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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
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RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10215 13-3490602
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-6388 56-0950247
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 258-5600
(Address, including zip code, and telephone number, including area code,
of the principal executive offices of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc.)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH
EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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RJR NABISCO HOLDINGS CORP.
Common Stock, par value $.01 per
share New York
Series B Depositary Shares New York
Series C Depositary Shares New York
RJR NABISCO, INC.
8.30% Senior Notes due April 15, 1999 New York
8.75% Senior Notes due April 15, 2004 New York
7 5/8% Notes due September 15, 2003 New York
8 5/8% Notes due 2002 New York
8% Notes due 2000 New York
9 1/4% Debentures due 2013 New York
8 3/4% Notes due 2005 New York
SUBSIDIARIES OF THE REGISTRANTS
Nabisco, Inc.
7 3/4% Sinking Fund Debentures due
May 1, 2001 New York
7 3/4% Sinking Fund Debentures due
November 1, 2003 New York
Standard Brands Incorporated
7 3/4% Sinking Fund Debentures, due
May 1, 2001 New York
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE 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
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO __
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANTS' KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF RJR
NABISCO HOLDINGS CORP. ON JANUARY 31, 1995 WAS APPROXIMATELY $5.9 BILLION.
CERTAIN AFFILIATES OF KKR ASSOCIATES AND DIRECTORS OF RJR NABISCO HOLDINGS CORP.
ARE CONSIDERED AFFILIATES FOR PURPOSES OF THIS CALCULATION BUT SHOULD NOT
NECESSARILY BE DEEMED AFFILIATES FOR ANY OTHER PURPOSE. NONE OF THE VOTING STOCK
OF RJR NABISCO, INC. IS HELD BY ANY NON-AFFILIATE.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS' CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: JANUARY 31, 1995:
RJR NABISCO HOLDINGS CORP.: 1,362,133,648 SHARES OF COMMON STOCK, PAR VALUE,
$.01 PER SHARE
RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER
SHARE
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RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
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DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE DEFINITIVE PROXY STATEMENT OF RJR NABISCO HOLDINGS CORP. TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A OF
THE SECURITIES EXCHANGE ACT OF 1934 ON OR PRIOR TO APRIL 30, 1995 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
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INDEX
PAGE
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PART I
Item 1. Business.................................................................... 1
(a) General Development of Business..................................... 1
(b) Financial Information about Industry Segments....................... 3
(c) Narrative Description of Business................................... 3
Tobacco........................................................... 3
Food.............................................................. 13
Other Matters..................................................... 17
(d) Financial Information about Foreign and Domestic Operations 17
and Export Sales..................................................
Item 2. Properties.................................................................. 18
Item 3. Legal Proceedings........................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......................... 18
Executive Officers of the Registrants....................................... 19
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 21
Item 6. Selected Financial Data..................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and 24
Results of Operations.....................................................
Item 8. Financial Statements and Supplementary Data................................. 38
Item 9. Changes in and Disagreements with Accountants on Accounting and 38
Financial Disclosure......................................................
PART III
Item 10. Directors and Executive Officers of the Registrants......................... 39
Item 11. Executive Compensation...................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 39
Item 13. Certain Relationships and Related Transactions.............................. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 40
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The operating subsidiaries of RJR Nabisco Holdings Corp. ("Holdings") and
its wholly-owned subsidiary, RJR Nabisco, Inc. ("RJRN") (collectively the
"Registrants") comprise one of the largest tobacco and food companies in the
world. In the United States, the tobacco business is conducted by R. J. Reynolds
Tobacco Company ("RJRT"), the second largest manufacturer of cigarettes, and the
packaged food business is conducted by Nabisco Holdings Corp. ("Nabisco
Holdings") through its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"), the
largest manufacturer and marketer of cookies and crackers. Outside the United
States, the tobacco operations are conducted by R. J. Reynolds Tobacco
International, Inc. ("Tobacco International"), and the food operations are
conducted by Nabisco International, Inc. ("Nabisco International") and Nabisco
Brands Ltd. RJRT's and Tobacco International's tobacco products are sold around
the world under a variety of brand names. Nabisco's food products are sold in
the United States, Canada, Latin America and certain other international
markets. For financial information with respect to RJRN's industry segments,
lines of business and operations in various geographic locations, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 15 to the consolidated financial statements, and the
related notes thereto, of Holdings and RJRN as of December 31, 1994 and 1993 and
for each of the years in the three-year period ended December 31, 1994 (the
"Consolidated Financial Statements").
Holdings was organized as a Delaware corporation in 1988 at the direction of
Kohlberg Kravis Roberts & Co., L.P. ("KKR"), a Delaware limited partnership, to
effect the acquisition of RJRN, which was completed on April 28, 1989 (the
"Acquisition"). As a result of the Acquisition, RJRN became an indirect, wholly
owned subsidiary of Holdings. After a series of holding company mergers
completed on December 17, 1992, RJRN became a direct, wholly owned subsidiary of
Holdings. The business of Holdings is conducted through RJRN.
RJRN was incorporated as a holding company in 1970. RJRT can trace its
origins back to its formation in 1875. Activities were confined to the tobacco
industry until the 1960's, when diversification led to investments in
transportation, energy and food. With the acquisition of Del Monte Corporation
("Del Monte") in 1979 (which was sold in 1989), RJRN began to concentrate its
focus on consumer products. This strategy led to the acquisition of Nabisco
Holdings Corp. (formerly Nabisco Brands, Inc.) in 1985.
In recent years subsidiaries of the Registrants have completed a number of
acquisitions. In 1994, these acquisitions included (i) the KNOX gelatin brand;
(ii) an approximately 99% interest in Establecimiento Modelo Terrabusi S.A.,
Argentina's second largest biscuit and pasta maker; (iii) a 76% interest in the
Yelets tobacco processing plant in Russia; (iv) a controlling interest in a
cigarette manufacturer in the Krasnodar region of southern Russia; and (v) a 90%
interest in Shimkent Confectionery Enterprises and a site for a new cigarette
factory in Kazakhstan. In February 1995, Tobacco International acquired Oy P.C.
Rettig Ab, Finland's second largest tobacco company.
In 1993, these acquisitions included (i) a 50% interest (increased to 100%
in 1994) in Royal Brands, S.A. in Spain and Royal Brands Portugal; (ii) a 95%
interest in Cia. Arturo Field y la Estrella Ltda., S.A., the leading biscuit
maker in Peru; (iii) the remaining interest in Compania Nacional de Galletas
Nabisco La Favorita, C.A., a Venezuelan biscuit maker, which as a result became
a wholly-owned indirect subsidiary of Nabisco International; and (iv) a 70%
interest in two cigarette factories in Ukraine.
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In 1992, these acquisitions included (i) the assets of New York Style Bagel
Chip Company, Inc., the country's leading producer and marketer of bagel chips
and pita chips; (ii) Plush Pippin Corporation ("Plush Pippin"), a leading
regional supplier of frozen pies to in-store supermarket bakeries; (iii) Stella
D'oro Biscuit Co., Inc., a New York based specialty bakery ("Stella D'oro") that
manufactures breadsticks, breakfast biscuits, specialty cakes, pastries and
snacks; (iv) Industrias Alimenticias Maguary S.A., Brazil's largest producer and
marketer of packaged fruit-based beverages; (v) the NOW & LATER confection
brand, a fruit chewy taffy product; (vi) Lance S.A. de C.V., one of Mexico's
leading biscuit and pasta manufacturers; (vii) six food and pet food businesses
in Mexico in exchange for Nabisco International's previous minority interest in
a joint venture operating those and other businesses in Mexico; and (viii) a 52%
interest (increased to 80% in 1994) in a cigarette factory in St. Petersburg,
Russia.
RJRN will continue to assess its businesses to evaluate their consistency
with strategic objectives. Although RJRN may acquire and/or divest additional
businesses in the future, no other decisions have been made with respect to any
such acquisitions or divestitures. The Registrants' credit agreement, dated as
of December 1, 1991, as amended (the "1991 Credit Agreement"), and credit
agreement, dated as of April 5, 1993, as amended (the "1993 Credit Agreement"
and, together with the 1991 Credit Agreement, the "Credit Agreements"), prohibit
the sale of all or substantially all or any substantial portion of the business
of certain subsidiaries of RJRN.
On January 26, 1995, Nabisco Holdings completed the initial public offering
of 51,750,000 shares of its Class A Common Stock at an initial offering price of
$24.50 per share. Nabisco used all of the approximately $1.2 billion of net
proceeds from the initial public offering to repay a portion of its initial
borrowing under its credit agreement, dated as of December 6, 1994 (the "Nabisco
1994 Credit Agreement"). RJRN owns 100% of the outstanding Class B Common Stock
of Nabisco Holdings, which represents approximately 80.5% of the economic
interest in Nabisco Holdings and approximately 97.6% of the total voting power
of Nabisco Holdings' outstanding common stock. In connection with the offering,
Holdings, RJRN and Nabisco Holdings entered into agreements to exchange certain
services, to establish tax sharing arrangements and to provide RJRN with certain
preemptive and registration rights with respect to Nabisco Holdings and Nabisco
securities.
Certain provisions in approximately $6 billion of RJRN's publicly held debt
limit the ability of its subsidiaries to incur long-term debt. RJRN and Nabisco
are currently considering a transaction in which they would seek to obtain
consents to remove such limitations in order to permit Nabisco to establish
long-term borrowing capacity independent of RJRN and to reduce its intercompany
debt to RJRN. It is anticipated that such consents would be sought in connection
with offers by Nabisco or RJRN to exchange debt of Nabisco for, or to pay
certain cash consent solicitation fees in respect of, all or a portion of such
RJRN debt. RJRN believes that any such transaction would not materially change
the amount of consolidated indebtedness of either RJRN or Nabisco, although any
newly issued debt of RJRN or Nabisco incurred in connection with the transaction
may have maturities, interest rates or other terms that are less attractive to
RJRN or Nabisco, respectively, than the terms of their existing debt. No
assurance can be given that any such restructuring will be pursued or
consummated or as to the timing of any such restructuring.
During 1994, the percentage voting power of Holdings held by partnerships
affiliated with KKR (the "KKR Partnerships") decreased substantially. This
reduction was principally the result of transactions in connection with the
acquisition of Borden, Inc. ("Borden") by certain of the KKR Partnerships. As of
December 31, 1993, an aggregate of approximately 46.16% (approximately 38.28% on
a fully diluted basis) of the total voting power of Holdings was held by the KKR
Partnerships. As of December 31, 1994, after giving effect to certain
transactions in connection with the acquisition of Borden by the KKR
Partnerships, the KKR Partnerships held or controlled an aggregate of
approximately 24.95% (approximately 20.28% on a fully diluted basis) of the
total voting power of Holdings, including 51,106,768 shares of Holdings Common
Stock, par value $.01 per share (the "Common Stock"), held by Borden. Subsequent
to December 31, 1994, Borden acquired 68,893,232 additional
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shares of Holdings Common Stock from the KKR Partnerships. On February 16, 1995,
Borden sold 120,000,000 shares of Holdings Common Stock in a public offering
(the "Borden Offering"). After giving effect to the Borden Offering and the
projected completion in March 1995 of the remaining steps in the acquisition of
Borden by the KKR Partnerships and assuming that no further options for Borden
common stock are exercised, the KKR Partnerships will hold or control an
aggregate of approximately 7.95% (approximately 6.56% on a fully diluted basis)
of the total voting power of Holdings based on the number of shares of Holdings
Common Stock outstanding as of January 31, 1995.
(b) Financial Information about Industry Segments
During 1994, 1993 and 1992, the Registrants' industry segments were tobacco
and food.
For information relating to industry segments for the years ended December
31, 1994, 1993 and 1992, see Note 15 to the Consolidated Financial Statements.
(c) Narrative Description of Business
TOBACCO
The tobacco line of business is conducted by RJRT and Tobacco International,
which manufacture, distribute and sell cigarettes. Cigarettes are manufactured
in the United States by RJRT and in over 30 foreign countries and territories by
Tobacco International and subsidiaries or licensees of RJRT and are sold
throughout the United States and in more than 160 markets around the world. In
1994, approximately 60% of total tobacco segment net sales (after deducting
excise taxes) and approximately 66% of total tobacco segment operating income
(before amortization of trademarks and goodwill) were attributable to domestic
tobacco operations.
DOMESTIC TOBACCO OPERATIONS
The domestic tobacco business is conducted by RJRT, which is the second
largest cigarette manufacturer in the United States. RJRT's largest selling
cigarette brands in the United States include WINSTON, DORAL, CAMEL, SALEM,
MONARCH and VANTAGE. RJRT's other cigarette brands, including MORE, NOW, BEST
VALUE, STERLING, MAGNA and CENTURY, are marketed to meet a variety of smoker
preferences. All RJRT brands are marketed in a variety of styles. Based on data
collected for RJRT by an independent market research firm, RJRT had an overall
share of retail consumer cigarette sales during 1994 of 27.8%, a decrease of
approximately 2 share points from 1993. During 1994, RJRT and the largest
domestic cigarette manufacturer, Philip Morris U.S.A., together sold, on a
shipment basis, approximately 73% of all cigarettes sold in the United States.
In November 1994, RJRT confirmed press reports that it was developing
ECLIPSE, a cigarette that primarily heats rather than burns tobacco and thereby
substantially reduces second-hand smoke. The cigarette remains under
development, and RJRT continues to assess a possible introduction of an ECLIPSE
cigarette.
A primary long-term objective of RJRT is to increase earnings and cash flow
through selective marketing investments in its key brands and continual
improvements in its cost structure and operating efficiency. Marketing programs
for full-price brands are designed to build brand awareness and add value to the
brands in order to build brand loyalty among current adult smokers and attract
adult smokers of competitive brands. In 1994, these efforts included the
introduction and expansion of conversion, continuity and relationship-building
programs such as the CAMEL Genuine Taste Mission, CAMEL Cash, CAMEL Insider,
WINSTON Winners Club and WINSTON Select Weekends and the
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regional introduction of the SALEM Preferred line extension. RJRT believes it is
essential to compete in all segments of the cigarette market, and accordingly it
offers a range of lower-priced brands including DORAL, MONARCH and BEST VALUE
intended to appeal to more cost-conscious adult smokers. For a discussion on
competition in the tobacco business, see "Tobacco--Competition" in this Item 1
and "Impact of Competitive Activity" under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RJRT's domestic manufacturing facilities, consisting principally of
factories and leaf storage facilities, are located in or near Winston-Salem,
North Carolina and are owned by RJRT. Cigarette production is conducted at the
Tobaccoville cigarette manufacturing plant (approximately two million square
feet) and the Whitaker Park cigarette manufacturing complex (approximately one
and one-half million square feet). RJRT believes that its cigarette
manufacturing facilities are among the most technologically advanced in the
United States. RJRT also has significant research and development facilities in
Winston-Salem, North Carolina.
RJRT's cigarettes are sold in the United States primarily to chain stores,
other large retail outlets and through distributors to other retail and
wholesale outlets. Except for McLane Company, Inc., which represented
approximately 13% of RJRT's sales, no RJRT customers accounted for more than 10%
of sales for 1994. RJRT distributes its cigarettes primarily to public
warehouses located throughout the United States that serve as local distribution
centers for RJRT's customers.
RJRT's products are sold to adult smokers primarily through retail outlets.
RJRT employs a decentralized marketing strategy that permits RJRT's sales force
to be flexible in responding to local market dynamics by designing individual
in-store programs to fit varying consumption patterns. RJRT utilizes print
media, billboards, point-of-sale displays and other methods of advertising.
Since 1971, television and radio advertising of cigarettes has been prohibited
in the United States.
INTERNATIONAL TOBACCO OPERATIONS
Tobacco International operates in over 160 markets around the world.
Although overall foreign cigarette sales (excluding China, in which production
data indicates an approximate 2% per annum growth rate) have increased at a rate
of only 1% per annum in recent years, Tobacco International believes that the
American Blend segment, in which Tobacco International primarily competes, is
growing significantly faster. Although Tobacco International is the second
largest of two international cigarette producers that have significant positions
in the American Blend segment, its share of sales of this segment is
approximately one-third of the share of Philip Morris International Inc., the
largest American Blend producer.
Tobacco International has strong brand presence in Western Europe and is
well established in its other key markets in the Middle East/Africa, Asia and
Canada. Tobacco International is aggressively pursuing development opportunities
in Eastern Europe and the former Soviet Union.
Tobacco International markets over 55 brands of which WINSTON, CAMEL and
SALEM, all American Blend cigarettes, are its international leaders. WINSTON,
Tobacco International's largest selling international brand, has a significant
presence in Puerto Rico and has particular strength in the Western Europe and
Middle East/Africa regions. CAMEL is sold in approximately 135 markets worldwide
and is Tobacco International's second largest selling international brand. SALEM
is the world's largest selling menthol cigarette and has particular strength in
Far East markets. Tobacco International also markets a number of local brands in
various foreign markets. None of Tobacco International's customers accounted for
more than 10% of sales for 1994.
Approximately 22% of Tobacco International's cigarette volume for 1994 was
manufactured by RJRT in the United States for sale in foreign markets. The
remainder was manufactured overseas,
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principally in owned manufacturing facilities or by licensees or joint ventures.
In addition to its new operations in the former Soviet Union, Tobacco
International operates two tobacco manufacturing facilities in Germany and one
located in each of Canada, Hong Kong, Hungary, Malaysia, Poland, Puerto Rico,
Switzerland and Turkey. Tobacco International also opened a factory in the
People's Republic of China in 1988 as part of the first cigarette manufacturing
joint venture in that country.
Certain of Tobacco International's foreign operations are subject to local
regulations that set import quotas, restrict financing flexibility, affect
repatriation of earnings or assets and limit advertising. In recent years,
certain trade barriers for cigarettes, particularly in Asia and Eastern Europe,
have been liberalized. This may provide opportunities for all international
cigarette manufacturers, including Tobacco International, to expand operations
in such markets; however, there can be no assurance that the liberalizing trends
will be maintained or extended or that Tobacco International will be successful
in pursuing such opportunities.
RAW MATERIALS
In its domestic production of cigarettes, RJRT primarily uses domestic
burley and flue cured leaf tobaccos purchased at domestic auction. RJRT also
purchases oriental tobaccos, grown primarily in Turkey and Greece, and certain
other non-domestic tobaccos. Tobacco International uses a variety of tobacco
leaf from both United States and international sources. RJRT and Tobacco
International believe there is a sufficient supply of tobacco in the worldwide
tobacco market to satisfy their current production requirements.
Tobacco leaf is an agricultural commodity subject in the United States to
government production controls and price supports that can affect market prices
substantially. The tobacco leaf price support program is subject to
Congressional review and may be changed at any time. In addition, Congress
enacted the Omnibus Budget Reconciliation Act of 1993, which assesses financial
penalties against manufacturers if cigarettes produced in the United States do
not contain at least 75% (by weight) domestically grown flue cured and burley
tobaccos. In December 1994, Congress enacted the Uruguay Round Agreements Act to
replace this domestic content requirement with a tariff rate quota system that
keys tariffs to import volumes. The tariff rate quotas are currently being
negotiated by the United States and overseas tobacco producers. Compliance with
import restrictions increased raw material costs slightly in 1994 and may cause
increases in the future.
COMPETITION
Generally, the markets in which RJRT and Tobacco International conduct their
businesses are highly competitive, with a number of large participants.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. For most of RJRT's and Tobacco International's brands,
substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new brand. Anti-smoking
groups have undertaken activities designed to inhibit cigarette sales, the form
and content of cigarette advertising and the testing and introduction of new
cigarette products.
Because television and radio advertising for cigarettes is prohibited in the
United States and brand loyalty has tended to be higher in the cigarette
industry than in other consumer product industries, established cigarette brands
in the United States have a competitive advantage. RJRT has repositioned or
introduced brands designed to appeal to adult smokers of the largest selling
cigarette brand in the United States, but there can be no assurance that such
efforts will be successful.
In addition, increased selling prices and taxes on cigarettes have resulted
in additional price sensitivity of cigarettes at the consumer level and in a
proliferation of discounted brands in the savings
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segment of the market. Generally, sales of cigarettes in the savings segment are
not as profitable as those in other segments.
LEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY
The advertising, sale and use of cigarettes has been under attack by
government and health officials in the United States and in other countries for
many years, principally due to claims that cigarette smoking is harmful to
health. This attack has resulted in a number of substantial restrictions on the
marketing, advertising and use of cigarettes, diminishing social acceptability
of smoking and activities by anti-smoking groups designed to inhibit cigarette
sales, the form and content of cigarette advertising and the testing and
introduction of new cigarette products. Together with manufacturers' price
increases in recent years and substantial increases in state and federal excise
taxes on cigarettes, this has had and will likely continue to have an adverse
effect on cigarette sales.
Cigarettes are subject to substantial excise taxes in the United States and
to similar taxes in many foreign markets. The federal excise tax per pack of 20
cigarettes increased from 16 cents to 20 cents on January 1, 1991 and to 24
cents on January 1, 1993. In addition, all states and the District of Columbia
impose excise taxes at levels ranging from a low of 2.5 cents to a high of 75
cents per pack on cigarettes. Increases in these state excise taxes could also
have an adverse effect on cigarette sales. In 1993, thirteen states and the
District of Columbia enacted excise tax increases ranging from less than 2 cents
to 41 cents per pack. In 1994, the cigarette excise tax in five states was
increased by amounts which ranged from 7.5 cents to 50 cents per pack.
In January 1993, the U.S. Environmental Protection Agency (the "EPA")
released a report on the respiratory effects of environmental tobacco smoke
("ETS") which concludes that ETS is a known human lung carcinogen in adults and
in children causes increased respiratory tract disease and middle ear disorders
and increases the severity and frequency of asthma. RJRT has joined other
segments of the tobacco and distribution industries in a lawsuit against the EPA
seeking a determination that the EPA did not have the statutory authority to
regulate ETS, and that, given the current body of scientific evidence and the
EPA's failure to follow its own guidelines in making the determination, the
EPA's classification of ETS was arbitrary and capricious.
In February 1994, the Commissioner of the U.S. Food and Drug Administration
(the "FDA"), which historically has refrained from asserting jurisdiction over
cigarette products, stated that he intended to cause the FDA to work with the
U.S. Congress to resolve the regulatory status of cigarettes under the Food,
Drug and Cosmetic Act. During the second quarter of 1994, hearings were held in
this regard, and RJRT and other members of the United States cigarette industry
were asked to provide voluntarily certain documents and other information to
Congress. RJRT is unable to predict the outcome of any Congressional
deliberations or the likelihood that the FDA will assert jurisdiction over
cigarettes in some manner. Were the FDA to assert jurisdiction in a manner that
materially restricts the availability of cigarettes to consumers, it would
likely have a significant adverse effect on RJRT.
In March 1994, the U.S. Occupational Safety and Health Administration
("OSHA") announced proposed regulations that would restrict smoking in the
workplace to designated smoking rooms that are separately exhausted to the
outside. Although RJRT cannot predict the form of any regulations that may be
finally adopted by OSHA, if the proposed regulations are adopted, RJRT expects
that many employers who have not already done so would prohibit smoking in the
workplace rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. Because many employers currently do not
permit smoking in the workplace, RJRT cannot predict the effect of any
regulations that may be adopted, but incremental restrictions on smokers could
have an adverse effect on cigarette sales and RJRT.
6
In July 1994, an amendment to a Florida statute became effective which
allows the state of Florida to bring an action in its own name against the
tobacco industry to recover amounts paid by the state under its Medicaid program
to treat illnesses statistically associated with cigarette smoking. The amended
statute does not require the state to identify the individual who received
medical care, permits a lawsuit to be filed as a class action, and eliminates
the comparative negligence and assumption of risk defenses. Similar legislation,
without Florida's elimination of these defenses, has been introduced in the
Massachusetts and New Jersey legislatures. RJRT is unable to predict whether
other states will enact similar legislation, whether lawsuits will be filed
under these statutes, or their outcome if filed. The Florida statute is being
challenged on state and federal constitutional grounds in a lawsuit brought by
Philip Morris Companies Inc., Associated Industries of Florida, Publix
Supermarkets, and National Association of Convenience Stores in June 1994. On
February 20, 1995, RJRT and Philip Morris Incorporated filed a petition with the
Supreme Court of Florida to prohibit Florida's Agency for Health Care
Administration and the Department of Business and Professional Regulation from
filing and maintaining a lawsuit against the tobacco industry under this
statute. A suit against the tobacco industry was filed under the Florida
statute on February 21, 1995. See "Litigation Affecting the Cigarette Industry"
below in this Item 1.
Legislation imposing various restrictions on public smoking has also been
enacted in forty-eight states and many local jurisdictions, and many employers
have initiated programs restricting or eliminating smoking in the workplace.
Seventeen states have enacted legislation designating a portion of increased
cigarette excise taxes to fund either anti-smoking programs, health care
programs or cancer research. Federal law prohibits smoking on all domestic
airline flights of six hours duration or less and the U.S. Interstate Commerce
Commission has banned smoking on buses transporting passengers inter-state.
Certain common carriers have imposed additional restrictions on passenger
smoking.
A number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. In June 1988, Canada enacted a
ban on cigarette advertising, the constitutionality of which is before the
Supreme Court of Canada.
In 1990, RJRN and other U.S. cigarette manufacturers, through The Tobacco
Institute, announced a tobacco industry initiative to assist retailers in
enforcing minimum age laws on the sale of cigarettes, to support the enactment
of state laws requiring the adult supervision of cigarette vending machines in
places frequented by minors, to seek the uniform establishment of 18 as the
minimum age for the purchase of cigarettes in all states, to distribute
informational materials to assist parents in combatting peer pressure on their
children to smoke and to limit voluntarily certain cigarette advertising and
promotional practices. In 1992, the Alcohol, Drug Abuse and Mental Health Act
was signed into law. This Act requires states to adopt a minimum age of 18 for
purchases of tobacco products and to establish a system to monitor, report and
reduce the illegal sale of tobacco products to minors in order to continue
receiving federal funding for mental health and drug abuse programs.
In 1964, the Report of the Advisory Committee to the Surgeon General of the
U.S. Public Health Service concluded that cigarette smoking was a health hazard
of sufficient importance to warrant appropriate remedial action. Since 1966,
federal law has required a warning statement on cigarette packaging. Since 1971,
television and radio advertising of cigarettes has been prohibited in the United
States. Cigarette advertising in other media in the United States is required to
include information with respect to the "tar" and nicotine content of
cigarettes, as well as a warning statement.
During the past three decades, various legislation affecting the cigarette
industry has been enacted. In 1984, Congress enacted the Comprehensive Smoking
Education Act (the "Smoking Education Act"). Among other things, the Smoking
Education Act: (i) establishes an interagency committee on smoking and health
that is charged with carrying out a program to inform the public of any dangers
to human health presented by cigarette smoking; (ii) requires a series of four
new health warnings to be
7
printed on cigarette packages and advertising on a rotating basis; (iii)
increases type size and area of the warning on cigarette advertisements; and
(iv) requires that cigarette manufacturers provide annually, on a confidential
basis, a list of ingredients used in the manufacture of cigarettes to the
Secretary of Health and Human Services. The warnings currently required on
cigarette packages and advertisements (other than billboards) are as follows:
(i) "Surgeon General's Warning: Smoking Causes Lung Cancer, Heart Disease,
Emphysema, And May Complicate Pregnancy"; (ii) "Surgeon General's Warning:
Quitting Smoking Now Greatly Reduces Serious Risks To Your Health"; (iii)
"Surgeon General's Warning: Smoking By Pregnant Women May Result in Fetal
Injury, Premature Birth, and Low Birth Weight"; and (iv) "Surgeon General's
Warning: Cigarette Smoke Contains Carbon Monoxide." Similar warnings are
required on outdoor billboards. In 1990, the Fire Safe Cigarette Act of 1990 was
enacted, which directed the Consumer Product Safety Commission to conduct and
oversee research begun under the direction of the Cigarette and Little Cigar
Fire Safety Act of 1984 to assess the practicability of developing a performance
standard to reduce cigarette ignition propensity. The Commission presented a
final report to Congress in 1993 describing the results of the research. The
Commission concluded that, while "it is practicable to develop a performance
standard to reduce cigarette ignition propensity, it is unclear that such a
standard would effectively address the number of cigarette-ignited fires." The
Commission further found that additional work would be required before the
actual development of a performance standard. Nevertheless, the Commission
reported that a test method developed by the National Institute of Standards and
Technology was valid and reliable within reasonable limits and could be suitable
for use in a performance standard. Although RJRT cannot predict whether further
legislation on this subject may be enacted, some form of regulation of
cigarettes based on their propensity to ignite soft furnishings may result.
Since the initial report in 1964, the Secretary of Health, Education and
Welfare and the Surgeon General have issued a number of other reports which
purport to link cigarette smoking with certain health hazards, including various
types of cancer, coronary heart disease and chronic obstructive lung disease.
These reports have recommended various governmental measures to reduce the
incidence of smoking.
In addition to the foregoing, legislation and regulations potentially
detrimental to the cigarette industry, generally relating to the taxation of
cigarettes and regulation of advertising, labeling, promotion, sale and smoking
of cigarettes, have been proposed from time to time at various levels of the
federal government. During the last Congress, the Clinton Administration and
federal legislators introduced bills that would have significantly increased the
federal excise tax on cigarettes, eliminated the deductibility of a portion of
the cost of tobacco advertising, banned smoking in public buildings and
workplaces, added additional health warnings on cigarette packaging and
advertising, further restricted the marketing of tobacco products and authorized
the Attorney General of the United States to seek to recover federal Medicaid
and Medicare payments used to treat illnesses allegedly related to the use of
tobacco products from their manufacturers. This legislation was not enacted.
Similarly, in recent years various Congressional committees and subcommittees
have approved other legislation that (i) would subject cigarettes to regulation
in various ways under the U.S. Department of Health and Human Services, (ii)
would subject cigarettes generally to regulation under the Consumer Products
Safety Act, (iii) could increase manufacturers' costs, (iv) would mandate
anti-smoking education campaigns or establish anti-smoking programs, (v) would
provide additional funding for federal and state anti-smoking activities, (vi)
would require a new list of six health warnings on cigarette packages and
advertising, expand the number or required size of the warnings and restrict the
contents of cigarette advertising and promotional activities, (vii) would
provide that neither the provisions of the Federal Cigarette Labeling and
Advertising Act, as amended (the "Cigarette Act"), nor the Smoking Education Act
should be interpreted to relieve any person from liability under common law or
state statutory law and (viii) would permit state and local governments to
restrict the sale and distribution of cigarettes and the placement of billboard
and transit advertising of tobacco products.
8
It is not possible to determine what additional federal, state, local or
foreign legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on RJRT, Tobacco
International or the cigarette industry generally, but such legislation or
regulations could have an adverse effect on RJRT, Tobacco International or the
cigarette industry generally.
LITIGATION AFFECTING THE CIGARETTE INDUSTRY
Various legal actions, proceedings and claims are pending or may be
instituted against RJRT or its affiliates or indemnitees, including those
claiming that lung cancer and other diseases have resulted from the use of or
exposure to RJRT's tobacco products. During 1994, 32 new actions were filed or
served against RJRT and/or its affiliates or indemnitees and 14 such actions
were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or
indemnitees without trial. A total of 54 such actions in the United States and
one against RJRT's Canadian subsidiary were pending on December 31, 1994. As of
February 17, 1995, 55 active cases were pending against RJRT and/or its
affiliates or indemnitees, 54 in the United States and one in Canada. The United
States cases are in 23 states and are distributed as follows: thirteen in
Louisiana, eight in Texas, three in each of Indiana, Mississippi and Tennessee,
two in each of Alabama, California, Florida, Minnesota, New Jersey and West
Virginia and one in each of Colorado, Ohio, Illinois, Kansas, Washington,
Oklahoma, Massachusetts, Nevada, South Carolina, New Hampshire, New York and
Pennsylvania. Of the 54 active cases in the United States, 33 are pending in
state court and 21 in federal court.
Five of the 54 active cases in the United States involve alleged non-smokers
claiming injuries resulting from exposure to environmental tobacco smoke. Seven
cases, which are described more specifically below, purport to be class actions
on behalf of thousands of individuals. Purported classes include individuals
claiming to be addicted to cigarettes, flight attendants alleging personal
injury from exposure to environmental tobacco smoke in their workplace and, in
one case, parents claiming that an RJRT advertising campaign constitutes an
unfair trade practice.
The plaintiffs in these actions seek recovery on a variety of legal
theories, including strict liability in tort, design defect, negligence, breach
of warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, unjust enrichment, indemnity and common law public nuisance.
Punitive damages, often in amounts ranging into the hundreds of millions of
dollars, are specifically pleaded in 27 cases in addition to compensatory and
other damages. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Cigarette Act of some or all such claims
arising after 1969; the lack of any defect in the product; assumption of the
risk; comparative fault; lack of proximate cause; and statutes of limitations or
repose. Juries have found for plaintiffs in two smoking and health cases in
which RJRT was not a defendant, but in one such case, which has been appealed by
both parties, no damages were awarded. The jury awarded plaintiffs $400,000 in
the other such case, Cipollone v. Liggett Group, Inc., et. al., which award was
overturned on appeal and the case was subsequently dismissed.
On June 24, 1992, the United States Supreme Court in Cipollone held that
claims that tobacco companies failed to adequately warn of the risks of smoking
after 1969 and claims that their advertising and promotional practices
undermined the effect of warnings after that date were preempted by the
Cigarette Act. The Court also held that claims of breach of express warranty,
fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's
decision was announced through a plurality opinion, and further definition of
how Cipollone will apply to other cases must await rulings in those cases.
Certain legislation proposed in recent years in Congress, among other
things, would eliminate any such preemptive effect on common law damage actions
for personal injuries. RJRT is unable to predict whether such legislation will
be enacted and, if so, in what form, or whether such legislation would be
9
intended by Congress to apply retroactively. The passage of such legislation
could increase the number of cases filed against cigarette manufacturers,
including RJRT.
Set forth below are descriptions of class action lawsuits, a suit in which
plaintiffs seek to act as private attorneys general, actions brought
by state attorneys general in Minnesota, Mississippi and West Virginia, an
action brought by the State of Florida and pending investigations relating to
RJRT's tobacco business.
In 1991, Broin v. Philip Morris Company, Inc. et al., a purported class
action against certain tobacco industry defendants, including RJRT, was brought
by flight attendants, claiming to represent a class of 60,000 individuals,
alleging personal injury caused by exposure to environmental tobacco smoke in
their workplace. In December 1994, the Florida state court certified a class
consisting of "all non-smoking flight attendants who are or have been employed
by airlines based in the United States and are suffering from diseases and
disorders caused by their exposure to secondhand cigarette smoke in airline
cabins." The defendants have appealed the ruling to the Florida Third District
Court of Appeal.
In March 1994, Castano v. The American Tobacco Company, et. al., a purported
class action, was filed in the United States District Court for the Eastern
District of Louisiana against tobacco industry defendants, including RJRT,
seeking certification of a class action on behalf of all United States residents
who allegedly are or claim to be addicted, or are the legal survivors of persons
who allegedly were addicted, to tobacco products manufactured by defendants. The
complaint alleges that cigarette manufacturers manipulated the levels of
nicotine in their tobacco products to induce addiction in smokers. Plaintiffs'
motion for certification of the class was granted in part on February 17, 1995.
The district court certified core liability issues (fraud, negligence, breach of
warranty, both express and implied, intentional tort, strict liability and
consumer protection statutes), and punitive damages. Not certified were issues
of injury-in-fact, proximate cause, reliance, affirmative defenses, and
compensatory damages. The defendants plan to pursue appellate remedies.
In March 1994, Lacey v. Lorillard Tobacco Company, Inc., et. al., a
purported class action, was filed in Circuit Court, Fayette County, Alabama
against three cigarette manufacturers, including RJRT. Plaintiff, who claims to
represent all smokers who have smoked or are smoking cigarettes manufactured and
sold by defendants in the state of Alabama, seeks compensatory and punitive
damages not to exceed $48,500 per class member and injunctive relief arising
from defendants' alleged failure to disclose additives used in their cigarettes.
In April 1994, defendants removed the case to the United States District Court
for the Northern District of Alabama.
In April 1994, Sparks v. R.J. Reynolds Tobacco Company, et al. was brought
in Washington state court on behalf of a purported class of "parents with a
conscience" alleging that an RJRT advertising campaign targets minors and
constitutes an unfair trade practice under Washington state law. In 1994, the
case was removed to the United States District Court for the Western District of
Washington. Defendants' motion to dismiss the case on preemption grounds was
granted on December 9, 1994. Plaintiffs have filed a notice of appeal.
In May 1994, Engle v. R.J. Reynolds Tobacco Company, et al. was filed in
Circuit Court, Eleventh Judicial District, Dade County, Florida against tobacco
manufacturers, including RJRT, and other members of the industry, by plaintiffs
who allege injury and purport to represent a class of all United States citizens
and residents who claim to be addicted, or who claim to be legal survivors of
persons who allegedly were addicted, to tobacco products. On October 28, 1994, a
state court judge in Miami granted plaintiffs' motion to certify the class. The
defendants have appealed that ruling to the Florida Third District Court of
Appeal.
In September 1994, Granier v. American Tobacco Company, et al., a purported
class action apparently patterned after the Castano case, was filed in the
United States District Court for the
10
Eastern District of Louisiana against tobacco industry defendants, including
RJRT. Plaintiffs seek certification of a class action on behalf of all residents
of the United States who have used and purportedly became addicted to tobacco
products manufactured by defendants. The complaint alleges that cigarette
manufacturers manipulated the levels of nicotine in tobacco products for the
purpose of addicting consumers. By agreement of the parties, all action in this
case is stayed pending determination of the motion for class certification in
the Castano case.
In January 1995, a purported class action was filed in the Ontario Canada
Court of Justice against RJR-MacDonald, Inc. and two other Canadian cigarette
manufacturers. The lawsuit, Le Tourneau, et al. v. Imperial Tobacco Company,
Ltd., et al., seeks certification of a class of persons who have allegedly
become addicted to the nicotine in cigarettes or who had such alleged addiction
heightened or maintained through the use of cigarettes, and who have allegedly
suffered loss, injury, and damage in consequence, together with persons with
Family Law Act claims in respect to the claims of such allegedly addicted
persons, and the estates of such allegedly addicted persons. Theories of
recovery pleaded include negligence, strict liability, failure to warn,
deceit, negligent misrepresentation, implied warranty and conspiracy. The
relief sought consists of damages of three million dollars, punitive damages,
funding of nicotine addiction rehabilitation centers, interest and costs.
As of February 21, 1995, RJR-MacDonald, Inc. had not yet been served with a
copy of the complaint.
In March 1994, Allman v. Philip Morris, Inc., et al. and Higley v. Philip
Morris, Inc., et al. were filed in the United States District Court for the
Southern District of California against industry members and others, including
RJRT, on behalf of a purported class of persons claiming to be addicted to
cigarettes who had been prescribed treatment using the nicotine transdermal
system. Plaintiffs assert a violation of the Racketeer Influenced and Corrupt
Organizations Act and claim unspecified actual and treble damages. In April
1994, the two cases were combined into a single amended complaint and
plaintiffs' counsel agreed to dismiss the Higley case. On September 28, 1994,
the court granted the defendants' motion to dismiss the remaining case with
prejudice. Plaintiffs filed a notice of appeal, but the parties later stipulated
to a dismissal. An order was entered February 13, 1995 dismissing the case.
In June 1994, in Mangini v. R.J. Reynolds Tobacco Company, et al., the
California Supreme Court ruled that the plantiffs' claim that an RJRT
advertising campaign constitutes unfair competition under the California
Business and Professions Code was not preempted by the Cigarette Act. The suit
is similar to the Sparks case pending in Washington except that the plantiffs
here are acting as private attorneys general rather than on behalf of a
purported class. This opinion allows the plaintiffs to pursue their lawsuit
which had been dismissed at the trial court level. On September 28, 1994, the
defendants in this case filed a Petition for Certiorari to the United States
Supreme Court, which was denied on December 28, 1994. The case has been remanded
to the trial court where additional defendants, including RJRN, have been added.
In June 1994, in Moore v. The American Tobacco Company, et al., RJRN and
RJRT were named along with other industry members as defendants in an action
brought by the Mississippi state attorney general on behalf of the state to
recover state funds paid for health care and medical and other assistance to
state citizens suffering from diseases and conditions allegedly related to
tobacco use. This suit, which was brought in Chancery (non-jury) Court, Jackson
County, Mississippi also seeks an injunction from "promoting" or "aiding and
abetting" the sale of cigarettes to minors. Both actual and punitive damages are
sought in unspecified amounts. Motions by the defendants to dismiss the case or
to transfer it to circuit (jury) court were denied on February 21, 1995 and the
case will proceed in Chancery Court. The defendants are considering their
options regarding appeal.
In August 1994, RJRT and other U.S. cigarette manufacturers were named as
defendants in an action instituted on behalf of the state of Minnesota and on
behalf of Blue Cross and Blue Shield of Minnesota to recover the costs of
medical expenses paid by the state and by Blue Cross/Blue Shield that were
incurred in the treatment of diseases allegedly caused by cigarette smoking. The
suit, Minnesota v.
11
Philip Morris, et al., alleges consumer fraud, unlawful and deceptive trade
practices, false advertising and restraint of trade, and it seeks injunctive
relief and money damages, trebled for violations of the state antitrust law.
In September 1994, the Attorney General of West Virginia filed suit against
RJRT, RJRN and twenty-one additional defendants in state court in West Virginia.
The lawsuit, McGraw v. American Tobacco Company, et al., is similar to those
previously filed in Mississippi and Minnesota. It seeks recovery for medical
expenses incurred by the state in the treatment of diseases statistically
associated with cigarette smoking and requests an injunction against the
promotion and sale of cigarettes and tobacco products to minors. The lawsuit
also seeks a declaration that the state of West Virginia, as plaintiff, is not
subject to the defenses of statute of repose, statute of limitations,
contributory negligence, comparative negligence, or assumption of the risk.
On February 21, 1994, the state of Florida filed a suit against RJRT and
RJRN, along with other industry members, their holding companies and other
entities, under the Florida statute described above in "Legislation and Other
Matters Affecting the Cigarette Industry". In addition to Medicaid reimbursement
under various theories of liability, the suit seeks injunctive relief to:
prevent the defendants from engaging in consumer fraud; disclose and publish all
research conducted directly or indirectly by the industry; fund a corrective
public education campaign on the issues of smoking and health in Florida;
prevent the distribution and sale of cigarettes to minors under the age of
eighteen; fund clinical smoking cessation programs in the state of Florida;
dissolve the Council for Tobacco Research and the Tobacco Institute or divest
ownership, sponsorship or membership in both; and disgorge all profits from
sales of cigarettes in Florida. Neither RJRT nor RJRN has been served with
a copy of the complaint as of February 21, 1995.
RJRT understands that a grand jury investigation being conducted in the
Eastern District of New York is examining possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research--USA,
Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this
investigation.
RJRT received a civil investigative demand dated January 11, 1994 from the
U.S. Department of Justice requesting broad documentary information from RJRT.
Although the request appears to focus on tobacco industry activities in
connection with product development efforts, it also requests general
information concerning contacts with competitors. RJRT is unable to predict the
outcome of this investigation.
-------------------
Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants in
similar actions, even if such rulings are not final, could adversely affect the
litigation against RJRT or its affiliates or indemnitees and increase the number
of such claims. Although it is impossible to predict the outcome of such events
or their effect on RJRT, a significant increase in litigation activities could
have an adverse effect on RJRT. RJRT believes that it has a number of valid
defenses to any such actions, including but not limited to those defenses based
on preemption under the Cipollone decision, and RJRT intends to defend
vigorously all such actions.
The Registrants believe that the ultimate outcome of all pending litigation
matters should not have a material adverse effect on the financial position of
either of the Registrants; however, it is possible that the results of
operations or cash flows of the Registrants in particular quarterly or annual
periods or the financial condition of the Registrants could be materially
affected by the ultimate outcome of certain pending litigation matters.
Management is unable to derive a meaningful estimate of the amount or range of
any possible loss in any particular quarterly or annual period or in the
aggregate.
12
FOOD
The food line of business is conducted by operating subsidiaries of Nabisco
Holdings. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco
Holdings, which represents approximately 80.5% of the economic interest in
Nabisco Holdings and approximately 97.6% of the total voting power of Nabisco
Holdings' outstanding common stock. Nabisco's business in the United States is
comprised of the Nabisco Biscuit, Specialty Products, LifeSavers, Planters, Food
Service and Fleischmann's Companies (collectively, the "Domestic Food Group").
Nabisco's business outside the United States is conducted by Nabisco Brands Ltd
and Nabisco International (collectively, the "International Food Group").
Nabisco Brands Ltd was recently shifted from the Domestic Food Group (formerly
the North American Food Group) to the International Food Group.
Food products are sold under trademarks owned or licensed by Nabisco and
brand recognition is considered essential to their successful marketing. None of
Nabisco's customers accounted for more than 10% of sales for 1994.
DOMESTIC FOOD GROUP OPERATIONS
Nabisco Biscuit Company. Nabisco Biscuit Company is the largest manufacturer
and marketer in the United States cookie and cracker industry with nine of the
ten top selling brands, each of which had annual net sales of over $100 million
in 1994. Overall, in 1994, Nabisco Biscuit had a 41.6% share of the domestic
cookie category and a 54.8% share of the domestic cracker category, in the
aggregate more than three times the share of its closest competitor. Leading
Nabisco Biscuit cookie brands include OREO, CHIPS AHOY!, NEWTONS and
SNACKWELL'S. Leading Nabisco Biscuit cracker brands include RITZ, PREMIUM,
NABISCO HONEY MAID GRAHAMS, WHEAT THINS and TRISCUIT.
OREO and CHIPS AHOY! are the two largest selling cookies in the United
States. OREO, the leading sandwich cookie, is Nabisco Biscuit's largest selling
cookie brand. Line extensions such as OREO DOUBLE STUF, FUDGE COVERED OREO and
Reduced Fat OREO continue to increase the brand's appeal to targeted consumer
groups. CHIPS AHOY! is the leader in the chocolate chip cookie segment with line
extensions such as CHUNKY CHIPS AHOY! and CHEWY CHIPS AHOY! broadening its
appeal and adding incremental sales.
NEWTONS, the oldest Nabisco Biscuit cookie brand, is the third leading
cookie brand in the United States. The introduction of FAT FREE FIG and APPLE
NEWTONS in 1992 and FAT FREE CRANBERRY, RASPBERRY and STRAWBERRY NEWTONS in 1993
has expanded the appeal of NEWTONS and added incremental sales.
Nabisco Biscuit's cracker business is led by RITZ, the largest selling
cracker in the United States, as well as RITZ BITS and RITZ BITS SANDWICHES,
successful product line extensions which, together with RITZ, accounted for
12.2% of cracker sales in the United States in 1994. In addition, PREMIUM, the
oldest Nabisco cracker brand and the leader in the saltine cracker segment, is
joined by NABISCO HONEY MAID GRAHAMS, WHEAT THINS and TRISCUIT to comprise,
along with RITZ, five of the six largest selling cracker brands in the United
States.
In 1991, Nabisco Biscuit introduced MR. PHIPPS PRETZEL CHIPS, the first such
product of its kind. Nabisco Biscuit expanded the MR. PHIPPS line with the
introduction of MR. PHIPPS TATER CRISPS in 1992, which deliver salty snack taste
with only half the fat of potato chips.
In 1992, Nabisco Biscuit became the leading manufacturer and marketer of no
fat/reduced fat cookies and crackers with the introduction of the SNACKWELL'S
line. Nabisco Biscuit also acquired Stella d'Oro, a leading producer of
breadsticks, breakfast biscuits, specialty cakes, pastries and snacks. This line
of specialty items gave Nabisco Biscuit access to new areas within supermarkets,
further broadening Nabisco's cookie and cracker portfolio.
13
Nabisco Biscuit's other cookie and cracker brands, which include NUTTER
BUTTER, NILLA WAFERS, BARNUM'S ANIMAL CRACKERS, BETTER CHEDDARS, HARVEST CRISPS,
CHICKEN IN A BISKIT and CHEESE NIPS, compete in consumer niche segments. Many
are the first or second largest selling brands in their respective segments.
Nabisco Biscuit's products are manufactured in 13 Nabisco Biscuit-owned
bakeries and in 16 facilities with which Nabisco Biscuit has production
agreements. These facilities are located throughout the United States. Nabisco
Biscuit is in the process of modernizing certain of its facilities. Nabisco
Biscuit also operates a flour mill in Toledo, Ohio which supplies 85% of its
flour needs.
Nabisco Biscuit's products are sold to major grocery and other large retail
chains through Nabisco Biscuit's direct store delivery system. The system is
supported by a distribution network utilizing 10 major distribution warehouses
and 125 shipping branches where shipments are consolidated for delivery to
approximately 111,000 separate delivery points. Nabisco believes this
sophisticated distribution and delivery system provides it with a significant
service advantage over its competitors.
Specialty Products Company. The Specialty Products Company manufacturers and
markets a broad range of food products, with sauces and condiments, pet snacks,
Mexican foods and hot cereals representing the largest categories. Many of its
products are first or second in their product categories. Well-known brand names
include A.1. steak sauces, GREY POUPON mustards, MILK-BONE pet snacks, ORTEGA
Mexican foods, CREAM OF WHEAT hot cereals, ROYAL desserts and COLLEGE INN
broths.
Specialty Products' primary entries in the sauce and condiment segments are
A.1. and A.1. BOLD steak sauces, the leading lines of steak sauces, and GREY
POUPON mustards, which include the leading Dijon mustard. Specialty Products
also markets REGINA wine vinegar, the leader in its segment of the vinegar
market. A.1., GREY POUPON and REGINA products are manufactured in one facility.
Specialty Products is the leading manufacturer of pet snacks in the United
States with MILK-BONE dog biscuits. MILK-BONE products include MILK-BONE
ORIGINAL BISCUITS, FLAVOR SNACKS, DOG TREATS and BUTCHER'S CHOICE. Pet snacks
are produced at a single manufacturing facility.
Specialty Products produces shelf-stable Mexican foods under its ORTEGA
brand name. Specialty Products also participates in the dry mix dessert category
with ROYAL gelatins and puddings and the non-dessert gelatin category with KNOX
unflavored gelatins and has lines of regional products including COLLEGE INN
broths, VERMONT MAID syrup, MY-T-FINE puddings, DAVIS baking powder and BRER
RABBIT molasses and syrup. ROYAL gelatins and puddings, KNOX gelatins and
MY-T-FINE puddings are manufactured in one facility.
Nabisco, through the Specialty Products Company, manufactures hot cereals,
participating in the cook-on-stove and mix-in-bowl segments of the category.
CREAM OF WHEAT, the leading wheat-based hot cereal, and CREAM OF RICE
participate in the cook-on-stove segment and eight varieties of INSTANT CREAM OF
WHEAT participate in the mix-in-bowl segment. Hot cereals are manufactured in
one facility. Quaker Oats Company is the most significant participant in the hot
cereal category.
Specialty Products sells to retail grocery chains through independent
brokers and to drugstores, mass merchandisers and other major retail outlets
through a direct sales force. The products are sold and distributed by Nabisco's
Sales & Integrated Logistics Group.
LifeSavers Company. The LifeSavers Company manufactures and markets hard
roll and bite-size candy and gum primarily for sale in the United States.
LifeSavers' well-known brands include LIFE SAVERS hard roll and bite-size candy,
BREATH SAVERS sugar free mints, BUBBLE YUM bubble gum, CARE*FREE sugarless gum,
NOW & LATER fruit chewy taffy and LIFE SAVERS GUMMI
14
SAVERS fruit chewy candy. Based on 1994 net sales, LIFE SAVERS is the largest
selling hard roll candy in the United States, with a 21.4% share of the hard
roll candy category, BREATH SAVERS is the largest selling sugar free breath mint
in the United States and BUBBLE YUM is the largest selling chunk bubble gum in
the United States. LifeSavers' products are seasonally strongest in the fourth
quarter.
LifeSavers sells its products in the United States primarily to grocery
stores, drug stores, mass merchandisers, convenience stores, membership club
stores and food service, military and vending machine suppliers. The products
are sold and distributed by Nabisco's Sales & Integrated Logistics Group.
LifeSavers currently owns and operates four manufacturing facilities.
Planters Company. The Planters Company produces and/or markets nuts and
snacks largely for sale in the United States, primarily under the PLANTERS
trademark. PLANTERS nuts are the clear leader in the packaged nut category, with
a market share of six times that of its nearest competitor. Planters' products
are commodity oriented and are seasonally strongest in the fourth quarter.
Planters sells its products in the United States primarily to grocery
stores, drug stores, mass merchandisers, convenience stores, membership club
stores and food service, military and vending machine suppliers. The products
are sold and distributed by Nabisco's Sales & Integrated Logistics Group.
Planters currently owns and operates two manufacturing facilities.
Food Service Company. The Food Service Company sells through non-grocery
channels a variety of specially packaged food products of the Nabisco Biscuit,
LifeSavers, Planters, Fleischmann's and Specialty Products Companies, including
cookies, crackers, hot cereals, sauces and condiments for the food service and
vending machine industry. Food Service is also a leading regional supplier of
premium frozen pies to in-store supermarket bakeries, wholesale clubs and food
service accounts through Plush Pippin Corporation. Food Service provides Nabisco
with an additional distribution method for its products. The Food Service
products are distributed by Nabisco's Sales & Integrated Logistics Group.
Fleischmann's Company. The Fleischmann's Company manufactures and markets
various margarines and spreads as well as a no-fat egg product, EGG BEATERS.
Fleischmann's margarine business is the second largest margarine producer in
the United States. Fleischmann's currently participates in all segments of the
margarine category, with FLEISCHMANN'S, BLUE BONNET and MOVE OVER BUTTER.
Fleischmann's margarines are manufactured in three facilities. Fleischmann's is
the market leader in the healthy packaged egg category with EGG BEATERS.
Distribution for the Fleischmann's Company is principally direct from plant to
retailer warehouse and through Nabisco's Sales & Integrated Logistics Group.
Sales and Integrated Logistics Group. The Sales & Integrated Logistics Group
handles sales and distribution for the Specialty Products, LifeSavers, Planters
and Fleischmann's Companies and distribution for the Food Service Company. Their
products are sold to retail grocery chains through independent brokers and a
direct sales force, and to drug stores, mass merchandisers and other major
retail outlets through the direct sales force. The products are distributed from
twelve distribution centers located throughout the United States.
INTERNATIONAL FOOD GROUP OPERATIONS
Nabisco Brands Ltd. Nabisco Brands Ltd conducts Nabisco's Canadian
operations through a biscuit division, a grocery division and a food service
division. Excluding private label brands, the biscuit division produced nine of
the top ten cookies and nine of the top ten crackers in Canada in 1994. Nabisco
Brands Ltd's cookie and cracker brands in Canada include OREO, CHIPS AHOY!,
FUDGEE-O, PEEK FREANS, DAD'S, DAVID, PREMIUM PLUS, RITZ, TRISCUIT and STONED
WHEAT THINS. These products are manufactured in five bakeries in Canada and are
sold through a direct store delivery system, utilizing 11 sales offices and
distribution centers and a combination of public and private carriers. Nabisco
Brands Ltd also markets a variety of single-serve
15
cookies, crackers and salty snacks under such brand names as MINI OREO, RITZ
BITS SANDWICHES and CRISPERS.
Nabisco Brands Ltd's grocery division produces and markets canned fruits and
vegetables, fruit juices and drinks and pet snacks. The grocery division is the
leading canned fruit producer in Canada and is the second largest canned
vegetable producer in Canada. Canned fruits, vegetables, soups and fruit juices
and drinks are marketed under the DEL MONTE trademark, pursuant to a license
from the Del Monte Corporation, and under the AYLMER trademark. The grocery
division also markets MILK-BONE pet snacks and MAGIC baking powder, each a
leading brand in Canada. Nabisco Brands Ltd's grocery division operated six
manufacturing facilities in 1994, five of which were devoted to canned products,
principally fruits and vegetables, and one of which produced pet snacks. The
grocery division's products are sold directly to retail chains and are
distributed through six regional warehouses.
Nabisco Brands Ltd's food service division sells a variety of specially
packaged food products including cookies, crackers and canned fruits and
vegetables as well as condiments to non-grocery outlets. The food service
division has its own sales and marketing organization and sources product from
Nabisco Brands Ltd's other divisions.
Nabisco International. Nabisco International is a leading producer of
biscuits, powdered dessert and drink mixes, baking powder, other grocery items,
industrial yeast and bakery ingredients. Nabisco International also exports a
variety of Nabisco, Inc. products to markets in Europe and Asia from the United
States. Nabisco International is one of the largest multinational packaged food
businesses in Latin America.
Nabisco International manufactures and markets biscuits and crackers under
the NABISCO brand, yeast, baking powder and bakery ingredients under the
FLEISCHMANN'S and ROYAL brands, desserts and drink mixes under the ROYAL brand,
processed milk products under the GLORIA brand and canned fruits and vegetables
under the DEL MONTE brand pursuant to a license from the Del Monte Corporation.
Nabisco International's largest market is Brazil, where it operates 15 plants.
Nabisco International is the market leader in powdered desserts in most of Latin
America, the yeast category in Brazil and certain other Latin American
countries, biscuits in Peru, Spain, Venezuela and Uruguay, and canned vegetables
in Venezuela. Nabisco International also maintains a strong position in the
processed milk category in Brazil. In Argentina, Nabisco International acquired
71% of Establecimiento Modelo Terrabusi S.A. in April 1994 and increased its
interest in the Argentine biscuit and pasta company to approximately 99% in
October and November 1994. Nabisco International now has operations in 17 Latin
American countries.
Nabisco International significantly increased its presence in Europe through
the 1993 acquisition of 50% of each of Royal Brands S.A. in Spain and Royal
Brands Portugal. The remaining 50% of each was purchased in May 1994. Nabisco
International's products in Spain now include biscuits marketed under the
ARTIACH and MARBU trademarks, powdered dessert mixes marketed under the ROYAL
trademark and various other foods, including canned meats and juices.
Nabisco International's grocery products are sold to retail outlets through
its own sales forces and independent wholesalers and distributors. Industrial
yeast and bakery products are sold to the bakery trade through Nabisco
International's own sales forces and independent distributors.
RAW MATERIALS
Various agricultural commodities constitute the principal raw materials used
by Nabisco in its food businesses. These raw materials are purchased on the
commodities market and through supplier contracts. Prices of agricultural
commodities tend to fluctuate due to various seasonal, climatic and economic
factors which generally also affect Nabisco's competitors. Nabisco believes that
all of the raw
16
materials for its products are in plentiful supply and are readily available
from a variety of independent suppliers.
COMPETITION
Generally, the markets in which the Domestic Food Group and the
International Food Group conduct their business are highly competitive.
Competition consists of large domestic and international companies, local and
regional firms and generic and private label products of food retailers.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. Substantial advertising and promotional expenditures are
required to maintain or improve a brand's market position or to introduce a new
product.
The trademarks under which the Domestic Food Group and the International
Food Group market their products are generally registered in the United States
and other countries in which such products are sold and are generally renewable
indefinitely. Nabisco and certain of its subsidiaries have from time to time
granted various parties exclusive licenses to use one or more of their
trademarks in particular locations. Nabisco does not believe that such licensing
arrangements have a material effect on the conduct of its domestic or
international business.
OTHER MATTERS
ENVIRONMENTAL MATTERS
The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the Environmental Protection Agency and other
governmental agencies under various statutes have resulted in, and will likely
continue to result in, substantial expenditures for pollution control, waste
treatment, plant modification and similar activities.
Certain subsidiaries of the Registrants have been named "potentially
responsible parties" with third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to
fifteen sites.
The Registrants' subsidiaries have been engaged in a continuing program to
assure compliance with such laws and regulations. Although it is difficult to
identify precisely the portion of capital expenditures or other costs
attributable to compliance with environmental laws and to estimate the cost of
resolving these CERCLA matters, the Registrants do not expect such expenditures
or other costs to have a material adverse effect on the financial condition of
either of the Registrants.
EMPLOYEES
At December 31, 1994, the Registrants together with their subsidiaries had
approximately 70,600 full time employees. None of RJRT's operations are
unionized. Most of the unionized workers at Nabisco's operations are represented
under a national contract with the Bakery, Confection and Tobacco Workers Union,
which was ratified in September 1992 and which will expire in September 1996.
Other unions represent the employees of a number of Nabisco's operations and
several of Tobacco International's operations are unionized. RJRN believes that
its relations with these employees and with their unions are good.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
For information about foreign and domestic operations and export sales for
the years 1992 through 1994, see "Geographic Data" in Note 15 to the
Consolidated Financial Statements.
17
ITEM 2. PROPERTIES
For information pertaining to the Registrants' assets by lines of business
and geographic areas as of December 31, 1994 and 1993, see Note 15 to the
Consolidated Financial Statements.
For information on properties, see Item 1.
ITEM 3. LEGAL PROCEEDINGS
In September 1994, nine putative class and derivative actions were filed by
purported Holdings' stockholders in the Court of Chancery of the State of
Delaware in and for New Castle County against members of the Holdings' board of
directors, KKR and Holdings, as nominal defendant, challenging the proposed
acquisition by Holdings of any interest in Borden. These actions alleged, among
other things, that the agreement in principle for Holdings to purchase a 20%
stake in Borden constituted a breach of fiduciary duty and waste of corporate
assets in that the price paid by Holdings for its Borden stake would be inflated
because it would include a control premium and that the issuance of new Holdings
Common Stock would substantially dilute the cash value and shareholdings of the
noncontrolling public stockholders of Holdings. On October 25, 1994, Holdings
and KKR concluded that they were unable to reach a definitive agreement for the
transaction contemplated by their agreement in principle. Shortly thereafter,
the nine actions were consolidated. In December 1994, the parties entered into a
proposed stipulation and order dismissing the litigation with prejudice and on
the merits, but providing that the court would retain jurisdiction to consider
an application by the plantiffs for fees and expenses. The order was entered by
the court on February 11, 1995.
For information about other litigation and legal proceedings, see
"Litigation Affecting the Cigarette Industry" and "Other Matters--Environmental
Matters" in Item 1.
------------------------
Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants in
similar actions, even if such rulings are not final, could adversely affect the
litigation against RJRT or its affiliates or indemnitees and increase the number
of such claims. Although it is impossible to predict the outcome of such events
or their effect on RJRT, a significant increase in litigation activities could
have an adverse effect on RJRT. RJRT believes that it has a number of valid
defenses to any such actions, including but not limited to those defenses based
on preemption under the Cipollone decision, and RJRT intends to defend
vigorously all such actions.
The Registrants believe that the ultimate outcome of all pending litigation
matters should not have a material adverse effect on the financial position of
either of the Registrants; however, it is possible that the results of
operations or cash flows of the Registrants in particular quarterly or annual
periods or the financial condition of the Registrants could be materially
affected by the ultimate outcome of certain pending litigation matters.
Management is unable to derive a meaningful estimate of the amount or range of
any possible loss in any particular quarterly or annual period or in the
aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
EXECUTIVE OFFICERS OF THE REGISTRANTS
EXECUTIVE OFFICERS OF HOLDINGS
The executive officers of Holdings are Charles M. Harper (Chairman of the
Board and Chief Executive Officer), Lawrence R. Ricciardi (President and General
Counsel), Eugene R. Croisant (Executive Vice President), Stephen R. Wilson
(Executive Vice President and Chief Financial Officer), Robert S. Roath (Senior
Vice President and Controller), John J. Delucca (Senior Vice President and
Treasurer) and Jo-Ann Ford (Senior Vice President, Law). Mr. Roath and Ms. Ford
are married. The following table sets forth certain information regarding such
officers.
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT AND FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
- ------------------------- --- ------------------------------------------------------------
Charles M. Harper 67 May 1993-Present, Chairman and Chief Executive Officer;
prior thereto, Chairman and Chief Executive Officer,
ConAgra, Inc., 1981-1993.
Lawrence R. Ricciardi(1) 54 May 1993-Present, President and General Counsel; prior
thereto, Co-Chairman and Chief Executive Officer and
General Counsel, March 1993-May 1993; Executive Vice
President and General Counsel, 1989-1993.
Eugene R. Croisant(2) 57 1989-Present, Executive Vice President of Human Resources
and Administration.
Stephen R. Wilson 48 May 1993-Present, Executive Vice President and Chief
Financial Officer; prior thereto, Senior Vice President,
Corporate Development, 1990-1993; General Manager, North
America, Franklin Mint, 1989-1990.
Robert S. Roath 52 1991-Present, Senior Vice President and Controller; prior
thereto, Vice President and Controller, 1990-1991; Vice
President and Corporate Controller, Colgate-Palmolive
Company, 1988-1990.
John J. Delucca 51 September 1993-Present, Senior Vice President and Treasurer;
Treasurer of Nabisco Holdings Corp. October 1994-February
1995; prior thereto, Managing Director and Chief Financial
Officer, Hascoe Associates, 1991-1993; President and Chief
Financial Officer, Lexington Group, 1990-1991; Senior Vice
President, Finance and Managing Director, Trump Group,
1988-1990.
Jo-Ann Ford 39 Effective March 3, 1995, Senior Vice President, Law and
Secretary; Vice President, Assistant General Counsel and
Secretary since July 1994; prior thereto, Vice President
and Assistant General Counsel, 1991-1994; Senior Counsel,
1990-1991; Counsel, Exxon Corporation, 1988-1990.
- ------------
(1) Mr. Ricciardi, in anticipation of retirement, will cease to be an
executive officer of Holdings effective March 3, 1995. Steven F. Goldstone,
has been appointed General Counsel effective March 3, 1995. Mr. Goldstone
will remain a partner of Davis Polk & Wardwell, and has been a partner of
such law firm since 1978.
(2) Mr. Croisant, in anticipation of retirement, will cease to be an
executive officer of Holdings effective March 3, 1995. Mr. Gerald I.
Angowitz, Vice President, Human Resources and Administration of RJRN since
1993, has been appointed Senior Vice President, Human Resources and
Administration of Holdings, effective March 3, 1995. Mr. Angowitz was Vice
President, Benefits of RJRN, 1991-1993, and was previously a principal in
Kwasha Lipton, an international benefits consulting firm.
19
EXECUTIVE OFFICERS OF RJRN NOT LISTED ABOVE
Set forth below are the names, ages, positions and offices held and a brief
account of the business experience during the past five years of each executive
officer of RJRN, other than those listed above.
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT AND FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
- ----------------------- --- ------------------------------------------------------------
H. John Greeniaus 50 October 1994-Present, President, Chief Executive Officer and
Director, Nabisco Holdings Corp. and Nabisco, Inc.; prior
thereto, Chairman and Chief Executive Officer, Nabisco,
Inc., 1993-October 1994. President, Nabisco Holdings
Corp., 1992-1993, President and Chief Executive Officer,
Nabisco Holdings Corp., 1987-1991.
James W. Johnston 48 1989-Present, Chairman and Chief Executive Officer, R. J.
Reynolds Tobacco Company; Chairman, R. J. Reynolds Tobacco
International, Inc. since 1993.
Anthony J. Butterworth 57 1993-Present, President and Chief Executive Officer, R. J.
Reynolds Tobacco International, Inc.; prior thereto,
Managing Director and Chief Executive Officer, London
International Group plc, 1991-1993; Chief Operating
Officer, London International Group plc, 1989-1991.
James J. Postl 49 December 1994-Present, President and Chief Executive
Officer, Nabisco International, Inc. and Senior Vice
President, Nabisco Holdings Corp.; prior thereto,
President and Chief Operating Officer, Nabisco
International, Inc., February-December 1994; President,
Hostess Frito-Lay, Canada and President, Americas, PepsiCo
Foods International, 1991-1994; Area/Group Vice President,
PepsiCo Foods International, 1986-1991.
M.B. Oglesby, Jr. 52 1989-Present, Senior Vice President, Government Affairs.
J. Thomas Pearson 53 1988-Present, Senior Vice President, Taxation.
Jason H. Wright 34 February 1994-Present, Senior Vice President of Worldwide
Communications; prior thereto, Vice President of Worldwide
Communications, 1993-1994; Vice President of Financial
Communications, 1990-1993; Director of Corporate
Communications, Aetna Life & Casualty, 1988-1990.
Jeffrey A. Kuchar 40 1993-Present, Vice President and General Auditor; prior
thereto, Director of Finance and Business Development,
Specialty Products Company, Nabisco, Inc., 1993; Director
of Financial Planning, Specialty Products Company,
Nabisco, Inc., 1992-1993; Assistant Corporate Controller,
1987-1991.
20
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed and traded on the New York Stock Exchange (the
"NYSE"). Since completion of the Acquisition there has been no public trading
market for the common stock of RJRN.
As of January 31, 1995, there were approximately 65,000 record holders of
the Common Stock. All of the common stock of RJRN is owned by Holdings. The
Common Stock closing price on the NYSE for February 17, 1995 was $5 5/8.
The following table sets forth, for the calendar periods indicated, the high
and low sales prices per share for the Common Stock on the NYSE Composite Tape,
as reported in the Wall Street Journal:
HIGH LOW
------------- -------------
1994:
First Quarter..................................... $ 8 1/8 $ 5 5/8
Second Quarter.................................... 7 5 1/2
Third Quarter..................................... 7 1/8 5 5/8
Fourth Quarter.................................... 7 1/4 5 5/16
HIGH LOW
------------- -------------
1993:
First Quarter..................................... $ 9 1/4 $ 7 5/8
Second Quarter.................................... 8 1/8 5 1/8
Third Quarter..................................... 5 7/8 4 1/2
Fourth Quarter.................................... 7 3/8 4 3/8
The Board of Directors of Holdings has declared an initial quarterly cash
dividend of $.075 per share payable on April 1, 1995 to holders of record as of
March 10, 1995. Holdings expects to continue to pay a quarterly cash dividend on
its common stock of $.075 per share or $.30 per share on an annualized basis.
Cash dividends paid by RJRN to Holdings are set forth in the Consolidated
Statements of Cash Flows in the Consolidated Financial Statements.
The operations of the Registrants are conducted through RJRN's subsidiaries
and, therefore, the Registrants are dependent on the earnings and cash flow of
RJRN's subsidiaries to satisfy their respective obligations and other cash
needs. The Credit Agreements and certain policies adopted by the Board of
Directors of Holdings limit the payment by Holdings of dividends on the Common
Stock in excess of certain specific amounts. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Financial Condition" and "-Holdings' Board of Directors
Policies" and Note 10 to the Consolidated Financial Statements. Holdings
does not believe that the provisions of its Credit Agreements or its adopted
policies concerning distributions to stockholders will limit its ability to
pay its anticipated quarterly dividends.
The Board of Directors of Holdings has approved a one-for-five reverse split
of the Common Stock, which will be submitted to Holdings' stockholders for
approval at its annual meeting in April 1995. If approved, the reverse stock
split would result in a dividend and earnings per share that are five times
higher with a corresponding reduction in the number of shares outstanding.
Holdings has indicated that, under normal circumstances, it does not plan to
issue additional equity securities for purposes of balance sheet improvement.
21
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data of RJR Nabisco Holdings Corp.
("Holdings") presented below as of December 31, 1994 and 1993 and for each of
the years in the three-year period ended December 31, 1994 was derived from the
consolidated financial statements of Holdings (the "Consolidated Financial
Statements"), which have been audited by Deloitte & Touche LLP, independent
auditors. In addition, the consolidated financial data of Holdings presented
below as of December 31, 1992, 1991 and 1990 and for each of the years in the
two year period ended December 31, 1991 was derived from the audited
consolidated financial statements of Holdings as of December 31, 1992, 1991
and 1990 and for the years ended December 31, 1991 and 1990, and are not
presented herein. The data should be read in conjunction with the Consolidated
Financial Statements, related notes and other financial information included
herein.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1994 1993 1992 1991 1990
------- ------- ------- ------- -------
RESULTS OF OPERATIONS
Net sales....................................... $15,366 $15,104 $15,734 $14,989 $13,879
------- ------- ------- ------- -------
Cost of products sold........................... 6,977 6,640 6,326 6,088 5,652
Selling, advertising, administrative and
general expenses.............................. 5,210 5,731 5,788 5,358 4,801
Amortization of trademarks and goodwill......... 629 625 616 609 608
Restructuring expense........................... -- 730 106 -- --
------- ------- ------- ------- -------
Operating income(1)........................... 2,550 1,378 2,898 2,934 2,818
Interest and debt expense....................... (1,065) (1,209) (1,449) (2,217) (3,176)
Other income (expense), net..................... (110) (58) 7 (69) (44)
------- ------- ------- ------- -------
Income (loss) before income taxes............. 1,375 111 1,456 648 (402)
Provision for income taxes...................... 611 114 680 280 60
------- ------- ------- ------- -------
Income (loss) before extraordinary item....... 764 (3) 776 368 (462)
Extraordinary item--(loss) gain on early
extinguishments of debt, net of income
taxes............................................ (245) (142) (477) -- 33
------- ------- ------- ------- -------
Net income (loss)............................... 519 (145) 299 368 (429)
Preferred stock dividends....................... 131 68 31 173 50
------- ------- ------- ------- -------
Net income (loss) applicable to common stock.... $ 388 $ (213) $ 268 $ 195 $ (479)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PER SHARE DATA
Income (loss) before extraordinary item per
common and common equivalent share(2)......... $ 0.41 $ (0.05) $ 0.55 $ 0.22 $ (1.19)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Pro forma income (loss) before extraordinary
item per common and common equivalent
share(3)...................................... $ 2.06 $ (0.26) $ 2.73 $ 1.10 $ (5.93)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Dividends per share of Series A Preferred
Stock(4)......................................... $ 2.92 $ 3.34 $ 3.34 $ 0.49 --
Dividends per share of Series C Preferred
Stock(4)......................................... $ 3.94 -- -- -- --
BALANCE SHEET DATA
(AT END OF PERIODS)
Working capital(5).............................. $(1,231) $ 202 $ 730 $ 165 $(1,089)
Total assets.................................... 31,408 31,295 32,041 32,131 32,915
Total debt(5)................................... 11,149 12,448 14,218 14,531 18,918
Redeemable preferred stock(6)................... -- -- -- -- 1,795
Stockholders' equity(7)......................... 10,908 9,070 8,376 8,419 2,494
(Footnotes on following page)
22
(Footnotes from preceding page)
- ------------
(1) The 1992 amount includes a gain of $98 million on the sale of the
ready-to-eat cold cereal business.
(2) The loss before extraordinary item per common and common equivalent share
reported for the year ended December 31, 1993 would have increased by $.17
per share if the weighted average number of shares of Series A Depositary
Shares (as defined below) outstanding during the period had been excluded
from the earnings per share calculation.
(3) Amounts reflect a one-for-five reverse split approved by the Board of
Directors of Holdings which will be submitted to Holdings' stockholders for
approval at its annual meeting in April 1995.
(4) On November 8, 1991, Holdings issued 52,500,000 shares of Series A
Conversion Preferred Stock, par value $.01 per share ("Series A Preferred
Stock"), and sold 210,000,000 $.835 depositary shares (the "Series A
Depositary Shares"), each of which represented one-quarter of a share of
Series A Preferred Stock. On May 6, 1994, Holdings issued 26,675,000 shares
of Series C Conversion Preferred Stock, par value $.01 per share (the
"Series C Preferred Stock"), and sold 266,750,000 Series C Depositary Shares
(the "Series C Depositary Shares"), each of which represented one-tenth of a
share of Series C Preferred Stock. On November 15, 1994, each outstanding
Series A Depositary Share converted into one share of Holdings Common Stock.
(5) Working capital at December 31, 1994 included $1.35 billion of borrowings
under the Nabisco 1994 Credit Agreement, a substantial portion of which was
used in connection with the refinancing of certain debt. On January 26,
1995, such borrowings were substantially reduced through the application of
approximately $1.2 billion of net proceeds received from the initial public
offering of 51,750,000 shares of Nabisco's Class A Common Stock.
(6) On December 16, 1991, an amendment to the Amended and Restated Certificate
of Incorporation of Holdings was filed which deleted the provisions
providing for the mandatory redemption of the redeemable preferred stock of
Holdings on November 1, 2015. Accordingly, such securities were presented as
a component of Holdings' stockholders' equity as of December 31, 1992 and
1991. Such securities were redeemed on December 6, 1993.
(7) Holdings' stockholders' equity at December 31 of each year from 1994 to 1990
includes non-cash expenses related to accumulated trademark and goodwill
amortization of $3.644 billion, $3.015 billion, $2.390 billion, $1.774
billion and $1.165 billion, respectively.
See Notes to Consolidated Financial Statements.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RJR Nabisco, Inc.'s ("RJRN") operating subsidiaries comprise one of the
largest tobacco and food companies in the world. In the United States, the
tobacco business is conducted by R. J. Reynolds Tobacco Company ("RJRT"), the
second largest manufacturer of cigarettes, and the packaged food business is
conducted by Nabisco Holdings Corp. ("Nabisco Holdings") through its
wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"), the largest manufacturer and
marketer of cookies and crackers. Tobacco operations outside the United States
are conducted by R. J. Reynolds Tobacco International, Inc. ("Tobacco
International") and food operations outside the United States are conducted by
Nabisco International, Inc. ("Nabisco International") and Nabisco Brands Ltd.
The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJR Nabisco Holdings Corp. ("Holdings"),
the parent company of RJRN. The discussion and analysis should be read in
connection with the historical financial information included in the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Summarized financial data for Holdings is as follows:
% CHANGE FROM
PRIOR YEAR
--------------
1994 1993 1992 1994 1993
------- ------- ------- ----- ----
(DOLLARS IN MILLIONS)
Net Sales:
RJRT........................................... $ 4,570 $ 4,949 $ 6,165 (8)% (20)%
Tobacco International.......................... 3,097 3,130 2,862 (1)% 9%
------- ------- -------
Total Tobacco.................................. 7,667 8,079 9,027 (5)% (11)%
Total Food..................................... 7,699 7,025 6,707 10% 5%
------- ------- -------
$15,366 $15,104 $15,734 2% (4)%
------- ------- -------
------- ------- -------
Operating Company Contribution(1):
RJRT........................................... $ 1,475 $ 1,200 $ 2,112 23% (43)%
Tobacco International.......................... 755 644 575 17% 12%
------- ------- -------
Total Tobacco.................................. 2,230 1,844 2,687 21% (31)%
Total Food..................................... 1,156 995 947 16% 5%
Headquarters................................... (207) (106) (112) (95)% 5%
------- ------- -------
$ 3,179 $ 2,733 $ 3,522 16% (22)%
------- ------- -------
------- ------- -------
Operating Income:
RJRT........................................... $ 1,110 $ 480 $ 1,704 131% (72)%
Tobacco International.......................... 716 413 537 73% (23)%
------- ------- -------
Total Tobacco.................................. 1,826 893 2,241 104% (60)%
Total Food..................................... 931 624 769 49% (19)%
Headquarters................................... (207) (139) (112) (49)% (24)%
------- ------- -------
$ 2,550 $ 1,378 $ 2,898 85% (52)%
------- ------- -------
------- ------- -------
INDUSTRY SEGMENTS
The percentage contributions of each of Holdings' industry segments to net
sales and operating company contribution during the last five years were as
follows:
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Net Sales:
Total Tobacco................................... 50 % 53 % 57 % 57 % 58 %
Total Food...................................... 50 47 43 43 42
---- ---- ---- ---- ----
100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Operating Company Contribution(1)(2):
Total Tobacco................................... 66 % 65 % 74 % 75 % 77 %
Total Food...................................... 34 35 26 25 23
---- ---- ---- ---- ----
100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
(Footnotes on following page)
24
(Footnotes from preceding page)
- ------------
(1) Operating income before amortization of trademarks and goodwill and
exclusive of restructuring expenses (RJRT: 1993-$355 million, 1992-$43
million; Tobacco International: 1993-$189 million, 1992-$0; Total Food:
1993-$153 million, 1992-$63 million; Headquarters: 1993-$33 million, 1992-
$0) and a 1992 gain ($98 million) on the sale of Holdings' ready-to-eat cold
cereal business as discussed below.
(2) Contributions by industry segments were computed without effects of
Headquarters' expenses.
TOBACCO
The tobacco business is conducted by RJRT and Tobacco International.
1994 vs. 1993. Despite declines in net sales for both the domestic and
international tobacco businesses, the worldwide tobacco business reported profit
gains for 1994. RJRT's net sales decline resulted principally from overall lower
pricing and volume which more than offset the impact of a higher proportion of
sales from full price brands. Tobacco International's net sales decline was
primarily attributable to a reduction in trade inventory levels and price
repositioning in Canada and Puerto Rico which more than offset higher selling
prices and volume. Overall, net sales from the worldwide tobacco business
amounted to $7.67 billion in 1994, a decline of 5% from the 1993 level of $8.08
billion. Worldwide volume for 1994 was flat compared to 1993. Operating company
contribution for the worldwide tobacco business grew to $2.23 billion in 1994
from $1.84 billion in 1993, an increase of 21% that resulted from improved
margins in both the domestic and international businesses. Operating income for
the worldwide tobacco business rose to $1.83 billion in 1994, an increase of
104% from the 1993 level of $893 million, as a result of the increase in
operating company contribution discussed above and the 1993 restructuring
expense of $544 million.
Net sales for RJRT amounted to $4.57 billion in 1994, a decrease of 8% from
the 1993 level of $4.95 billion. The decrease primarily reflects the impact of
industry-wide price reductions on full price brands (approximately $500 million)
which went into effect during the second half of 1993, lower volume in the
savings segment (approximately $60 million) primarily due to RJRT's decision to
be more selective in its participation in that segment and lower volume in the
full price segment (approximately $300 million) primarily due to increased
competitor activities during the second half of 1994. These factors more than
offset the impact of a higher proportion of sales from full price brands
(approximately $400 million), higher selling prices in the savings segment
(approximately $60 million) and higher selling prices in the full price segment
during the fourth quarter of 1994 as compared to the fourth quarter of 1993
(approximately $40 million). RJRT's operating company contribution was $1.48
billion in 1994, a 23% increase from the 1993 level of $1.20 billion, as reduced
promotional and selling expenses (approximately $650 million) more than offset
the decline in net sales. RJRT's operating income was $1.11 billion in 1994, an
increase of 131% from the 1993 level of $480 million. The increase in operating
income for 1994 from the prior year reflects the increase in RJRT's operating
company contribution discussed above and the 1993 restructuring expense of $355
million.
Tobacco International recorded net sales of $3.10 billion in 1994, a
decrease of 1% from the 1993 level of $3.13 billion. The net sales decrease for
1994 primarily resulted from a reduction in trade inventory levels
(approximately $75 million), repositioning of prices in Canada and Puerto Rico
to enhance brand competitiveness (approximately $60 million), and unfavorable
foreign exchange developments, primarily in Europe and the Middle East
(approximately $30 million), which were offset in part by higher selling prices
throughout Tobacco International's international markets (approximately $70
million) and an increase in volume in certain regions (approximately $60
million). Tobacco International's operating company contribution rose to $755
million in 1994, an increase of 17% compared to the 1993 level of $644 million.
The increase in operating company contribution for 1994 was due to lower product
costs in all regions (approximately $100 million), reduced promotional expenses
(approximately $70 million), the higher selling prices (approximately $70
million) and higher
25
volume (approximately $15 million), which more than offset price repositioning
in Canada and Puerto Rico (approximately $50 million), the reduction in trade
inventories (approximately $30 million), higher operating expenses to support
expansion of business activity primarily in Eastern Europe (approximately $30
million) and unfavorable foreign exchange developments (approximately $20
million). Tobacco International's operating income was $716 million in 1994, an
increase of 73% from the 1993 level of $413 million. The increase in operating
income reflects the increase in Tobacco International's operating company
contribution discussed above and the 1993 restructuring expense of $189 million.
1993 vs. 1992. The worldwide tobacco business experienced continued net
sales growth in its international business which was more than offset by a
significant sales decline in the domestic business, resulting in reported net
sales of $8.08 billion in 1993, a decline of 11% from the 1992 level of $9.03
billion. Operating company contribution for the worldwide tobacco business of
$1.84 billion in 1993 declined 31% from the 1992 level of $2.69 billion,
reflecting sharp reductions for the domestic business which were partially
offset by gains in the international business. Operating income for the
worldwide tobacco business in 1993 of $893 million declined 60% from $2.24
billion in 1992, reflecting the lower operating company contribution and a $544
million restructuring expense in 1993 versus a restructuring expense of $43
million in 1992. The 1993 restructuring expense includes expenses to streamline
both the domestic and international operations through administrative,
manufacturing and sales personnel reductions and the rationalization of
manufacturing and office facilities.
Net sales for RJRT amounted to $4.95 billion in 1993, a decline of 20% from
the 1992 level, reflecting the impact of industry-wide price reductions and
price discounting on higher price brands (approximately $700 million), a higher
proportion of sales from lower price brands (approximately $600 million) and an
overall volume decline of approximately 3.6% (approximately $300 million), that
more than offset benefits of earlier price increases in full price brands
(approximately $400 million). The impact of the 1993 decrease in overall volume
resulted mainly from the decline in the full-price segment. Growth in lower
price brands was slowed in the second half of 1993 by net price reductions on
full-price brands. RJRT's operating company contribution was $1.20 billion in
1993, a 43% decline from the 1992 level of $2.11 billion, primarily due to the
lower net sales (approximately $1.2 billion), offset in part by lower
promotional expenses on savings brands (approximately $200 million). RJRT's
operating income was $480 million in 1993, a decline of 72% from $1.7 billion in
1992. The decline in operating income reflected the lower RJRT operating company
contribution as well as a restructuring expense of $355 million in 1993 which is
significantly higher than the $43 million restructuring expense recorded in
1992.
Tobacco International recorded net sales of $3.13 billion in 1993, an
increase of 9% from the 1992 level, due to higher volume in all regions of
business (approximately $274 million), favorable pricing in certain regions
(approximately $71 million), the expansion of markets through ventures in
Eastern Europe and Turkey (approximately $23 million) and contract sales to the
Russian Federation (approximately $9 million), which more than offset
unfavorable currency developments in Western Europe (approximately $104
million). Tobacco International's operating company contribution rose to $644
million in 1993, an increase of 12% compared to the prior year due to higher
volume (approximately $112 million) and pricing (approximately $71 million)
which was offset in part by higher operating expenses (approximately $80
million) and to a lesser extent foreign currency developments (approximately $12
million) and unfavorable product mix (approximately $17 million). Tobacco
International's operating income was $413 million for 1993, a decline of 23%
from the 1992 level. The decline in operating income reflects a restructuring
expense of $189 million in 1993 that more than offset the increase in operating
company contribution.
26
Impact of Competitive Activity
RJRT's largest U.S. competitor announced competitive initiatives in April
1993 that ultimately resulted in significant changes in the U.S. cigarette
market. These competitive actions and responses by RJRT and other competitors
effectively lowered the retail price of full price cigarette brands and raised
the price of the most highly discounted brands in the second half of 1993. This
resulted in a market comprised of a full price tier and a lower price tier of
products (as opposed to the three or more tiers that had previously existed) and
in smaller relative price differences between brands in different tiers.
The costs of responding to these competitive initiatives and the decrease in
list prices for full price cigarette brands of approximately 40 cents per pack
were primarily responsible for the sharp decline in RJRT's operating company
contribution in 1993 because net price increases of approximately 12 cents per
pack (including the price increase referenced below) in the most highly
discounted brands did not and are not expected to offset the lower margins on
full price brands. Notwithstanding these lower margins, full price brands remain
more profitable than lower price brands, which consist of certain national
brands designed to have a lower price and private label brands for retailers and
distributors. The private label brands are generally the least profitable of
RJRT's brands, but are important to facilitate RJRT's service to wholesale and
retail customers.
Although RJRT's full price volume as a percentage of total volume declined
to 56% in 1993 from 65% in 1992, lower retail prices on full price brands since
the third quarter of 1993 have resulted in an increase in full price volume as a
percentage of total volume to 60% in 1994. The higher mix of full price volume
occurred despite significantly reduced promotional expenses on full price brands
during this period.
During the fourth quarter of 1993, RJRT increased the list price of all of
its brands by 4 cents per pack, a move that its competitors generally matched.
The increases reflected an improvement in the stability of the competitive
environment that began in the fourth quarter of 1993. This improved stability
continued through 1994 and, together with operating cost reductions and
favorable product mix shifts, improved margins. However, 1994 profit margins
remain below first quarter 1993 levels and experienced some deterioration in the
last quarter of 1994 as a result of increases in marketing expenses to protect
and build market share. RJRT is unable to predict whether 1994's pricing
stability and profit margins are sustainable.
1994 Governmental Activity. Congress enacted legislation effective January
1, 1994 (the Omnibus Budget Reconciliation Act of 1993) that assesses financial
penalties against manufacturers if cigarettes produced in the United States do
not contain at least 75% (by weight) domestically grown flue cured and burley
tobaccos. In December 1994, Congress enacted the Uruguay Round Agreements Act to
replace this domestic content requirement with a tariff rate quota system that
keys tariffs to import volumes. The tariff rate quotas are currently being
negotiated by the United States and overseas tobacco producers. Domestic content
requirements and tariff rate quotas increased raw material costs slightly in
1994 and may do so again in the future. RJRT is unable to predict the impact of
these import barriers on raw material costs while the tariff rate quotas are
still being negotiated.
In February 1994, the Commissioner of the U.S. Food and Drug Administration
(the "FDA"), which historically has refrained from asserting jurisdiction over
cigarette products, stated that he intended to cause the FDA to work with the
U.S. Congress to resolve the regulatory status of cigarettes under the Food,
Drug and Cosmetic Act. During the second quarter of 1994, hearings were held in
this regard and RJRT and other members of the U.S. cigarette industry were asked
to provide voluntarily certain documents and other information to Congress and
the FDA. RJRT is unable to predict the outcome of any Congressional
deliberations or the likelihood that the FDA will assert jurisdiction over
cigarettes in some manner. Were the FDA to assert jurisdiction in a manner that
materially restricts the availability of cigarettes to consumers, it would
likely have a significant adverse effect on RJRT.
27
In March 1994, the U.S. Occupational Safety and Health Administration
("OSHA") announced proposed regulations that would restrict smoking in the
workplace to designated smoking rooms that are separately exhausted to the
outside. Although RJRT cannot predict the form of any regulations that may be
finally adopted by OSHA, if the proposed regulations are adopted, RJRT expects
that many employers who have not already done so would prohibit smoking in the
workplace rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. Because many employers currently do not
permit smoking in the workplace, RJRT cannot predict the effect of any
regulations that may be adopted, but incremental restrictions on smokers could
have an adverse effect on cigarette sales and RJRT.
In July 1994, an amendment to a Florida statute became effective which
allows the state of Florida to bring an action in its own name against the
tobacco industry to recover amounts paid by the state under its Medicaid program
to treat illnesses statistically associated with cigarette smoking. The amended
statute does not require the state to identify the individual who received
medical care, permits a lawsuit to be filed as a class action and eliminates the
comparative negligence and assumption of risk defenses. Similar legislation,
without Florida's elimination of these defenses, has been introduced in the
Massachusetts and New Jersey legislatures. RJRT is unable to predict whether
other states will enact similar legislation and whether lawsuits will be filed
under these statutes or their outcome if filed. The Florida statute is being
challenged on state and federal constitutional grounds in a lawsuit brought by
Philip Morris Companies Inc., Associated Industries of Florida, Publix
Supermarkets, and National Association of Convenience Stores in June 1994.
On February 20, 1995, RJRT and Philip Morris Companies Incorporated filed
a petition with the Supreme Court of Florida to prohibit Florida's Agency for
Health Care Administration and the Department of Business and Professional
Regulation from filing and maintaining a lawsuit against the tobacco
industry under this statute. A suit against the tobacco industry under this
statute was filed on February 21, 1995. See Note 11 to the Consolidated
Financial Statements.
Various states and local jurisdictions enacted legislation imposing various
restrictions on public smoking, increasing excise taxes and designating a
portion of the increased cigarette excise taxes to fund anti-smoking programs,
health care programs or cancer research. Many employers also initiated programs
restricting or eliminating smoking in the workplace.
It is not possible to determine what additional federal, state or local
legislation or regulations relating to smoking or cigarettes will be enacted or
to predict any resulting effect thereof on RJRT, Tobacco International or the
cigarette industry generally, but such legislation or regulations could have an
adverse effect on RJRT, Tobacco International or the cigarette industry
generally.
For a description of certain litigation affecting RJRT and its affiliates,
see Note 11 to the Consolidated Financial Statements.
FOOD
The food business is conducted by operating subsidiaries of Nabisco
Holdings. Nabisco's businesses in the United States are comprised of the Nabisco
Biscuit, Specialty Products, LifeSavers, Planters, Food Service and
Fleischmann's Companies (collectively, the "Domestic Food Group"). Nabisco's
businesses outside the United States are conducted by Nabisco Brands Ltd and
Nabisco International (collectively, the "International Food Group"). Nabisco
Brands Ltd was recently shifted from the Domestic Food Group (formerly the North
American Food Group) to the International Food Group. Accordingly, prior periods
have been restated to conform to the 1994 presentation.
1994 vs. 1993. Nabisco reported net sales of $7.70 billion in 1994, an
increase of 10% from the 1993 level of $7.03 billion, with the Domestic Food
Group up 4% and the International Food Group up 28%. The Domestic Food Group
increase was primarily attributable to significant volume gains at Nabisco
Biscuit Company, reflecting the success of new product introductions and product
line extensions in the U.S. biscuit market (approximately $215 million) and
volume increases from the Specialty Products Company (approximately $13
million). The International Food Group increase was primarily the result of the
favorable impact of recent acquisitions (approximately $345 million) and
28
improved business conditions in Brazil (approximately $70 million) as a result
of its second-half economic recovery.
Nabisco's operating company contribution was $1.16 billion in 1994, an
increase of 16% from the 1993 level of $995 million, with the Domestic Food
Group up 14% and the International Food Group up 27%. The Domestic Food Group
increase for 1994 was primarily due to the increase in net sales (approximately
$40 million) and savings from productivity programs (approximately $135
million), including previously established restructuring programs, which were
offset in part by competitive pricing pressures (approximately $35 million) and
the absence of a 1993 gain on the sale of certain assets (approximately $17
million). The International Food Group increase in operating company
contribution for 1994 was primarily due to recent acquisitions (approximately
$40 million) and strong results in Canada (approximately $7 million), partially
offset by unfavorable business results in Mexico (approximately $7 million). The
devaluation of the Mexican peso was not material to earnings in 1994.
Nabisco's operating income was $931 million in 1994, an increase of 49% from
the 1993 level of $624 million, as a result of the increase in operating company
contribution discussed above and the 1993 restructuring expense of $153 million.
1993 vs. 1992. Nabisco reported net sales of $7.03 billion in 1993, an
increase of 5% from 1992. Excluding the 1992 operating results of the
ready-to-eat cold cereal business, which was sold at the end of that year, net
sales in 1993 increased 9% from 1992, resulting from higher volume
(approximately $260 million), sales from recently acquired businesses
(approximately $270 million) and modest price increases in both the Domestic
Food Group (approximately $65 million) and the International Food Group
(approximately $15 million). The Domestic Food Group's volume increase
(approximately $210 million) was primarily attributable to the success of new
product introductions in the U.S., including the SNACKWELL'S line of low fat/fat
free cookies and crackers, FAT FREE NEWTONS, LIFE SAVERS GUMMI SAVERS candy and
the PLANTERS stand-up bag line of peanuts and snacks. The International Food
Group's net sales increased as a result of the 1993 acquisitions in Spain and
Peru (approximately $108 million) and higher volume (approximately $50 million)
and prices (approximately $15 million) from its Latin American businesses.
Nabisco's operating company contribution of $995 million in 1993 was 5%
higher than the 1992 amount. Excluding the 1992 operating results of the
ready-to-eat cold cereal business, operating company contribution increased 14%,
with the Domestic Food Group up 15% and the International Food Group up 5%. The
Domestic Food Group's increase was primarily due to the gain in net sales
(approximately $45 million), savings from productivity programs (approximately
$150 million), contributions from the recently acquired businesses
(approximately $15 million) and the $17 million gain on sale of certain assets,
offset in part by higher expenses for consumer marketing programs (approximately
$40 million) and competitive pricing pressures (approximately $75 million). The
International Food Group increased operating company contribution through
acquisitions (approximately $10 million).
Nabisco's operating income was $624 million in 1993, a decrease of 19% from
1992, as a result of the $153 million restructuring expense in 1993, which was
significantly higher than the restructuring expense of $63 million recorded in
1992. The effect of the restructuring expenses more than offset the gain in
operating company contribution. Excluding the 1992 operating results of the
ready-to-eat cold cereal business and the related gain on its sale, as well as
the restructuring expenses in both 1993 and 1992, Nabisco's operating income was
up 16% as a result of the increase in operating company contribution. The 1993
restructuring expense primarily consists of expenses related to the
reorganization and downsizing of manufacturing and sales functions which reduced
personnel costs, both domestically and internationally, in order to improve
productivity and, to a lesser extent, the rationalization of facilities.
29
RESTRUCTURING EXPENSE
Holdings recorded a pre-tax restructuring expense of $730 million in the
fourth quarter of 1993 ($467 million after-tax) related to a program announced
on December 7, 1993. The restructuring program was undertaken in response to a
changing consumer product business environment and to streamline operations and
improve profitability. The program was implemented in the latter part of 1993.
Approximately 75% of the restructuring program will require cash outlays of
which approximately $300 million was spent as of the end of 1994. As an offset
to the cash outlays, after-tax cash savings of approximately $140 million were
realized as of the end of 1994. Holdings expects future annual after-tax cash
savings to be in the range of approximately $200 million to $225 million.
The cost of providing severance pay and benefits for the reduction of
approximately 6,000 employees (approximately 4,400 positions eliminated by the
end of 1994) throughout the domestic and international food and tobacco
businesses was approximately $400 million of the pre-tax charge and is primarily
a cash expense. Actual charges for severance pay and benefits through December
31, 1994 amounted to approximately $250 million. The workforce reduction was
undertaken in order to make fundamental changes to the cost structure of the
domestic tobacco business in the face of acute competitive activity in that
business and to take advantage of cost savings opportunities in other businesses
through process efficiency improvements. Legislation enacted during the third
quarter of 1993 stipulated that, effective January 1, 1994, financial penalties
would be assessed against manufacturers if cigarettes produced in the United
States did not contain at least 75% (by weight) domestically grown flue cured
and burley tobaccos. As a result, the domestic and international tobacco
businesses accrued approximately $70 million of related restructuring charges
resulting from a reassessment of raw material sourcing and production
arrangements. In addition, a shift in pricing strategy designed to gain market
share by RJRT's largest competitor led to a redeployment of spending and changes
in sales and distribution strategies that resulted in a restructuring charge of
approximately $80 million primarily related to contract termination costs.
Abandonment of leases related to the above changes in the businesses resulted in
approximately $60 million of restructuring charges. The remainder of the charge,
approximately $120 million, represents primarily non-cash costs to rationalize
and close manufacturing and sales facilities in both the tobacco and food
businesses to facilitate cost improvements. Charges related to these items
amounted to approximately $250 million through December 31, 1994.
As of December 31, 1994, the original estimates related to the food
businesses have remained unchanged. However, changes have occurred in the
original tobacco estimates. Due to stronger than anticipated demand for domestic
tobacco products, the estimate of the amount of domestic production to be moved
off-shore has been reduced, causing a domino-effect on domestic and
international raw material sourcing and production strategies. The end result
will be a reduction in the amount of domestic production moved to off-shore
facilities and significant changes in sourcing and production among off-shore
production facilities.
As a result of this change, approximately 300 domestic tobacco employees
originally anticipated to be terminated will be retained and approximately 200
additional international tobacco employees will be terminated. The financial
impact of these changes is a credit to income of approximately $23 million
related to the reduction in the cost of providing severance pay and benefits to
domestic tobacco employees and an increase in the cost of providing such
benefits to terminated international tobacco employees. In addition, the cost
associated with the rationalization and abandonment of manufacturing and sales
facilities was increased by approximately $21 million as it became evident that
the original plan to find an alternative manufacturing use for a tobacco
blending facility would not come to fruition. The net adjustment to operating
income of the above changes is included in selling, advertising, administrative
and general expense.
30
INTEREST EXPENSE
1994 vs. 1993. Consolidated interest and debt expense of $1.06 billion in
1994 decreased 12% from 1993, primarily as a result of refinancings of debt
during 1993 and 1994 and lower debt levels resulting primarily from the
application of proceeds from the issuance of preferred stock to repay debt.
These factors more than offset the impact of higher market interest rates during
1994, including the effects thereof on RJRN's interest rate derivative
instruments described below.
RJRN manages its interest rate exposure by adjusting its mix of floating
rate debt and fixed rate debt. As part of such management of interest rate
exposure, RJRN has entered into interest rate swaps, options, caps and other
interest rate arrangements, including written options and other financial
instruments having a risk profile substantially similar to written options. As
a result of the impact of higher market interest rates during 1994, RJRN
recognized additional interest expense of approximately $22 million associated
with its interest rate derivative instruments. However, such interest rate
derivative instruments resulted in lower interest expense during 1993 and 1992
of approximately $70 million and $15 million, respectively. Included in the
1994 additional interest expense is approximately $45 million related to
RJRN's outstanding written options and interest rate derivatives with embedded
written optionality, all of which were cancelled during 1994. Also as part of
RJRN's ongoing management of its interest rate exposure during 1994, RJRN
effectively neutralized the effects of any further changes in market interest
rates on the remainder of its outstanding derivative interest rate instruments
through the purchase of offsetting positions. Accordingly, as a result
of higher interest rates on the above instruments, approximately $39 million,
$28 million and $5 million of additional interest expense remains to be
recognized in 1995, 1996 and 1997, respectively.
In 1994, RJRN adopted a policy to utilize interest rate derivative
transactions that will adjust the mix of floating rate debt and fixed rate debt
on a one for one basis.
1993 vs. 1992. Consolidated interest and debt expense of $1.21 billion in
1993 decreased 17% from 1992, primarily as a result of the refinancings of debt
that were completed during 1992 and 1993, lower debt levels from the application
of net proceeds from the issuance of preferred stock in 1993 and lower effective
interest rates which were partly attributable to declining market interest rates
in 1993.
INCOME TAXES
Holdings' provision for income taxes for 1993 was increased by $96 million
as a result of the enactment of certain federal tax legislation during the third
quarter of 1993 which increased federal corporate income tax rates to 35% from
34%, retroactively to January 1, 1993. The components of this increase to
Holdings' provision for income taxes included an $86 million non-cash charge
resulting primarily from the remeasurement of the balance of deferred federal
income taxes at the date of enactment of the new federal tax legislation for the
change in the income tax rates, and a $10 million charge resulting from the
increase in current federal income taxes accrued for the change in the income
tax rates and other effects of the new tax legislation. Also during 1993,
Holdings' provision for income taxes was decreased by a $108 million credit
primarily resulting from a change in the functional currency, for U.S. federal
income tax purposes, relating to foreign branch operations.
NET INCOME
1994 vs. 1993. Holdings' net income of $519 million in 1994 includes an
after-tax extraordinary loss of $245 million related to the repurchase and
redemption of debt during the year. Excluding the extraordinary loss in 1994, as
well as a similar extraordinary item which resulted in a $142 million after-tax
loss in 1993, Holdings would have reported net income of $764 million for 1994,
an increase of $767 million from 1993. The increase results primarily from the
improvement in operating company contribution by both the Tobacco and Food
operations, the impact of lower interest expense and the
31
1993 restructuring expense of $730 million, offset in part by a $65 million
charge related to the realignment of Headquarters' functions at the holding
company discussed below.
During the fourth quarter of 1994, Holdings approved and adopted a plan to
realign Headquarters' functions, transferring certain responsibilities to the
operating companies and significantly streamlining the holding company. The plan
reflects expectations of a lower level of financings and other activities at the
holding company as Holdings concludes the post-LBO period. The costs and
expenses associated with this decision resulted in a charge of approximately $65
million before tax, a significant portion of which is a cash expense. The
majority of the charge is related to accrued employee termination benefits for
the 25% of Headquarters' employees terminated (approximately $40 million). This
cost was incurred pursuant to a continuing plan for employee termination
benefits that provides for the payment of specified amounts of severance and
benefits to terminated employees. The remainder of the charge (approximately $25
million) is related to the abandonment of leases of certain corporate office
facilities as a result of the realignment and streamlining and the reduced need
for office space. The plan was implemented in the first quarter of 1995 and will
be completed by year-end 1995. Anticipated annual future cash savings flowing
from the plan are estimated at approximately $25 million before tax
(approximately $16 million after tax).
1993 vs. 1992. Holdings reported a net loss of $145 million in 1993, a
decrease of $444 million from 1992. Included in Holdings' 1993 net loss is an
after-tax extraordinary loss of $142 million related to the repurchases of high
cost debt during 1993 and an after-tax restructuring expense of $467 million.
Excluding the extraordinary loss and restructuring expense recorded in 1993,
Holdings would have reported net income of $464 million in 1993. Excluding a
similar after-tax extraordinary loss and an after-tax restructuring expense of
$477 million and $66 million, respectively, in 1992, as well as a 1992 after-tax
gain on the sale of Holdings' ready-to-eat cold cereal business of $30 million,
Holdings would have reported net income of $812 million in 1992. The decrease in
net income in 1993 from 1992, after such exclusions, is due to the lower
operating income offset in part by lower interest expense.
Holdings' net income (loss) applicable to its common stock for 1994, 1993
and 1992 of $388 million, ($213) million and $268 million, respectively,
includes a deduction for preferred stock dividends of $131 million, $68 million
and $31 million, respectively.
32
LIQUIDITY AND FINANCIAL CONDITION
DECEMBER 31, 1994
Holdings continued to generate significant free cash flow in 1994. Free cash
flow, which represents cash available for the repayment of debt and certain
other corporate purposes before the consideration of any debt and equity
financing transactions, acquisition expenditures and divestiture proceeds, was
$0.8 billion for 1994 and $1.0 billion for 1993. The lower level of free cash
flow for 1994 primarily reflects increased capital expenditures, higher taxes,
interest and preferred stock dividends paid and an increase in operating working
capital (primarily restructuring payments) which more than offset the higher
operating company contribution by both the Tobacco and Food operations.
The components of free cash flow are as follows:
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
------ -------
(DOLLARS IN
MILLIONS)
OPERATING INCOME......................................................... $2,550 $ 1,378
Amortization of intangibles............................................ 629 625
Restructuring expense.................................................. -- 730
------ -------
OPERATING COMPANY CONTRIBUTION........................................... 3,179 2,733
Depreciation and other amortization.................................... 522 524
Increase in operating working capital.................................. (414) (121)
Capital expenditures................................................... (670) (615)
Change in other assets and liabilities................................. 12 (21)
------ -------
OPERATING CASH FLOW*..................................................... 2,629 2,500
Taxes paid............................................................. (496) (332)
Interest paid.......................................................... (986) (912)
Dividends paid......................................................... (395) (241)
Other, net............................................................. 17 19
------ -------
FREE CASH FLOW........................................................... $ 769 $ 1,034
------ -------
------ -------
- ------------
* Operating cash flow, which is used as an internal measurement for evaluating
business performance, includes, in addition to net cash flow from (used in)
operating activities as recorded in the Consolidated Statement of Cash Flows,
proceeds from the sale of capital assets less capital expenditures, and is
adjusted to exclude income taxes paid and items of a financial nature (such as
interest paid, interest income, and other miscellaneous financial income or
expense items).
------------
During 1994, Holdings and RJRN continued to enter into a series of
transactions designed to refinance long-term debt, lower debt levels and lower
interest costs, thereby improving the consolidated debt cost and maturity
structure. As more fully described below, these transactions included the
issuance of preferred stock and repurchase and redemption of certain debt
obligations. As a result of these transactions, Holdings reduced the effective
interest rate on its consolidated long-term debt from 8.4% at December 31, 1993
to 7.7% at December 31, 1994 despite the impact of higher market interest rates
during 1994, including the effects thereof on RJRN's interest rate derivative
instruments. Future effective interest rates may vary as a result of changing
market interest rates as well as refinancing activities and changes in the
ratings assigned to RJRN's debt securities by independent rating agencies. In
addition, Holdings' outstanding total debt (notes payable and long-term debt,
including current maturities) and total capital (total debt and total
stockholders' equity) levels at December 31, 1994 amounted to approximately
$11.1 billion and $22.1 billion, respectively, of which total debt is lower by
approximately $1.3 billion and total capital is higher by approximately $539
million than the corresponding amounts at December 31, 1993. Furthermore,
Holdings' ratio of total debt to total stockholders' equity at December 31, 1994
improved to 1.0-to-1 from 1.4-to-1 at December 31, 1993. RJRN's
33
ratio of total debt to common equity at December 31, 1994 was 1.0-to-1 compared
with 1.3-to-1 at December 31, 1993. Total current liabilities and long-term debt
of RJRN's subsidiaries was approximately $4.8 billion at December 31, 1994.
On May 6, 1994, Holdings completed the issuance of 26,675,000 shares of
Series C Conversion Preferred Stock, par value $.01 per share (the "Series C
Preferred Stock"), in connection with the sale of 266,750,000 Series C
Depositary Shares (the "Series C Depositary Shares") at $6.50 per depositary
share. Approximately $900 million of the net proceeds from the sale of the
Series C Depositary Shares was applied to the redemption of RJRN's subordinated
debentures on May 15, 1994 as discussed below. The remaining proceeds from the
sale of the Series C Depositary Shares were used to repay indebtedness under the
Registrants' credit agreement, dated as of December 1, 1991, as amended (the
"1991 Credit Agreement"), and for short-term liquid investments until they were
applied to redeem certain of RJRN's sinking fund debentures as discussed below.
On May 15, 1994, RJRN redeemed substantially all of its approximately $2
billion in outstanding subordinated debentures. The subordinated debentures
redeemed consisted of the Subordinated Discount Debentures due May 15, 2001, the
15% Payment-in-Kind Subordinated Debentures due May 15, 2001 and the 13 1/2%
Subordinated Debentures due May 15, 2001 (the "13 1/2% Subordinated Debentures")
at redemption prices of 107 1/2%, 107 1/2% and 106 3/4%, respectively, plus
accrued interest. Approximately $1.2 billion principal or accreted amount of
such debentures was refinanced with proceeds of debt securities maturing after
1998 that were issued during 1993. Such proceeds had been used to temporarily
reduce indebtedness under the 1991 Credit Agreement.
On November 15, 1994, the 210,000,000 outstanding $.835 Depositary Shares
("Series A Depositary Shares"), which represented 52,500,000 shares of Series A
Conversion Preferred Stock, par value $.01 per share ("Series A Preferred
Stock"), issued by Holdings on November 8, 1991, converted into 210,000,000
shares of common stock of Holdings, par value $.01 per share (the "Common
Stock").
On November 30, 1994, RJRN redeemed $1.5 billion of 10 1/2% Senior Notes due
1998, $373.5 million of 8 3/8% Sinking Fund Debentures due 2017 and
approximately $24.8 million of 7 3/8% Sinking Fund Debentures due 2001. On
December 2, 1994, RJRN redeemed $100 million of the 13 1/2% Subordinated
Debentures. The redemption price for the 10 1/2% Senior Notes due 1998 was equal
to $1,071 plus accrued interest for each $1,000 principal amount of notes. The
redemption price for the 8 3/8% Sinking Fund Debentures due 2017 was equal to
$1,054.44 plus accrued interest for each $1,000 principal amount of debentures.
The redemption price for the 7 3/8% Sinking Fund Debentures due 2001 was equal
to $1,005.60 plus accrued interest for each $1,000 principal amount of
debentures. The redemption price for the 13 1/2% Subordinated Debentures was
equal to $1,067.50 plus accrued interest for each $1,000 principal amount of
debentures. These redemptions were funded with borrowings under the 1991 Credit
Agreement, internally generated cash flow and, in the case of the 8 3/8% Sinking
Fund Debentures due 2017, proceeds from Holdings' Series C Preferred Stock
offering.
On December 7, 1994, Nabisco borrowed $1.35 billion under its credit
agreement, dated as of December 6, 1994 (the "Nabisco 1994 Credit Agreement"),
to repay a portion of Nabisco's intercompany indebtedness to RJRN. RJRN used the
proceeds of the repayment to reduce its borrowings under the 1991 Credit
Agreement.
Management expects to consider opportunities to improve Holdings' and its
subsidiaries' capital and/or cost structure as they arise. Such opportunities,
if pursued, could involve further acquisitions, from time to time, of
substantial amounts of securities of Holdings or its subsidiaries through open
market purchases, redemptions, privately negotiated transactions, tender or
exchange offers and/or the issuance, from time to time, of additional securities
by Holdings or its subsidiaries. Acquisitions of securities at prices above
their book value, together with the accelerated amortization of deferred
financing fees attributable to the acquired securities, as applicable, would
reduce reported net income and/or stockholders' equity, depending upon the price
paid and related financing fees of such acquisitions. Holdings' and its
subsidiaries' ability to take advantage of such opportunities is subject to
34
restrictions in RJRN debt indentures, the 1991 Credit Agreement, the
Registrants' credit agreement, dated as of April 5, 1993, as amended (the "1993
Credit Agreement" and, together with the 1991 Credit Agreement, the "Credit
Agreements"), and the Nabisco 1994 Credit Agreement. For information
concerning a transaction that RJRN and Nabisco are seeking to pursue, see
"Subsequent Events" below.
The 1991 Credit Agreement is a revolving bank credit facility that provides
for the issuance of up to $800 million of irrevocable letters of credit.
Availability under the 1991 Credit Agreement is reduced by an amount equal to
the stated amount of the letters of credit outstanding, by borrowings under the
facility and by commercial paper borrowings in excess of $1.0 billion. On
December 1, 1994, the Registrants reduced the commitment under the 1991 Credit
Agreement from $6.5 billion to $6.0 billion and agreed to reduce availability by
the amount of borrowings and the stated amount of letters of credit issued under
the Nabisco 1994 Credit Agreement. The amendment to the 1991 Credit Agreement
imposed additional restrictions on dividends and distributions, as described
below, and extended the term of the facility from December 31, 1996 to December
31, 1997. At December 31, 1994, approximately $412 million stated amount of
letters of credit and $1.75 billion in borrowings were outstanding under the
1991 Credit Agreement, and $1.35 billion in borrowings (but no letters of
credit) were outstanding under the Nabisco 1994 Credit Agreement. Accordingly,
the amount available under the 1991 Credit Agreement at December 31, 1994 was
$2.49 billion.
The 1993 Credit Agreement, under which commitments terminate on April 3,
1995, provides a back-up line of credit to support commercial paper issuances of
up to $1.0 billion. Availability thereunder is reduced by an amount equal to the
aggregate amount of domestic commercial paper outstanding. At December 31, 1994,
approximately $864 million of commercial paper was outstanding. Accordingly,
$136 million was available under the 1993 Credit Agreement at December 31, 1994.
Holdings and RJRN expect to obtain bank consent to extend the maturity date of
the 1993 Credit Agreement for an additional 364 days.
The Nabisco 1994 Credit Agreement is a 364 day, $1.5 billion revolving bank
credit facility that provides for the issuance of up to $200 million of
irrevocable letters of credit. Availability under the Nabisco 1994 Credit
Agreement is reduced by an amount equal to the stated amount of the letters of
credit outstanding and by amounts borrowed under the facility. At December 31,
1994, $1.35 billion in borrowings and no letters of credit were outstanding
under the Nabisco 1994 Credit Agreement. Accordingly, the amount available under
the Nabisco 1994 Credit Agreement at December 31, 1994 was $150 million.
The aggregate consolidated indebtedness subject to fluctuating interest
rates approximated $4.3 billion at December 31, 1994. This represents a decrease
of $1.2 billion from the year end 1993 level of $5.5 billion, primarily due to
Holdings' on-going management of its interest rate exposure and activities
associated with RJRN's interest rate derivative instruments discussed above.
As a result of the level of market interest rates at December 31, 1994 and
1993 compared with the interest rates associated with Holdings' consolidated
debt obligations, the estimated fair value amounts of Holdings' long-term debt
reflected in its Consolidated Balance Sheets is lower by $444 million and higher
by $400 million than the carrying amounts (book value) of such debt at December
31, 1994 and 1993, respectively. For additional disclosures concerning the fair
value of Holdings' consolidated indebtedness as well as the fair value of its
interest rate arrangements at December 31, 1994 and 1993, see Notes 10 and 11 to
the Consolidated Financial Statements.
Capital expenditures were $670 million, $615 million and $519 million for
1994, 1993 and 1992, respectively. The current level of expenditures planned for
1995 is expected to be in the range of approximately $750 million to $850
million (approximately 60% Food and 40% Tobacco), which will be funded primarily
by cash flows from operating activities. Management expects that its capital
expenditure program will continue at a level sufficient to support the strategic
and operating needs of Holdings' operating subsidiaries.
35
Holdings' subsidiaries have operations in many countries, utilizing 35
functional currencies in its foreign subsidiaries and branches. Significant
foreign currency net investments are located in Germany, Canada, Hong Kong,
Brazil and Spain. Changes in the strength of these countries' currencies
relative to the U.S. dollar result in direct charges or credits to equity for
non-hyperinflationary countries and direct charges or credits to the income
statement for hyperinflationary countries. Translation gains or losses,
resulting from foreign-denominated borrowings that are accounted for as hedges
of certain foreign currency net investments, also result in charges or credits
to equity. Holdings' subsidiaries also have significant exposure to foreign
exchange sale and purchase transactions in currencies other than its functional
currency. The exposures include the U.S. dollar, German mark, Japanese yen,
Swiss franc, Hong Kong dollar, Singapore dollar and cross-rate exposure among
the French franc, British pound, Italian lira and the German mark. These
exposures are managed to minimize the effects of foreign currency transactions
on its cash flows.
Nabisco Holdings has advised RJRN that, commencing after the second quarter
of 1995, it anticipates paying a quarterly cash dividend on its outstanding
stock of $.1375 per share or $.55 per share on an annualized basis. This policy
would provide RJRN with dividends on the 213,250,000 shares of Nabisco Holdings
Class B Common Stock held by it of approximately $58.6 million in 1995 and
approximately $117 million annually thereafter.
In general, the Nabisco 1994 Credit Agreement limits prepayments of
Nabisco's indebtedness to RJRN and limits dividends and distributions by Nabisco
to $300 million plus 50% of Nabisco's cumulative consolidated net income
commencing January 1, 1995. Loans and advances by Nabisco to RJRN are generally
subject to a $100 million limit. The Nabisco 1994 Credit Agreement also limits
the ability of Nabisco to incur indebtedness, engage in transactions with
stockholders and affiliates, create liens, sell certain assets and securities
and engage in certain mergers or consolidations. These limitations are not
expected to have a material effect on the ability of Nabisco Holdings to pay its
anticipated dividends to RJRN, or on the ability of RJRN to meet its
obligations.
The Credit Agreements limit the payment of dividends by Holdings.
Specifically, these Credit Agreements generally restrict dividends and
distributions by Holdings to $1 billion, plus 50% of cumulative consolidated
net income commencing January 1, 1995, plus the net cash proceeds of up to
$250 million in any twelve month period from issuances of its equity
securities. These credit agreements and certain other financing agreements limit
the ability of Holdings and its subsidiaries to incur indebtedness, engage in
transactions with stockholders and affiliates, create liens, sell or dispose of
certain assets and certain subsidiaries' stock and engage in certain mergers or
consolidations. Holdings and RJRN believe that they and their subsidiaries are
currently in compliance with all covenants and restrictions imposed by the terms
of their indebtedness.
ENVIRONMENTAL MATTERS
RJRN's subsidiaries have been engaged in a continuing program to assure
compliance with U.S. Government and various state and local government laws and
regulations concerning the protection of the environment. Certain of these
subsidiaries have been named "potentially responsible parties" with third
parties under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to approximately fifteen sites. Although
it is difficult to identify precisely the portion of capital expenditures or
other costs attributable to compliance with environmental laws and to estimate
the cost of resolving these CERCLA matters, the Registrants do not expect such
expenditures or other costs to have a material adverse effect on the financial
condition of either of the Registrants.
HOLDINGS' BOARD OF DIRECTORS POLICIES
The Board of Directors of Holdings has adopted a policy stating that
Holdings will limit, until December 31, 1998, the aggregate amount of cash
dividends on its capital stock. Under this policy,
36
during that period Holdings will not pay any extraordinary cash dividends and
will limit the aggregate amount of its cash dividends, cash distributions and
repurchases for cash of capital stock and subordinated debt to an amount equal
to the sum of $500 million plus (i) 65% of Holdings' cumulative consolidated net
income before extraordinary gains or losses and restructuring charges subsequent
to December 31, 1994 and (ii) net cash proceeds of up to $250 million in any
year from the sale of capital stock of Holdings or its subsidiaries (other than
proceeds from the Nabisco Holdings initial public offering) to the extent used
to repay, purchase or redeem debt or preferred stock.
The Board of Directors of Holdings has adopted a policy providing that
Holdings will not declare a dividend or distribution to its stockholders of the
shares of capital stock of a subsidiary before December 31, 1996. Holdings has
also adopted a policy setting forth its intention not to make such a
distribution prior to December 31, 1998 if that distribution would cause the
ratings of the senior indebtedness of RJRN to be reduced from investment grade
to non-investment grade or if, after giving effect to such distribution, any
publicly-held senior indebtedness of the distributed company would not be rated
investment grade. There is no assurance that any such distribution will take
place. Additional policies provide that an amount equal to the net cash proceeds
from any issuance and sale of equity by Holdings or from any sale outside the
ordinary course of business of material assets owned or used by subsidiaries in
the tobacco business, in each case before December 31, 1998, will be used either
to repay, purchase or redeem consolidated indebtedness or to acquire properties,
assets or businesses to be used in existing or new lines of business and that an
amount equal to the net cash proceeds of any secondary sale of shares of Nabisco
Holdings before December 31, 1998 will be used to repay, purchase or redeem
consolidated debt. No assurance can be given that Holdings will issue or sell
any equity or sell any material assets outside the ordinary course of business.
SUBSEQUENT EVENTS
On January 26, 1995, Nabisco Holdings completed the initial public offering
of 51,750,000 shares of its Class A Common Stock at an initial offering price of
$24.50 per share. Nabisco used all of the approximately $1.2 billion of net
proceeds from the initial public offering to repay a portion of its initial
borrowing under the Nabisco 1994 Credit Agreement. RJRN owns 100% of the
outstanding Class B Common Stock of Nabisco Holdings, which represents
approximately 80.5% of the economic interest in Nabisco Holdings and
approximately 97.6% of its voting power. In connection with the offering,
Holdings, RJRN and Nabisco Holdings entered into agreements to exchange certain
services, to establish tax sharing arrangements and to provide RJRN with certain
preemptive and registration rights with respect to Nabisco Holdings and Nabisco
securities.
Certain provisions in approximately $6 billion of RJRN's publicly held debt
limit the ability of Nabisco Holdings and Nabisco to incur long-term debt. RJRN
and Nabisco are currently considering a transaction in which they would
seek to obtain consents to remove such limitations in order to permit Nabisco to
establish long-term borrowing capacity independent of RJRN and to reduce its
intercompany debt to RJRN. It is anticipated that such consents would be sought
in connection with offers by Nabisco or RJRN to exchange debt of Nabisco for, or
to pay certain cash consent solicitation fees in respect of, all or a portion of
such RJRN debt. RJRN believes that any such transaction would not materially
change the amount of consolidated indebtedness of either RJRN or Nabisco,
although any newly issued debt of RJRN or Nabisco incurred in connection with
the transaction may have maturities, interest rates or other terms that are less
attractive to RJRN or Nabisco, respectively, than the terms of their existing
debt. No assurance can be given that any such restructuring will be pursued or
consummated or as to the timing of any such restructuring.
The Board of Directors of Holdings has declared an initial quarterly
dividend of $.075 per share payable on April 1, 1995 to holders of record as of
March 10, 1995. Holdings expects to continue to pay a quarterly cash dividend on
the Common Stock of $.075 per share or $.30 per share on an annualized basis.
Holdings does not believe that the provisions of its Credit Agreements or
its adopted policies concerning distributions to stockholders will limit its
ability to pay its anticipated quarterly dividends.
37
The Board of Directors of Holdings approved a one-for-five reverse split of
the Common Stock, which will be submitted to Holdings' stockholders for approval
at its annual meeting in April 1995. If approved, the reverse stock split would
result in a dividend and earnings per share that are five times higher with a
corresponding reduction in the number of shares outstanding.
Holdings has indicated that, under normal circumstances, it does not plan to
issue additional equity securities for purposes of balance sheet improvement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index to Financial Statements and Financial Statement Schedules
on page 43, for the required information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
Item 10 is hereby incorporated by reference to Holdings' Definitive Proxy
Statement to be filed with the Securities and Exchange Commission on or prior to
April 30, 1995. Reference is also made regarding the executive officers of the
Registrants to "Executive Officers of the Registrants" following Item 4 of Part
I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Item 11 is hereby incorporated by reference to Holdings' Definitive Proxy
Statement to be filed with the Securities and Exchange Commission on or prior to
April 30, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is hereby incorporated by reference to Holdings' Definitive Proxy
Statement to be filed with the Securities and Exchange Commission on or prior to
April 30, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is hereby incorporated by reference to Holdings' Definitive Proxy
Statement to be filed with the Securities and Exchange Commission on or prior to
April 30, 1995.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedules are filed as part of this report.
2. The financial statement schedules listed in the accompanying Index to Financial
Statements and Financial Statement Schedules are filed as part of this report.
3. The exhibits listed in the accompanying Index to Exhibits are filed as part of
this report.
(b) Reports on Form 8-K filed in Fourth Quarter 1994
None.
(c) Exhibits
See Exhibit Index.
(d) Financial Statement Schedules.
See Index to Financial Statements and Financial Statement Schedules.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of New
York, State of New York on February 23, 1995.
RJR NABISCO HOLDINGS CORP.
By: /s/ CHARLES M. HARPER
(Charles M. Harper)
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 23, 1995.
SIGNATURE TITLE
- -------------------------------- --------------------------------
/s/ CHARLES M. HARPER Chairman of the Board and Chief
................................ Executive Officer (principal
(Charles M. Harper) executive officer) and Director
/s/ STEPHEN R. WILSON Executive Vice President and
................................ Chief Financial Officer
(Stephen R. Wilson) (principal financial officer)
Senior Vice President and
/s/ ROBERT S. ROATH Controller (principal
................................ accounting officer)
(Robert S. Roath)
Director
................................
(John T. Chain, Jr.)
* Director
................................
(Julius L. Chambers)
* Director
................................
(John L. Clendenin)
* Director
................................
(James H. Greene, Jr.)
* Director
................................
(H. John Greeniaus)
Director
................................
(James W. Johnston)
* Director
................................
(Henry R. Kravis)
* Director
................................
(John G. Medlin, Jr.)
* Director
................................
(Paul E. Raether)
* Director
................................
(Lawrence R. Ricciardi)
* Director
................................
(Rozanne L. Ridgway)
Director
................................
(Clifton S. Robbins)
Director
................................
(George R. Roberts)
* Director
................................
(Scott M. Stuart)
Director
................................
(Michael T. Tokarz)
*By: /s/ JO-ANN FORD
(Jo-Ann Ford)
Attorney-in-Fact
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of New
York, State of New York on February 23, 1995.
RJR NABISCO, INC.
By: /s/ CHARLES M. HARPER
(Charles M. Harper)
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 23, 1995.
SIGNATURE TITLE
- -------------------------------- --------------------------------
/s/ CHARLES M. HARPER Chairman of the Board and Chief
................................ Executive Officer (principal
(Charles M. Harper) executive officer) and Director
/s/ STEPHEN R. WILSON Executive Vice President and
................................ Chief Financial Officer
(Stephen R. Wilson) (principal financial officer)
Senior Vice President and
/s/ ROBERT S. ROATH Controller (principal
................................ accounting officer)
(Robert S. Roath)
Director
................................
(John T. Chain, Jr.)
* Director
................................
(Julius L. Chambers)
* Director
................................
(John L. Clendenin)
* Director
................................
(James H. Greene, Jr.)
* Director
................................
(H. John Greeniaus)
Director
................................
(James W. Johnston)
* Director
................................
(Henry R. Kravis)
* Director
................................
(John G. Medlin, Jr.)
* Director
................................
(Paul E. Raether)
* Director
................................
(Lawrence R. Ricciardi)
* Director
................................
(Rozanne L. Ridgway)
Director
................................
(Clifton S. Robbins)
Director
................................
(George R. Roberts)
* Director
................................
(Scott M. Stuart)
Director
................................
(Michael T. Tokarz)
*By: /s/ JO-ANN FORD
(Jo-Ann Ford)
Attorney-in-Fact
42
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
---------
FINANCIAL STATEMENTS
Report of Deloitte & Touche LLP, Independent Auditors......................... F-1
Summary of Significant Accounting Policies.................................... F-2-F-3
Consolidated Statements of Income and Retained Earnings--Years Ended December
31, 1994, 1993 and 1992..................................................... F-4
Consolidated Statements of Cash Flows--Years Ended December 31, 1994,
1993 and 1992............................................................... F-5
Consolidated Balance Sheets--December 31, 1994 and 1993....................... F-6
Notes to Consolidated Financial Statements.................................... F-7-F-39
FINANCIAL STATEMENT SCHEDULES
For the years ended December 31, 1994, 1993 and 1992:
Schedule I --Condensed Financial Information of Registrants................... S-1-S-8
Schedule II --Valuation and Qualifying Accounts................................ S-9
43
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
RJR Nabisco Holdings Corp.:
RJR Nabisco, Inc.:
We have audited the accompanying consolidated balance sheets of RJR Nabisco
Holdings Corp. ("Holdings") and RJR Nabisco, Inc. ("RJRN") as of December 31,
1994 and 1993, and the related consolidated statements of income and retained
earnings and cash flows for each of the three years in the period ended December
31, 1994. Our audits also include the financial statement schedules of Holdings
and RJRN as of December 31, 1994 and 1993, and for each of the three years in
the period ended December 31, 1994 as listed in the accompanying index to
financial statements and financial statement schedules. These financial
statements and financial statement schedules are the responsibility of the
companies' management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Holdings and RJRN
at December 31, 1994 and 1993, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
January 30, 1995 (February 21, 1995 as to Notes 11 and 17)
F-1
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED FINANCIAL STATEMENTS
The Summary of Significant Accounting Policies below and the notes to
consolidated financial statements on pages F-7 through F-39 are integral parts
of the accompanying consolidated financial statements of RJR Nabisco Holdings
Corp. ("Holdings") and RJR Nabisco, Inc. ("RJRN" and, collectively with
Holdings, the "Registrants") (the "Consolidated Financial Statements").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This Summary of Significant Accounting Policies is presented to assist in
understanding the Consolidated Financial Statements included in this report.
These policies conform to generally accepted accounting principles.
Consolidation
Consolidated Financial Statements include the accounts of each Registrant
and its subsidiaries.
Cash Equivalents
Cash equivalents include all short-term, highly liquid investments that are
readily convertible to known amounts of cash and so near maturity (three months
or less) that they present an insignificant risk of changes in value because of
changes in interest rates.
Inventories
Inventories are stated at the lower of cost or market. Various methods are
used for determining cost. The cost of U.S. tobacco inventories is determined
principally under the LIFO method. The cost of remaining inventories is
determined under the FIFO, specific lot and weighted average methods. In
accordance with recognized trade practice, stocks of tobacco, which must be
cured for more than one year, are classified as current assets.
Depreciation
Property, plant and equipment are depreciated principally by the
straight-line method.
Trademarks and Goodwill
Values assigned to trademarks are based on appraisal reports and are
amortized on the straight-line method over a 40 year period. Goodwill is also
amortized on the straight-line method over a 40 year period.
In evaluating the value and future benefits of trademarks and goodwill, the
recoverability from operating income is measured. Under this approach, the
carrying value of goodwill and trademarks would be reduced if it is probable
that management's best estimate of future operating income before amortization
of trademarks and goodwill from related operations, on an undiscounted basis,
will be less than the carrying amount of trademarks and goodwill over the
remaining amortization period.
Other Income (Expense), Net
Interest income, gains and losses on foreign currency transactions and other
financial items are included in "Other income (expense), net".
F-2
Income Taxes
Income taxes are calculated for each Registrant on a separate return basis.
Excise Taxes
Excise taxes are excluded from "Net sales" and "Cost of products sold".
Reclassifications and Restatements
Certain reclassifications have been made to prior years' amounts to conform
to the 1994 presentation.
Advertising
Advertising costs are generally expensed as incurred.
F-3
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
----------------------- ----------------------- -----------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
---------- ---------- ---------- ---------- ---------- ----------
NET SALES (NOTE 1)............ $ 15,366 $ 15,366 $ 15,104 $ 15,104 $ 15,734 $ 15,734
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses (Note 1):
Cost of products sold........ 6,977 6,977 6,640 6,640 6,326 6,326
Selling, advertising,
administrative and general
expenses...................... 5,210 5,198 5,731 5,723 5,788 5,776
Amortization of trademarks
and goodwill............... 629 629 625 625 616 616
Restructuring expense........ -- -- 730 730 106 106
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME......... 2,550 2,562 1,378 1,386 2,898 2,910
Interest and debt expense
(Notes 8 and 10)............. (1,065) (1,065) (1,209) (1,186) (1,449) (1,359)
Other income (expense), net... (110) (121) (58) (88) 7 (75)
---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes......................... 1,375 1,376 111 112 1,456 1,476
Provision for income taxes
(Note 3)...................... 611 614 114 116 680 693
---------- ---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM............ 764 762 (3) (4) 776 783
Extraordinary item--loss on
early extinguishments of
debt, net of income taxes
(Note 4)...................... (245) (245) (142) (135) (477) (464)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)........ 519 517 (145) (139) 299 319
Less preferred stock
dividends..................... 131 -- 68 -- 31 --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)
applicable to common
stock......................... 388 517 (213) (139) 268 319
Retained earnings (accumulated
deficit) at beginning of
period........................ (883) (459) (738) (320) (1,037) (639)
Dividends paid to parent and
charged to retained earnings.. -- (42) -- -- -- --
Add preferred stock dividends
charged to paid-in capital.... 131 -- 68 -- 31 --
---------- ---------- ---------- ---------- ---------- ----------
RETAINED EARNINGS (ACCUMULATED
DEFICIT) AT END OF PERIOD
(NOTE 13)..................... $ (364) $ 16 $ (883) $ (459) $ (738) $ (320)
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) per common
and common equivalent share
(Note 2):
Income (loss) before
extraordinary item............ $ 0.41 -- $ (.05) -- $ 0.55 --
Extraordinary item........... (0.16) -- (.10) -- (0.35) --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 0.25 -- $ (.15) -- $ 0.20 --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)
per common and common
equivalent share (Note 2).... $ 1.26 -- $ (.79) -- $ .98 --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Dividends per share of Series
A Preferred Stock (Note
12)........................... $ 2.92 -- $ 3.34 -- $ 3.34 --
Dividends per share of Series
C Preferred Stock (Note
12)........................... $ 3.94 -- -- -- -- --
Average number of common and
common equivalent shares
outstanding (in thousands)
(Note 2)...................... 1,538,127 -- 1,349,196 -- 1,363,549 --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements.
F-4
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------------ ------------------ ------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
-------- -------- -------- -------- -------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES
(NOTE 5)................................. $ 1,754 $ 1,719 $ 1,769 $ 1,604 $ 2,307 $ 2,455
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING
ACTIVITIES:
Capital expenditures.................... (670) (670) (615) (615) (519) (519)
Proceeds from disposition of business... -- -- 450 450 -- --
Acquisitions of businesses.............. (510) (510) (128) (128) (385) (385)
Other, net.............................. 39 39 32 32 11 11
-------- -------- -------- -------- -------- --------
Net cash flows used in investing
activities............................... (1,141) (1,141) (261) (261) (893) (893)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net borrowings (repayments) under credit
agreements............................... 2,911 2,911 (2,614) (2,614) (620) (620)
Net proceeds from the issuance
(repayments) of commercial paper...... (49) (49) 342 342 571 571
Proceeds from issuance of other
long-term debt........................ 16 16 1,965 1,965 3,155 3,155
Repayments of other long-term debt...... (4,666) (4,666) (1,977) (1,429) (4,549) (4,298)
Increase (decrease) in notes payable.... 18 18 (24) (24) (25) (25)
Proceeds from issuance of common stock
and exercise of warrants.............. 54 -- 9 -- 1 --
Proceeds from issuance of Series B
Preferred Stock....................... -- -- 1,250 -- -- --
Proceeds from issuance of Series C
Preferred Stock....................... 1,734 -- -- -- -- --
Financing and advisory fees paid........ (60) (6) (48) (9) (35) (33)
Capital contributions from/issuance of
common stock to parent................... -- 1,680 -- 1,214 -- --
Dividends paid to parent................ -- (42) -- (48) -- (278)
Preferred stock dividends paid.......... (395) -- (241) -- (214) --
Repurchase of preferred stock........... (3) -- (105) -- -- --
Repurchases and cancellations of common
stock, stock options and warrants........ (1) -- (1) -- (89) --
Other, net--including intercompany
transfers................................ 42 (230) 62 (621) 62 (363)
-------- -------- -------- -------- -------- --------
Net cash flows used in financing
activities............................... (399) (368) (1,382) (1,224) (1,743) (1,891)
-------- -------- -------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents.................... (6) (6) (10) (10) (6) (6)
-------- -------- -------- -------- -------- --------
Net change in cash and cash
equivalents.............................. 208 204 116 109 (335) (335)
Cash and cash equivalents at beginning of
period................................... 215 205 99 96 434 431
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................... $ 423 $ 409 $ 215 $ 205 $ 99 $ 96
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
See Notes to Consolidated Financial Statements.
F-5
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31,
1994 1993
----------------- -----------------
HOLDINGS RJRN HOLDINGS RJRN
-------- ------- -------- -------
ASSETS
Current assets:
Cash and cash equivalents (Note 5)........................ $ 423 $ 409 $ 215 $ 205
Accounts and notes receivable, net (Note 5)............... 934 934 856 847
Inventories (Note 6)...................................... 2,580 2,580 2,700 2,700
Prepaid expenses and excise taxes......................... 426 426 374 374
-------- ------- -------- -------
TOTAL CURRENT ASSETS.................................. 4,363 4,349 4,145 4,126
-------- ------- -------- -------
Property, plant and equipment--at cost...................... 7,767 7,767 7,166 7,166
Less accumulated depreciation............................... (2,333) (2,333) (1,998) (1,998)
-------- ------- -------- -------
Net property, plant and equipment (Note 7)................ 5,434 5,434 5,168 5,168
-------- ------- -------- -------
Trademarks, net of accumulated amortization of $1,491 and
$1,223, respectively........................................ 8,506 8,506 8,727 8,727
Goodwill, net of accumulated amortization of $2,124 and
$1,767, respectively........................................ 12,681 12,681 12,851 12,851
Other assets and deferred charges........................... 424 423 404 400
-------- ------- -------- -------
$ 31,408 $31,393 $ 31,295 $31,272
-------- ------- -------- -------
-------- ------- -------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 8).................................... $ 296 $ 296 $ 301 $ 301
Accounts payable.......................................... 548 548 515 515
Accrued liabilities (Note 9).............................. 2,532 2,488 2,751 2,705
Current maturities of long-term debt (Notes 10 and 17).... 1,970 1,970 142 142
Income taxes accrued (Note 3)............................. 248 248 234 234
-------- ------- -------- -------
TOTAL CURRENT LIABILITIES............................. 5,594 5,550 3,943 3,897
-------- ------- -------- -------
Long-term debt (less current maturities) (Notes 10 and
17)......................................................... 8,883 8,883 12,005 12,005
Other noncurrent liabilities................................ 2,235 1,836 2,503 2,353
Deferred income taxes (Note 3).............................. 3,788 3,714 3,774 3,701
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 12, 13 and 17):
ESOP convertible preferred stock--15,315,130 and
15,573,973 shares issued and outstanding at December 31,
1994 and 1993, respectively............................. 245 -- 249 --
Series A convertible preferred stock--52,500,000 shares
issued and outstanding at December 31, 1993............. -- -- 2 --
Series B preferred stock--50,000 shares issued and
outstanding at December 31, 1994 and 1993................... 1,250 -- 1,250 --
Series C preferred stock--26,675,000 shares issued and
outstanding at December 31, 1994............................ 3 -- -- --
Common stock--1,361,656,883 and 1,138,011,292 shares
issued and outstanding at December 31, 1994 and 1993,
respectively................................................ 13 -- 11 --
Paid-in capital........................................... 10,147 11,558 8,778 9,877
Cumulative translation adjustments........................ (164) (164) (102) (102)
Retained earnings (accumulated deficit)................... (364) 16 (883) (459)
Receivable from ESOP...................................... (186) -- (211) --
Loans receivable from employees........................... (14) -- (18) --
Unamortized value of restricted stock..................... (22) -- (6) --
-------- ------- -------- -------
TOTAL STOCKHOLDERS' EQUITY............................ 10,908 11,410 9,070 9,316
-------- ------- -------- -------
$ 31,408 $31,393 $ 31,295 $31,272
-------- ------- -------- -------
-------- ------- -------- -------
See Notes to Consolidated Financial Statements.
F-6
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--OPERATIONS
Net sales and cost of products sold exclude excise taxes of $3.578 billion,
$3.757 billion and $3.560 billion for 1994, 1993 and 1992, respectively.
During the fourth quarter of 1994, Holdings approved and adopted a plan to
realign Headquarters' functions, transferring certain responsibilities to the
operating companies and significantly streamlining the holding company. The plan
reflects expectations of a lower level of financings and other activities at the
holding company as Holdings concludes the post-LBO period. The costs and
expenses associated with this decision resulted in a charge of approximately $65
million before tax, a significant portion of which is a cash expense. The
majority of the charge is related to accrued employee termination benefits for
the 25% of Headquarters' employees terminated (approximately $40 million). This
cost was incurred pursuant to a continuing plan for employee termination
benefits that provides for the payment of specified amounts of severance and
benefits to terminated employees. The remainder of the charge (approximately $25
million) is related to the abandonment of leases of certain corporate office
facilities as a result of the realignment and streamlining and the reduced need
for office space. The plan was implemented in the first quarter of 1995 and will
be completed by year-end 1995. Anticipated annual future cash savings flowing
from the plan are estimated at approximately $25 million before tax
(approximately $16 million after tax).
Operating income in the fourth quarter of 1993 was reduced by a $730 million
restructuring expense for a program initiated at the domestic tobacco operations
($355 million), the international tobacco operations ($189 million), the food
operations ($153 million) and Headquarters ($33 million). Such restructuring
program was undertaken in response to a changing consumer product business
environment and to streamline operations and improve profitability. The program
was implemented in the latter part of 1993. Approximately 75% of the
restructuring program will require cash outlays of which approximately $300
million was spent as of the end of 1994. As an offset to the cash outlays,
after-tax cash savings of approximately $140 million were realized as of the end
of 1994. Holdings expects future annual after-tax cash savings to be in the
range of approximately $200 million to $225 million.
The cost of providing severance pay and benefits for the reduction of
approximately 6,000 employees (approximately 4,400 positions eliminated by the
end of 1994) throughout the domestic and international food and tobacco
businesses was approximately $400 million of the pre-tax charge and is primarily
a cash expense. Actual charges for severance pay and benefits through December
31, 1994 amounted to approximately $250 million. The workforce reduction was
undertaken in order to establish fundamental changes to the cost structure of
the domestic tobacco business in the face of acute competitive activity in that
business and to take advantage of cost savings opportunities in other businesses
through process efficiency improvements. Legislation enacted during the third
quarter of 1993 stipulated that, effective January 1, 1994, financial penalties
would be assessed against manufacturers if cigarettes produced in the United
States did not contain at least 75% (by weight) domestically grown flue cured
and burley tobaccos. As a result, the domestic and international tobacco
businesses accrued approximately $70 million of related restructuring charges
resulting from a reassessment of raw material sourcing and production
arrangements. In addition, a shift in pricing strategy designed to gain market
share by RJRT's largest competitor led to a redeployment of spending and changes
in sales and distribution strategies that resulted in a restructuring charge of
approximately $80 million primarily related to contract termination costs.
Abandonment of leases related to the above changes in the businesses resulted in
approximately $60 million of restructuring charges. The remainder of the
F-7
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--OPERATIONS--(CONTINUED)
charge, approximately $120 million, represents primarily non-cash costs to
rationalize and close manufacturing and sales facilities in both the tobacco and
food businesses to facilitate cost improvements. Charges related to these items
amounted to approximately $250 million through December 31, 1994.
As of December 31, 1994, the original estimates related to the food
businesses have remained unchanged. However, changes have occurred in the
original tobacco estimates. Due to stronger than anticipated demand for domestic
tobacco products, the estimate of the amount of domestic production to be moved
off-shore has been reduced, causing a domino-effect on domestic and
international raw material sourcing and production strategies. The end result
will be a reduction in the amount of domestic production moved to off-shore
facilities and significant changes in sourcing and production among off-shore
production facilities.
As a result of this change, approximately 300 domestic tobacco employees
originally anticipated to be terminated will be retained and approximately 200
additional international tobacco employees will be terminated. The financial
impact of these changes is a credit to income of approximately $23 million
related to the reduction in the cost of providing severance pay and benefits to
domestic tobacco employees and an increase in the cost of providing such
benefits to terminated international tobacco employees. In addition, the cost
associated with the rationalization and abandonment of manufacturing and sales
facilities was increased by approximately $21 million as it became evident that
the original plan to find an alternative manufacturing use for a tobacco
blending facility would not come to fruition. The net adjustment to operating
income as a result of the above changes (approximately $2 million) is included
in selling, advertising, administrative and general expense.
The major components of restructuring reserves are as follows:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Severance pay and benefits......................................... $147 $323
Manufacturing/sales facilities..................................... 26 100
Contract termination costs......................................... -- 75
Abandonment of leases.............................................. 15 45
Reassessment of sourcing/product arrangements...................... 38 67
----- -----
$226 $610
----- -----
----- -----
During the fourth quarter of 1992, operating income was reduced by a net
charge of $8 million as a result of a $106 million restructuring expense
recorded at the tobacco operations ($43 million) and the food operations ($63
million), partially offset by a $98 million gain recognized from the sale of
Holdings' ready-to-eat cold cereal business for $456 million in cash, prior to
post-closing adjustments. The restructuring expense was incurred in connection
with a restructuring plan at the tobacco operations, the purpose of which was to
improve productivity by realigning operations in the sales, manufacturing,
research and development, and administrative areas and a restructuring plan at
the food operations, the purpose of which was to reduce costs and improve
productivity by realigning sales operations and implementing a previously
announced voluntary separation program. The receivable established at December
31, 1992 for the sale of the ready-to-eat cold cereal business was collected on
January 4, 1993, except for certain escrow amounts which were subsequently
collected.
F-8
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
Holdings' common stock, par value $.01 per share (the "Common Stock"), $.835
Depositary Shares ("Series A Depositary Shares") and Series C Depositary Shares
("Series C Depositary Shares") outstanding during the period and common stock
assumed to be outstanding to reflect the effect of dilutive warrants and
options. Holdings' other potentially dilutive securities are not included in the
earnings per share calculation because the effect of excluding interest and
dividends on such securities for the period would exceed the earnings allocable
to the common stock into which such securities would be converted. Accordingly,
Holdings' earnings per share and fully diluted earnings per share are the same.
The net loss per common and common equivalent share reported for the year ended
December 31, 1993 would have increased by $.19 per share if the weighted average
number of shares of Series A Depositary Shares outstanding during the period had
been excluded from the earnings per share calculation.
The pro forma net income (loss) per common and common equivalent share for
each of the years within the three year period ended December 31, 1994 reflects
a one-for-five reverse split approved by the Board of Directors of Holdings
which will be submitted to Holdings' stockholders for approval at its annual
meeting in April 1995. (See Note 17 to the Consolidated Financial Statements.)
NOTE 3--INCOME TAXES
The provision for income taxes consisted of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
----------------- ---------------- ----------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
-------- ---- -------- ---- -------- ----
Current:
Federal................................ $401 $466 $295 $366 $165 $115
Foreign and other...................... 221 221 169 169 216 216
-------- ---- -------- ---- -------- ----
622 687 464 535 381 331
-------- ---- -------- ---- -------- ----
Deferred:
Federal................................ (40) (102) (298) (367) 300 363
Foreign and other...................... 29 29 (52) (52 ) (1) (1 )
-------- ---- -------- ---- -------- ----
(11) (73 ) (350) (419) 299 362
-------- ---- -------- ---- -------- ----
Provision for income taxes............... $611 $614 $114 $116 $680 $693
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
F-9
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INCOME TAXES--(CONTINUED)
The components of the deferred income tax liability disclosed on the
Consolidated Balance Sheet at December 31, 1994 and 1993 included the following:
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------ ------------------
HOLDINGS RJRN HOLDINGS RJRN
-------- ------ -------- ------
Deferred tax assets:
Pension liabilities............................ $ (88) $ (88) $ (123) $ (123)
Other postretirement liabilities............... (326) (326) (342) (342)
Restructure and other accrued liabilities...... (226) (226) (325) (325)
-------- ------ -------- ------
Total deferred tax assets................ (640) (640) (790) (790)
-------- ------ -------- ------
Deferred tax liabilities:
Property and equipment......................... 1,049 1,049 1,154 1,154
Trademarks..................................... 2,784 2,784 2,913 2,913
Other.......................................... 531 457 465 392
-------- ------ -------- ------
Total deferred tax liabilities........... 4,364 4,290 4,532 4,459
-------- ------ -------- ------
Net deferred tax liabilities before
valuation allowance.............................. 3,724 3,650 3,742 3,669
Valuation allowance............................ 64 64 32 32
-------- ------ -------- ------
Net deferred income taxes...................... $3,788 $3,714 $3,774 $3,701
-------- ------ -------- ------
-------- ------ -------- ------
Pre-tax income (loss) before extraordinary item for domestic and foreign
operations is shown in the following table:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------------ ------------------ ------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
-------- ------ -------- ------ -------- ------
Domestic (includes U.S. exports)....... $ 867 $ 868 $ (169) $ (168) $1,052 $1,072
Foreign................................ 508 508 280 280 404 404
-------- ------ -------- ------ -------- ------
Pre-tax income......................... $1,375 $1,376 $ 111 $ 112 $1,456 $1,476
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
F-10
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INCOME TAXES--(CONTINUED)
The differences between the provision for income taxes and income taxes
computed at statutory U.S. federal income tax rates are explained as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
--------------- ---------------- ------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
-------- ---- -------- ----- -------- -------
Income taxes computed at statutory
U.S. federal income tax rates........ $481 $481 $ 39 $ 39 $ 495 $ 502
State taxes, net of federal
benefit.............................. 54 54 23 23 54 54
Goodwill amortization................ 124 124 125 125 122 122
Asset sale........................... -- -- -- -- 33 33
Federal rate change impact on
deferred income taxes.............. -- -- 86 86 -- --
Decrease in deferred tax amounts,
primarily for a change in the
functional currency relating to
foreign branch operations............ -- -- (108) (108) -- --
Taxes on foreign operations at rates
different than statutory U.S.
federal rate....................... (6) (6) (14) (14) 15 15
FSC income exclusion................. (14) (14) (14) (14) (10) (10)
Other items, net..................... (28) (25) (23) (21) (29) (23)
-------- ---- -------- ----- -------- -------
Provision for income taxes........... $611 $614 $ 114 $ 116 $ 680 $ 693
-------- ---- -------- ----- -------- -------
-------- ---- -------- ----- -------- -------
Effective tax rate................... 44.5% 44.7% 102.7% 103.8% 46.7% 47.0%
-------- ---- -------- ----- -------- -------
-------- ---- -------- ----- -------- -------
At December 31, 1994, there was $1.444 billion of accumulated and
undistributed income of foreign subsidiaries. These earnings are intended by
management to be reinvested abroad indefinitely. Accordingly, no applicable U.S.
federal deferred income taxes or foreign withholding taxes have been provided
nor is a determination of the amount of unrecognized U.S. federal deferred
income taxes practicable.
During 1994, $64 million of previously recognized deferred income tax
benefits for minimum tax credit carryforwards were realized for U.S. federal tax
purposes.
Effective January 1, 1993, Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS
No. 109 superseded Statement of Financial Accounting Standards No. 96, the
method of accounting for income taxes previously followed by the Registrants.
The adoption of SFAS No. 109 did not have a material impact on the financial
statements of either Holdings or RJRN.
Holdings' provision for income taxes for 1993 was increased by $96 million
as a result of the enactment of certain federal tax legislation during the third
quarter of 1993 which increased federal corporate income tax rates to 35% from
34%, retroactively to January 1, 1993. The components of this increase to
Holdings' provision for income taxes included an $86 million non-cash charge
resulting primarily from the remeasurement of the balance of deferred federal
income taxes at the date of enactment of the new federal tax legislation for the
change in the income tax rates, and a $10 million charge resulting from the
increase in current federal income taxes accrued for the change in the income
F-11
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INCOME TAXES--(CONTINUED)
tax rates and other effects of the new tax legislation. Also during 1993,
Holdings' provision for income taxes was decreased by a $108 million credit
primarily resulting from a change in the functional currency, for U.S. federal
income tax purposes, relating to foreign branch operations.
During 1993, $101 million of previously recognized deferred income tax
benefits for operating loss carryforwards ($36 million), minimum tax credit
carryforwards ($44 million) and other carryforward items ($21 million) were
realized for federal tax purposes.
NOTE 4--EXTRAORDINARY ITEM
The extinguishments of debt of Holdings and RJRN resulted in the following
extraordinary losses:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
---------------- ---------------- ----------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
-------- ----- -------- ----- -------- -----
Cash paid in excess of net carrying amount (book
value) of debentures extinguished................. $ (348) $(348) $ (206) $(196) $ (636) $(616)
Write-off of debt issuance costs.................. (29) (29) (12) (12) (40) (40)
-------- ----- -------- ----- -------- -----
Extraordinary item--loss on early extinguishments
of debt before income taxes..................... (377) (377) (218) (208) (676) (656)
Benefit for income taxes.......................... 132 132 76 73 199 192
-------- ----- -------- ----- -------- -----
Extraordinary item--loss on early extinguishments
of debt, net of income taxes.................... $ (245) $(245) $ (142) $(135) $ (477) $(464)
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
F-12
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION
A reconciliation of net income (loss) to net cash flows from operating
activities follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------------ ------------------ ------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
-------- ------ -------- ------ -------- ------
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income (loss)..................... $ 519 $ 517 $ (145) $ (139) $ 299 $ 319
-------- ------ -------- ------ -------- ------
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Depreciation of property, plant and
equipment............................... 454 454 448 448 455 455
Amortization (principally
intangibles)............................ 698 698 701 701 691 691
Deferred income tax provision
(benefit)............................... (11) (73) (350) (419) 299 362
Non-cash interest and debt
expense................................. 119 119 295 273 454 375
Extraordinary item--loss on early
extinguishments of debt................. 377 377 218 208 676 656
Gain on sale of ready-to-eat cold
cereal business......................... -- -- -- -- (98) (98)
(Increase) decrease in accounts and
notes receivable........................ (69) (61) 75 84 (180) (180)
(Increase) decrease in
inventories............................. 111 111 80 80 (102) (102)
Increase in prepaid expenses and
excise taxes............................ (18) (18) (37) (37) (53) (53)
(Increase) decrease in other assets
and deferred charges.............. (55) (57) (4) 43 (186) (185)
Increase (decrease) in accounts
payable and accrued liabilities......... (363) (363) 308 312 70 84
Increase (decrease) in income taxes
accrued................................. 26 51 (53) 54 38 128
Increase (decrease) in other
noncurrent liabilities.................. (37) (37) 215 24 (110) (96)
Other, net.......................... 3 1 18 (28) 54 99
-------- ------ -------- ------ -------- ------
Total adjustments............... 1,235 1,202 1,914 1,743 2,008 2,136
-------- ------ -------- ------ -------- ------
Net cash flows from operating
activities.............................. $1,754 $1,719 $1,769 $1,604 $2,307 $2,455
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Cash payments for income taxes and interest were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
---------------- ---------------- ------------------
HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN
-------- ---- -------- ---- -------- ------
Income taxes paid, net of refunds.......... $496 $496 $408 $408 $ 116 $ 116
Interest paid.............................. $986 $986 $912 $912 $1,102 $1,102
F-13
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION--(CONTINUED)
Cash equivalents at December 31, 1994 and 1993, valued at cost (which
approximates market value), totaled $364 million and $215 million, respectively,
and consisted principally of domestic and Eurodollar time deposits and
certificates of deposit.
At December 31, 1994 and 1993, cash of $60 million and $62 million,
respectively, was held in escrow as collateral for letters of credit issued in
connection with certain foreign currency debt.
On February 7, 1990, RJRN entered into an arrangement in which it agreed to
sell for cash substantially all of its subsidiaries' domestic trade accounts
receivable generated during a five-year period to a financial institution.
Pursuant to amendments entered into in 1992, the length of the receivable
program was extended an additional year. The accounts receivable have been and
will continue to be sold with limited recourse at purchase prices reflecting the
rate applicable to the cost to the financial institution of funding its
purchases of accounts receivable and certain administrative costs. During 1994,
1993, and 1992, total proceeds of approximately $7.9 billion, $8.2 billion and
$8.5 billion, respectively, were received by RJRN in connection with this
arrangement. At December 31, 1994 and 1993, the accounts receivable balance has
been reduced by approximately $524 million and $437 million, respectively, due
to the receivables sold.
For information regarding certain non-cash financing activities, see Notes
10 and 12 to the Consolidated Financial Statements.
NOTE 6--INVENTORIES
The major classes of inventory are shown in the table below:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Finished products........................................ $ 771 $ 771
Leaf tobacco............................................. 1,299 1,458
Raw materials............................................ 206 208
Other.................................................... 304 263
------------ ------------
$2,580 $2,700
------------ ------------
------------ ------------
At December 31, 1994 and 1993, approximately $1.2 billion and $1.4 billion,
respectively, of inventory was valued under the LIFO method. The current cost of
LIFO inventories at December 31, 1994 and 1993 was greater than the amount at
which these inventories were carried on the Consolidated Balance Sheets by $141
million and $284 million, respectively.
For the years ended December 31, 1994, 1993 and 1992, net income was
increased by $10 million, $6 million, and $4 million, respectively, as a result
of LIFO inventory liquidations. The LIFO liquidations resulted from programs to
reduce leaf durations consistent with forecasts of future operating
requirements.
F-14
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment were as follows:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Land and land improvements.............................. $ 323 $ 308
Buildings and leasehold improvements.................... 1,856 1,771
Machinery and equipment................................. 5,056 4,624
Construction-in-process................................. 532 463
------------ ------------
7,767 7,166
Less accumulated depreciation........................... (2,333) (1,998)
------------ ------------
Net property, plant and equipment................... $ 5,434 $ 5,168
------------ ------------
------------ ------------
NOTE 8--NOTES PAYABLE
Notes payable consisted of the following:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Notes payable to foreign banks........................... $ 296 $ 301
------------ ------------
------------ ------------
Weighted average interest rate for notes payable consisted of the following:
Notes payable to foreign banks........................... 9.77% 8.37%
------------ ------------
------------ ------------
NOTE 9--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Marketing and advertising................................ $ 553 $ 643
Payroll and employee benefits............................ 380 325
Excise taxes............................................. 260 226
Accrued interest......................................... 189 260
Restructuring............................................ 146 377
Other.................................................... 1,004 920
------------ ------------
$2,532 $2,751
------------ ------------
------------ ------------
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE
Interest and debt expense consisted of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Cash interest..................................... $ 946 $ 914 $ 995
Non-cash interest and debt expense................ 119 295 454
------ ------ ------
$1,065 $1,209 $1,449
------ ------ ------
------ ------ ------
F-15
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
Long-term debt consisted of the following:
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------- -------------------
DUE DUE DUE DUE
WITHIN AFTER WITHIN AFTER
ONE YEAR ONE YEAR(1) ONE YEAR ONE YEAR
-------- ----------- -------- --------
Long-term Debt:
8.625-9.25% Debentures with annual sinking fund
payments through 2017 (net of $59 million and $160
million of such debentures held by RJRN on December
31, 1994 and 1993, respectively, for future sinking
fund requirements)................................. $ 400 $ 634 $ -- $ 1,464
5.09-9.25% Notes, due 1995 through 2013.............. 200 4,932 -- 6,631
5.375-10%, foreign currency debt, due 2000 to 2001... -- 500 123 472
1991 Credit Agreement, variable interest (varies with
prime rate and LIBOR--weighted average interest
rate of 6.68% at December 31, 1994), due December
31, 1997(2)........................................ -- 1,750 -- 328
Nabisco 1994 Credit Agreement, variable interest
(varies with prime rate and LIBOR--weighted average
interest rate of 6.55% at December 31, 1994), due
December 5, 1995(3)................................ 1,350 -- -- --
Commercial paper(4).................................. -- 864 -- 913
Other indebtedness................................... 20 203 19 247
Subordinated Debentures:
15% Subordinated Debentures, net of discount of $18
million at December 31, 1993........................... -- -- -- 280
Subordinated Discount Debentures, net of discount of
$133 million at December 31, 1993.................. -- -- -- 1,393
Other Subordinated Debentures, fixed rate of 13
1/2%................................................... -- -- -- 277
-------- ----------- -------- --------
Total long-term debt(5).......................... $1,970 $ 8,883 $142 $ 12,005
-------- ----------- -------- --------
-------- ----------- -------- --------
- ------------
(1) The payment of debt through December 31, 1999 is due as follows (in
millions): 1996--$143; 1997--$1,826; 1998--$217 and 1999--$612.
(2) RJRN maintains a revolving credit facility of $6.0 billion, as amended (the
"1991 Credit Agreement"), of which $4.25 billion was unused at December 31,
1994. At December 31, 1994, availability of the unused portion is reduced by
$412 million for the extension of irrevocable letters of credit issued under
the 1991 Credit Agreement and by $1.35 billion for borrowings under the
Nabisco, Inc. credit agreement, dated as of December 6, 1994 (the "Nabisco
1994 Credit Agreement"). A commitment fee of 1/4% per annum is payable on
the unused portion of the facility.
(3) The Nabisco 1994 Credit Agreement provides a 364 day revolving credit
facility of $1.5 billion of which $150 million was unused at December 31,
1994. A commitment fee of 1/5% per annum is payable on the full amount of
the commitment.
(4) RJRN maintains a back-up line of credit to support commercial paper
issuances of up to $1 billion. Commercial paper outstanding in excess of $1
billion is supported by the 1991 Credit Agreement.
(5) As a result of certain activities associated with RJRN's interest rate
derivative instruments during 1994, the effective interest rate on certain
debt may differ from that disclosed in the table. See Note 11 to the
Consolidated Financial Statements.
F-16
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
-------------------
On May 15, 1992, RJR Nabisco Capital Corp. ("Capital") merged with and into
its wholly-owned subsidiary, RJRN. As a result of the merger, RJR Nabisco
Holdings Group, Inc. ("Group") became the direct parent of RJRN and RJRN assumed
all of the obligations of Capital under the 1991 Credit Agreement and with
respect to the following debt securities: Subordinated Discount Debentures due
May 15, 2001 (the "Subordinated Discount Debentures"); 15% Payment-in-Kind
Subordinated Debentures due May 15, 2001 (the "15% Subordinated Debentures"); 13
1/2% Subordinated Debentures due May 15, 2001 (the "13 1/2% Subordinated
Debentures" and, collectively with the Subordinated Discount Debentures and the
15% Subordinated Debentures, the "Subordinated Debentures"); 10 1/2% Senior
Notes due 1998 (the "10 1/2% Senior Notes"); 8.30% Senior Notes due April 15,
1999 (the "8.30% Senior Notes"); and 8.75% Senior Notes due April 15, 2004 (the
"8.75% Senior Notes" and, collectively with the 8.30% Senior Notes, the "1992
Senior Notes"). Prior to this merger, RJRN had guaranteed all of Capital's
obligations with respect to such indebtedness, and the financial statements of
RJRN had reflected such indebtedness and all debt related costs.
On December 17, 1992, Group merged with and into its wholly-owned
subsidiary, RJRN.
Also during 1992, Holdings entered into the following refinancing
transactions: (i) the redemption on February 15, 1992 of $250 million principal
amount of Capital's Subordinated Floating Rate Notes due 1999 (the "Subordinated
Floating Rate Notes") at a price of $1,005 for each $1,000 principal amount of
Subordinated Floating Rate Notes plus accrued and unpaid interest thereon, (ii)
the early extinguishments by Capital of approximately $1 billion aggregate
principal amount of certain of Capital's subordinated debentures in a privately
negotiated transaction (the "1992 Capital Debenture Repurchase") for
approximately $995 million in cash, consisting of $165 million aggregate
principal amount of its 15% Subordinated Debentures, $85 million aggregate
principal amount of its 13 1/2% Subordinated Debentures and $750 million
aggregate principal amount (approximately $550 million accreted amount) of its
Subordinated Discount Debentures, (iii) the issuance by Capital on April 9, 1992
of $600 million principal amount of 8.30% Senior Notes and $600 million
principal amount of 8.75% Senior Notes and the application of substantially all
of the net proceeds from the issuance of the 1992 Senior Notes to repay a
portion of the funds temporarily drawn under the 1991 Credit Agreement for the
redemption of the Subordinated Floating Rate Notes and for the 1992 Capital
Debenture Repurchase, (iv) the retirement on May 15, 1992 of $225 million
aggregate principal amount of Capital's Subordinated Extendible Reset Debentures
due May 15, 1991 (the "Subordinated Reset Debentures") at a price of $1,010 for
each $1,000 principal amount of Subordinated Reset Debentures plus accrued and
unpaid interest thereon with the remaining proceeds available from the 1992
Senior Notes plus temporary borrowings under the 1991 Credit Agreement, which
were repaid with proceeds of medium-term notes and (v) the additional
repurchases during 1992 for approximately $1.822 billion in cash of certain of
RJRN's subordinated debentures consisting of $690 million aggregate principal
amount of its 15% Subordinated Debentures, $81 million aggregate principal
amount of its 13 1/2% Subordinated Debentures and $941 million aggregate
principal amount (approximately $728 million accreted amount) of its
Subordinated Discount Debentures. The principal or accreted amount of the
debentures in item (v) was refinanced with proceeds of debt securities maturing
in the years 1999-2004. The purchase of most of such amount had been temporarily
funded with borrowings under the 1991 Credit Agreement. Also during 1992,
Holdings repurchased $126 million aggregate principal amount (approximately $209
million including accrued interest) of its Senior Converting Debentures due 2009
F-17
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
(the "Converting Debentures") for $229 million in cash, and RJRN repurchased
$229 million aggregate principal amount of various other debentures for $240
million in cash. The funds for the repurchase of Converting Debentures and
various other debentures of RJRN and for a portion of the purchase price of the
Subordinated Debentures in item (v) were provided from the issuance of medium-
term notes maturing in the years 1995-1997, borrowings under the 1991 Credit
Agreement and cash flow from operations.
During 1993, RJRN repurchased for approximately $1.0 billion in cash certain
of its subordinated debentures consisting of $153 million aggregate principal
amount of its 15% Subordinated Debentures, $82 million aggregate principal
amount of its 13 1/2% Subordinated Debentures and $768 million aggregate
principal amount (approximately $671 million accreted amount) of its
Subordinated Discount Debentures. The principal or accreted amounts of such
debentures was refinanced from proceeds of debt securities maturing after 1998,
including debt securities issued during 1993. The purchase of most of such
amount had been temporarily funded with borrowings under the 1991 Credit
Agreement.
The remaining portion of a participation in an employee stock ownership plan
established by Holdings (the "ESOP") was repurchased on January 15, 1993 for
cash, plus accrued and unpaid interest thereon.
Holdings redeemed on May 1, 1993, 100% of the aggregate principal amount of
its outstanding Converting Debentures at a price of $1,000 for each $1,000
principal amount of Converting Debentures, plus accrued and unpaid interest
thereon, for the period from February 9, 1989 through April 30, 1993, of $937.54
for each $1,000 principal amount of Converting Debentures.
During 1993, RJRN issued $750 million principal amount of 8% Notes due 2000,
$500 million principal amount of 8 3/4% Notes due 2005 and $500 million
principal amount of 9 1/4% Debentures due 2013. Also during 1993, RJRN issued
medium-term notes maturing in the years 1995-1998 having an aggregate initial
offering price of approximately $230 million. The net proceeds from the sale of
these debt securities and the Series B Preferred Stock Offering (as hereinafter
defined) were used for general corporate purposes, which included refinancings
of indebtedness, working capital, capital expenditures, acquisitions and
repurchases and redemptions of securities. Pending such uses, proceeds were used
to repay indebtedness under the 1991 Credit Agreement or for short-term liquid
investments.
A portion of the net proceeds collected from the sale of Holdings'
ready-to-eat cold cereal business was used on February 5, 1993 to redeem $216
million principal amount of RJRN's 9 3/8% Sinking Fund Debentures due 2016 (the
"9 3/8% Debenture") at a price of $1,065.63 for each $1,000 principal amount of
9 3/8% Debentures, plus accrued and unpaid interest thereon.
On May 15, 1994, RJRN redeemed substantially all of its approximately $2
billion in outstanding subordinated debentures. The subordinated debentures
redeemed consisted of the Subordinated Discount Debentures, the 15% Subordinated
Debentures and the 13 1/2% Subordinated Debentures at redemption prices of 107
1/2%, 107 1/2% and 106 3/4%, respectively, plus accrued interest. Approximately
$1.2 billion principal or accreted amount of such debentures was refinanced
with proceeds of debt securities maturing after 1998 that were issued during
1993. Such proceeds had been used to temporarily reduce indebtedness under the
1991 Credit Agreement. In addition, the redemption of such debentures was
funded with approximately $900 million of net proceeds from the sale of
266,750,000 Series C Depositary Shares
F-18
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
completed on May 6, 1994 in connection with the issuance of 26,675,000 shares of
Series C Conversion Preferred Stock, par value $.01 per share ("Series C
Preferred Stock").
On November 30, 1994, RJRN redeemed $1.5 billion of 10 1/2% Senior Notes;
$373.5 million of 8 3/8% Sinking Fund Debentures due 2017 and approximately
$24.8 million of 7 3/8% Sinking Fund Debentures due 2001. On December 2, 1994,
RJRN redeemed $100 million of the 13 1/2% Subordinated Debentures. The
redemption price for the 10 1/2% Senior Notes was equal to $1,071 plus
accrued interest for each $1,000 principal amount of notes. The redemption price
for the 8 3/8% Sinking Fund Debentures due 2017 was equal to $1,054.44 plus
accrued interest for each $1,000 principal amount of debentures. The redemption
price for the 7 3/8% Sinking Fund Debentures due 2001 was equal to $1,005.60
plus accrued interest for each $1,000 principal amount of debentures. The
redemption price for the 13 1/2% Subordinated Debentures was equal to $1,067.50
plus accrued interest for each $1000 principal amount of debentures. These
redemptions were funded with borrowings under the 1991 Credit Agreement,
internally generated cash flow, and, in the case of the 8 3/8% Sinking Fund
Debentures due 2017, proceeds from Holdings' Series C Preferred Stock offering.
On December 7, 1994, Nabisco, Inc. borrowed $1.35 billion under the Nabisco
1994 Credit Agreement to repay a portion of Nabisco's intercompany indebtedness
to RJRN. RJRN used the proceeds of the repayment to reduce borrowings under the
1991 Credit Agreement.
The Registrants' credit agreement dated as of April 5, 1993, as amended (the
"1993 Credit Agreement" and, together with the 1991 Credit Agreement, the
"Credit Agreements"), under which commitments terminate on April 3, 1995,
provides a back-up line of credit to support commercial paper issuances of up to
$1 billion. Availability thereunder is reduced by an amount equal to the
aggregate amount of domestic commercial paper outstanding. At December 31, 1994,
approximately $864 million of commercial paper was outstanding. Accordingly,
$136 million was available under the 1993 Credit Agreement at December 31, 1994.
Holdings and RJRN expect to obtain bank consent to extend the maturity date of
the 1993 Credit Agreement for an additional 364 days.
Based on RJRN's intention and ability to continue to refinance, for more
than one year, the amount of its commercial paper borrowings outstanding either
in the commercial paper market or with additional borrowings under the 1991
Credit Agreement, the commercial paper borrowings have been included under
"Long-term debt".
The payment of dividends and the making of distributions by Holdings to its
stockholders and by Nabisco to RJRN are subject to direct and indirect
restrictions under certain financing agreements and debt instruments of the
Registrants and their subsidiaries. With certain exceptions, the Nabisco 1994
Credit Agreement limits prepayments of Nabisco's indebtedness to RJRN and
restricts dividends and distributions by Nabisco to $300 million plus 50% of
Nabisco's cumulative consolidated net income since January 1, 1995. Loans and
advances by Nabisco to RJRN are generally subject to a $100 million limit. The
Nabisco 1994 Credit Agreement also limits the ability of Nabisco to incur
indebtedness, engage in transactions with stockholders and affiliates, create
liens, sell certain assets and securities and engage in certain mergers or
consolidations. These restrictions have not had and are not expected to have a
material effect on the ability of Nabisco Holdings Corp. to pay its anticipated
dividends to RJRN, or on the ability of RJRN to meet its obligations.
F-19
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)
The Credit Agreements limit the payment of dividends by Holdings.
Specifically, the Credit Areements generally restrict dividends and
distributions by Holdings to $1 billion, plus 50% of cumulative
consolidated net income since January 1, 1995, plus the net cash proceeds
of up to $250 million in any twelve month period from issuances of its
equity securities. The Credit Agreements and certain other financing
agreements limit the ability of Holdings and its subsidiaries to incur
indebtedness, engage in transactions with stockholders and affiliates, create
liens, sell or dispose of certain assets and certain subsidiaries' stock and
engage in certain mergers or consolidations. Holdings and RJRN believe that they
and their subsidiaries are currently in compliance with all convenants and
restrictions imposed by the terms of their indebtedness.
The estimated fair value of Holdings' consolidated long-term debt as of
December 31, 1994 and 1993 was approximately $10.7 billion and $12.4 billion,
respectively, based on available market quotes, discounted cash flows and book
values, as appropriate. The estimated fair value is lower by $444 million and
higher by $400 million than the carrying amounts of Holdings' long-term debt at
December 31, 1994 and 1993, respectively, as a result of the level of market
interest rates at December 31, 1994 and 1993 compared with the interest rates
associated with Holdings' debt obligations. Considerable judgment was required
in interpreting market data to develop the estimates of fair value. In addition,
the use of different market assumptions and/or estimation methodologies may have
had a material effect on the estimated fair value amounts. Accordingly, the
estimated fair value of Holdings' consolidated long-term debt as of December 31,
1994 and 1993 is not necessarily indicative of the amounts that Holdings could
realize in a current market exchange.
NOTE 11--COMMITMENTS AND CONTINGENCIES
TOBACCO-RELATED LITIGATION
Various legal actions, proceedings and claims are pending or may be
instituted against R. J. Reynolds Tobacco Company ("RJRT") or its affiliates or
indemnitees, including those claiming that lung cancer and other diseases have
resulted from the use of or exposure to RJRT's tobacco products. During 1994, 32
new actions were filed or served against RJRT and/or its affiliates or
indemnitees and 14 such actions were dismissed or otherwise resolved in favor of
RJRT and/or its affiliates or indemnitees without trial. A total of 54 such
actions in the United States and one against RJRT's Canadian subsidiary were
pending on December 31, 1994. As of February 17, 1995, 55 active cases were
pending against RJRT and/or its affiliates or indemnitees, 54 in the United
States and one in Canada. The United States cases are in 23 states and are
distributed as follows: thirteen in Louisiana, eight in Texas, three in each of
Indiana, Mississippi and Tennessee, two in each of Alabama, California, Florida,
Minnesota, New Jersey and West Virginia and one in each of Colorado, Ohio,
Illinois, Kansas, Washington, Oklahoma, Massachusetts, Nevada, South Carolina,
New Hampshire, New York and Pennsylvania. Of the 54 active cases in the United
States, 33 are pending in state court and 21 in federal court.
Five of the 54 active cases in the United States involve alleged non-smokers
claiming injuries resulting from exposure to environmental tobacco smoke. Seven
cases, which are described more specifically below, purport to be class actions
on behalf of thousands of individuals. Purported classes include individuals
claiming to be addicted to cigarettes, flight attendants alleging personal
injury from
F-20
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
exposure to environmental tobacco smoke in their workplace and, in one case,
parents claiming that an RJRT advertising campaign constitutes an unfair trade
practice.
The plaintiffs in these actions seek recovery on a variety of legal
theories, including strict liability in tort, design defect, negligence, breach
of warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, unjust enrichment, indemnity and common law public nuisance.
Punitive damages, often in amounts ranging into the hundreds of millions of
dollars, are specifically pleaded in 27 cases in addition to compensatory and
other damages. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Liability and
Advertising Act, as amended (the "Cigarette Act") of some or all such claims
arising after 1969; the lack of any defect in the product; assumption of the
risk; comparative fault; lack of proximate cause; and statutes of limitations or
repose. Juries have found for plaintiffs in two smoking and health cases in
which RJRT was not a defendant, but in one such case, which has been appealed by
both parties, no damages were awarded. The jury awarded plaintiffs $400,000 in
the other such case, Cipollone v. Liggett Group, Inc., et al., which award was
overturned on appeal and the case was subsequently dismissed.
On June 24, 1992, the United States Supreme Court in Cipollone held that
claims that tobacco companies failed to adequately warn of the risks of smoking
after 1969 and claims that their advertising and promotional practices
undermined the effect of warnings after that date were preempted by the
Cigarette Act. The Court also held that claims of breach of express warranty,
fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's
decision was announced through a plurality opinion, and further definition of
how Cipollone will apply to other cases must await rulings in those cases.
Certain legislation proposed in recent years in Congress, among other
things, would eliminate any such preemptive effect on common law damage actions
for personal injuries. RJRT is unable to predict whether such legislation will
be enacted and, if so, in what form, or whether such legislation would be
intended by Congress to apply retroactively. The passage of such legislation
could increase the number of cases filed against cigarette manufacturers,
including RJRT.
Set forth below are descriptions of class action lawsuits, a suit in which
plaintiffs seek to act as private attorneys general, actions brought by state
attorneys general in Minnesota, Mississippi and West Virginia, an action
brought by the State of Florida and pending investigations relating to RJRT's
tobacco business.
In 1991, in Broin v. Philip Morris Company, Inc. et al., a purported class
action against certain tobacco industry defendants, including RJRT, was brought
by flight attendants, claiming to represent a class of 60,000 individuals,
alleging personal injury caused by exposure to environmental tobacco smoke in
their workplace. In December 1994, the Florida state court certified a class
consisting of "all non-smoking flight attendants who are or have been employed
by airlines based in the United States and are suffering from diseases and
disorders caused by their exposure to secondhand cigarette smoke in airline
cabins." The defendants have appealed the ruling to the Florida Third District
Court of Appeal.
In March 1994, Castano v. The American Tobacco Company, et. al., a purported
class action, was filed in the United States District Court for the Eastern
District of Louisiana against tobacco industry defendants, including RJRT,
seeking certification of a class action on behalf of all United States residents
who allegedly are or claim to be addicted, or are the legal survivors of persons
who allegedly
F-21
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
were addicted, to tobacco products manufactured by defendants. The complaint
alleges that cigarette manufacturers manipulated the levels of nicotine in their
tobacco products to induce addiction in smokers. Plaintiffs' motion for
certification of the class was granted in part on February 17, 1995. The
district court certified core liability issues (fraud, negligence, breach of
warranty, both express and implied, intentional tort, strict liability and
consumer protection statutes), and punitive damages. Not certified were issues
of injury-in-fact, proximate cause, reliance, affirmative defenses, and
compensatory damages. The defendants plan to pursue appellate remedies.
In March 1994, Lacey v. Lorillard Tobacco Company, Inc., et. al. a purported
class action, was filed in Circuit Court, Fayette County, Alabama against three
cigarette manufacturers, including RJRT. Plaintiff, who claims to represent all
smokers who have smoked or are smoking cigarettes manufactured and sold by
defendants in the state of Alabama, seeks compensatory and punitive damages not
to exceed $48,500 per class member and injunctive relief arising from
defendants' alleged failure to disclose additives used in their cigarettes. In
April 1994, defendants removed the case to the United States District Court for
the Northern District of Alabama.
In April 1994, Sparks v. R.J. Reynolds Tobacco Company, et al. was brought
in Washington state court on behalf of a purported class of "parents with a
conscience" alleging that an RJRT advertising campaign targets minors and
constitutes an unfair trade practice under Washington state law. In 1994, the
case was removed to the United States District Court for the Western District of
Washington. Defendants' motion to dismiss the case on preemption grounds was
granted on December 9, 1994. Plaintiffs have filed a notice of appeal.
In May 1994, Engle v. R.J. Reynolds Tobacco Company, et al., was filed in
Circuit Court, Eleventh Judicial District, Dade County, Florida against tobacco
manufacturers, including RJRT, and other members of the industry, by plaintiffs
who allege injury and purport to represent a class of all United States citizens
and residents who claim to be addicted, or who claim to be legal survivors of
persons who allegedly were addicted, to tobacco products. On October 28, 1994, a
state court judge in Miami granted plaintiffs' motion to certify the class. The
defendants have appealed that ruling to the Florida Third District Court of
Appeal.
In September 1994, Granier v. American Tobacco Company, et al., a purported
class action apparently patterned after the Castano case, was filed in the
United States District Court for the Eastern District of Louisiana against
tobacco industry defendants, including RJRT. Plaintiffs seek certification of a
class action on behalf of all residents of the United States who have used and
purportedly became addicted to tobacco products manufactured by defendants. The
complaint alleges that cigarette manufacturers manipulated the levels of
nicotine in tobacco products for the purpose of addicting consumers. By
agreement of the parties, all action in this case was stayed pending
determination of the motion for class certification in the Castano case.
In January 1995, a purported class action was filed in the Ontario Canada
Court of Justice against RJR-MacDonald, Inc. and two other Canadian cigarette
manufacturers. The lawsuit, Le Tourneau, et al. v. Imperial Tobacco Company,
Ltd., et al., seeks certification of a class of persons who have allegedly
become addicted to the nicotine in cigarettes or who had such alleged addiction
heightened or maintained through the use of cigarettes, and who have allegedly
suffered loss, injury, and damage in consequence, together with persons with
Family Law Act claims in respect to the claims of such allegedly addicted
persons, and the estates of such allegedly addicted persons. Theories of
recovery
F-22
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
pleaded include negligence, strict liability, failure to warn, deceit, negligent
misrepresentation, implied warranty, and conspiracy. The relief sought consists
of damages of three million dollars, punitive damages, funding of nicotine
addiction rehabilitation centers, interest and costs. As of February 21, 1995,
RJR-MacDonald, Inc. had not yet been served with a copy of the complaint.
In March 1994, Allman v. Philip Morris, Inc., et al. and Higley v. Philip
Morris, Inc., et al. were filed in the United States District Court for the
Southern District of California against industry members and others, including
RJRT, on behalf of a purported class of persons claiming to be addicted to
cigarettes who had been prescribed treatment using the nicotine transdermal
system. Plaintiffs assert a violation of the Racketeer Influenced and Corrupt
Organizations Act and claim unspecified actual and treble damages. In April
1994, the two cases were combined into a single amended complaint and
plaintiffs' counsel agreed to dismiss the Higley case. On September 28, 1994,
the court granted the defendants' motion to dismiss the remaining case with
prejudice. Plaintiffs filed a notice of appeal, but the parties later stipulated
to a dismissal. An order was entered on February 13, 1995 dismissing the case.
In June 1994, in Mangini v. R.J. Reynolds Tobacco Company, et al., the
California Supreme Court ruled that the plaintiffs' claim that an RJRT
advertising campaign constitutes unfair competition under the California
Business and Professions Code was not preempted by the Cigarette Act. The suit
is similar to the Sparks case pending in Washington, except that the plantiffs
here are acting as private attorneys general rather than on behalf of a
purported class. This opinion allows plaintiffs to pursue their lawsuit which
had been dismissed at the trial court level. On September 28, 1994, the
defendants in this case filed a Petition for Certiorari to the United States
Supreme Court, which was denied on December 28, 1994. The case has been remanded
to the trial court where additional defendants, including RJRN, have been added.
In June 1994, in Moore v. The American Tobacco Company, et al., RJRN and
RJRT were named along with other industry members as defendants in an action
brought by the Mississippi state attorney general on behalf of the state to
recover state funds paid for health care and medical and other assistance to
state citizens suffering from diseases and conditions allegedly related to
tobacco use. This suit, which was brought in Chancery (non-jury) Court, Jackson
County, Mississippi also seeks an injunction from "promoting" or "aiding and
abetting" the sale of cigarettes to minors. Both actual and punitive damages are
sought in unspecified amounts. Motions by the defendants to dismiss the case or
to transfer it to circuit (jury) court were denied on February 21, 1995 and the
case will proceed in Chancery Court. The defendants are considering their
options regarding appeal.
In August 1994, RJRT and other U.S. cigarette manufacturers were named as
defendants in an action instituted on behalf of the state of Minnesota and on
behalf of Blue Cross and Blue Shield of Minnesota to recover the costs of
medical expenses paid by the state and by Blue Cross/Blue Shield that were
incurred in the treatment of diseases allegedly caused by cigarette smoking. The
suit, Minnesota v. Philip Morris, et al., alleges consumer fraud, unlawful and
deceptive trade practices, false advertising and restraint of trade, and it
seeks injunctive relief and money damages, trebled for violations of the state
antitrust law.
In September 1994, the Attorney General of West Virginia filed suit against
RJRT, RJRN and twenty-one additional defendants in state court in West Virginia.
The lawsuit, McGraw v. American Tobacco Company, et al., is similar to those
previously filed in Mississippi and Minnesota. It seeks
F-23
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
recovery for medical expenses incurred by the state in the treatment of diseases
statistically associated with cigarette smoking and requests an injunction
against the promotion and sale of cigarettes and tobacco products to minors. The
lawsuit also seeks a declaration that the state of West Virginia, as plaintiff,
is not subject to the defenses of statute of repose, statute of limitations,
contributory negligence, comparative negligence, or assumption of the risk.
On February 21, 1995, the state of Florida filed a suit against RJRT and
RJRN, along with other industry members, their holding companies and other
entities. The state is seeking Medicaid reimbursement under various theories of
liability and injunctive relief to: prevent the defendants from engaging in
consumer fraud; disclose and publish all research conducted directly or
indirectly by the industry; fund a corrective public education campaign on the
issues of smoking and health in Florida; prevent the distribution and sale of
cigarettes to minors under the age of eighteen; fund clinical smoking cessation
programs in the state of Florida; dissolve the Council for Tobacco Research and
the Tobacco Institute or divest ownership, sponsorship, or membership in both;
and disgorge all profits from sales of cigarettes in Florida. Neither RJRT nor
RJRN has been served with a copy of the complaint as of February 21, 1995.
The suit by the state of Florida was brought under a statute which was
amended effective July 1994 to allow the state to bring an action in its own
name against the tobacco industry to recover amounts paid by the state under its
Medicaid program to treat illnesses statistically associated with cigarette
smoking. The amended statute does not require the state to identify the
individual who received medical care, permits a lawsuit to be filed as a class
action and eliminates the compartive negligence and assumption of risk defenses.
The Florida statute is being challenged on state and federal constitutional
grounds in a lawsuit brought by Philip Morris Companies Inc., Associated
Industries of Florida, Publix Supermarkets, and National Association of
Convenience Stores in June 1994. On February 20, 1995, RJRT and Philip Morris
Incorporated filed a petition with the Supreme Court of Florida to prohibit
Florida's Agency for Health Care Administration and the Department of Business
and Professional Regulation from filing and maintaining a lawsuit against the
tobacco industry under this statute.
RJRT understands that a grand jury investigation being conducted in the
Eastern District of New York is examining possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research--USA,
Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this
investigation.
RJRT received a civil investigative demand dated January 11, 1994 from the
U.S. Department of Justice requesting broad documentary information from RJRT.
Although the request appears to focus on tobacco industry activities in
connection with product development efforts, it also requests general
information concerning contacts with competitors. RJRT is unable to predict the
outcome of this investigation.
-------------------
Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants in
similar actions, even if such rulings are not final, could adversely affect the
litigation against RJRT or its affiliates or indemnitees and increase the number
of such claims. Although it is impossible to predict the outcome of such events
or their effect on RJRT, a significant increase in litigation activities could
have an adverse effect on RJRT. RJRT believes that it has a number of valid
defenses to any such
F-24
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
actions, including but not limited to those defenses based on preemption under
the Cipollone decision, and RJRT intends to defend vigorously all such actions.
The Registrants believe that the ultimate outcome of all pending litigation
matters should not have a material adverse effect on the financial position of
either of the Registrants; however, it is possible that the results of
operations or cash flows of the Registrants in particular quarterly or annual
periods or the financial condition of the Registrants could be materially
affected by the ultimate outcome of certain pending litigation matters.
Management is unable to derive a meaningful estimate of the amount or range of
any possible loss in any particular quarterly or annual period or in the
aggregate.
COMMITMENTS
At December 31, 1994, other commitments totalled approximately $556 million,
principally for minimum operating lease commitments, the purchase of machinery
and equipment and other contractual arrangements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT CONCENTRATIONS
OF CREDIT RISK
Certain financial instruments with off-balance sheet risk have been entered
into by RJRN to manage its interest rate and foreign currency exposures.
Interest Rate Arrangements
RJRN manages its interest rate exposure by adjusting its mix of floating
rate debt and fixed rate debt. As part of such management of interest rate
exposure, RJRN has entered into interest rate swaps, options, caps and other
interest rate arrangements, including written options and other financial
instruments having a risk profile substantially similar to written options.
As a result of the impact of higher market interest rates during 1994, RJRN
recognized additional interest expense of approximately $22 million associated
with its interest rate derivative instruments. However, such interest rate
derivative instruments resulted in lower interest expense during 1993 and 1992
of approximately $70 million and $15 million, respectively. Included in the
1994 additional interest expense is approximately $45 million related to RJRN'S
outstanding written options and interest rate derivatives with embedded
written optionality, all of which were canceled during 1994. Also as part of
RJRN's ongoing management of its interest rate exposure during 1994, RJRN
effectively neutralized the effects of any further changes in market interest
rates on the remainder of its outstanding derivative interest rate
instruments (approximately $1.8 billion notional amount at December 31, 1994)
through the purchase of offsetting positions (approximately $1.8 billion
notional amount at December 31, 1994). Accordingly, as a result of higher
interest rates on the above instruments, approximately $39 million, $28
million and $5 million of additional interest expense remains to be
recognized in 1995, 1996 and 1997, respectively. At December 31, 1994 and
1993, RJRN had outstanding interest rate swaps, options, caps and other
interest rate arrangements with financial institutions having a total gross
notional principal amount of $3.6 billion and $5.7 billion, respectively.
Although the
F-25
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
arrangements outstanding at December 31, 1994 have a net notional amount of $0,
these arrangements mature as follows:
NOTIONAL PRINCIPAL AMOUNT
----------------------------------------------------
TYPE OF INSTRUMENT 1995 1996 1997 1998 TOTAL
- --------------------------------------- ---- ------ ------ ------ ------
(AMOUNTS IN MILLIONS)
Variable rate pay swaps................ $400 $ 600 $ 750 $ 50 $1,800
Fixed rate pay swaps................... 400 600 750 50 1,800
---- ------ ------ ------ ------
$800 $1,200 $1,500 $ 100 $3,600
---- ------ ------ ------ ------
---- ------ ------ ------ ------
In 1994, RJRN adopted a policy to utilize interest rate derivative
transactions that will adjust the mix of floating rate debt and fixed rate
debt on a one for one basis.
The estimated fair value of these arrangements as of December 31, 1994 and
1993 was unfavorable by approximately $72 million and favorable by approximately
$37 million, respectively, based on calculations from independent third parties
for similar arrangements.
When interest rate swaps and purchased options and other interest rate
arrangements effectively hedge interest rate exposures, the differential to be
paid or received is accrued and recognized in interest expense and may change as
market interest rates change. If an arrangement is terminated or effectively
terminated prior to maturity, then the realized or unrealized gain or loss is
effectively recognized over the remaining original life of the agreement if the
hedged item remains outstanding, or immediately, if the underlying hedged
instrument does not remain outstanding. If the arrangement is not terminated or
effectively terminated prior to maturity, but the underlying hedged instrument
is no longer outstanding, then the unrealized gain or loss on the related
interest rate swap, option, cap or other interest rate arrangement is recognized
immediately. In addition, for written options and other financial instruments
(or components thereof) having a risk profile substantially similar to written
options, changes in market value result in the current recognition of any
related gains or losses.
Foreign Currency Arrangements
At December 31, 1994 and 1993, RJRN had outstanding forward foreign exchange
contracts with banks to purchase or sell an aggregate notional principal amount
of $807 million and $476 million, respectively. Such contracts were primarily
entered into to hedge future commitments. The purpose of RJRN's foreign currency
hedging activities is to protect RJRN from risk that the eventual dollar cash
flows resulting from transactions with international parties will be adversely
affected by changes in exchange rates. The estimated fair value of these
arrangements as of December 31, 1994 and 1993 was unfavorable by approximately
$4 million and favorable by approximately $3 million, respectively, based on
calculations from independent third parties for similar arrangements.
The forward foreign exchange contracts and other hedging arrangements
entered into by RJRN generally mature at the time the hedged foreign currency
transactions are settled. Gains or losses on forward foreign currency
transactions are determined by changes in market rates and are generally
included at settlement in the basis of the underlying hedged transaction. To the
extent that the foreign currency transaction does not occur, gains and losses
are recognized immediately.
F-26
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The above interest rate and foreign currency arrangements entered into by
RJRN involve, to varying degrees, elements of market risk as a result of
potential changes in future interest and foreign currency exchange rates. To the
extent that the financial instruments entered into remain outstanding as
effective hedges of existing interest rate and foreign currency exposure, the
impact of such potential changes in future interest and foreign currency
exchange rates on the financial instruments entered into would offset the
related impact on the items being hedged. Also, RJRN may be exposed to credit
losses in the event of non-performance by the counterparties to these financial
instruments. However, RJRN continually monitors its positions and the credit
rating of its counterparties and therefore, does not anticipate any
non-performance.
There are no significant concentrations of credit risk with any individual
counterparties or groups of counterparties as a result of any financial
instruments entered into including those financial instruments discussed above.
SUMMARY FINANCIAL INSTRUMENTS FAIR VALUE INFORMATION
At December 31, 1994, the carrying amounts and estimated fair values of
RJRN's financial instruments were as follows:
ASSETS/(LIABILITIES)
----------------------------
FINANCIAL INSTRUMENTS CARRYING VALUE FAIR VALUE
- -------------------------------------------------------------------- -------------- ----------
(AMOUNTS IN MILLIONS)
Interest rate swaps:
Variable rate pay swaps........................................... $ (2) $ (76)
-------------- ----------
Fixed rate pay swaps.............................................. $ -- $ 4
-------------- ----------
Forward foreign exchange contracts.................................. $ (1) $ (4)
-------------- ----------
Total debt.......................................................... $(11,161) $ (10,717)
-------------- ----------
F-27
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL
The changes in Common Stock and paid-in capital are shown as follows:
1994 1993
------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------- ------------- ------
(DOLLARS IN MILLIONS)
Common Stock--$0.01 par value--authorized 2,200,000,000 shares at
December 31, 1994:
Balance at beginning of year.................................... 1,138,011,292 $ 11 1,134,648,542 $ 11
Shares issued during the period................................. 13,907,874 -- 3,692,911 --
Conversion of Series A Preferred Stock.......................... 210,000,000 2 -- --
Management shares repurchased and
cancelled..................................................... (262,283) -- (330,161) --
------------- ------- ------------- ------
Balance at end of year...................................... 1,361,656,883 $ 13 1,138,011,292 $ 11
------------- ------- ------------- ------
------------- ------- ------------- ------
Paid-in capital:
Balance at beginning of year.................................... $ 8,778 $9,048
Shares issued during the period, net of stock issuance costs.... 1,754 (16)
Tax benefits recorded on shares issued to management and ESOP
shares allocated................................................. 9 3
Management shares and stock options repurchased and cancelled... (1) (2)
Preferred stock dividends....................................... (393) (246)
Warrants repurchased and cancelled.............................. -- --
Other........................................................... -- (9)
------- ------
Balance at end of year...................................... $10,147 $8,778
------- ------
------- ------
1992
------------------------
SHARES AMOUNT
------------- ------
Common Stock--$0.01 par value--authorized 2,200,000,000 shares at
December 31, 1994:
Balance at beginning of year.................................... 1,121,658,569 $ 11
Shares issued during the period................................. 13,117,248 --
Conversion of Series A Preferred Stock.......................... -- --
Management shares repurchased and
cancelled..................................................... (127,275) --
------------- ------
Balance at end of year...................................... 1,134,648,542 $ 11
------------- ------
------------- ------
Paid-in capital:
Balance at beginning of year.................................... $9,352
Shares issued during the period, net of stock issuance costs.... (8 )
Tax benefits recorded on shares issued to management and ESOP
shares allocated................................................. 4
Management shares and stock options repurchased and cancelled... (6 )
Preferred stock dividends....................................... (207 )
Warrants repurchased and cancelled.............................. (87 )
Other........................................................... --
------
Balance at end of year...................................... $9,048
------
------
The changes in stock options are shown as follows:
1994 1993 1992
--------------------------- --------------------------- --------------------------
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ----------- ---------- ------------ ---------- -----------
Balance at beginning of year:
Stock Option Plan...................... 23,240,112 $5.00-10.45 25,355,948 $ 5.00-10.45 25,814,648 $5.00- 5.75
Long Term Incentive Plan............... 64,632,634 4.52-11.56 19,654,600 7.50-11.56 12,990,600 7.50-11.63
Options granted to management investors
and directors:
Stock Option Plan...................... 160,800 6.88 2,400 5.00
Long Term Incentive Plan............... 1,777,000 5.50-7.44 49,213,100 4.52- 9.13 7,004,000 8.25-10.125
Management options exercised:
Stock Option Plan...................... (4,594,737) 5.00-5.75 (1,116,046) 5.00
Long Term Incentive Plan............... (35,855) 5.56
Management options repurchased and
cancelled:
Stock Option Plan...................... (32,813) 5.00-11.25 (999,790) 5.00- 8.55 (461,100) 5.00-10.45
Long Term Incentive Plan............... (4,315,524) 5.56-10.13 (4,235,066) 5.56-10.00 (340,000) 7.50-11.63
----------- ---------- ----------
Balance at end of year:
Stock Option Plan...................... 18,773,362 5.00-10.45 23,240,112 5.00-10.45 25,355,948 5.00-10.45
Long Term Incentive Plan............... 62,058,255 4.52-11.56 64,632,634 4.52-11.56 19,654,600 7.50-11.56
----------- ---------- ----------
80,831,617 4.52-11.56 87,872,746 4.52-11.56 45,010,548 5.00-11.56
----------- ---------- ----------
----------- ---------- ----------
At December 31, 1994, options were exercisable as to 43,974,207 shares,
compared with 20,018,041 shares at December 31, 1993, and 15,590,909 shares at
December 31, 1992. As of December 31, 1994, options for 100,351,127 shares of
Common Stock were available for future grant.
F-28
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
To provide an incentive to attract and retain key employees responsible for
the management and administration of the business affairs of Holdings and its
subsidiaries, on June 15, 1989 the board of directors of Holdings adopted the
Stock Option Plan for Directors and Key Employees of RJR Holdings Corp. and
Subsidiaries (the "Stock Option Plan") pursuant to which options to purchase
Common Stock may be granted. On June 16, 1989 the Stock Option Plan was approved
by the written consent of the holders of a majority of the Common Stock.
Non-employee directors or key employees of Holdings or any subsidiary of
Holdings are eligible to be granted options under the Stock Option Plan. A
maximum of 30,000,000 shares of Common Stock (which may be adjusted in the event
of certain capital changes) may be issued under the Stock Option Plan. The
options to key employees granted under the Stock Option Plan generally vest over
a five year period and the exercise price of such options is generally the fair
market value of the Common Stock on the date of grant. Each eligible director
is, upon becoming a director, granted an option under the Stock Option Plan to
purchase 30,000 shares of Common Stock. The options have an exercise price equal
to the fair market value of the Common Stock on the date of grant. They cannot
be exercised for six months following the date of grant but, thereafter, are
exercisable for ten years from the date of grant. In addition, each eligible
director receives an annual grant of stock options which, beginning in 1995,
will be made on the date of the director's election or re-election to the Board
of Directors. The annual grant is intended to deliver a predetermined value, and
the number of shares of Common Stock subject to the option is determined based
on an internal valuation methodology. In 1994, each eligible director received a
stock option to purchase 5,900 shares of Common Stock. The annually granted
stock options have a 15 year term and vest over three years (33% on the first
and second anniversaries of the date of grant and 34% on the third anniversary).
On August 1, 1990, the board of directors of Holdings adopted the 1990 Long
Term Incentive Plan (the "1990 LTIP") which was approved on such date by the
written consent of the holders of a majority of the Common Stock. The 1990 LTIP
authorizes grants of incentive awards ("Grants") in the form of "incentive stock
options" under Section 422 of the Internal Revenue Code, other stock options,
stock appreciation rights, restricted stock, purchase stock, dividend equivalent
rights, performance units, performance shares or other stock-based grants.
Awards under the 1990 LTIP may be granted to key employees of, or other persons
having a unique relationship to, Holdings and its subsidiaries. Directors who
are not also employees of Holdings and its subsidiaries are ineligible for
Grants. A maximum of 105,000,000 shares of Common Stock (which may be adjusted
in the event of certain capital changes) may be issued under the 1990 LTIP
pursuant to Grants. The 1990 LTIP also limits the amount of shares which may be
issued pursuant to "incentive stock options" and the amount of shares subject to
Grants which may be issued to any one participant. As of December 31, 1994,
purchase stock, stock options other than incentive stock options, restricted
stock, performance shares, performance units and other stock-based grants have
been granted under the 1990 LTIP. The options granted before 1993 under the 1990
LTIP generally will vest over a three year period ending December 31, 1995.
Prior to January 1, 1993, such options had vested over a six to eight year
period. Options granted in 1994 vest over a three year period beginning from the
date of grant. The exercise prices of such options are between $5.50 and $7.44
per share. In connection with the purchase stock grants awarded during 1994,
1993 and 1992, 0 shares, 622,222 shares and 495,000 shares, respectively, of
Common Stock were purchased and options to purchase four shares were granted for
every share of such Common Stock purchased. In addition, arrangements were made
enabling purchasers to borrow on a secured basis from Holdings the price of the
stock purchased, as well as the taxes due on any taxable income
F-29
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
recognized in connection with such purchases. The current annual interest rate
on such arrangements, which was set in July 1994 at the then applicable federal
rate for long-term loans, is 6.37%. These borrowings plus accrued interest and
taxes must generally be repaid within two years following termination of active
employment. During 1994, 4,420,500 shares of Common Stock were awarded in
connection with restricted stock grants made. These shares are subject to
restrictions that will lapse on July 15, 1997 (or earlier under certain
circumstances). Other stock-based awards were made in 1994 under the 1990 LTIP
to individuals who previously acquired certain purchase stock under the 1990
LTIP. Under this program, such individuals receive grants of Common Stock or
cash at the Company's election on either three or four annual grant dates
beginning July 1994 and ending either July 1, 1996 or July 1, 1997. The fair
market value of Common Stock to be awarded on each grant date is equal to the
excess, if any, of (i) 33% or 25%, respectively, of the maximum amount the
individual could have borrowed to acquire purchase stock, over (ii) the then
fair market value of the same percentage of such individual's purchase stock.
The grant is increased by the amount of presumed borrowing costs and the amount
necessary to hold the individual harmless from income taxes due as a result of
the grant. No grant will be made on a grant date if, on such grant date, the
amount determined under clause (ii) above equals or exceeds the amount
determined in clause (i) above.
In connection with the initial public offering of shares of Nabisco in
January 1995, the board of directors of Nabisco adopted the Nabisco Holdings
Corp. 1994 Long Term Incentive Plan (the "Nabisco LTIP") which is substantially
similar to the LTIP except that stock-based awards are denominated in shares of
Class A Common Stock of Nabisco. On January 19, 1995 and on January 27, 1995,
employees of Nabisco with outstanding stock options under the LTIP were
permitted to elect to surrender 100% of their outstanding LTIP stock options in
exchange for the grant of options under the Nabisco LTIP. Charles M. Harper, as
chairman of the board of directors of Nabisco, was permitted to surrender 50% of
his outstanding LTIP options on January 19, 1995 in exchange for Nabisco LTIP
options. Options to purchase a total of 24,686,068 shares of Common Stock were
surrendered pursuant to this program. Also on January 19, 1995, Holdings
purchased one-half of Mr. Harper's restricted LTIP purchase shares (311,111
shares) at the then fair market value ($5.625 per share), and he used the
proceeds to acquire similarly restricted shares of Class A Common Stock of
Nabisco.
In addition to the shares purchased under the 1990 LTIP, approximately
550,000 shares of Common Stock were sold during 1991 to certain management
investors. No such sales occurred in 1993 or 1994. Unlike the shares sold under
the 1990 LTIP, a portion of these shares remain subject to significant
restrictions on transferability.
At December 31, 1994, Holdings' outstanding classes of capital stock
consisted of the following: the Common Stock, the Series B Cumulative Preferred
Stock, par value $.01 per share (the "Series B Preferred Stock"), and the ESOP
Convertible Preferred Stock, stated value of $16.00 per share and par value of
$.01 per share (the "ESOP Preferred Stock"). In addition, Holdings had its
Cumulative Convertible Preferred Stock, stated value of $25 per share and par
value of $.01 per share (the "Cumulative Convertible Preferred Stock"),
outstanding until the fourth quarter of 1993 and its Series A Conversion
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"),
outstanding until the fourth quarter of 1994. All of the classes of preferred
stock of Holdings rank senior to the Common Stock as to dividends and
preferences in liquidation. Holdings' charter authorized 150,000,000 preferred
shares at December 31, 1994 and 1993.
F-30
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
On November 1, 1990, Holdings issued and/or registered 72,032,000 shares of
the Cumulative Convertible Preferred Stock. The Cumulative Convertible Preferred
Stock paid cash dividends at a rate of 11.5% of stated value per annum, payable
quarterly in arrears commencing January 15, 1991. The Cumulative Convertible
Preferred Stock was convertible after May 1, 1991 into shares of Common Stock at
a conversion price of $9 of stated value per share of Common Stock. Holders of
the Cumulative Convertible Preferred Stock converted 379 shares of the stock
into 1,051 shares of Common Stock during 1992 and another 123,523 shares into
342,976 shares of Common Stock during 1993. On December 6, 1993, the outstanding
Cumulative Convertible Preferred Stock was redeemed at a redemption price of
$27.0125 per share plus accrued and unpaid dividends.
On November 8, 1991, Holdings issued 52,500,000 shares of Series A Preferred
Stock and sold 210,000,000 Series A Depositary Shares, each of which represented
one-quarter of a share of Series A Preferred Stock. Each share of Series A
Preferred Stock paid cash dividends at a rate of $3.34 per annum, payable
quarterly in arrears commencing February 18, 1992. On November 15, 1994, the
210,000,000 Series A Depository Shares converted automatically into 210,000,000
shares of Common Stock.
On August 18, 1993, Holdings issued 50,000 shares of Series B Preferred
Stock, and sold 50,000,000 depositary shares ("Series B Depositary Shares") at
$25 per Series B Depositary Share ($1.25 billion) in connection with such
issuance (the "Series B Preferred Stock Offering"). Each share of Series B
Preferred Stock bears cumulative cash dividends at a rate of $2,312.50 per
annum, or $2.3125 per Series B Depositary Share, and is payable quarterly in
arrears commencing December 1, 1993. Each Series B Depositary Share represents
.001 ownership interest in a share of Series B Preferred Stock of Holdings. At
Holdings' option, on or after August 19, 1998, Holdings may redeem shares of the
Series B Preferred Stock (and the Depositary will redeem the number of Series B
Depositary Shares representing the shares of Series B Preferred Stock) at a
redemption price equivalent to $25 per Series B Depositary Share plus accrued
and unpaid dividends thereon. Holdings' ability to redeem the Series B Preferred
Stock is subject to certain restrictions in its credit agreements.
On May 6, 1994, Holdings completed the issuance of 26,675,000 shares of
Series C Preferred Stock in connection with the sale of 266,750,000 Series C
Depositary Shares at $6.50 per depositary share. Approximately $900 million of
the net proceeds from the sale of the Series C Depositary Shares was applied to
the redemption of RJRN's subordinated debentures on May 15, 1994. The remaining
proceeds from the sale of the Series C Depositary Shares were used to repay
indebtedness under the 1991 Credit Agreement and for short-term liquid
investments until they were applied to redeem certain of RJRN's sinking fund
debentures. Each share of Series C Preferred Stock bears cumulative cash
dividends at a rate of $6.012 per annum, or $.6012 per Series C Depositary
Share, payable quarterly in arrears. Each Series C Depositary Share represents a
one tenth ownership interest in a share of Series C Preferred Stock of Holdings.
Each share of Series C Preferred Stock will mandatorily convert into ten shares
of Holdings Common Stock on May 15, 1997, subject to adjustment in certain
events, plus accrued and unpaid dividends thereon. In addition, at Holdings'
option, Holdings may redeem shares of the Series C Preferred Stock (and the
Depositary will redeem the number of Series C Depositary Shares representing
such shares of Series C Preferred Stock) at a redemption price to be paid in
shares of Holdings Common Stock (or, following certain circumstances, other
consideration), plus accrued and
F-31
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)
unpaid dividends. The optional redemption price declines from $112.286 per share
by $.01656 per share on each day following May 6, 1994 to $95.246 per share on
March 15, 1997 and is $94.25 thereafter.
On April 10, 1991, the ESOP borrowed $250 million from Holdings (the "ESOP
Loan") to purchase 15,625,000 shares of ESOP Preferred Stock. The ESOP Loan,
which was renegotiated in 1993, has a final maturity in 2006 and bears interest
at the rate of 8.2% of its stated value per annum. At December 31, 1994, the
ESOP Preferred Stock is convertible into 15,315,130 shares of Common Stock,
subject to adjustment in certain events, and bears cumulative dividends at a
rate of 7.8125% of stated value per annum at least until April 10, 1999, payable
semi-annually in arrears commencing January 2, 1992, when, as and if declared by
the board of directors of Holdings. The ESOP Preferred Stock is redeemable at
the option of Holdings, in whole or in part, at any time on or after April 10,
1999, at an initial optional redemption price of $16.250 per share. The initial
optional redemption price declines thereafter on an annual basis in the amount
of $.125 a year to $16 per share on April 10, 2001, plus accrued and unpaid
dividends. Holders of ESOP Preferred Stock have voting rights with respect to
certain matters submitted to a vote of the holders of the Common Stock.
Effective January 1, 1992, RJRN's matching contributions to eligible employees
under its Capital Investment Plan are being made in the form of ESOP Preferred
Stock. RJRN's matching contribution obligation in respect of each participating
employee is equal to $.50 for every pre-tax dollar contributed by the employee,
up to 6% of the employee's pay. The shares of ESOP Preferred Stock are allocated
at either the floor value of $16 a share or the fair market value of Common
Stock, whichever is higher. During 1994 and 1993, approximately $22 million and
$29 million, respectively, was contributed to the ESOP by RJRN or Holdings and
approximately $19 million and $20 million, respectively, of ESOP dividends were
used to service the ESOP's debt to Holdings.
On February 9, 1989, 15,254,238 warrants were issued to purchase 15,254,238
shares of Common Stock. Such warrants were initially exercisable at an exercise
price of $5.00 per share, subject to adjustment in certain events, at any time
prior to February 9, 1999. On November 8, 1991, the exercise price for the
warrants and the number of shares of Common Stock issuable upon exercise thereof
were adjusted to $4.9164 and 1.017, respectively. During the third quarter of
1992, Holdings repurchased from a limited partnership of which KKR Associates,
an affiliate of Kohlberg Kravis Roberts & Co., L.P, is the sole general partner
and certain affiliates of Merrill Lynch & Co., Inc. 6,182,586 warrants of the
15,254,238 warrants issued on February 9, 1989 for approximately $36 million in
cash. During October 1992, Holdings repurchased from the same parties the
remaining 9,071,652 warrants for approximately $51 million in cash. Each of
these warrants allowed the holder to purchase 1.017 shares of Common Stock for
an exercise price of $4.9164 at any time on or prior to February 8, 1999.
Warrants to purchase 45,529,024 shares of Common Stock were issued in
connection with the sale of the 15% Subordinated Debentures and the Subordinated
Discount Debentures. Such warrants were initially exercisable at an exercise
price of $0.07 per share, subject to adjustment in certain events, and expired
January 31, 1992. On November 8, 1991, the exercise price for the warrants and
the number of shares of Common Stock issuable upon exercise thereof were
adjusted to $0.0688 and 1.017, respectively. During 1992, 12,370,936 warrants
were exercised at $0.0688 per share.
The pro forma net income (loss) per common and common equivalent share for
each of the years within the three year period ended December 31, 1994 reflects
a one-for-five reverse split approved by the Board of Directors of Holdings
which will be submitted to Holdings' stockholders for approval at its Annual
Meeting in April 1995. (See Note 17 to the Consolidated Financial Statements).
F-32
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--RETAINED EARNINGS AND CUMULATIVE TRANSLATION ADJUSTMENTS
Retained earnings (accumulated deficit) at December 31, 1994, 1993 and 1992
includes non-cash expenses related to accumulated trademark and goodwill
amortization of $3.644 billion, $3.015 billion and $2.390 billion, respectively.
The changes in cumulative translation adjustments are shown as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Balance at beginning of period......................... $ (102) $ (47) $ 11
Translation and other adjustments.................... (62) (55) (58)
------ ------ -----
Balance at end of period............................... $ (164) $ (102) $(47)
------ ------ -----
------ ------ -----
NOTE 14--RETIREMENT BENEFITS
RJRN sponsors a number of non-contributory defined benefit pension plans
covering most U.S. and certain foreign employees. Plans covering regular
full-time employees in the tobacco operations as well as the majority of
salaried employees in the corporate groups and food operations provide pension
benefits that are based on credits, determined by age, earned throughout an
employee's service and final average compensation before retirement. Plan
benefits are offered as lump sum or annuity options. Plans covering hourly as
well as certain salaried employees in the corporate groups and food operations
provide pension benefits that are based on the employee's length of service and
final average compensation before retirement. RJRN's policy is to fund the cost
of current service benefits and past service cost over periods not exceeding 30
years to the extent that such costs are currently tax deductible. Additionally,
RJRN participates in several multi-employer and other defined contribution
plans, which provide benefits to certain of RJRN's union employees. Employees in
foreign countries who are not U.S. citizens are covered by various
post-employment benefit arrangements, some of which are considered to be defined
benefit plans for accounting purposes.
A summary of the components of pension expense for RJRN-sponsored plans
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Defined benefit pension plans:
Service cost--benefits earned during the period......... $ 97 $ 76 $ 84
Interest cost on projected benefit obligation........... 256 255 251
Less actual return on plan assets....................... (260) (262) (259)
Net amortization and deferral........................... (2) (4) (4)
------ ------ ------
Total............................................... 91 65 72
Multi-employer and other defined contribution plans....... 36 32 31
------ ------ ------
Total pension expense............................... $ 127 $ 97 $ 103
------ ------ ------
------ ------ ------
F-33
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--RETIREMENT BENEFITS--(CONTINUED)
The principal plans used the following actuarial assumptions for accounting
purposes:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Weighted average discount rate................. 8.75% 7.50%
Rate of increase in compensation levels........ 5.00% 5.00%
Expected long-term rate of return on assets.... 9.50% 9.50%
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at December 31, 1994 and 1993 for RJRN's defined
benefit pension plans.
U.S. PLANS FOREIGN PLANS
------------------------------------------------------------------------ --------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1994
----------------------------------- ----------------------------------- --------------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED
ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS
BENEFITS ASSETS(1) BENEFITS ASSETS(1) BENEFITS EXCEEDED ASSETS
--------------- ------------------ --------------- ------------------ --------------- ---------------
Actuarial
present
value of:
Vested
benefits..... $ 2,318 $ 89 $ 2,252 $ 272 $ 143 $ 187
Non-vested
benefits..... 26 2 225 5 5 25
----- --- ----- --- --- ---
Accumulated
benefit
obligation... 2,344 91 2,477 277 148 212
Effect of
future
salary
increases.... 252 8 296 29 39 40
----- --- ----- --- --- ---
Projected
benefit
obligation... 2,596 99 2,773 306 187 252
Plan assets
at fair
market
value........ 2,542 40 2,529 204 170 106
----- --- ----- --- --- ---
Plan assets
in excess of
(less than)
projected
benefit
obligation... (54) (59) (244) (102) (17) (146)
Unrecognized
net (gain)
loss......... (256) (6) (68) 3 6 29
Unrecognized
prior
service
cost......... (30) (6) (31) (10) (7) 23
----- --- ----- --- --- ---
Net pension
liabilities
recognized
in the
Consolidated
Balance
Sheets....... $ (340) $(71) $ (343) $ (109) $ (18) $ (94)
----- --- ----- --- --- ---
----- --- ----- --- --- ---
DECEMBER 31, 1993
--------------------------------
PLANS WHOSE PLANS WHOSE
ASSETS EXCEEDED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEEDED ASSETS
--------------- ---------------
Actuarial
present
value of:
Vested
benefits..... $ 148 $ 186
Non-vested
benefits..... 6 23
--- ---
Accumulated
benefit
obligation... 154 209
Effect of
future
salary
increases.... 42 31
--- ---
Projected
benefit
obligation... 196 240
Plan assets
at fair
market
value........ 172 109
--- ---
Plan assets
in excess of
(less than)
projected
benefit
obligation... (24) (131)
Unrecognized
net (gain)
loss......... 17 26
Unrecognized
prior
service
cost......... (8) 14
--- ---
Net pension
liabilities
recognized
in the
Consolidated
Balance
Sheets....... $ (15) $ (91)
--- ---
--- ---
- ------------
(1) Of the net pension liability, $(2) million and $34 million were related to
qualified plans at December 31, 1994 and 1993, respectively.
At December 31, 1994, approximately 99 percent of the plans' assets were
invested in listed stocks and bonds and other highly liquid investments. The
balance consisted of various income producing investments.
F-34
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--RETIREMENT BENEFITS--(CONTINUED)
In addition to providing pension benefits, RJRN provides certain health care
and life insurance benefits for retired employees and their dependents.
Substantially all of its regular full-time employees, including certain
employees in foreign countries, may become eligible for those benefits if they
reach retirement age while working for RJRN. Effective January 1, 1992, RJRN
adopted Statement of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions ("SFAS No. 106").
Under SFAS No. 106, RJRN is required to accrue the costs for retirees' health
and other postretirement benefits other than pensions and recognize the unfunded
and unrecognized accumulated benefit obligation for these benefits. RJRN had
previously accrued a liability for postretirement benefits other than pensions
and as a result, SFAS No. 106 did not have a material impact on RJRN's financial
statements.
Net postretirement health and life insurance benefit cost consisted of the
following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Service cost--benefits earned during the period........ $ 17 $ 16 $ 12
Interest cost on accumulated postretirement benefit
obligation........................................... 62 60 58
--- --- ---
Net postretirement health care and life insurance
costs.............................................. $ 79 $ 76 $ 70
--- --- ---
--- --- ---
RJRN's postretirement health and life insurance benefit plans currently are
not funded. The status of the plans was as follows:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
Actuarial present value of accumulated postretirement benefit
obligation:
Retirees......................................................... $638 $693
Fully eligible active plan participants.......................... 95 88
Other active plan participants................................... 216 263
Unrecognized actuarial amounts..................................... 49 (58)
----- -----
Accrued postretirement health care and life insurance
costs............................................................ $998 $986
----- -----
----- -----
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% in 1994, 8% in 1995 and 7% in 1996
gradually declining to 5% by the year 2000 and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost
trend rate for each year would increase the accumulated postretirement benefit
obligation as of December 31, 1994 and the 1994 net postretirement health care
and life insurance costs by approximately 5.8% and 5.2%, respectively.
The assumed discount rate used in determining the accumulated postretirement
benefit obligation was 8.75% and 7.50% as of December 31, 1994 and 1993,
respectively.
Effective January 1, 1993, RJRN adopted Statement of Financial Accounting
Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS No.
112"). Under SFAS No. 112, RJRN is required to accrue the costs for
preretirement postemployment benefits provided to former or inactive employees
and recognize an obligation for these benefits. The adoption of SFAS No. 112 did
not have a material impact on the financial statements of either Holdings or
RJRN.
F-35
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--SEGMENT INFORMATION
Industry Segment Data
Holdings classifies its continuing operations into two industry segments
which are described in Management's Discussion and Analysis of Financial
Condition and Results of Operations, appearing elsewhere herein. Summarized
financial information for these operations is shown in the following tables.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Net sales:
Tobacco.............................................. $ 7,667 $ 8,079 $ 9,027
Food................................................. 7,699 7,025 6,707
------------ ------------ ------------
Consolidated net sales............................. $ 15,366 $ 15,104 $ 15,734
------------ ------------ ------------
------------ ------------ ------------
Operating income:
Tobacco(1)(2)........................................ $ 1,826 $ 893 $ 2,241
Food(1)(2)........................................... 931 624 769
Headquarters (2)..................................... (207) (139) (112)
------------ ------------ ------------
Consolidated operating income...................... $ 2,550 $ 1,378 $ 2,898
------------ ------------ ------------
------------ ------------ ------------
Capital expenditures:
Tobacco.............................................. $ 215 $ 224 $ 189
Food................................................. 455 391 330
------------ ------------ ------------
Consolidated capital expenditures.................. $ 670 $ 615 $ 519
------------ ------------ ------------
------------ ------------ ------------
Depreciation expense:
Tobacco.............................................. $ 228 $ 237 $ 252
Food................................................. 218 207 197
Headquarters......................................... 8 4 6
------------ ------------ ------------
Consolidated depreciation expense.................. $ 454 $ 448 $ 455
------------ ------------ ------------
------------ ------------ ------------
Assets: DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
Tobacco............................................... $19,420 $19,904
Food.................................................. 11,917 11,270
Headquarters(3)....................................... 71 121
-------- --------
Consolidated assets................................. $31,408 $31,295
-------- --------
-------- --------
- ------------
(1) Includes amortization of trademarks and goodwill for Tobacco and Food,
respectively, for the year ended December 31, 1994, of $404 million and $225
million; for the year ended December 31, 1993, of $407 million and $218
million and for the year ended December 31, 1992, of $404 million and $212
million.
(2) The 1993 and 1992 amounts include the effects of the restructuring expense
at Tobacco (1993-- $544 million; 1992--$43 million), Food (1993--$153
million; 1992--$63 million) and Headquarters (1993--$33; 1992--$0), and the
1992 gain ($98 million) from the sale of Holdings' ready-to-eat cold cereal
business (See Note 1 to the Consolidated Financial Statements).
(3) Cash and cash equivalents for the domestic operating companies are included
in Headquarters' assets.
F-36
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--SEGMENT INFORMATION--(CONTINUED)
Geographic Data
The following tables show certain financial information relating to
Holdings' continuing operations in various geographic areas.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Net sales:
United States (including U.S. export sales).......... $ 11,144 $ 11,570 $ 13,182
Europe............................................... 1,934 1,671 1,109
Other geographic areas............................... 3,039 2,794 1,855
Less transfers between geographic areas(1)........... (751) (931) (412)
------------ ------------ ------------
Consolidated net sales............................. $ 15,366 $ 15,104 $ 15,734
------------ ------------ ------------
------------ ------------ ------------
Operating income:(2)
United States........................................ $ 2,159 $ 1,284 $ 2,634
Europe............................................... 272 40 138
Other geographic areas............................... 326 193 238
Headquarters......................................... (207) (139) (112)
------------ ------------ ------------
Consolidated operating income(3)................... $ 2,550 $ 1,378 $ 2,898
------------ ------------ ------------
------------ ------------ ------------
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
Assets:
United States......................................... $26,447 $27,143
Europe................................................ 2,141 1,820
Other geographic areas................................ 2,749 2,211
Headquarters.......................................... 71 121
-------- --------
Consolidated assets................................. $31,408 $31,295
-------- --------
-------- --------
Liabilities of Holdings' continuing operations located
in foreign countries.................................. $ 1,725 $ 1,689
-------- --------
-------- --------
- ------------
(1) Transfers between geographic areas (which consist principally of tobacco
transferred principally from the United States to Europe) are generally made
at fair market value.
(2) The 1993 and 1992 amounts include the effects of the restructuring expense
of $730 million and $106 million, respectively, and a 1992 gain ($98
million) on the sale of Holdings' ready-to-eat cold cereal business (see
Note 1 to the Consolidated Financial Statements).
(3) Includes amortization of trademarks and goodwill of $629 million, $625
million and $616 million for the 1994, 1993 and 1992 periods, respectively.
F-37
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
Holdings for the quarterly periods of 1994 and 1993:
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
1994
Net sales................................................. $3,572 $3,784 $3,966 $4,044
Operating income.......................................... 632 675 678 565
Income before extraordinary item.......................... 194 192 216 162
Net income................................................ 195 46 216 62
Income before extraordinary item per common share(1)...... 0.12 0.11 0.11 0.08
Net income per common share(1)............................ 0.12 0.01 0.11 0.02
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
1993
Net sales................................................. $3,736 $3,719 $3,598 $4,051
Operating income (loss)................................... 683 582 431 (318)
Income (loss) before extraordinary item................... 210 142 74 (429)
Net income (loss)......................................... 163 77 76 (461)
Income (loss) before extraordinary item per common
share(1).................................................... 0.15 0.10 0.04 (0.34)
Net income (loss) per common share(1)..................... 0.12 0.05 0.04 (0.36)
- ------------
(1) Earnings per share is computed independently for each of the periods
presented; therefore, the sum of the earnings per share amounts for the
quarters may not equal the total for the year.
NOTE 17--SUBSEQUENT EVENTS
----------------------------
On January 26, 1995, Nabisco Holdings completed the initial public offering
of 51,750,000 shares of its Class A Common Stock at an initial offering price of
$24.50 per share. Nabisco used all of the approximately $1.2 billion of net
proceeds from the initial public offering to repay a portion of its initial
borrowing under the Nabisco 1994 Credit Agreement. RJRN owns 100% of the
outstanding Class B Common Stock of Nabisco Holdings, which represents
approximately 80.5% of the economic interest in Nabisco Holdings and
approximately 97.6% of its voting power. In connection with the offering,
Holdings, RJRN and Nabisco Holdings entered into agreements to exchange certain
services, to establish tax sharing arrangements and to provide RJRN with certain
preemptive and registration rights with respect to Nabisco Holdings and Nabisco
securities.
Certain provisions in approximately $6 billion of RJRN's publicly held debt
limit the ability of Nabisco Holdings and Nabisco to incur long-term debt. RJRN
and Nabisco are currently considering a transaction in which they would seek
to obtain consents to remove such limitations in order to permit Nabisco to
establish long-term borrowing capacity independent of RJRN and to reduce its
intercompany debt to RJRN. It is anticipated that such consents would be sought
in connection with offers by Nabisco or RJRN to exchange debt of Nabisco for, or
to pay certain cash consent solicitation fees in respect of, all or a portion of
such RJRN debt. RJRN believes that any such transaction would not materially
change the amount of consolidated indebtedness of either RJRN or Nabisco,
although any newly issued debt of RJRN or Nabisco incurred in connection with
the transaction may have maturities, interest rates or other terms that are less
attractive to RJRN or Nabisco, respectively, than the terms of their existing
debt. No assurance can be given that any such restructuring will be pursued or
consummated or as to the timing of any such restructuring.
F-38
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--SUBSEQUENT EVENTS --(CONTINUED)
The Board of Directors of Holdings has declared an initial quarterly
dividend of $.075 per share payable on April 1, 1995 to holders of record as of
March 10, 1995. Holdings expects to continue to pay a quarterly cash dividend on
the Common Stock of $.075 per share or $.30 per share on an annualized basis.
Holdings believes that its adopted policies concerning distributions to
stockholders and the provisions of its credit agreements will not limit its
ability to pay quarterly dividends.
The Board of Directors of Holdings approved a one-for-five reverse split of
the Common Stock, which will be submitted to Holdings' stockholders for approval
at its annual meeting in April 1995. If approved, the reverse stock split would
result in a dividend and earnings per share that are five times higher with a
corresponding reduction in the number of shares outstanding.
F-39
SCHEDULE I
RJR NABISCO HOLDINGS CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Administrative expenses................................ $ (12) $ (8) $ (12)
Interest and debt expense.............................. -- (23) (90)
Other income (expense), net............................ 11 30 82
------------ ------------ ------------
Income (loss) before income taxes................ (1) (1) (20)
Provision (benefit) for income taxes................... (3) (2) (13)
------------ ------------ ------------
2 1 (7)
Equity in income (loss) of subsidiary, net of income
taxes.................................................. 762 (4) 783
------------ ------------ ------------
Income (loss) before extraordinary item.......... 764 (3) 776
Extraordinary item--loss on early extinguishments of
debt, net of income taxes (including extraordinary
losses of $135 and $464 from subsidiary for 1993 and
1992, respectively).................................. (245) (142) (477)
------------ ------------ ------------
Net income (loss)................................ 519 (145) 299
Less preferred stock dividends......................... 131 68 31
------------ ------------ ------------
Net income (loss) applicable to common stock..... 388 (213) 268
Retained earnings (accumulated deficit) at beginning of
period................................................. (883) (738) (1,037)
Add preferred stock dividends charged to paid-in
capital................................................ 131 68 31
------------ ------------ ------------
Retained earnings (accumulated deficit) at end of
period................................................. $ (364) $ (883) $ (738)
------------ ------------ ------------
------------ ------------ ------------
See Notes to Condensed Financial Information.
S-1
SCHEDULE I
RJR NABISCO HOLDINGS CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
----------------- ------------ ------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)................................. $ 519 $ (145) $ 299
------- ------------ ------------
Adjustments to reconcile net income (loss) to net
cash flows from (used in) operating activities:
Deferred income tax provision (benefit)......... 62 69 (63)
Non-cash interest and debt expense.............. -- 22 79
Extraordinary item--loss on early
extinguishments of debt....................... -- 10 20
Equity in (income) loss of subsidiary,
net of income taxes........................... (517) 139 (319)
Other, net...................................... (29) 70 (164)
------- ------------ ------------
Total adjustments........................... (484) 310 (447)
------- ------------ ------------
Net cash flows from (used in) operating
activities.......................................... 35 165 (148)
------- ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Dividends received from subsidiary................ 42 48 278
Investment in subsidiary.......................... (1,680) (1,214) --
------- ------------ ------------
Net cash flows from (used in) investing
activities.......................................... (1,638) (1,166) 278
------- ------------ ------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES (NOTE
A):
Repayments of long-term debt...................... -- (548) (251)
Proceeds from issuance of common stock and
exercised warrants.................................. 54 9 1
Proceeds from issuance of Series B Preferred
Stock............................................... -- 1,250 --
Proceeds from issuance of Series C Preferred
Stock............................................... 1,734 -- --
Preferred stock dividends paid.................... (395) (241) (214)
Financing and advisory fees paid.................. (54) (39) (2)
Repurchase of preferred stock..................... (3) (105) --
Repurchases and cancellations of common stock,
stock options and warrants.......................... (1) (1) (89)
Other, net--including intercompany transfers...... 272 683 425
------- ------------ ------------
Net cash flows from (used in) financing
activities.......................................... 1,607 1,008 (130)
------- ------------ ------------
Net change in cash and cash equivalents......... 4 7 --
Cash and cash equivalents at beginning of period.... 10 3 3
------- ------------ ------------
Cash and cash equivalents at end of period.......... $ 14 $ 10 $ 3
------- ------------ ------------
------- ------------ ------------
See Notes to Condensed Financial Information.
S-2
SCHEDULE I
RJR NABISCO HOLDINGS CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 14 $ 10
Accounts and notes receivable............................ -- 9
-------- -------
TOTAL CURRENT ASSETS............................... 14 19
-------- -------
Investment in subsidiary................................... 11,410 9,316
Other assets and deferred charges.......................... 1 4
-------- -------
$11,425 $ 9,339
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................. $ 44 $ 46
-------- -------
TOTAL CURRENT LIABILITIES.......................... 44 46
-------- -------
Intercompany payable, net.................................. 399 150
Deferred income taxes...................................... 74 73
Commitments and contingencies (Note B).....................
Stockholders' equity (Note C):
ESOP convertible preferred stock--15,315,130 and
15,573,973 shares issued and outstanding at December
31, 1994 and 1993, respectively........................ 245 249
Series A convertible preferred stock--52,500,000 shares
issued and outstanding at December 31, 1993............ -- 2
Series B preferred stock--50,000 shares issued and
outstanding at December 31, 1994 and 1993.............. 1,250 1,250
Series C preferred stock--26,675,000 shares issued and
outstanding at December 31, 1994....................... 3 --
Common stock--1,361,656,883 and 1,138,011,292 shares
issued and outstanding at December 31, 1994 and 1993,
respectively........................................... 13 11
Paid-in capital.......................................... 10,147 8,778
Cumulative translation adjustments....................... (164) (102)
Retained earnings (accumulated deficit).................. (364) (883)
Receivable from ESOP..................................... (186) (211)
Loans receivable from employees.......................... (14) (18)
Unamortized value of restricted stock.................... (22) (6)
-------- -------
TOTAL STOCKHOLDERS' EQUITY......................... 10,908 9,070
-------- -------
$11,425 $ 9,339
-------- -------
-------- -------
See Notes to Condensed Financial Information.
S-3
SCHEDULE I
RJR NABISCO HOLDINGS CORP.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE A--SUPPLEMENTAL CASH FLOWS
INFORMATION
For information regarding certain non-cash financing activities, see Notes
10 and 12 to the Consolidated Financial Statements.
NOTE B--COMMITMENTS AND CONTINGENCIES
Holdings has guaranteed the indebtedness of RJRN under the 1991 Credit
Agreement and the 1993 Credit Agreement. For a discussion of certain restrictive
covenants associated with these debt obligations, see Note 10 to the
Consolidated Financial Statements.
For disclosure of additional contingent liabilities, see Note 11 to the
Consolidated Financial Statements.
NOTE C--STOCKHOLDERS' EQUITY
The Board of Directors of Holdings approved a one-for-five reverse split
of the Common Stock which will be submitted to Holdings' stockholders for
approval at its Annual Meeting in April 1995. For additional information,
see Notes 2 and 17 to the Consolidated Financial Statements.
S-4
SCHEDULE I
RJR NABISCO INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
Administrative expenses................................ $ (99) $ (7) $ 2
Restructuring expense.................................. -- (33) --
Interest and debt expense.............................. (1,009) (1,105) (1,265)
Other income (expense), net............................ 1,153 1,391 2,252
------------ ------------ ------------
Income (loss) before income taxes................ 45 246 989
Provision (benefit) for income taxes................... (17) 40 208
------------ ------------ ------------
62 206 781
Equity in income (loss) of subsidiary, net of income
taxes.................................................. 700 (210) 2
------------ ------------ ------------
Income (loss) before extraordinary item.......... 762 (4) 783
Extraordinary item-loss on early extinguishments of
debt, net of income taxes............................ (245) (135) (464)
------------ ------------ ------------
Net income (loss)...................................... 517 (139) 319
Retained earnings (accumulated deficit) at beginning of
period............................................... (459) (320) (639)
Dividend paid to Parent and charged to retained
earnings............................................. (42) -- --
------------ ------------ ------------
Retained earnings (accumulated deficit) at end of
period............................................... $ 16 $ (459) $ (320)
------------ ------------ ------------
------------ ------------ ------------
See Notes to Condensed Financial Information.
S-5
SCHEDULE I
RJR NABISCO INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
----------------- ------------ ------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)................................. $ 517 $ (139) $ 319
------- ------------ ------------
Adjustments to reconcile net income (loss) to net
cash flows from (used in) operating activities:
Deferred income tax provision (benefit)......... (56) (154) 244
Non-cash interest and debt expense.............. 117 264 364
Extraordinary item-loss on early extinguishments
of debt............................................. 377 208 656
Equity in (income) loss of subsidiary,
net of income taxes........................... (700) 210 (2)
Other, net...................................... (375) (107) (454)
------- ------------ ------------
Total adjustments........................... (637) 421 808
------- ------------ ------------
Net cash flows from (used in) operating
activities.......................................... (120) 282 1127
------- ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Distribution to parent............................ (42) (48) (276)
Capital expenditures.............................. (1) (1) (1)
Investment in subsidiary.......................... -- -- --
------- ------------ ------------
Net cash flows used in investing activities..... (43) (49) (277)
------- ------------ ------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES (NOTE
A):
Net borrowings (repayments) under the credit
agreements.......................................... 1,561 (2,614) (620)
Net proceeds from the issuance (repayment) of
commercial paper.................................... (49) 342 571
Proceeds from issuance of other long-term debt.... -- 1,942 3,124
Repayments of long-term debt...................... (4,648) (1,376) (4,210)
Financing and advisory fees paid.................. (6) (9) (33)
Other, net--including intercompany transfers...... 3,294 1,518 45
------- ------------ ------------
Net cash flows from (used in) financing
activities.......................................... 152 (197) (1213)
------- ------------ ------------
Net change in cash and cash equivalents......... (11) 36 (363)
Cash and cash equivalents at beginning of period.... 51 15 378
------- ------------ ------------
Cash and cash equivalents at end of period.......... $ 40 $ 51 $ 15
------- ------------ ------------
------- ------------ ------------
See Notes to Condensed Financial Information.
S-6
SCHEDULE I
RJR NABISCO INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 40 $ 51
Accounts and notes receivable............................ 13 45
Prepaid expenses......................................... 2 3
-------- -------
TOTAL CURRENT ASSETS............................... 55 99
-------- -------
Intercompany receivable, net............................... 12,875 13,392
Investment in subsidiary................................... 8,794 9,643
Property, plant and equipment, net......................... 11 18
Goodwill, net.............................................. -- 16
Other assets and deferred charges.......................... 147 177
-------- -------
21,882 23,345
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................. $ 346 $ 477
Current maturities of long-term debt..................... 600 226
Income taxes accrued..................................... 74 38
-------- -------
TOTAL CURRENT LIABILITIES.......................... 1,020 741
-------- -------
Long-term debt (less current maturities)................... 8,683 11,621
Other noncurrent liabilities............................... 62 1,375
Deferred income taxes...................................... 707 292
Commitments and contingencies (Note B).....................
Stockholders' equity:
Paid-in capital.......................................... 11,558 9,877
Cumulative translation adjustments....................... (164) (102)
Retained earnings (accumulated deficit).................. 16 (459)
-------- -------
TOTAL STOCKHOLDERS' EQUITY......................... 11,410 9,316
-------- -------
$21,882 $23,345
-------- -------
-------- -------
See Notes to Condensed Financial Information.
S-7
SCHEDULE I
RJR NABISCO INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE A--SUPPLEMENTAL CASH FLOWS
INFORMATION
For information regarding certain non-cash financing activities, see Notes
10 and 12 to the Consolidated Financial Statements.
NOTE B--COMMITMENTS AND CONTINGENCIES
Holdings has guaranteed the indebtedness of RJRN under the 1991 Credit
Agreement and the 1993 Credit Agreement. For a discussion of certain restrictive
covenants associated with these debt obligations, see Note 10 to the
Consolidated Financial Statements.
For disclosure of additional contingent liabilities, see Note 11 to the
Consolidated Financial Statements.
S-8
SCHEDULE II
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------
ADDITIONS
--------------------
(1) (2)
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE AT
BEGINNING AND ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (A) (B) PERIOD(C)
- -------------------------------------------------------------------------------------------
Those valuation and qualifying accounts
which are deducted in the balance sheet
from the assets to which they apply:
Year ended December 31, 1994:
For discounts and doubtful accounts...... $ 59 $ 16 $ 1 $(13) $ 63
Other assets............................. 46 34 8 (35) 53
----- --- --- ----- -----
$105 $ 50 $ 9 $(48) $116
----- --- --- ----- -----
----- --- --- ----- -----
Year ended December 31, 1993:
For discounts and doubtful accounts...... $ 84 $ 23 $ 8 $(56) $ 59
Other assets............................. 38 26 -- (18) 46
----- --- --- ----- -----
$122 $ 49 $ 8 $(74) $105
----- --- --- ----- -----
----- --- --- ----- -----
Year ended December 31, 1992:
For discounts and doubtful accounts...... $ 99 $ 15 $ 3 $(33) $ 84
Other assets............................. 30 25 -- (17) 38
----- --- --- ----- -----
$129 $ 40 $ 3 $(50) $122
----- --- --- ----- -----
----- --- --- ----- -----
- ------------
(A) Miscellaneous adjustments.
(B) Principally charges against the accounts.
(C) Excludes valuation allowance accounts for deferred tax assets.
S-9
EXHIBIT INDEX
EXHIBIT
NO.
- ---------
3.1 Amended and Restated Certificate of Incorporation of RJR Nabisco
Holdings Corp., filed October 1, 1990 (incorporated by reference to
Exhibit 3.1 to Amendment No. 4, filed on October 2, 1990, to the
Registration Statement on Form S-4 of RJR Nabisco Holdings Corp.,
Registration No. 33-36070, filed on July 25, 1990, as amended (the
"Form S-4, Registration No. 33-36070")).
3.1(a) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., filed January 29, 1991
(incorporated by reference to Exhibit 3.1(a) to Amendment No. 3, filed
on January 31, 1991, to the Registration Statement on Form S-4 of RJR
Nabisco Holdings Corp., Registration No. 33-38227).
3.1(b) Certificate of Designation of ESOP Convertible Preferred Stock, filed
April 10, 1991 (incorporated by reference to Exhibit 3.1(b) to
Amendment No. 2, filed on April 11, 1991, to the Registration Statement
on Form S-1 of RJR Nabisco Holdings Corp., Registration No. 33-39532,
filed on March 20, 1991).
3.1(c) Certificate of Designation of Series A Conversion Preferred Stock,
filed November 7, 1991 (incorporated by reference to Exhibit 3.1(c) to
Amendment No. 3, filed on November 1, 1991, to the Registration
Statement on Form S-1 of RJR Nabisco Holdings Corp., Registration No.
33-43137, filed October 2, 1991 (the "Form S-1, Registration No.
33-43137")).
3.1(d) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., filed December 16, 1991
(incorporated by reference to Exhibit 3.1(d) of the Annual Report on
Form 10-K of RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group,
Inc., RJR Nabisco Capital Corp. and RJR Nabisco, Inc. for the fiscal
year ended December 31, 1991, File Nos. 1-10215, 1-10214, 1-10248 and
1-6388 (the "1991 Form 10-K")).
3.1(e) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of RJR Nabisco Holdings Corp., filed April 6, 1993
(incorporated by reference to Exhibit 3.3 of the Quarterly Report on
Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the
fiscal quarter ended March 31, 1993, filed April 30, 1993 (the "March
1993 Form 10-Q")).
3.1(f) Certificate of Designation of Series B Cumulative Preferred Stock,
filed August 16, 1993 (incorporated by reference to Exhibit 3.1(f) of
the Annual Report on Form 10-K of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc. for the fiscal year ended December 31, 1993, file numbers
1-10215 and 1-6388, filed on February 24, 1994 (the "1993 Form 10-K").
3.1(g) Certificate of Designation of Series C Conversion Preferred Stock
(incorporated by reference to Exhibit 4.1(h) to the Registration
Statement on Form S-3 of RJR Nabisco Holdings Corp., Registration No.
33-52381 filed on February 2, 1994, as amended ("Form S-3 Registration
No. 33-52381").
3.1(h) Certificate of Elimination of Cumulative Convertible Preferred Stock of
RJR Nabisco Holdings Corp., filed July 7, 1994 (incorporated by
reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q of RJR
Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter
ended June 30, 1994 (the "June 1994 Form 10-Q")).
3.1(i) Certificate of Retirement of Series A Conversion Preferred Stock of RJR
Nabisco Holdings Corp., filed effective November 21, 1994.
*3.1(j) A composite of the Amended and Restated Certificate of Incorporation of
RJR Nabisco Holdings Corp., as amended to November 21, 1994.
EXHIBIT
NO.
- ---------
3.2 Amended and Restated By-Laws of RJR Nabisco Holdings Corp., as amended,
effective January 20, 1994 (incorporated by reference to Exhibit 3.2 to
the 1993 Form 10-K).
*3.2(a) Certificate of Retirement of Series A Conversion Preferred Stock of
Nabisco Holdings Corp. dated November 18, 1994.
3.3 Restated Certificate of Incorporation of RJR Nabisco, Inc.
(incorporated by reference to Exhibit 3.9 to Amendment No. 2, filed on
May 12, 1989, to the Registration Statement on Form S-1 of RJR Holdings
Capital Corp., RJR Holdings Corp., RJR Holdings Group, Inc. and RJR
Nabisco, Inc., Registration No. 33-27891, filed on April 4, 1989 (the
"Form S-1, Registration No. 33-27891")).
3.3(a) Certificate of Amendment of the Certificate of Incorporation of RJR
Nabisco, Inc., filed September 22, 1989 (incorporated by reference to
Exhibit 3.7(b) to the Registration Statement on Form S-1 of RJR
Holdings Capital Corp., RJR Holdings Corp., RJR Holdings Group, Inc.
and RJR Nabisco, Inc., Registration No. 33-31937, filed on November 3,
1989, as amended (the "Form S-1, Registration No. 33-31937")).
3.3(b) Certificate of Change of Location of Registered Office and of
Registered Agent of RJR Nabisco, Inc., filed July 5, 1990 (incorporated
by reference to Exhibit 3.7(b) of the Annual Report on Form 10-K of RJR
Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR Nabisco
Capital Corp. and RJR Nabisco, Inc. for the year ended December 31,
1990, File Nos. 1-10215, 1-10214, 1-10248 and 1-6388 (the "1990 Form
10-K")).
3.3(c) Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of RJR Nabisco, Inc., filed May 13, 1994 (incorporated
by reference to the June 30, 1994 Form 10-Q).
*3.3(d) A composite of the Certificate of Incorporation of RJR Nabisco, Inc.,
as amended to May 13, 1994.
3.4 Amended and Restated By-laws of RJR Nabisco, Inc., as amended,
effective January 20, 1994 (incorporated by reference to Exhibit 3.4 of
the 1993 Form 10-K).
4.1 Credit Agreement ("1991 Credit Agreement") dated as of December 1, 1991
among RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR
Nabisco Capital Corp., RJR Nabisco, Inc. and the lending institutions
party thereto (the "Credit Agreement") (incorporated by reference to
Exhibit 4.1 of the 1991 Form 10-K).
4.1(a) Amendment No. 1 to 1991 Credit Agreement, dated as of October 21, 1992
(incorporated by reference to Exhibit 4.1(a) of the Annual Report on
Form 10-K of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the
fiscal year ended December 31, 1992, File Nos. 1-10215 and 1-6388 (the
"1992 Form 10-K")).
4.1(b) Second Amendment to 1991 Credit Agreement, dated as of March 4, 1993
(incorporated by reference to Exhibit 4.2 of the March 1993 Form 10-Q).
4.1(c) Third Amendment to 1991 Credit Agreement, dated as of October 12, 1993
(incorporated by reference to Exhibit 10.1 of the Quarterly Report on
Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the
fiscal quarter ended September 30, 1993, filed October 29, 1993 (the
"September 1993 Form 10-Q")).
4.1(d) Fourth Amendment to 1991 Credit Agreement, dated as of November 2, 1994
(incorporated by reference to Exhibit 4.1(d) to Post-Effective
Amendment No. 2 filed February 1, 1995 to the Registration Statement on
Form S-4 of RJR Nabisco Holdings Corp., Registration Statement
No. 33-55767, filed October 5, 1994, as amended, (the "Form S-4,
Registration No. 33-55767").
4.1(e) Fifth Amendment to 1991 Credit Agreement, dated as of December 2, 1994
(incorporated by reference to Exhibit 4.1(e) to the Form S-4,
Registration No. 33-55767).
EXHIBIT
NO.
- ---------
4.2 Credit Agreement ("1993 Credit Agreement") dated as of April 5, 1993
among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and the lending
institutions party thereto (incorporated by reference to Exhibit 4.3 of
the March 1993 Form 10-Q).
4.2(a) First Amendment to Credit Agreement dated as of October 12, 1993
(incorporated by reference to Exhibit 10.1 of the September 1993 Form
10-Q).
4.2(b) Second Amendment to the Credit Agreement dated as of , 1994
(incorporated by reference to Exhibit 4.2 of the March 1994 Form 10-Q).
4.2(c) Third Amendment to 1993 Credit Agreement, dated as of November 2, 1994
(incorporated by reference to Exhibit 4.1(d) hereof).
4.2(d) Fourth Amendment to 1993 Credit Agreement, dated as of December 2, 1994
(incorporated by reference to Exhibit 4.1(e) hereof).
4.4 Credit Agreement dated as of December 6, 1994 between Nabisco, Inc. and
the lending institutions party thereto.
4.6 The Registrants agree to furnish copies of any instrument defining the
rights of holders of long-term debt of the Registrants and their
consolidated subsidiaries that does not exceed 10 percent of the total
assets of the Registrants and their consolidated subsidiaries to the
Commission upon request.
10.1 Registration Rights Agreement, dated as of February 9, 1989, among RJR
Holdings Corp., RJR Associates, L.P., KKR Partners II, L.P., Drexel
Burnham Lambert Incorporated and Merrill Lynch & Co. (incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form S-1 of
RJR Holdings Corp., Registration No. 33-29401, filed on June 20, 1989,
as amended (the "Form S-1, Registration No. 33-29401")).
10.2 Retirement Plan for Directors of RJR Nabisco, Inc. as amended and
restated on January 1, 1989 (incorporated by reference to Exhibit 10(a)
to the Annual Report on Form 10-K for the fiscal year ended December
31, 1988, file number 1-6388, filed on March 9, 1989, as amended
through April 14, 1989 (the "1988 Form 10-K")).
10.3 Retirement Trust Agreement, made as of October 12, 1988, between RJR
Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated
by reference to Exhibit 10.6 to the Registration Statement on Form S-4
of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No.
33-27894, filed April 5, 1989, as amended (the "Form S-4, Registration
No. 33-27894")).
10.4 Agreement Containing Consent Order to Cease and Desist, dated January
30, 1989, among KKR Associates, the general partners of KKR Associates,
Kohlberg Kravis Roberts & Co., L.P., the general partners of Kohlberg
Kravis Roberts & Co., L.P., RJR Associates, L.P., RJR Holdings Corp.,
RJR Holdings Group, Inc., RJR Acquisition Corporation and the Federal
Trade Commission (incorporated by reference to Exhibit 10.2 to the Form
S-4, Registration No. 33-27894).
10.5 Form of Employment Agreement containing Change of Control provision
(incorporated by reference to Exhibit 10.8 to the Form S-4,
Registration No. 33-27894).
10.6 Special Addendum to Form of Employment Agreement filed as Exhibit
10.22, dated December 20, 1988 (incorporated by reference to Exhibit
10(d)(ii) to the 1988 Form 10-K).
10.7 Form of Agreement containing Gross-Up provisions, dated January 27,
1989 (incorporated by reference to Exhibit 10(d)(iii) to the 1988 Form
10-K).
10.8 Trust Agreement between RJR Nabisco, Inc. and Wachovia Bank and Trust
Company, N.A., Trustee, dated January 27, 1989 (incorporated by
reference to Exhibit 10(d)(iv) to the 1988 Form 10-K).
EXHIBIT
NO.
- ---------
10.9 Form of Employment Agreement Without Change of Control provision
(incorporated by reference to Exhibit 10.16 to the Form S-4,
Registration No. 33-27894).
10.10 Special Addendum, dated December 20, 1988 (incorporated by reference to
Exhibit 10(d)(ii) to the 1988 Form 10-K).
10.11 Master Trust Agreement, as amended and restated as of October 12, 1988,
between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A.
(incorporated by reference to Exhibit 10.18 to the Form S-4,
Registration No. 33-27894).
10.11(a) Amendment No. 1 to Master Trust Agreement, dated January 27, 1989
(incorporated by reference to Exhibit 10(g)(ii) to the 1988 Form 10-K).
10.11(b) Amendment No. 2 to Master Trust Agreement, dated January 27, 1989
(incorporated by reference to Exhibit 10(g)(iii) to the 1988 Form
10-K).
10.12 Excess Benefit Master Trust Agreement, as amended and restated as of
October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust
Company, N.A. (incorporated by reference to Exhibit 10.21 to the Form
S-4, Registration No. 33-27894).
10.12(a) Amendment No. 1 to Excess Benefit Master Trust Agreement, dated January
27, 1989 (incorporated by reference to Exhibit 10(h)(ii) to the 1988
Form 10-K).
10.13 Supplemental Benefits Plan of RJR Nabisco, Inc. and Participating
Companies, as amended on October 12, 1988 (incorporated by reference to
Exhibit 10.25 to the Form S-4, Registration No. 33-27894).
10.13(a) Amendment to Supplemental Benefits Plan, dated November 23, 1988
(incorporated by reference to Exhibit 10(k)(ii) to the 1988 Form 10-K).
10.13(b) Amendment No. 2 to Supplemental Benefits Plan, dated January 27, 1989
(incorporated by reference to Exhibit 10(k)(iii) to the 1988 Form
10-K).
10.14 Additional Benefits Plan of RJR Nabisco, Inc. and Participating
Companies, effective October 12, 1988 (incorporated by reference to
Exhibit 10.28 to the Form S-4, Registration No. 33-27894).
10.14(a) Amendment to Additional Benefits Plan, dated October 28, 1988
(incorporated by reference to Exhibit 10(l)(ii) to the 1988 Form 10-K).
10.14(b) Amendment to Additional Benefits Plan, dated November 23, 1988
(incorporated by reference to Exhibit 10(l)(iii) to the 1988 Form
10-K).
10.14(c) Amendment to Additional Benefits Plan No. 3, dated January 27, 1989
(incorporated by reference to Exhibit 10(l)(iv) to the 1988 Form 10-K).
10.15 RJR Nabisco, Inc. Supplemental Executive Retirement Plan, as amended on
July 21, 1988 (incorporated by reference to Exhibit 10.32 to the Form
S-4, Registration No. 33-27894).
10.15(a) Amendment to Supplemental Executive Retirement Plan, dated November 23,
1988 (incorporated by reference to Exhibit 10(m)(ii) to the 1988 Form
10-K).
10.15(b) Amendment No. 2 to Supplemental Executive Retirement Plan, dated
January 27, 1989 (incorporated by reference to Exhibit 10(m)(iii) to
the 1988 Form 10-K).
10.15(c) Amendment to Supplemental Executive Retirement Plan, dated April 10,
1993 (incorporated by reference to the 1993 Form 10-K).
10.16 Form of Common Stock Subscription Agreement between RJR Holdings Corp.
and the purchaser named therein (incorporated by reference to Exhibit A
to Post-Effective Amendment No. 2, filed on August 21, 1989, to the
Form S-1, Registration No. 33-29401 (the "Post-Effective Amendment No.
2 to the Form S-1, Registration No. 33-29401")).
EXHIBIT
NO.
- ---------
10.17 Form of Non-Qualified Stock Option Agreement between RJR Holdings Corp.
and the optionee named therein (incorporated by reference to Exhibit B
to Post-Effective Amendment No. 2 to the Form S-1, Registration No.
33-29401).
10.18 Non-Qualified Stock Option Agreement, dated December 31, 1993, between
RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference
to the 1993 Form 10-K).
*10.18(a) Non-Qualified Stock Option Agreement, dated December 31, 1994, between
RJR Nabisco Holdings Corp. and Charles M. Harper.
10.19 Employment Agreement, dated May 27, 1993, by and among RJR Nabisco
Holdings Corp., RJR Nabisco, Inc. and Charles M. Harper (incorporated
by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of
RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter
ended June 30, 1993, filed August 3, 1993 (the "June 1993 Form 10-Q")).
10.20 Amendment No. 1 dated March 8, 1994 to Employment Agreement dated May
27, 1993 by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and
Charles M. Harper dated as of March 1, 1994 (incorporated by reference
to Exhibit 10.2 of the Quarterly Report on Form 10-Q of RJR Nabisco Holdings
Corp. and RJR Nabisco, Inc. for the fiscal quarter ended March 31, 1994
filed May 12, 1994 (the "March 1994 Form 10-Q").
10.21 Form of Non-Qualified Stock Option Agreement between RJR Nabisco
Holdings Corp. and Charles M. Harper (incorporated by reference to
Exhibit 10.2 of the June 1993 Form 10-Q).
10.22 Employment Agreement, dated July 19, 1993, by and among RJR Nabisco
Holdings Corp., RJR Nabisco, Inc. and Lawrence R. Ricciardi
(incorporated by reference to Exhibit 10.3 of the June 1993 Form 10-Q).
10.23 Letter Agreement, dated July 27, 1989, between RJR Holdings Corp. and
Lawrence R. Ricciardi (incorporated by reference to Exhibit 10.71 to
the Form S-1, Registration No. 33-31937).
10.24 Letter Agreement, dated January 20, 1994, between RJR Nabisco Holdings
Corp. and Lawrence R. Ricciardi (incorporated by reference to Exhibit
10.24 the 1993 Form 10-K).
*10.25 Letter Agreement, dated February 14, 1995, among RJR Nabisco Holdings
Corp., RJR Nabisco, Inc. and Lawrence R. Ricciardi.
*10.26 Consulting Agreement, dated February 14, 1995, among RJR Nabisco
Holdings Corp., R.J. Reynolds Tobacco Company, Nabisco Holdings Corp.
and Lawrence R. Ricciardi.
10.27 Amended and Restated Employment Agreement, dated as of September 1,
1993, by and among R.J. Reynolds Tobacco Company, R.J. Reynolds Tobacco
International Inc., RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and
Mr. James W. Johnston (incorporated by reference to Exhibit 10.2 to the
September 1993 Form 10-Q).
10.28 Letter Agreement, dated March 30, 1993, between RJR Nabisco, Inc. and
Mr. Eugene R. Croisant (incorporated by reference to Exhibit 10.4 to
the March 1993 Form 10-Q).
10.29 Equity Securities Purchase Agreement dated as of July 15, 1990 between
RJR Nabisco Holdings Corp. and Whitehall Associates, L.P. (incorporated
by reference to Exhibit 4.4 to the Form S-4, Registration No.
33-36070).
10.30 Letter Agreement dated June 10, 1994 among Eugene R. Croisant, RJR
Nabisco Holdings Corp. and RJR Nabisco, Inc. (incorporated by reference
to the June 1994 Form 10-Q).
*10.31 Letter Agreement, dated February 14, 1995, among RJR Nabisco Holdings
Corp., RJR Nabisco, Inc. and Eugene R. Croisant.
*10.32 Consulting Agreement, dated February 14, 1995, among RJR Nabisco Holdings
Corp., Nabisco Holdings Corp. and Eugene R. Croisant.
EXHIBIT
NO.
- ---------
10.33 Registration Rights Agreement (Common Stock), dated as of July 15,
1990, between RJR Nabisco Holdings Corp. and Whitehall Associates, L.P.
(incorporated by reference to Exhibit 4.5 to the Form S-4, Registration
No. 33-36070).
10.34 Amended and Restated RJR Nabisco Holdings Corp. 1990 Long Term
Incentive Plan (incorporated by reference to Exhibit 10.2 to the March
1993 Form 10-Q).
10.35 Form of Purchase Stock Agreement between RJR Nabisco Holdings Corp. and
purchaser named therein (1991 Grant) (incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form S-8 of RJR Nabisco
Holdings Corp., Registration No. 33-39791, filed on April 5, 1991 (the
"Form S-8, Registration No. 33-39791").
10.36 Form of Non-Qualified Stock Option Agreement between RJR Nabisco
Holdings Corp. and the senior executive optionee named therein (1991
Grant) (incorporated by reference to Exhibit 4.4(a) to Form S-8,
Registration No. 33-39791).
10.37 Form of Non-Qualified Stock Option Agreement between RJR Nabisco
Holdings Corp. and the executive or management optionee named therein
(1991 Grant) (incorporated by reference to Exhibit 4.4(b) to Form S-8,
Registration No. 33-39791).
10.38 Form of Secured Promissory Note of purchaser named therein in favor of
RJR Nabisco Holdings Corp. (1991 Grant) (incorporated by reference to
Exhibit 4.5 to Form S-8, Registration No. 33-39791).
10.38(a) Form of Amendment and Exchange of Secured Promissory Note, dated July
1, 1993 (1991 Grant) (incorporated by reference to Exhibit 10.33(a) to
the 1993 Form 10-K).
10.39 Form of Purchase Stock Agreement between RJR Nabisco Holdings Corp. and
the purchaser named therein (1992 Grant) (incorporated by reference to
Exhibit 10.34 of the 1991 Form 10-K).
10.40 Form of Non-Qualified Stock Option Agreement between RJR Nabisco
Holdings Corp. and the senior executive optionee named therein (1992
Grant/cycle) (incorporated by reference to Exhibit 10.35 of the 1991
Form 10-K).
10.41 Form of Non-Qualified Stock Option Agreement between RJR Nabisco
Holdings Corp. and the senior executive optionee named therein (1992
Grant/5-year) (incorporated by reference to Exhibit 10.36 of the 1991
Form 10-K).
10.42 Form of Non-Qualified Stock Option Agreement between RJR Nabisco
Holdings Corp. and the executive or management optionee named therein
(1992 Grant) (incorporated by reference to Exhibit 10.37 of the 1991
Form 10-K).
10.43 Form of Restated Non-Qualified Stock Option Agreement under the 1990
Long Term Incentive Plan, between RJR Nabisco Holdings Corp. and the
optionee named therein (incorporated by reference to Exhibit 10.38 to
the 1993 Form 10-K).
10.44 Form of Non-Qualified Stock Option Agreement between RJR Nabisco
Holdings Corp. and the optionee name therein (1993 Grant) (incorporated
by reference to Exhibit 10.39 of the 1992 Form 10-K).
10.45 Performance Share Program under RJR Nabisco Holdings Corp. 1990 Long
Term Incentive Plan (incorporated by reference to Exhibit 10.40 of the
1992 Form 10-K).
10.46 Form of Performance Share Agreement between RJR Nabisco Holdings Corp.
and the grantee named therein (1993 Grant) (incorporated by reference
to Exhibit 10.41 of the 1992 Form 10-K).
10.47 Restricted Stock Program under the 1990 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.42 to the 1993 Form 10-K).
EXHIBIT
NO.
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10.48 Form of Restricted Stock Agreement under the 1990 Long Term Incentive Plan between RJR
Nabisco Holdings Corp. and the grantee named therein (1993 Grant) (incorporated by
reference to Exhibit 10.1 the March 1993 Form 10-Q).
10.49 Form of Executive Equity Program Agreement under the 1990 Long Term Incentive Plan,
between RJR Nabisco Holdings Corp. and the grantee named therein (3 year) (incorporated
by reference to Exhibit 10.44 to the 1993 Form 10-K).
10.50 Form of Executive Equity Program Agreement under the 1990 Long Term Incentive Plan,
between RJR Nabisco Holdings Corp. and the grantee named therein (4 year) (incorporated
by reference to Exhibit 10.45 to the 1993 Form 10-K).
10.51 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the
Consultant named therein (1991 Grant) (incorporated by reference to Exhibit 10.42 of the
1992 Form 10-K).
10.52 Form of Secured Promissory Note of purchaser named therein in favor of RJR Nabisco
Holdings Corp. (1992 Grant) (incorporated by reference to Exhibit 10.38 of the 1991 Form
10-K).
10.52(a) Form of Amendment and Exchange of Secured Promissory Note, dated July 1, 1993 (1992
Grant) (incorporated by reference to Exhibit 10.47(a) to the 1993 Form 10-K).
10.53 Registration Rights Agreement (Preferred Stock), dated as of July 15, 1990, between RJR
Nabisco Holdings Corp. and Whitehall Associates, L.P. (incorporated by reference to
Exhibit 4.6 to the Form S-4, Registration No. 33-36070).
10.54 Preferred Stock Exchange Agreement dated as of October 1, 1990 between RJR Nabisco
Holdings Corp. and Whitehall Associates, L.P. (incorporated by reference to Exhibit 4.8
to the Form S-4, Registration No. 33-36070).
*10.55 Restated and Amended Stock Option Plan for Directors and Key Employees of RJR Nabisco
Holdings Corp. dated as of October 4, 1994.
10.56 Performance Unit Program under RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.3 to the March 1994 Form 10-Q).
10.57 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee
named therein (1994 Grant--1 Year Period) (incorporated by reference to Exhibit 10.4 to
the March 1994 Form 10-Q).
10.58 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee
named therein (1994 Grant--3 Year Period) (incorporated by reference to Exhibit 10.5 to
the March 1994 10-Q).
*11. RJR Nabisco Holdings Corp. Computation of Earnings Per Share for the years ended
December 31, 1994, 1993 and 1992.
*12. RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges/Deficiency in the
Coverage of Fixed Charges by Earnings before Fixed Charges for each of the periods
within the five year period ended December 31, 1994.
*21. Subsidiaries of the Registrants.
*23. Consent of Independent Auditors.
*24. Powers of Attorney.
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*Filed herewith.