<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 JUNE 30, 2000
---------------------
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>
7 CAMPUS DRIVE
PARSIPPANY, NEW JERSEY 07054-0311
(973) 682-5000
(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: JULY 31, 2000:
326,357,077 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 Six
Months Ended June 30, 2000 and 1999....................... 1
Consolidated Condensed Statements of Comprehensive
Income--Three and Six Months Ended June 30, 2000 and
1999...................................................... 2
Consolidated Condensed Statements of Cash Flows--Six Months
Ended June 30, 2000 and 1999.............................. 3
Consolidated Condensed Balance Sheets--June 30, 2000 and
December 31, 1999......................................... 4
Notes to Consolidated Condensed Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 16
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 17
Item 4........ Submission of Matters to a Vote of Security Holders......... 17
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures.......................................................................... 19
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------- ------- -------
NET SALES............................................. $ 2,258 $ 2,023 $ 4,327 $ 3,878
------- ------- ------- -------
Costs and expenses:
Cost of products sold............................... 1,216 1,089 2,363 2,116
Selling, advertising, administrative and general
expenses.......................................... 775 703 1,471 1,344
Amortization of trademarks and goodwill............. 55 54 110 107
Restructuring credit................................ (27) -- (27) --
------- ------- ------- -------
OPERATING INCOME.................................. 239 177 410 311
Interest and debt expense............................. (75) (90) (147) (188)
Other income (expense), net........................... (2) -- (4) (10)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES........................ 162 87 259 113
Provision for income taxes............................ 67 36 105 45
------- ------- ------- -------
INCOME BEFORE MINORITY INTEREST IN INCOME OF
NABISCO HOLDINGS................................ 95 51 154 68
Less minority interest in income of Nabisco
Holdings............................................ 19 13 31 20
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS................. 76 38 123 48
Discontinued operations:
Income (loss) from operations of discontinued
businesses, net of income taxes................... -- (42) -- 24
Gain on discontinued businesses, net of income
taxes............................................. -- 2,970 -- 2,970
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM.................. 76 2,966 123 3,042
Extraordinary item--loss on early extinguishment of
debt, net of income taxes........................... -- (279) -- (279)
------- ------- ------- -------
NET INCOME........................................ $ 76 $ 2,687 $ 123 $ 2,763
======= ======= ======= =======
BASIC NET INCOME (LOSS) PER SHARE:
Income from continuing operations................... $ .23 $ .10 $ .38 $ .12
Income from discontinued operations................. -- 9.01 -- 9.21
Extraordinary loss.................................. -- (.86) -- (.86)
------- ------- ------- -------
Net income........................................ $ .23 $ 8.25 $ .38 $ 8.47
======= ======= ======= =======
DILUTED NET INCOME (LOSS) PER SHARE:
Income from continuing operations................... $ .23 $ .10 $ .38 $ .12
Income from discontinued operations................. -- 9.01 -- 9.21
Extraordinary loss.................................. -- (.86) -- (.86)
------- ------- ------- -------
Net income........................................ $ .23 $ 8.25 $ .38 $ 8.47
======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE................... $ .1225 $ .5125 $ .245 $ 1.025
======= ======= ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
1
<PAGE>
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME................................................ $ 76 $2,687 $ 123 $2,763
------ ------ ------ ------
Other comprehensive income (loss):
Reclassification of cumulative translation losses
related to businesses sold included in net income..... 41 218 41 218
Minimum pension liability associated with the
distribution of R.J. Reynolds Tobacco Holdings, Inc.
stock................................................. -- 6 -- 6
Cumulative translation adjustment....................... (24) 18 (21) (88)
(Provision) benefit for income taxes.................... -- -- -- --
------ ------ ------ ------
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX............. 17 242 20 136
------ ------ ------ ------
COMPREHENSIVE INCOME...................................... $ 93 $2,929 $ 143 $2,899
====== ====== ====== ======
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
<PAGE>
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income................................................ $ 123 $ 2,763
Less income from discontinued operations.................. -- 2,994
------- -------
Income (loss) from continuing operations.................. 123 (231)
------- -------
Adjustments to reconcile to net cash flows from continuing
operating activities:
Depreciation of property, plant and equipment......... 136 132
Amortization of intangibles........................... 110 107
Deferred income tax provision......................... 34 21
Extraordinary loss on early extinguishment of debt.... -- 428
Restructuring credit.................................. (27) --
Restructuring payments................................ (38) (41)
Accounts receivable, net.............................. 66 2
Inventories........................................... (69) (86)
Accounts payable and accrued liabilities, including
income taxes........................................ (223) (338)
Other, net............................................ 19 24
------- -------
Total adjustments................................... 8 249
------- -------
Net cash flows from continuing operating activities..... 131 18
Net cash flows from discontinued operations............. -- 2,284
------- -------
Net cash flows from operating activities................ 131 2,302
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures...................................... (82) (99)
Purchases of financial investments, net of maturities..... 2 (114)
Proceeds from sale of assets.............................. 14 14
Investment in Finalrealm transactions..................... (55) --
Repurchases of Nabisco Holdings' Class A common stock..... (13) (12)
Proceeds from exercise of Nabisco Holdings' Class A common
stock options........................................... 20 7
------- -------
Net cash flows (used in) investing activities........... (114) (204)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings (repayments) of long-term debt............. 2 (115)
Increase in notes payable................................. 23 181
Dividends paid on common and preferred stock.............. (99) (583)
Repurchase/redemption of trust preferred securities....... -- (1,265)
Repurchase of ESOP preferred stock........................ -- (202)
Other, net................................................ 7 63
------- -------
Net cash flows (used in) financing activities........... (67) (1,921)
------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (2) (6)
------- -------
Net change in cash and cash equivalents................. (52) 171
Cash and cash equivalents at beginning of period............ 254 112
------- -------
Cash and cash equivalents at end of period.................. $ 202 $ 283
======= =======
Income taxes paid, net of refunds........................... $ 27 $ 223
Interest paid............................................... $ 143 $ 191
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 202 $ 254
Short-term investments.................................... 9 6
Accounts receivable, net.................................. 520 681
Deferred income taxes..................................... 96 114
Inventories............................................... 905 898
Prepaid expenses and other current assets................. 82 79
Net assets of businesses held for sale.................... 274 --
------- -------
TOTAL CURRENT ASSETS.................................. 2,088 2,032
------- -------
Property, plant and equipment, net.......................... 2,923 3,089
Trademarks, net............................................. 3,372 3,443
Goodwill, net............................................... 3,014 3,159
Other assets and deferred charges........................... 315 238
------- -------
$11,712 $11,961
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 45 $ 39
Account payable........................................... 379 642
Accrued liabilities....................................... 1,023 1,056
Current maturities of long-term debt...................... 9 158
Income taxes accrued...................................... 144 107
------- -------
TOTAL CURRENT LIABILITIES............................. 1,600 2,002
------- -------
Long-term debt (less current maturities).................... 3,977 3,892
Minority interest in Nabisco Holdings....................... 785 763
Other noncurrent liabilities................................ 782 768
Deferred income taxes....................................... 1,235 1,277
Contingencies (Note 6)
Nabisco Group Holdings' obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
junior subordinated debentures*........................... 98 98
Stockholders' equity:
Common stock (326,357,077 and 326,146,847 shares issued
and outstanding at June 30, 2000 and December 31, 1999,
respectively)........................................... 3 3
Paid-in capital........................................... 3,467 3,459
Retained earnings........................................... 168 125
Accumulated other comprehensive income (loss)............... (300) (320)
Treasury stock, at cost..................................... (100) (100)
Other stockholders' equity.................................. (3) (6)
------- -------
TOTAL STOCKHOLDERS' EQUITY.......................... 3,235 3,161
------- -------
$11,712 $11,961
======= =======
</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 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
NABISCO GROUP HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS
GENERAL
The consolidated condensed financial statements include the accounts of
Nabisco Group Holdings Corp. ("NGH"), and its majority-owned subsidiaries,
including 80.5% of Nabisco Holdings Corp. ("Nabisco Holdings") and its
wholly-owned subsidiary, Nabisco, Inc. ("Nabisco").
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 six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ended
December 31, 2000.
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.
The Consolidated Condensed Financial Statements should be read in conjunction
with the consolidated financial statements and footnotes in the Annual Report on
Form 10-K of NGH at December 31, 1999.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
BUSINESS DISPOSALS
In April 2000, Nabisco joined a consortium of investors, Finalrealm Limited
("Finalrealm"), that acquired the equity of United Biscuits (Holdings) plc
("UB"), a United Kingdom company. At that time, Nabisco invested approximately
$45 million of cash to an affiliate of Finalrealm. In July 2000, Nabisco sold
its operations in Spain, Portugal and the Middle East, which included
$10 million of cash and cash equivalents, to an affiliate of Finalrealm and
agreed to pay an additional $41 million of cash to Finalrealm. In exchange for
the total cash consideration and businesses sold, Nabisco received mandatorily
redeemable discounted preferred stock and warrants valued at approximately
$277 million. The preferred stock is convertible into common equity upon the
future exercise of the warrants. These securities are being accounted for on a
cost basis. The sale of operations resulted in the recognition of a
pre-and-after-tax loss of approximately $18 million that was recorded in
selling, advertising, administrative and general expenses in the quarter ended
June 30, 2000. The net assets of these operations are presented as net assets of
businesses held for sale as of June 30, 2000, in the Consolidated Condensed
Balance Sheet. In 1999, these operations had annual net sales of approximately
$290 million.
BUSINESS ACQUISITIONS
In July 2000, Nabisco acquired UB's operations in China, Hong Kong and
Taiwan for approximately $99 million as part of its agreement to join the
consortium of investors discussed above. In 1999, these operations had annual
net sales of approximately $66 million.
In November 1999, Nabisco acquired certain assets and liabilities of
Favorite Brands International, Inc. As of June 30, 2000, the purchase price
allocation was completed and resulted in goodwill of $106 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the second quarter of 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments
5
<PAGE>
NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED)
and Hedging Activities. 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 will adopt
SFAS 133, as amended, on January 1, 2001 but has not yet determined the impact
that such adoption or subsequent application will have on its financial position
or results of operations.
In December 1999, The Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. NGH is required to adopt SAB No. 101 in the fourth quarter of 2000.
SAB No. 101 provides additional guidance on revenue recognition, as well as
criteria for when certain revenue is generally realized and earned, and also
requires the deferral of incremental direct selling costs. NGH has determined
that the impact of adoption or subsequent application of SAB No. 101 will not
have a material effect on its financial position or result of operations.
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. In
the second quarter of 2000, Nabisco recorded a net reduction of $27 million in
the previously recorded restructuring expense due to higher than anticipated
proceeds from assets sold and lower than anticipated spending primarily in
severance programs. This restructuring credit combined with the $67 million net
restructuring credit recorded in 1999 resulted in a total net charge for the
1998 restructuring programs of $436 million ($238 million after tax, net of
minority interest). These restructuring programs were undertaken to streamline
operations and improve profitability and have resulted in the elimination of
approximately 6,900 employee positions.
The June 1998 program was completed in 1999 and the December 1998 program
was completed as of June 30, 2000.
The key elements of the restructuring programs were:
<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 costs 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
1999 net restructuring credit............ (50) 1 (14) (4) (67)
2000 net restructuring credit............ (4) (3) (21) 1 (27)
----- ---- ----- ---- -----
Total program reserves............... 154 16 222 44 436
----- ---- ----- ---- -----
Charges and Payments:
Cumulative through December 31, 1999..... (132) (14) (233) (35) (414)
Six months ended June 30, 2000........... (22) (2) 11 (9) (22)
----- ---- ----- ---- -----
Total charges and payments, net of
cash proceeds...................... (154) (16) (222) (44) (436)
----- ---- ----- ---- -----
Program reserves as of June 30, 2000..... $ -- $ -- $ -- $ -- $ --
===== ==== ===== ==== =====
</TABLE>
6
<PAGE>
NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED)
The key elements of the restructuring programs, after the restructuring
credits of $94 million were:
<TABLE>
<CAPTION>
SEVERANCE CONTRACT ASSET OTHER EXIT
IN MILLIONS AND BENEFITS TERMINATIONS IMPAIRMENTS COSTS TOTAL
----------- ------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Sales force reorganizations.............. $ 16 $ 3 $ -- $-- $ 19
Distribution reorganizations............. 10 4 (2) -- 12
Staff reductions......................... 56 1 3 -- 60
Manufacturing costs reduction
initiatives............................ 19 -- 8 -- 27
Plant closures........................... 51 3 192 15 261
Product line rationalizations............ 2 5 21 29 57
---- --- ---- --- ----
Total restructuring charges.......... $154 $16 $222 $44 $436
==== === ==== === ====
</TABLE>
Total charges and payments include cash expenditures, non-cash charges
primarily for asset impairments and committed severance and benefits to be paid.
The total cash payments, net of cash proceeds applied against the restructuring
reserves totaled $130 million, which is comprised of cumulative cash
expenditures of $162 million and cumulative cash proceeds of $32 million. For
the six months ended June 30, 2000, cash payments, net of cash proceeds totaled
$27 million, which is comprised of $38 million of cash expenditures and
$11 million of cash proceeds which were applied against the restructuring
reserves. Although projects have been completed, proceeds to be collected and
certain cash payments, primarily severance and benefits that are paid over time,
will be transacted after the program completion dates. This is expected to
result in a net cash inflow of approximately $15 million subsequent to June 30,
2000. Cash payments for the six months ended June 30, 2000, exceeded charges and
payments, net of cash proceeds, for the six months ended June 30, 2000 due to
payments made to satisfy severance and benefit obligations previously committed
and charged against the reserves.
NOTE 2 -- CHANGE OF CONTROL
PROPOSED TRANSACTIONS
On June 25, 2000, the board of directors of NGH approved two major
transactions: (1) the sale of NGH's 80.5% interest in Nabisco Holdings to Philip
Morris Companies, Inc. (the "Nabisco Sale") pursuant to a merger in which Philip
Morris will acquire all of the outstanding Nabisco Holdings common stock for
$55 per share (the "Nabisco Holdings merger"), and (2) the subsequent
acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. ("RJR") pursuant to a
merger in which RJR will acquire all of the outstanding NGH common stock for
$30 per share (the "NGH merger"). Completion of the Nabisco Holdings merger is
subject to customary closing conditions, including receipt of stockholder and
regulatory approvals. Completion of the NGH merger is also subject to customary
closing conditions, including receipt of stockholder and regulatory approvals
and is conditioned on the completion of the Nabisco Sale. There can be no
assurance that such approvals will be obtained. The transactions are expected to
close during the fourth quarter of 2000.
NGH STOCKHOLDER VOTE REQUIRED TO APPROVE THE NABISCO SALE AND THE NGH MERGER
The Nabisco Sale requires approval by holders of a majority of the
outstanding shares of NGH common stock because the Nabisco Holdings shares
constitute substantially all of the assets of NGH. The Nabisco Sale represents
approximately $11.728 billion in gross proceeds to NGH. NGH has entered into a
voting and indemnity agreement with Philip Morris with respect to the Nabisco
Sale which generally provides that, subject to receiving approval of the Nabisco
Sale from NGH stockholders, NGH will promptly vote in favor of the Nabisco
Holdings merger. The approval by NGH is the only Nabisco Holdings stockholder
approval required to complete the Nabisco Holdings merger.
7
<PAGE>
NOTE 2 -- CHANGE OF CONTROL (CONTINUED)
The NGH merger also requires approval by holders of a majority of the
outstanding shares of NGH common stock.
NOTE 3 -- INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
IN MILLIONS 2000 1999
----------- -------- ------------
<S> <C> <C>
Finished products........................................... $508 $551
Raw materials............................................... 246 199
Work in process............................................. 46 45
Other....................................................... 105 103
---- ----
$905 $898
==== ====
</TABLE>
NOTE 4 -- NET INCOME PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
applicable to common stock:
Income from continuing operations....... $ 76 $ 76 $ 38 $ 38 $ 123 $ 123 $ 48 $ 48
Preferred stock dividends............... -- -- (4) (4) -- -- (8) (8)
------- ------- ------- ------- ------- ------- ------- -------
$ 76 $ 76 $ 34 $ 34 $ 123 $ 123 $ 40 $ 40
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding (in
thousands):
Common shares........................... 325,853 325,853 324,769 324,769 325,808 325,808 324,411 324,411
Assumed exercise of NGH's stock
options............................... -- 1,929 -- 347 -- 989 -- 298
------- ------- ------- ------- ------- ------- ------- -------
325,853 327,782 324,769 325,116 325,808 326,797 324,411 324,709
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Common shares exclude 179,500 and 949,100 shares of restricted stock as the
vesting provisions had not been met at June 30, 2000 and 1999, respectively.
NOTE 5 -- SEGMENT REPORTING
NGH is a holding company whose majority-owned 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: Nabisco Biscuit Company, the Nabisco Foods Company and
the International Food Group which are segregated by both product and geographic
area.
NGH's management evaluates the performance and allocates resources based
upon operating company contribution ("OCC"). OCC for each reportable segment is
operating income before amortization of intangibles and exclusive of a
restructuring credit, loss on sale of businesses and restructuring-related
expenses.
8
<PAGE>
NOTE 5 -- SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
IN MILLIONS 2000 1999 2000 1999
----------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net sales from external customers:
Nabisco Biscuit Company........................ $ 936 $ 897 $ 1,817 $ 1,764
Nabisco Foods Company.......................... 733 547 1,364 982
International Food Group....................... 589 579 1,146 1,132
------- ------- ------- -------
Total...................................... $ 2,258 $ 2,023 $ 4,327 $ 3,878
======= ======= ======= =======
Segment operating company contribution:
Nabisco Biscuit Company........................ $ 146 $ 129 $ 278 $ 250
Nabisco Foods Company.......................... 106 73 171 122
International Food Group....................... 39 48 72 80
Other.......................................... (6) -- (10) --
------- ------- ------- -------
Total segment operating company contribution..... 285 250 511 452
Restructuring-related expenses................... -- (19) -- (34)
Loss on sale of businesses....................... (18) -- (18) --
Restructuring credit............................. 27 -- 27 --
Amortization of trademarks and goodwill.......... (55) (54) (110) (107)
------- ------- ------- -------
Consolidated operating income.................... 239 177 410 311
Interest and debt expense........................ (75) (90) (147) (188)
Other income (expense), net...................... (2) -- (4) (10)
------- ------- ------- -------
Income before income taxes....................... $ 162 $ 87 $ 259 $ 113
======= ======= ======= =======
</TABLE>
NOTE 6 -- CONTINGENCIES
TOBACCO LITIGATION
As of August 7, 2000, NGH was a defendant in 41 lawsuits arising out of its
now severed relationship with the tobacco business conducted by its former
subsidiary, R. J. Reynolds Tobacco Company ("Reynolds Tobacco") or its
subsidiaries. During the second quarter of 2000, NGH was served with 15 new
tobacco related cases but was voluntarily dismissed from 3 cases. Since the
close of the second quarter, NGH has been dropped from 8 additional cases. These
tobacco related 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. None of these cases is scheduled for trial in 2000.
Fifteen of the active suits were brought in state courts by claimants
seeking recovery of health care costs they incurred for large numbers of
beneficiaries whose illnesses are allegedly related to cigarettes. The
plaintiffs in these cases include groups of union health-benefit trust funds, a
Native American tribe and two foreign countries or political subdivisions. Four
of the cases are non-union class action suits, one in Pennsylvania federal
court, one in Indiana state court, one in New York federal court and one in
Missouri state court.
In addition, as of August 7, 2000, NGH was a defendant in 18 anti-trust
cases along with a number of cigarette manufacturers and their present or former
parent companies in various state courts. NGH has been named in an additional 14
such cases, but has not been, and does not expect to be served. NGH and other
parent or former parent companies were voluntarily dismissed from all the
antitrust cases previously pending against them in federal courts and plaintiffs
in all but one of the remaining state court cases are currently considering
taking similar action. These cases, all of which seek to be certified as class
actions, allege violations of state and/or federal anti-trust law and are
brought by plaintiffs who claim to represent direct purchasers, indirect
purchasers and retail purchasers of cigarettes.
9
<PAGE>
NOTE 6 -- CONTINGENCIES (CONTINUED)
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 health-care cost-recovery cases of the kind 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 court of appeals for the Second, Third, Fifth, Seventh and Ninth
Circuits, have granted motions to dismiss on these "remoteness" grounds. Ten of
these union cases, all pending in New York State courts, have been consolidated
and, on March 6, 2000, defendants' motion to dismiss these cases on "remoteness"
grounds was granted. Plaintiffs have filed a notice of appeal.
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 cost of defense, as well as any liabilities incurred
as a result of the cases brought by plaintiffs based on sales of cigarettes
outside the United States, are generally also subject to an indemnity from Japan
Tobacco Inc. ("Japan Tobacco") 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.
In addition to the cases pending against NGH, there are several hundred
lawsuits relating to cigarettes in which Reynolds Tobacco, and sometimes RJR,
are named defendants. One Florida class action case, in which Reynolds Tobacco
is a defendant, ENGLE VS. R.J. REYNOLDS TOBACCO COMPANY, is being tried in
several phases. The jury, on July 7, 1999, found against Reynolds Tobacco and
the other cigarette company defendants in the first phase which included issues
of liability, general causation and entitlement to punitive damages. The second
phase, considering the claims of class representatives, was completed on
April 7, 2000 with an award of $12.7 million to three class members. The same
jury subsequently heard the case for a lump sum award of punitive damages and on
July 14, 2000 awarded $145 billion against the defendants as a group of which
$36.3 billion was allotted to Reynolds Tobacco. The defendants, including
Reynolds Tobacco, on July 24, 2000 filed numerous post-verdict motions,
including motions for a new trial and to reduce the punitive damages verdict.
Under the trial plan, the third phase will address all other class members'
claims in individual trials before separate juries.
Reynolds Tobacco expects to appeal the decisions of the Florida court and
does not believe that any payment of damages should be required until the end of
the trial and appellate process. It is possible, however, that defendants will
be required to post a bond in order to file their appeals. A recently enacted
Florida statute should limit the amount of such a bond to $100 million per
defendant, although it is possible that plaintiffs will challenge the validity
of this legislative limitation. Defendants have removed the case to federal
court which is currently considering whether to retain jurisdiction over the
case or remand it back to the Florida state court where it was pending. If
Reynolds Tobacco and RJR are unable to satisfy their payment obligations for any
adverse judgments against them in ENGLE or any other of these cases pending
against them, 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.
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.
While management believes it has strong defenses in the litigation against NGH,
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of NGH's financial condition and
results of operations. The discussion and analysis of the results of operations
is divided into separate sections for sales and operating company contribution
and operating income. The sales section includes information as reported in the
historical financial statements, followed by management's discussion and
analysis of these results. The operating income and operating company
contribution section provides a reconciliation of operating income to operating
company contribution, which excludes amortization of trademarks and goodwill and
special items that management believes impact the comparability of historical
results. This is followed by management's discussion and analysis of operating
company contribution ("OCC") which is presented on a basis consistent with how
the businesses are managed. Special items include a restructuring credit, loss
on sale of businesses and restructuring-related expenses that management
believes affect the comparability of the results of operations. OCC 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 NGH's 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.
NGH's business is conducted by Nabisco Holdings Corp.'s ("Nabisco Holdings")
wholly-owned subsidiary Nabisco Inc. ("Nabisco"). The food business is conducted
by the operating subsidiaries of Nabisco Holdings. Nabisco's businesses in the
United States are comprised of Nabisco Biscuit Company and the Nabisco Foods
Company. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
DOLLARS IN MILLIONS 2000 1999 % CHANGE 2000 1999 % CHANGE
------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Nabisco Biscuit Company................ $ 936 $ 897 4% $1,817 $1,764 3%
Nabisco Foods Company.................. 733 547 34% 1,364 982 39%
International Food Group............... 589 579 2% 1,146 1,132 1%
------ ------ ------ ------
Total.................................. $2,258 $2,023 12% $4,327 $3,878 12%
====== ====== ====== ======
</TABLE>
- Nabisco Biscuit Company's net sales increased 4% in the second quarter and
3% in the first six months versus the same prior year periods. The
increase in both periods resulted from the continued momentum in volume
growth from its cookie and cracker brands. These volume gains were driven
by new products, increased marketing investment and the increasing
efficiency and effectiveness of Biscuit's reorganized direct store
delivery sales force. Several discontinued breakfast food and snack
products partially offset the improvements in both periods.
- Nabisco Foods Company's net sales increased 34% in the second quarter and
39% in the first six months versus the same prior year periods. Excluding
the impact on net sales resulting from the November 1999 acquisition of
the Favorite Brands' business, net sales grew 8% and 10%, over the
respective prior year periods. Volume gains from nuts, confections, pet
snacks and condiments, as well as the impact of several new products,
continued to drive growth in both periods.
- International Food Group's net sales increased 2% in the second quarter
and 1% in the first six months versus the same prior year periods.
Excluding the impact of unfavorable foreign currency translations,
International's net sales increased 5% and 4% over the same prior year
periods. The second quarter increase was primarily due to volume gains in
the Andean region, Canada and Argentina and favorable pricing actions in
Brazil, Mexico and the Caribbean region partially offset by volume
declines in Mexico and Iberia. The sales increase in the first six months
reflects volume
11
<PAGE>
gains in the Andean region, Asia, and Argentina and price increases in
Brazil, the Caribbean region and Canada. This increase was offset in part
by volume declines in Mexico, Brazil and Iberia. The impact of the Canale
S.A. acquisition in September 1999 is reflected in Argentina's volume
gains for both periods.
OPERATING INCOME AND OPERATING COMPANY CONTRIBUTION
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
DOLLARS IN MILLIONS 2000 1999 % CHANGE 2000 1999 % CHANGE
------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME......................... $ 239 $ 177 35% $ 410 $ 311 32%
------ ------ ------ ------
ITEMS EXCLUDED FROM OPERATING COMPANY
CONTRIBUTION:
Amortization of trademarks and
goodwill........................... (55) (54) (110) (107)
Special items:
Restructuring credit................. 27 -- 27 --
Loss on sale of businesses........... (18) -- (18) --
Restructuring-related expenses....... -- (19) -- (34)
------ ------ ------ ------
(46) (73) (101) (141)
------ ------ ------ ------
OPERATING COMPANY CONTRIBUTION BY
SEGMENT:
Nabisco Biscuit Company................ 146 129 13% 278 250 11%
Nabisco Foods Company.................. 106 73 45% 171 122 40%
International Food Group............... 39 48 (19)% 72 80 (10)%
Other.................................. (6) -- -- (10) -- --
------ ------ ------ ------
Total.................................. $ 285 $ 250 14% $ 511 $ 452 13%
====== ====== ====== ======
</TABLE>
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING COMPANY
CONTRIBUTION:
- Nabisco Biscuit Company's operating company contribution increased 13% in
the second quarter and 11% in the first six months versus the same prior
year periods. Volume gains continued to drive the results, along with
reduced raw materials costs. Increased marketing spending and lower
breakfast snack volumes partially offset these gains in both periods.
- Nabisco Foods Company's operating company contribution increased 45% in
the second quarter and 40% in the first six months versus the same prior
year periods. The results were primarily due to strong volume gains
partially offset by increased marketing spending. The addition of Favorite
Brands' business contributed 11 percentage points and 9 percentage points
to the second quarter and first six months increases, respectively.
- International Food Group's operating company contribution decreased 19% in
the second quarter and 10% in the first six months versus the same prior
year periods. The second quarter decrease was primarily due to increased
marketing investments in Brazil, Canada and Asia and volume declines in
Mexico and Iberia, as well as higher costs in Iberia. Partially offsetting
this decrease were favorable pricing actions in Mexico and the Caribbean
region and higher volumes in the Andean region and Canada. The first six
months' performance principally reflects increased marketing spending in
Canada, Asia and Brazil, lower volumes in Mexico and Iberia, and higher
costs in Iberia. This decrease was offset in part by volume gains in the
Andean region, Asia and Argentina and price increases in the Caribbean
region and Canada.
12
<PAGE>
INTEREST AND DEBT EXPENSE
Consolidated interest and debt expense of $75 million and $147 million for
the second quarter and first six months of 2000 decreased 17% and 22%,
respectively, from the same 1999 periods primarily due to the repurchase and
redemption of trust preferred securities in May of 1999. Increased interest
expense on debt partially offset this decrease due to higher average interest
rates and higher average debt levels.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $2 million expense and $4 million expense
for the second quarter and first six months of 2000 compared to zero and
$10 million expense in the same 1999 periods. The second quarter comparison
primarily reflects increased financing costs and lower interest income partially
offset by higher dividend income. The first six months comparison primarily
reflects lower foreign exchange losses and higher interest income in 2000.
DISCONTINUED OPERATIONS
Total income from discontinued operations was $2.9 billion and $3.0 billion
in the second quarter and first six months of 1999, respectively. Discontinued
operations represent the results from tobacco businesses and RJR Nabisco, Inc.'s
corporate headquarters' expenses prior to the sale in 1999 of the international
tobacco business and subsequent spin-off to shareholders of the domestic tobacco
business.
NET INCOME
Nabisco Group Holdings' net income of $76 million and $123 million for the
second quarter and first six months of 2000 compared with net income of
$2.69 billion and $2.76 billion for the same 1999 periods. Both periods reflect
the absence in 2000 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 expenses.
COMPREHENSIVE INCOME
Comprehensive income was $93 million income and $143 million income for the
second quarter and first six months of 2000 versus income of $2.9 billion in
both comparable 1999 periods. The second quarter decrease primarily reflects
lower net income, a decrease in the reclassification of cumulative translation
losses related to businesses sold and foreign currency translation losses in
2000 versus foreign currency translation gains in 1999. The six month decrease
is primarily due to lower net income and a decrease in the reclassification of
cumulative translation losses related to businesses sold partially offset by
lower foreign currency translation losses.
RESTRUCTURING
Savings objectives set in Nabisco's 1998 restructuring programs are on
target. As of June 30, 2000, the 1998 restructuring programs are complete.
Pre-tax savings in 2000 are expected to be approximately $140 million including
cash savings of $133 million and are expected to be approximately $145 million
annually including cash savings of $135 million in 2001 and thereafter. In the
second quarter of 2000, Nabisco recorded a net restructuring credit of
$27 million in addition to the $67 million net restructuring credit recorded in
1999. These net credits reduced the restructuring charges to $436 million.
Cumulative cash expenditures, net of cash proceeds, to date have totaled
$130 million with $27 million expended in the first six months of 2000.
Cumulative cash payments, net of cash proceeds is comprised of $162 million in
cash payments and cumulative cash proceeds of $32 million. For the six months
ended June 30, 2000, cash payments, net of cash proceeds is comprised of
$38 million of cash expenditures and $11 million of cash proceeds. Although
projects have been completed, proceeds to be collected and certain cash
payments, primarily severance and benefits that are paid over time, will be
transacted after the program completion
13
<PAGE>
dates. This is expected to result in a net cash inflow of approximately
$15 million subsequent to June 30, 2000. For a further discussion of the
restructuring programs, see Note 1 to the Consolidated Condensed Financial
Statements.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from continuing operating activities amounted to
$131 million for the first six months of 2000 compared to $18 million for the
first six months of 1999. The increase in net cash flows from continuing
operating activities primarily reflects income from continuing operations in
2000 compared to a loss from continuing operations in 1999 and lower working
capital requirements partially offset by the absence of an extraordinary loss on
the early extinguishment of debt in 2000.
Cash flows used in investing activities for the first six months of 2000
decreased $90 million from the first six months of 1999 to $114 million,
primarily due to maturities of financial investments in 2000 compared to net
purchases of financial investments in 1999, lower capital expenditures and
increased proceeds from the exercise of Nabisco Holdings' common stock options
partially offset by the investment in Finalrealm transactions.
Capital expenditures were $82 million in the first six months of 2000.
Management expects that capital expenditures for 2000 will be approximately
$250 million, 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
2000.
Cash flows used in financing activities were $67 million for the first six
months of 2000, a decrease of $1.9 billion from the first six months of 1999.
The decrease was principally due to the absence of trust preferred securities
and ESOP preferred stock purchases and redemptions in 2000 and lower dividends
paid on common and preferred stock. The significant cash flows used in financing
activities were sourced from cash inflows resulting from the sale of the
international tobacco business in the second quarter of 1999.
As of June 30, 2000, Nabisco's $1.5 billion revolving credit facility was
unutilized and available to support borrowings. In addition, the 364-day
$1.1 billion credit facility was utilized to support outstanding commercial
paper borrowings of $1.06 billion, and accordingly, approximately $41 million
was available.
Nabisco's credit facilities limit the ability of Nabisco Holdings and its
subsidiaries to incur indebtedness, engage in transactions with stockholders and
affiliates, create liens, acquire, sell or dispose of certain assets and
securities and engage in certain mergers or consolidations. Nabisco Holdings and
Nabisco believe that they are currently in compliance with all covenants and
restrictions imposed by the terms of their indebtedness.
The Nabisco Holdings merger agreement with Philip Morris Companies, Inc.
dated as of June 25, 2000 requires Nabisco Holdings to conduct its business in
the ordinary course consistent with past practice and limits the ability of
Nabisco Holdings and its subsidiaries to incur indebtedness, acquire, sell or
dispose of certain assets and securities, and take certain other actions.
Similarly, the NGH merger agreement with RJR dated as of June 25, 2000, requires
NGH to conduct its business in the ordinary course consistent with past practice
and limits the ability of NGH to incur indebtedness, acquire, sell or dispose of
certain assets and securities, and take certain other actions.
At June 30, 2000, NGH's total debt (notes payable and long-term debt,
including current maturities and mandatorily redeemable preferred securities)
and total capital (total debt and stockholders' equity) amounted to
approximately $4.1 billion and $7.4 billion, respectively, of which total debt
is lower by approximately $58 million and total capital is higher by
$16 million than at December 31, 1999, NGH's ratios of total debt to
stockholders' equity and total debt to total capital were 1.28 to 1 and .56 to
1, respectively.
14
<PAGE>
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. There are no restrictions
on the payment of Nabisco Holdings' customary quarterly dividend under the terms
of the terms of the Nabisco Holdings' merger agreement with Philip Morris
Companies, Inc. 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
326,357,077 shares of NGH stock outstanding on June 30, 2000.
CHANGE OF CONTROL
PROPOSED TRANSACTIONS
On June 25, 2000, the board of directors of NGH approved two major
transactions: (1) the sale of NGH's 80.5% interest in Nabisco Holdings to Philip
Morris Companies, Inc. (the "Nabisco Sale") pursuant to a merger in which Philip
Morris will acquire all of the outstanding Nabisco Holdings common stock for
$55 per share (the "Nabisco Holdings merger"), and (2) the subsequent
acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. ("RJR") pursuant to a
merger in which RJR will acquire all of the outstanding NGH common stock for
$30 per NGH share (the "NGH merger"). Completion of the Nabisco Holdings merger
is subject to customary closing conditions, including receipt of stockholder and
regulatory approvals. Completion of the NGH merger is also subject to customary
closing conditions, including receipt of stockholder and regulatory approvals
and is conditioned on the completion of Nabisco Sale. There can be no assurance
that such approvals will be obtained. The transactions are expected to close
during the fourth quarter of 2000.
NGH STOCKHOLDER VOTE REQUIRED TO APPROVE THE NABISCO SALE AND THE NGH MERGER
The Nabisco Sale requires approval by holders of a majority of the
outstanding shares of NGH common stock because the Nabisco Holdings' shares
constitute substantially all of the assets of NGH. The Nabisco Sale represents
approximately $11.728 billion in gross proceeds to NGH. NGH has entered into a
voting and indemnity agreement with Philip Morris with respect to the Nabisco
Sale which generally provides that, subject to receiving approval of the Nabisco
Sale from NGH stockholders, NGH will promptly vote in favor of the Nabisco
Holdings' merger. The approval by NGH is the only Nabisco Holdings' stockholder
approval required to complete the Nabisco Holdings' merger.
The NGH merger also requires approval by holders of a majority of the
outstanding shares of NGH common stock.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Nabisco is exposed to market risk in the areas of foreign currency exchange
rates, interest rates and commodity prices. 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 market risk sensitive financial instruments over a one-year
horizon using a 95% confidence interval for changes in market rates and prices.
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 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.
INTEREST RATE EXPOSURE
The VaR, which is the potential loss in fair value of financial instruments
resulting from Nabisco's exposure to changing interest rates, was $174 million
after tax, net of minority interest at June 30, 2000, a decrease of $4 million
from the December 31, 1999 amount.
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 (anticipated future
purchases less derivatives, inventory and firm purchase commitments) would
result in a potential loss in earnings, before taxes and minority interest of
$36 million at June 30, 2000, an increase of $6 million from the December 31,
1999 amount.
The VaR associated with either Nabisco's derivative commodity instruments or
its net commodity exposure would not have a material effect on the fair value or
cash flows of Nabisco.
------------------------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 6 to the Consolidated
Condensed Financial Statements contains forward-looking statements concerning,
among other things, 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.
16
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
NGH has been named as a defendant in a number of lawsuits (41 as of
August 7, 2000) as a result of its now severed relationship with the tobacco
business conducted by Reynolds Tobacco or its subsidiaries. For information
about this litigation see Note 6 to the Consolidated Condensed Financial
Statements.
Some of the claims against NGH in the tobacco-related litigation noted above
seek recovery of hundreds of millions and possibly billions of dollars. This is
also true of litigation pending against Reynolds Tobacco and RJR, former
subsidiaries of NGH. Litigation is subject to many uncertainties. While
management believes it has strong defenses in the litigation against NGH,
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.
OTHER LITIGATION
During the week of June 26, 2000, two actions were filed in the Court of
Chancery for the State of Delaware and one action was filed in the Chancery
Division of the Superior Court of New Jersey, in each case by alleged common
stockholders of NGH on behalf of a purported class of similarly situated NGH
stockholders. The actions are styled ALFONSE MAYER, ET AL. V. NABISCO GROUP
HOLDINGS CORPORATION, ET AL., C.A. 18126, HARRIET RAND, ET AL. V. NABISCO GROUP
HOLDINGS CORPORATION, ET AL., C.A. 18129NC, AND MARK SCHNEIDER V. STEVEN F.
GOLDSTONE, ET AL., DOCKET NO. L-2028-00. The complaints in the actions name as
defendants NGH and the members of its Board of Directors, and allege that the
NGH directors breached their fiduciary duties to NGH stockholders by agreeing to
the NGH merger and by allegedly failing to obtain the highest value for NGH
stockholders in the NGH merger. The complaints seek injunctive relief and
monetary damages in an unspecified amount. Defendants believe that the claims
are without merit and intend to defend the actions vigorously. None of these
complaints challenges the validity or fairness of the Nabisco Holdings' merger
or seeks injunctive relief or monetary damages in connection with the Nabisco
Holdings' merger.
Nabisco Holdings and Nabisco, both subsidiaries of NGH, are defendants in
various lawsuits arising in the ordinary course of business. In the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on those companies' or on NGH's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The matters below were voted upon at the annual meeting of stockholders of
NGH held on May 9, 2000. Holders of Common Stock were entitled to vote upon the
proposals to elect directors, ratify the appointment of auditors and to vote on
one stockholder proposal. Holders present in person or by proxy at the meeting
were entitled to vote 300,340,458 shares of Common Stock.
(a) Election of Twelve Directors
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
---- ----------- --------------
<S> <C> <C>
John T. Chain, Jr. ........................................ 281,014,732 19,325,726
Julius L. Chambers......................................... 281,032,413 19,308,045
John L. Clendenin.......................................... 281,934,980 19,405,478
Steven F. Goldstone........................................ 280,865,642 19,474,816
Ray J. Groves.............................................. 280,952,377 19,388,081
David B. Jenkins........................................... 279,716,734 20,623,724
Nancy Karch................................................ 279,897,120 20,353,338
James M. Kilts............................................. 281,057,355 19,283,103
Fred H. Langhammer......................................... 281,065,202 19,275,256
H. Eugene Lockhart......................................... 279,640,098 20,700,360
Theodore E. Martin......................................... 281,028,259 19,312,199
Rozanne L. Ridgway......................................... 280,923,439 19,417,019
</TABLE>
17
<PAGE>
(b) Ratification of appointment of Deloitte & Touche LLP as independent
auditors.
<TABLE>
<S> <C>
For:........................................................ 298,597,320
Against:.................................................... 582,517
Abstain:.................................................... 1,160,621
</TABLE>
(c) Stockholder Proposal on Financial and Social Accountability in
Executive Compensation
<TABLE>
<S> <C>
For:........................................................ 10,057,279
Against:.................................................... 183,678,118
Abstain:.................................................... 20,754,328
Non-Votes:.................................................. 85,850,733
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
2 Agreement and Plan of Merger, dated as of June 25, 2000
among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco
Holdings, Inc., and RJR Acquisition Corp. (which is
incorporated by reference to Annex C to the Preliminary
Proxy Statement on Schedule 14A filed on July 21, 2000).
10.1 Agreement and Plan of Merger, dated as of June 25, 2000
among Nabisco Holdings Corp., Philip Morris Companies Inc.,
and Strike Acquisition Corp. (which is incorporated by
reference to Annex A to the Preliminary Proxy Statement on
Schedule 14A filed on July 21, 2000).
10.2 Voting and Indemnity Agreement dated as of June 25, 2000
between Nabisco Group Holdings Corp., Philip Morris
Companies Inc., and Nabisco Holdings Corp (which is
incorporated by reference to Annex B to the Preliminary
Proxy Statement on Schedule 14A filed on July 21, 2000).
10.3* Amendment to Form of Non-Qualified Stock Option Agreement
between Nabisco Group Holdings Corp. and the optionee named
therein dated June 28, 2000 (1999 and 2000 grants).
10.4* Amendment to Form of Restricted Stock Unit Agreement between
Nabisco Group Holdings Corp. and the optionee named therein
dated June 28, 2000 (1999 and 2000 grants).
10.5* Amendment to Tax Sharing Agreement dated as of June 25, 2000
among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco
Holdings, Inc., Nabisco Holdings Corp. and R. J. Reynolds
Tobacco Company.
12.1* Nabisco Group Holdings Corp. Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends/Deficiency in the Coverage of Combined Fixed
Charges and Preferred Stock Dividends by Earnings Before
Fixed Charges for the six months ended June 30, 2000.
12.2* Nabisco Group Holdings Corp. Computation of Ratio of
Earnings to Fixed Charges/ Deficiency in the Coverage of
Fixed Charges By Earnings Before Fixed Charges for the six
months ended June 30, 2000.
27* Nabisco Group Holdings Corp. Financial Data Schedule for the
six months ended June 30, 2000.
</TABLE>
------------------------
*Filed herewith
(b) Reports on Form 8-K
<TABLE>
<S> <C>
None.
</TABLE>
18
<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: August 14, 2000 /s/ THOMAS J. PESCE
---------------------------------------------
Thomas J. Pesce
Senior Vice President and Controller
</TABLE>
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