<TABLE><CAPTION>
1993 1992
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ----------- -------------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Common Stock--$0.01 par value--authorized
1,500,000,000 shares at December 31, 1993:
Balance at beginning of year..................... 1,134,648,542 $ 11 1,121,658,569 $ 11
Shares issued during the period.................. 3,692,911 -- 13,117,248 --
Management shares repurchased and
cancelled...................................... (330,161) -- (127,275) --
-------------- ----------- -------------- -----------
Balance at end of year....................... 1,138,011,292 $ 11 1,134,648,542 $ 11
-------------- ----------- -------------- -----------
-------------- ----------- -------------- -----------
Paid-in capital:
Balance at beginning of year..................... $ 9,048 $ 9,352
Shares issued during the period, net of stock
issuance costs................................. (16) (8)
Tax benefits recorded on shares issued to
management and ESOP shares allocated........... 3 4
Issuance of Series A Preferred Stock............. -- --
Management shares and stock options repurchased
and cancelled.................................. (2) (6)
Preferred stock dividends........................ (246) (207)
Warrants repurchased and cancelled............... -- (87)
Other............................................ (9) --
----------- -----------
Balance at end of year....................... $ 8,778 $ 9,048
----------- -----------
----------- -----------
</TABLE>
<TABLE><CAPTION>
1991
----------------------------
SHARES AMOUNT
-------------- -----------
<S> <C> <C>
Common Stock--$0.01 par value--authorized
1,500,000,000 shares at December 31, 1993:
Balance at beginning of year..................... 580,023,513 $ 6
Shares issued during the period.................. 542,135,431 5
Management shares repurchased and
cancelled...................................... (500,375) --
-------------- -----------
Balance at end of year....................... 1,121,658,569 $ 11
-------------- -----------
-------------- -----------
Paid-in capital:
Balance at beginning of year..................... $ 3,860
Shares issued during the period, net of stock
issuance costs................................. 3,630
Tax benefits recorded on shares issued to
management and ESOP shares allocated........... 4
Issuance of Series A Preferred Stock............. 2,060
Management shares and stock options repurchased
and cancelled.................................. (4)
Preferred stock dividends........................ (198)
Warrants repurchased and cancelled............... --
Other............................................ --
-----------
Balance at end of year....................... $ 9,352
-----------
-----------
</TABLE>
<PAGE>
The changes in stock options are shown as follows:
<TABLE><CAPTION>
1993 1992 1991
------------------------- -------------------------- -----------
OPTIONS PRICE OPTIONS PRICE OPTIONS
----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year:
Stock Option Plan................................ 25,355,948 $ 5.00-10.45 25,814,648 $ 5.00- 5.75 25,638,520
Long Term Incentive Plan......................... 19,654,600 7.50-11.56 12,990,600 7.50-11.63
Options granted to management investors and
directors:
Stock Option Plan................................ 2,400 5.00 2,176,828
Long Term Incentive Plan......................... 49,213,100 4.52- 9.13 7,004,000 8.25-10.125 13,041,800
Management options exercised:
Stock Option Plan................................ (1,116,046) 5.00
Management options repurchased and cancelled:
Stock Option Plan................................ (999,790) 5.00- 8.55 (461,100) 5.00-10.45 (2,000,700)
Long Term Incentive Plan......................... (4,235,066) 5.56-10.00 (340,000) 7.50-11.63 (51,200)
----------- ----------- -----------
Balance at end of year:
Stock Option Plan................................ 23,240,112 5.00-10.45 25,355,948 5.00-10.45 25,814,648
Long Term Incentive Plan......................... 64,632,634 4.52-11.56 19,654,600 7.50-11.56 12,990,600
----------- ----------- -----------
87,872,746 4.52-11.56 45,010,548 5.00-11.56 38,805,248
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRICE
------------
<S> <C>
Balance at beginning of year:
Stock Option Plan................................ $ 5.00
Long Term Incentive Plan.........................
Options granted to management investors and
directors:
Stock Option Plan................................ 5.75
Long Term Incentive Plan......................... 7.50-11.63
Management options exercised:
Stock Option Plan................................
Management options repurchased and cancelled:
Stock Option Plan................................ 5.00- 5.75
Long Term Incentive Plan......................... 7.50
Balance at end of year:
Stock Option Plan................................ 5.00- 5.75
Long Term Incentive Plan......................... 7.50-11.63
5.00-11.63
</TABLE>
At December 31, 1993, options were exercisable as to 20,018,041 shares,
compared with 15,590,909 shares at December 31, 1992, and 11,310,162 shares at
December 31, 1991. As of December 31, 1993, options for 66,777,008 shares of
Common Stock were available for future grant.
F-22
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
To provide an incentive to attract and retain key employees responsible for
the management and administration of the business affairs of Holdings and its
subsidiaries, on June 15, 1989 the board of directors of Holdings adopted the
Stock Option Plan for Directors and key Employees of RJR Holdings Corp. and
Subsidiaries (the "Stock Option Plan") pursuant to which options to purchase
Common Stock may be granted. On June 16, 1989 the Stock Option Plan was
approved by the written consent of the holders of a majority of the Common
Stock. Any director or key employee of Holdings or any subsidiary of Holdings is
eligible to be granted options under the Stock Option Plan. A maximum of
30,000,000 shares of Common Stock (which may be adjusted in the event of certain
capital changes) may be issued under the Stock Option Plan. The options to key
employees granted under the Stock Option Plan generally vest over a five year
period and the options granted to directors under the Stock Option Plan are
immediately fully vested. The exercise price of such options is generally the
fair market value of the Common Stock on the date of grant.
On August 1, 1990, the board of directors of Holdings adopted the 1990 Long
Term Incentive Plan (the "1990 LTIP") which was approved on such date by the
written consent of the holders of a majority of the Common Stock. The 1990 LTIP
authorizes grants of incentive awards ("Grants") in the form of "incentive stock
options" under Section 422 of the Code, other stock options, stock appreciation
rights, restricted stock, purchase stock, dividend equivalent rights,
performance units, performance shares or other stock-based grants. Awards under
the 1990 LTIP may be granted to key employees of, or other persons having a
unique relationship to, Holdings and its subsidiaries. Directors who are not
also employees of Holdings and its subsidiaries are ineligible for Grants. A
maximum of 105,000,000 shares of Common Stock (which may be adjusted in
the event of certain capital changes) may be issued under the 1990 LTIP pursuant
to Grants. The 1990 LTIP also limits the amount of shares which may be issued
pursuant to "incentive stock options" and the amount of shares subject to Grants
which may be issued to any one participant. As of December 31, 1993, purchase
stock, stock options other than incentive stock options, restricted stock,
performance shares and other stock-based grants have been granted under the 1990
LTIP. The options granted before 1993 under the 1990 LTIP generally will vest
over a three year period ending December 31, 1995. Prior to January 1, 1993,
such options had vested over a six to eight year period. Options granted in 1993
vest over a three year period beginning from the date of grant. The exercise
prices of such options are between $4.50 and $11.56 per share. In connection
with the purchase stock grants awarded during 1993, 1992 and 1991, 622,222
shares and 495,000 shares and 2,681,000 shares, respectively, of Common Stock
were purchased and options to purchase four shares were granted for every share
of such Common Stock purchased. In addition, arrangements were made enabling
purchasers to borrow on a secured basis from Holdings the price of the stock
purchased, as well as the taxes due on any taxable income recognized in
connection with such purchases. The current annual interest rate on such
arrangements, which was set in July 1993 at the then applicable federal rate for
long-term loans, is 6.37%. These borrowings plus accrued interest and taxes
must generally be repaid within two years following termination of active
employment. During 1993, 1,484,840 shares of Common Stock were awarded in
connection with restricted stock grants made. These shares are subject to
restrictions that will lapse on December 31, 1994. Performance shares were also
granted under the 1990 LTIP during 1993, pursuant to which participants are
granted a designated number of performance shares that may be earned over a
three year performance period commencing January 1, 1993. Pay outs of awards at
the end of the performance period, which are denominated in shares of Common
Stock, but which may be paid at Holdings' option in either Common Stock or
cash, are currently based on Holdings' cumulative cash-earnings per share
during such performance period. During 1993, 3,307,500 performance shares were
awarded. The maximum aggregate number of shares of Common Stock that
F-23
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
may be paid at the end of the performance period is 4,961,250. Commitments to
make other stock-based awards were made in 1993 under the 1990 LTIP to
individuals who previously acquired certain purchase stock under the 1990 LTIP.
Under this program, such individuals may receive grants of Common Stock or cash
at the Company's election on either three or four annual grant dates beginning
July 1994 and ending either July 1, 1996 or July 1, 1997. The fair market value
of Common Stock to be awarded on each grant date is equal to the excess, if any,
of (i) 33% or 25%, respectively, of the maximum amount the individual could have
borrowed to acquire purchase stock, over (ii) the then fair market value of the
same percentage of such individual's purchase stock. The grant is increased by
the amount of presumed borrowing costs and the amount necessary to hold the
individual harmless from income taxes due as a result of the grant. No grant
will be made on a grant date if, on such grant date, the amount determined under
clause (ii) above equals or exceeds the amount determined in clause (i) above.
In addition to the shares purchased under the 1990 LTIP, approximately
550,000 shares of Common Stock were sold during 1991 to certain management
investors. No such sales occurred in 1992 or 1993. Unlike the shares sold
under the 1990 LTIP, a portion of these shares remain subject to significant
restrictions on transferability.
The Preferred Stock, together with the Series A Preferred Stock, Series B
Preferred Stock and ESOP Convertible Preferred Stock, stated value $16.00 per
share and par value $.01 per share, of Holdings (the "ESOP Preferred Stock")
(150,000,000 aggregate preferred shares authorized at December 31, 1993 and
1992) are senior to the Common Stock as to dividends and preferences in
liquidation.
On December 6, 1993, the outstanding Preferred Stock was redeemed at a
redemption price of $27.0125 per share plus accrued and unpaid dividends
thereon. Also during 1993, 123,523 shares of Preferred Stock were converted into
342,976 shares of Common Stock. During 1992, 379 shares of Preferred Stock were
converted into 1,051 shares of Common Stock. During 1991, 884 shares of
Preferred Stock were converted into 2,450 shares of Common Stock and 67,997,769
shares of Preferred Stock were exchanged for 258,391,523 shares of Common Stock
in connection with the December 1991 Exchange Offer. The Preferred Stock, stated
value $25 per share at par value $.01 per share, paid cash dividends at a rate
of 11.5% of stated value per annum, payable quarterly in arrears commencing
January 15, 1991. The Preferred Stock was convertible after May 1, 1991 into
shares of Common Stock at a conversion price of $9 of stated value per share of
Common Stock.
Each Series A Depositary Share represents a one-quarter ownership interest
in a share of Series A Preferred Stock of Holdings. Each share of Series A
Preferred Stock bears cumulative cash dividends at a rate of $3.34 per annum and
is payable quarterly in arrears commencing February 18, 1992. Each share of
Series A Preferred Stock will mandatorily convert into four shares of Common
Stock by November 15, 1994, subject to adjustment in certain events. In
addition, each share of Series A Preferred Stock may be convertible upon the
occurrence of certain other events, including the option by Holdings to redeem,
in whole or in part, at any time at an initial optional redemption price of
$64.82 per share, to be paid in shares of Common Stock, plus accrued and unpaid
dividends. The initial optional redemption price declines by $.009218 on each
day following the issuance of the Series A Preferred Stock to $55.36 on
September 15, 1994 and $54.80 thereafter. Holders of Series A Preferred Stock
have voting rights with respect to certain matters submitted to a vote of the
holders of the Common
F-24
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
Stock. Because Series A Preferred Stock mandatorily converts into Common Stock,
dividends on shares of Series A Preferred Stock are reported similar to common
equity dividends.
On August 18, 1993, Holdings issued 50,000 shares of Series B Cumulative
Preferred Stock, par value $.01 per share ("Series B Preferred Stock"), and sold
50,000,000 depositary shares ("Series B Depositary Shares") at $25 per Series B
Depositary Share ($1.250 billion) in connection with such issuance (the "Series
B Preferred Stock Offering"). Each share of Series B Preferred Stock bears
cumulative cash dividends at a rate of $2,312.50 per annum, or $2.3125 per
Series B Depositary Share, and is payable quarterly in arrears commencing
December 1, 1993. Each Series B Depositary Share represents .001 ownership
interest in a share of Series B Preferred Stock of Holdings. At Holdings'
option, on or after August 19, 1998, Holdings may redeem shares of the Series B
Preferred Stock (and the Depositary will redeem the number of Series B
Depositary Shares representing the shares of Series B Preferred Stock) at a
redemption price equivalent to $25 per Series B Depositary Share, plus accrued
and unpaid dividends thereon.
On August 1, 1991, Holdings issued 2,983,904 shares of Common Stock in
exchange for certain debentures of RJRN aggregating approximately $32.3 million
in principal amount.
On April 10, 1991, an employee stock ownership plan established by Holdings
borrowed $250 million from Holdings (the "ESOP Loan") to purchase 15,625,000
shares of ESOP Preferred Stock. The ESOP Loan, which was renegotiated in 1993,
has a final maturity in 2006 and bears interest at the rate of 8.2% per annum.
The ESOP Preferred Stock is convertible as of December 31, 1993 into 15,573,973
shares of Common Stock, subject to adjustment in certain events, and bears
cumulative dividends at a rate of 7.8125% of stated value per annum at least
until April 10, 1999, payable semi-annually in arrears commencing January 2,
1992, when, as and if declared by the board of directors of Holdings. The ESOP
Preferred Stock is redeemable at the option of Holdings, in whole or in part, at
any time on or after April 10, 1999, at an initial optional redemption price of
$16.250 per share. The initial optional redemption price declines thereafter on
an annual basis in the amount of $.125 a year to $16 per share on April 10,
2001, plus accrued and unpaid dividends. Holders of ESOP Preferred Stock have
voting rights with respect to certain matters submitted to a vote of the holders
of the Common Stock. Effective January 1, 1992, RJRN's matching contributions to
eligible employees under its Capital Investment Plan are being made in the form
of ESOP Preferred Stock. RJRN's matching contribution obligation in respect of
each participating employee is equal to $.50 for every pre-tax dollar
contributed by the employee, up to 6% of the employee's pay. The shares of ESOP
Preferred Stock are allocated at either the floor value of $16 a share or the
fair market value of Common Stock, whichever is higher. During 1993 and 1992,
approximately $29 million and $29 million, respectively, was contributed to the
ESOP by RJRN or Holdings and approximately $20 million and $24 million,
respectively, of ESOP dividends were used to service the ESOP's debt to
Holdings.
On February 9, 1989, 15,254,238 warrants were issued to purchase 15,254,238
shares of Common Stock. Such warrants were initially exercisable at an exercise
price of $5.00 per share, subject to adjustment in certain events, at any time
prior to February 9, 1999. On November 8, 1991, the exercise price for the
warrants and the number of shares of Common Stock issuable upon exercise thereof
were adjusted to $4.9164 and 1.017, respectively. During the third quarter of
1992, Holdings repurchased from a limited partnership of which KKR Associates,
an affiliate of KKR, is the sole general partner and certain affiliates of
Merrill Lynch & Co., Inc. 6,182,586 warrants of the 15,254,238 warrants issued
F-25
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
on February 9, 1989 for approximately $36 million in cash. During October 1992,
Holdings repurchased from the same parties the remaining 9,071,652 warrants for
approximately $51 million in cash. Each of these warrants allowed the holder to
purchase 1.017 shares of Common Stock for an exercise price of $4.9164 at any
time on or prior to February 8, 1999.
Warrants to purchase 45,529,024 shares of Common Stock were issued in
connection with the sale of the 15% Subordinated Debentures and the Subordinated
Discount Debentures. Such warrants were initially exercisable at an exercise
price of $0.07 per share, subject to adjustment in certain events, and expired
January 31, 1992. On November 8, 1991, the exercise price for the warrants and
the number of shares of Common Stock issuable upon exercise thereof were
adjusted to $0.0688 and 1.017, respectively. During 1992, 12,370,936 warrants
were exercised at $0.0688 per share. During 1991, 29,695,730 warrants were
exercised at $0.07 per share and 3,361,323 warrants were exercised at $0.0688
per share.
See Note 10 for transactions involving the exchange of capital stock for
long-term debt.
NOTE 13--RETAINED EARNINGS AND CUMULATIVE TRANSLATION ADJUSTMENTS
Retained earnings (accumulated deficit) at December 31, 1993, 1992 and 1991
includes non-cash expenses related to accumulated trademark and goodwill
amortization of $3.015 billion, $2.390 billion and $1.774 billion, respectively.
The changes in cumulative translation adjustments are shown as follows:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period...................................... $ (47) $ 11 $ 35
Translation and other adjustments................................. (55) (58) (24)
------------- ------ ------
Balance at end of period............................................ $ (102) $ (47) $ 11
------------- ------ ------
------------- ------ ------
</TABLE>
NOTE 14--RETIREMENT BENEFITS
RJRN sponsors a number of non-contributory defined benefit pension plans
covering most U.S. and certain foreign employees. Plans covering regular
full-time employees in the tobacco operations as well as the majority of
salaried employees in the corporate groups and food operations to provide
pension benefits that are based on credits, determined by age, earned throughout
an employee's service and final average compensation before retirement. Plan
benefits are offered as lump sum or annuity options. Plans covering hourly as
well as certain salaried employees in the corporate groups and food operations
provide pension benefits that are based on the employee's length of service and
final average compensation before retirement. RJRN's policy is to fund the cost
of current service benefits and past service cost over periods not exceeding 30
years to the extent that such costs are currently tax deductible. Additionally,
RJRN participates in several multi-employer and other defined contribution
plans, which provide benefits to certain of RJRN's union employees. Employees in
foreign countries who are not
F-26
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--RETIREMENT BENEFITS--(CONTINUED)
U.S. citizens are covered by various post-employment benefit arrangements, some
of which are considered to be defined benefit plans for accounting purposes.
A summary of the components of pension expense for RJRN-sponsored plans
follows:
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Defined benefit pension plans:
Service cost--benefits earned during the period........................ $ 76 $ 84 $ 71
Interest cost on projected benefit obligation.......................... 255 251 239
Less actual return on plan assets...................................... (262) (259) (504)
Net amortization and deferral.......................................... (4) (4) 252
------------- ------------- -------------
Total............................................................. 65 72 58
Multi-employer and other contribution plans.............................. 32 31 33
------------- ------------- -------------
Total pension expense............................................. $ 97 $ 103 $ 91
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The principal plans used the following actuarial assumptions for accounting
purposes:
<TABLE><CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
--------------- ---------------
<S> <C> <C>
Weighted average discount rate............................ 7.5% 8.5%
Rate of increase in compensation levels................... 5.0% 5.0%
Expected long-term rate of return on assets............... 9.5% 10.0%
</TABLE>
F-27
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--RETIREMENT BENEFITS--(CONTINUED)
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at December 31, 1993 and 1992 for RJRN's defined
benefit pension plans.
<TABLE><CAPTION>
U.S. PLANS FOREIGN PLANS
------------------------------------------------------------------------ ----------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1993
---------------------------------- ------------------------------------ ----------------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED
ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS
BENEFITS ASSETS(1) BENEFITS ASSETS(1) BENEFITS EXCEEDED ASSETS
--------------- ----------------- --------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Actuarial
present value
of:
Vested
benefits...... $ 2,252 $ 272 $ 2,133 $ 80 $ 148 $ 186
Non-vested
benefits.... 225 5 118 4 6 23
------ ----- ------ --- ----- -----
Accumulated
benefit
obligation.. 2,477 277 2,251 84 154 209
Effect of
future
salary
increases... 296 29 366 5 42 31
------ ----- ------ --- ----- -----
Projected
benefit
obligation.. 2,773 306 2,617 89 196 240
Plan assets at
fair market
value......... 2,529 204 2,449 35 172 109
------ ----- ------ --- ----- -----
Plan assets in
excess of
(less than)
projected
benefit
obligation.... (244) (102) (168) (54) (24) (131)
Unrecognized net
(gain) loss... (68) 3 (121) (19) 17 26
Unrecognized
prior service
cost.......... (31) (10) (32) (13) (8) 14
------ ----- ------ --- ----- -----
Net pension
liabilities
recognized in
the
Consolidated
Balance Sheets.. $ (343) $ (109) $ (321) $ (86) $ (15) $ (91)
------ ----- ------ --- ----- -----
------ ----- ------ --- ----- -----
</TABLE>
<TABLE><CAPTION>
FOREIGN PLANS
----------------------------------
DECEMBER 31, 1992
----------------------------------
PLANS WHOSE PLANS WHOSE
ASSETS EXCEEDED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEEDED ASSETS
----------------- ---------------
<S> <C> <C>
Actuarial
present value
of:
Vested
benefits...... $ 159 $ 155
Non-vested
benefits.... 6 21
----- -----
Accumulated
benefit
obligation.. 165 176
Effect of
future
salary
increases... 46 33
----- -----
Projected
benefit
obligation.. 211 209
Plan assets at
fair market
value......... 196 88
----- -----
Plan assets in
excess of
(less than)
projected
benefit
obligation.... (15) (121)
Unrecognized net
(gain) loss... 11 20
Unrecognized
prior service
cost.......... (11) 11
----- -----
Net pension
liabilities
recognized in
the
Consolidated
Balance Sheets.. $ (15) $ (90)
----- -----
----- -----
</TABLE>
- ---------------
(1) Of the net pension liability, $34 million and $12 million were related
to qualified plans at December 31, 1993 and 1992, respectively.
At December 31, 1993, approximately 99 percent of the plans' assets were
invested in listed stocks and bonds and other highly liquid investments. The
balance consisted of various income producing investments.
In addition to providing pension benefits, RJRN provides certain health
care and life insurance benefits for retired employees and their dependents.
Substantially all of its regular full-time employees, including certain
employees in foreign countries, may become eligible for those benefits if they
reach retirement age while working for RJRN. Effective January 1, 1992, RJRN
adopted SFAS No. 106. Under SFAS No. 106, RJRN is required to accrue the costs
for retirees' health and other postretirement benefits other than pensions and
recognize the unfunded and unrecognized accumulated benefit obligation for these
benefits. RJRN had previously accrued a liability for postretirement benefits
other
F-28
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--RETIREMENT BENEFITS--(CONTINUED)
than pensions and as a result, SFAS No. 106 did not have a material impact on
RJRN's financial statements.
Net postretirement health and life insurance benefit cost for 1993 consists
of the following:
<TABLE><CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Service cost--benefits earned during the period..................................................... $ 16 $ 12
Interest cost on accumulated postretirement benefit obligation...................................... 60 58
----- -----
Net postretirement health care cost............................................................... $ 76 $ 70
----- -----
----- -----
</TABLE>
Net postretirement health and life insurance benefit costs representing
accretion on the liability balance of $89 million was charged to operations for
the year ended December 31, 1991. The reduction in expense in 1992 reflects the
reduction of recorded liabilities by approximately $225 million at December 31,
1991 as disclosed in Note 1 to the Consolidated Financial Statements.
RJRN's postretirement health and life insurance benefit plans currently are
not funded. The status of the plans was as follows:
<TABLE><CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
--------------- ---------------
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit obligation:
Retirees.......................................................................... $ 693 $ 598
Fully eligible active plan participants........................................... 88 135
Other active plan participants.................................................... 263 226
Unrecognized actuarial amounts...................................................... (58) --
------ ------
Accrued postretirement health care costs............................................ $ 986 $ 959
------ ------
------ ------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8% in 1993, 9% in 1994 and 10.7% in
1995 gradually declining to 6.0% by the year 2002 and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost
trend rate for each year would increase the accumulated postretirement benefit
obligation as of December 31, 1993 and net postretirement health care cost by
approximately 7% and 8.5%, respectively.
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 8.5% as of December 31, 1993 and
1992, respectively.
Effective January 1, 1993, RJRN adopted SFAS No. 112. Under SFAS No. 112,
RJRN is required to accrue the costs for preretirement postemployment benefits
provided to former or inactive employees and recognize an obligation for these
benefits. The adoption of SFAS No. 112 did not have a material impact on the
financial statements of either Holdings or RJRN.
F-29
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--SEGMENT INFORMATION
Industry Segment Data
Holdings classifies its continuing operations into two industry segments
which are described in Management's Discussion and Analysis of Financial
Condition and Results of Operations, appearing elsewhere herein. Summarized
financial information for these operations is shown in the following tables.
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------- ------------- -------------
Net sales:
<S> <C> <C> <C>
Tobacco........................................................... $ 8,079 $ 9,027 $ 8,540
Food.............................................................. 7,025 6,707 6,449
------------- ------------- -------------
Consolidated net sales......................................... $ 15,104 $ 15,734 $ 14,989
------------- ------------- -------------
------------- ------------- -------------
Operating income:
Tobacco(1)(2)..................................................... $ 893 $ 2,241 $ 2,322
Food(1)(2)........................................................ 624 769 715
Headquarters (2).................................................. (139) (112) (103)
------------- ------------- -------------
Consolidated operating income.................................. $ 1,378 $ 2,898 $ 2,934
------------- ------------- -------------
------------- ------------- -------------
Capital expenditures:
Tobacco........................................................... $ 224 $ 189 $ 200
Food.............................................................. 391 330 254
Headquarters...................................................... -- -- 5
------------- ------------- -------------
Consolidated capital expenditures.............................. $ 615 $ 519 $ 459
------------- ------------- -------------
------------- ------------- -------------
Depreciation expense:
Tobacco........................................................... $ 237 $ 252 $ 242
Food.............................................................. 207 197 194
Headquarters...................................................... 4 6 5
------------- ------------- -------------
Consolidated depreciation expense.............................. $ 448 $ 455 $ 441
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE><CAPTION>
Assets: DECEMBER 31, 1993 DECEMBER 31, 1992
------------------ ------------------
<S> <C> <C>
Tobacco............................................................. $ 19,904 $ 20,592
Food................................................................ 11,270 11,165
Headquarters(3)..................................................... 121 284
---------- ----------
Consolidated assets.............................................. $ 31,295 $ 32,041
---------- ----------
---------- ----------
</TABLE>
- ---------------
(1) Includes amortization of trademarks and goodwill for Tobacco and Food,
respectively, for the year ended December 31, 1993, of $407 million and $218
million; for the year ended December 31, 1992, of $404 million and $212
million and for the year ended December 31, 1991, of $404 million and $205
million.
(2) The 1993 and 1992 amounts include the effects of the restructuring expense
at Tobacco (1993-- $544 million; 1992--$43 million), Food (1993--$153
million; 1992--$63 million) and Headquarters (1993--$33 million; 1992--$0),
as applicable, and the sale of Holdings' ready-to-eat cold cereal business
(See Note 1 to the Consolidated Financial Statements).
(3) Cash and cash equivalents for the domestic operating companies are included
in Headquarters' assets.
F-30
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--SEGMENT INFORMATION--(CONTINUED)
Geographic Data
The following tables show certain financial information relating to
Holdings' continuing operations in various geographic areas.
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------- ------------- -------------
Net sales:
<S> <C> <C> <C>
United States (including U.S. export sales)....................... $ 11,570 $ 13,182 $ 12,548
Europe............................................................ 1,671 1,109 1,037
Other geographic areas............................................ 2,794 1,855 1,675
Less transfers between geographic areas(1)........................ (931) (412) (271)
------------- ------------- -------------
Consolidated net sales......................................... $ 15,104 $ 15,734 $ 14,989
------------- ------------- -------------
------------- ------------- -------------
Operating income:(2)
United States..................................................... $ 1,284 $ 2,634 $ 2,692
Europe............................................................ 40 138 117
Other geographic areas............................................ 193 238 228
Headquarters...................................................... (139) (112) (103)
------------- ------------- -------------
Consolidated operating income(3)............................... $ 1,378 $ 2,898 $ 2,934
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE><CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------ ------------------
Assets:
<S> <C> <C>
United States....................................................... $ 27,143 $ 28,553
Europe.............................................................. 1,820 1,360
Other geographic areas.............................................. 2,211 1,844
Headquarters........................................................ 121 284
---------- ----------
Consolidated assets.............................................. $ 31,295 $ 32,041
---------- ----------
---------- ----------
Liabilities of Holdings' continuing operations located in foreign
countries............................................................. $ 1,689 $ 1,352
---------- ----------
---------- ----------
</TABLE>
- ---------------
(1) Transfers between geographic areas (which consist principally of tobacco
transferred principally from the United States to Europe) are generally made
at fair market value.
(2) The 1993 and 1992 amounts include the effects of the restructuring expense
of $730 million and $106 million, respectively, and a gain on the sale of
Holdings' ready-to-eat cold cereal business ($98 million) (see Note 1 to the
Consolidated Financial Statements).
(3) Includes amortization of trademarks and goodwill of $625 million, $616
million and $609 million for the 1993, 1992 and 1991 periods, respectively.
F-31
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
Holdings for the quarterly periods of 1993 and 1992:
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1993
<S> <C> <C> <C> <C>
Net sales................................................................ $ 3,736 $ 3,719 $ 3,598 $ 4,051
Operating income (loss).................................................. 683 582 431 (318)
Income (loss) before extraordinary item.................................. 210 142 74 (429)
Net income (loss)........................................................ 163 77 76 (461)
Income (loss) before extraordinary item per common share(1).............. 0.15 0.10 0.04 (0.34)
Net income (loss) per common share(1).................................... 0.12 0.05 0.04 (0.36)
</TABLE>
<TABLE><CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1992
<S> <C> <C> <C> <C>
Net sales................................................................ $ 3,643 $ 3,983 $ 4,021 $ 4,087
Operating income......................................................... 664 768 763 703
Income before extraordinary item......................................... 144 209 252 171
Net income (loss)........................................................ (15) 87 182 45
Income before extraordinary item per common share(1)..................... 0.10 0.15 0.18 0.12
Net income (loss) per common share(1).................................... (0.02) 0.06 0.13 0.03
</TABLE>
- ---------------
(1) 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. In addition, assuming that
the transactions discussed in Notes 10 and 12 to the Consolidated Financial
Statements had occurred on January 1, 1993 or January 1, 1992, as
applicable, and the net proceeds thereof were used to redeem or to repay
outstanding indebtedness, the impact on earnings per share would be
anti-dilutive for the reported periods.
NOTE 17--SUBSEQUENT EVENT
On February 24, 1994, Holdings filed a Registration Statement on Form S-3
for a proposed offering of 300 million depositary shares, each representing a
one-tenth ownership interest in a share of a newly created series of Preferred
Equity Redemption Cumulative Stock ("PERCS"). Each depositary share would
mandatorily convert in three years into one share of Common Stock, subject
to adjustment and subject to earlier conversion or redemption under certain
circumstances. Any net proceeds of a PERCS offering may be used for general
corporate purposes which may include refinancings of indebtedness, working
capital, capital expenditures, acquisitions and repurchases or redemptions of
securities. In addition, such proceeds may be used to facilitate one or more
significant corporate transactions, such as a joint venture, merger,
acquisition, divestiture, asset swap, spin-off and/or recapitalization, that
would result in the separation of the tobacco and food businesses of Holdings.
As of February 24, 1994, the specific uses of proceeds have not been determined.
Pending such uses, any proceeds would be used to repay indebtedness under RJRN's
revolving credit facilities or for short-term liquid investments.
------------------------------------
F-32
<PAGE>
Paste up
[Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration fee.......................................... $ 892,242
Blue Sky fees and expenses................................ 20,000
Printing and engraving expenses........................... 200,000
Legal fees and expenses................................... 200,000
Accounting fees and expenses.............................. 25,000
Miscellaneous............................................. 62,758
-------------
Total........................................... $ 1,400,000
-------------
-------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include 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, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors against expenses (including
attorneys' fees) in connection with the defense or settlement of an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.
In accordance with the Delaware Law, the Certificate of Incorporation of
the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Company or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
Article IV of the Amended and Restated By-Laws of the Company provides for
indemnification of the officers and directors of the Company to the full extent
permitted by applicable law.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE> <CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------
<S> <C>
**1.1 Form of Underwriting Agreement.
4.1 Amended and Restated Certificate of Incorporation of RJR Nabisco
Holdings Corp., filed October 1, 1990 (incorporated by
reference to Exhibit 3.1 to Amendment No. 4 filed on October 2,
1990, to the Registration Statement on Form S-4 of RJR Nabisco
Holdings Corp., Registration No. 33-36070, filed on July 25,
1990, as amended (the "Form S-4, Registration No. 33-36070")).
4.1(a) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., filed January 29,
1991 (incorporated by reference to Exhibit 3.1(a) to Amendment
No. 3, filed on January 31, 1991, to the Registration Statement
on Form S-4 of RJR Nabisco Holdings Corp., Registration No.
33-38227).
4.1(b) Certificate of Designation of ESOP Convertible Preferred Stock,
filed April 10, 1991 (incorporated by reference to Exhibit
3.1(b) to Amendment No. 2 filed on April 11, 1991, to the
Registation Statement on Form S-1 of RJR Nabisco Holdings
Corp., Registration No. 33-39532, filed on March 20, 1991).
4.1(c) Certificate of Designation of Series A Conversion Preferred
Stock, filed November 7, 1991 (incorporated by reference to
Exhibit 3.1(c) to Amendment No. 3, filed on November 1, 1991,
to the Registration Statement on Form S-1 of RJR Nabisco
Holdings Corp., Registration No. 33-43137, filed October 2,
1991).
4.1(d) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., filed December 16,
1991 (incorporated by reference to Exhibit 3.1(d) of the Annual
Report on Form 10-K of RJR Nabisco Holdings Corp., RJR Nabisco
Holdings Group, Inc., RJR Nabisco Capital Corp. and RJR
Nabisco, Inc. for the fiscal year ended December 31, 1991, File
Nos. 1-10215, 1-10214, 1-10248 and 1-6388 (the "1991 Form
10-K")).
4.1(e) Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of RJR Nabisco Holdings Corp. (relating to the
authorization of the issuance of additional shares of Common
Stock) filed April 6, 1993 (incorporated by reference to
Exhibit 3.3 of the Quarterly Report on Form 10-Q of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter
ended March 31, 1993, filed April 30, 1993 (the "March 1993
Form 10-Q")).
4.1(f) Certificate of Designation of Series B Cumulative Preferred
Stock, filed August 16, 1993 (incorporated by reference to
Exhibit 3.1(g) of the Annual Report on Form 10-K of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. for the fiscal year ended
December 31, 1993, File Nos. 1-10215 and 1-6388 (the "1993 Form
10-K").
4.1(g) A composite of the Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., as amended to
August 16, 1993 (incorporated by reference to Exhibit 3.1(g) of
the 1993 Form 10-K).
**4.1(h) Form of Certificate of Designation of Series C Conversion
Preferred Stock.
**4.2 Form of Deposit Agreement.
4.3 Credit Agreement dated as of December 1, 1991, among RJR Nabisco
Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR Nabisco
Capital Corp., RJR Nabisco, Inc. and the lending institutions
party thereto (incorporated by reference to Exhibit 4.1 of the
1991 Form 10-K) (the "Credit Agreement").
4.3(a) Amendment No. 1 to Credit Agreement, dated as of October 21, 1992
(incorporated by reference to Exhibit 4.1(a) of the Annual
Report on Form 10-K of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc. for the fiscal year ended December 31, 1992, File
Nos. 1-10215 and 1-6388).
4.3(b) Amendment No. 2 to Credit Agreement, dated as of March 4, 1993
(incorporated by reference to Exhibit 4.2 of the March 1993
Form 10-Q).
4.3(c) Amendment No. 3 to Credit Agreement, dated as of October 12, 1993
(incorporated by reference to Exhibit 10.1 of the Quarterly
Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc. for the quarter ended September 30, 1993 (the
"September 1993 Form 10-Q").
4.4 Credit Agreement dated as of April 5, 1993 among RJR Nabisco
Holdings Corp., RJR Nabisco, Inc. and the lending institutions
party thereto (incorporated by reference to Exhibit 4.3 of the
March 1993 Form 10-Q) (the "1993 Credit Agreement")
4.4(a) Amendment No. 1 to 1993 Credit Agreement, dated October 12, 1993
(incorporated by reference to Exhibit 10.1 of the September
1993 10-Q).
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
4.5 Indenture dated as of April 25, 1991 among RJR Nabisco Capital
Corp., RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group,
Inc., RJR Nabisco, Inc. and Citibank, N.A., as Trustee,
relating to the 10 1/2% Senior Notes due 1998, including form
of securities. (incorporated by reference to Exhibit 4.5 to
Amendment No. 7 filed on August 11, 1993, to the Registration
Statement of Form S-3 of RJR Nabisco Holdings Corp.,
Registration No. 33-58930, filed March 1, 1993, as amended (the
"Form S-3, Registration No. 33-58930")).
4.5(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Citibank, N.A., as Trustee, relating to the 10
1/2% Senior Notes due 1998 (incorporated by reference to
Exhibit 4.5(a) to the Form S-3, Registration No. 33-58930).
4.6 Indenture dated as of May 22, 1989 among RJR Holdings Capital
Corp., RJR Holdings Corp., RJR Holdings Group, Inc., RJR
Nabisco, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the 15% Payment-in-Kind
Subordinated Debentures due 2001, including form of securities
(incorporated by reference to Exhibit 4.6 to the Form S-3,
Registration No. 33-58930).
4.6(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the 15% Payment-in-Kind
Subordinated Debentures due 2001 (incorporated by reference to
Exhibit 4.6(a) to the Form S-3, Registration No. 33-58930).
4.7 Indenture dated as of May 22, 1989 among RJR Holdings Capital
Corp., RJR Holdings Corp., RJR Holdings Group, Inc., RJR
Nabisco, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the Subordinated Discount
Debentures due 2001, including form of securities (incorporated
by reference to Exhibit 4.7 to the Form S-3, Registration No.
33-58930).
4.7(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the Subordinated Discount
Debentures due 2001 (incorporated by reference to Exhibit
4.7(a) to the Form S-3, Registration No. 33-58930).
4.8 Indenture dated as of May 22, 1989 among RJR Holdings Capital
Corp., RJR Holdings Corp., RJR Holdings Group, Inc., RJR
Nabisco, Inc. and U.S. Trust Company of California, N.A., as
Trustee, relating to the 13 1/2% Subordinated Debentures due
2001, including form of securities (incorporated by reference
to Exhibit 4.8 to the Form S-3, Registration No. 33-58930).
4.8(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Security Pacific National Trust Company (New
York), as trustee, relating to the 13 1/2% Subordinated
Debentures due 2001 (incorporated by reference to Exhibit
4.8(a) to the Form S-3, Registration No. 33-58930).
4.9 Amended and Restated By-laws of RJR Nabisco Holdings Corp., as
amended, effective January 20, 1994 (incorporated by reference
to Exhibit 3.2 to the 1993 Form 10-K).
**5.1 Opinion of Jo-Ann Ford regarding the legality of the securities
being registered.
**7.1 Opinion of Simpson Thacher & Bartlett regarding the liquidation
preference of the securities being registered.
**8.1 Opinion of Simpson Thacher & Bartlett regarding certain federal
income tax matters with respect to the securities being
registered (included on Exhibit 7.1).
12.1 RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR
Nabisco Capital Corp., RJR Nabisco, Inc. (Successor) and RJR
Nabisco, Inc. (Predecessor) Computation of Historical Ratio of
Earnings to Fixed Charges/Deficiency in the Coverage of Fixed
Charges by Earnings Before Fixed Charges for the periods within
the year ended December 31, 1989 (incorporated by reference to
Exhibit 12.3 to the Form S-4, Registration No. 33-36070).
12.2 RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group Inc., RJR
Nabisco Capital Corp. and RJR Nabisco, Inc. Computation of
Historical Ratio of Earnings to Fixed Charges/Deficiency in the
Coverage of Combined Fixed Charges and Preferred Stock
Dividends by Earnings Before Fixed Charges for the year ended
December 31, 1990 (incorporated by reference to Exhibit 12.4 to
Form S-1, Registration Statement No. 33-32728).
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
12.3 RJR Nabisco Holdings Corp. Computation of Earnings to Combined
Fixed Charges and Preferred Stock Dividends for each of the
years in the two year period ended December 31, 1992
(incorporated by reference to Exhibit 12.4 to Form S-3,
Registration Statement No. 33-58930).
*12.4 RJR Nabisco Holdings Corp. Computation of Historical and Pro
Forma Deficiency in the Coverage of Combined Fixed Charges and
Preferred Stock Dividends by Earnings Before Fixed Charges for
the year ended December 31, 1993.
*23.1 Consent of Independent Auditors.
**23.2 Consent of Jo-Ann Ford (included in her opinion filed as Exhibit
5.1).
**23.3 Consent of Simpson Thacher & Bartlett (included in their opinions
filed as Exhibits 7.1 and 8.1)
**25 Powers of Attorney of Charles M. Harper, Stephen R. Wilson,
Robert S. Roath, John T. Chain, Jr., Saul A. Fox, Louis V.
Gerstner, Jr., James H. Greene, Jr., H. John Greeniaus, James
W. Johnston, Vernon E. Jordan, Jr., Henry R. Kravis, John G.
Medlin, Jr., Paul E. Raether, Lawrence R. Ricciardi, Rozanne L.
Ridgway, Clifton S. Robbins, George R. Roberts, Scott M. Stuart
and Michael T. Tokarz.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes:
1. For purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 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 this registration statement shall be deemed to
be a new registration statement relating to the securities offered thereby,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
2. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
3. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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; and
4. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities 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 such registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the 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 Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on March 16, 1994.
RJR NABISCO HOLDINGS CORP.
By: /s/ Stephen R. Wilson
................................
Title: Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities indicated on March 16, 1994.
<TABLE> <CAPTION>
SIGNATURE TITLE
- ----------------------------- ----------------------------
<S> <C>
* Chairman of the Board and
............................. Chief Executive Officer
(Charles M. Harper) (principal executive
officer) and Director
* Executive Vice President and
............................. Chief Financial Officer
(Stephen R. Wilson) (principal financial
officer)
* Senior Vice President and
............................. Controller (principal
(Robert S. Roath) accounting officer)
* Director
.............................
(John T. Chain, Jr.)
* Director
.............................
(Saul A. Fox)
* Director
.............................
(Louis V. Gerstner, Jr.)
* Director
.............................
(James H. Greene, Jr.)
* Director
.............................
(H. John Greeniaus)
* Director
.............................
(James W. Johnston)
* Director
.............................
(Vernon E. Jordan, Jr.)
* Director
.............................
(Henry R. Kravis)
* Director
.............................
(John G. Medlin, Jr.)
* Director
.............................
(Paul E. Raether)
* Director
.............................
(Lawrence R. Ricciardi)
* Director
.............................
(Rozanne L. Ridgway)
* Director
.............................
(Clifton S. Robbins)
* Director
.............................
(George R. Roberts)
* Director
.............................
(Scott M. Stuart)
* Director
.............................
(Michael T. Tokarz)
</TABLE>
*By:
/s/ JO-ANN FORD
Jo-Ann Ford
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE> <CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------
<S> <C>
**1.1 Form of Underwriting Agreement.
4.1 Amended and Restated Certificate of Incorporation of RJR Nabisco
Holdings Corp., filed October 1, 1990 (incorporated by
reference to Exhibit 3.1 to Amendment No. 4 filed on October 2,
1990, to the Registration Statement on Form S-4 of RJR Nabisco
Holdings Corp., Registration No. 33-36070, filed on July 25,
1990, as amended (the "Form S-4, Registration No. 33-36070")).
4.1(a) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., filed January 29,
1991 (incorporated by reference to Exhibit 3.1(a) to Amendment
No. 3, filed on January 31, 1991, to the Registration Statement
on Form S-4 of RJR Nabisco Holdings Corp., Registration No.
33-38227).
4.1(b) Certificate of Designation of ESOP Convertible Preferred Stock,
filed April 10, 1991 (incorporated by reference to Exhibit
3.1(b) to Amendment No. 2 filed on April 11, 1991, to the
Registation Statement on Form S-1 of RJR Nabisco Holdings
Corp., Registration No. 33-39532, filed on March 20, 1991).
4.1(c) Certificate of Designation of Series A Conversion Preferred
Stock, filed November 7, 1991 (incorporated by reference to
Exhibit 3.1(c) to Amendment No. 3, filed on November 1, 1991,
to the Registration Statement on Form S-1 of RJR Nabisco
Holdings Corp., Registration No. 33-43137, filed October 2,
1991).
4.1(d) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., filed December 16,
1991 (incorporated by reference to Exhibit 3.1(d) of the Annual
Report on Form 10-K of RJR Nabisco Holdings Corp., RJR Nabisco
Holdings Group, Inc., RJR Nabisco Capital Corp. and RJR
Nabisco, Inc. for the fiscal year ended December 31, 1991, File
Nos. 1-10215, 1-10214, 1-10248 and 1-6388 (the "1991 Form
10-K")).
4.1(e) Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of RJR Nabisco Holdings Corp. (relating to the
authorization of the issuance of additional shares of Common
Stock) filed April 6, 1993 (incorporated by reference to
Exhibit 3.3 of the Quarterly Report on Form 10-Q of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter
ended March 31, 1993, filed April 30, 1993 (the "March 1993
Form 10-Q")).
4.1(f) Certificate of Designation of Series B Cumulative Preferred
Stock, filed August 16, 1993 (incorporated by reference to
Exhibit 3.1(g) of the Annual Report on Form 10-K of RJR Nabisco
Holdings Corp. and RJR Nabisco, Inc. for the fiscal year ended
December 31, 1993, File Nos. 1-10215 and 1-6388 (the "1993 Form
10-K").
4.1(g) A composite of the Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., as amended to
August 16, 1993 (incorporated by reference to Exhibit 3.1(g) of
the 1993 Form 10-K).
**4.1(h) Form of Certificate of Designation of Series C Conversion
Preferred Stock.
**4.2 Form of Deposit Agreement.
4.3 Credit Agreement dated as of December 1, 1991, among RJR Nabisco
Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR Nabisco
Capital Corp., RJR Nabisco, Inc. and the lending institutions
party thereto (incorporated by reference to Exhibit 4.1 of the
1991 Form 10-K) (the "Credit Agreement").
4.3(a) Amendment No. 1 to Credit Agreement, dated as of October 21, 1992
(incorporated by reference to Exhibit 4.1(a) of the Annual
Report on Form 10-K of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc. for the fiscal year ended December 31, 1992, File
Nos. 1-10215 and 1-6388).
4.3(b) Amendment No. 2 to Credit Agreement, dated as of March 4, 1993
(incorporated by reference to Exhibit 4.2 of the March 1993
Form 10-Q).
4.3(c) Amendment No. 3 to Credit Agreement, dated as of October 12, 1993
(incorporated by reference to Exhibit 10.1 of the Quarterly
Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc. for the quarter ended September 30, 1993 (the
"September 1993 Form 10-Q").
4.4 Credit Agreement dated as of April 5, 1993 among RJR Nabisco
Holdings Corp., RJR Nabisco, Inc. and the lending institutions
party thereto (incorporated by reference to Exhibit 4.3 of the
March 1993 Form 10-Q) (the "1993 Credit Agreement")
4.4(a) Amendment No. 1 to 1993 Credit Agreement, dated October 12, 1993
(incorporated by reference to Exhibit 10.1 of the September
1993 10-Q).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.5 Indenture dated as of April 25, 1991 among RJR Nabisco Capital
Corp., RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group,
Inc., RJR Nabisco, Inc. and Citibank, N.A., as Trustee,
relating to the 10 1/2% Senior Notes due 1998, including form
of securities. (incorporated by reference to Exhibit 4.5 to
Amendment No. 7 filed on August 11, 1993, to the Registration
Statement of Form S-3 of RJR Nabisco Holdings Corp.,
Registration No. 33-58930, filed March 1, 1993, as amended (the
"Form S-3, Registration No. 33-58930")).
4.5(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Citibank, N.A., as Trustee, relating to the 10
1/2% Senior Notes due 1998 (incorporated by reference to
Exhibit 4.5(a) to the Form S-3, Registration No. 33-58930).
4.6 Indenture dated as of May 22, 1989 among RJR Holdings Capital
Corp., RJR Holdings Corp., RJR Holdings Group, Inc., RJR
Nabisco, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the 15% Payment-in-Kind
Subordinated Debentures due 2001, including form of securities
(incorporated by reference to Exhibit 4.6 to the Form S-3,
Registration No. 33-58930).
4.6(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the 15% Payment-in-Kind
Subordinated Debentures due 2001 (incorporated by reference to
Exhibit 4.6(a) to the Form S-3, Registration No. 33-58930).
4.7 Indenture dated as of May 22, 1989 among RJR Holdings Capital
Corp., RJR Holdings Corp., RJR Holdings Group, Inc., RJR
Nabisco, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the Subordinated Discount
Debentures due 2001, including form of securities (incorporated
by reference to Exhibit 4.7 to the Form S-3, Registration No.
33-58930).
4.7(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Security Pacific National Trust Company (New
York), as Trustee, relating to the Subordinated Discount
Debentures due 2001 (incorporated by reference to Exhibit
4.7(a) to the Form S-3, Registration No. 33-58930).
4.8 Indenture dated as of May 22, 1989 among RJR Holdings Capital
Corp., RJR Holdings Corp., RJR Holdings Group, Inc., RJR
Nabisco, Inc. and U.S. Trust Company of California, N.A., as
Trustee, relating to the 13 1/2% Subordinated Debentures due
2001, including form of securities (incorporated by reference
to Exhibit 4.8 to the Form S-3, Registration No. 33-58930).
4.8(a) First Supplemental Indenture dated as of May 18, 1992 among RJR
Nabisco, Inc., RJR Nabisco Holdings Corp., RJR Nabisco Holdings
Group, Inc. and Security Pacific National Trust Company (New
York), as trustee, relating to the 13 1/2% Subordinated
Debentures due 2001 (incorporated by reference to Exhibit
4.8(a) to the Form S-3, Registration No. 33-58930).
4.9 Amended and Restated By-laws of RJR Nabisco Holdings Corp., as
amended, effective January 20, 1994 (incorporated by reference
to Exhibit 3.2 to the 1993 Form 10-K).
**5.1 Opinion of Jo-Ann Ford regarding the legality of the securities
being registered.
**7.1 Opinion of Simpson Thacher & Bartlett regarding the liquidation
preference of the securities being registered.
**8.1 Opinion of Simpson Thacher & Bartlett regarding certain federal
income tax matters with respect to the securities being
registered (included on Exhibit 7.1).
12.1 RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR
Nabisco Capital Corp., RJR Nabisco, Inc. (Successor) and RJR
Nabisco, Inc. (Predecessor) Computation of Historical Ratio of
Earnings to Fixed Charges/Deficiency in the Coverage of Fixed
Charges by Earnings Before Fixed Charges for the periods within
the year ended December 31, 1989 (incorporated by reference to
Exhibit 12.3 to the Form S-4, Registration No. 33-36070).
12.2 RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group Inc., RJR
Nabisco Capital Corp. and RJR Nabisco, Inc. Computation of
Historical Ratio of Earnings to Fixed Charges/Deficiency in the
Coverage of Combined Fixed Charges and Preferred Stock
Dividends by Earnings Before Fixed Charges for the year ended
December 31, 1990 (incorporated by reference to Exhibit 12.4 to
Form S-1, Registration Statement No. 33-32728).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
12.3 RJR Nabisco Holdings Corp. Computation of Earnings to Combined
Fixed Charges and Preferred Stock Dividends for each of the
years in the two year period ended December 31, 1992
(incorporated by reference to Exhibit 12.4 to Form S-3,
Registration Statement No. 33-58930).
*12.4 RJR Nabisco Holdings Corp. Computation of Historical and Pro
Forma Deficiency in the Coverage of Combined Fixed Charges and
Preferred Stock Dividends by Earnings Before Fixed Charges for
the year ended December 31, 1993.
*23.1 Consent of Independent Auditors.
**23.2 Consent of Jo-Ann Ford (included in her opinion filed as Exhibit
5.1).
**23.3 Consent of Simpson Thacher & Bartlett (included in their opinions
filed as Exhibits 7.1 and 8.1)
**25 Powers of Attorney of Charles M. Harper, Stephen R. Wilson,
Robert S. Roath, John T. Chain, Jr., Saul A. Fox, Louis V.
Gerstner, Jr., James H. Greene, Jr., H. John Greeniaus, James
W. Johnston, Vernon E. Jordan, Jr., Henry R. Kravis, John G.
Medlin, Jr., Paul E. Raether, Lawrence R. Ricciardi, Rozanne L.
Ridgway, Clifton S. Robbins, George R. Roberts, Scott M. Stuart
and Michael T. Tokarz.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
EXHIBIT 12.4
RJR NABISCO HOLDINGS CORP.
COMPUTATION OF HISTORICAL AND PRO FORMA DEFICIENCY IN THE COVERAGE OF COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS BY EARNINGS BEFORE FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C> <C>
YEAR ENDED
DECEMBER 31, 1993
------------------------
HISTORICAL PRO FORMA
----------- -----------
Earnings before fixed charges:
Income (loss) from continuing operations........................................... $ (3) $ 41
Provision for income taxes......................................................... 114 138
----------- -----------
Income from continuing operations before income taxes.............................. 111 179
Interest expense................................................................... 1,190 1,139
Amortization of debt issuance costs................................................ 19 19
Interest portion of rental expense................................................. 52 52
----------- -----------
Earnings before fixed charges***..................................................... $ 1,372 $ 1,389
----------- -----------
----------- -----------
Combined fixed charges and preferred stock dividends:
Interest expense................................................................... $ 1,190 $ 1,139
Amortization of debt issuance costs................................................ 19 19
Interest portion of rental expense................................................. 52 52
Capitalized interest............................................................... 9 9
Preferred stock dividends.......................................................... 366* 589**
----------- -----------
Combined fixed charges and preferred stock dividends............................ $ 1,636 $ 1,808
----------- -----------
----------- -----------
Deficiency in the coverage of fixed charges and preferred dividends by earnings
before fixed charges and preferred dividends***...................................... $ 264 $ 419
----------- -----------
----------- -----------
</TABLE>
- ---------------
* Represents dividends of $14 million on ESOP Preferred Stock and pre-tax
equivalent amount on dividends of $175 million on the Series A PERCS, $43
million on the Series B Preferred Stock, and $11 million on the Redeemable
Convertible Preferred Stock.
** Represents dividends of $14 million on ESOP Preferred Stock and pre-tax
equivalent amount on dividends of $175 million on the Series A PERCS, $145
million on the Series C PERCS, $43 million on the Series B Preferred Stock,
and $11 million on the Redeemable Convertible Preferred Stock.
*** Earnings before fixed charges and the resulting calculation of deficiency in
the coverage of fixed charges and preferred dividends by earnings before
fixed charges and preferred dividends includes amortization of trademarks
and goodwill in the amount of $625 million.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to (1) the use in this Amendment No. 1 to Registration Statement
No. 33-52381 of RJR Nabisco Holdings Corp. ("Holdings") on Form S-3 (the
"Registration Statement") of our report dated February 1, 1994 (except with
respect to the subsequent event discussed in Note 17, as to which the date is
February 24, 1994), appearing in the Prospectus, which is part of this
Registration Statement, and (2) the incorporation by reference in the
Registration Statement of our report dated February 1, 1994 (except with respect
to the subsequent event discussed in Note 17, as to which the date is February
24, 1994), appearing in the Annual Report on Form 10-K of Holdings and RJR
Nabisco, Inc. for the year ended December 31, 1993.
We also consent to the reference to us under the headings "Summary
Historical and Pro Forma Consolidated Data", "Selected Historical Consolidated
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE
New York, New York
March 15, 1994
