<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
---------------------
NABISCO GROUP HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 1-10215 13-3490602
<S> <C> <C>
(State or other jurisdiction (Commission file number) (I.R.S. Employer Identification No.)
of
incorporation or organization)
</TABLE>
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6013
(212) 258-5600
(Address, including zip code, and telephone number, including area
code, of the registrant's principal executive offices)
------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X , NO ___.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: OCTOBER 29, 1999:
326,146,847 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three and Nine
Months Ended September 30, 1999 and 1998.................. 1
Consolidated Condensed Statements of Cash Flows--Nine Months
Ended September 30, 1999 and 1998......................... 2
Consolidated Condensed Balance Sheets--September 30, 1999
and December 31, 1998..................................... 3
Notes to Consolidated Condensed Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
Signatures.......................................................................... 22
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------- ------- ------- -------
NET SALES.......................................... $ 2,057 $ 2,098 $ 5,935 $ 6,191
------- ------- ------- -------
Costs and expenses:
Cost of products sold............................ 1,133 1,166 3,249 3,478
Selling, advertising, administrative and general
expenses....................................... 679 693 2,023 1,982
Amortization of trademarks and goodwill.......... 54 54 161 167
Restructuring charge (credit).................... (59) -- (59) 406
------- ------- ------- -------
OPERATING INCOME............................... 250 185 561 158
Interest and debt expense.......................... (66) (97) (254) (303)
Other income (expense), net........................ (4) (10) (14) (22)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES.............. 180 78 293 (167)
Provision (benefit) for income taxes............... 64 35 109 (37)
------- ------- ------- -------
INCOME (LOSS) BEFORE MINORITY INTEREST IN
INCOME (LOSS) OF NABISCO HOLDINGS............ 116 43 184 (130)
Less minority interest in income (loss) of Nabisco
Holdings......................................... 22 11 42 (17)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS....... 94 32 142 (113)
Discontinued operations:
Income from operations of discontinued
businesses, net of income taxes................ -- 126 24 121
Gain on discontinued businesses, net of income
taxes.......................................... -- -- 2,970 --
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM............... 94 158 3,136 8
Extraordinary item--loss on early extinguishment of
debt, net of income taxes and minority
interest......................................... (2) -- (281) --
------- ------- ------- -------
NET INCOME..................................... $ 92 $ 158 $ 2,855 $ 8
======= ======= ======= =======
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations......... $ .29 $ .06 $ .43 $ (.45)
Income from discontinued operations.............. -- .39 9.21 .37
Extraordinary loss............................... (.01) -- (.87) --
------- ------- ------- -------
Net income (loss).............................. $ .28 $ .45 $ 8.77 $ (.08)
======= ======= ======= =======
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations......... $ .29 $ .06 $ .42 $ (.45)
Income from discontinued operations.............. -- .39 9.21 .37
Extraordinary loss............................... (.01) -- (.87) --
------- ------- ------- -------
Net income (loss).............................. $ .28 $ .45 $ 8.76 $ (.08)
======= ======= ======= =======
DIVIDENDS PER SHARE OF COMMON STOCK................ $ .1225 $ .5125 $1.1475 $1.5375
======= ======= ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
1
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income................................................ $2,855 $ 8
Less income from discontinued operations.................. 2,994 121
------ -----
Subtotal.................................................. (139) (113)
------ -----
Adjustments to reconcile to net cash flows from continuing
operating activities:
Depreciation and amortization......................... 359 374
Deferred income tax provision (benefit)............... 28 (183)
Extraordinary loss on early extinguishment of debt,
net................................................. 431 --
Changes in working capital items, net................. (583) (208)
Restructuring items, net of cash payments............. (124) 379
Other, net............................................ 27 (40)
------ -----
Total adjustments................................... 138 322
------ -----
Net cash flows from (used in) continuing operating
activities............................................ (1) 209
Net cash flows from discontinued operations............. 2,284 76
------ -----
Net cash flows from operating activities................ 2,283 285
------ -----
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures...................................... (150) (242)
Proceeds from sale of businesses.......................... -- 550
Acquisition of businesses................................. (107) (9)
Investment in commercial paper............................ (114) --
Proceeds on sale of assets................................ 27 8
Repurchases of Nabisco Holdings' Class A common stock..... (12) (38)
Proceeds from exercise of Nabisco Holdings' Class A common
stock options........................................... 7 24
------ -----
Net cash flows from (used in) investing activities...... (349) 293
------ -----
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings (repayments) of long-term debt............. (18) (29)
Repurchase/redemption of trust preferred securities....... (1,265) --
Increase (decrease) in short-term borrowings.............. 183 (95)
Dividends paid on common and preferred stock.............. (583) (564)
Repurchase of ESOP preferred stock........................ (202) (9)
Other, net................................................ 63 77
------ -----
Net cash flows used in financing activities............. (1,822) (620)
------ -----
Effect of exchange rate changes on cash and cash
equivalents............................................... (9) (6)
------ -----
Net change in cash and cash equivalents................. 103 (48)
Cash and cash equivalents at beginning of period............ 112 127
------ -----
Cash and cash equivalents at end of period.................. $ 215 $ 79
====== =====
Income taxes paid, net of refunds........................... $ 85 $ 81
Interest paid............................................... $ 265 $ 258
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 215 $ 112
Accounts and notes receivable, net........................ 522 522
Inventories............................................... 915 753
Prepaid expenses.......................................... 75 70
Deferred income taxes..................................... 131 101
Net assets of discontinued businesses (Note 2)............ -- 6,696
------- -------
TOTAL CURRENT ASSETS.................................. 1,858 8,254
------- -------
Property, plant and equipment, net.......................... 2,830 2,947
Trademarks, net............................................. 3,281 3,368
Goodwill, net............................................... 3,071 3,182
Other assets and deferred charges........................... 331 94
------- -------
$11,371 $17,845
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 54 $ 68
Accounts payable and accrued liabilities.................. 1,388 1,638
Current maturities of long-term debt...................... 159 118
Income taxes accrued...................................... 67 121
------- -------
TOTAL CURRENT LIABILITIES............................. 1,668 1,945
------- -------
Long-term debt (less current maturities).................... 3,753 3,619
Minority interest in Nabisco Holdings....................... 740 752
Other noncurrent liabilities................................ 757 962
Deferred income taxes....................................... 1,293 1,226
Contingencies (Note 9)
Nabisco Group Holdings' obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely
junior subordinated debentures*........................... 98 1,327
Stockholders' equity:
ESOP preferred stock...................................... -- 205
Common stock (1999--329,524,147 shares issued, 1998--
328,385,148 shares issued).............................. 3 3
Paid-in capital........................................... 3,460 9,004
Retained earnings (accumulated deficit)................... 52 (577)
Accumulated other comprehensive income (loss)............. (340) (460)
Treasury stock, at cost................................... (100) (100)
Other stockholders' equity................................ (13) (61)
------- -------
TOTAL STOCKHOLDERS' EQUITY.......................... 3,062 8,014
------- -------
$11,371 $17,845
======= =======
</TABLE>
- ------------------------
* The sole asset of the subsidiary trust is the junior subordinated debentures
of Nabisco Group Holdings Corp. The remaining outstanding junior
subordinated debentures have an aggregate principal amount of approximately
$101 million, an annual interest rate of 9 1/2%, and mature in September,
2047. The preferred securities will be mandatorily redeemed upon redemption
of the junior subordinated debentures. See Note 2 for discussion regarding
the partial tender and redemption of these securities.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- INTERIM REPORTING
GENERAL
The consolidated condensed financial statements include the accounts of
Nabisco Group Holdings Corp. ("NGH"--formerly named RJR Nabisco Holdings Corp.),
and its majority-owned subsidiaries, including 80.5% of Nabisco Holdings Corp.
("Nabisco Holdings") and its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco").
In management's opinion, the accompanying unaudited consolidated condensed
financial statements (the "Consolidated Condensed Financial Statements") of NGH
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods presented.
For interim reporting purposes, certain costs and expenses are charged to
operations in proportion to the estimated total annual amount expected to be
incurred. The results for the three and nine month periods ended September 30,
1999 are not necessarily indicative of the results to be expected for the year
ended December 31, 1999.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
The account balances and activities of R.J. Reynolds Tobacco Holdings, Inc.
("RJR"--formerly named RJR Nabisco, Inc.), which included R.J. Reynolds
International ("Reynolds International"), R.J. Reynolds Tobacco Company
("Reynolds Tobacco") and corporate headquarters, are segregated and reported as
discontinued operations in the accompanying consolidated condensed financial
statements. See Note 2 for further discussion. The Consolidated Condensed
Financial Statements should be read in conjunction with the restated
consolidated financial statements and footnotes of NGH at December 31, 1998 and
1997 and for each of the three years ended December 31, 1998 filed on Form 8-K
on June 3, 1999.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
On January 1, 1999, NGH adopted SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 established standards on accounting for
start-up and organization costs and, in general, requires such costs to be
expensed as incurred. The adoption of SOP No. 98-5 did not have a material
effect on NGH's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
During the second quarter of 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was required
to be adopted by January 1, 2000, with early adoption permitted. In June 1999,
the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133, which amended SFAS
No. 133 to delay its effective date one year. SFAS No. 133 requires that all
derivative instruments be recorded on the consolidated balance sheet at their
fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. NGH has not yet determined the impact, if any, that
adoption or subsequent application of SFAS No. 133 will have on its financial
position or results of operations.
COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was $76 million and $154 million for the
three months ended September 30, 1999 and 1998, respectively, and $2.76 billion
and $(27) million for the nine months ended
4
<PAGE>
NOTE 1 -- INTERIM REPORTING (CONTINUED)
September 30, 1999 and 1998, respectively. Total comprehensive income (loss)
includes net income (loss), foreign currency translation adjustments.
ACQUISITIONS
During the third quarter of 1999 Nabisco acquired the stock of Canale SA,
Argentina's fourth largest biscuit company, for approximately $126 million. The
acquisition was accounted for as a purchase. Accordingly, the purchase price
will be allocated to the underlying assets and liabilities based upon their
estimated fair values at the date of acquisition. As of September 30, 1999 the
acquisition was carried in other assets in the consolidated balance sheet
pending completion of the purchase price allocation.
During the third quarter of 1999 Nabisco entered into a definitive agreement
to acquire certain assets and liabilities of Favorite Brands International, Inc.
for $475 million. The transaction is expected to be completed in the fourth
quarter of 1999, subject to various conditions including court and regulatory
approval. Favorite Brands is currently reorganizing under Chapter 11 bankruptcy
protection, and the transaction is still subject to a bankruptcy court public
auction process. Favorite Brands is the fourth largest non-chocolate candy
company in the United States with annual sales of approximately $700 million.
NOTE 2 -- THE REORGANIZATION
On March 9, 1999, RJR and Reynolds Tobacco entered into a definitive
agreement to sell the international tobacco business for approximately $8
billion, including the assumption of approximately $200 million of net debt, to
Japan Tobacco Inc. ("Japan Tobacco"). The sale was substantially completed on
May 12, 1999 and resulted in a net gain of approximately $2.97 billion, after
income taxes of approximately $1.9 billion, subject to post-closing adjustments.
Under the terms of the agreement, Japan Tobacco acquired substantially all of
the business, including intellectual property rights of Reynolds International,
including the international rights to the CAMEL, WINSTON and SALEM brand names.
Proceeds from the sale were used to reduce debt and for general corporate
purposes. The repurchase of approximately $4 billion of debt securities by RJR
resulted in an extraordinary loss of approximately $384 million ($250 million
after-tax) during the period.
Also on March 9, 1999, NGH announced that its board of directors had
approved a plan to separate the domestic tobacco business conducted by Reynolds
Tobacco, from the food business conducted by Nabisco's operating subsidiaries.
Under the plan, the separation was accomplished by the transfer on May 18, 1999
of RJR's 80.5% interest in Nabisco, together with approximately $1.6 billion in
proceeds from the international tobacco sale, to NGH through a merger
transaction, followed by a spin-off on June 14, 1999 to NGH stockholders of
shares in RJR. The merger transaction and subsequent spin-off are intended to be
tax-free. An additional $200 million of proceeds from the international tobacco
sale was transferred by RJR to NGH prior to the spin-off in satisfaction of
certain liabilities assumed by NGH.
Upon completion of the spin-off, NGH was legally renamed Nabisco Group
Holdings Corp. and continues to exist as a holding company, owning 80.5% of
Nabisco. The renamed Nabisco Group Holdings Corp. (symbol: NGH) and Nabisco
(symbol: NA) each will continue to trade as separate companies on The New York
Stock Exchange. Shares of RJR (symbol: RJR), as the owner of 100% of Reynolds
Tobacco, are also trading separately under the changed name of R.J. Reynolds
Tobacco Holdings, Inc.
NGH, RJR and Reynolds Tobacco have entered into several agreements governing
the relationships among the parties after the distribution of RJR's shares to
NGH stockholders, including the provision of intercompany services by Nabisco to
NGH, certain tax matters, indemnification rights and obligations and other
matters among the parties as disclosed in the Form 8-K filed by NGH on June 15,
1999.
On April 13, 1999, NGH offered to purchase any and all of its 9 1/2% trust
preferred securities and sought consents from the holders of those securities to
waive certain covenants that might have prevented some of the transactions
described above. The consent offer expired on May 17, 1999 and resulted in the
5
<PAGE>
NOTE 2 -- THE REORGANIZATION (CONTINUED)
tender of approximately $276 million of the total $374 million trust preferred
securities. The total cost to tender the preferred securities, including accrued
interest, premium fees and consent fees was approximately $314 million. NGH
invested approximately $114 million of the proceeds received from RJR from the
international tobacco sale in highly rated short-term commercial paper to
service future principal and interest payments through 2003 on the trust
securities not tendered. Of the balance remaining at September 30, 1999,
$9 million is included in current assets and $101 million is included in other
assets and deferred charges.
On May 18, 1999, NGH called for redemption all of its $949 million 10% trust
preferred securities outstanding. NGH completed the redemption of the full
amount of the securities on June 18, 1999.
The purchase and redemption of the 9 1/2% and 10% trust preferred securities
resulted in an extraordinary loss of approximately $44 million ($29 million
after tax) which is included in the results for the nine months ended
September 30, 1999.
On or about May 18, 1999, NGH called for redemption of all of its
outstanding ESOP convertible preferred stock at $16.25 per share, plus accrued
dividends. A total of 12,412,767 shares were redeemed at a cost of approximately
$202 million. NGH completed this transaction on June 10, 1999. The 406,200
remaining shares were repurchased at $16.00 per share.
In connection with the reorganization transactions, the assets and
liabilities of the Retirement Plan for Employees of RJR Nabisco, Inc. (the "old
plan") were split into two plans. One plan covers employees and former employees
of Nabisco Holdings, Nabisco and NGH ("the Nabisco Plan") and the other plan
covers employees and former employees of RJR.
The split of the assets and liabilities of the old plan was in accordance
with a May 1999 agreement between the Pension Benefit Guaranty Corporation
("PBGC") and RJR Nabisco Holdings Corp. Based on this agreement and as required
by Section 414(1) of the Internal Revenue Code, the assets of the old plan were
allocated in proportion to the benefit obligations of each of the respective
plans. The use of this methodology resulted in a lower actual transfer of assets
to the Nabisco Plan of approximately $70 million and the assumption of higher
actual benefit obligations of approximately $30 million than the allocated
amounts used in the December 31, 1998 consolidated financial statements. The
impact of this change, an increase in the unfunded pension liability of
$100 million, will be recognized in net periodic benefit costs over future
periods. As a result, net periodic benefit cost for full year 1999 is expected
to increase by approximately $7 million. The PBGC agreement did not require
Nabisco to make additional contributions to the Nabisco Plan.
Summarized operating results of the discontinued businesses are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................................... $ -- $2,230 $4,210 $6,376
Provision for income taxes.................................. -- 139 123 212
</TABLE>
6
<PAGE>
NOTE 2 -- THE REORGANIZATION (CONTINUED)
Assets and liabilities of the discontinued businesses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Current assets.............................................. $ 2,987
Property, plant and equipment, net.......................... 2,351
Trademarks and goodwill, net................................ 12,165
Other assets and deferred charges........................... 341
Current liabilities......................................... (2,859)
Long-term debt (less current maturities).................... (5,036)
Deferred income taxes....................................... (1,936)
Other noncurrent liabilities................................ (1,317)
-------
Net assets of discontinued businesses..................... $ 6,696
=======
</TABLE>
----------------------------
NOTE 3 -- EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
applicable to common stock:
Income (loss) from continuing
operations............................ $ 94 $ 94 $ 32 $ 32 $ 142 $ 142 $ (113) $ (113)
Preferred stock dividends............... -- -- (11) (11) (8) (8) (33) (33)
-------- -------- -------- -------- -------- -------- -------- --------
$ 94 $ 94 $ 21 $ 21 $ 134 $ 134 $ (146) $ (146)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding (in
thousands):
Common shares........................... 325,190 325,190 323,858 323,858 324,671 324,671 323,838 323,838
Assumed exercise of NGH's stock
options............................... -- 263 -- 2 -- 286 -- --
-------- -------- -------- -------- -------- -------- -------- --------
325,190 325,453 323,858 323,860 324,671 324,957 323,838 323,838
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Shares of ESOP convertible preferred stock of 13,214,133 were not included
in computing diluted earnings per share for 1998, because the effect would have
been antidilutive. Common shares also exclude 949,100 and 969,000 shares of
restricted stock as the vesting provisions had not been met at September 30,
1999 and 1998, respectively.
In connection with the spin-off, options held by employees to purchase RJR
Nabisco Holdings Corp. common stock (17,065,066 options) were equitably adjusted
into options covering NGH shares (18,354,932 options) and options covering RJR
shares (5,456,114 options) in a manner intended to preserve the aggregate
benefits under the options.
7
<PAGE>
NOTE 4 -- STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the nine months ended September 30, 1999
were as follows:
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
EARNINGS OTHER
CAPITAL PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY
IN MILLIONS STOCK* CAPITAL DEFICIT) INCOME (LOSS) STOCK OTHER TOTAL
- ----------- -------- -------- ------------ -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998....... $ 208 $9,004 $ (577) $(460) $(100) $ (61) $ 8,014
Net income......................... -- -- 2,855 -- -- -- 2,855
Exercise of stock options.......... -- 28 -- -- -- -- 28
Retirement and redemption of ESOP
preferred stock.................. (205) (2) -- -- -- -- (207)
Cash dividends declared............ -- -- (381) -- -- -- (381)
Foreign currency translation
adjustments...................... -- -- -- (104) -- -- (104)
ESOP note payments received........ -- -- -- -- -- 34 34
Recognition of Reynolds
International cumulative
translation adjustments upon
sale............................. -- -- -- 218 -- -- 218
Distribution of RJR stock.......... -- -- (7,417) 6 -- 7 (7,404)
Reclassify retained earnings debit
balance.......................... -- (5,572) 5,572 -- -- -- --
Other.............................. -- 2 -- -- -- 7 9
----- ------ ------- ----- ----- ------- -------
Balance at September 30, 1999...... $ 3 $3,460 $ 52 $(340) $(100) $ (13) $ 3,062
===== ====== ======= ===== ===== ======= =======
</TABLE>
* Includes $3 million of common stock for each reporting period presented.
NOTE 5 -- 1998 RESTRUCTURING CHARGES
In the second and fourth quarters of 1998, Nabisco recorded restructuring
charges of $406 million ($216 million after tax, net of minority interest) and
$124 million ($75 million after tax, net of minority interest), respectively.
These restructuring programs were undertaken to streamline operations and
improve profitability and will result in a workforce reduction of approximately
6,500 employees of which 5,020 positions were eliminated as of September 30,
1999. The restructuring programs will require net cash expenditures of
approximately $170 million. In addition, the programs will require additional
restructuring-related expenses of approximately $134 million. Since the
programs' inception, $102 million ($49 million after tax, net of minority
interest) was incurred, of which $12 million ($6 million after tax, net of
minority interest) and $46 million ($22 million after tax, net of minority
interest), respectively, were incurred in the three months and nine months ended
September 30, 1999. These additional expenses are principally for implementation
and integration of the programs and include costs for relocation of employees
and equipment and training.
In the third quarter of 1999, Nabisco recorded a net restructuring credit of
$59 million ($35 million after tax, net of minority interest) related to the
Biscuit, U.S. Foods Group and International businesses of $26 million,
$14 million and $19 million, respectively, primarily reflecting higher than
anticipated proceeds from the sale of facilities closed as part of the 1998
restructuring programs and lower costs and cash outlays than originally
estimated for certain of these programs.
The major components of the credit were lower severance and benefit costs
for: the sales force reorganization of $18 million; staff reduction at
headquarters and operating units of $20 million; and distribution
reorganizations of $4 million. The reduced costs reflect unanticipated staff
reductions through voluntary separations rather than planned terminations and
other net changes in cost estimates. In addition, asset impairment costs were
lower by $14 million reflecting higher proceeds and anticipated proceeds from
the sales of facilities.
8
<PAGE>
NOTE 5 -- 1998 RESTRUCTURING CHARGES (CONTINUED)
The key elements of the restructuring programs include:
<TABLE>
<CAPTION>
SEVERANCE CONTRACT ASSET OTHER EXIT
IN MILLIONS AND BENEFITS TERMINATIONS IMPAIRMENTS COSTS TOTAL
- ----------- ------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Sales force reorganizations.............. $ 37 $ 3 $ -- $-- $ 40
Distribution reorganizations............. 16 8 9 33
Staff reductions......................... 83 3 86
Manufacturing cost reduction
initiatives............................. 22 8 30
Plant closures........................... 46 3 217 15 281
Product line rationalizations............ 4 4 20 32 60
---- --- ---- --- ----
Total 1998 restructuring reserves.... 208 18 257 47 530
Third quarter 1999 restructuring
credit.................................. (41) (2) (14) (2) (59)
---- --- ---- --- ----
167 16 243 45 471
---- --- ---- --- ----
Charges and Payments:
Year ended December 31, 1998............. (34) (3) (12) (12) (61)
Nine months ended September 30, 1999..... (55) (5) (66) (16) (142)
---- --- ---- --- ----
Total charges and payments, net of
cash proceeds...................... (89) (8) (78) (28) (203)
---- --- ---- --- ----
Reserve and valuation account balances as
of September 30, 1999................... $ 78 $ 8 $165 $17 $268
==== === ==== === ====
</TABLE>
The total charges and payments, net of cash proceeds applied against the
restructuring reserves totaled $85 million which is comprised of cumulative cash
expenditures of $103 million and cumulative cash proceeds of $18 million. For
the first nine months of 1999, charges and payments, net of cash proceeds
totaled $47 million, which is comprised of $65 million of cash expenditures and
$18 million of cash proceeds which were applied against the restructuring
reserves.
The key elements of the restructuring programs, after the restructuring
credit of $59 million include:
<TABLE>
<CAPTION>
SEVERANCE CONTRACT ASSET OTHER EXIT
IN MILLIONS AND BENEFITS TERMINATIONS IMPAIRMENTS COSTS TOTAL
- ----------- ------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Sales force reorganization............... $ 19 $ 3 $ -- $-- $ 22
Distribution reorganization.............. 12 4 7 23
Staff reductions......................... 63 1 4 68
Manufacturing cost reduction
initiatives............................. 22 8 30
Plant closures........................... 49 3 203 15 270
Product line rationalizations............ 2 5 21 30 58
---- --- ---- --- ----
Total restructuring charges.......... $167 $16 $243 $45 $471
==== === ==== === ====
</TABLE>
Asset impairments in connection with the restructuring program were
identified and measured in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In
instances where the held and used method was applied, which includes all plant
closures, the fair value of impaired assets was determined using the discounted
cash flows generated from assets while still in use and the estimated proceeds
from their ultimate sale.
As of September 30, 1999, production had ceased in 10 of the 18 facilities
to be closed, of which 4 were sold. In addition, 2 of the remaining facilities
are under contract to be sold.
9
<PAGE>
NOTE 6 -- INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished products................................... $573 $457
Raw materials....................................... 195 164
Other............................................... 147 132
---- ----
$915 $753
==== ====
</TABLE>
NOTE 7 -- LONG-TERM DEBT
During the third quarter of 1999 Nabisco exercised a call option to redeem
$200 million of floating rate notes due August 2009 and recognized an after-tax
extraordinary loss, net of minority interest of approximately $2 million. This
redemption was refinanced with commercial paper.
NOTE 8 -- SEGMENT REPORTING
NGH is a holding company whose subsidiaries are engaged principally in the
manufacture, distribution and sale of cookies, crackers, and other food
products. NGH is organized and reports its results of operations in three
operating segments: Biscuit, the U.S. Foods Group and the International Food
Group which are segregated by both product and geographic location.
NGH's management evaluates the performance of its operating segments based
upon ongoing Operating Company Contribution (OCC). OCC for each reportable
segment is operating income before amortization of trademarks and goodwill,
restructuring charges and credits and restructuring-related expenses and gain on
divestitures, net.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
IN MILLIONS 1999 1998 1999 1998
- ----------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net sales from external customers:
Biscuit........................................ $ 924 $ 926 $ 2,688 $ 2,640
U.S. Foods Group............................... 545 498 1,527 1,419
International Food Group....................... 588 631 1,720 1,836
------- ------- ------- -------
Total ongoing.............................. 2,057 2,055 5,935 5,895
------- ------- ------- -------
U.S. Foods Group............................... -- 40 -- 286
International Food Group....................... -- 3 -- 10
------- ------- ------- -------
Total divested............................. -- 43 -- 296
------- ------- ------- -------
Total.................................... $ 2,057 $ 2,098 $ 5,935 $ 6,191
======= ======= ======= =======
</TABLE>
10
<PAGE>
NOTE 8 -- SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
IN MILLIONS 1999 1998 1999 1998
- ----------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Segment operating company contribution:
Biscuit........................................ $ 136 $ 127 $ 386 $ 399
U.S. Foods Group............................... 74 60 196 171
International Food Group....................... 49 48 129 127
Other.......................................... (2) 1 (2) 2
------- ------- ------- -------
Total ongoing.............................. 257 236 709 699
------- ------- ------- -------
U.S. Foods Group and other..................... -- 3 -- 38
International Food Group....................... -- 1 -- 1
------- ------- ------- -------
Total divested............................. -- 4 -- 39
------- ------- ------- -------
Total segment operating company contribution..... 257 240 709 738
Restructuring-related expenses................... 12 15 46 21
Gain on divestitures, net........................ -- (14) -- (14)
Amortization of trademarks and goodwill.......... 54 54 161 167
Restructuring charge (credit).................... (59) -- (59) 406
------- ------- ------- -------
Consolidated operating income.................... 250 185 561 158
Interest and debt expense........................ 66 97 254 303
Other expense, net............................... 4 10 14 22
------- ------- ------- -------
Income (loss) before income taxes................ $ 180 $ 78 $ 293 $ (167)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
IN MILLIONS 1999 1998
- ----------- ------------- ------------
<S> <C> <C>
Segment assets:
Biscuit................................................... $ 2,280 $ 2,136
U.S. Foods Group.......................................... 961 845
International Food Group.................................. 2,696 2,594
-------- -------
Total segment assets...................................... 5,937 5,575
Unallocated intangibles, net (1).......................... 5,434 5,574
Net assets of discontinued businesses..................... -- 6,696
-------- -------
Consolidated assets....................................... $ 11,371 $17,845
======== =======
</TABLE>
- ------------------------
(1) Represents unallocated goodwill, trademarks and tradename resulting from
KKR's 1989 acquisition of RJR.
NOTE 9 -- CONTINGENCIES
TOBACCO LITIGATION
CASES NAMING NGH. As a result of its now severed ownership connection to
Reynolds Tobacco, NGH was named as a defendant in a number of smoking and health
lawsuits. As of November 3, 1999, NGH continued to be a defendant in 18 lawsuits
arising out of the tobacco business conducted by Reynolds Tobacco or its
subsidiaries. Two cases that had been pending against NGH were dismissed in the
last quarter. One case, brought in an Alaska state court by a group of Native
American tribes, was voluntarily dismissed by the plaintiffs. In the other, a
Pennsylvania federal district court granted defendants' motion to dismiss with
prejudice plaintiffs' claims that defendants had violated their civil rights by
marketing
11
<PAGE>
NOTE 9 -- CONTINGENCIES (CONTINUED)
cigarettes. The 18 cases name NGH on a variety of theories, not always
specifically pled, that seek to impose liability on NGH for injuries allegedly
caused by the use, sale, distribution, manufacture, development, advertising,
marketing or health effects of, exposure to, or research, statements or warnings
regarding cigarettes.
Most of these 18 active suits were brought in state courts by union
health-benefit trust funds and, in one instance, Native American tribes seeking
to recover the health-care costs they claim to have incurred for their members
whose illnesses are allegedly related to cigarettes. One health-care cost
recovery suit is being brought in a Texas state court by a foreign state
government (RIO DE JANIERO V. PHILIP MORRIS COMPANIES). Three of the cases are
non-union class action suits, one in Indiana state court, one in Missouri state
court and one pending in Lagos, Nigeria. NGH's defenses in all the cigarette
cases in which it is named include the merits defenses of Reynolds Tobacco plus
separate arguments that NGH is a holding company that does not engage in any of
the activities for which plaintiffs seek to impose liability. NGH also seeks to
be dismissed from some of these cases based on the fact that it has no presence
in the state in which a particular case is pending and therefore should not be
subject to the jurisdiction of the applicable court.
In the union health-care cost-recovery cases noted above, defendants also
argue that the case should be dismissed because of the settled law that one who
pays an injured person's medical expenses is legally too remote to maintain an
action against the person allegedly responsible for the injury. Most courts that
have decided motions to dismiss based on this argument, including the federal
courts of appeals for the Second, Third and Ninth Circuits, have granted the
motions to dismiss on these "remoteness" grounds. In another case, in which NGH
was named and which proceeded to trial before a jury, NGH was dismissed from the
case on a directed verdict after plaintiffs had presented their case.
As of November 3, 1999, no case in which NGH is a named defendant was
scheduled for trial in 1999 or the first quarter of 2000. NGH's litigation
defense costs as well as any liabilities it might incur as a result of the cases
pending against it are to be paid by RJR and Reynolds Tobacco under the
indemnification provisions of an agreement between NGH, RJR and Reynolds
Tobacco. NGH's costs of defense, as well as any liabilities incurred as a result
of the case pending in Nigeria and the RIO DE JANIERO case, are also subject to
an indemnity from Japan Tobacco Inc. as provided under the sale agreement among
Japan Tobacco, Reynolds Tobacco and RJR. If RJR and Reynolds Tobacco and Japan
Tobacco cannot fulfill their respective indemnity obligations, NGH could be
required to make the relevant payments itself.
CASES NAMING RJR. In addition to the cases pending against NGH, there are
several hundred lawsuits (556 on October 29, 1999) relating to cigarettes in
which Reynolds Tobacco, and sometimes RJR, are named defendants. Many of these
cases aggregate claims of many plaintiffs and seek recovery of millions and
possibly billions of dollars. One such suit was recently filed by the government
of the United States. If Reynolds Tobacco and RJR are unable to satisfy their
payment obligations for any adverse judgments against them in some or all of
these cases, it is possible that plaintiffs in these cases would seek to recover
the unsatisfied obligations from the assets of NGH by bringing lawsuits on
various theories.
One class action case in which Reynolds Tobacco is a defendant, ENGLE V.
R.J. REYNOLDS TOBACCO COMPANY, is currently being tried. This case, in Florida
state court, is being tried in three phases. A jury found against Reynolds
Tobacco and the other cigarette company defendants in the first phase. In the
second phase, which began on November 1, 1999, the jury is hearing the
individual cases of two class representatives. If liability is found in either
individual case, the jury will determine related compensatory damages for the
relevant individual. In addition, it is possible that the jury may consider the
award of punitive damages for an entire class of Florida smokers. The second
phase is expected to be completed within the next three to four months. The
third phase would consist of individual trials for each purported class member
and could go on for many years.
12
<PAGE>
NOTE 9 -- CONTINGENCIES (CONTINUED)
It is not possible to predict the amount of class-wide punitive damages the
EAGLE jury might award, if any, but it could be in the billions of dollars.
Although the tobacco company defendants are expected to appeal any award of
punitive damages, it is uncertain when the right of such appeal would be
available and what, if any, bonding requirements might be imposed on the
defendants in connection with such an appeal. If a multibillion dollar punitive
damages award were to be granted in the second phase of this case and a bond in
the full amount of the award were required to stay execution on the judgment of
such an award, it could be difficult or impossible for defendants to post such a
bond. Management of Reynolds Tobacco has informed NGH that it does not believe
it would be necessary to post bond to stay execution of any punitive damages
award until an actual award to a specific individual class member was made. As
the trial is currently structured, this would not happen until the claims of all
potential class members had been litigated.
In addition to the ENGEL case, there are currently approximately 11 class
action or health-care cost recovery cases scheduled for trial through the first
half of 2000 in which Reynolds Tobacco is a defendant.
Some of the claims against NGH seek recovery of hundreds of millions and
possibly billions of dollars. This is also true of the litigation pending
against Reynolds Tobacco and RJR. Litigation is subject to many uncertainties.
Management is unable to predict the outcome of the litigation against NGH, or to
derive a meaningful estimate of the amount or range of any possible loss in any
quarterly or annual period or in the aggregate.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of Nabisco Group Holdings'
financial condition and results of operations. The discussion and analysis for
sales, operating company contribution and operating income includes information
as reported in the historical financial statements, followed by items that
management believes impact the comparability of historical results, ongoing
results and management's discussion and analysis of ongoing results. Ongoing
results are presented on a basis consistent with how the ongoing businesses are
managed. They exclude sales, operating company contribution and operating income
from divested and discontinued businesses, restructuring charges and credits,
restructuring-related expenses and gains on divestitures, net that management
believes affect the comparability of the results of operations. The ongoing
results of operations should not be viewed as a substitute for the historical
results of operations but as a tool to better understand the underlying trends
in the business. The discussion and analysis of Nabisco Group Holdings'
financial condition and results of operations should be read in conjunction with
the historical financial information and the related notes thereto included in
the Consolidated Condensed Financial Statements.
Nabisco Group Holdings owns an 80.5% majority interest in Nabisco Holdings.
The food business is conducted by the operating subsidiaries of Nabisco
Holdings. Nabisco's businesses in the United States are comprised of Biscuit and
the U.S. Foods Group. Nabisco's businesses outside the United States are
conducted by Nabisco Ltd and Nabisco International, Inc. ("Nabisco
International" together with Nabisco Ltd, the "International Food Group").
NET SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998 % CHANGE
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
REPORTED NET SALES:
Biscuit................................ $ 924 $ 926 -- $2,688 $2,640 2%
U.S. Foods Group....................... 545 538 1% 1,527 1,705 (10%)
International Food Group............... 588 634 (7%) 1,720 1,846 (7%)
------ ------ ------ ------
Total.................................. 2,057 2,098 (2%) 5,935 6,191 (4%)
------ ------ ------ ------
NET SALES FROM DIVESTED BUSINESSES:
U.S. Foods Group....................... -- 40 -- 286
International Food Group............... -- 3 -- 10
------ ------ ------ ------
Total.................................. -- 43 -- 296
------ ------ ------ ------
NET SALES FROM ONGOING BUSINESSES:
Biscuit................................ 924 926 -- 2,688 2,640 2%
U.S. Foods Group....................... 545 498 9% 1,527 1,419 8%
International Food Group............... 588 631 (7%) 1,720 1,836 (6%)
------ ------ ------ ------
Total.................................. $2,057 $2,055 -- $5,935 $5,895 1%
====== ====== ====== ======
</TABLE>
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON NET SALES FROM ONGOING
BUSINESSES:
- Biscuit's net sales were flat in the third quarter and increased 2% in the
first nine months versus the prior year. The sales performance in the
third quarter reflects the carryover effect of 1998 price increases and
volume gains in cookies and crackers which were more than offset by lower
volumes in breakfast snacks. The first nine months' sales increase
reflects the carryover effect of 1998 price increases and volume increases
in cookie and cracker brands, partially offset by a decline in breakfast
snack volumes.
14
<PAGE>
- U.S. Foods Group's net sales increased 9% in the third quarter and 8% in
the first nine months versus the prior year. Both periods were paced by
strong volume gains from nuts, confections, condiments and pet snacks.
- International's net sales decreased 7% in the third quarter and 6% in the
first nine months versus the prior year. The decrease in the third quarter
was primarily driven by unfavorable foreign currency translation in
Brazil, the Andean region and Spain. Excluding the impact of foreign
currency translation, sales increased 5%. This performance reflects
increased pricing in Brazil and solid volume gains in Argentina, Asia,
Canada and the Caribbean partially offset by volume declines in Brazil and
Spain and price weakness in certain markets. The sales decline for the
first nine months was primarily driven by unfavorable foreign currency
translation, principally in Brazil. Excluding the impact of unfavorable
foreign currency translation, sales increased 4%. The increase was
primarily due to price increases partially offset by volume declines. The
price increases, paced by Brazil, were across all regions, with the
exception of Argentina which experienced competitive pricing pressures.
The volume declines were primarily in Brazil, the Andean region and Spain
offset in part by volume gains in Canada, the Caribbean and Mexico.
OPERATING COMPANY CONTRIBUTION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998 % CHANGE
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
REPORTED OPERATING COMPANY CONTRIBUTION(1):
Biscuit........................................ $129 $117 10% $351 $385 (9%)
U.S. Foods Group............................... 73 64 14% 192 208 (7%)
International Food Group....................... 45 57 (21%) 122 136 (10%)
Other.......................................... (2) 1 (2) 2
---- ---- ---- ----
Total.......................................... 245 239 3% 663 731 (9%)
---- ---- ---- ----
ITEMS EXCLUDED FROM ONGOING OPERATING COMPANY
CONTRIBUTION:
Biscuit:
Restructuring-related expenses............. (7) (10) (35) (14)
U.S. Foods Group:
Restructuring-related expenses............. (1) (1) (4) (3)
Results from divested businesses........... -- 3 -- 38
Net gain on divested businesses............ -- 2 -- 2
International Food Group:
Restructuring-related expenses............. (4) (4) (7) (4)
Results from divested businesses........... -- 1 -- 1
Net gain on divested businesses............ -- 12 -- 12
---- ---- ---- ----
Total.......................................... (12) 3 (46) 32
---- ---- ---- ----
OPERATING COMPANY CONTRIBUTION FROM ONGOING
BUSINESSES:
Biscuit........................................ 136 127 7% 386 399 (3%)
U.S. Foods Group............................... 74 60 23% 196 171 15%
International Food Group....................... 49 48 2% 129 127 2%
Other.......................................... (2) 1 (2) 2
---- ---- ---- ----
Total.......................................... $257 $236 9% $709 $699 1%
==== ==== ==== ====
</TABLE>
- ------------------------
(1) Operating company contribution represents operating income before
amortization of trademarks and goodwill and restructuring charges.
15
<PAGE>
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING COMPANY
CONTRIBUTION FROM ONGOING
BUSINESSES:
- Biscuit's operating company contribution increased 7% in the third quarter
and decreased 3% in the first nine months versus the prior year. The third
quarter results were primarily attributable to the carryover effect of
1998 price increases and slightly lower marketing spending partially
offset by a decline in volume. The volume decline is primarily due to the
impact of lower breakfast snack volumes partially offset by gains in
cookie and cracker volumes. The year to date period was impacted by
increased marketing spending and increased selling costs associated with
the implementation of the redesigned direct store delivery sales force.
The carryover effect of 1998 price increases and lower manufacturing
overhead costs resulting from ongoing productivity programs, along with
volume gains for both cookies and crackers partially offset these higher
costs. Both the 1999 third quarter and year to date periods were
negatively impacted by a $6 million one time charge reflecting the
settlement with the Department of Labor regarding overtime pay for sales
personnel.
- U.S. Foods Group's operating company contribution increased 23% in the
third quarter and 15% in the first nine months versus the prior year. The
third quarter and first nine months' improvements were primarily due to
strong volume gains for nuts, confections, condiments and pet snacks
partially offset by increased marketing spending. The first nine months
were also impacted by the effect of productivity programs on fixed selling
costs.
- International's operating company contributions increased 2% in both the
third quarter and first nine months of 1999 versus the prior year. The
third quarter increase was primarily due to the sales results discussed
previously, combined with productivity gains partially offset by higher
marketing expenditures and the net impact of unfavorable foreign currency
translation. Increased operating company contribution was reported by
Asia, Canada, Argentina and the Caribbean offset in part by shortfalls in
Brazil and Mexico. The first nine months' increase reflects gains in most
regions paced by Asia, Spain, Brazil and Argentina offset in part by
shortfalls in Colombia and Mexico. The gains reflect the price increases
noted in our sales discussion and productivity gains in Argentina and
Spain. Partially offsetting these gains were increased marketing
expenditures primarily in Canada, Argentina and Asia and the unfavorable
impact of foreign currency translation.
OPERATING INCOME
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998 % CHANGE
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
REPORTED OPERATING INCOME..................... $250 $ 185 35% $561 $ 158
---- ----- ---- -----
OPERATING INCOME (LOSS) EXCLUDED FROM ONGOING
BUSINESS:
Restructuring (charge) credit............. 59 -- 59 (406)
Restructuring-related expenses............ (12) (15) (46) (21)
Net gain on divested businesses........... -- 14 -- 14
Results from divested businesses and
other................................... -- 1 -- 31
---- ----- ---- -----
Total 47 -- 13 (382)
---- ----- ---- -----
OPERATING INCOME FROM ONGOING BUSINESS........ $203 $ 185 10% $548 $ 540 1%
==== ===== ==== =====
</TABLE>
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING INCOME FROM ONGOING
BUSINESSES:
- NGH's operating income was $203 million and $548 million for the third
quarter and the first nine months of 1999, an increase of 10% and an
increase of 1%, respectively, from the same 1998
16
<PAGE>
periods. The increase in the third quarter was a result of higher
operating company contribution discussed previously. The increase in the
first nine months reflects higher operating company contribution discussed
previously as well as lower amortization of intangibles due to businesses
sold in 1998.
INTEREST AND DEBT EXPENSE
Consolidated interest and debt expense of $66 million and $254 million for
the third quarter and first nine months of 1999 both decreased 32% and 16%,
respectively from the same 1998 periods primarily due to the paydown of
long-term debt with the net proceeds from businesses sold in the third quarter
of 1998 and with funds generated from operating cash flows and the repurchase
and redemption of trust preferred securities in May of 1999.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $4 million expense and $14 million expense
for the third quarter and first nine months of 1999, a decrease of $6 million
and $8 million, respectively, principally due to higher interest income,
partially offset by higher foreign exchange losses.
NET INCOME (LOSS)
Nabisco Group Holdings' net income of $92 million and $2.9 billion for the
third quarter and the first nine months of 1999 compares to net income of
$158 million and $8 million for the same 1998 periods. The third quarter
decrease primarily reflects the absence of income from operations of
discontinued businesses and an increased provision for income taxes partially
offset by higher operating income, lower interest and debt expense and lower
other income (expense), net. The first nine months reflects the net gain on the
sale of the international tobacco business, increased operating income and lower
interest and debt expense.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income of $76 million and $2.76 billion for the third quarter
and first nine months of 1999 compares to comprehensive income of $154 million
and a comprehensive loss of $27 million for the same 1998 periods. The third
quarter reflects lower net income and the unfavorable impact of foreign currency
translation. The first nine months reflects higher net income offset by the
unfavorable impact of foreign currency translation.
RESTRUCTURING
Savings objectives set in our 1998 restructuring programs are on target
despite lower than anticipated spending to date. The June 1998 program is
expected to be substantially completed in 1999 and the December 1998 program is
expected to be substantially completed by mid-year 2000. Pre-tax savings in 1999
will be approximately $90 million including cash savings of $85 million and,
after completion of the programs, are expected to be approximately $145 million
annually including cash savings of $135 million. In the third quarter of 1999,
Nabisco recorded a restructuring credit of $59 million reflecting higher than
anticipated proceeds from the sale of facilities closed as part of the 1998
restructuring programs and lower costs and cash outlays than originally
estimated for certain of these programs. As projects near completion, we will
continue to analyze the actual spending and the estimated cost to complete the
programs. The results of that analysis will determine what further adjustments,
if any, will be necessary. For a further discussion of restructuring programs
see Note 5 to the Consolidated Condensed Financial Statements.
DISCONTINUED OPERATIONS
Total income from discontinued operations decreased approximately $126
million in the third quarter of 1999 compared to the third quarter of 1998 and
increased approximately $2.9 billion for the first nine
17
<PAGE>
months of 1999 compared to the comparable 1998 period. The first nine months
increase was due primarily to the gain on the sale of Reynolds International in
May of 1999.
EXTRAORDINARY LOSS
The extraordinary loss for the third quarter and first nine months of 1999
includes a loss of approximately $384 million ($250 million after tax) on the
repurchase of approximately $4 billion of debt securities by RJR and a loss of
approximately $44 million ($29 million after tax) related to the purchase and
redemption of NGH's trust preferred securities. Both periods also include a loss
of $5 million ($2 million after tax, net of minority interest) on the early
redemption of Nabisco's debt.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows used in continuing operating activities amounted to
$1 million for the first nine months of 1999 compared to $209 million for the
first nine months of 1998. The decrease in net cash flows from operating
activities primarily reflects higher interest and income tax payments
principally due to a higher inventory position at September 30, 1999 versus an
unusually low inventory position at December 31, 1998.
Cash flows used in investing activities for the first nine months of 1999
increased $642 million from the first nine months of 1998 to $349 million,
primarily due to the absence of net proceeds from the sale of businesses, an
investment in commercial paper and increased spending for business acquisitions,
partially offset by lower capital expenditures and higher proceeds from the sale
of assets.
Capital expenditures were $150 million in the first nine months of 1999.
Management expects that the 1999 level of net investment for property, plant and
equipment will be $200 million, as spending for capital expenditures will be
approximately $230 million offset by proceeds from asset sales, which is
sufficient to support the strategic and operating needs of Nabisco Holdings'
businesses. Management also expects that cash flow from operations will be
sufficient to support its planned capital expenditures in 1999.
Cash flows used in financing activities were $1.8 billion for the first nine
months of 1999, a change in cash flow of $1.2 billion from the first nine months
of 1998, principally due to the purchase and redemption of trust preferred
securities and the repurchase of ESOP preferred stock partially offset by an
increase in short-term borrowings.
During the third quarter of 1999 Nabisco exercised a call option to redeem
$200 million of floating rate notes due August 2009 and recognized an after-tax
extraordinary loss, net of minority interest of approximately $2 million. This
redemption was refinanced with commercial paper.
As of September 30, 1999, Nabisco's $1.5 billion revolving credit facility
was unutilized and available to support borrowings. In addition, the 364-day
$1.11 billion credit facility was utilized to support outstanding commercial
paper borrowings of $582 million, and accordingly, $528 million was available.
Effective October 28, 1999, the 364-day facility was renewed and amended to a
$1.10 billion credit facility.
The companies believe that they are currently in compliance with all
covenants and restrictions imposed by the terms of their indebtedness.
NGH currently anticipates that it will pay a regular quarterly cash dividend
that is approximately equal to the amount of the regular Nabisco Holdings'
quarterly cash dividend that NGH expects to receive. However, the dividend
payable on each NGH common share will be less than the dividend payable on each
Nabisco Holdings' common share because the number of outstanding NGH common
shares exceeds the number of Nabisco Holdings' shares owned by NGH. Passing
through Nabisco Holdings' current annual dividend of $0.75 per share on NGH's
213,250,000 shares of Nabisco Holdings' stock would yield an annual dividend of
approximately $0.49 per share on the 326,146,847 shares of NGH stock outstanding
on September 30, 1999.
18
<PAGE>
FOREIGN MARKET RISK
Nabisco's international businesses are exposed to financial market
volatility in the countries in which they operate, which can impact the
International Food Group's financial position. As of September 30, 1999,
Brazil's currency, the Real, devalued approximately 58% from December 31, 1998,
compared to the U.S. Dollar, which resulted in an unfavorable foreign currency
translation adjustment of approximately $95 million after minority interest for
the nine months ended September 30, 1999.
YEAR 2000 ISSUE
Nabisco has developed plans to address the implications of the Year 2000 on
its computer systems and business operations. The Year 2000 Issue stems from
computer applications that were written using two digits rather than four digits
to define the applicable year. The issue is whether computer systems will
properly interpret date-sensitive information when the year changes to 2000.
Nabisco has completed an inventory and assessment of its financial,
information and operational systems, including equipment with embedded
microprocessors, and has developed and executed detailed plans for required
systems modifications or replacements.
Software remediation of information technology systems ("IT systems") has
been completed and remediation of non-information technology systems with
embedded technology ("non-IT systems") is 97% complete and scheduled to be 100%
complete by the end of 1999.
Software testing following remediation is approximately 98% complete for IT
systems and is expected to be completed by the end of 1999. With respect to
non-IT systems, testing is 96% complete and is expected to be complete by the
end of 1999.
Approximately 98% of IT systems are remediated and in production. Management
expects the remainder to be completed and in production by the end of
1999. Approximately 99% of non-IT systems are compliant and are expected to be
fully Year 2000 compliant by the end of 1999.
Incremental costs, which include contractor costs to modify or replace
existing systems, and costs of internal resources dedicated to achieving Year
2000 compliance are charged to expense as incurred and are funded by operating
cash flows. Costs are expected to total approximately $40 million to
$45 million, of which $33 million has been spent through September 30, 1999.
In 1998 Nabisco began a process of contacting key third parties (suppliers,
services providers and customers) to determine their progress on Year 2000
compliance issues and to assess the potential impact on operations if key third
parties are not successful in converting their systems in a timely manner. In
early 1999, Nabisco initiated an effort to gain greater assurance that it will
not suffer any material adverse affects of third party non-compliance. This
effort consisted of re-contacting these third parties and contacting additional
selected third parties to obtain more accurate and up-to-date status of their
Year 2000 compliance. As of September 30, 1999, Nabisco had sent correspondence
to 100% of these third parties. As of September 30, 1999, Nabisco has received
responses from 70% of all third parties, with 69% of all third parties
indicating compliance. To supplement this effort, Nabisco has conducted more
detailed readiness reviews, including telephone interviews, of the Year 2000
status of the suppliers ranked as most critical based on the nature of their
relationship with Nabisco. For third parties who have not responded or where
compliance could not be established from the communications, management has
considered this in their assessment of risk and contingency planning.
Progress against Year 2000 compliance plans is monitored by management as
well as the internal audit department. Results are reported to the Board of
Directors on a regular basis.
Nabisco's existing systems risk management program includes emergency backup
and recovery procedures to be followed in the event of failure of a
business-critical system. In addition, contingency plans to protect the business
from Year 2000-related interruptions have been developed, which include
19
<PAGE>
backup procedures, identification of alternate suppliers and possible increases
in safety inventory levels. The possible consequences of Nabisco or key third
parties not being fully Year 2000 compliant include temporary plant closings,
delays in the delivery of products or receipt of supplies, invoice and
collection errors, and inventory obsolescence. However, Nabisco believes its
Year 2000 implementation plan, including contingency measures, will be completed
in all material respects by the end of 1999, thereby reducing the possible
material adverse effects of the Year 2000 on Nabisco's business, results of
operations, cash flows or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Nabisco is exposed to changes in interest rates primarily as a result of its
borrowing activities which include commercial paper, short-term borrowings and
long-term fixed rate debt used to maintain liquidity and fund its business
operations. Nabisco employs a variance/co-variance approach to its calculation
of Value at Risk ("VaR"), which is a statistical measure of potential loss in
terms of fair value, cash flows, or earnings of interest rate sensitive
financial instruments over a one year horizon using a 95% confidence interval
for changes in interest rates. The model assumes that financial returns are
normally distributed. For options and instruments with non-linear returns, the
model uses the delta/gamma method to approximate the financial return.
The VaR of the potential loss in fair value associated with Nabisco's
exposure to changing interest rates was $167 million after tax, net of minority
interest at September 30, 1999, a decrease of $31 million from the December 31,
1998 amount. This exposure is primarily related to long-term debt with fixed
interest rates.
The VaR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by Nabisco, nor does it
consider the potential effect of favorable changes in market factors.
COMMODITY PRICE EXPOSURE
The VaR associated with Nabisco's derivative commodity instruments due to
reasonably possible near-term changes in commodity prices, based on historical
commodity price movements, would not result in a material effect on the future
earnings of Nabisco.
The VaR associated with Nabisco's net commodity exposure (derivatives plus
physical contracts less anticipated future consumption) would result in a
potential loss in earnings of $35 million after tax, net of minority interest at
September 30, 1999, an increase of $21 million from the December 31, 1998 amount
primarily due to the volatility of soy oil and wheat commodity prices on our
underlying position in those commodities.
The VaR associated with either Nabisco's derivative commodity instruments or
its net commodity exposure would not have a material effect on the fair values
or cash flows of Nabisco.
------------------------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 9 to the Consolidated
Condensed Financial Statements contains forward-looking statements concerning,
among other things, the impact of Year 2000 on systems and applications, the
level of restructuring-related expenses and the amount of savings from the
restructuring program, the level of future capital expenditures, the level of
dividends and litigation. These statements reflect management's current views
with respect to future events and financial performance. These forward-looking
statements are based on many assumptions and factors including competitive
pricing for products, commodity prices, success of new product innovations and
acquisitions, economic conditions in countries where Nabisco Group Holdings'
subsidiaries do business, the effects of currency fluctuations, the effects of
government regulation and the status of litigation. Any changes in such
assumptions or factors could produce significantly different results.
20
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
As a result of its now severed ownership connection to Reynolds Tobacco, NGH
was named as a defendant in a number of smoking and health lawsuits. As of
November 3, 1999, NGH continued to be a defendant in 18 lawsuits arising out of
the tobacco business conducted by Reynolds Tobacco or its subsidiaries. Two
cases that had been pending against NGH were dismissed in the last quarter. One
case, brought in an Alaska state court by a group of Native American tribes, was
voluntarily dismissed by the plaintiffs. In the other, a Pennsylvania federal
district court granted defendants' motion to dismiss with prejudice plaintiffs'
claims that defendants had violated their civil rights by marketing cigarettes.
The 18 cases name NGH on a variety of theories, not always specifically pled,
that seek to impose liability on NGH for injuries allegedly caused by the use,
sale, distribution, manufacture, development, advertising, marketing or health
effects of, exposure to, or research, statements or warnings regarding
cigarettes.
Most of these 18 active suits were brought in state courts by union health
benefit trust funds and, in one instance, Native American tribes seeking to
recover the health care costs they claim to have incurred for their members
whose illnesses are allegedly related to cigarettes. One health-care cost
recovery suit is being brought in a Texas state court by a foreign state
government (RIO DE JANIERO V. PHILIP MORRIS COMPANIES). Three of the cases are
non-union class action suits, one in Indiana state court, one in Missouri state
court and one pending in Lagos, Nigeria. NGH's defenses in all the cigarette
cases in which it is named include the merits defenses of Reynolds Tobacco plus
separate arguments that NGH is a holding company that does not engage in any of
the activities for which plaintiffs seek to impose liability. NGH also seeks to
be dismissed from some of these cases based on the fact that it has no presence
in the state in which a particular case is pending and therefore should not be
subject to the jurisdiction of the applicable court.
Some of the claims against NGH seek recovery of hundreds of millions and
possibly billions of dollars. This is also true of the litigation pending
against Reynolds Tobacco and RJR. Litigation is subject to many uncertainties.
Management is unable to predict the outcome of the litigation against NGH, or to
derive a meaningful estimate of the amount or range of any possible loss in any
quarterly or annual period or in the aggregate.
For additional information about litigation and legal proceedings, see
Note 9 to the Consolidated Condensed Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.1 Form of Stock Option Agreement between Nabisco Group
Holdings Corp. and the Executives named therein, dated
July 14, 1999.
10.2 Third Amendment to the 364 Day Facility, dated October 28,
1999, among Nabisco Holdings Corp., Nabisco, Inc., and the
lending institutions parties thereto.
27.1 Nabisco Group Holdings Corp. Financial Data Schedule for the
nine months ended September 30, 1999.
27.2 Nabisco Group Holdings Corp. Financial Data Schedule for the
nine months ended September 30, 1998.
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<S> <C>
None.
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
NABISCO GROUP HOLDINGS CORP.
(Registrant)
/s/ JAMES E. HEALEY
---------------------------------------------
James E. Healey
Senior Vice President and Chief Financial Officer
Date: November 15, 1999 /s/ THOMAS J. PESCE
---------------------------------------------
Thomas J. Pesce
Senior Vice President and Controller
</TABLE>
22
<PAGE>
EXHIBIT 10.1
NABISCO GROUP HOLDINGS CORP.
1990 LONG TERM INCENTIVE PLAN
STOCK OPTION AGREEMENT
----------------------
DATE OF GRANT: JULY 14, 1999
W I T N E S S E T H
1. GRANT OF OPTION. Pursuant to the provisions of the 1990 Long Term
Incentive Plan (the "Plan"), Nabisco Group Holdings Corp. on the above date
has granted to
((NAME))(THE "OPTIONEE"),
subject to the terms and conditions which follow and the terms and conditions
of the Plan, the right and option to exercise from the Company a total of
((STOCK_OPTIONS)) SHARES
of Common Stock of the Company, at the exercise price of $20.125 per share
(the "Option"). A copy of the Plan is attached and made a part of this
agreement with the same effect as if set forth in the agreement itself. All
capitalized terms used herein shall have the meaning set forth in the Plan,
unless the context requires a different meaning. The "Company" shall refer to
Nabisco Group Holdings Corp. and, if the context so requires, may refer to
Nabisco, Inc.
2. EXERCISE OF OPTION.
(a) Shares may be purchased by giving the Corporate Secretary of
the Company written notice of exercise, on a form prescribed by the Company,
specifying the number of shares to be purchased. The notice of exercise shall
be accompanied by
(i) tender to the Company of cash for the full purchase price of
the shares with respect to which such Option or portion thereof
is exercised; OR
(ii) the unsecured, demand borrowing by the Optionee from the
Company on an open account maintained solely for this purpose
in the amount of the full exercise price together with the
instruction from the Optionee to sell the shares exercised on
the open market through a duly registered broker-dealer with
which the Company makes an arrangement for the sale of such
shares under the Plan. This method is known as the "broker-dealer
<PAGE>
exercise method" and is subject to the terms and conditions set forth
herein, in the Plan and in guidelines established by the Committee.
The Option shall be deemed to be exercised simultaneously with the
sale of the shares by the broker-dealer. If the shares purchased upon
the exercise of an Option or a portion thereof cannot be sold for a
price equal to or greater than the full exercise price plus direct
costs of the sales, then there is no exercise of the Option. Election
of this method authorizes the Company to deliver shares to the
broker-dealer and authorizes the broker-dealer to sell said shares on
the open market. The broker-dealer will remit proceeds of the sale to
the Company which will remit net proceeds to the Optionee after
repayment of the borrowing, deduction of costs, if any, and
withholding of taxes. The Optionee's borrowing from the Company on
an open account shall be a personal obligation of the Optionee which
shall bear interest at the published Applicable Federal Rate (AFR) for
short-term loans and shall be payable upon demand by the Company. Such
borrowing may be authorized by telephone or other telecommunications
acceptable to the Company. Upon such borrowing and the exercise of the
Option or portion thereof, title to the shares shall pass to the
Optionee whose election hereunder shall constitute instruction to the
Company to register the shares in the name of the broker-dealer or its
nominee. The Company reserves the right to discontinue this
broker-dealer exercise method at any time for any reason whatsoever.
The Optionee agrees that if this broker-dealer exercise method under
this paragraph is used, the Optionee promises unconditionally to pay
the Company the full balance in his open account at any time upon
demand. Optionee also agrees to pay interest on the account balance at
the AFR for short-term loans from and after demand.
(b) This Option shall be exercisable in three installments. The
first installment shall be exercisable on the first anniversary following the
Date of Grant for 33% of the number of shares of Common Stock subject to this
Option. Thereafter, on each subsequent anniversary date an installment shall
become exercisable for 33% and 34%, respectively, of the number of shares
subject to this Option until the Option has become fully exercisable. To the
extent that any of the above installments is not exercised when it becomes
exercisable, it shall not expire, but shall continue to be exercisable at any
time thereafter until this Option shall terminate, expire or be surrendered.
An exercise shall be for whole shares only.
3. TERMINATION OF EMPLOYMENT
(a) Unless otherwise provided in a written employment or
termination agreement between the Optionee and the Company, the Option shall
not become exercisable as to any additional shares following the Termination
of Employment of the Optionee for any reason including a Termination of
Employment because of Permanent Disability or Retirement of the Optionee.
Notwithstanding the foregoing, in the event of Termination
2
<PAGE>
of Employment because of death, the Option shall immediately become
exercisable as to all shares.
(b) "Termination of Employment" as used herein means termination
from active employment with Nabisco, Inc. or any of its subsidiaries or
affiliates (including the Company); it does not mean termination of payment
of severance or benefits at the end of salary continuation or other form of
severance or pay in lieu of salary.
4. EXPIRATION OF OPTION. The Option shall expire or terminate and may
not be exercised to any extent by the Optionee after the first to occur of
the following events:
(a) The tenth anniversary of the Date of Grant, or such earlier
time as the Company may determine is necessary or appropriate in light of
applicable foreign tax laws; or
(b) The first anniversary of the date of the Optionee's Termination
of Employment for any reason other than the Optionee's Death, Permanent
Disability, Retirement or involuntary Termination of Employment by the
Company without Cause (as defined in Section 11 herein); or
(c) Immediately upon the Optionee's Termination of Employment for
Cause (as defined in Section 11 herein).
5. TRANSFERABILITY. Other than as specifically provided with regard to
the death of the Optionee, this Option agreement and any benefit provided or
accruing hereunder shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and
any attempt to do so shall be void. No such benefit shall, prior to receipt
thereof by the Optionee, be in any manner liable for or subject to the debts,
contracts, liabilities, engagements or torts of the Optionee.
6. NO RIGHT TO EMPLOYMENT. Neither the execution and delivery of this
agreement nor the granting of the Option evidenced by this agreement shall
constitute or be evidence of any agreement or understanding, express or
implied, on the part of the Company or its subsidiaries to employ the
Optionee for any specific period or shall prevent the Company or its
subsidiaries from terminating the Optionee's employment at any time with or
without "Cause" (as defined in Section 11 herein).
7. ADJUSTMENTS IN OPTION. In the event that the outstanding shares of
the Common Stock subject to the Option are, from time to time, changed into
or exchanged for a different number or kind of shares of the Company or other
securities by reason of a merger, consolidation, recapitalization,
reclassification, stock split, stock dividend, combination of shares, or
otherwise, the Committee shall make an appropriate and equitable adjustment
in the number and kind of shares or other consideration as to which the
Option, or portions thereof then unexercised, shall be exercisable. Any
adjustment
3
<PAGE>
made by the Committee shall be final and binding upon the Optionee, the
Company and all other interested persons.
8. APPLICATION OF LAWS. The granting and the exercise of this Option and
the obligations of the Company to sell and deliver shares hereunder and to
remit cash under the broker-dealer exercise method shall be subject to all
applicable laws, rules, and regulations and to such approvals of any
governmental agencies as may be required.
9. TAXES. Any taxes required by federal, state or local laws to be
withheld by the Company upon exercise by the Optionee of the Option for
Common Stock, shall be paid to the Company before delivery of the Common
Stock is made to the Optionee. When the Option is exercised under the
broker-dealer exercise method, the full amount of any taxes required to be
withheld by the Company on exercise of stock options shall be deducted by the
Company from the proceeds.
10. NOTICES. Any notices required to be given hereunder to the Company
shall be addressed to The Secretary, Nabisco Group Holdings Corp., 7 Campus
Drive, Parsippany, NJ 07054, and any notice required to be given hereunder to
the Optionee shall be sent to the Optionee's address as shown on the records
of the Company.
11. TERMINATION FOR "CAUSE." For purposes of this Agreement, if the
Optionee has an employment or severance agreement with the Company or a
subsidiary, the Optionee's employment shall be deemed to have been terminated
for "Cause" only as such term is defined in the Optionee's employment or
severance agreement.
For purposes of this Agreement, if the Optionee does not have an
employment or severance agreement which defines the term "Cause", the
Optionee's employment shall be deemed to have been terminated for "Cause" if
the termination results from the Optionee's: (a) criminal conduct, (b)
deliberate continual refusal to perform employment duties on substantially a
full time basis, (c) deliberate and continual refusal to act in accordance
with any specific lawful instructions of an authorized officer or employee
more senior than the Optionee, or (d) deliberate misconduct which could be
materially damaging to the Company or any of its business operations without
a reasonable good faith belief by the Optionee that such conduct was in the
best interests of the Company. A termination of the Optionee's employment
shall not be deemed for Cause hereunder unless the senior personnel
executive of the Company shall confirm that any such termination is for
Cause as defined hereunder.
Any voluntary termination by the Optionee in anticipation of an
involuntary termination of the Optionee's employment for Cause shall be
deemed to be termination of Optionee's employment for Cause.
12. ADMINISTRATION AND INTERPRETATION. In consideration of the grant,
the Optionee specifically agrees that the Committee shall have the exclusive
power to interpret the
4
<PAGE>
Plan and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan and Agreement as are consistent
therewith and to interpret or revoke any such rules. All actions taken and
all interpretations and determinations made by the Committee shall be final,
conclusive, and binding upon the Optionee, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect
to the Plan or the Agreement. The Committee may delegate its interpretive
authority to an officer or officers of the Company.
13. NON-COMPETITION
In consideration for the Option, Optionee agrees that:
(a) For the twelve (12) month period commencing on the date of
Optionee's Termination of Employment, Optionee shall not engage in
Competitive Employment. As used herein, "Competitive Employment" means
providing any person, company or other entity with any services, whether as a
consultant, employee, investor or otherwise, regarding any business, product,
service or other matter which: (i) is substantially similar to or competes
with any business, product, service or other matter regarding which Optionee
worked for the Company, or any of its affiliates, during the two (2) years
prior to Optionee's Termination of Employment; or (ii) concerns subject
matters about which Optionee gained proprietary information of the Company,
or its affiliates, during the two (2) year period prior to Optionee's
Termination of Employment.
(b) If the Company reasonably determines that Optionee has
materially violated any of Optionee's obligations under subparagraph (a),
above, then, in addition to any other remedies at law or in equity it may
have: (i) the Company shall have the right to cease payment of any
compensation, salary continuation, benefits, prerequisites and any other
remuneration which is due or may become due Optionee under any employment,
salary continuation or similar agreement between the Company, or any of its
affiliates, and Optionee; and (ii) all past, present and future stock option
grants awarded Optionee under the Plan, including grants which according to
their terms are vested, shall terminate, effective the date on which such
violation began (the "Violation Date"). The Company may demand the return of
any gain realized by Optionee from the exercise of any such grants by
Optionee at any time on or after the date sixty (60) days prior to the
Violation Date. If after such demand Optionee fails to return said amounts,
Optionee acknowledges that the Company has the right to offset against said
amounts any amounts, including compensation, owed Optionee by the Company or
to commence judicial proceedings against Optionee to recover said amounts and
any attorney's fees and costs.
(c) Optionee acknowledges and agrees that: (i) the restrictions
contained in this Section 13 are necessary to protect the legitimate
interests of the Company and impose no undue hardship on Optionee; (ii) the
violation or threatened violation of this Section 13 will result in
irreputable injury to the Company and Optionee consents to the issuance of
any restraining order, preliminary restraining order or injunction, without
5
<PAGE>
bond, which arises from conduct by Optionee in violation of this Section 13,
and the existence of any claim Optionee may have against the Company will not
constitute a defense thereto; (iii) if the Company prevails in any suit or
proceeding to enforce its rights under this Section 13, Optionee shall
indemnify the Company for all expenses incurred by the Company, including
reasonable attorney's fees; and (iv) no one employed by or representing the
Company has any authority to make oral statements which modify, waive or
discharge in any manner any provision of this Section 13.
14. OTHER PROVISIONS.
a) Titles are provided herein for convenience only and are not to
serve as a basis for interpretation of the Agreement.
b) This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE
INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT
REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF
LAWS.
6
<PAGE>
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Optionee have executed this Agreement as of the date of Grant first above
written.
NABISCO GROUP HOLDINGS CORP.
By:
-------------------------
Authorized Signatory
- ------------------------------
Optionee
Optionee's Taxpayer Identification Number:
- ------------------------------
Optionee's Home Address:
- ------------------------------
- ------------------------------
- ------------------------------
7
<PAGE>
Exhibit 10.2
THIRD AMENDMENT
THIRD AMENDMENT (this "Amendment"), dated as of October 28,
1999, among NABISCO HOLDINGS CORP. ("Holdings"), NABISCO, INC. (the "Borrower"),
the lenders party to the Credit Agreement referred to below and Bankers Trust
Company, The Chase Manhattan Bank, Citibank, N.A. and The Fuji Bank Limited, as
Senior Managing Agents. All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided for such terms in the Credit
Agreement.
W I T N E S S E T H:
WHEREAS, Holdings, the Borrower, the Lenders and the Senior
Managing Agents are parties to a Credit Agreement, dated as of October 31, 1996
(as amended prior to the date hereof, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW, THEREFORE, it is agreed:
1. Section 6.09 of the Credit Agreement is hereby amended by
changing the two references to "December 31, 1995" therein to read "December 31,
1998".
2. Section 6.10 of the Credit Agreement is hereby amended by
changing the phrase "RJRN is indemnifying Holdings" therein to read: "RJT is
indemnifying NGHC, Holdings and its Subsidiaries".
3. The Credit Agreement is hereby amended by adding a new
Section 6.16 to read:
"6.16 YEAR 2000 COMPLIANCE. Holdings has reviewed the areas
within its consolidated business and operations that could be adversely affected
by, and has developed and is carrying out a plan to address on a timely basis,
the "Year 2000 Problem" (that is, the risk that computer applications used by
Holdings and its Subsidiaries may be unable to recognize and perform properly
date-sensitive functions involving certain dates on or prior to and any date
after December 31, 1999). Based on such review and plan, Holdings reasonably
believes that the "Year 2000 Problem" will not have a material adverse effect on
the operations, business, properties, assets or financial condition of Holdings
and its Subsidiaries, taken as a whole."
4. Sections 7.01(c) and 7.09 of the Credit Agreement are
hereby amended by changing the references to "Sections 8.03(e), 8.04(i), 8.05,
8.07, 8.08 and 8.09" therein to read: "Sections 8.03(e), 8.05 and 8.06".
<PAGE>
5. Section 7.10 of the Credit Agreement is hereby deleted in
its entirety.
6. Section 8.02 of the Credit Agreement is hereby amended in
its entirety to read:
"8.02 CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Holdings
will not, and will not permit any Subsidiary to, wind up, liquidate or dissolve
its affairs, or enter into any transaction of merger or consolidation, or sell
or otherwise dispose of property or assets constituting all or substantially all
of the property or assets of Holdings and its Subsidiaries as a whole, except
that any Subsidiary of Holdings may be merged or consolidated with or into, or
be liquidated into, any Person (including Holdings, but only if the Borrower has
first merged into or consolidated with Holdings) PROVIDED that in the event of a
merger, consolidation or liquidation of the Borrower with or into any such
Person, the surviving corporation, if not the Borrower, shall execute and
deliver agreements assuming the obligations of the Borrower under this Agreement
and the Notes, which assumption agreements and all related actions and
documentation shall be in form and substance satisfactory to the Senior Managing
Agents; PROVIDED FURTHER that if any of the foregoing transactions involves a
Material Subsidiary, after giving effect to such transaction, no Event of
Default would result therefrom. Notwithstanding anything to the contrary
contained in this Section 8.02, no Restricted Sale shall be permitted".
7. Sections 8.04, 8.05 and 8.09 of the Credit Agreement are
hereby deleted and Sections 8.06, 8.07 and 8.08 of the Credit Agreement are
hereby renumbered as Sections 8.04, 8.05 and 8.06, respectively.
8. Section 8.06 of the Credit Agreement (renumbered as 8.04
pursuant to Section 7 above) is hereby amended by changing the reference therein
to "RJRN Agreements" to read "NGHC Agreements".
9. Section 8.07 of the Credit Agreement (renumbered as 8.05
pursuant to Section 7 above) is hereby amended by (i) changing the reference to
"25%" therein to read "33%" and (ii) changing the reference to "January 1, 1996"
therein to read "January 1, 1999".
10. Section 10 of the Credit Agreement is hereby amended as
follows:
(i) the reference to "Section 8.08" in the definition of
Adjusted Operating Income is changed to "Section 8.06";
(ii) the definition of Applicable Utilization Fee Percentage
shall be changed in its entirety to read:
"Applicable Utilization Fee Percentage" shall mean, at any
time during a period set forth below, the percentage set forth opposite such
period below:
<TABLE>
<CAPTION>
Applicable
Period Utilization Fee Percentage
------ --------------------------
<S> <C>
NIG Period .500%
-2-
<PAGE>
Minimum Investment .375%
Grade Period
Increased Investment Grade Period .250%
Maximum Investment Grade Period .125%
</TABLE>
(iii) the reference to "RJRN" in the definition of Change of
Control is changed to "NGHC";
(iv) the definitions of Consolidated Cash Interest Expense,
Cumulative Consolidated Net Income, Dividends, Exchange Agreement, Foreign
Subsidiary, Permitted Currency Agreement, Restricted Payments, RJRN, RJRN
Agreements, RJRN Entity, RJRN Holdings and Specified Permitted Existing Debt are
deleted;
(v) the definition of Corporate Agreement is changed in its
entirety to read:
"Corporate Agreement" shall mean the Corporate Agreement dated
as of June 14, 1999 among NGHC, Holdings and RJT.
(vi) in the definition of Indebtedness (i) the reference to
"the RJRN Agreements" is changed to "the NGHC Agreements" and (ii) the reference
to "or outstanding under Section 8.04(i)" is deleted;
(vii) the reference to "or any substantial portion" in the
definition of Restricted Sales is deleted;
(viii) the definition of Services Agreement is changed in its
entirety to read:
"Services Agreement" shall mean the Intercompany Services
Agreement dated as of June 14, 1999 among NGHC, Holdings and RJT.
(ix) the definition of Tax Sharing Agreement is changed in its
entirety to read:
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement
dated as of June 14, 1999 among NGHC, Holdings, RJT and R.J. Reynolds Tobacco
Company.
(x) the reference to "Section 8.08 or 8.09" in the definition
of Test Period is changed to read "Section 8.06";
(xi) the phrase "dated as of the date hereof" in the
definition of 364 DF Credit Agreement is changed to read "dated as of October
28, 1999";
(xii) the reference to "50%" in the definition of Utilization
Period is changed to read "33%"; and
-3-
<PAGE>
(xiii) the following definitions are added in appropriate
alphabetical order:
"NGHC" shall mean Nabisco Group Holdings Corp., a Delaware
corporation.
"NGHC Agreements" shall mean the Corporate Agreement, the
Services Agreement and the Tax Sharing Agreement.
"RJT" shall mean R.J. Reynolds Tobacco Holdings, Inc., a
Delaware corporation.
11. The references to "Sections 8.03(e), 8.04(i), 8.05, 8.07,
8.08, and 8.09" in each of Sections 12.07(a) and 12.12 of the Credit Agreement
are hereby changed to read "Sections 8.03(e), 8.05 and 8.06".
12. The references to page 38 and to December 31, 1995 in
Annex IV to the Credit Agreement are hereby changed to read "page 7" and
"December 31, 1998", respectively.
13. This Amendment is limited as specified and shall not
constitute a modification, amendment or waiver of any other provision of the
Credit Agreement or any other Credit Document.
14. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Payments
Administrator.
15. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
16. This Amendment shall become effective on the date when
Holdings, the Borrower and the Required Banks shall have signed a counterpart
hereof (whether the same or different counterparts) and shall have delivered
(including by way of facsimile transmission) the same to the Payments
Administrator at its Notice Office provided that any payment of Utilization Fees
due on or after such date with respect to any day prior thereto shall be
computed on the basis of the Utilization Fee applicable prior to such
effectiveness.
17. From and after the effectiveness of this Amendment, all
references in the Credit Agreement and each of the Credit Documents to the
Credit Agreement shall be deemed to be references to such Credit Agreement as
amended hereby.
* * *
-4-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
NABISCO HOLDINGS CORP.
By_________________________________
Title:
NABISCO, INC.
By__________________________________
Title:
-5-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM NABISCO GROUP
HOLDINGS' CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BE
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000847903
<NAME> NABISCO GROUP HOLDINGS CORP.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 215
<SECURITIES> 0
<RECEIVABLES> 522
<ALLOWANCES> 0
<INVENTORY> 915
<CURRENT-ASSETS> 1,858
<PP&E> 4,785
<DEPRECIATION> (1,955)
<TOTAL-ASSETS> 11,371
<CURRENT-LIABILITIES> 1,668
<BONDS> 3,753
98
0
<COMMON> 3
<OTHER-SE> 3,059
<TOTAL-LIABILITY-AND-EQUITY> 11,371
<SALES> 5,935
<TOTAL-REVENUES> 5,935
<CGS> 3,249
<TOTAL-COSTS> 3,249
<OTHER-EXPENSES> 102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> 293
<INCOME-TAX> 109
<INCOME-CONTINUING> 142
<DISCONTINUED> 2,994
<EXTRAORDINARY> (281)
<CHANGES> 0
<NET-INCOME> 2,855
<EPS-BASIC> 8.77
<EPS-DILUTED> 8.76
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NABISCO
GROUP HOLDINGS' CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000847903
<NAME> NABISCO GROUP HOLDINGS CORP.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 79
<SECURITIES> 0
<RECEIVABLES> 524
<ALLOWANCES> 0
<INVENTORY> 865
<CURRENT-ASSETS> 9,216
<PP&E> 4,820
<DEPRECIATION> (1,813)
<TOTAL-ASSETS> 18,957
<CURRENT-LIABILITIES> 1,783
<BONDS> 3,828
1,327
509
<COMMON> 3
<OTHER-SE> 8,582
<TOTAL-LIABILITY-AND-EQUITY> 18,957
<SALES> 6,191
<TOTAL-REVENUES> 6,191
<CGS> 3,478
<TOTAL-COSTS> 3,478
<OTHER-EXPENSES> 573
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303
<INCOME-PRETAX> (167)
<INCOME-TAX> (37)
<INCOME-CONTINUING> (113)
<DISCONTINUED> 121
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
