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[RJR Reynolds Tobacco Company Letterhead]
February 26, 1996
Mr. John Gates
Editorial Editor
Winston-Salem Journal
418 N. Marshall Street
Winston-Salem, NC 27101
Dear Mr. Gates:
"Let the spin-off begin."
So began a Winston-Salem Journal editorial on February 22, when
it endorsed an immediate spin-off of Nabisco, to save tobacco
from the "sharks."
Instead, you might have said it more directly: "Pay ransom to
the 'greenmailers' and maybe the tobacco company will be
spared. Given them what they want and they'll leave you
alone." With every good intention, that appears to be what the
Journal is advocating. But 'sharks', as you described Messrs.
LeBow and Icahn, are rarely satisfied with a morsel; instead
they consume their victims. Just look at these raiders, past
victims: TWA, Western Union, and others, all ended in
bankruptcy; but the hungry sharks were well-fed.
Pay the ransom to the raiders? Do something that the Journal
acknowledges may hurt shareholders in order to tempt the
raiders to go away? As the leader of our tobacco business and
a director of RJR Nabisco, I won't do that. I can't do that.<PAGE>
"We work for smokers."
Regarding the spin-off, RJR Nabisco's board of directors has
stated its commitment to separating food and tobacco, but only
at the right time. Before I address why now is not the right
time, let me make it clear that what this raid is all about has
little to do with spinning off Nabisco. It has a lot to do
with LeBow and Icahn attempting to unload the struggling
Liggett and Myers Tobacco Company on RJR.
Mr. LeBow controls the parent company (Brooke Group) of Liggett
and Myers. Last year Mr. LeBow approached RJR Nabisco's
management about buying out Liggett, thereby enabling him to
pay his debt to Mr. Icahn and make a handsome profit as well.
We turned him down.
There was no value to RJR in acquiring Liggett. It has nothing
to offer us in the marketplace. So Messrs. LeBow and Icahn
decided to acquire RJR Nabisco stock in hopes of forcing RJR to
buy Liggett and turn control of RJR's successful cash flow over
to them and their hand-picked board of directors. When pencil
is put to paper, Mr. Icahn stands to receive $50 million from
the deal; Mr. LeBow millions of dollars -- if they can pull
this off.
So, from their perspective, this isn't a simple question of
whether RJR and Nabisco will split.
As I stated earlier, the RJR Nabisco board has committed to
split the two companies, but at the right time. Nearly two
years ago, we began the discussion of when the appropriate time
for such a split might be and how to establish appropriate
conditions for a successful spin-off.
Now is not that time. These are the conditions to meet in
order for a spin-off to occur: we must avoid costly litigation
delays and protracted uncertainties; we must preserve the
financial integrity of our tobacco and food businesses; we must
have a tax-free transaction.<PAGE>
The Journal's editorial referred to the fact that a precipitous
split of the companies would likely spur a lawsuit from
bondholders of RJR Nabisco. That is indeed likely. To present
our bondholders with two separate companies facing an entirely
new set of legal and financial liabilities would likely be
challenged in court. In addition, there are other legal
hurdles already outstanding against RJR Tobacco. Some involve
traditional smoking and health issues. Some are "class
actions," lumping millions of smokers into lawsuits against the
industry. And some state governments are attempting to recover
Medicaid payments that states have purportedly made to cover
medical treatment for people who smoke. The plaintiffs'
attorneys in some of these actions have already stated that
they would ask the courts to block any split of the food
company from the tobacco industry.
Messrs. LeBow and Icahn have dangled the hope of much higher
stock prices for the separated companies. I believe those
prices are unrealistic at this time. No one has a higher
opinion of this company, its employees, and its inherent value
than I do. Our stock is currently undervalued, and I believe
this will improve. However, Messrs. LeBow and Icahn's
irresponsible and irrevocable approach is not the way to
achieve those goals
One clear indicator of bondholders' concern occurred on
February 22 when Standard and Poor's placed RJR Nabisco's debt
on a 'credit watch' for possible downgrading, a direct result
of the LeBow/Icahn activities to date. It took several years
of hard work to improve RJR Nabisco's financial position after
the LBO in 1989 to the point where we can once again borrow
investment capital at competitive rates. To put our financial
position in jeopardy is unwise.
For these reasons and more, the time is not right to split the
companies today. I know the frustration of our shareholders at
the performance of RJR Nabisco's stock price. We, as a
management team, must continue to improve the fundamentals of
this business to provide strong returns in the short run while<PAGE>
resolving some of the legal and regulatory situations that face
our industry. This will enable us to split two strong, viable
companies.
Finally, I want to clarify the status of our battle with Brooke
Group. According to Mr. LeBow's account of the vote (yet to be
verified), 50.4% of RJR Nabisco shareholders voted in favor of
a resolution to spin-off Nabisco. The vote is a non-binding
expression of shareholder interest, a course of action with
which we agree, but again, at the right time.
The upcoming vote to elect directors at our annual meeting is
the critical vote. That is when shareholders decide who they
want to oversee RJR Nabisco. The choice is clear: either the
current board of outstanding, seasoned people or LeBow's hand-
picked slate, many of whom are part of Brooke Group. Over the
next several weeks, we will be talking to our shareholders to
convince them to be prudent and not turn this company over to
this group of raiders.
In the seven years since I've returned to RJR, we have survived
a number of crises from high debt levels to price wars. Today,
our company is on more solid financial footing than ever.
Through every dark cloud, I've asked that my fellow employees
stand with me, and they have. When I've hoped the community
would stand with us, it has.
For RJR to bow down and feed the sharks underestimates the RJR
team, this community, our shareholders, and me.
Sincerely,
/s/ James W. Johnston
James W. Johnston<PAGE>
CERTAIN ADDITIONAL INFORMATION: RJR Nabisco Holdings Corp.
will be soliciting proxies against the director nominees of
Brooke Group Ltd. and other shareholder proposals. The
following individuals may be deemed to be participants in the
solicitation of proxies by RJR Nabisco Holdings Corp.: RJR
Nabisco Holdings Corp.; John T. Chain, Jr.; Julius L. Chambers;
John L. Clendenin; Steven F. Goldstone; H. John Greeniaus; Ray
J. Groves; Charles M. Harper, James W. Johnston; John G.
Medlin, Jr.; Robert S. Roath; Rozanne L. Ridgway; Robert F.
Sharpe, Jr.; and Huntley R. Whitacre. As of February 1, 1996,
Mr. Chain is the beneficial owner of 8,859 shares of the
company's common stock; Mr. Chambers is the beneficial owner of
6,888 shares of the company's common stock; Mr. Clendenin is
the beneficial owner of 7,312 shares of the company's common
stock; Mr. Goldstone is the beneficial owner of 16,532 shares
of the company's common stock; Mr. Greeniaus is the beneficial
owner of 126,390 shares of the company's common stock; Mr.
Groves is the beneficial owner of 7,466 shares of the company's
common stock; Mr. Harper is the beneficial owner of 524,955
shares of the company's common stock; Mr. Johnston is the
beneficial owner of 114,463 shares of the company's common
stock; Mr. Medlin is the beneficial owner of 7,725 shares of
the company's common stock; Mr. Roath is the beneficial owner
of 38,435 shares of the company's common stock; Ms. Ridgway is
the beneficial owner of 6,859 shares of the company's common
stock; Mr. Sharpe is the beneficial owner of 37,276 shares of
the company's common stock; and Mr. Whitacre is the beneficial
owner of 29,464 shares of the company's common stock.
