-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pa9G5kXWKhYFmUG1vHQkZeDbf3HQL3xEP7VE+Uhj649XC+xulpvbio0ZdzkBufOj fg7sjdJEcIx46hFtDOxf4w== 0000912057-97-008860.txt : 19970317 0000912057-97-008860.hdr.sgml : 19970317 ACCESSION NUMBER: 0000912057-97-008860 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RJR NABISCO HOLDINGS CORP CENTRAL INDEX KEY: 0000847903 STANDARD INDUSTRIAL CLASSIFICATION: COOKIES & CRACKERS [2052] IRS NUMBER: 133490602 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10215 FILM NUMBER: 97556828 BUSINESS ADDRESS: STREET 1: 1301 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019-6013 BUSINESS PHONE: 2122585600 MAIL ADDRESS: STREET 1: 1301 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019-6013 FORMER COMPANY: FORMER CONFORMED NAME: RJR HOLDINGS CORP DATE OF NAME CHANGE: 19891116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RJR NABISCO INC CENTRAL INDEX KEY: 0000083612 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 560950247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06388 FILM NUMBER: 97556829 BUSINESS ADDRESS: STREET 1: 1301 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2122585600 MAIL ADDRESS: STREET 1: 1301 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: REYNOLDS R J INDUSTRIES INC DATE OF NAME CHANGE: 19860501 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- 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, 1996 ------------------- RJR NABISCO HOLDINGS CORP. (Exact name of registrant as specified in its charter) DELAWARE 1-10215 13-3490602 (State or other (Commission file (I.R.S. Employer jurisdiction of number) 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 (Commission file (I.R.S. Employer jurisdiction of number) 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.) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED - ---------------------------------------------- --------------- NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED - ---------------------------------------------- ---------------
RJR NABISCO HOLDINGS CORP. Common Stock, par value $.01 per share NewYork Series B Depositary Shares NewYork Series C Depositary Shares NewYork RJR NABISCO, INC. 8.30% Senior Notes due April 15, 1999 NewYork 8% Notes due January 15, 2000 NewYork 8% Notes due 2001 NewYork 8 5/8% Notes due 2002 NewYork 7 5/8% Notes due September 15, 2003 NewYork 8.75% Senior Notes due April 15, 2004 NewYork 8 3/4% Notes due 2005 NewYork 8 3/4% Notes due 2007 NewYork 9 1/4% Debentures due 2013 NewYork SUBSIDIARIES OF THE REGISTRANTS RJR NABISCO HOLDINGS CAPITAL TRUST I 10% Trust Originated Preferred Securities NewYork
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, 1997 WAS APPROXIMATELY $8.8 BILLION. CERTAIN 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, 1997: RJR NABISCO HOLDINGS CORP.: 270,376,804 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 ------------------- 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. ------------------- 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, 1997 ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX
PAGE ----- PART I Item 1. Business........................................................................................ 1 (a) General Development of Business......................................................... 1 (b) Financial Information about Industry Segments........................................... 2 (c) Narrative Description of Business....................................................... 2 Tobacco............................................................................... 2 Food.................................................................................. 12 Other Matters......................................................................... 17 (d) Financial Information about Foreign and Domestic Operations and Export Sales...................................................................... 17 Item 2. Properties...................................................................................... 17 Item 3. Legal Proceedings............................................................................... 17 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 Results of Operations......................................................................... 24 Item 8. Financial Statements and Supplementary Data..................................................... 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................... 38 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. ("RJRN 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"), a wholly-owned subsidiary of RJRN and 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. 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. Outside the United States, the tobacco operations are conducted by R.J. Reynolds International ("Reynolds International"), and the food operations are conducted by Nabisco International, Inc. ("Nabisco International") and Nabisco Ltd (formerly Nabisco Brands Ltd). RJRT's and Reynolds 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, certain European countries 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 14 to the consolidated financial statements, and the related notes thereto, of RJRN Holdings and RJRN as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 (the "Consolidated Financial Statements"). RJRN 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 RJRN Holdings. After a series of holding company mergers completed on December 17, 1992, RJRN became a direct, wholly-owned subsidiary of RJRN Holdings. The business of RJRN Holdings is conducted through RJRN. KKR no longer holds an interest in RJRN Holdings. 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 RJRN Holdings and RJRN have completed a number of acquisitions and have divested certain businesses. In 1996, these acquisitions included the Mayco and Capri biscuit businesses and the Vizzolini pasta business in Argentina, the Pilar biscuit business in Brazil and the Fontanda biscuit business in Spain as well as the biscuit, confectionery and snack food assets of a Taiwan-based manufacturer and a 50% interest plus management control of Azerbaijan Tobacco Company. In 1995, these acquisitions included (i) certain trademark and other assets of Kraft Foods' U.S. and Canadian margarine and tablespreads business; (ii) certain trademarks and other assets of Primo Foods Limited, a Canadian manufacturer of dry pasta, canned tomatoes and pasta and pizza sauces; (iii) a 50% interest in Royal Beech-Nut (pty) Ltd., a South African subsidiary of Del Monte Royal Foods, Ltd; (iv) the assets of Avare and Gumz, two Brazilian milk product companies; (v) O.y. P.c. Rettig Ab, Finland's second 1 largest tobacco company and (vi) a significant interest and management control of the Tanzania Tobacco Company. The 1995 divestitures included (i) the sale of the Ortega Mexican Food business and (ii) the sale of the New York Style Bagel Chip business. 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. RJRN Holdings' and RJRN's credit agreements, each dated as of April 28, 1995, as amended, prohibit the sale of all or any substantial portion of certain assets of RJRN Holdings or its subsidiaries. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS During 1996, 1995 and 1994, RJRN's industry segments were tobacco and food. For information relating to industry segments for the years ended December 31, 1996, 1995 and 1994, see Note 14 to the Consolidated Financial Statements. (C) NARRATIVE DESCRIPTION OF BUSINESS TOBACCO The tobacco line of business is conducted by RJRT and Reynolds International, which manufacture, distribute and sell cigarettes. Cigarettes are manufactured in the United States by RJRT and in over 40 foreign countries and territories by Reynolds International and subsidiaries or licensees of RJRT and are sold throughout the United States and in more than 170 markets around the world. In 1996, approximately 56% of total tobacco segment net sales (after deducting excise taxes) and approximately 64% 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 1996 of 26%, a decrease of approximately 1 share point from 1995. During 1996, RJRT and the largest domestic cigarette manufacturer, Philip Morris Incorporated, together sold, on a shipment basis, approximately 72% of all cigarettes sold in the United States. In May 1996, RJRT began test marketing in Chattanooga, Tennessee, ECLIPSE, a cigarette that primarily heats rather than burns tobacco and thereby substantially reduces second-hand smoke. RJRT continues to assess the test results and a possible full market 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 by building brand loyalty among current adult smokers and attracting adult smokers of competing brands. In 1996, these efforts included the continuation and refinement of conversion, continuity and relationship-building and test marketing of a variety of new cigarette products and marketing programs for existing RJRT brands. 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 2 and BEST VALUE, intended to appeal to more cost-conscious adult smokers. For a discussion on competition in the tobacco business, see "Business--Tobacco--Competition" in this Item 1. 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 15% of RJRT's sales, no RJRT customers accounted for more than 10% of sales for 1996. 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 its sales force to be flexible in responding to local market dynamics by designing individual in-store programs to fit varying consumption patterns. RJRT uses 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 Reynolds International operates in over 170 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, Reynolds International believes that the American-blend segment, in which Reynolds International primarily competes, is growing significantly faster. Although Reynolds International is the second largest of two international cigarette producers that have significant positions in the American-blend segment, its share of sales in this segment is approximately one-fourth of the share of Philip Morris International Inc., the largest American-blend producer. Reynolds International has strong brand presence in Western Europe and is well established in its other key markets in the Middle East/Africa, Asia, the former Soviet Union and Canada. Reynolds International is aggressively pursuing development opportunities throughout the world. Reynolds International markets nearly 100 brands of which WINSTON, CAMEL and SALEM, all American-blend cigarettes, are its international leaders. WINSTON, Reynolds 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 140 markets worldwide and is Reynolds International's second largest selling international brand. SALEM is the world's largest selling menthol cigarette and is particularly strong in Far East markets. Reynolds International also markets a number of local brands in various foreign markets. None of Reynolds International's customers accounted for more than 10% of sales in 1996. Approximately 23% of Reynolds International's 1996 volume was U.S.-made product, with the remainder manufactured outside the U.S. Reynolds International brands are manufactured in owned or joint-venture facilities in 20 locations outside the United States, and through licensing agreements in about 20 other countries. Reynolds International owned or joint-venture manufacturing locations include Azerbaijan, Canada, the Canary Islands, China, the Czech Republic, Finland, Germany, Hong Kong, Hungary, Indonesia, Kazakhstan, Malaysia, Poland, Portugal, Romania, Russia, Switzerland, Tanzania, Turkey, Ukraine and Vietnam. 3 Certain of Reynolds International's foreign operations are subject to local regulations that set import quotas, restrict financing flexibility, affect repatriation of earnings or assets and/or 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 Reynolds International, to expand operations in such markets; however, there can be no assurance that the liberalizing trends will be maintained or extended or that Reynolds 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. Reynolds International uses a variety of tobacco leaf from both United States and international sources. RJRT and Reynolds International believe there is a sufficient supply of tobacco in the worldwide tobacco market to satisfy their current production requirements. Reynolds International is actively involved in tobacco cultivation activities with fully owned agronomy operations in Viet Nam and Turkey and a joint venture in China. 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 have been established by the United States with overseas tobacco producers and became effective on September 13, 1995. COMPETITION Generally, the markets in which RJRT and Reynolds 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 Reynolds 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 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, 4 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. These developments, together with manufacturers' price increases in recent years and substantial increases in state and federal excise taxes on cigarettes, have 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 was last increased in January 1993 to its current rate of 24 cents per pack. 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 82.5 cents per pack of cigarettes. Increases in these state excise taxes could also have an adverse effect on cigarette sales. In 1995, the cigarette excise tax in four states was increased by amounts which ranged from 5 cents to 24 cents per pack. In one state, a temporary 10 cent tax, scheduled to expire in 1995, was extended through 1997. In 1996, the cigarette excise tax was increased in two states by amounts of 25 cents and 30 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 concluded 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 parties from 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 August 1995, the Commissioner of the Food and Drug Administration (the "FDA"), with the support of the Clinton administration, announced that he was asserting jurisdiction over cigarettes and certain other tobacco products and issued a notice and request for comments on proposed regulations. In August 1996, the Commissioner announced the adoption of these rules with certain modifications, and with a phased in schedule of effectiveness over a two year period. The first phase began February 28, 1997, when regulations relating to the sale of cigarettes to minors became effective. Among other things the regulations would prohibit or impose stringent limits on a broad range of sales and marketing practices, including bans on sampling, sponsorship by brand name, and distribution of non-tobacco items carrying brand names. The FDA's rules also limit advertising in print and on billboards to black and white text and impose new labeling language. The purported purpose of the FDA's assertion of jurisdiction was to curb the use of tobacco products by underage youth. RJRT believes, however, that the assertion of jurisdiction and the scope of the proposed rules would materially restrict the availability of cigarettes and RJRT's ability to market its cigarette products to ADULT smokers. RJRT, together with the four major domestic cigarette manufacturers and an advertising agency, filed suit on the day of the Commissioner's 1995 announcement in the U.S. District Court for the Middle District of North Carolina seeking to enjoin the FDA's assertion of jurisdiction (COYNE BEAHM V. UNITED STATES FOOD & DRUG ADMINISTRATION). On the day of the announced regulations, the plaintiffs filed an amended complaint challenging the final regulations. Similar suits have been filed in the same court by manufacturers of smokeless tobacco products, by operators of retail stores and by advertising interests. RJRT is unable to predict the outcome of the litigation seeking to find the FDA's regulations to be unlawful. If the full regulations do go into effect, they could be expected to have an adverse effect on cigarette sales and 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 or timing 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. RJRT submitted 5 comments on the proposed regulations during the comment period which closed in February 1996. 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. The Florida statute was 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 June 26, 1995, the trial court judge granted in part the plaintiffs' motion for summary judgment finding portions of the statute unconstitutional. Both plaintiffs and defendants appealed this decision to the Florida Supreme Court which, on June 27, 1996, issued its opinion limiting the amendment in several respects. Among other things, the court ruled: that provisions abrogating affirmative defenses available to tobacco companies if sued by individuals could only be applied to claims brought by the state arising out of payments made after July 1, 1994, the effective date of the amendment; that the state must identify individual recipients of Medicaid payments; and that claims previously barred by the statute of repose could not be revived. The Florida Supreme Court, in a 4-3 decision, expressly stated that although it found provisions of the statute to be "facially" constitutional, it was specifically leaving open the right to challenge those provisions as applied in any specific lawsuit. The plaintiffs in that lawsuit have sought United States Supreme Court review of the Florida Supreme Court's decision, to determine whether the Florida statute, by which the State of Florida conferred on itself a unique cause of action and which directs courts to abrogate common law and equitable principles, including affirmative defenses, is unconstitutional under the Fourteenth Amendment to the United States Constitution. The following year, the Florida Legislature passed a bill that would repeal the Florida statute retroactively which was subsequently vetoed by the Governor. Efforts made in 1996 to override the Governor's veto were unsuccessful. Another attempt to repeal the 1994 statute is expected during the 1997 legislative session, but RJRT cannot predict whether the effort will succeed. Similar legislation, without Florida's elimination of defenses, was introduced in twelve states during 1996. None of these proposals was enacted. 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. A suit against the tobacco industry was filed under the Florida statute on February 21, 1995. See "Business--Tobacco--Litigation Affecting the Cigarette Industry" below in this Item 1. Legislation imposing various restrictions on public smoking has also been enacted in 48 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. In July 1996, Massachusetts enacted legislation that would require manufacturers of tobacco products sold in Massachusetts to report yearly beginning in 1997, the ingredients of each brand sold. RJRT believes that the disclosure of trade secrets required by this law could damage the competitive position of its brands. The statute requires the reporting of nicotine yield ratings in accordance with procedures to be established. Together with other cigarette manufacturers, RJRT has filed suit in the U.S. District Court for the District of Massachusetts seeking to have the statute declared null and void and to restrain Massachusetts officials from enforcing it. A similar suit has been filed by manufacturers of smokeless tobacco products. RJRT is unable to predict the outcome of this litigation. 6 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, which was struck down on grounds of constitutionality by the Supreme Court of Canada in 1995. In 1990, RJRT 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 1995, wholesalers, retailers and the tobacco industry including RJRT formed the Coalition for Responsible Tobacco Retailing and launched a new program, called "We Card," focused on stopping underage access to cigarettes. 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 January, 1996, regulations implementing this legislation were announced by the Department of Health and Human Services. 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 yield content of cigarettes, as well as a warning statement. During the past three decades, various laws affecting the cigarette industry have 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 health warnings to be printed on cigarette packages and advertising on a rotating basis; (iii) increases type size and area of the warning required in 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 1984 and 1990, Congress enacted legislation directing the Consumer Product Safety Commission to conduct and oversee research on the ignition propensity of cigarettes. 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 (now the Secretary of Health and Human Services) and the Surgeon General have issued a number of other reports which purport to find the nicotine in cigarettes addictive and to link cigarette smoking and exposure to cigarette smoke 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. 7 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 the cost of tobacco advertising, banned smoking in federally funded buildings and on any scheduled airline flight, restricted tobacco product sampling and vending machines to areas or establishments that deny access to minors, provided financial incentives for states to sue tobacco manufacturers for recovery of Medicaid costs, and given the Food and Drug Administration authority to regulate the manufacture, sale and distribution of tobacco products. None of this legislation was enacted. 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, Reynolds International or the cigarette industry generally, but such legislation or regulations could have an adverse effect on RJRT, Reynolds International or the cigarette industry generally. LITIGATION AFFECTING THE CIGARETTE INDUSTRY OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJRN) or indemnitees, including those claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During 1996, 203 new actions were filed or served against RJRT and/or its affiliates or indemnitees and 103 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. There have been noteworthy increases in the number of these cases pending. On December 31, 1996 there were 234 active cases pending, as compared with 132 on December 31, 1995 and only 54 on December 31, 1994. As of February 28, 1997, 270 active cases were pending against RJRT and/or its affiliates or indemnitees, 268 in the United States, one in Canada and one in Puerto Rico. The United States cases are in 33 states and are distributed as follows: 117 in Florida, 26 in New York, 36 in Texas, 15 in Louisiana, eight in Alabama, seven in California, six in each of Kansas, Mississippi and Indiana, five in New Jersey, three in each of Minnesota, Ohio, Pennsylvania and Tennessee, two in each of Colorado, Connecticut, Maryland, Massachusetts and Michigan, and one each in Arizona, Arkansas, District of Columbia, Illinois, Iowa, Nevada, New Mexico, New Hampshire, Oklahoma, Rhode Island, Utah, Washington, West Virginia and Wisconsin. Of the 268 active cases in the United States, 170 are pending in state court and 98 in federal court. Most of these cases are brought by individual plaintiffs, but an increasing number, discussed below, seek recovery on behalf of states or large classes of claimants. THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a variety of legal theories, including, among others, strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, anti-trust, Racketeer Influenced and Corrupt Organizations Act ("RICO"), indemnity and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. Seven of the 268 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. Nineteen cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, flight attendants alleging personal injury from exposure to environmental tobacco smoke in their workplace and Blue Cross/Blue Shield subscribers claiming reimbursement for premiums paid. Twenty seven of the active cases seek, INTER ALIA, recovery of the cost of Medicaid funds paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco. 8 DEFENSES. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act ("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; and, in the attorneys general cases (discussed below), additional constitutional defenses. RJRN has asserted additional defenses, including jurisdictional defenses, in many of the cases in which it is named. Juries have found for plaintiffs in three smoking and health cases in which RJRT was not a defendant, but in one such case, no damages were awarded and the judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on appeal and the case was subsequently dismissed. In the third such case, on August 9, 1996, a Florida jury awarded damages of $750,000 to an individual plaintiff. The defendants in that case, CARTER V. BROWN & WILLIAMSON, are seeking to reverse the judgment on appeal. On June 24, 1992, the United States Supreme Court in CIPOLLONE held that claims that tobacco companies failed adequately to 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 Supreme Court also held that certain claims sounding in breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. CERTAIN CLASS ACTION SUITS. In May 1996, there was an important ruling in one of the purported class action cases, CASTANO V. THE AMERICAN TOBACCO COMPANY, originally filed in March 1994 in the United States District Court for the Eastern District of Louisiana against tobacco industry defendants, including RJRT and RJRN. Plaintiffs sought to obtain 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 alleged 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 but, on May 23, 1996, the Fifth Circuit Court of Appeals overturned the certification and ordered the case remanded to the district court for decertification of the class on the grounds that a class consisting of all "addicted" smokers failed to meet the standards and requirements of Federal Rule 23 governing class actions. The class has been decertified. Since the federal appeals court decision in CASTANO, class action suits based on similar claims have been brought in state courts in Alabama, Arkansas, the District of Columbia (D.C. court), Louisiana, Maryland, Minnesota, New Mexico, Ohio, Pennsylvania and New York. A similar suit had previously been filed in Indiana. Similar suits are also expected to be filed in additional jurisdictions. Each such suit asserts claims on behalf of residents of the particular state who allegedly are or claim to be addicted, or are the legal survivors of such persons. In addition, two earlier class action suits are still pending in Florida. In one case, ENGLE V. R.J. REYNOLDS TOBACCO COMPANY, a class consisting of Florida residents or their survivors who claim to have diseases or medical conditions caused by their "addiction" to cigarettes has been certified, and a petition to review the certification has been denied. Notice to the class is in progress and the case is scheduled for trial in September 1997. In a second case, BROIN V. PHILIP MORRIS COMPANY, a class consisting of all non-smoking flight attendants who work or have worked for U.S. airlines has been certified, and a mandamus petition to reverse this certification was denied. Notice to the class is now in progress and the case is scheduled for trial in June 1997. Pre-Castano class action suits are also pending in Alabama and Louisiana. A class action filed in Tennessee seeks reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout the United States. THE ATTORNEYS GENERAL AND RELATED CASES. In June 1994, the Mississippi attorney general brought an action, MOORE V. THE AMERICAN TOBACCO COMPANY, against various industry members including RJRT. The case was brought 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 9 injunction against "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 is scheduled for trial June 2, 1997. RJRN and other industry holding companies have been voluntarily dismissed from the case. Following the filing of the MOORE case referred to above, other states, through their attorneys general and/or other state agencies, have sued RJRT and other U.S. cigarette manufacturers as well as, in some instances, their parent companies, in actions to recover the costs of medical expenses incurred by the state or its agencies in the treatment of diseases allegedly caused by cigarette smoking. Some of these cases also seek injunctive relief and treble damages for state and/or federal antitrust law and RICO violations. On February 28, 1997, there were 20 such cases pending in the following states: Arizona, Connecticut, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, Oklahoma, Texas, Utah, Washington, West Virginia and Wisconsin. The Mississippi case is the first such case currently scheduled for trial, with a trial date set for June 2, 1997. The Florida attorney general's case is scheduled for trial on August 4, 1997 and the Texas case is scheduled for September 22, 1997. The suit by the State of Florida raises special issues because it was brought under a July 1994 amendment to a Florida statute which allows the state to bring an action in its own name against the tobacco industry to recover the state's Medicaid payments for the treatment of illnesses statistically associated with cigarette smoking. The amendment did not require the state to identify the individuals who received medical care, permitted claims to be filed in the aggregate and eliminated the comparative negligence and assumption of risk defenses. The amendment was challenged on state and federal constitutional grounds in a lawsuit brought by Philip Morris Companies Inc., Associated Industries of Florida and others in June 1994. The case was appealed to the Florida Supreme Court which, on June 27, 1996, issued its opinion limiting the amendment in several respects. Among other things, the court ruled: that provisions abrogating affirmative defenses available to tobacco companies if sued by individuals could only be applied to claims brought by the state arising out of payments made after July 1, 1994, the effective date of the amendment; that the state must identify individual recipients of Medicaid payments; and that claims previously barred by the statute of repose could not be revived. The Florida Supreme Court, in a 4-3 decision, expressly stated that although it found provisions of the statute to be "facially" constitutional, it was specifically leaving open the right to challenge those provisions as applied in any specific lawsuit. The plaintiffs in that lawsuit have sought United States Supreme Court review of the Florida Supreme Court's decision, to determine whether the Florida statute, by which the State of Florida conferred on itself a unique cause of action and which directs courts to abrogate common law and equitable principles, including affirmative defenses, is unconstitutional under the Fourteenth Amendment to the United States Constitution. In an order, dated September 16, 1996, the Florida trial court hearing the attorney general's case applied the Florida Supreme Court decision to that case. The order dismissed fifteen of plaintiff's eighteen causes of action, but left standing the claims of negligence and/or products liability and one count of the complaint which seeks to enjoin certain acts including the sale of cigarettes to minors. It also required the attorney general to identify the individual Medicaid recipients for whom the state is seeking recovery within 30 days and precluded recovery by the state on payments made prior to July, 1994, except by subrogation and assignment. Following this ruling, the State of Florida filed an amended complaint that restated the counts of the prior complaint left standing by the September order and added five additional counts. One of these counts alleged various statutory and criminal violations arising under the Florida Drug and Cosmetic Act, based on alleged wrongful and illegal targeting of minors, fraudulent practices, public nuisance and deceptive and unfair trade practices. The other four new counts alleged violations of various sections of the Florida RICO Act. Defendants' motion to dismiss the RICO counts was denied. In addition to the 20 actions brought by the various state attorneys general, seven actions advancing similar theories have been brought by private attorneys and/or local officials purportedly on behalf of the citizens of certain states, counties and/or cities. 10 RJRT and most other cigarette manufacturers are defending these attorneys general and related cases vigorously (as is RJRN in the cases where it is a named defendant). In addition, these defendants have filed petitions for declaratory judgment in several of the states in which the attorneys general cases are pending or threatened, including Massachusetts (federal court), Texas (state court), Maryland (state court), Connecticut (federal court), Utah (state court), New Jersey (state court), Alaska (federal court) and Hawaii (federal court). Motions to dismiss on behalf of the defendants in two of the declaratory judgment actions (Maryland and Connecticut) have been granted. RJRT and the other cigarette manufacturers involved in those two cases have noticed appeals seeking to overturn these rulings. RECENT AND SCHEDULED TRIALS. As of February 28, 1997, there were 17 cases scheduled for trial in 1997, against RJRT and/or RJRN alleging injuries relating to tobacco. Cases against other tobacco company defendants are also scheduled for trial in 1997 and thereafter. Among these are three class action suits and four attorneys general suits. Although trial schedules are subject to change and many cases are dismissed before trial, it is likely that there will be an increased number of tobacco cases, involving claims for possibly billions of dollars, coming to trial over the next year as compared to prior years when trials in these cases were infrequent. OTHER DEVELOPMENTS. On March 12, 1996, defendants Brooke Group and Liggett Group, Inc. stated they had reached agreement with the Castano plaintiffs to settle that case. On April 4, 1996, Liggett Group, Liggett & Myers and Brooke Group filed settlement statements in the Massachusetts, West Virginia, Mississippi, Louisiana and Florida attorneys general cases. The settlements would be available to any other defendant whose share of the U.S. cigarette market is less than 30% if it acquires or is acquired by Liggett, and Liggett can terminate each settlement upon the occurrence of certain events including the decertification of the Castano case, an event that has now occurred. According to press reports, negotiations to extend these settlements to other attorneys general cases are ongoing. All other cigarette manufacturers, including RJRT, announced their intent to continue to defend the cases. Legislation similar to the Florida legislation described above (facilitating Medicaid recovery suits and stripping defendants of certain defenses) was introduced in the legislatures of 12 states in 1996. None was enacted. RJRT is unable to predict whether legislation will be enacted in these states, whether other states will introduce and enact similar legislation, whether lawsuits will be filed under such statutes, if enacted, or the outcome of any such lawsuits, if filed. In recent months the press has reported rumors regarding potential legislation to limit regulatory or litigation uncertainty associated with smoking and health issues. RJRT and RJRN believe that they have valid defenses in the smoking and health cases and continue their commitment to defend these cases vigorously. Nonetheless, Management or their representatives may hold discussions with various persons, including elected officials, government officials and private parties to learn their views about and to explore ideas on this subject. The enactment of legislation in this area by its nature is highly speculative and may well face insurmountable hurdles. Accordingly, there can be no assurance that any legislation will be enacted. 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 has responded, and will continue to respond to document subpoenas issued by this grand jury. On March 20, 1996, RJRT and RJRN each received a subpoena from a Federal grand jury sitting in the Southern District of New York. RJRT and RJRN understand that this investigation is no longer active in the Southern District of New York and has been transferred to the District of Columbia. In addition, subpoenas dated May 24, 1996, November 8, 1996 and December 5, 1996, were served on RJRT by a grand jury sitting in the District of Columbia. RJRT is in the process of responding to those subpoenas. RJRN and RJRT are unable to predict the outcome of these investigations. RJRT has received civil investigative demands from the United States Department of Justice requiring RJRT to produce documents and respond to interrogatories relating to the possibility of joint activity to 11 restrain competition in the manufacture and sale of cigarettes, including possible joint activity to restrict research and development or product innovations. RJRT was informed, by letter dated November 13, 1996, that the United States Department of Justice had closed its 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 could encourage an increase in the number of such claims. There have also been a number of political, legislative, regulatory and other developments relating to the tobacco industry and cigarette smoking that have received wide media attention. Although it is impossible to predict the outcome of such events on pending litigation and the rate at which new lawsuits are filed against RJRT and RJRN, 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 all such actions vigorously. RJRN Holdings and RJRN also believe they have valid defenses for such actions and intend to defend vigorously all such actions in which they are named defendants. RJRN Holdings and RJRN believe that the ultimate outcome of all pending litigation matters (including litigation costs) should not have a material adverse effect on the financial position of either RJRN Holdings or RJRN; however, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). 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. For more detailed information about the class action and attorneys general suits pending against RJRT and its affiliates and indemnitees, see exhibit 99 to this Form 10-K, a copy of which will be provided free of charge to persons requesting it in writing and addressed to Worldwide Communications, RJR Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019 or by phone to 800-RJR-NAB3. ------------------------ 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 businesses in the United States are comprised of the Nabisco Biscuit, Specialty Products, LifeSavers, Planters, Food Service and Nabisco Tablespreads companies (collectively, the "Domestic Food Group"). Nabisco's businesses outside the United States are conducted by Nabisco Ltd and Nabisco International (collectively, 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 1996. 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 1996. Overall, in 1996, Nabisco Biscuit had a 41.0% share of the domestic cookie category and a 55.8% share of the domestic cracker category, in the aggregate more than two times 12 the share of its closest competitor. Leading Nabisco Biscuit cookie brands include OREO, CHIPS AHOY!, SNACKWELL's and NEWTONS. Leading Nabisco Biscuit cracker brands include RITZ, PREMIUM, NABISCO HONEY MAID GRAHAMS, TRISCUIT, WHEAT THINS and AIR CRISPS. 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 fourth leading cookie brand in the United States. In recent years, the introduction of fat free and reduced calorie varieties of NEWTONS, as well as NEWTONS COBBLERS, have expanded the appeal of NEWTONS. Nabisco Biscuit's cracker business is led by RITZ, the largest selling cracker in the United States, as well as RITZ BITS, RITZ BITS SANDWICHES, and REDUCED FAT RITZ successful product line extensions which, together with RITZ, accounted for 13.9% of cracker sales in the United States in 1996. 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 TRISKET to comprise, along with RITZ, five of the six largest selling cracker brands in the United States. AIR CRISPS, a line of light, crispy baked snacks in Ritz, Cheese Nips, Wheat Thins and Pretzel varieties was launched nationally in 1996 and had sales in excess of $100 million. 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, which is now the third largest cookie brand in the U.S. Nabisco Biscuit's other cookie and cracker brands, which include NILLA, NUTTER BUTTER, STELLA D'ORO, BETTER CHEDDARS, CHEESE NIPS and BARNUM'S ANIMAL CRACKERS, compete in consumer niche segments. Many are the first or second largest selling brands in their respective segments. In 1994, Nabisco entered the breakfast snack aisle with the launch of SNACKWELL'S cereal bars and granola bars and the repositioning of TOASTETTES toaster pastries. Nabisco introduced SNACKWELL'S fat free toaster pastries in 1996. Nabisco Biscuit's products are manufactured in 14 Nabisco owned bakeries and in 13 facilities with which Nabisco has production agreements. These facilities are located throughout the United States. Nabisco Biscuit also operates a flour mill in Toledo, Ohio which supplies over 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 126 shipping branches where shipments are consolidated for delivery to approximately 119,000 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 manufactures and markets a broad range of food products, with sauces and condiments, pet snacks, hot cereals, healthy packaged egg products, dry mix desserts and non-fat chocolate yogurt representing the largest categories. Many of Specialty Products Company 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, CREAM OF WHEAT hot cereals, EGGBEATERS healthy packaged egg products and ROYAL desserts. 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. 13 Specialty Products is the second largest 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, BUTCHER'S CHOICE and DOGGIE BAG TREATS. The Specialty Products Company, a leading manufacturer of hot cereals, participates 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 nine varieties of INSTANT CREAM OF WHEAT participate in the mix-in-bowl segment. Quaker Oats Company is the most significant participant in the hot cereal category. Specialty Products manufactures in five plants and sources products from a number of contract manufacturers. Specialty Products utilizes Nabisco's Sales & Integrated Logistics Group to manage the sales and distribution of its products. Its products are primarily sold to retail grocery chains, drug stores, mass merchandisers and other major retail outlets through a direct sales force. Independent brokers are used to sell its refrigerated and frozen products. LIFESAVERS COMPANY. The LifeSavers Company manufactures and markets non-chocolate candy and gum primarily for sale in the United States. LifeSavers' well-known brands include LIFESAVERS candy, BREATH SAVERS sugar free mints, BUBBLE YUM bubble gum, FRUIT STRIPE gum, CARE*FREE sugarless gum, NOW & LATER fruit chewy taffy, ICE BREAKERS gum and GUMMI SAVERS fruit chewy candy. LIFESAVERS is the largest selling non-chocolate candy brand in the United States, with a 1996 share of 5.4% of the non-chocolate 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 manufactures its products in four plants and utilizes Nabisco's Sales & Integrated Logistics Group to manage the sales and distribution of its products. Its products are primarily sold to grocery stores, drug stores, mass merchandisers, convenience stores and membership club stores. PLANTERS COMPANY. The Planters Company produces and markets nuts and snacks largely for sale in the United States, primarily under the PLANTERS trademark. Planters, the only packaged nut brand sold nationally, is the clear leader in the category. Planters' products are seasonally strongest in the fourth quarter. Planters manufactures its products in two plants and utilizes Nabisco's Sales & Integrated Logistics Group to manage the sales and distribution of its products. Its products are primarily sold to grocery stores, drug stores, mass merchandisers, convenience stores and membership club stores. FOOD SERVICE COMPANY. The Food Service Company sells through non-grocery channels, a variety of specially packaged food products of the Domestic Food Group including cookies, crackers, confections, hot cereals, sauces and condiments for the food service and vending machine industry. Food Service also sells pies through its Plush Pippin business. Food Service Company's products are distributed by Nabisco's Sales & Integrated Logistics Group. NABISCO TABLESPREADS COMPANY. The Nabisco Tablespreads Company manufactures and markets various margarines and spreads and is the second largest margarine producer in the United States. Nabisco Tablespreads participates in all segments of the margarine category, with the FLEISCHMANN'S, BLUE BONNET and MOVE OVER BUTTER brands. Nabisco Tablespreads strengthened its position in the margarine category in 1995, with the purchase of the Kraft Foods, Inc. margarine business which includes the PARKAY, TOUCH OF BUTTER and CHIFFON brands. Nabisco Tablespreads currently manufactures in two facilities and sources products from two contract manufacturers. Nabisco Tablespreads utilizes Nabisco's Sales and Integrated Logistics Group to manage the sales and distribution of its products which are sold primarily to grocery stores. SALES & INTEGRATED LOGISTICS GROUP. The Sales & Integrated Logistics Group handles sales and distribution for the Specialty Products, LifeSavers, Planters and Nabisco Tablespreads Companies and 14 distribution for the Food Service Company. It sells to retail grocery chains through independent brokers and a direct sales force, and to drug stores, mass merchandisers and other major retail outlets through its direct sales force. The products are distributed from twenty distribution centers located throughout the United States. INTERNATIONAL FOOD GROUP OPERATIONS NABISCO LTD. Nabisco Ltd conducts Nabisco's Canadian operations through its Biscuit Division, Grocery Division and 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 1996. Nabisco Ltd's cookie and cracker brands in Canada include OREO, CHIPS AHOY!, SNACKWELL'S, 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 Ltd also markets a variety of single-serve cookies, crackers and salty snacks under such brand names as MINI OREO, RITZ BITS SANDWICHES and CRISPERS. Nabisco 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 Ltd's Grocery Division operated seven manufacturing facilities in 1996, of which five were devoted to canned products, principally fruits and vegetables, one produced pet snacks and one produced pasta. The Grocery Division's products are sold directly to retail chains and are distributed through five regional warehouses. In 1995, Nabisco Ltd acquired the PRIMO brand of dry pasta, canned tomatoes and other Italian food products which are manufactured in two facilities and distributed in certain geographic areas by a direct store delivery system. In 1995, Nabisco Ltd re-entered the margarine and tablespread business with its acquisition of the PARKAY, TOUCH OF BUTTER and CHIFFON brands from Kraft Canada Inc. These products are currently manufactured and distributed under agreements with Ault Foods, Ltd., to which Nabisco Ltd licensed the Parkay brand in November 1996. Nabisco Ltd's Food Service Division sells a variety of specially packaged food products including cookies, crackers, canned fruits, vegetables and condiments to non-grocery outlets. The Food Service Division has its own sales and marketing organization and sources product from Nabisco Ltd's other divisions. NABISCO INTERNATIONAL. Nabisco International is a leading producer of biscuits, powdered dessert and drink mixes, baking powder, pasta, juices, milk products and other grocery items as well as industrial yeast and bakery ingredients. Nabisco International also exports a variety of Domestic Food Group products to markets in Europe, the Middle East, Latin America, Africa and Asia from the United States. It is one of the largest multinational packaged food businesses in Latin America, with operations in 17 countries. 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, AVARE, and GUMZ brands, juice under the MAGUARY 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. In biscuits, Nabisco International is the market leader in Spain, Venezuela, Puerto Rico, Nicaragua, Uruguay and Taiwan, and holds strong number two positions in Argentina, Peru, Ecuador and other Central American markets. Nabisco International is the market leader in powdered desserts in Spain and most of Latin America, in 15 the yeast category in Brazil and certain other Latin American countries, in baking powder throughout South America, and in canned vegetables in Venezuela. Nabisco International also maintains a strong position in the processed milk category in Brazil and expanded its market share through the 1995 acquisitions of Avare (I.C.P.A. Cerqueirense Ltda.) and Gumz Alimentos S.A. Industria e Comercio. In Argentina, Nabisco International acquired 71% of Establecimiento Modelo Terrabusi S.A.I.C. in April 1994, and increased its interest in the Argentine biscuit and pasta company to approximately 99% in October and November 1994. Nabisco further strengthened its Latin American biscuit operations through the acquisitions during 1996 of Companhia Produtos Pilar in Brazil, Productos Mayco S.A.I.C.I.F. and Productos Capri S.A.C.I.I. in Argentina, and during 1995, Galletera Tejerias, S.A. in Venezuela. Its pasta business was strengthened in Argentina via the acquisitions of Luis Vizzolini e Hijos, S.A.I.C., and initiated in Brazil with the Pilar acquisition. Nabisco International significantly increased its presence in Europe through its 1993 and 1994 100% acquisition of Royal Brands S.A. in Spain and Royal Brands Portugal. Nabisco International's products in Spain 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. In 1996, it consolidated its market leadership position in biscuits with the acquisition of Galletas Fontaneda, S.A. In 1995, Nabisco International re-entered the South African market through the acquisition of 50% of Royal Beech-Nut (Pty) Ltd., which it previously owned. Royal Beech-Nut markets baking powder and powdered dessert mixes under the ROYAL brand, chewing gum under the BEECHIES and CARE*FREE brands and candy under the LIFESAVERS and BEECH-NUT brands. In Asia, Nabisco International expanded its Chinese biscuit business through a joint venture in Beijing and a wholly-owned subsidiary in Shanghai. The bakery was trebled in size and a greenfield plant outside Shanghai started up in 1996. In addition, a greenfield plant, 70% owned by Nabisco and 30% by its partner and distributor, P.T. Rodamas-Indonesia, started up in 1996. Biscuit leadership in Taiwan was achieved in 1996 through the acquisition of the assets of Lucky Enterprises Corporation Limited, the leading biscuit company in Taiwan. Nabisco International's grocery products are sold to retail outlets through its own local country sales forces and independent wholesalers and distributors. Industrial yeast and bakery products are sold to the bakery trade through Nabisco International's own local country sales force 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 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 16 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 EPA 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. In April 1995, RJRN Holdings was named a potentially responsible party (a "PRP") with certain third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to a superfund site at which a former subsidiary of RJRN had operations. Certain subsidiaries of the Registrants have also been named as PRPs with third parties or may have indemnification obligations with respect to a number of additional sites. Liability under CERCLA is joint and several. RJRN Holdings' subsidiaries have been engaged in a continuing program to assure compliance with U.S., state and local 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, RJRN Holdings and RJRN do not expect such expenditures or other costs to have a material adverse effect on the business or financial condition of the Registrants and their subsidiaries taken as a whole. EMPLOYEES At December 31, 1996, RJRN Holdings together with its subsidiaries had approximately 79,700 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, Confectionery and Tobacco Workers International Union, which was ratified in August 1996 and which will expire in August 2001. Other unions represent the employees of a number of Nabisco's operations and several of Reynolds International's operations are unionized. RJRN believes that its subsidiaries' 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 1994 through 1996, see "Geographic Data" in Note 14 to the Consolidated Financial Statements. ITEM 2. PROPERTIES For information pertaining to the RJRN Holdings' and RJRN's assets by lines of business and geographic areas as of December 31, 1996 and 1995, see Note 14 to the Consolidated Financial Statements. For information on properties, see Item 1. ITEM 3. LEGAL PROCEEDINGS In the fourth quarter of 1995, purported RJRN Holdings stockholders for themselves and derivatively for RJRN Holdings and Nabisco Holdings filed three putative class and derivative actions in the Court of Chancery of the State of Delaware in and for New Castle County against members of RJRN Holdings Board of Directors. The actions were consolidated in December 1995. The plaintiffs allege, among other things, that the individual defendants breached their fiduciary duty and wasted corporate assets by undertaking an exchange offer and related consent solicitations completed by RJRN and Nabisco in 17 June 1995 and by amending, in August 1995, RJRN Holdings By-Law provisions concerning the calling of shareholder meetings and procedures for shareholder action by written consent. The plaintiffs allege that management took these and other actions to wrongfully obstruct a spin-off of Nabisco, to enrich the defendants at the expense of RJRN Holdings, its shareholders and Nabisco Holdings and to entrench the defendants in the management and control of RJRN Holdings. By agreement of the parties, the defendants' time to respond to the complaint in these consolidated actions has been extended, most recently, to May 9, 1997. RJRN Holdings believes that these allegations are without merit and, if necessary, will defend these actions vigorously. For information about other litigation and legal proceedings, see "Business--Tobacco--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. RJRN Holdings and RJRN believe that the ultimate outcome of all pending litigation matters (including litigation costs) should not have a material adverse effect on the financial position of either RJRN Holdings or RJRN; however, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). 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 RJRN HOLDINGS The executive officers of RJRN Holdings are Steven F. Goldstone (Chairman of the Board, Chief Executive Officer and President), Gerald I. Angowitz (Senior Vice President, Human Resources and Administration), John J. Delucca (Senior Vice President and Treasurer), Robert S. Roath (Senior Vice President and Chief Financial Officer), Richard G. Russell (Senior Vice President and Controller), Robert F. Sharpe, Jr. (Senior Vice President and General Counsel), and H. Colin McBride (Vice President, Assistant General Counsel and Secretary). Commencing in mid-March 1997, David B. Rickard will become Senior Vice President and Chief Financial Officer, replacing Robert S. Roath who is retiring. The following table sets forth certain information regarding such officers.
BUSINESS EXPERIENCE DURING THE PAST NAME AGE FIVE YEARS AND OTHER INFORMATION - --------------------------- --- ----------------------------------------------------------------------------- Steven F. Goldstone 51 Chairman since May 1996; Chief Executive Officer since December 1995; President since October 1995; prior thereto General Counsel, March 1995 to December 1995; previously Senior Partner with law firm of Davis, Polk & Wardwell until October 1995 and for more than five years prior thereto. Gerald I. Angowitz 47 Senior Vice President of Human Resources and Administration since March 1995; prior thereto, Vice President of Human Resources, January 1994 to March 1995; Vice President of Employee Benefits, January 1992 to December 1993; Senior Director of Benefits Planning and Analysis, June 1991 to December 1991; previously Principal of the consulting firm of Kwasha Lipton, 1989 to 1991. John J. Delucca 53 Senior Vice President and Treasurer since September 1993; Treasurer of Nabisco Holdings, October 1994 to February 1995; previously, Managing Director and Chief Financial Officer, Hascoe Associates, 1991 to 1993; President and Chief Financial Officer, Lexington Group, 1990 to 1991. David B. Rickard 50 Senior Vice President and Chief Financial Officer beginning mid-March 1997; previously, Executive Vice President and Chief Administrative Officer, International Distillers and Vintners, 1996 to 1997; Finance Director, International Distillers and Vintners, 1995 to 1996; Group Controller, Grand Metropolitan PLC, 1994 to 1995; Senior Vice President and Chief Financial Officer, The Pillsbury Company, 1991 to 1994. Robert S. Roath 54 Senior Vice President and Chief Financial Officer since May 1995; prior thereto, Senior Vice President and Controller, 1991 to May 1995; Vice President and Controller, 1990 to 1991. Richard G. Russell 51 Senior Vice President and Controller since May 1995; previously Partner at the accounting firm of Deloitte & Touche LLP for more than five years. Robert F. Sharpe Jr. 44 Senior Vice President and General Counsel since January 1996; previously Vice President, Tyco International Ltd., July 1994 to January 1996; Vice President, Assistant General Counsel and Secretary, RJRN Holdings and RJRN, 1989 to July 1994. H. Colin McBride 51 Vice President, Assistant General Counsel and Secretary since December 1995; prior thereto, Vice President and Assistant General Counsel for more than five years.
19 EXECUTIVE OFFICERS OF RJRN HOLDINGS OR ITS SUBSIDIARIES 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 certain executive officers of RJRN Holdings or its subsidiaries, other than those listed above.
BUSINESS EXPERIENCE DURING THE PAST NAME AGE FIVE YEARS AND OTHER INFORMATION - --------------------------- --- ----------------------------------------------------------------------------- H. John Greeniaus 52 Vice Chairman and Director, June 1995 to May 1996; President and Chief Executive Officer of Nabisco Holdings and of Nabisco since October 1994; prior thereto, Chairman and Chief Executive Officer of Nabisco, 1993 to 1994; President and Chief Executive Officer of Nabisco, 1987 to 1993. Member of the Board of Directors of Nabisco Holdings and Nabisco. Pierre de Labouchere 42 Chief Executive Officer and President of Reynolds International since December 1995; prior thereto, President of Eastern Europe, Middle East and Africa Region, Reynolds International, 1994 to December 1995; Regional Vice President--European and Special Markets, Reynolds International, 1991 to 1994; Vice President-- Scandinavia and Tax-Free Europe, Reynolds International, 1987 to 1991. Andrew J. Schindler 52 President and Chief Executive Officer of RJRT since July 1995; prior thereto, President and Chief Operating Officer--U.S.A. of RJRT, May 1994 to June 1995; Executive Vice President--Operations, RJRT, 1991 to 1994; Senior Vice President--Operations, RJRT, 1989 to 1991. J. Thomas Pearson 55 Senior Vice President, Taxation since 1988. Huntley R. Whitacre 54 Senior Vice President of Investor Relations since August 1995; prior thereto, Vice President of Investor Relations for more than five years. Jason H. Wright 36 Senior Vice President of Worldwide Communications since February 1994; prior thereto, Vice President of Worldwide Communications, 1993 to 1994; Vice President of Financial Communications, 1990 to 1993. Jeffrey A. Kuchar 42 Vice President and General Auditor since 1993; prior thereto, Director of Finance and Business Development, Specialty Products Company, Nabisco, 1993; Director of Financial Planning, Specialty Products Company, Nabisco, 1992 to 1993; Assistant Corporate Controller, 1987 to 1991.
20 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of RJRN Holdings, par value $.01 per share (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, 1997, there were approximately 59,000 record holders of the Common Stock. All of the common stock of RJRN is owned by RJRN Holdings. The Common Stock closing price on the NYSE for February 25, 1997 was $38 3/8. 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 --------- --------- 1996: First Quarter.................................................. $ 35 1/4 $ 29 Second Quarter................................................. 34 1/2 29 Third Quarter.................................................. 32 3/8 25 1/8 Fourth Quarter................................................. 34 5/8 25 3/4 HIGH LOW --------- -------------------- 1995: First Quarter*................................................. $ 32 1/2 $ 25 Second Quarter*................................................ 31 1/4 25 1/4 Third Quarter.................................................. 33 1/4 26 3/8 Fourth Quarter................................................. 33 3/8 27 7/8
* Adjusted to reflect a one-for-five reverse stock split - ------------------------ The Board of Directors of RJRN Holdings declared an initial quarterly cash dividend of $.375 per share payable on April 1, 1995. During 1995, RJRN Holdings continued to pay such a quarterly cash dividend on the Common Stock, adjusted to take into account a one-for-five reverse split of the Common Stock. Cash dividends paid by RJRN to RJRN Holdings are set forth in the Consolidated Statements of Cash Flows in the Consolidated Financial Statements. On March 5, 1996, RJRN Holdings announced a 23% increase in its annual common dividend rate from $1.50 to $1.85 per share of Common Stock and adopted as an objective the repurchase of approximately 10 million shares of Common Stock over the next several years based on the achievement of performance targets. RJRN Holdings repurchased approximately $100 million of Common Stock in 1996. On February 28, 1997, the Board of Directors authorized an 11% increase in the annual common dividend to $2.05 per share and authorized the repurchase of up to $200 million of Common Stock in 1997. On June 5, 1996, Nabisco Holdings announced a 13% increase in its annual common stock dividend from $.55 to $.62 per share. As a result, the Nabisco Holdings dividends payable to RJRN increased from approximately $117 million to approximately $132 million annually. The operations of RJRN Holdings and RJRN are conducted through RJRN's subsidiaries and, therefore, RJRN Holdings and RJRN are dependent on the earnings and cash flow of RJRN's subsidiaries to satisfy their respective obligations and other cash needs. Certain Nabisco credit facilities limit the amount of dividends, distributions and advances by Nabisco Holdings and its subsidiaries to RJRN Holdings and its non-Nabisco subsidiaries. Moreover, RJRN's credit agreements and certain policies adopted by the Board of Directors of RJRN Holdings limit the payment by RJRN 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 Note 8 to the Consolidated Financial Statements. RJRN 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. 21 ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 - ----------------------------------------------------------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS Net sales................................................ $ 17,063 $ 16,008 $ 15,366 $ 15,104 $ 15,734 --------- --------- --------- --------- --------- Cost of products sold.................................... 7,973 7,468 6,977 6,640 6,326 Selling, advertising, administrative and general expenses....................................... 5,774 5,412 5,210 5,731 5,788 Amortization of trademarks and goodwill.................. 636 636 629 625 616 Restructuring expense.................................... 428 154 -- 730 106 --------- --------- --------- --------- --------- Operating income....................................... 2,252 2,338 2,550 1,378 2,898 Interest and debt expense................................ (927) (899) (1,065) (1,209) (1,449) Other income (expense), net.............................. (126) (173) (110) (58) 7 --------- --------- --------- --------- --------- Income before income taxes............................. 1,199 1,266 1,375 111 1,456 Provision for income taxes............................... 585 580 611 114 680 --------- --------- --------- --------- --------- Income (loss) before minority interest in income of Nabisco Holdings..................................... 614 686 764 (3) 776 Less minority interest in income of Nabisco Holdings..... 3 59 -- -- -- --------- --------- --------- --------- --------- Income (loss) before extraordinary item................ 611 627 764 (3) 776 Extraordinary item--loss on early extinguishments of debt, net of income taxes and minority interest........ -- (16) (245) (142) (477) --------- --------- --------- --------- --------- Net income (loss)........................................ $ 611 $ 611 $ 519 $ (145) $ 299 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PER SHARE DATA Net income (loss) per common and common equivalent share: Income before extraordinary item......................... $ 1.74 $ 1.58 $ 2.06 $ (0.26) $ 2.73 Extraordinary item....................................... -- (0.05) (0.79) (0.53) (1.75) --------- --------- --------- --------- --------- Net income (loss)...................................... $ 1.74 $ 1.53 $ 1.27 $ (0.79) $ 0.98 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Dividends per share of common stock...................... $ 1.85 $ 1.50 -- -- -- Dividends per share of Series A convertible preferred stock.................................................. -- -- $ 2.92 $ 3.34 $ 3.34 Dividends per share of Series C convertible preferred stock.................................................. $ 6.01 $ 6.01 $ 3.94 -- -- BALANCE SHEET DATA (AT END OF PERIODS) Working capital.......................................... $ 445 $ 436 $ (1,231) $ 202 $ 730 Total assets............................................. 31,289 31,518 31,408 31,295 32,041 Total debt............................................... 9,928 9,847 11,149 12,448 14,218 Mandatorily redeemable preferred securities.............. 954 954 -- -- -- Stockholders' equity..................................... 10,148 10,329 10,908 9,070 8,376
- ------------------------ (1) See the consolidated financial statements regarding (i) the restructuring of the food operations during 1996; (ii) the restructuring of the worldwide tobacco operations, the exchange of preferred securities by RJRN Holdings and a subsidiary, and certain debt exchanges and refinancings by RJRN and Nabisco during 1995; (iii) the realignment of corporate headquarters and the issuance of depositary shares during 1994; and (iv) the conversion during 1994 of depositary shares issued during 1991. (2) The deficit in working capital at December 31, 1994 included $1.35 billion of borrowings by Nabisco under its 364-day credit facility, a substantial portion of which was used in connection with the refinancing of certain long-term debt. During January 1995, such borrowings were substantially 22 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 Holdings' Class A common stock. (3) During 1993, a pre-tax restructuring charge of $730 million ($467 million after-tax) was recorded in connection with a program to streamline both the tobacco and food operations and to improve profitability. (4) The 1993 per share loss before extraordinary item would have amounted to $1.08 per share if the weighted average number of shares of RJRN Holdings' Series A depositary shares outstanding during the period had been excluded from the earnings per share calculation. (5) Net sales and costs of products sold exclude excise taxes of $3.852 billion, $3.832 billion, $3.578 billion, $3.757 billion and $3.560 billion for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. See Notes to Consolidated Financial Statements. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of the consolidated financial condition and results of operations of RJRN Holdings. The discussion and analysis should be read in connection with the consolidated financial statements and the related notes thereto of RJRN Holdings as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996. RESULTS OF OPERATIONS
% CHANGE FROM PRIOR YEAR ------------------------ YEARS ENDED DECEMBER 31 1996 1995 1994 1996 1995 - -------------------------------------------------------------- --------- --------- --------- ----- ----- (DOLLARS IN MILLIONS) Net sales: R.J. Reynolds Tobacco....................................... $ 4,551 $ 4,480 $ 4,570 2% (2)% Reynolds International...................................... 3,623 3,234 3,097 12% 4% --------- --------- --------- Total Tobacco............................................... 8,174 7,714 7,667 6% 1% --------- --------- --------- Domestic Food Group......................................... 6,315 6,020 5,729 5% 5% International Food Group.................................... 2,574 2,274 1,970 13% 15% --------- --------- --------- Total Nabisco............................................... 8,889 8,294 7,699 7% 8% --------- --------- --------- $ 17,063 $ 16,008 $ 15,366 7% 4% --------- --------- --------- --------- --------- --------- Operating company contribution(1): R.J. Reynolds Tobacco....................................... $ 1,450 $ 1,420 $ 1,450 2% (2)% Reynolds International...................................... 803 643 755 25% (15)% --------- --------- --------- Total Tobacco............................................... 2,253 2,063 2,205 9% (6)% --------- --------- --------- Domestic Food Group......................................... 888 890 935 -- (5)% International Food Group.................................... 242 239 177 1% 35% --------- --------- --------- Total Nabisco............................................... 1,130 1,129 1,112 -- 2% --------- --------- --------- Headquarters................................................ (67) (64) (138) (5)% 54% --------- --------- --------- $ 3,316 $ 3,128 $ 3,179 6% (2)% --------- --------- --------- --------- --------- --------- Operating income: R.J. Reynolds Tobacco....................................... $ 1,084 $ 954 $ 1,085 14% (12)% Reynolds International...................................... 761 546 716 39% (24)% --------- --------- --------- Total Tobacco............................................... 1,845 1,500 1,801 23% (17)% --------- --------- --------- Domestic Food Group......................................... 333 687 730 (52)% (6)% International Food Group.................................... 141 215 157 (34)% 37% --------- --------- --------- Total Nabisco............................................... 474 902 887 (47)% 2% --------- --------- --------- Headquarters................................................ (67) (64) (138) (5)% 54% --------- --------- --------- $ 2,252 $ 2,338 $ 2,550 (4)% (8)% --------- --------- --------- --------- --------- ---------
24 INDUSTRY SEGMENTS The percentage contributions of each industry segment to net sales and operating company contribution during the last five years were as follows:
1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Net sales: Total Tobacco........................................... 48% 48% 50% 53% 57% Total Food.............................................. 52 52 50 47 43 --- --- --- --- --- 100% 100% 100% 100% 100% --- --- --- --- --- --- --- --- --- --- Operating company contribution(1)(2): Total Tobacco........................................... 67% 65% 66% 66% 74% Total Food.............................................. 33 35 34 34 26 --- --- --- --- --- 100% 100% 100% 100% 100% --- --- --- --- --- --- --- --- --- ---
- ------------------------ (1) Operating company contribution represents operating income before amortization of trademarks and goodwill and restructuring expenses. Restructuring expenses amounted to $428 million for 1996 (Domestic Food Group-$353 million, International Food Group-$75 million), $154 million for 1995 (RJRT-$100 million, Reynolds International-$54 million) and $730 million for 1993 (RJRT-$355 million, Reynolds International-$189 million, Domestic Food Group-$132 million, International Food Group-$21 million and Headquarters-$33 million). (2) Contributions by industry segments were computed without effects of Headquarters' expenses. TOBACCO The tobacco business is conducted by R.J. Reynolds Tobacco and Reynolds International. 1996 VS. 1995. RJRT's net sales in 1996 increased 2% over 1995 to $4.6 billion primarily due to pricing ($164 million), partially offset by an overall volume decline of 4% ($127 million). RJRT's full-price volume decreased 3% for the full year. Given extra business days in 1996 versus 1995, total industry shipments were up slightly versus 1995 while consumption was essentially flat. The dynamics of the market continued to shift toward full-price brands in 1996 which comprised 72% of the total industry volume in 1996 versus 28% for savings brands. This compares to a 70% to 30% split in 1995 and a 67% to 33% split in 1994. RJRT's full-price volume as a percentage of total volume was 63% in 1996 and 1995, and 60% in 1994. RJRT's full-price share of market decreased 0.4 share points to 17.0% with 1996 shipments of 75 billion units. Camel performed exceedingly well, generating a 5% growth in shipments and a 0.3 share point gain for the full year versus 1995. However, Winston and Salem volume declined 8% and 3%, respectively. The Winston family declined 8% primarily due to the decision to reduce support of Winston Select. RJRT's savings brands shipments declined 4% to 44.1 billion units in 1996 due to planned sales reductions of lower priority brands. Offsetting the decline on these brands was continued growth of the industry's largest savings brand, Doral. Doral experienced a 4% volume increase over 1995, and a 2.3 share of segment gain despite an industry savings category decline of two percentage points from 30% to 28%. RJRT's overall volume performance reflects the decision to focus on growth among its key full-price and savings brands. To stabilize full-price market share, RJRT has several initiatives in test. Building on the Camel momentum, RJRT introduced Camel Menthol during the third quarter of 1996 and began a national launch in the first quarter of 1997. Red Kamel and Kamel Menthe are also being test marketed in several cities. RJRT is conducting a Florida test market of Winston that emphasizes the "No Bull" positioning of Winston and a no-additives blend. Another initiative being tested is Eclipse, a cigarette featuring 90% reduced second-hand smoke that leaves no ashes, stain or lingering smoke. RJRT is also continuing to test 25 Moonlight Tobacco Company brands that feature innovative packaging and product concepts. Test markets are New York City, Seattle/Portland, Chicago, Cleveland and North Carolina. RJRT's operating company contribution was $1.45 billion, $30 million higher than 1995 primarily due to favorable pricing and lower manufacturing costs, partially offset by lower volume and higher marketing and merchandising spending. RJRT's operating income increased $130 million to $1.1 billion primarily due to the higher operating company contribution and the absence in 1996 of a $100 million restructuring charge reported in 1995. On March 6, 1997, RJRT announced a 4% average price increase across most of its brands, which may have an impact on volume in future periods. Reynolds International delivered 10% volume growth in 1996. The growth is essentially across all regions and can be attributed to Reynolds International's overall focus on the right brands in the right markets. Revenues increased 12% over 1995 to $3.6 billion, primarily due to the 10% volume increase ($255 million), pricing ($200 million) and acquisitions ($58 million), partially offset by the impact of unfavorable foreign currency translation ($150 million). The 10% volume gain was driven by Reynolds International's three flagship brands: Camel, Winston and Salem. The three combined to account for 8% of the 10% increase. Individually, Camel, fueled by the introduction of new Camel Lights, grew 2%. Winston, Reynolds International's largest brand, grew 12% and Salem, aided by the introduction of Salem Pianissimo, grew 10%. Regionally, the major contributions to volume growth were in the former Soviet Union, Central Europe, Africa, Japan, and to a lesser extent, Western Europe. In Western Europe, volume was up 2% over 1995 driven by the rollout of Camel Lights, which helped abate the decline in the full-flavor segment. Camel Lights is now available throughout Western Europe. In the former Soviet Union, core brands--Camel, Winston, Salem, Magna, North Star and Peter I--grew volume by more than 60%, with each brand recording double-digit volume growth. Total market share grew two share points to almost 15%. In Central Europe, volume grew 55%, mainly in Turkey and Romania. Reynolds International is now the number one international cigarette company in Romania, having almost doubled its market share to 15%. In Turkey, market share also almost doubled. In Asia, fueled by the successful introduction of Salem Pianissimo and Premier Pianissimo, Reynolds International is now the fastest-growing cigarette company in Japan. Salem Pianissimo is a menthol brand featuring less smoke and less smell and Premier is the non-menthol version. In Africa, volume almost doubled, driven by the successful integration of the Tanzanian business acquired in 1995. Reynolds International's operating company contribution increased 25% or $160 million to $803 million reflecting the volume growth, pricing and the absence in 1996 of $49 million of costs reported in 1995 related to the consolidation and relocation of its headquarters operations and sales offices, partially offset by higher marketing spending, product costs and unfavorable foreign currency translation. The higher operating income is attributable to the higher operating company contribution and the absence in 1996 of a $54 million restructuring charge reported in 1995. 1995 VS. 1994. Net sales for RJRT amounted to $4.5 billion in 1995, a decline of 2% from the 1994 level of $4.6 billion. The decline in net sales in 1995 resulted primarily from an overall volume loss of 5% (approximately $320 million), partially offset by a higher proportion of full-price sales (approximately $140 million) and higher selling prices in both the full-price and savings segments (approximately $67 million). RJRT's volume declined slightly in the full-price segment during 1995 despite an industry average increase of approximately 2% due to the pattern of wholesale purchases and the erosion of market share of certain brands during the first six months of 1995. However, RJRT's share of full-price segment stabilized during the third and fourth quarters of 1995. RJRT's volume in the savings segment declined by 13% during 1995 which exceeded the industry average, reflecting an erosion of market share of certain brands in the segment due to RJRT's decision to be more selective in its participation in that segment. 26 RJRT's full-price volume as a percentage of total volume in 1995 and 1994 amounted to 63% and 60%, respectively. Comparable figures for the domestic cigarette market in 1995 and 1994 amounted to 70% and 67%, respectively. RJRT's operating company contribution was $1.42 billion in 1995, a 2% decline from the 1994 level of $1.5 billion, as lower manufacturing costs (approximately $67 million), the higher proportion of full-price sales (approximately $118 million), reduced merchandising costs (approximately $13 million), lower administrative expenses (approximately $14 million) and higher selling prices (approximately $67 million) were more than offset by the decline in overall volume (approximately $196 million) and an increase in marketing expenses (approximately $97 million). RJRT's operating income was $954 million in 1995, a decline of 12% from the 1994 level of $1.1 billion. The decline in operating income for 1995 reflected the lower operating company contribution and a restructuring expense in 1995 of $100 million. Reynolds International recorded net sales of $3.2 billion in 1995, an increase of 4% from the 1994 level of $3.1 billion. The increase in net sales for 1995 primarily resulted from favorable foreign currency developments (approximately $113 million) and higher pricing (approximately $42 million), offset in part by unfavorable mix (approximately $17 million). Overall volume increased by 1%. Reynolds International's operating company contribution of $643 million in 1995 decreased 15% from the 1994 level of $755 million primarily due to costs and expenses incurred in connection with the consolidation and relocation of its headquarters' operations and certain sales facilities (approximately $49 million), trade stock realignment (approximately $22 million), write-off of certain export receivables (approximately $16 million), higher administrative costs (approximately $19 million), higher promotional and selling expenses (approximately $25 million), higher manufacturing costs (approximately $13 million) and unfavorable mix (approximately $10 million), which were partially offset by higher pricing (approximately $42 million). The decline in operating income for 1995 reflected the lower operating company contribution and a restructuring expense in 1995 of $54 million. GOVERNMENTAL ACTIVITY 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, these developments have 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 was last increased in January 1993 to its current rate of 24 cents per pack. 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 82.5 cents per pack of cigarettes. Increases in these state excise taxes could also have an adverse effect on cigarette sales. In 1995, the cigarette excise tax in four states was increased by amounts which ranged from 5 cents to 24 cents per pack. In one state, a temporary 10 cent tax, scheduled to expire in 1995, was extended through 1997. In 1996, the cigarette excise tax was increased in two states by amounts of 25 cents and 30 cents per pack. In August 1995, the Commissioner of the FDA, with the support of the Clinton administration, announced that he was asserting jurisdiction over cigarettes and certain other tobacco products and issued a notice and request for comments on proposed regulations. In August 1996, the Commissioner announced the adoption of these rules with certain modifications, and with a phased in schedule of effectiveness over a two year period. The first phase began February 28, 1997, when regulations relating to the sale of cigarettes to minors became effective. Among other things, the regulations would prohibit or impose stringent limits on a broad range of sales and marketing practices, including bans on sampling, sponsorship by brand name, and distribution of non-tobacco items carrying brand names. The FDA's rules also limit advertising in print and on billboards to black and white text and impose new labeling language. 27 The purported purpose of the FDA's assertion of jurisdiction was to curb the use of tobacco products by underage youth. RJRT believes, however, that the assertion of jurisdiction and the scope of the proposed rules would materially restrict the availability of cigarettes and RJRT's ability to market its cigarette products to ADULT smokers. RJRT, together with the four other major domestic cigarette manufacturers and an advertising agency, filed suit on the day of the Commissioner's 1995 announcement in the U.S. District Court for the Middle District of North Carolina seeking to enjoin the FDA's assertion of jurisdiction (COYNE BEAHM V. UNITED STATES FOOD & DRUG ADMINISTRATION). On the day of the announced regulations, the plaintiffs filed an amended complaint challenging the final regulations. Similar suits have been filed in the same court by manufacturers of smokeless tobacco products, by operators of retail stores and by advertising interests. RJRT is unable to predict the outcome of the litigation seeking to find the FDA's regulations to be unlawful. If the full regulations do go into effect, they could be expected to have an adverse effect on cigarette sales and 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 or timing 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. RJRT submitted comments on the proposed regulations during the comment period which closed in February 1996. 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 individuals who received medical care, permits a lawsuit to be filed as a class action and eliminates the comparative negligence and assumption of risk defenses. The Florida statute was 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 June 26, 1995, the trial court judge granted in part the plaintiffs' motion for summary judgment finding portions of the statute unconstitutional. Both plaintiffs and defendants appealed this decision to the Florida Supreme Court which, on June 27, 1996, issued its opinion limiting the amendment in several respects. Among other things, the court ruled: that provisions abrogating affirmative defenses available to tobacco companies if sued by individuals could only be applied to claims brought by the state arising out of payments made after July 1, 1994, the effective date of the amendment; that the state must identify individual recipients of Medicaid payments; and that claims previously barred by the statute of repose could not be revived. The Florida Supreme Court, in a 4-3 decision, expressly stated that although it found provisions of the statute to be "facially" constitutional, it was specifically leaving open the right to challenge those provisions as applied in any specific lawsuit. The plaintiffs in that lawsuit have sought United States Supreme Court review of the Florida Supreme Court's decision, to determine whether the Florida statute, by which the State of Florida conferred on itself a unique cause of action and which directs courts to abrogate common law and equitable principles, including affirmative defenses, is unconstitutional under the Fourteenth Amendment to the Unites States Constitution. The following year, the Florida legislature passed a bill that would repeal the Florida statute retroactively, which was subsequently vetoed by the Governor. Efforts made in 1996 to override the Governor's veto were unsuccessful. Another attempt to repeal the 1994 statute is expected during the 1997 legislative session, but RJRT cannot predict whether the effort will succeed. Similar legislation, without Florida's elimination of defenses, was introduced in twelve states during 1996. None of these proposals was enacted. RJRT is unable to predict whether other states will enact similar legislation and whether lawsuits 28 will be filed under these statutes, or their outcome, if filed. A suit against the tobacco industry was filed under the Florida statute on February 21, 1995. Legislation imposing various restrictions on public smoking has also been enacted in 48 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. In July 1996, Massachusetts enacted legislation that would require manufacturers of tobacco products sold in Massachusetts to report yearly, beginning in 1997, the ingredients of each brand sold. RJRT believes that the disclosure of trade secrets required by this law could damage the competitive position of its brands. The statute requires the reporting of nicotine yield ratings in accordance with procedures to be established. Together with other cigarette manufacturers, RJRT has filed suit in the U.S. District Court for the District of Massachusetts seeking to have the statute declared null and void and to restrain Massachusetts officials from enforcing it. A similar suit has been filed by manufacturers of smokeless tobacco products. RJRT is unable to predict the outcome of this litigation. 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, which was struck down on grounds of constitutionality by the Supreme Court of Canada in 1995. In 1990, RJRT 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 1995, wholesalers, retailers and the tobacco industry including RJRT formed the Coalition for Responsible Tobacco Retailing and launched a new program ("We Card") focused on stopping underage access to cigarettes. 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 January 1996, regulations implementing this legislation were announced by the Department of Health and Human Services. 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 yield content of cigarettes, as well as a warning statement. During the past three decades, various laws affecting the cigarette industry have 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 health warnings to be printed on cigarette packages and advertising on a rotating basis; (iii) increases type size and area of the warning required in cigarette advertisements; and (iv) requires that cigarette manufacturers provide annually, on a confidential 29 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 1984 and 1990, Congress enacted legislation directing the Consumer Product Safety Commission to conduct and oversee research on the ignition propensity of cigarettes. 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 (now the Secretary of Health and Human Services) and the Surgeon General have issued a number of other reports which purport to find the nicotine in cigarettes addictive and to link cigarette smoking and exposure to cigarette smoke 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 the cost of tobacco advertising, banned smoking in federally funded buildings and on any scheduled airline flight, restricted tobacco product sampling and vending machines to areas or establishments that deny access to minors, provided financial incentives for states to sue tobacco manufacturers for recovery of Medicaid costs, and given the Food and Drug Administration authority to regulate the manufacture, sale and distribution of tobacco products. None of this legislation was enacted. 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, Reynolds International or the cigarette industry generally, but such legislation or regulations could have an adverse effect on RJRT, Reynolds International or the cigarette industry generally. For a description of certain litigation affecting RJRT and its affiliates (including RJRN Holdings and RJRN) and indemnitees, see note 9 to the consolidated financial statements. FOOD The food business is conducted by the Domestic Food Group and the International Food Group. The Domestic Food Group is comprised of the Nabisco Biscuit, Specialty Products, LifeSavers, Planters, Nabisco Tablespreads (formerly Fleischmann's) and Food Service companies. 1996 VS. 1995. Nabisco Holdings reported net sales of $8.9 billion in 1996, an increase of 7% from the 1995 level of $8.3 billion, with the Domestic Food Group up 5% and the International Food Group up 13%. The Domestic Food Group's sales increase was attributable to volume increases, principally at Planters and in key core products at Nabisco Biscuit, accounting for one percentage point of the increase, increased selling prices, principally at Nabisco Biscuit, accounting for three percentage points of the increase, and the net impact of the Parkay acquisition and the 1995 product line disposals accounting for the remaining percentage increase. Nabisco Biscuit's increase in net sales was primarily attributable to volume increases in the Oreo, Ritz, Air Crisps and Chips Ahoy! brands, partially offset by lower volume for Snackwell's and Newtons. Planters' volume increase resulted from gains in the warehouse club and mass merchandising channels and a more stable competitive environment in the nut market. The International 30 Food Group's net sales increase for 1996 was primarily driven by 1995 business acquisitions, principally Primo in Canada and Royal Beech-Nut in South Africa, and the 1996 business acquisitions in Latin America. Nabisco Holdings' operating company contribution of $1.1 billion in 1996 was approximately equal to last year's level, with the International Food Group up 1% and the Domestic Food Group flat. Operating company contribution for 1996 includes $91 million of restructuring-related expenses in the Domestic Food Group associated with the implementation of the June 1996 restructuring program and the International Food Group includes similar expenses of $6 million. The 1995 period includes a net gain of $11 million from the sale of the Ortega Mexican food ($18 million gain in the Domestic Food Group) and New York Style Bagel Chip ($7 million loss in the International Food Group) businesses. Excluding the 1996 restructuring-related expenses, Nabisco Holdings' operating company contribution was $1.2 billion, an increase of 9% from the $1.1 billion reported in 1995. On the same basis, operating company contribution for the Domestic Food Group increased $89 million, or 10%, in 1996 primarily as a result of the profit impact from higher net sales and lower advertising expenses, partially offset by higher trade promotion expenses and higher fixed manufacturing and distribution expenses. On the same basis, the International Food Group's operating company contribution increased $9 million, or 4%, in 1996 which was primarily due to the profit impact from business acquisitions. Nabisco Holdings' operating income in 1996 includes $525 million of restructuring and restructuring-related expenses. Excluding these expenses, operating income was $999 million for 1996, an increase of 11% over the comparable 1995 period, reflecting higher operating company contribution. 1995 VS. 1994. Nabisco Holdings reported net sales of $8.3 billion in 1995, an increase of 8% from the 1994 level of $7.7 billion, with the Domestic Food Group up 5% and the International Food Group up 15%. The Domestic Food Group's increase was primarily attributable to volume gains at Nabisco Biscuit (approximately $228 million), reflecting new product introductions and product line extensions, volume gains at Food Service (approximately $37 million), volume gains at Fleischmann's (approximately $18 million) and the impact of the October 1995 acquisition of the Parkay margarine brand (approximately $64 million), which were offset in part by volume declines at Planters (approximately $40 million) and the impact of the September 1995 sale of the Ortega brand (approximately $39 million). The International Food Group's net sales increase for 1995 was primarily due to improved results in Brazil (approximately $120 million), reflecting a continuation of the country's economic recovery, the favorable impact of recent business acquisitions (approximately $112 million) and the favorable performance from businesses in Iberia, Canada and Venezuela (approximately $65 million), partially offset by lower net sales in Mexico (approximately $30 million) due to the devaluation of the peso. Nabisco Holdings' operating company contribution was $1.13 billion in 1995, an increase of 2% from the 1994 level of $1.11 billion, with the International Food Group higher by 35% and the Domestic Food Group lower by 5%. The 1995 period includes a net pre-tax gain of $11 million from the sale of the Ortega Mexican food ($18 million gain) and New York Style Bagel Chip ($7 million loss) businesses, and the favorable impact of recent business acquisitions (approximately $18 million). Excluding these items and the results of operations from the business disposals in both years, Nabisco Holdings' operating company contribution was $14 million lower than the 1994 level, with the International Food Group higher by 32% and the Domestic Food Group lower by 8%. The Domestic Food Group's adjusted operating company contribution decrease for 1995 (approximately $70 million) reflects investment spending behind new product initiatives and intense competitive conditions in biscuits and nuts. The International Food Group's adjusted operating company contribution increase for 1995 (approximately $56 million) was primarily due to the profit impact of increased sales in Brazil, Iberia, Canada and Venezuela (approximately $34 million). Nabisco Holdings' operating income was $902 million in 1995, an increase of 2% from the 1994 level of $887 million, as a result of the changes in operating company contribution discussed above. 31 RESTRUCTURING EXPENSE Restructuring charges of $428 million were incurred in 1996 to streamline operations and improve profitability of the food operations, and $154 million of restructuring charges were incurred in 1995 to reorganize the worldwide tobacco operations and also to streamline operations and improve profitability. Both programs included workforce reductions and facility rationalizations. These charges are discussed further in note 2 to the consolidated financial statements. Substantially all of the worldwide tobacco restructuring charge is cash-related and approximately $230 million of the food restructuring charge is cash-related. After completion, the food restructuring is expected to generate approximately $200 million in annual savings beginning in 1998 and the tobacco restructuring is expected to generate approximately $100 million in annual savings beginning in 1997. INTEREST AND DEBT EXPENSE Interest and debt expense for 1996 increased 3% to $927 million compared to $899 million in 1995, principally as a result of the issuance of preferred securities by a subsidiary of RJRN Holdings in September 1995, the payments on which are reported as interest expense, partially offset by lower market interest rates. Interest and debt expense amounted to $899 million in 1995, a decrease of 16% from 1994. The decline is primarily due to refinancings completed during 1994 and repayments of debt with the proceeds from the issuances of preferred stock during 1994 and Nabisco Holdings' Class A common stock during the first quarter of 1995. These factors more than offset the impact of higher market interest rates. RJRN Holdings manages overall interest rate exposure by adjusting the mix of floating rate debt and fixed rate debt for both RJRN and Nabisco. As part of managing such interest rate exposures, RJRN and Nabisco may enter into various interest rate arrangements from time to time, none of which, by policy, may include any written optionality. RJRN did not enter into any financial interest rate arrangements during 1996 and 1995. During 1994, RJRN either cancelled or neutralized all of its outstanding financial interest rate arrangements. Any unrealized gains and losses have been substantially amortized as additional interest expense as follows: 1996-$28 million and 1995-$39 million. Interest rate activities during 1994 increased interest expense by $22 million, which includes $45 million associated with written interest rate arrangements. For further details regarding RJRN's interest rate activities during 1994, see note 10 to the consolidated financial statements. Nabisco, in coordination with RJRN Holdings, began managing its own interest rate exposure during 1995 by entering into interest rate arrangements to effectively fix a portion of its interest rate exposure on its floating rate debt. The impact of these arrangements has not been significant. At December 31, 1996, Nabisco had outstanding interest rate caps with an aggregate notional principal amount of $1.5 billion, $500 million of which became effective during 1997. These arrangements expire during 1997. OTHER INCOME (EXPENSE), NET Consolidated other income (expense), net for 1995 includes a pre-tax charge of approximately $103 million ($67 million after-tax) for fees and expenses incurred in connection with the exchange of debt between RJRN and Nabisco. NET INCOME APPLICABLE TO COMMON STOCK 1996 VS. 1995. Net income applicable to common stock of $568 million in 1996 increased 13% over 1995. Excluding after-tax restructuring and restructuring-related expenses recorded in 1996 and 1995, the $67 million after-tax effect of the 1995 debt exchange between RJRN and Nabisco and a $16 million after- 32 tax extraordinary loss on the early extinguishment of debt by Nabisco during 1995, net income applicable to common stock for 1996 would have been $855 million, a 19% increase over the comparable 1995 amount of $721 million. For the years ended December 31, 1996, 1995 and 1994, net income applicable to common stock was increased by approximately $35 million, $29 million and $10 million, respectively, as a result of LIFO inventory liquidations. The LIFO liquidations resulted from programs to reduce RJRT leaf durations consistent with forecasts of future operating requirements. Comparisons to prior year were also affected by the exchange in September 1995 of preferred securities issued by a subsidiary of RJRN Holdings (the payments on which are reported as interest expense and are tax-deductible) for a like amount of RJRN Holdings' Series B preferred stock (the payments on which are reported below net income and are not tax-deductible). The tax benefit from the deductibility feature of the new securities issued in the September 1995 exchange resulted in a net increase to net income applicable to common stock for 1996 of approximately $24 million compared to 1995. 1995 VS. 1994. RJRN Holdings reported net income applicable to common stock of $501 million in 1995, $113 million higher than $388 million reported in 1994. The increase primarily reflects the impact in 1995 of lower interest and debt expense and a lower amount of loss from early extinguishment of debt which more than offset the impact in 1995 of lower operating company contribution, the domestic and international tobacco restructuring expenses, the fees and expenses incurred in connection with the debt exchange between RJRN and Nabisco and the minority interest in income of Nabisco Holdings. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No. 125"), which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The adoption of SFAS No. 125 is not expected to have any impact on the financial position or results of operations of RJRN Holdings and its subsidiaries. In October 1996, the AICPA's Accounting Standards Executive Committee issued Statement of Position No. 96-1, Environmental Remediation Liabilities ("SOP No. 96-1"). SOP No. 96-1 is required to be adopted for years beginning January 1, 1997. The adoption of SOP No. 96-1 is not expected to have a material effect on the financial position or results of operations of RJRN Holdings and its subsidiaries. 33 LIQUIDITY AND FINANCIAL CONDITION DECEMBER 31, 1996 Net cash flows from operating activities for 1996 were $1.50 billion, a decrease of $170 million from the 1995 level of $1.67 billion. The decrease in net cash flows from operating activities primarily reflects higher interest and tax payments and higher inventory levels which more than offset lower receivable requirements. Free cash flow, another measure used by management to evaluate liquidity and financial condition, represents cash available for the repayment of debt and certain other corporate purposes such as common stock dividends, stock repurchases and acquisitions. Free cash flow is essentially net cash flow from operating activities and investing activities per the Consolidated Statement of Cash Flows, adjusted for acquisitions and divestitures of businesses, preferred dividends and the net proceeds from Nabisco Holdings' initial public offering. Free cash flow resulted in inflows of $748 million and $670 million for 1996 and 1995, respectively. The higher level of free cash flow in 1996 compared with 1995 primarily reflects higher operating company contribution and lower financing fees, which more than offset the impact from higher working capital requirements, higher income tax payments and higher combined interest and preferred stock dividend payments. The components of free cash flow are as follows:
YEARS ENDED DECEMBER 31 1996 1995 - ------------------------------------------------------------------------------------------- --------- --------- (DOLLARS IN MILLIONS) OPERATING INCOME........................................................................... $ 2,252 $ 2,338 Amortization of trademarks and goodwill.................................................. 636 636 Restructuring expense.................................................................... 428 154 --------- --------- OPERATING COMPANY CONTRIBUTION............................................................. 3,316 3,128 Depreciation and other amortization...................................................... 538 535 Increase in operating working capital.................................................... (389) (307) Capital expenditures..................................................................... (741) (744) Change in other assets and liabilities................................................... 190 125 Restructuring and restructuring-related cash payments.................................... (268) (256) Income tax payments, excluding income tax benefits from cash interest paid..................................................................... (1,044) (906) --------- --------- OPERATING CASH FLOW*....................................................................... 1,602 1,575 Cash interest paid, net of income tax benefit............................................ (562) (465) Preferred dividends paid................................................................. (207) (276) Other, net............................................................................... (85) (164) --------- --------- FREE CASH FLOW............................................................................. $ 748 $ 670 --------- --------- --------- ---------
- ------------------------ * Operating cash flow, which is used internally to evaluate business performance, includes, in addition to net cash flows 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 items of a financial nature such as interest paid (net of tax), interest income and other miscellaneous financial income or expense items. ------------ During 1995 and 1994, RJRN Holdings, RJRN, Nabisco Holdings and Nabisco entered into a series of transactions designed to refinance long-term debt, lower debt levels, manage interest rate exposure and refinance certain preferred securities. One of the transactions was the initial public offering of 51,750,000 shares of Nabisco Holdings' Class A common stock at an initial offering price of $24.50 per share in January 1995, which reduced RJRN's proportionate economic interest in Nabisco Holdings from 100% to 34 approximately 80.5%. Nabisco Holdings used all of the approximately $1.2 billion of net proceeds from the initial public offering to repay a portion of its borrowings under a bank credit agreement. Also during 1995, RJRN and Nabisco completed a debt exchange, that was designed, among other things, to enable Nabisco to obtain long-term debt financing independent of RJRN and to repay its intercompany debt to RJRN. At the same time, Nabisco borrowed approximately $2.4 billion under a new credit agreement to repay or repurchase the remaining approximately $2.3 billion of intercompany debt and repay approximately $125 million of outstanding borrowings under an earlier bank credit agreement. RJRN applied the payments received from Nabisco to repay a portion of its borrowings under its bank credit agreement. RJRN maintains a $2.75 billion revolving credit facility, of which no borrowings were outstanding at December 31, 1996, and a 364-day $650 million credit facility primarily to support commercial paper issuances, of which approximately $353 million was available at December 31, 1996. On June 3, 1996, the maturity of the revolving credit facility was extended to June 6, 1999 and the 364-day credit facility was renewed through June 2, 1997. The commitments under the revolving credit facility decline to approximately $2.4 billion in the final year. The revolving credit facility also provides for the issuance of up to $800 million of letters of credit, $429 million of which was issued at December 31, 1996. Availability under the revolving credit facility is reduced by the amount of any borrowings outstanding and letters of credit issued under the facility and by the amount of outstanding commercial paper in excess of $650 million. In October 1996, Nabisco Holdings and Nabisco entered into a new five-year $1.5 billion revolving credit facility and a 364-day $1.5 billion credit facility primarily to support commercial paper issuances. At the end of the 364-day period, any borrowings outstanding under the 364-day credit facility are convertible into a three-year term loan at Nabisco's option. The revolving credit facility provides for the issuance of up to $300 million of letters of credit, none of which was issued at December 31, 1996. At December 31, 1996, no borrowings were outstanding under the revolving credit facility and $325 million was available under the 364-day credit facility. Availability under the revolving credit facility is reduced by the amount of any borrowings outstanding and letters of credit issued under the facility and by any commercial paper borrowings outstanding in excess of $1.5 billion. In September 1995, a newly formed subsidiary of RJRN Holdings issued $949 million principal amount of its preferred securities in exchange for an equal amount of RJRN Holdings' Series B preferred stock. RJRN Holdings retired the exchanged Series B preferred stock, leaving $301 million outstanding. In March 1996, RJRN Holdings announced a 23% increase in its annual common stock dividend rate from $1.50 to $1.85 per share and adopted a share repurchase objective of approximately 10 million shares of common stock over the next several years based on the achievement of performance targets. During 1996, RJRN Holdings repurchased 3,377,300 shares of common stock for approximately $100 million. In June 1996, Nabisco Holdings announced a 13% increase in its annual common stock dividend rate from $.55 to $.62 per share. In February 1997, RJRN Holdings announced an 11% increase in its annual common stock dividend rate from $1.85 to $2.05 per share and a 1997 share repurchase objective of up to $200 million. Distributions and the payment of dividends by RJRN Holdings are subject to certain restrictions under certain financing agreements and debt instruments of RJRN Holdings and RJRN and their subsidiaries. The financing agreements generally restrict cumulative common and preferred dividends and distributions, limit the ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell or dispose of certain assets and certain subsidiaries' stock, issue certain equity securities and engage in certain mergers or consolidations. RJRN Holdings and RJRN believe that they are currently in compliance with all covenants and restrictions imposed by the terms of their indebtedness. Nabisco's credit agreements, among other things, generally restrict common and preferred dividends and distributions, limit loans and advances by Nabisco Holdings and its subsidiaries to RJRN, limit the 35 ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, acquire, sell or dispose of certain assets and securities and engage in certain mergers or consolidations. Nabisco Holdings and Nabisco believe that they are currently in compliance with all covenants and restrictions imposed by the terms of their indebtedness. Management of RJRN Holdings and its subsidiaries are continuing to review various strategic transactions, including but not limited to, acquisitions, divestitures, mergers and joint ventures. No assurance may be given that any such transactions will be announced or completed. Capital expenditures were $741 million, $744 million and $670 million for 1996, 1995 and 1994, respectively. The current level of expenditures planned for 1997 is expected to be in the range of approximately $850 million to $900 million (approximately 52% Food and 48% Tobacco), which will be funded primarily by cash flows from operating activities. The increased level of capital expenditures planned for 1997 is primarily due to the growth of Reynolds International. Management expects that its capital expenditure program will continue at a level sufficient to support the strategic and operating needs of RJRN Holdings' operating subsidiaries. RJRN Holdings' subsidiaries have operations in many countries, which utilize many different functional currencies. Significant foreign currency net investments are located in Canada, Spain, Argentina, Puerto Rico, Germany, Brazil, Mexico, Malaysia, Venezuela and Hong Kong. RJRN Holdings' subsidiaries also have significant exposure to foreign exchange sale and purchase transactions in currencies other than their functional currencies. Their exposures include the U.S. dollar, German mark, French franc, British pound, Italian lira, Japanese yen, Swiss franc, Hong Kong dollar, Singapore dollar, Finnish markka, Canadian dollar and Spanish peseta. Whenever possible, RJRN Holdings' policy is to net exposures and utilize natural offsets to minimize the effects of foreign currency transactions on cash flows; otherwise, foreign currency hedging activities are entered into to protect RJRN Holdings and its subsidiaries from risk that the eventual dollar cash flows resulting from transactions with international parties will be adversely affected by changes in exchange rates. Such contracts are primarily entered into to hedge future firm commitments. For further details regarding foreign currency hedging activities, see note 10 to the consolidated financial statements. At December 31, 1996, there was $1.899 billion of accumulated and undistributed income of foreign subsidiaries. No applicable taxes have been provided because management intends to reinvest these earnings abroad indefinitely to fund international acquisitions, new products and other opportunities in foreign markets. LITIGATION For a description of certain litigation affecting RJRT and its affiliates (including RJRN Holdings and RJRN) and indemnitees, see note 9 to the consolidated financial statements. 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. In April 1995, RJRN Holdings was named a potentially responsible party (a "PRP") with certain third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to a superfund site at which a former subsidiary of RJRN had operations. Certain subsidiaries of RJRN Holdings and RJRN have also been named as PRPs with third parties or may have indemnification obligations with respect to a number of additional sites. Liability under CERCLA is joint and several. 36 RJRN Holdings' and RJRN's subsidiaries have been engaged in a continuing program to assure compliance with U.S., state and local 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, RJRN Holdings and RJRN do not expect such expenditures or other costs to have a material adverse effect on the business or financial condition of RJRN Holdings and RJRN and their subsidiaries taken as a whole. ------------ The foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements which reflect management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, the effect on financial performance and future events of competitive pricing for products, success of new product innovations and acquisitions, local economic conditions and the effects of currency fluctuations in countries in which RJRN Holdings and its subsidiaries do business, the effects of domestic and foreign government regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in the case of the tobacco business, litigation. For additional information concerning factors affecting future events and policies and RJRN Holdings' performance, see Part I, Items 1 through 3 and Part II, Item 5 of this report. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. 37 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 RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. 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 RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 12 is hereby incorporated by reference to RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 13 is hereby incorporated by reference to RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. 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 1996 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 March 14, 1997. RJR NABISCO HOLDINGS CORP. BY: /S/ STEVEN F. GOLDSTONE ----------------------------------------------- (Steven F. Goldstone) 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 March 14, 1997.
SIGNATURE TITLE - -------------------------------------------------- -------------------------------------------------- /s/ STEVEN F. GOLDSTONE Chairman of the Board and Chief Executive Officer --------------------------------------- (principal executive officer) (Steven F. Goldstone) /s/ ROBERT S. ROATH Senior Vice President and Chief Financial Officer --------------------------------------- (principal financial officer) (Robert S. Roath) /s/ RICHARD G. RUSSELL Senior Vice President and Controller (principal --------------------------------------- accounting officer) (Richard G. Russell) * Director --------------------------------------- (John T. Chain, Jr.) * Director --------------------------------------- (Julius L. Chambers) * Director --------------------------------------- (John L. Clendenin) * Director --------------------------------------- (L. Dennis Kozlowski) * Director --------------------------------------- (Ray J. Groves) * Director --------------------------------------- (H. Eugene Lockhart) * Director --------------------------------------- (John G. Medlin, Jr.) * Director --------------------------------------- (Rozanne L. Ridgway)
*By: /s/ ROBERT F. SHARPE, JR. ---------------------------------------------- (Robert F. Sharpe, Jr.) 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 March 14, 1997. RJR NABISCO, INC. BY: /S/ STEVEN F. GOLDSTONE ----------------------------------------------- (Steven F. Goldstone) 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 March 14, 1997.
SIGNATURE TITLE - -------------------------------------------------- -------------------------------------------------- /s/ STEVEN F. GOLDSTONE Chairman of the Board and Chief Executive Officer --------------------------------------- (principal executive officer) (Steven F. Goldstone) /s/ ROBERT S. ROATH Senior Vice President and Chief Financial Officer --------------------------------------- (principal financial officer) (Robert S. Roath) /s/ RICHARD G. RUSSELL Senior Vice President and Controller (principal --------------------------------------- accounting officer) (Richard G. Russell) * Director --------------------------------------- (John T. Chain, Jr.) * Director --------------------------------------- (Julius L. Chambers) * Director --------------------------------------- (John L. Clendenin) * Director --------------------------------------- (Ray J. Groves) * Director --------------------------------------- (L. Dennis Kozlowski) * Director --------------------------------------- (H. Eugene Lockhart) * Director --------------------------------------- (John G. Medlin, Jr.) * Director --------------------------------------- (Rozanne L. Ridgway)
*By: /s/ ROBERT F. SHARPE, JR. ---------------------------------------------- (Robert F. Sharpe, Jr.) Attorney-in-Fact
42 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE ----------- FINANCIAL STATEMENTS Report of Deloitte & Touche LLP, Independent Auditors............................................. F-1 Report of Management's Responsibility for Financial Statements.................................... F-1 Consolidated Statements of Income--Years Ended December 31, 1996, 1995 and 1994................... F-2 Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994................................................................................... F-3 Consolidated Balance Sheets--December 31, 1996 and 1995........................................... F-4-F-5 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1996, 1995 and 1994..... F-6 Notes to Consolidated Financial Statements........................................................ F-7-F-31
FINANCIAL STATEMENT SCHEDULES For the years ended December 31, 1996, 1995 and 1994: Schedule I --Condensed Financial Information of Registrants................... S-1-S-8
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. ("RJRN Holdings") and RJR Nabisco, Inc. ("RJRN") as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules of RJRN Holdings and RJRN as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996 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 misstatement. 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 RJRN Holdings and RJRN at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 28, 1997 (March 13, 1997 as to note 9) REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements presented in this report have been prepared by management in accordance with generally accepted accounting principles using, where appropriate, management's best estimates and judgment. Management maintains a system of internal controls to provide reasonable assurance that the Company's assets are safeguarded and transactions are executed as authorized and properly recorded. The system includes established policies and procedures, a program of internal audits, management reviews and careful selection and training of qualified personnel. The audit committee is comprised solely of outside directors. It meets periodically with management, the internal auditors, and the independent auditors, Deloitte & Touche LLP, to discuss and address internal accounting control, auditing and financial reporting matters. Both independent and internal auditors have unrestricted access to the audit committee. /S/ STEVEN F. GOLDSTONE - ---------------------------- Chairman of the Board and Chief Executive Officer /S/ ROBERT S. ROATH - ---------------------------- Senior Vice President and Chief Financial Officer (Retiring April 1997) F-1 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31 1996 1995 1994 - -------------------------------------- -------------------------- -------------------------- -------------------------- RJRN RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN ------------ ------------ ------------ ------------ ------------ ------------ NET SALES*............................ $ 17,063 $ 17,063 $ 16,008 $ 16,008 $ 15,366 $ 15,366 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Cost of products sold*.............. 7,973 7,973 7,468 7,468 6,977 6,977 Selling, advertising, administra- tive and general expenses......... 5,774 5,779 5,412 5,412 5,210 5,198 Amortization of trademarks and goodwill.......................... 636 636 636 636 629 629 Restructuring expense............... 428 428 154 154 -- -- ------------ ------------ ------------ ------------ ------------ ------------ OPERATING INCOME................ 2,252 2,247 2,338 2,338 2,550 2,562 Interest and debt expense............. (927) (832) (899) (872) (1,065) (1,065) Other income (expense), net........... (126) (127) (173) (175) (110) (121) ------------ ------------ ------------ ------------ ------------ ------------ Income before income taxes...... 1,199 1,288 1,266 1,291 1,375 1,376 Provision for income taxes............ 585 619 580 594 611 614 ------------ ------------ ------------ ------------ ------------ ------------ INCOME BEFORE MINORITY INTEREST IN INCOME OF NABISCO HOLDINGS...................... 614 669 686 697 764 762 Less minority interest in income of Nabisco Holdings.................... 3 3 59 59 -- -- ------------ ------------ ------------ ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM.......................... 611 666 627 638 764 762 Extraordinary item--loss on early extinguishments of debt, net of income taxes and minority interest............................ -- -- (16) (16) (245) (245) ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME...................... 611 666 611 622 519 517 Less preferred stock dividends........ 43 -- 110 -- 131 -- ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME APPLICABLE TO COMMON STOCK......................... $ 568 $ 666 $ 501 $ 622 $ 388 $ 517 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Income before extraordinary item.... $ 1.74 $ 1.58 $ 2.06 Extraordinary item.................. -- (0.05) (0.79) ------------ ------------ ------------ Net income...................... $ 1.74 $ 1.53 $ 1.27 ------------ ------------ ------------ ------------ ------------ ------------ Dividends per share of common stock... $ 1.85 $ 1.50 $ -- Dividends per share of Series A preferred stock..................... -- -- 2.92 Dividends per share of Series C preferred stock..................... 6.01 6.01 3.94 Weighted average number of common and common equivalent shares outstanding (in thousands)...................... 326,502 326,643 307,625 ------------ ------------ ------------ ------------ ------------ ------------
- ------------------------ * Excludes excise taxes as follows: 1996--$3.852 billion, 1995--$3.832 billion and 1994--$3.578 billion. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-2 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31 1996 1995 1994 - -------------------------------------------------------------- ---------------------- ---------------------- ----------- RJRN RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN HOLDINGS ----------- --------- ----------- --------- ----------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income.................................................. $ 611 $ 666 $ 611 $ 622 $ 519 ----------- --------- ----------- --------- ----------- Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization............................. 1,174 1,174 1,171 1,171 1,152 Deferred income tax benefit............................... (120) (114) (172) (173) (11) Extraordinary item........................................ -- -- 29 29 377 Restructuring and restructuring-related expenses, net of cash payments........................................... 257 257 (53) (53) (432) Other changes that provided (used) cash:.................. Accounts and notes receivable......................... (77) (66) (351) (344) (69) Inventories........................................... (135) (135) 159 159 111 Accounts payable and accrued liabilities, including income taxes........................................ (310) (283) 145 125 95 Other, net............................................ 95 87 126 163 12 ----------- --------- ----------- --------- ----------- Total adjustments..................................... 884 920 1,054 1,077 1,235 ----------- --------- ----------- --------- ----------- Net cash flows from operating activities.................. 1,495 1,586 1,665 1,699 1,754 ----------- --------- ----------- --------- ----------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Capital expenditures........................................ (741) (741) (744) (744) (670) Acquisitions of businesses.................................. (189) (189) (429) (429) (510) Divestitures of businesses and certain assets............... 153 153 237 237 39 Net proceeds from issuance of Nabisco Holdings' common stock..................................................... -- -- 1,201 1,201 -- ----------- --------- ----------- --------- ----------- Net cash flows from (used in) investing activities........ (777) (777) 265 265 (1,141) ----------- --------- ----------- --------- ----------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................... 34 34 2,324 2,324 16 Repayments of long-term debt................................ (216) (216) (1,285) (1,285) (4,666) Increase (decrease) in short-term borrowings................ 249 249 (2,500) (2,500) 2,880 Repurchase of common stock.................................. (100) -- -- -- -- Proceeds from issuance of Series C preferred stock.......... -- -- -- -- 1,734 Dividends paid on common and preferred stock, including dividends paid to Nabisco Holdings' minority common shareholders.............................................. (716) (30) (598) (15) (395) Financing and advisory fees paid............................ -- -- (114) (114) (60) Other, net, including intercompany transfers and payments... 60 (816) 50 (555) 92 ----------- --------- ----------- --------- ----------- Net cash flows used in financing activities............... (689) (779) (2,123) (2,145) (399) ----------- --------- ----------- --------- ----------- Effect of exchange rate changes on cash and cash equivalents.. (11) (11) 4 4 (6) ----------- --------- ----------- --------- ----------- Net change in cash and cash equivalents................... 18 19 (189) (177) 208 Cash and cash equivalents at beginning of period.............. 234 232 423 409 215 ----------- --------- ----------- --------- ----------- Cash and cash equivalents at end of period.................... $ 252 $ 251 $ 234 $ 232 $ 423 ----------- --------- ----------- --------- ----------- ----------- --------- ----------- --------- ----------- Income taxes paid, net of refunds............................. $ 693 $ 727 $ 583 $ 583 $ 496 Interest paid................................................. $ 913 $ 794 $ 788 $ 784 $ 986 YEARS ENDED DECEMBER 31 - -------------------------------------------------------------- RJRN --------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income.................................................. $ 517 --------- Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization............................. 1,152 Deferred income tax benefit............................... (73) Extraordinary item........................................ 377 Restructuring and restructuring-related expenses, net of cash payments........................................... (432) Other changes that provided (used) cash:.................. Accounts and notes receivable......................... (61) Inventories........................................... 111 Accounts payable and accrued liabilities, including income taxes........................................ 120 Other, net............................................ 8 --------- Total adjustments..................................... 1,202 --------- Net cash flows from operating activities.................. 1,719 --------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Capital expenditures........................................ (670) Acquisitions of businesses.................................. (510) Divestitures of businesses and certain assets............... 39 Net proceeds from issuance of Nabisco Holdings' common stock..................................................... -- --------- Net cash flows from (used in) investing activities........ (1,141) --------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................... 16 Repayments of long-term debt................................ (4,666) Increase (decrease) in short-term borrowings................ 2,880 Repurchase of common stock.................................. -- Proceeds from issuance of Series C preferred stock.......... -- Dividends paid on common and preferred stock, including dividends paid to Nabisco Holdings' minority common shareholders.............................................. -- Financing and advisory fees paid............................ (6) Other, net, including intercompany transfers and payments... 1,408 --------- Net cash flows used in financing activities............... (368) --------- Effect of exchange rate changes on cash and cash equivalents.. (6) --------- Net change in cash and cash equivalents................... 204 Cash and cash equivalents at beginning of period.............. 205 --------- Cash and cash equivalents at end of period.................... $ 409 --------- --------- Income taxes paid, net of refunds............................. $ 496 Interest paid................................................. $ 986
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31 1996 1995 - ---------------------------------------------------------------------- ---------------------- ---------------------- RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN ----------- --------- ----------- --------- ASSETS Current assets: Cash and cash equivalents........................................... $ 252 $ 251 $ 234 $ 232 Accounts and notes receivable, net.................................. 1,418 1,413 1,334 1,327 Inventories: Finished products................................................. 830 830 755 755 Leaf tobacco...................................................... 1,161 1,161 1,152 1,152 Raw materials..................................................... 234 234 231 231 Other............................................................. 411 411 351 351 ----------- --------- ----------- --------- Total inventories................................................. 2,636 2,636 2,489 2,489 ----------- --------- ----------- --------- Prepaid expenses and excise taxes................................... 445 445 503 503 ----------- --------- ----------- --------- TOTAL CURRENT ASSETS............................................ 4,751 4,745 4,560 4,551 ----------- --------- ----------- --------- Property, plant and equipment--at cost: Land and land improvements........................................ 323 323 319 319 Buildings and leasehold improvements.............................. 1,974 1,974 1,899 1,899 Machinery and equipment........................................... 5,936 5,936 5,615 5,615 Construction-in-process........................................... 604 604 553 553 ----------- --------- ----------- --------- Total property, plant and equipment............................... 8,837 8,837 8,386 8,386 Less accumulated depreciation......................................... 3,002 3,002 2,696 2,696 ----------- --------- ----------- --------- Property, plant and equipment, net................................ 5,835 5,835 5,690 5,690 ----------- --------- ----------- --------- Trademarks, net of accumulated amortization (1996--$1,996, 1995--$1,745)....................................................... 8,030 8,030 8,265 8,265 Goodwill, net of accumulated amortization (1996--$2,901, 1995--$2,502)....................................................... 12,268 12,268 12,536 12,536 Other assets and deferred charges..................................... 405 382 467 466 ----------- --------- ----------- --------- $ 31,289 $ 31,260 $ 31,518 $ 31,508 ----------- --------- ----------- --------- ----------- --------- ----------- ---------
F-4 CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN MILLIONS)
DECEMBER 31 1996 1995 - ---------------------------------------------------------------------- ---------------------- ---------------------- RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN ----------- --------- ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings............................................... $ 609 $ 609 $ 268 $ 268 Accounts payable.................................................... 691 690 755 755 Accrued liabilities................................................. 2,684 2,527 2,649 2,490 Current maturities of long-term debt................................ 63 63 150 150 Income taxes accrued................................................ 259 235 302 302 ----------- --------- ----------- --------- TOTAL CURRENT LIABILITIES....................................... 4,306 4,124 4,124 3,965 ----------- --------- ----------- --------- Long-term debt (less current maturities).............................. 9,256 9,256 9,429 9,429 Other noncurrent liabilities.......................................... 3,020 2,669 3,016 2,365 Deferred income taxes................................................. 3,605 3,542 3,666 3,596 Commitments and contingencies (note 9) RJRN Holdings' obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures*......................................................... 954 -- 954 -- Stockholders' equity: Series C convertible preferred stock (26,675,000 shares issued and outstanding)...................................................... 3 -- 3 -- Other preferred stock............................................... 534 -- 541 -- Common stock (1996--273,574,308 shares issued, 1995-- 272,807,942 shares issued).................................................... 3 -- 3 -- Paid-in capital..................................................... 10,038 11,890 10,110 11,958 Retained earnings................................................... -- -- -- 371 Cumulative translation adjustments.................................. (221) (221) (176) (176) Treasury stock, at cost............................................. (100) -- -- -- Other stockholders' equity.......................................... (109) -- (152) -- ----------- --------- ----------- --------- TOTAL STOCKHOLDERS' EQUITY...................................... 10,148 11,669 10,329 12,153 ----------- --------- ----------- --------- $ 31,289 $ 31,260 $ 31,518 $ 31,508 ----------- --------- ----------- --------- ----------- --------- ----------- ---------
- ------------------------------ * The sole asset of the subsidiary trust is the junior subordinated debentures of RJRN Holdings. Upon redemption of the junior subordinated debentures, which have a final maturity of December 31, 2044, the preferred securities will be mandatorily redeemed. The outstanding junior subordinated debentures have an aggregate principal amount of approximately $978 million and an annual interest rate of 10%. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN MILLIONS)
OTHER CUMULATIVE COMMON CAPITAL PAID-IN RETAINED TRANSLATION TREASURY STOCK* STOCK CAPITAL EARNINGS ADJUSTMENTS STOCK ------------- ----------- --------- ----------- --------------- ----------- Balance at January 1, 1994............. $ 2 $ 1,501 $ 8,787 $ (883) $ (102) $ -- Net income........................... 519 Retirement of 258,843 shares of ESOP preferred stock.................... (4) Conversion of Series A preferred stock into 42,000,000 shares of common stock....................... 1 (2) 1 Issuance of 26,675,000 shares of Series C preferred stock........... 3 1,731 Issuance of 2,781,575 shares of common stock....................... 80 Repurchase and cancellation of 52,456 shares of common stock............. (1) Foreign currency translation, net.... (62) Dividends............................ (393) ESOP note payments received.......... Other................................ (48) --- ----------- --------- ----- ----- ----- Balance at December 31, 1994........... 3 1,498 10,157 (364) (164) -- Net income........................... 611 Retirement of 324,453 shares of ESOP preferred stock.................... (5) Exchange of preferred securities of a subsidiary for 37,956 shares of Series B preferred stock........... (949) (5) Issuance of 543,787 shares of common stock.............................. 13 Repurchase and cancellation of 67,222 shares of common stock............. (2) Gain on sale of Nabisco Holdings' common stock....................... 401 Foreign currency translation, net.... (12) Dividends............................ (432) (247) ESOP note payments received.......... Other................................ (22) --- ----------- --------- ----- ----- ----- Balance at December 31, 1995........... 3 544 10,110 -- (176) -- Net income........................... 611 Retirement of 431,757 shares of ESOP preferred stock.................... (7) Issuance of 775,366 shares of common stock.............................. 18 Repurchase of 3,377,300 shares of common stock....................... (100) Cancellation of 9,000 shares of common stock....................... Foreign currency translation, net.... (45) Dividends............................ (97) (611) ESOP note payments received.......... Other................................ 7 --- ----------- --------- ----- ----- ----- Balance at December 31, 1996........... $ 3 $ 537 $ 10,038 $ -- $ (221) $ (100) --- ----------- --------- ----- ----- ----- --- ----------- --------- ----- ----- ----- TOTAL STOCKHOLDERS' OTHER EQUITY ----------- ------------- Balance at January 1, 1994............. $ (235) $ 9,070 Net income........................... 519 Retirement of 258,843 shares of ESOP preferred stock.................... (4) Conversion of Series A preferred stock into 42,000,000 shares of common stock....................... -- Issuance of 26,675,000 shares of Series C preferred stock........... 1,734 Issuance of 2,781,575 shares of common stock....................... 80 Repurchase and cancellation of 52,456 shares of common stock............. (1) Foreign currency translation, net.... (62) Dividends............................ (393) ESOP note payments received.......... 25 25 Other................................ (12) (60) ----- ------------- Balance at December 31, 1994........... (222) 10,908 Net income........................... 611 Retirement of 324,453 shares of ESOP preferred stock.................... (5) Exchange of preferred securities of a subsidiary for 37,956 shares of Series B preferred stock........... (954) Issuance of 543,787 shares of common stock.............................. 13 Repurchase and cancellation of 67,222 shares of common stock............. (2) Gain on sale of Nabisco Holdings' common stock....................... 401 Foreign currency translation, net.... (12) Dividends............................ (679) ESOP note payments received.......... 27 27 Other................................ 43 21 ----- ------------- Balance at December 31, 1995........... (152) 10,329 Net income........................... 611 Retirement of 431,757 shares of ESOP preferred stock.................... (7) Issuance of 775,366 shares of common stock.............................. 18 Repurchase of 3,377,300 shares of common stock....................... (100) Cancellation of 9,000 shares of common stock....................... -- Foreign currency translation, net.... (45) Dividends............................ (708) ESOP note payments received.......... 34 34 Other................................ 9 16 ----- ------------- Balance at December 31, 1996........... $ (109) $ 10,148 ----- ------------- ----- -------------
- ------------------------ * The number of shares of common stock, par value $.01, authorized at December 31, 1996 was 440,000,000. Common shares outstanding: 1996 - 270,197,008 and 1995 - 272,807,942. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of RJR Nabisco Holdings Corp. ("RJRN Holdings"), its wholly-owned subsidiary RJR Nabisco, Inc. ("RJRN") and their majority-owned subsidiaries, including 80.5% of Nabisco Holdings Corp. ("Nabisco Holdings") and its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"). The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior years' amounts have been reclassified to conform to the 1996 presentation. CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments that are readily convertible to known amounts of cash and that have original maturities of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. The cost of U.S. tobacco inventories is determined principally under the LIFO method. The cost of remaining inventories is determined principally under the FIFO, specific lot and weighted average methods. In accordance with recognized industry practice, stocks of tobacco, which must be cured for more than one year, are classified as current assets. DEPRECIATION AND AMORTIZATION AND VALUATION OF INTANGIBLES Property, plant and equipment are depreciated principally by the straight-line method over the estimated useful lives of the assets. Goodwill and trademarks are amortized using the straight-line method, principally over 40 years. Management periodically evaluates the recoverability of goodwill and trademarks. 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 goodwill and trademarks from related operations, on an undiscounted basis, will be less than the carrying value over the remaining amortization period. OTHER INCOME (EXPENSE), NET Interest income, gains and losses on foreign currency transactions, financing-related fees and other items of a financial nature are included in "Other income (expense), net". INCOME TAXES Income taxes are calculated for RJRN on a separate return basis. ADVERTISING Advertising costs are generally expensed as incurred. F-7 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE Earnings per share is based upon the weighted average number of shares of common stock and convertible depositary shares outstanding during the period and common stock assumed to be outstanding to reflect the effect of dilutive options of both RJRN Holdings and Nabisco Holdings. Other potentially dilutive securities are not included in the earnings per share calculation because the effect of including such securities would be anti-dilutive. FOREIGN CURRENCY ARRANGEMENTS Forward foreign exchange contracts and other hedging arrangements entered into generally mature at the time the hedged foreign currency transactions are settled. Gains or losses on forward foreign exchange contracts 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 underlying hedged foreign currency transaction does not occur, gains and losses are recognized immediately. Translation gains or losses resulting from foreign-denominated borrowings that are accounted for as hedges of certain foreign currency net investments result in charges or credits to the cumulative translation adjustments account in stockholders' equity. NEW ACCOUNTING PRONOUNCEMENTS On January 1, 1996, RJRN Holdings and its subsidiaries adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS No. 121"). The adoption of SFAS No. 121 did not have a material impact on the financial position or results of operations of RJRN Holdings and its subsidiaries. On January 1, 1996, RJRN Holdings and its subsidiaries adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123 granted companies the option to recognize and measure compensation costs related to employee stock plans based on either the fair value of the award at date of grant or the difference between the quoted market price of the stock at the date the award is granted over the amount the employee must pay to acquire the stock (the "intrinsic value based method"). RJRN Holdings and its subsidiaries elected to continue to apply the intrinsic value based method, which generally does not result in compensation expense for fixed stock option plans. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No. 125"), which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The adoption of SFAS No. 125 is not expected to have any impact on the financial position or results of operations of RJRN Holdings and its subsidiaries. In October 1996, the AICPA's Accounting Standards Executive Committee issued Statement of Position No. 96-1, Environmental Remediation Liabilities ("SOP No. 96-1"). SOP No. 96-1 is required to be adopted for years beginning January 1, 1997. The adoption of SOP No. 96-1 is not expected to have a material effect on the financial position or results of operations of RJRN Holdings and its subsidiaries. NOTE 2--RESTRUCTURING Nabisco Holdings recorded a pre-tax restructuring expense of $428 million ($241 million after-tax, net of minority interest) in the second quarter of 1996 in order to streamline operations and improve F-8 NOTE 2--RESTRUCTURING (CONTINUED) profitability. The $428 million restructuring expense will require cash expenditures of approximately $230 million. In addition to the restructuring expense, approximately $97 million was recognized during 1996 for implementation and integration expenses, principally for the relocation of employees and equipment and for training. After completion of the 1996 restructuring program, pre-tax savings are expected to be approximately $200 million annually, beginning in 1998. The major components of the $428 million restructuring expense are domestic and international severance and related benefits associated with workforce reductions totaling approximately 6,000 employees (approximately $194 million), estimated losses from disposals of equipment and packaging materials related to product line rationalizations, which will eliminate production of more than 300 SKU's (stock keeping units) of slow-moving products (approximately $116 million), estimated losses to write-down the carrying value of several non-strategic product lines prior to sale (approximately $51 million), estimated costs to terminate manufacturing supply and distribution contracts (approximately $45 million) and estimated losses from disposals of property related to international plant closures and domestic and international facility reorganizations (approximately $22 million). As of December 31, 1996, approximately $156 million of the 1996 restructuring program accruals were utilized as follows: $69 million for severance and related benefits; $63 million for product line rationalizations; $18 million for contract terminations and $6 million for plant closures. The specific operations and geographic locations of the restructured businesses within each of the domestic and international food businesses is as follows: The restructuring expense for the domestic food business amounted to $353 million and consisted of approximately $238 million for Nabisco Biscuit, $29 million for Food Service and $20 million for Specialty Products, with the remainder of approximately $66 million for Nabisco corporate headquarters operations, the Sales & Integrated Logistics Group and other business units. The restructuring expense for the international food business amounted to $75 million and primarily consisted of approximately $51 million for Latin American operations, (including $31 million for Brazil), $11 million for Canada and $10 million for Iberia. RJRN Holdings recorded a pre-tax restructuring expense of $154 million ($104 million after-tax) in the fourth quarter of 1995 to reorganize its worldwide tobacco operations. The 1995 restructuring program, which was primarily undertaken in order to streamline operations and improve profitability, was substantially completed during 1996. A significant portion of the 1995 restructuring program was a cash expense. In addition to the $154 million restructuring expense, approximately $49 million was recorded in the fourth quarter of 1995 for the consolidation and relocation of the international tobacco operations' headquarters facilities and certain of its sales offices. The major components of the $154 million restructuring expense were workforce reductions totaling 1,260 employees (approximately $132 million), the rationalization and closing of facilities relating to the international tobacco operations (approximately $8 million) and equipment and lease abandonments at the domestic tobacco operations (approximately $14 million). Annual savings are expected to be approximately $100 million. During the fourth quarter of 1994, RJRN Holdings recorded a $65 million pre-tax charge related to a plan to realign its corporate headquarters' functions, transferring certain responsibilities to the operating companies and significantly streamlining the holding company. The majority of the charge was related to accrued employee termination benefits (approximately $40 million). The remainder of the charge (approximately $25 million) was related to the abandonment of leases of certain corporate office facilities. The plan was implemented in the first quarter of 1995 and was substantially completed during 1995. NOTE 3--ACCOUNTS RECEIVABLE In 1996, certain domestic and foreign trade accounts receivable generated by Nabisco and, prior to 1996, substantially all trade accounts receivable generated by the domestic food and tobacco subsidiaries had been sold with limited recourse. During 1996, 1995 and 1994, total proceeds of approximately $6.4 billion, $8.0 billion and $7.9 billion, respectively, were received in connection with this program. At F-9 NOTE 3--ACCOUNTS RECEIVABLE (CONTINUED) December 31, 1996 and 1995, the accounts receivable balance was reduced by approximately $397 million and $418 million, respectively, due to the receivables sold. NOTE 4--INVENTORIES At December 31, 1996 and 1995, approximately $694 million and $1.0 billion, respectively, of domestic tobacco inventories was valued under the LIFO method. The current cost of LIFO inventories at December 31, 1996 and 1995 was greater than the amount at which these inventories were carried on the consolidated balance sheets by $166 million and $146 million, respectively. For the years ended December 31, 1996, 1995 and 1994, net income was increased by approximately $35 million, $29 million and $10 million, respectively, as a result of LIFO inventory liquidations. The LIFO liquidations resulted from programs to reduce domestic leaf durations consistent with forecasts of future operating requirements. NOTE 5--SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS Short-term borrowings at December 31, 1996 and 1995 consisted of the following (Dollars in millions):
1996 1995 -------------------------- -------------------------- AVERAGE AVERAGE AMOUNT YEAR-END AMOUNT YEAR-END OUTSTANDING INTEREST RATE OUTSTANDING INTEREST RATE ----------- ------------- ----------- ------------- Nabisco Holdings: Revolving credit facility................... $ -- -- $ -- -- Domestic commercial paper................... 1,175 5.8% 1,289 6.0% International commercial paper.............. 45 3.2% 34 6.2% Notes payable to banks...................... 206 14.8% 42 12.6% Amount reclassified as long-term debt....... (1,175) (1,289) ----------- ----------- Total Nabisco Holdings.................... 251 76 ----------- ----------- RJRN: Revolving credit facility................... -- -- -- -- Domestic commercial paper................... 297 6.2% 224 6.3% Notes payable to banks...................... 358 6.4% 192 3.2% Amount reclassified as long-term debt....... (297) (224) ----------- ----------- Total RJRN................................ 358 192 ----------- ----------- Total short-term borrowings.............................. $ 609 $ 268 ----------- ----------- ----------- -----------
RJRN maintains a $2.75 billion revolving credit facility, of which no borrowings were outstanding at December 31, 1996, and a 364-day $650 million credit facility primarily to support commercial paper issuances, of which approximately $353 million was available at December 31, 1996. On June 3, 1996, the maturity of the revolving credit facility was extended to June 6, 1999 and the 364-day credit facility was renewed through June 2, 1997. The commitments under the revolving credit facility decline to approximately $2.4 billion in the final year. Borrowings under the revolving credit facility bear interest at rates which vary with the prime rate or LIBOR. Borrowings under the 364-day credit facility bear interest at rates which vary with LIBOR. F-10 NOTE 5--SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS (CONTINUED) In October 1996, Nabisco Holdings and Nabisco entered into a new five-year $1.5 billion revolving credit facility and a 364-day $1.5 billion credit facility primarily to support commercial paper issuances. At the end of the 364-day period, any borrowings outstanding under the 364-day credit facility are convertible into a three-year term loan at Nabisco's option. At December 31, 1996, no borrowings were outstanding under the revolving credit facility and $325 million was available under the 364-day credit facility. Borrowings under the revolving credit facility bear interest at rates which vary with the prime rate or LIBOR. Borrowings outstanding under the 364-day credit facility bear interest at rates which vary with LIBOR. Based on RJRN's and Nabisco's intention and ability to continue to refinance for more than one year the amount of their respective domestic commercial paper and revolving credit agreement borrowings through their separate long-term revolving credit facilities, domestic commercial paper and revolving credit agreement borrowings were reclassified as long-term debt. NOTE 6--ACCRUED LIABILITIES Accrued liabilities at December 31, 1996 and 1995 consisted of the following (Dollars in millions):
1996 1995 ------------- ------------- Payroll and employee benefits................................ $ 552 $ 484 Marketing and advertising.................................... 461 532 Excise taxes................................................. 255 277 Restructuring................................................ 210 152 Accrued interest............................................. 202 254 Other........................................................ 1,004 950 ------ ------ $ 2,684 $ 2,649 ------ ------ ------ ------
NOTE 7--INCOME TAXES The provision for income taxes consisted of the following (Dollars in millions):
YEARS ENDED DECEMBER 31 1996 1995 1994 - ---------------------------------------------------------------------- --------------- --------------- --------------- Current: Federal............................................................. $ 471 $ 525 $ 401 Foreign and other................................................... 234 227 221 ----- ----- ----- 705 752 622 ----- ----- ----- Deferred: Federal............................................................. (147) (190) (40) Foreign and other................................................... 27 18 29 ----- ----- ----- (120) (172) (11) ----- ----- ----- Provision for income taxes............................................ $ 585 $ 580 $ 611 ----- ----- ----- ----- ----- -----
F-11 NOTE 7--INCOME TAXES (CONTINUED) The components of the deferred income tax liability disclosed on the consolidated balance sheet at December 31, 1996 and 1995 included the following (Dollars in millions):
1996 1995 --------- --------- Deferred tax assets: Pension and other postretirement liabilities....................................... $ (403) $ (439) Restructuring and other accrued liabilities........................................ (242) (142) --------- --------- Total deferred tax assets.................................................... (645) (581) --------- --------- Deferred tax liabilities: Property and equipment............................................................. 963 1,008 Trademarks......................................................................... 2,755 2,765 Other.............................................................................. 446 427 --------- --------- Total deferred tax liabilities............................................... 4,164 4,200 --------- --------- Net deferred tax liabilities before valuation allowance.................... 3,519 3,619 Valuation allowance................................................................ 86 47 --------- --------- Net deferred income taxes.......................................................... $ 3,605 $ 3,666 --------- --------- --------- ---------
Pre-tax income for domestic and foreign operations is shown in the following table (Dollars in millions):
YEARS ENDED DECEMBER 31 1996 1995 1994 - ---------------------------------------------------------------------- ------------- ------------- ------------- Domestic (includes U.S. exports)...................................... $ 554 $ 782 $ 867 Foreign............................................................... 645 484 508 ------ ------ ------ Pre-tax income........................................................ $ 1,199 $ 1,266 $ 1,375 ------ ------ ------ ------ ------ ------
F-12 NOTE 7--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 (Dollars in millions):
YEARS ENDED DECEMBER 31 1996 1995 1994 - -------------------------------------------------------------- --------------- --------------- --------------- Income taxes computed at statutory U.S. federal income tax rates....................................................... $ 420 $ 443 $ 481 State and local income taxes, net of federal tax benefits..... 55 52 54 Goodwill amortization......................................... 132 125 124 Taxes on foreign operations at rates different than statutory U.S. federal rate........................................... (9) (4) (6) Exempt foreign sales corporation earnings..................... (7) (15) (14) Other items, net.............................................. (6) (21) (28) ----- ----- ----- Provision for income taxes.................................... $ 585 $ 580 $ 611 ----- ----- ----- ----- ----- ----- Effective tax rate............................................ 48.8% 45.8% 44.5% ----- ----- ----- ----- ----- -----
At December 31, 1996, there was $1.899 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 have been provided nor is a determination of the amount of unrecognized U.S. federal deferred income taxes practicable. NOTE 8--LONG-TERM DEBT Long-term debt at December 31, 1996 and 1995 consisted of the following (Dollars in millions):
1996 1995 --------- --------- Nabisco Holdings: Short-term borrowings, reclassified.......................................................... $ 1,175 $ 1,289 6.7-8.3% Notes, due 1997 through 2015........................................................ 2,938 2,942 Other indebtedness........................................................................... 124 148 Current maturities of long-term debt......................................................... (24) (24) --------- --------- Total Nabisco Holdings long-term debt.................................................... 4,213 4,355 --------- --------- RJRN: Short-term borrowings, reclassified.......................................................... 297 224 6.25-9.25% Notes, due 1997 through 2013...................................................... 4,122 4,238 5.375-10% foreign currency debt, due 2000 to 2001............................................ 501 548 Other indebtedness........................................................................... 162 190 Current maturities of long-term debt......................................................... (39) (126) --------- --------- Total RJRN long-term debt................................................................ 5,043 5,074 --------- --------- Total long-term debt..................................................................... $ 9,256 $ 9,429 --------- --------- --------- ---------
- ------------------------ The payment of long-term debt through December 31, 2001 is as follows (in millions): 1998--$40; 1999-- $952; 2000--$2,423 and 2001--$647. F-13 NOTE 8--LONG-TERM DEBT (CONTINUED) During 1995 and 1994, RJRN Holdings, RJRN, Nabisco Holdings and Nabisco entered into a series of transactions designed to refinance long-term debt, lower debt levels, manage interest rate exposure and refinance certain preferred securities. In connection with the refinancing of certain long-term debt during 1995 and 1994, extraordinary losses of approximately $29 million ($16 million after-tax, net of minority interest) and $377 million ($245 million after-tax), respectively, were recorded. Also during 1995, RJRN and Nabisco completed a debt exchange, that was designed, among other things, to enable Nabisco to obtain long-term debt financing independent of RJRN and to repay its intercompany debt to RJRN. At the same time, Nabisco borrowed approximately $2.4 billion under a new credit agreement to repay or repurchase the remaining approximately $2.3 billion of intercompany debt and repay approximately $125 million of outstanding borrowings under an earlier bank credit agreement. RJRN applied the payments received from Nabisco to repay a portion of its borrowings under its bank credit agreement. Consolidated other income (expense), net for 1995 includes a pre-tax charge of approximately $103 million for fees and expenses incurred in connection with this debt exchange and related solicitation of consents by RJRN to certain indenture modifications from holders of certain RJRN debt. In September 1995, RJRN Holdings issued approximately $978 million principal amount of 10% junior subordinated debentures to a newly formed subsidiary trust. The subsidiary, in turn, issued $949 million principal amount of its preferred securities in exchange for an equal amount of RJRN Holdings' Series B preferred stock outstanding. RJRN Holdings retired the exchanged Series B preferred stock, leaving $301 million outstanding. The junior subordinated debentures may be redeemed at $25 per debenture by RJRN Holdings on or after August 19, 1998 and are due in December 2044. Cash distributions on the preferred securities issued by the subsidiary are cumulative at an annual rate of 10% of the liquidation amount of $25 per security and are payable quarterly in arrears. At December 31, 1996, approximately $4.9 billion of total debt (notes payable and long-term debt, including current maturities) was owed by RJRN and approximately $5.0 billion was owed by its subsidiaries. The estimated fair value of RJRN Holdings' consolidated long-term debt as of December 31, 1996 and 1995 was approximately $9.4 billion and $9.8 billion, respectively, based on available market quotes, discounted cash flows and book values, as appropriate. RJRN Holdings manages overall interest rate exposure by adjusting the mix of floating rate debt and fixed rate debt for both RJRN and Nabisco. As part of managing such interest rate exposures, RJRN and Nabisco may enter into various interest rate arrangements from time to time, none of which, by policy, may include any written optionality. See note 10 to the consolidated financial statements for further information regarding interest rate arrangements. Distributions and the payment of dividends by RJRN Holdings are subject to certain restrictions under certain financing agreements and debt instruments. The financing agreements generally restrict cumulative common and preferred dividends and distributions, limit the ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell or dispose of certain assets and certain subsidiaries' stock, issue certain equity securities and engage in certain mergers or consolidations. Nabisco's credit agreements, among other things, generally restrict common and preferred dividends and distributions, limit loans and advances by Nabisco Holdings and its subsidiaries to RJRN, limit the ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, acquire, sell or dispose of certain assets and securities and engage in certain mergers or consolidations. F-14 NOTE 8--LONG-TERM DEBT (CONTINUED) RJRN Holdings adopted a policy setting forth its intention not to make a distribution to shareholders prior to December 31, 1998 of shares of capital stock of a subsidiary 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. The board of directors of RJRN Holdings is committed to effecting a spin-off of Nabisco Holdings at the appropriate time. 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 RJRN 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 RJRN Holdings will issue or sell any equity or sell any material assets outside the ordinary course of business. NOTE 9--COMMITMENTS AND CONTINGENCIES TOBACCO LITIGATION OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJRN) or indemnitees, including those claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During 1996, 203 new actions were filed or served against RJRT and/or its affiliates or indemnitees and 103 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. There have been noteworthy increases in the number of these cases pending. On December 31, 1996 there were 234 active cases pending, as compared with 132 on December 31, 1995 and only 54 on December 31, 1994. As of February 28, 1997, 270 active cases were pending against RJRT and/or its affiliates or indemnitees, 268 in the United States, one in Canada and one in Puerto Rico. The United States cases are in 33 states and are distributed as follows: 117 in Florida, 26 in New York, 36 in Texas, 15 in Louisiana, eight in Alabama, seven in California, six in each of Kansas, Mississippi and Indiana, five in New Jersey, three in each of Minnesota, Ohio, Pennsylvania and Tennessee, two in each of Colorado, Connecticut, Maryland, Massachusetts and Michigan, and one each in Arizona, Arkansas, District of Columbia, Illinois, Iowa, Nevada, New Mexico, New Hampshire, Oklahoma, Rhode Island, Utah, Washington, West Virginia and Wisconsin. Of the 268 active cases in the United States, 170 are pending in state court and 98 in federal court. Most of these cases are brought by individual plaintiffs, but an increasing number, discussed below, seek recovery on behalf of states or large classes of claimants. THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a variety of legal theories, including, among others, strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, anti-trust, Racketeer Influenced and Corrupt Organization Act ("RICO"), indemnity and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. Seven of the 268 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. Nineteen cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, flight attendants alleging personal injury from exposure to environmental tobacco F-15 NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED) smoke in their workplace and Blue Cross/Blue Shield subscribers claiming reimbursement for premiums paid. Twenty seven of the active cases seek, INTER ALIA, recovery of the cost of Medicaid funds paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco. DEFENSES. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act ("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; and, in the attorneys general cases (discussed below), additional constitutional defenses. RJRN has asserted additional defenses, including jurisdictional defenses, in many of the cases in which it is named. Juries have found for plaintiffs in three smoking and health cases in which RJRT was not a defendant, but in one such case, no damages were awarded and the judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on appeal and the case was subsequently dismissed. In the third such case, on August 9, 1996, a Florida jury awarded damages of $750,000 to an individual plaintiff. The defendants in that case, CARTER V. BROWN & WILLIAMSON, are seeking to reverse the judgment on appeal. On June 24, 1992, the United States Supreme Court in CIPOLLONE held that claims that tobacco companies failed adequately to 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 Supreme Court also held that certain claims sounding in breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. CERTAIN CLASS ACTION SUITS. In May 1996, there was an important ruling in one of the purported class action cases, CASTANO V. THE AMERICAN TOBACCO COMPANY, originally filed in March 1994 in the United States District Court for the Eastern District of Louisiana against tobacco industry defendants, including RJRT and RJRN. Plaintiffs sought to obtain 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 alleged 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 but, on May 23, 1996, the Fifth Circuit Court of Appeals overturned the certification and ordered the case remanded to the district court for decertification of the class on the grounds that a class consisting of all "addicted" smokers failed to meet the standards and requirements of Federal Rule 23 governing class actions. The class has been decertified. Since the federal appeals court decision in CASTANO, class action suits based on similar claims have been brought in state courts in Alabama, Arkansas, the District of Columbia (D.C. court), Louisiana, Maryland, Minnesota, New Mexico, Ohio, Pennsylvania and New York. A similar suit had previously been filed in Indiana. Similar suits are also expected to be filed in additional jurisdictions. Each such suit asserts claims on behalf of residents of the particular state who allegedly are or claim to be addicted, or are the legal survivors of such persons. In addition, two earlier class action suits are still pending in Florida. In one case, ENGLE V. R.J. REYNOLDS TOBACCO COMPANY, a class consisting of Florida residents or their survivors who claim to have diseases or medical conditions caused by their "addiction" to cigarettes has been certified, and a petition to review the certification has been denied. Notice to the class is in progress and the case is scheduled for trial in September 1997. In a second case, BROIN V. PHILIP MORRIS COMPANY, a class consisting of all non-smoking flight attendants who work or have worked for U.S. airlines has been certified, and a mandamus petition to reverse this certification was denied. Notice to the class is now in progress and the case is scheduled for trial in June 1997. Pre-CASTANO class action suits are also pending in Alabama and F-16 NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED) Louisiana. A class action filed in Tennessee seeks reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout the United States. THE ATTORNEYS GENERAL AND RELATED CASES. In June 1994, the Mississippi attorney general brought an action, MOORE V. THE AMERICAN TOBACCO COMPANY, against various industry members including RJRT. The case was brought 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 against "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 is scheduled for trial on June 2, 1997. RJRN and other industry holding companies have been voluntarily dismissed from the case. Following the filing of the MOORE case referred to above, other states, through their attorneys general and/or other state agencies, have sued RJRT and other U.S. cigarette manufacturers as well as, in some instances, their parent companies, in actions to recover the costs of medical expenses incurred by the state or its agencies in the treatment of diseases allegedly caused by cigarette smoking. Some of these cases also seek injunctive relief and treble damages for state and/or federal antitrust law and RICO violations. On February 28, 1997, there were 20 such cases pending in the following states: Arizona, Connecticut, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, Oklahoma, Texas, Utah, Washington, West Virginia and Wisconsin. The Mississippi case is the first such case currently scheduled for trial, with a trial date set for June 2, 1997. The Florida attorney general's case is scheduled for trial on August 4, 1997 and the Texas case is scheduled for September 22, 1997. The suit by the State of Florida raises special issues because it was brought under a July 1994 amendment to a Florida statute which allows the state to bring an action in its own name against the tobacco industry to recover the state's Medicaid payments for the treatment of illnesses statistically associated with cigarette smoking. The amendment did not require the state to identify the individuals who received medical care, permitted claims to be filed in the aggregate and eliminated the comparative negligence and assumption of risk defenses. The amendment was challenged on state and federal constitutional grounds in a lawsuit brought by Philip Morris Companies Inc., Associated Industries of Florida and others in June 1994. The case was appealed to the Florida Supreme Court which, on June 27, 1996, issued its opinion limiting the amendment in several respects. Among other things, the court ruled: that provisions abrogating affirmative defenses available to tobacco companies if sued by individuals could only be applied to claims brought by the state arising out of payments made after July 1, 1994, the effective date of the amendment; that the state must identify individual recipients of Medicaid payments; and that claims previously barred by the statute of repose could not be revived. The Florida Supreme Court, in a 4-3 decision, expressly stated that although it found provisions of the statute to be "facially" constitutional, it was specifically leaving open the right to challenge those provisions as applied in any specific lawsuit. The plaintiffs in that lawsuit have sought United States Supreme Court review of the Florida Supreme Court's decision, to determine whether the Florida statute, by which the State of Florida conferred on itself a unique cause of action and which directs courts to abrogate common law and equitable principles, including affirmative defenses, is unconstitutional under the Fourteenth Amendment to the United States Constitution. In an order dated September 16, 1996, the Florida trial court hearing the attorney general's case applied the Florida Supreme Court decision to that case. The order dismissed fifteen of plaintiff's eighteen causes of action, but left standing the claims of negligence and/or products liability and one count of the complaint which seeks to enjoin certain acts including the sale of cigarettes to minors. It also required the F-17 NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED) attorney general to identify the individual Medicaid recipients for whom the state is seeking recovery within 30 days and precluded recovery by the state on payments made prior to July 1994, except by subrogation and assignment. Following this ruling, the State of Florida filed an amended complaint that restated the counts of the prior complaint left standing by the September order and added five additional counts. One of these counts alleged various statutory and criminal violations arising under the Florida Drug and Cosmetic Act, based on alleged wrongful and illegal targeting of minors, fraudulent practices, public nuisance and deceptive and unfair trade practices. The other four new counts alleged violations of various sections of the Florida RICO Act. Defendants' motion to dismiss the RICO counts was denied. In addition to the 20 actions brought by the various state attorneys general, seven actions advancing similar theories have been brought by private attorneys and/or local officials purportedly on behalf of the citizens of certain states, counties and/or cities. RJRT and most other cigarette manufacturers are defending these attorneys general and related cases vigorously (as is RJRN in the cases where it is a named defendant). In addition, these defendants have filed for declaratory judgment in several of the states in which the attorneys general cases are pending or threatened, including Massachusetts (federal court), Texas (state court), Maryland (state court), Connecticut (federal court), Utah (state court), New Jersey (state court), Alaska (federal court) and Hawaii (federal court). Motions to dismiss on behalf of the defendants in two of the declaratory judgment actions (Maryland and Connecticut) have been granted. RJRT and the other cigarette manufacturers involved in those two cases have noticed appeals seeking to overturn these rulings. RECENT AND SCHEDULED TRIALS. As of February 28, 1997, there were 17 cases scheduled for trial in 1997 against RJRT and/or RJRN alleging injuries relating to tobacco. Among these are three class action suits and four attorneys general suits. Cases against other tobacco company defendants are also scheduled for trial in 1997 and thereafter. Although trial schedules are subject to change and many cases are dismissed before trial, it is likely that there will be an increased number of tobacco cases involving claims for possibly billions of dollars, against RJRT and RJRN coming to trial over the next year as compared to prior years when trials in these cases were infrequent. OTHER DEVELOPMENTS. On March 12, 1996, defendants Brooke Group and Liggett Group, Inc. stated they had reached agreement with the CASTANO plaintiffs to settle that case. On April 4, 1996, Liggett Group, Liggett & Myers and Brooke Group filed settlement statements in the Massachusetts, West Virginia, Mississippi, Louisiana and Florida attorneys general cases. The settlements would be available to any other defendant whose share of the U.S. cigarette market is less than 30% if it acquires or is acquired by Liggett, and Liggett can terminate each settlement upon the occurrence of certain events including the decertification of the CASTANO case, an event that has now occurred. According to press reports, negotiations to extend these settlements to other attorneys general cases are ongoing. All other cigarette manufacturers, including RJRT, announced their intent to continue to defend the cases. Legislation similar to the Florida legislation described above (facilitating Medicaid recovery suits and stripping defendants of certain defenses) was introduced in the legislatures of 12 states in 1996. None was enacted. RJRT is unable to predict whether legislation will be enacted in these states, whether other states will introduce and enact similar legislation, whether lawsuits will be filed under such statutes, if enacted, or the outcome of any such lawsuits, if filed. 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 has responded, and will continue to respond to document subpoenas issued by this grand jury. On March 20, 1996, RJRT and RJRN each received a subpoena from a Federal grand jury sitting in the Southern District of New York. RJRT and F-18 NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED) RJRN understand that this investigation is no longer active in the Southern District of New York and has been transferred to the District of Columbia. In addition, subpoenas dated May 24, 1996, November 8, 1996 and December 5, 1996 were served on RJRT by a grand jury sitting in the District of Columbia. RJRT is in the process of responding to those subpoenas. RJRN and RJRT are unable to predict the outcome of these investigations. RJRT has received civil investigative demands from the United States Department of Justice requiring RJRT to produce documents and respond to interrogatories relating to the possibility of joint activity to restrain competition in the manufacture and sale of cigarettes, including possible joint activity to restrict research and development or product innovations. RJRT was informed, by letter dated November 13, 1996, that the United States Department of Justice had closed its 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 (including RJRN Holdings and RJRN) 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 could encourage an increase in the number of such claims. There have also been a number of political, legislative, regulatory and other developments relating to the tobacco industry and cigarette smoking that have received wide media attention. Although it is impossible to predict the outcome of such events on pending litigation and the rate at which new lawsuits are filed against RJRT and RJRN, 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 all such actions vigorously. RJRN Holdings and RJRN also believe they have valid defenses for such actions and intend to defend vigorously all such actions in which they are named defendants. RJRN Holdings and RJRN believe that the ultimate outcome of all pending litigation matters (including litigation costs) should not have a material adverse effect on the financial position of either RJRN Holdings or RJRN; however, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). 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. ------------------------ 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. In April 1995, RJRN Holdings was named a potentially responsible party (a "PRP") with certain third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to a superfund site at which a former subsidiary of RJRN had operations. Certain subsidiaries of RJRN Holdings and RJRN have also been named as PRPs with third parties or may have indemnification obligations with respect to a number of additional sites. Liability under CERCLA is joint and several. F-19 NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED) RJRN Holdings' and RJRN's subsidiaries have been engaged in a continuing program to assure compliance with U.S., state and local 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, RJRN Holdings and RJRN do not expect such expenditures or other costs to have a material adverse effect on the business or financial condition of RJRN Holdings and RJRN and their subsidiaries taken as a whole. COMMITMENTS At December 31, 1996, commitments totalled approximately $720 million, principally for minimum operating leases, the purchase of leaf tobacco inventories and other contractual arrangements. NOTE 10--FINANCIAL INSTRUMENTS INTEREST RATE ARRANGEMENTS RJRN Holdings manages overall interest rate exposure by adjusting the mix of floating rate debt and fixed rate debt for both RJRN and Nabisco. As part of managing such interest rate exposures, RJRN and Nabisco may enter into various interest rate arrangements from time to time, none of which, by policy, may include any written optionality. RJRN did not enter into any financial interest rate arrangements during 1996 and 1995. During 1994, RJRN cancelled all of its financial interest rate arrangements with optionality following adoption of a policy change and also effectively neutralized the future impact of any changes in market interest rates on the remainder of its outstanding interest rate arrangements through the purchase of offsetting positions. As a result of these offsetting positions, the net notional principal amount of outstanding interest rate arrangements has been $0. Any unrealized gains and losses on the interest rate arrangements remaining at the time of offset have been substantially amortized as additional interest expense as follows: 1996--$28 million and 1995--$39 million. Interest rate activities during 1994 increased interest expense $22 million, which includes $45 million associated with written interest rate arrangements. At December 31, 1996, the aggregate notional principal amount of outstanding interest rate arrangements, including the offsetting positions, was $1.6 billion. These arrangements substantially mature in 1997. Nabisco, in coordination with RJRN Holdings, began managing its own interest rate exposure during 1995 by entering into interest rate arrangements to effectively fix a portion of its interest rate exposure on its floating rate debt. The impact of these arrangements has not been significant. At December 31, 1996, Nabisco has outstanding interest rate caps with an aggregate notional principal amount of $1.5 billion, $500 million of which became effective during 1997. These arrangements expire during 1997. The carrying amounts and estimated fair values of interest rate arrangements entered into as of December 31, 1996 and 1995 were as follows (Dollars in millions):
1996 1995 -------------------------------- -------------------------------- ASSETS/(LIABILITIES) ASSETS/(LIABILITIES) -------------------------------- -------------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE ----------------- ------------- ----------------- ------------- Interest rate swaps: Variable rate pay swaps................................. $ (1) $ (2) $ (1) $ -- Fixed rate pay swaps.................................... $ (6) $ (10) $ (11) $ (46) Interest rate caps........................................ $ 2 $ 1 $ 3 $ 1
F-20 NOTE 10--FINANCIAL INSTRUMENTS (CONTINUED) FOREIGN CURRENCY ARRANGEMENTS RJRN Holdings and its subsidiaries have significant exposure to foreign exchange sale and purchase transactions in currencies other than their functional currencies. Their exposures include the U.S. dollar, German mark, French franc, British pound, Italian lira, Japanese yen, Swiss franc, Hong Kong dollar, Singapore dollar, Finnish markka, Canadian dollar and Spanish peseta. Whenever possible, RJRN Holdings' policy is to net exposures and utilize natural offsets to minimize the effects of foreign currency transactions on cash flows; otherwise, foreign currency hedging activities are entered into to protect RJRN Holdings and its subsidiaries from risk that the eventual dollar cash flows resulting from transactions with international parties will be adversely affected by changes in exchange rates. Such contracts are primarily entered into to hedge future firm commitments. At December 31, 1996 and 1995, RJRN Holdings and its subsidiaries had approximately $608 million and $526 million, respectively, of outstanding foreign exchange contracts with banks in which foreign currencies (primarily the Swiss franc, Spanish peseta, Canadian dollar and the German mark) were purchased, and approximately $245 million and $575 million, respectively, of outstanding foreign exchange contracts in which foreign currencies (primarily the Japanese yen, British pound, French franc and Finnish markka) were sold. The weighted average maturity of the arrangements outstanding at December 31, 1996 approximated two months. At December 31, 1996 and 1995, the carrying amounts and estimated fair values of foreign currency arrangements entered into were as follows (Dollars in millions):
1996 1995 ---------------------------- ---------------------------- ASSETS/(LIABILITIES) ASSETS/(LIABILITIES) ---------------------------- ---------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE --------------- ----------- --------------- ----------- Forward foreign exchange contracts to purchase foreign currencies............................................... $ (7) $ (7) $ -- $ 1 Forward foreign exchange contracts to sell foreign currencies............................................... $ 12 $ 13 $ 2 $ 8
MARKET AND CREDIT RISK The above interest rate and foreign currency arrangements entered into 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 Holdings and its subsidiaries may be exposed to credit losses in the event of non-performance by the counterparties to these financial instruments. However, RJRN Holdings and its subsidiaries continually monitor their positions and the credit ratings of their counterparties and therefore, do 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. NOTE 11--CAPITAL STOCK AND PAID-IN CAPITAL The outstanding capital stock of RJRN Holdings at December 31, 1996 consisted of common stock, Series B preferred stock (stated value of $25,000 per share), Series C convertible preferred stock (par value F-21 NOTE 11--CAPITAL STOCK AND PAID-IN CAPITAL (CONTINUED) $.01 per share) and ESOP convertible preferred stock (stated value of $16 per share). All classes of preferred stock of RJRN Holdings (150,000,000 shares authorized at December 31, 1996) rank senior to common stock as to dividends and liquidation preferences. In addition, Series B depositary shares and Series C depositary shares were issued in connection with the issuance of the Series B preferred stock and the Series C preferred stock. Each Series B depositary share (12,043,940 outstanding at December 31, 1996 and 1995) represents a .001 ownership interest in a share of Series B preferred stock. Each Series C depositary share (266,750,000 outstanding at December 31, 1996 and 1995) represents a one-tenth ownership interest in a share of Series C preferred stock. Each share of Series B preferred stock (12,044 shares issued and outstanding at December 31, 1996 and 1995) bears cumulative cash dividends of $2,312.50 or $2.3125 per Series B depositary share per annum, payable quarterly in arrears. RJRN Holdings may redeem Series B preferred stock on or after August 19, 1998 resulting in the redemption of the Series B depositary shares at $25 per Series B depositary share plus accrued and unpaid dividends. Each share of Series C preferred stock bears cumulative cash dividends of $6.012 or $.6012 per Series C depositary share per annum, payable quarterly in arrears. Each share of Series C preferred stock will mandatorily convert into two shares of common stock on May 15, 1997, subject to adjustment, plus accrued and unpaid dividends. In addition, RJRN Holdings may redeem Series C preferred stock resulting in the redemption of the Series C depositary shares at a redemption price to be paid in shares of common stock, plus accrued and unpaid dividends. RJRN Holdings and its subsidiaries sponsor a defined contribution plan in which matching contributions to eligible employees are made in the form of ESOP preferred stock. Every five shares of ESOP preferred stock (14,558,920 and 14,990,677 shares issued and outstanding at December 31, 1996 and 1995, respectively) is generally convertible into one share of common stock of RJRN Holdings, and bears cumulative dividends at 7.8125% of stated value per annum at least until April 10, 1999, payable semi-annually in arrears. The ESOP preferred stock is redeemable at the option of RJRN Holdings on or after April 10, 1999 at an initial redemption price of $16.25 per share. The redemption price declines thereafter to $16 per share on April 10, 2001, plus accrued and unpaid dividends. RJRN Holdings matches $.50 for every pre-tax dollar contributed by each eligible employee, up to a maximum of 6% of the employee's pay. The shares of ESOP preferred stock are allocated to employees at either a floor value of $16 per share or the fair market value of one-fifth of a share of common stock, whichever is higher. Unallocated shares totalled 6,423,948 and 8,585,461 at December 31, 1996 and 1995, respectively. During 1996, 1995 and 1994, approximately $28 million, $23 million and $22 million, respectively, was contributed to the ESOP by RJRN Holdings and approximately $18 million, $19 million and $19 million, respectively, of ESOP dividends were used to service the ESOP's debt to RJRN Holdings that was incurred in connection with the initial formation of the ESOP. The completion in January 1995 of Nabisco Holdings' initial public offering of 51,750,000 shares of its Class A common stock (par value $.01 per share at an initial offering price of $24.50 per share) reduced RJRN's proportionate economic interest in Nabisco Holdings from 100% to approximately 80.5%. An adjustment to paid-in capital of $401 million was recorded to reflect an increase in the carrying amount of RJRN's investment in Nabisco Holdings for the difference between the initial public offering price and the book value of Nabisco Holdings at the time of the offering. In March 1996, RJRN Holdings adopted a share repurchase objective of approximately 10 million shares of common stock over the next several years based upon the achievement of performance targets. During 1996, RJRN Holdings repurchased 3,377,300 shares of common stock for approximately $100 million. F-22 NOTE 12--STOCK PLANS RJRN Holdings' 1989 stock plan provides for grants of options to purchase common stock of RJRN Holdings to non-employee directors, directors and key employees. A maximum of 6,000,000 shares may be issued under this plan. The options granted under the plan generally vest over three years, are separately exercisable for primarily ten years from the date of grant, and the exercise price is generally the fair market value of the stock at the grant date. RJRN Holdings' 1990 long-term incentive plan ("LTIP") provides for grants of incentive stock options, other stock options, stock appreciation rights, restricted stock, purchase stock, dividend equivalent rights, performance units, performance shares and other stock-based grants to key employees. A maximum of 21,000,000 shares of common stock of RJRN Holdings may be issued under the LTIP. The options granted under the plan generally vest over three years, are exercisable for 10-15 years from date of grant, and the exercise price is generally the fair market value of the stock at the grant date. As of December 31, 1996, purchase stock, stock options other than incentive stock options, restricted stock and other stock-based grants have been granted under the LTIP. In 1995, employees of RJRN Holdings and its non-Nabisco subsidiaries surrendered 8,378,449 options in exchange for a new grant of options under the LTIP. These options are fully vested but are not exercisable for three years thereafter. Also in 1995, certain key employees were granted premium options to purchase shares of RJRN Holdings' common stock. These options had an exercise price that was 10% above the fair market value on the date of the grant. In connection with purchase stock grants awarded under the LTIP, 16,529 shares of common stock of RJRN Holdings were purchased during 1995 and options to purchase a specific number of shares were granted upon the optionee purchasing such shares of common stock. During 1996, 1995 and 1994, 35,000 shares, 30,000 shares and 884,100 shares, respectively, of RJRN Holdings' common stock were awarded in connection with restricted stock grants. These shares are subject to restrictions that generally lapse three years from the date of grant. Other stock-based awards were made in 1996, 1995 and 1994 under the LTIP to individuals who previously acquired certain purchase stock. Under this program, such individuals received grants of common stock or cash at RJRN Holdings' election on either three or four annual grant dates beginning July 1994 and ending either July 1, 1996 or July 1, 1997 at market prices calculated based upon a formula developed by RJRN Holdings. The changes in stock options under RJRN Holdings' stock plans are as follows:
1996 1995 1994 ------------------------- ------------------------ ---------------------- WEIGHTED- AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- ------------- ----------- ----------- --------- ----------- Balance at beginning of year: Stock Option Plan................................ 1,274,621 $ 26.55 3,754,672 $25.00-52.25 4,648,022 $25.00-52.25 Long Term Incentive Plan......................... 13,581,314 28.57 12,411,651 22.60-57.80 12,926,527 22.60-57.80 Options granted: Stock Option Plan................................ 74,456 31.10 14,400 30.00 32,160 34.40 Long Term Incentive Plan......................... 3,717,991 34.64 12,823,060 26.88-32.25 355,400 27.50-37.20 Options exercised: Stock Option Plan................................ (458,728) 25.04 (153,960) 25.00 (918,947) 25.00-28.75 Long Term Incentive Plan......................... (136,384) 27.85 (14,137) 22.82-29.69 (7,171) 27.80 Options cancelled: Stock Option Plan................................ (2,280) 25.74 (2,340,491) 25.00-34.38 (6,563) 25.00-56.25 Long Term Incentive Plan......................... (267,667) 31.46 (11,639,260) 22.82-54.69 (863,105) 27.80-50.65 ---------- ----------- --------- Balance at end of year: Stock Option Plan................................ 888,069 25.66 1,274,621 25.00-52.25 3,754,672 25.00-52.25 Long Term Incentive Plan......................... 16,895,254 29.74 13,581,314 22.60-57.80 12,411,651 22.60-57.80 ---------- ----------- --------- 17,783,323 29.54 14,855,935 22.60-57.80 16,166,323 22.60-57.80 ---------- ----------- --------- ---------- ----------- ---------
F-23 NOTE 12--STOCK PLANS (CONTINUED) In 1994, Nabisco Holdings adopted a long-term incentive plan which is substantially similar to the LTIP except that stock-based awards are denominated in shares of Class A common stock of Nabisco Holdings. In 1995, employees of Nabisco Holdings with outstanding stock options granted under RJRN Holdings' stock plans exchanged 4,968,214 (including Mr. Harper's exchange discussed below) of these options for options in the Nabisco Holdings' stock plan. Charles M. Harper, then chairman of the board of directors of Nabisco Holdings, was permitted to surrender 50% of his outstanding LTIP options in exchange for options in the Nabisco Holdings' stock plan. Also in 1995, employees of RJRN Holdings with outstanding stock options under RJRN Holdings' stock plans exchanged 264,989 of these options for options under the Nabisco Holdings' stock plan. The Nabisco Holdings' stock options granted (5,971,858) in exchange for the cancellation of RJRN Holdings' stock options are fully vested; however, such Nabisco Holdings' stock options may not be exercised for three years thereafter. During 1995, RJRN Holdings also purchased one-half of Mr. Harper's restricted LTIP purchase shares (62,222 shares) at the then fair market value ($28.125 per share). Such proceeds were used to acquire similarly restricted shares of Nabisco Holdings' Class A common stock. In 1996, 14,672 shares of Nabisco Holdings' Class A common stock were awarded under Nabisco Holdings' stock plan as restricted stock. The changes in stock options under Nabisco Holdings' stock plan are as follows:
1996 ------------------------- WEIGHTED- 1995 AVERAGE -------------------------- EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE ------------ ----------- ---------- -------------- Balance at beginning of year................................ 8,909,663 $ 26.77 -- -- Options granted............................................. 3,114,200 33.83 9,043,263 $ 24.50-29.38 Options cancelled........................................... (295,982) 29.73 (133,600) 27.38-29.00 ------------ ---------- Balance at end of year...................................... 11,727,881 28.57 8,909,663 24.50-29.38 ------------ ---------- ------------ ----------
Additional information for 1996 with respect to options under RJRN Holdings' and Nabisco Holdings' stock plans are as follows:
RJRN NABISCO HOLDINGS HOLDINGS --------------- ---------------- Option price range at end of year........................................... $22.815-52.50 $24.50-39.125 Options exercisable at end of year.......................................... 4,618,935 None Shares of common stock available for future grant........................... 3,680,316 4,872,119 Weighted-average grant date fair value of options granted during year under the Black-Scholes option pricing model.................................... $7.06 $11.00 Weighted-average exercise price of options exercisable at end of year....... $30.46 Not applicable Weighted-average remaining contractual life of outstanding options at end of year...................................................................... 11.5 years 12.1 years
RJRN Holdings and its subsidiaries recognize and measure compensation costs related to employee stock plans utilizing the intrinsic value based method. Had compensation expense been determined based F-24 NOTE 12--STOCK PLANS (CONTINUED) upon the fair value of awards granted during 1996 and 1995, RJRN Holdings' net income and earnings per share would have been as follows:
1996 1995 -------------------------- ------------------------ AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------- ----------- ----------- ----------- Net income (in millions)........................................ $ 611 $591 $611 $542 Earnings per share.............................................. $ 1.74 $1.68 $1.53 $1.32
The 1995 pro forma disclosures reflect the surrender and exchange of RJRN Holdings' options for options under the LTIP or under Nabisco Holdings' stock option plan. For options granted, fair value was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
1996 1995 ------------------------ ------------------------ RJRN NABISCO RJRN NABISCO HOLDINGS HOLDINGS HOLDINGS HOLDINGS ----------- ----------- ----------- ----------- Dividend yield......................................................... 5.3% 1.9% 5.5% 1.9% Expected volatility.................................................... 29% 24% 29% 27% Risk-free interest rate................................................ 6.2% 6.4% 5.3% 6.8% Expected option lives (years).......................................... 5 7 5 11
For restricted stock awards granted, the market price of the stock at the date the award is granted is used to measure the fair value of the award. The weighted-average grant date fair value of restricted stock granted during 1996 for RJRN Holdings and Nabisco Holdings was $30.36 and $32.41, respectively. Total compensation costs recognized for stock-based compensation plans during 1996 amounted to approximately $1 million. NOTE 13--RETIREMENT BENEFITS RJRN and its subsidiaries sponsor 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 and its subsidiaries participate in several (i) multi-employer plans, which provide benefits to certain union employees, and (ii) defined contribution plans, which provide benefits to certain employees in foreign countries. 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. F-25 NOTE 13--RETIREMENT BENEFITS (CONTINUED) A summary of the components of pension expense is as follows (Dollars in millions):
YEARS ENDED DECEMBER 31 1996 1995 1994 - --------------------------------------------------------------------------- ------------- ------------- ------------- Defined benefit pension plans: Service cost--benefits earned during the period.......................... $ 96 $ 69 $ 97 Interest cost on projected benefit obligation............................ 281 265 256 Less actual return on plan assets........................................ (445) (555) (17) Net amortization and deferral............................................ 159 308 (245) ----- ----- ----- Total................................................................ 91 87 91 Multi-employer and other defined contribution plans........................ 42 39 36 ----- ----- ----- Total pension expense................................................ $ 133 $ 126 $ 127 ----- ----- ----- ----- ----- -----
The principal plans used the following actuarial assumptions for accounting purposes:
U.S. PLANS FOREIGN PLANS -------------------- -------------------------------- DECEMBER 31 1996 1995 1996 1995 - ------------------------------------------------------------ --------- --------- --------------- --------------- Weighted-average discount rate.............................. 7.5% 7% 4%-9% 4.5%-9% Rate of increase in compensation levels..................... 5% 5% 3%-5% 3%-5.5% Expected long-term rate of return on assets................. 9.5% 9.5% 4.75%-8.5% 5%-9%
The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at December 31, 1996 and 1995 for U.S. defined benefit pension plans (Dollars in millions):
U.S. PLANS ------------------------------------------------------------------------ 1996 1995 ---------------------------------- ------------------------------------ PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS EXCEEDED BENEFITS ASSETS BENEFITS ASSETS --------------- ----------------- ----------------- ----------------- Actuarial present value of: Vested benefits................................. $ 3,032 $ 120 $ 216 $ 2,823 Non-vested benefits............................. 32 3 16 23 ------ ------ ----- ------ Accumulated benefit obligation.................. 3,064 123 232 2,846 Effect of future salary increases............... 301 14 29 355 ------ ------ ----- ------ Projected benefit obligation.................... 3,365 137 261 3,201 Plan assets at fair market value.................. 3,172 17 254 2,704 ------ ------ ----- ------ Plan assets in excess of (less than) projected benefit obligation.............................. (193) (120) (7) (497) Unrecognized net (gain) loss...................... (65) 41 6 157 Unrecognized prior service cost................... (5) (6) 1 (15) Adjustment required to recognize minimum pension liability....................................... -- (21) -- (20) ------ ------ ----- ------ Net pension assets (liabilities) recognized in the consolidated balance sheets..................... $ (263) $ (106) $ -- $ (375) ------ ------ ----- ------ ------ ------ ----- ------
F-26 NOTE 13--RETIREMENT BENEFITS (CONTINUED) The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at December 31, 1996 and 1995 for foreign defined benefit pension plans (Dollars in millions):
FOREIGN PLANS ------------------------------------------------------------------------ 1996 1995 ---------------------------------- ------------------------------------ PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS EXCEEDED BENEFITS ASSETS BENEFITS ASSETS --------------- ----------------- ----------------- ----------------- Actuarial present value of: Vested benefits................................. $ 283 $ 105 $ 154 $ 231 Non-vested benefits............................. 2 29 6 30 ------ ------ ----- ------ Accumulated benefit obligation.................. 285 134 160 261 Effect of future salary increases............... 27 38 46 51 ------ ------ ----- ------ Projected benefit obligation.................... 312 172 206 312 Plan assets at fair market value.................. 331 3 178 127 ------ ------ ----- ------ Plan assets in excess of (less than) projected benefit obligation.............................. 19 (169) (28) (185) Unrecognized net (gain) loss...................... (21) 11 13 31 Unrecognized prior service cost................... 10 -- -- 8 Transition amount................................. (6) 11 (6) 13 Adjustment required to recognize minimum pension liability....................................... -- (2) -- (2) ------ ------ ----- ------ Net pension assets (liabilities) recognized in the consolidated balance sheets..................... $ 2 $ (149) $ (21) $ (135) ------ ------ ----- ------ ------ ------ ----- ------
At December 31, 1996, approximately 95% of the plans' assets were invested in listed stocks and bonds and other highly liquid investments. The balance consisted of various income producing investments. In addition to providing pension benefits, RJRN provides certain health care and life insurance benefits for retired employees and their dependents. Substantially all of its regular full-time employees, including certain employees in foreign countries, may become eligible for those benefits if they reach retirement age while working for RJRN and its subsidiaries. Net postretirement health and life insurance benefit costs consisted of the following (Dollars in millions):
YEARS ENDED DECEMBER 31 1996 1995 1994 - ---------------------------------------------------------------------- ----------------- ----------------- ----------------- Service cost--benefits earned during the period....................... $ 16 $ 18 $ 17 Interest cost on accumulated postretirement benefit obligation........ 64 62 62 --- --- --- Net postretirement health care and life insurance costs............. $ 80 $ 80 $ 79 --- --- --- --- --- ---
F-27 NOTE 13--RETIREMENT BENEFITS (CONTINUED) Postretirement health and life insurance benefit plans currently are not funded. The status of the plans at December 31, 1996 and 1995 was as follows (Dollars in millions):
1996 1995 --------- --------- Actuarial present value of accumulated postretirement benefit obligation: Retirees..................................................................................... $ 697 $ 696 Fully eligible active plan participants...................................................... 131 124 Other active plan participants............................................................... 265 255 Unrecognized actuarial amounts................................................................. (95) (62) --------- --------- Accrued postretirement health care and life insurance costs.................................... $ 998 $ 1,013 --------- --------- --------- ---------
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 7% in 1996 and 6.5% in 1997 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, 1996 and the aggregate of the service and interest cost components of the net postretirement benefit cost for the year then ended by approximately $59 million and $5 million, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 7% as of December 31, 1996 and 1995, respectively. NOTE 14--SEGMENT INFORMATION INDUSTRY SEGMENT DATA RJRN Holdings is a holding company whose subsidiaries are engaged principally in the manufacture, distribution and sale of tobacco products, cookies, crackers and other food products. Cigarettes are manufactured in the United States by RJRT and in over 40 foreign countries and territories by Reynolds International and subsidiaries or licensees of RJRT and are sold throughout the United States and in more than 170 markets around the world including Europe, the Middle East, Africa, Asia, the former Soviet Union and Canada. RJRN's 80.5% owned subsidiary, Nabisco Holdings, manufactures and markets cookies, crackers, non-chocolate candy and gum products, nuts and snacks, various margarines and spreads and other specialty products under several brand names in the United States, Canada, Europe, Asia and Latin America. See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of RJRN Holdings' operations. F-28 NOTE 14--SEGMENT INFORMATION (CONTINUED) Summarized financial information for these operations is shown in the following tables (Dollars in millions):
YEARS ENDED DECEMBER 31 1996 1995 1994 - --------------------------------------------------------------------------------- --------- --------- --------- Net sales: Tobacco........................................................................ $ 8,174 $ 7,714 $ 7,667 Food........................................................................... 8,889 8,294 7,699 --------- --------- --------- Consolidated net sales....................................................... $ 17,063 $ 16,008 $ 15,366 --------- --------- --------- --------- --------- --------- Operating income: Tobacco........................................................................ $ 1,845 $ 1,500 $ 1,801 Food........................................................................... 474 902 887 Headquarters................................................................... (67) (64) (138) --------- --------- --------- Consolidated operating income................................................ $ 2,252 $ 2,338 $ 2,550 --------- --------- --------- --------- --------- --------- Capital expenditures: Tobacco........................................................................ $ 304 $ 231 $ 215 Food........................................................................... 437 513 455 --------- --------- --------- Consolidated capital expenditures............................................ $ 741 $ 744 $ 670 --------- --------- --------- --------- --------- --------- Depreciation expense: Tobacco........................................................................ $ 217 $ 236 $ 228 Food........................................................................... 270 244 218 Headquarters................................................................... 2 2 8 --------- --------- --------- Consolidated depreciation expense............................................ $ 489 $ 482 $ 454 --------- --------- --------- --------- --------- ---------
DECEMBER 31 1996 1995 - -------------------------------------------------------------------------------------- --------- --------- Assets: Tobacco............................................................................. $ 18,952 $ 19,226 Food................................................................................ 12,235 12,239 Headquarters(1)..................................................................... 102 53 --------- --------- Consolidated assets............................................................... $ 31,289 $ 31,518 --------- --------- --------- ---------
- ------------------------ (1) Cash and cash equivalents for the domestic tobacco operations are included in Headquarters' assets. F-29 NOTE 14--SEGMENT INFORMATION (CONTINUED) GEOGRAPHIC DATA The following tables show certain financial information relating to continuing operations in various geographic areas (Dollars in millions):
YEARS ENDED DECEMBER 31 1996 1995 1994 - --------------------------------------------------------------------------------- --------- --------- --------- Net sales: United States (including U.S. export sales).................................... $ 11,140 $ 11,295 $ 11,144 Europe......................................................................... 2,379 2,184 1,934 Other geographic areas......................................................... 3,927 3,261 3,039 Less transfers between geographic areas(1)..................................... (383) (732) (751) --------- --------- --------- Consolidated net sales....................................................... $ 17,063 $ 16,008 $ 15,366 --------- --------- --------- --------- --------- --------- Operating income: United States.................................................................. $ 1,606 $ 1,749 $ 2,090 Europe......................................................................... 274 299 272 Other geographic areas......................................................... 439 354 326 Headquarters................................................................... (67) (64) (138) --------- --------- --------- Consolidated operating income................................................ $ 2,252 $ 2,338 $ 2,550 --------- --------- --------- --------- --------- ---------
DECEMBER 31 1996 1995 - ----------------------------------------------------------------------------------------- --------- --------- Assets: United States.......................................................................... $ 24,860 $ 25,631 Europe................................................................................. 2,607 2,663 Other geographic areas................................................................. 3,720 3,171 Headquarters(2)........................................................................ 102 53 --------- --------- Consolidated assets.................................................................. $ 31,289 $ 31,518 --------- --------- --------- ---------
- ------------------------ (1) Transfers between geographic areas are generally made at fair market value. (2) Cash and cash equivalents for the domestic tobacco operations are included in Headquarters' assets. F-30 NOTE 15--ADDITIONAL INFORMATION
(DOLLARS IN MILLIONS) YEARS ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------- --------- --------- --------- Advertising expense................................................................ $544 $496 $477 Research and development expense................................................... 191 229 211 Rent expense....................................................................... 167 163 153
NOTE 16--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations and per share data for 1996 and 1995: (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH --------- --------- --------- --------- 1996(1) Net sales................................................................. $ 3,886 $ 4,203 $ 4,349 $ 4,625 Operating income.......................................................... 640 237 683 692 Income (loss) before extraordinary item................................... 198 (27) 225 215 Net income (loss)......................................................... 198 (27) 225 215 Per share data:(2) Net income (loss)....................................................... $ .57 $ (.11) $ .66 $ .63 Common stock dividends declared......................................... .4625 .4625 .4625 .4625 Market price of common stock --high................................................................ $ 35 1/4 $ 34 1/2 $ 32 3/8 $ 34 5/8 --low................................................................. 29 29 25 1/8 25 3/4
FIRST SECOND THIRD FOURTH --------- --------- --------- --------- 1995(1) Net sales................................................................. $ 3,540 $ 4,081 $ 4,063 $ 4,324 Operating income.......................................................... 620 644 641 433 Income before extraordinary item.......................................... 198 153 232 44 Net income................................................................ 198 153 216 44 Per share data:(2) Income before extraordinary item........................................ $ .51 $ .37 $ .61 $ .10 Net income.............................................................. .51 .37 .56 .10 Common stock dividends declared......................................... .375 .375 .375 .375 Market price of common stock --high................................................................ $ 32 1/2 $ 31 1/4 $ 33 1/4 $ 33 3/8 --low................................................................. 25 25 1/4 26 3/8 27 7/8
- ------------------------ (1) The second quarter of 1996 includes $428 million ($241 million after-tax, net of minority interest) of restructuring expense at the food operations. The second quarter of 1995 includes $103 million ($67 million after-tax) of expenses relating to certain debt exchanges by RJRN and Nabisco. The fourth quarter of 1995 includes $154 million ($104 million after-tax) of restructuring expenses at the tobacco operations. (2) 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. ---------------------------- F-31 SCHEDULE I RJR NABISCO HOLDINGS CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------- ------------- ------------- Administrative expenses............................................. $ -- $ -- $ (12) Interest and debt expense........................................... (98) (29) -- Other income (expense), net......................................... 6 2 11 ------------- ------------- ------------- Loss before income taxes...................................... (92) (27) (1) Benefit for income taxes............................................ (34) (15) (3) ------------- ------------- ------------- Income (loss) before equity in income from subsidiaries....... (58) (12) 2 Equity in income from subsidiaries, net of income taxes............. 669 639 762 ------------- ------------- ------------- Income before extraordinary item.............................. 611 627 764 Extraordinary item--loss on early extinguishments of subsidiaries' debt, net of income taxes......................................... -- (16) (245) ------------- ------------- ------------- Net income.................................................... $ 611 $ 611 $ 519 ------------- ------------- ------------- ------------- ------------- -------------
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, 1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income........................................................ $ 611 $ 611 $ 519 ------------- ------------- ------------- Adjustments to reconcile net income to net cash flows from (used in) operating activities: Deferred income tax provision (benefit)......................... (6) 1 62 Extraordinary item.............................................. -- 29 377 Equity in income from subsidiaries, net of income taxes........................................... (669) (639) (762) Other, net...................................................... (2) (36) (161) ------------- ------------- ------------- Total adjustments........................................... (677) (645) (484) ------------- ------------- ------------- Net cash flows from (used in) operating activities.............. (66) (34) 35 ------------- ------------- ------------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Dividends received from subsidiary................................ 1,108 267 42 Investment in subsidiary.......................................... -- -- (1,680) ------------- ------------- ------------- Net cash flows from (used in) investing activities.............. 1,108 267 (1,638) ------------- ------------- ------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Repurchase of common stock........................................ (100) -- -- Proceeds from issuance of Series C preferred stock................ -- -- 1,734 Dividends paid on common and preferred stock...................... (686) (583) (395) Financing and advisory fees paid.................................. -- -- (54) Other, net--including intercompany transfers...................... (257) 338 322 ------------- ------------- ------------- Net cash flows from (used in) financing activities.............. (1,043) (245) 1,607 ------------- ------------- ------------- Net change in cash and cash equivalents......................... (1) (12) 4 Cash and cash equivalents at beginning of period.................... 2 14 10 ------------- ------------- ------------- Cash and cash equivalents at end of period.......................... $ 1 $ 2 $ 14 ------------- ------------- ------------- ------------- ------------- -------------
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, DECEMBER 31, 1996 1995 ------------- ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 1 $ 2 Accounts and notes receivable, net............................................... 5 7 ------------- ------------- TOTAL CURRENT ASSETS....................................................... 6 9 ------------- ------------- Investment in subsidiaries......................................................... 11,702 12,182 Other assets....................................................................... 23 1 ------------- ------------- $ 11,731 $ 12,192 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities......................................... $ 158 $ 159 Income taxes accrued............................................................. 24 -- ------------- ------------- TOTAL CURRENT LIABILITIES.................................................. 182 159 ------------- ------------- Intercompany payable, net.......................................................... 355 651 Deferred income taxes.............................................................. 63 70 Junior subordinated debentures..................................................... 983 983 Commitments and contingencies (note C) Stockholders' equity: Series C convertible preferred stock............................................. 3 3 Other preferred stock............................................................ 534 541 Common stock--(1996--273,574,308 shares issued, 1995--272,807,942 shares issued)........................................................................ 3 3 Paid-in capital.................................................................. 10,038 10,110 Retained earnings................................................................ -- -- Cumulative translation adjustments............................................... (221) (176) Treasury stock, at cost.......................................................... (100) -- Other stockholders' equity....................................................... (109) (152) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY................................................. 10,148 10,329 ------------- ------------- $ 11,731 $ 12,192 ------------- ------------- ------------- -------------
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 note 8 to the consolidated financial statements. NOTE B--JUNIOR SUBORDINATED DEBENTURES See note 8 to the consolidated financial statements for information regarding the issuance of the junior subordinated debentures. RJRN Holdings' obligations under the junior subordinated debentures are unsecured and subordinate to all senior indebtedness of RJRN Holdings, but junior to all future stock issuances and stock guarantees. As of December 31, 1996, RJRN Holdings had no senior indebtedness other than its guarantee of RJRN's obligations under RJRN's credit agreements. RJRN Holdings' guarantees all distributions made by its subsidiary trust, subordinate to any distributions to any senior debenture holders and junior subordinated debenture holders. Interest on the junior subordinated debentures is payable quarterly in arrears. The junior subordinated debentures may be redeemed by RJRN Holdings on or after August 19, 1998 and mature in December, 2044. Covenants applicable to the junior subordinated debentures limit RJRN Holdings' ability to enter into certain capital stock transactions, among other things, if RJRN Holdings is in default of any payments or guarantees with respect to the junior subordinated debentures. NOTE C--COMMITMENTS AND CONTINGENCIES RJRN Holdings has guaranteed the indebtedness of RJRN under RJRN's credit facilities. For disclosure of additional contingent liabilities, see note 9 to the consolidated financial statements. S-4 SCHEDULE I RJR NABISCO, INC. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------- ------------- ------------- Administrative expenses............................................. $ (5) $ -- $ (99) Interest and debt expense........................................... (454) (614) (1,009) Other income (expense), net......................................... 956 923 1,153 ------------- ------------- ------------- Income before income taxes.................................... 497 309 45 Provision (benefit) for income taxes................................ 169 80 (17) ------------- ------------- ------------- Income before equity in income from subsidiaries.................... 328 229 62 Equity in income from subsidiaries, net of income taxes............. 338 409 700 ------------- ------------- ------------- Income before extraordinary item.............................. 666 638 762 Extraordinary item-loss on early extinguishments of debt, net of income taxes (including equity in extraordinary loss from subsidiary of $16 million for 1995)............................... -- (16) (245) ------------- ------------- ------------- Net income.......................................................... $ 666 $ 622 $ 517 ------------- ------------- ------------- ------------- ------------- -------------
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, 1996 1995 1994 ------------- ------------------ ------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income..................................................... $ 666 $ 622 $ 517 ------------- ------- ------------- Adjustments to reconcile net income to net cash flows from (used in) operating activities: Deferred income tax (benefit)................................ (8) (146) (56) Extraordinary item........................................... -- 29 377 Equity in income from subsidiaries, net of income taxes........................................ (338) (409) (700) Other, net................................................... 20 (288) (258) ------------- ------- ------------- Total adjustments........................................ (326) (814) (637) ------------- ------- ------------- Net cash flows from (used in) operating activities........... 340 (192) (120) ------------- ------- ------------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Dividends received from subsidiary............................. 125 58 -- Capital expenditures........................................... (1) -- (1) ------------- ------- ------------- Net cash flows from (used in) investing activities........... 124 58 (1) ------------- ------- ------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of other long-term debt................. -- 666 -- Repayments of other long-term debt............................. (118) (800) (4,648) Increase (decrease) in short-term borrowings................... 53 (2,390) 1,512 Financing and advisory fees paid............................... -- (29) (6) Dividends paid to parent....................................... (1,108) (267) (42) Other, net--including intercompany transfers................... 717 2,919 3,294 ------------- ------- ------------- Net cash flows from (used in) financing activities........... (456) 99 110 ------------- ------- ------------- Net change in cash and cash equivalents...................... 8 (35) (11) Cash and cash equivalents at beginning of period................. 5 40 51 ------------- ------- ------------- Cash and cash equivalents at end of period....................... $ 13 $ 5 $ 40 ------------- ------- ------------- ------------- ------- -------------
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, DECEMBER 31, 1996 1995 ------------- ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 13 $ 5 Accounts and notes receivable.................................................... 63 81 Prepaid expenses................................................................. 1 2 ------------- ------------- TOTAL CURRENT ASSETS....................................................... 77 88 ------------- ------------- Intercompany receivable, net....................................................... 11,248 11,944 Investment in subsidiaries......................................................... 6,067 5,962 Property, plant and equipment, net................................................. 6 8 Other assets....................................................................... 72 86 ------------- ------------- $ 17,470 $ 18,088 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued liabilities......................................... $ 184 $ 264 Current maturities of long-term debt............................................. 24 117 Income taxes accrued............................................................. 43 36 ------------- ------------- TOTAL CURRENT LIABILITIES.................................................. 251 417 ------------- ------------- Long-term debt (less current maturities)........................................... 4,928 4,945 Other noncurrent liabilities....................................................... 71 16 Deferred income taxes.............................................................. 551 557 Commitments and contingencies (note B) Stockholder's equity: Paid-in capital.................................................................. 11,890 11,958 Retained earnings................................................................ -- 371 Cumulative translation adjustments............................................... (221) (176) ------------- ------------- TOTAL STOCKHOLDER'S EQUITY................................................. 11,669 12,153 ------------- ------------- $ 17,470 $ 18,088 ------------- ------------- ------------- -------------
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 note 8 to the consolidated financial statements. NOTE B--COMMITMENTS AND CONTINGENCIES For disclosure of contingent liabilities, see note 9 to the consolidated financial statements. S-8 EXHIBIT INDEX (a) Exhibits
EXHIBIT NO. - ----------- 3.1(a) Composite of the Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp. as amended to and including April 12, 1995 (incorporated by reference to Exhibit 3.1(a) 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 "First Quarter 1993 Form 10-Q")). 3.1(b) Certificate of Retirement of certain shares of Series B Cumulative Preferred Stock, filed October 11, 1995 (incorporated by reference to Exhibit 3.1(m) of the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No.'s I-10215 and I-6388, filed on February 22, 1996 (the "1995 Form 10-K")). 3.2 RJR Nabisco Holdings Corp. By-Laws as Amended Effective December 5, 1995 (incorporated by reference to Exhibit 3.2(d) of the 1995 Form 10-K). 3.3 A composite of the Certificate of Incorporation of RJR Nabisco, Inc., as amended to May 13, 1994 (incorporated by reference to Exhibit 3.3(d) of the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No.'s I- 10215 and I-6388 filed on February 23, 1995 (the "1994 Form 10-K")). 3.4 RJR Nabisco, Inc. By-Laws as Amended Effective December 5, 1995 (incorporated by reference to the Exhibit 3.4(b) of the 1995 Form 10-K). 4.1 Amended and Restated Indenture, dated as of July 24, 1995, between RJR Nabisco, Inc. and Citibank, N.A., dated as of July 24, 1995 (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended June 30, 1995 (the "Second Quarter 1995 10-Q")). 4.2 Indenture (the "TOPrS Indenture"), dated as of September 21, 1995, between RJR Nabisco Holdings Corp. and the Bank of New York (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of RJR Nabisco Holdings Corp. and RJR Nabisco Holdings Capital Trust I, Registration Nos. 33-60415 and 33-60415-01, filed June 20, 1995 (the "TOPrS Registration Statement")). 4.3 Form of First Supplemental Indenture to the TOPrS Indenture (incorporated by reference to Exhibit 4.2 to the TOPrS Registration Statement). 4.4 Form of Amended and Restated Declaration of Trust of RJR Nabisco Holdings Capital Trust I (incorporated by reference to Exhibit 4.5 to the TOPrS Registration Statement). 4.5 Form of Preferred Security of RJR Nabisco Holdings Capital Trust I (included in Exhibit 4.4 above). 4.6 Form of Junior Subordinated Debenture (included in Exhibit 4.2 above). 4.7 Form of Guarantee Agreement with respect to Preferred Securities between RJR Nabisco Holdings Corp. and the Bank of New York as the Guarantee Trustee (incorporated by reference to Exhibit 4.8 to the TOPrS Registration Statement). 4.8 Indenture, dated as of June 5, 1995, between Nabisco, Inc. and Citibank, N.A., (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 of Nabisco, Inc., Registration No. 33-90224, filed March 29, 1995).
EXHIBIT NO. - ----------- 4.9 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 Credit Agreement (the "Three Year Credit Agreement"), dated as of April 28, 1995, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and various lending institutions (incorporated by reference to Exhibit 10.1 to the Second Quarter 1995 Form 10-Q). 10.2 Credit Agreement (the "364 Day Credit Agreement"), dated as of April 28, 1995, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and various lending institutions (incorporated by reference to Exhibit 10.2 to the Second Quarter 1995 Form 10-Q). 10.3 Agreement and Waiver to the Three Year Credit Agreement and the 364 Day Credit Agreement, dated as of July 27, 1995 (incorporated by reference to Exhibit 10.5 to the Second Quarter 1995 Form 10-Q). 10.4 First Amendment, dated as of September 12, 1995, to the Three Year Credit Agreement and the 364 Day Credit Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended September 30, 1995 (the "Third Quarter 1995 Form 10-Q)). 10.5 Second Amendment, dated as of June 3, 1996, to the 364 Day Credit Agreement (incorporated by reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the Second Quarter ended June 30, 1996, filed July 31, 1996 (the "Second Quarter 1996 Form 10-Q")). *10.6 Second Amendment to the Three Year Credit Agreement and Third Amendment to the 364 Day Credit Agreement dated as of January 31, 1997. *10.7 Credit Agreement (the "Five Year Nabisco Credit Agreement"), dated as of October 31, 1996, among Nabisco Holdings Corp., Nabisco, Inc., and Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents and various lending institutions. *10.8 Credit Agreement (the "364 Day Nabisco Credit Agreement"), dated as of October 31, 1996, among Nabisco Holdings Corp., Nabisco, Inc., and Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents and various lending institutions. 10.9 Credit Agreement (the "Nabisco Credit Agreement"), dated as of April 28, 1995, among Nabisco Holdings Corp., Nabisco, Inc. and various lending institutions (incorporated by reference to Exhibit 4.3 to Amendment No. 1 filed June 16, 1995 to the Registration Statement on Form S-3 of Nabisco, Inc., Registration No. 33-93214, filed June 7, 1995). 10.10 First Amendment to the Nabisco Credit Agreement, dated as of July 24, 1995 (incorporated by reference to Exhibit 10.4 to the Second Quarter 1995 10-Q). 10.11 Second Amendment, dated as of November 3, 1995, to the Nabisco Credit Agreement (incorporated by reference to Exhibit 10.7 to the 1995 Form 10-K). 10.12 Credit Agreement (the "Nabisco Commercial Paper Facility"), dated as of November 3, 1995, among Nabisco Holdings Corp., Nabisco, Inc. and various lending institutions (incorporated by reference to Exhibit 10.8 of the 1995 Form 10-K). 10.13 Amendments dated as of June 20, 1996 to the Nabisco Credit Agreement and the Nabisco Commercial Paper Facility, dated as of April 28, 1995 (incorporated by reference to Exhibit 10.2 to the Second Quarter 1996 Form 10-Q).
EXHIBIT NO. - ----------- 10.14 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996; one-year period) (incorporated by reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996, filed on May 1, 1996 (the "First Quarter 1996 Form 10-Q")). 10.15 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996; three-year period) (incorporated by reference to Exhibit 10.2 of the First Quarter 1996 Form 10- Q). 10.16 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996 grant-regular) (incorporated by reference to Exhibit 10.3 of the First Quarter 1996 Form 10-Q). 10.17 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996 grant-insider) (incorporated by reference to Exhibit 10.4 of the First Quarter 1996 Form 10-Q). 10.18 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996 grant-executive) (incorporated by reference to Exhibit 10.5 of the First Quarter 1996 Form 10-Q). 10.19 Amendment to Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996 grant-insider) (incorporated by reference to Exhibit 10.5 to the Second Quarter 1996 Form 10-Q). 10.20 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")). 10.21 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")). 10.22 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). 10.23 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). 10.24 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). 10.25 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). 10.26 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). 10.27 Special Addendum, dated December 20, 1988 (incorporated by reference to Exhibit 10(d)(ii) to the 1988 Form 10-K). 10.28 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). 10.29(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).
EXHIBIT NO. - ----------- 10.29(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). 10.30 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). 10.31 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). 10.32 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). 10.33(a) Amendment to Supplemental Benefits Plan, dated November 23, 1988 (incorporated by reference to Exhibit 10(k)(ii) to the 1988 Form 10-K). 10.33(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). 10.34 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). 10.35(a) Amendment to Additional Benefits Plan, dated October 28, 1988 (incorporated by reference to Exhibit 10(l)(ii) to the 1988 Form 10-K). 10.35(b) Amendment to Additional Benefits Plan, dated November 23, 1988 (incorporated by reference to Exhibit 10(1)(iii) to the 1988 Form 10-K). 10.35(c) Amendment to Additional Benefits Plan No. 3, dated January 27, 1989 (incorporated by reference to Exhibit 10(1)(iv) to the 1988 Form 10-K). 10.36 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). 10.37(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). 10.37(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). 10.37(c) Amendment to Supplemental Executive Retirement Plan, dated April 10, 1993 (incorporated by reference to the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No.'s I- 10215 and I-6388 filed on February 24, 1994 (the "1993 Form 10-K")). 10.38 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")). 10.39 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). 10.40 Amended and Restated Employment Agreement (dated June 1, 1996) by and between R.J. Reynolds International B.V. and Pierre de Labouchere (incorporated by reference to Exhibit 10.1 of to the Registrants' Quarterly Report on Form 10-Q for the Third Quarter ended September 30, 1996, filed November 1, 1996 (the "Third Quarter 1996 Form 10-Q")). 10.41 Non-Qualified Stock Option Agreement, dated December 31, 1993, between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to 1993 Form 10-K).
EXHIBIT NO. - ----------- 10.42 Non-Qualified Stock Option Agreement, dated December 31, 1994, between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.18(a) of 1994 Form 10-K). 10.43 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 Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1993, filed August 3, 1993 (the "Second Quarter 1993 Form 10-Q")). 10.44 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 Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994, filed May 12, 1994 (the "First Quarter 1994 Form 10-Q")). 10.45 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 Second Quarter 1993 Form 10-Q). 10.46 First 1995 Amendment (dated February 15, 1995) to Employment Agreement dated May 27, 1993 between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.31 of the 1995 Form 10-K). 10.47 Second 1995 Amendment (dated April 13, 1995) to Employment Agreement dated May 27, 1993 between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.32 of the 1995 Form 10-K). 10.48 Restated and Amended Employment Agreement (dated December 5, 1995) by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Charles M. Harper (incorporated by reference to Exhibit 10.33 of the 1995 Form 10-K). 10.49 Amendment dated April 13, 1995 to Non-Qualified Stock Option Agreements dated May 31, 1993, December 31, 1993, and December 31, 1994 between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.34 of the 1995 Form 10- K). 10.50 Non-Qualified Stock Option Agreement dated January 19, 1995 between Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.35 of the 1995 Form 10-K). 10.51 Non-Qualified Stock Option Agreement dated June 13, 1995 between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.36 of the 1995 Form 10-K). 10.52 Non-Qualified Stock Option Agreement dated December 31, 1995 between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.37 of the 1995 Form 10-K). 10.53 Engagement Agreement (dated March 3, 1995) between RJR Nabisco Holdings Corp. and Steven F. Goldstone (incorporated by reference to Exhibit 10.38 of the 1995 Form 10-K). 10.54 Employment Agreement (dated October 1, 1995) by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Steven F. Goldstone (incorporated by reference to Exhibit 10.39 of the 1995 Form 10-K). 10.55 Amended and Restated Employment Agreement (dated December 5, 1995) by and among RJR Nabisco Holdings Corp., and RJR Nabisco, Inc. and Steven F. Goldstone (incorporated by reference to Exhibit 10.40 of the 1995 Form 10-K). 10.56 Non-Qualified Stock Option Agreement (dated December 5, 1995) between RJR Nabisco Holdings Corp. and Steven. F. Goldstone (incorporated by reference to Exhibit 10.41of the 1995 Form 10-K).
EXHIBIT NO. - ----------- 10.57 Contingent Performance Share Agreement (dated December 5, 1995) between RJR Nabisco Holdings Corp. and Steven F. Goldstone (incorporated by reference to Exhibit 10.42 of the 1995 Form 10-K). 10.58 Secured Promissory Note (dated December 5, 1995) of Steven F. Goldstone in favor of RJR Nabisco Holdings Corp. (incorporated by reference to Exhibit 10.43 of the 1995 Form 10-K). 10.59 1996 Amendment to Employment Agreement dated December 5, 1995 by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Steven F. Goldstone (incorporated by reference to Exhibit 10.6 of the First Quarter 1996 Form 10-Q). 10.60 Secured Promissory Note (dated May 15, 1996) of Steven F. Goldstone in favor of Nabisco Holdings Corp. (incorporated by reference to Exhibit 10.6 to the Third Quarter 1996 Form 10-Q). 10.61 Amendment dated December 5, 1995 to Employment Agreement between RJR Nabisco Holdings Corp. and Andrew J. Schindler (incorporated by reference to Exhibit 10.44 of the Registrants' 1995 Form 10-K). 10.62 Participation Agreement--RJR Nabisco, Inc. Supplemental Executive Retirement Plan for Andrew J. Schindler dated December 28, 1995 (incorporated by reference to Exhibit 10.45 of the Registrants' 1995 Form 10-K). 10.63 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 Registrants' Quarterly Report on Form 10-Q for the fiscal year ended September 30, 1993, filed October 29, 1993 (the "Third Quarter 1993 Form 10-Q")). 10.64 Letter Agreement dated July 26, 1995, regarding Amended and Restated Employment Agreement with James W. Johnston (incorporated by reference to Exhibit 10.46(a) of the 1995 Form 10-K). 10.65 Letter Agreement dated December 21, 1995, regarding Amended and Restated Employment Agreement with James W. Johnston (incorporated by reference to Exhibit 10.46(b) of the 1995 Form 10-K). 10.66 Letter Agreement dated May 10, 1996, regarding Amended and Restated Employment Agreement with James W. Johnston (incorporated by reference to Exhibit 10.3 to the Second Quarter 1996 Form 10-Q). 10.67 Letter Agreement dated May 31, 1996, regarding Amended and Restated Employment Agreement with James W. Johnston (incorporated by reference to Exhibit 10.4 to the Second Quarter 1996 Form 10-Q.) 10.68 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). 10.69 Consulting Agreement, dated February 14, 1995, among RJR Nabisco Holdings Corp., Nabisco Holdings Corp. and Eugene R. Croisant (incorporated by reference to Exhibit 10.32 of 1994 Form 10-K). 10.70 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). 10.71 Amended and Restated RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the First Quarter 1993 Form 10-Q).
EXHIBIT NO. - ----------- 10.72 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")). 10.73 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). 10.74 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). 10.75 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). 10.76 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). 10.77 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). 10.78 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 Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No.'s I- 10215 and I-6388, filed on February 25, 1992 (the "1991 Form 10-K")). 10.79 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). 10.80 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). 10.81 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). 10.82 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 Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No.'s I-10215 and I-6388, filed on March 1, 1993 (the "1992 Form 10-K")). 10.83 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). 10.84 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). 10.85 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). 10.86 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).
EXHIBIT NO. - ----------- 10.87 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). 10.88 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). 10.89 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). 10.90 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). 10.91 Restated and Amended Stock Option Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. dated as of October 4, 1994 (incorporated by reference to Exhibit 10.55 of 1994 Form 10-K). 10.92 Amended and Restated Deferred Compensation Plan for RJR Directors (dated as of September 1, 1996) (incorporated by reference to Exhibit 10.2 of the Third Quarter 1996 Form 10-Q) 10.93 Amended and Restated Equity Incentive Award Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries (dated as of September 1, 1996) (incorporated by reference to Exhibit 10.3 to the Third Quarter 1996 Form 10-Q). 10.94 Performance Unit Program under RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the First Quarter 1994 Form 10-Q). 10.95 Amended and Restated RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (as amended and restated effective September 1, 1996) (incorporated by reference to Exhibit 10.4 to the Third Quarter 1996 Form 10-Q). 10.96 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 10.4 to the March 1994 Form 10-Q). 10.97 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 First Quarter 1994 10-Q). 10.98 Amendment to Non-Qualified Stock Option Agreements dated prior to October 11, 1995 (incorporated by reference to Exhibit 10.75 of the 1995 Form 10-K). 10.99 Restated and Amended RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan dated as of December 5, 1995 (incorporated by reference to Exhibit 10.76 of the 1995 Form 10-K). 10.100 Form of Non-Qualified Stock Option Agreement dated April 27, 1995 between RJR Nabisco Holdings Corp. and the grantee named therein (Reissued options) (incorporated by reference to Exhibit 10.77 of the 1995 Form 10-K). 10.101 Form of Non-Qualified Stock Option Agreement dated April 27, 1995 between RJR Nabisco Holdings Corp. and the grantee named therein (Premium options) (incorporated by reference to Exhibit 10.78 of the 1995 Form 10-K). 10.102 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (incorporated by reference to Exhibit 10.79 of the 1995 Form 10-K). 10.103 Form of Deferred Stock Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein dated as of May 31, 1996 (incorporated by reference to Exhibit 10.5
EXHIBIT NO. - ----------- to the Third Quarter 1996 Form 10-Q). 10.104 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1995 Grant--3 Year Period) (incorporated by reference to Exhibit 10.80 of the 1995 Form 10-K). 10.105 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1995 Grant--1 Year Period) (incorporated by reference to Exhibit 10.81 of the 1995 Form 10-K). 10.106 Amendment dated July 10, 1995 to Executive Equity Program Agreement under the 1990 Long Term Incentive Plan between RJR Nabisco Holdings Corp. and the grantee named therein (incorporated by reference to Exhibit 10.82 of the 1995 Form 10-K). 10.107 Form of Employment Agreement dated October 11, 1995 (incorporated by reference to Exhibit 10.83 of the 1995 Form 10-K). 10.108 Form of Employment Agreement dated November 1, 1995 (incorporated by reference to Exhibit 10.84 of the 1995 Form 10-K). 10.109 Restated and Amended Stock Option Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. dated as of December 5, 1995 (incorporated by reference to Exhibit 10.85 of the 1995 Form 10-K). 10.110 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp., and Director named therein (Election version) (incorporated by reference to Exhibit 10.86 of the 1995 Form 10-K). 10.111 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp., and Director named therein (Annual version) (incorporated by reference to Exhibit 10.87 of the 1995 Form 10-K). *11.1 RJR Nabisco Holdings Corp. Computation of Earnings Per Share for the years ended December 31, 1996, 1995 and 1994. *12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges for each of the periods within the five year period ended December 31, 1996. *21. Subsidiaries of the Registrants. *23. Consent of Independent Auditors. *24. Powers of Attorney. *27.1 Financial Data Schedule of RJR Nabisco Holdings Corp. *27.2 Financial Data Schedule of RJR Nabisco, Inc. *99. Expanded Litigation Disclosure
- ------------------------ * Filed herewith. (b) Reports on Form 8-K None EX-10.6 2 SECOND AMENDMENT TO THE 3 YEAR CREDIT AGREEMENT Exhibit 10.6 SECOND AMENDMENT TO THE 3 YEAR CREDIT AGREEMENT THIRD AMENDMENT TO THE 364 DAY CREDIT AGREEMENT SECOND AMENDMENT, dated as of January 31, 1997, among RJR NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), RJR NABISCO, INC., a Delaware corporation (the "Borrower"), and the lending institutions party to the 3 Year Credit Agreement referred to below and THIRD AMENDMENT, dated as of January 31, 1997, among Holdings, the Borrower and the lending institutions party to the 364 Day Credit Agreement referred to below (collectively, the "Amendment"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the respective Credit Agreements (as defined below). W I T N E S S E T H : WHEREAS, Holdings, the Borrower and various lending institutions (the "3 Year Banks") are parties to a Credit Agreement, dated as of April 28, 1995, with respect to Commitments aggregating $2,700,000,000 (the "3 Year Credit Agreement"); WHEREAS, Holdings, the Borrower and various lending institutions (the "364 Day Banks" and, together with the 3 Year Banks, the "Banks") are parties to a Credit Agreement, dated as of April 28, 1995, with respect to Commitments aggregating $750,000,000 (the "364 Day Credit Agreement" and, together with the 3 Year Credit Agreement, the "Credit Agreements"); WHEREAS, Holdings, the Borrower and the 3 Year Banks wish to enter into the agreements with respect to the 3 Year Credit Agreement as herein provided; and WHEREAS, Holdings, the Borrower and the 364 Day Banks wish to enter into the agreements with respect to the 364 Day Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: I. Amendments to the 3 Year Credit Agreement. 1. Section 8.05 of the 3 Year Credit Ageement is hereby amended by (x) deleting the phrase "the Effective Date" in each place it appears in clause (iii) of said Section and inserting the phrase "January 1, 1997" in lieu thereof and (y) deleting the phrase "Cumulative Consolidated Net Income" appearing in clause (iii) of said Section and inserting the phrase "Cumulative Adjusted Cash Net Income" in lieu thereof. -1- 2. Section 8.07 of the 3 Year Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: "Period Amount ------- ------ Initial Borrowing Date $7,500,000,000 to and including December 31, 1995 January 1, 1996 $7,600,000,000 to and including December 31, 1996 Thereafter $7,500,000,000". 3. Section 8.08 of the 3 Year Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: "Period Ratio ------- ----- Initial Borrowing Date 1.60:1 to and including December 31, 1995 January 1, 1996 1.50:1 to and including December 31, 1997 January 1, 1998 1.60:1 to and including December 31, 1998 Thereafter 1.65:1". 4. Section 8.09 of the 3 Year Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: -2- "Period Ratio ------- ----- Initial Borrowing Date 2.60:1 to and including December 31, 1995 January 1, 1996 2.55:1 to and including December 31, 1996 January 1, 1997 2.40:1 to and including December 31, 1997 January 1, 1998 2.25:1 to and including December 31, 1998 Thereafter 2.05:1". 5. The definition of "Cumulative Consolidated Net Income" appearing in Section 10 of the 3 Year Credit Agreement shall be deleted in its entirety and the following new definition shall be inserted in lieu thereof: "Cumulative Adjusted Cash Net Income" shall mean, at any time for any determination thereof, the sum of (i) consolidated net income of Holdings and its Non-Nabisco Subsidiaries, determined in accordance with GAAP, for the period (taken as one accounting period) commencing January 1, 1997 and ending on the last day of the last fiscal quarter of Holdings then ended plus (ii) all losses from debt retirement deducted in determining such consolidated net income plus (iii) all cash dividends actually received from NHC during such period to the extent not included in determining such consolidated net income plus (iv) all trademark and goodwill amortization deducted in determining such consolidated net income, reduced by any tax benefit relating thereto included in determining such consolidated net income for such period. II. Amendments to the 364 Day Credit Agreement. 1. Section 8.05 of the 364 Day Credit Ageement is hereby amended by (x) deleting the phrase "the Effective Date" in each place it appears in clause (iii) of said Section and inserting the phrase "January 1, 1997" in lieu thereof and (y) deleting the phrase -3- "Cumulative Consolidated Net Income" appearing in clause (iii) of said Section and inserting the phrase "Cumulative Adjusted Cash Net Income" in lieu thereof. 2. Section 8.07 of the 364 Day Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: "Period Amount ------- ------ Initial Borrowing Date $7,500,000,000 to and including December 31, 1995 January 1, 1996 $7,600,000,000 to and including December 31, 1996 Thereafter $7,500,000,000". 3. Section 8.08 of the 364 Day Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: "Period Ratio ------- ----- Initial Borrowing Date 1.60:1 to and including December 31, 1995 January 1, 1996 1.50:1 to and including December 31, 1997 January 1, 1998 1.60:1 to and including December 31, 1998 Thereafter 1.65:1". -4- 4. Section 8.09 of the 364 Day Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: "Period Ratio ------- ----- Initial Borrowing Date 2.60:1 to and including December 31, 1995 January 1, 1996 2.55:1 to and including December 31, 1996 January 1, 1997 2.40:1 to and including December 31, 1997 January 1, 1998 2.25:1 to and including December 31, 1998 Thereafter 2.05:1". 5. The definition of "Cumulative Consolidated Net Income" appearing in Section 10 of the 364 Day Credit Agreement shall be deleted in its entirety and the following new definition shall be inserted in lieu thereof: "Cumulative Adjusted Cash Net Income" shall mean, at any time for any determination thereof, the sum of (i) consolidated net income of Holdings and its Non-Nabisco Subsidiaries, determined in accordance with GAAP, for the period (taken as one accounting period) commencing January 1, 1997 and ending on the last day of the last fiscal quarter of Holdings then ended plus (ii) all losses from debt retirement deducted in determining such consolidated net income plus (iii) all cash dividends actually received from NHC during such period to the extent not included in determining such consolidated net income plus (iv) all trademark and goodwill amortization deducted in determining such consolidated net income, reduced by any tax benefit relating thereto included in determining such consolidated net income for such period. -5- III. Miscellaneous Provisions 1. In order to induce the Banks to enter into this Amendment, (a) the Borrower agrees to pay a fee to each 3 Year Bank which has signed a copy of this Amendment and delivered by facsimile transmission an executed signature page thereof to White & Case, 1155 Avenue of the Americas, New York, New York 10036, Attention: Seema Shah, Esq. (Facsimile No.: (212) 354-8113) on or prior to 5:00 P.M. (New York time) on January 31, 1997, equal to 0.05% of such 3 Year Bank's Commitment (as defined in the 3 Year Credit Agreement), such fee to be payable on or prior to the fifth Business Day (such date, the "Fee Payment Date") following the later of (A) January 31, 1997 and (B) the Amendment Effective Date (as defined below), (b) the Borrower agrees to pay a fee to each 364 Day Bank which has signed a copy of this Amendment and delivered by facsimile transmission an executed signature page thereof to White & Case as described in preceding clause (a) at or prior to 5:00 P.M. (New York time) on January 31, 1997, equal to 0.05% of such 364 Day Bank's Commitment (as defined in the 364 Day Credit Agreement), such fee to be payable on or prior to the Fee Payment Date and (c) each Credit Party hereby (i) makes each of the representations, warranties and agreements contained in Section 6 of each Credit Agreement and (ii) represents and warrants that there exists no Default or Event of Default, in each case on the Amendment Effective Date, both before and after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of either Credit Agreement or any other Credit Document (as defined in each Credit Agreement). 3. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with Holdings and the Payments Administrator. 4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 5. This Amendment shall become effective as of the date first written above on the date (the "Amendment Effective Date") when (i) each of the Credit Parties, (ii) 3 Year Banks constituting Required Banks under the 3 Year Credit Agreement and (iii) 364 Day Banks constituting Required Banks under the 364 Day Credit Agreement, shall have signed a copy hereof (whether the same or different copies) and shall have delivered (including by way of facsimile transmission) the same to White & Case, 1155 Avenue of the Americas, New York, New York 10036, Attention: Seema Shah, Esq. (Facsimile No.: (212) 354-8113). After transmitting its executed signature page to White & Case as provided above, each of the Banks shall deliver executed hard copies of this Amendment to White & Case, Attention: Maria Beltran at the address provided above. -6- EX-10.7 3 CREDIT AGREEMENT DATED 10/31/96 Exhibit 10.7 5 YEAR NABISCO CREDIT AGREEMENT ================================================================================ CREDIT AGREEMENT AMONG NABISCO HOLDINGS CORP., NABISCO, INC. AND BANKERS TRUST COMPANY, THE CHASE MANHATTAN BANK, CITIBANK, N.A. AND THE FUJI BANK, LIMITED, AS SENIOR MANAGING AGENTS AND VARIOUS LENDING INSTITUTIONS ------------------- Dated as of October 31, 1996 ------------------- $1,500,000,000 ================================================================================ TABLE OF CONTENTS Page ---- SECTION 1. Amount and Terms of Credit...................................... 1 1.01 Commitments...................................................... 1 1.02 Minimum Amount of Each Borrowing; Maximum Number of Borrowings................................................. 4 1.03 Notice of Borrowing of Committed Loans........................... 4 1.04 Competitive Bid Borrowings....................................... 5 1.05 Disbursement of Funds............................................ 7 1.06 Notes; Register.................................................. 8 1.07 Conversions...................................................... 8 1.08 Pro Rata Borrowings.............................................. 9 1.09 Interest......................................................... 9 1.10 Interest Periods................................................. 10 1.11 Increased Costs, Illegality, etc................................. 11 1.12 Compensation..................................................... 13 1.13 Change of Lending Office......................................... 14 1.14 Replacement of Banks............................................. 14 1.15 Notice of Certain Costs.......................................... 15 1.16 Commitment Increases............................................. 15 1.17 Maturity Date Extensions......................................... 16 SECTION 2. Letters of Credit............................................... 17 2.01 Letters of Credit................................................ 17 2.02 Letter of Credit Requests........................................ 17 2.03 Letter of Credit Participations.................................. 18 2.04 Agreement to Repay Letter of Credit Drawings..................... 20 2.05 Increased Costs.................................................. 21 2.06 Indemnification; Nature of Letter of Credit Issuers' Duties...... 22 SECTION 3. Fees; Commitments............................................... 23 3.01 Fees............................................................. 23 3.02 Voluntary Reduction of Commitments............................... 24 3.03 Mandatory Reduction of Commitments, etc.......................... 25 (i) Page ---- SECTION 4. Payments........................................................ 25 4.01 Voluntary Prepayments............................................ 25 4.02 Mandatory Prepayments............................................ 26 4.03 Method and Place of Payment...................................... 27 4.04 Net Payments..................................................... 27 SECTION 5. Conditions...................................................... 29 5.01 Conditions Precedent to the Effective Date....................... 29 5.02 Conditions Precedent to Each Credit Event........................ 31 SECTION 6. Representations, Warranties and Agreements...................... 32 6.01 Corporate Status................................................. 32 6.02 Corporate Power and Authority.................................... 32 6.03 No Violation..................................................... 32 6.04 Litigation....................................................... 33 6.05 Use of Proceeds; Margin Regulations.............................. 33 6.06 Governmental Approvals........................................... 33 6.07 Investment Company Act........................................... 33 6.08 True and Complete Disclosure..................................... 34 6.09 Financial Condition; Financial Statements........................ 34 6.10 Tax Returns and Payments......................................... 34 6.11 Compliance with ERISA............................................ 34 6.12 Subsidiaries..................................................... 35 6.13 Patents, etc..................................................... 35 6.14 Pollution and Other Regulations.................................. 35 6.15 Properties....................................................... 35 SECTION 7. Affirmative Covenants............................................ 35 7.01 Information Covenants............................................ 36 7.02 Books, Records and Inspections................................... 38 7.03 Insurance........................................................ 38 7.04 Payment of Taxes................................................. 38 7.05 Consolidated Corporate Franchises................................ 38 7.06 Compliance with Statutes, etc.................................... 38 7.07 ERISA............................................................ 39 7.08 Good Repair...................................................... 39 7.09 End of Fiscal Years; Fiscal Quarters............................. 39 7.10 Commercial Paper and Competitive Bid Loan Outstandings........... 40 (ii) Page ---- SECTION 8. Negative Covenants............................................... 40 8.01 Changes in Business.............................................. 40 8.02 Consolidation, Merger, Sale of Assets, etc....................... 40 8.03 Liens............................................................ 41 8.04 Indebtedness..................................................... 42 8.05 Limitation on Restricted Payments................................ 43 8.06 Transactions with Affiliates..................................... 44 8.07 Consolidated Net Worth........................................... 45 8.08 Leverage Ratio................................................... 45 8.09 Cash Interest Coverage Ratio..................................... 45 SECTION 9. Events of Default............................................... 45 9.01 Payments......................................................... 45 9.02 Representations, etc............................................. 45 9.03 Covenants........................................................ 45 9.04 Default Under Other Agreements................................... 45 9.05 Bankruptcy, etc.................................................. 46 9.06 ERISA............................................................ 47 9.07 Judgments........................................................ 47 9.08 Guaranty......................................................... 47 SECTION 10. Definitions..................................................... 49 SECTION 11. The Senior Managing Agents...................................... 70 11.01 Appointment..................................................... 70 11.02 Delegation of Duties............................................ 70 11.03 Exculpatory Provisions.......................................... 70 11.04 Reliance by Senior Managing Agents.............................. 71 11.05 Notice of Default............................................... 72 11.06 Non-Reliance on Senior Managing Agents and Other Banks.......... 72 11.07 Indemnification................................................. 72 11.08 Senior Managing Agents in Their Individual Capacities........... 73 11.09 Successor Senior Managing Agents................................ 73 SECTION 12. Miscellaneous................................................... 74 12.01 Payment of Expenses, etc........................................ 74 12.02 Right of Setoff................................................. 74 12.03 Notices......................................................... 75 12.04 Benefit of Agreement............................................ 75 12.05 No Waiver; Remedies Cumulative.................................. 78 12.06 Payments Pro Rata............................................... 78 (iii) Page ---- 12.07 Calculations; Computations...................................... 79 12.08 Governing Law; Submission to Jurisdiction; Venue................ 80 12.09 Counterparts.................................................... 80 12.10 Effectiveness................................................... 81 12.11 Headings Descriptive............................................ 81 12.12 Amendment or Waiver............................................. 81 12.13 Survival........................................................ 81 12.14 Domicile of Loans............................................... 82 12.15 Confidentiality................................................. 82 12.16 Waiver of Jury Trial............................................ 82 SECTION 13. Guaranty........................................................ 82 13.01 The Guaranty.................................................... 82 13.02 Bankruptcy...................................................... 83 13.03 Nature of Liability............................................. 83 13.04 Independent Obligation.......................................... 83 13.05 Authorization................................................... 84 13.06 Reliance........................................................ 84 13.07 Subordination................................................... 84 13.08 Waiver.......................................................... 84 13.09 Limitation on Enforcement....................................... 85 ANNEX I -- List of Banks and Commitments ANNEX II -- Bank Addresses ANNEX III -- Schedule of Material Subsidiaries ANNEX IV -- Certain Litigation ANNEX V -- Specified Permitted Existing Debt EXHIBIT A -- Form of Note EXHIBIT B -- Form of Letter of Credit Request EXHIBIT C-1 -- Form of Opinion of General Counsel of the Borrower EXHIBIT C-2 -- Form of Opinion of White & Case, Special Counsel to the Banks EXHIBIT D-1 -- Form of Notice of Assignment EXHIBIT D-2 -- Form of Assignment Agreement EXHIBIT D-3 -- Form of Agreement of Commitment Increase EXHIBIT E -- Form of Confidentiality Agreement (iv) CREDIT AGREEMENT, dated as of October 31, 1996, among NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), NABISCO, INC., a New Jersey corporation (the "Borrower"), and the lending institutions listed from time to time on Annex I hereto (each a "Bank" and, collectively, the "Banks"). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 10 are used herein as so defined. W I T N E S S E T H : WHEREAS, subject to and upon the terms and conditions herein set forth, the Banks are willing to make available the credit facility provided for herein. NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. 1.01 Commitments. (A) Subject to and upon the terms and conditions herein set forth, each Bank severally agrees to make a loan or loans (each a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower, which Revolving Loans: (i) shall be made at any time and from time to time on and after the Effective Date and prior to such Bank's Maturity Date; (ii) may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Reference Rate Loans or Eurodollar Loans, provided that all Revolving Loans made by all Banks pursuant to the same Borrowing shall, unless otherwise specifically provided herein, consist entirely of Revolving Loans of the same Type; (iii) may be repaid and reborrowed in accordance with the provisions hereof; and (iv) shall not exceed for any Bank at any time outstanding that aggregate principal amount which, when added to (A) the product of (x) such Bank's Adjusted Percentage and (y) the sum of (I) the aggregate Letter of Credit Outstandings and (II) the aggregate principal amount of all Swingline Loans then outstanding plus (B) the product of (x) such Bank's Percentage and (y) the sum of (I) the aggregate outstanding principal amount of all Competitive Bid Loans then outstanding and (II) Commercial Paper Outstandings at such time, equals the Commitment of such Bank at such time. -1- (B) Subject to and upon the terms and conditions herein set forth, each Swingline Lender severally agrees, at any time and from time to time on and after the Effective Date and prior to the Swingline Maturity Date, to make a loan or loans (each a "Swingline Loan" and, collectively, the "Swingline Loans") to the Borrower, which Swingline Loans: (i) shall be Reference Rate Loans; (ii) shall have the benefit of the provisions of Section 1.01(C); (iii) shall not exceed in the aggregate at any one time outstanding the Swingline Commitment of such Swingline Lender at such time; (iv) shall not exceed in the aggregate for all Swingline Lenders at any one time outstanding, when combined with the aggregate principal amount of all Revolving Loans and Competitive Bid Loans then outstanding and all Letter of Credit Outstandings and all Commercial Paper Outstandings at such time, the Total Commitment then in effect; and (v) may be repaid and reborrowed in accordance with the provisions hereof. On (x) the Swingline Maturity Date, all Swingline Loans shall be repaid in full and (y) the last Business Day of each calendar quarter, all Swingline Loans shall be repaid in full and may not be reborrowed until the next succeeding Business Day, provided that repayment of the Swingline Loans pursuant to this clause (y) shall not be required to the extent that the aggregate outstanding principal amount of Swingline Loans to be repaid is less than $25,000,000. No Swingline Lender will make a Swingline Loan after it has received written notice from the Required Banks that one or more of the applicable conditions to Credit Events specified in Section 5.02 are not then satisfied. (C) On any Business Day, a Swingline Lender (the "Notifying SL Lender") may, in its sole discretion, give notice to the Payments Administrator that all then outstanding Swingline Loans shall be funded with a Borrowing of Revolving Loans (provided that such notice shall be deemed to have been automatically given by each Swingline Lender and each Swingline Lender shall constitute a Notifying SL Lender upon the occurrence of an Event of Default under Section 9.05), in which case a Borrowing of Revolving Loans constituting Reference Rate Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the immediately succeeding Business Day by all Banks pro rata based on each Bank's Adjusted Percentage, and the proceeds thereof shall be applied directly to repay all Swingline Lenders for their outstanding Swingline Loans. Each Bank hereby irrevocably agrees to make Reference Rate Loans upon one Business Day's notice -2- pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by the Notifying SL Lender notwithstanding: (i) that the amount of the Mandatory Borrowing may not comply with the Minimum Borrowing Amount otherwise required hereunder; (ii) whether any conditions specified in Section 5.02 are then satisfied; (iii) whether a Default or an Event of Default has occurred and is continuing; (iv) the date of such Mandatory Borrowing; and (v) any reduction in the Total Commitment after any such Swingline Loans were made. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code in respect of the Borrower), each Bank (other than each Swingline Lender with respect to its Swingline Loans) hereby agrees that it shall forthwith purchase from each Swingline Lender (without recourse or warranty) such assignment of its outstanding Swingline Loans as shall be necessary to cause the Banks to share in such Swingline Loans ratably based upon their respective Adjusted Percentages, provided that all interest payable on such Swingline Loans shall be for the account of the Swingline Lenders until the date the respective assignment is purchased and, to the extent attributable to the purchased assignment, shall be payable to the Bank purchasing same from and after such date of purchase. (D) Subject to and upon the terms and conditions herein set forth, each Bank severally agrees that the Borrower may incur a loan or loans (each a "Competitive Bid Loan" and, collectively, the "Competitive Bid Loans") pursuant to a Competitive Bid Borrowing from time to time on and after the Effective Date and prior to the date which is the third Business Day preceding the date which is 14 days prior to the Final Maturity Date, provided, that after giving effect to any Competitive Bid Borrowing and the use of the proceeds thereof, the aggregate outstanding principal amount of Competitive Bid Loans when combined with the aggregate outstanding principal amount of all Revolving Loans and Swingline Loans then outstanding, the aggregate Commercial Paper Outstandings and the aggregate Letter of Credit Outstandings at such time shall not exceed the Total Commitment at such time. Within the foregoing limits and subject to the conditions set out in Section 1.04, Competitive Bid Loans may be repaid and reborrowed in accordance with the provisions hereof. -3- 1.02 Minimum Amount of Each Borrowing; Maximum Number of Borrowings. The aggregate principal amount of each Borrowing of Committed Loans shall not be less than the Minimum Borrowing Amount with respect thereto (except that Mandatory Borrowings shall be made in the amounts required by Section 1.01(C)). More than one Borrowing may be incurred on any date, provided that at no time shall there be outstanding more than twenty Borrowings of Eurodollar Loans under this Agreement. 1.03 Notice of Borrowing of Committed Loans. (a) Whenever the Borrower desires to incur Revolving Loans hereunder (other than Mandatory Borrowings), it shall give the Payments Administrator at the Payments Administrator's Office (x) prior to 11:00 A.M. (New York time) at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Revolving Loans constituting Eurodollar Loans and (y) prior to 11:00 A.M. (New York time) prior written notice (or telephonic notice promptly confirmed in writing) on the date of each Borrowing of Revolving Loans constituting Reference Rate Loans. Each such notice (each, together with each notice of a Borrowing of Swingline Loans pursuant to Section 1.03(b), a "Notice of Borrowing") shall be irrevocable and shall specify: (i) the aggregate principal amount of the Revolving Loans to be made pursuant to such Borrowing; (ii) the date of Borrowing (which shall be a Business Day); and (iii) whether the respective Borrowing shall consist of Reference Rate Loans or Eurodollar Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto. The Payments Administrator shall promptly give each Bank written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing of Revolving Loans, of such Bank's proportionate share thereof and of the other matters covered by the Notice of Borrowing. (b) Whenever the Borrower desires to incur Swingline Loans hereunder, it shall give the Payments Administrator at the Payments Administrator's Office written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Swingline Loans prior to 11:00 A.M. (New York time) on the date of such Borrowing. Each such notice shall be irrevocable and shall specify (i) the aggregate principal amount of the Swingline Loans to be made pursuant to such Borrowing and (ii) the date of Borrowing (which shall be a Business Day). The Payments Administrator shall promptly give each Swingline Lender written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing of Swingline Loans, of such Swingline Lender's proportionate share thereof and of the other matters covered by the Notice of Borrowing. (c) Mandatory Borrowings shall be made upon the notice specified in Section 1.01(C), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of Mandatory Borrowings as set forth in such Section. (d) Without in any way limiting the obligation of the Borrower to confirm in writing any notice it may give hereunder by telephone, the Payments Administrator may -4- act prior to receipt of written confirmation without liability upon the basis of such telephonic notice, believed by the Payments Administrator in good faith to be from the Chairman, Chief Financial Officer or Treasurer of the Borrower, or from any other person designated in writing to the Payments Administrator by the Chief Financial Officer or Treasurer of the Borrower as a person entitled to give telephonic notices under this Agreement on behalf of the Borrower. In each such case the Borrower hereby waives the right to dispute the Payments Administrator's record of the terms of any such telephonic notice. 1.04 Competitive Bid Borrowings. (a) Whenever the Borrower desires to incur a Competitive Bid Borrowing, it shall deliver to the Payments Administrator at the Payments Administrator's Office, prior to 11:00 A.M. (New York time) (x) at least four Business Days prior to the date of such proposed Competitive Bid Borrowing in the case of a Spread Borrowing, and (y) at least one Business Day prior to the date of such proposed Competitive Bid Borrowing, in the case of an Absolute Rate Borrowing, a written notice (a "Notice of Competitive Bid Borrowing"), which notice shall specify in each case (i) the date (which shall be a Business Day) and the aggregate amount of the proposed Competitive Bid Borrowing, (ii) the maturity date for repayment of each and every Competitive Bid Loan to be made as part of such Competitive Bid Borrowing (which maturity date may be (A) one, two, three or six months after the date of such Competitive Bid Borrowing in the case of a Spread Borrowing and (B) between 7 and 180 days, inclusive, after the date of such Competitive Bid Borrowing in the case of an Absolute Rate Borrowing, provided that in no event shall the maturity date of any Competitive Bid Borrowing be later than the third Business Day preceding the Final Maturity Date), (iii) the interest payment date or dates relating thereto, (iv) whether the proposed Competitive Bid Borrowing is to be an Absolute Rate Borrowing or a Spread Borrowing, and if a Spread Borrowing, the Interest Rate Basis, and (v) any other terms to be applicable to such Competitive Bid Borrowing. The Payments Administrator shall promptly notify each Bidder Bank of each such request for a Competitive Bid Borrowing received by it from the Borrower by telecopying to each such Bidder Bank a copy of the related Notice of Competitive Bid Borrowing. (b) Each Bidder Bank shall, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Loans to the Borrower as part of such proposed Competitive Bid Borrowing at a rate or rates of interest (which shall be a specified Spread over or under the Interest Rate Basis in the case of a Spread Borrowing or an Absolute Rate in the case of an Absolute Rate Borrowing) specified by such Bank in its sole discretion and determined by such Bank independently of each other Bank, by notifying the Payments Administrator (which shall give prompt notice thereof to the Borrower) before 10:00 A.M. (New York time) on the date (the "Reply Date") which is (x) in the case of an Absolute Rate Borrowing, the date of such proposed Competitive Bid Borrowing and (y) in the case of a Spread Borrowing, three Business Days before the date of such proposed Competitive Bid Borrowing, of the minimum amount and maximum -5- amount of each Competitive Bid Loan which such Bank would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso to Section 1.01(D), exceed such Bank's Commitment), the rate or rates of interest therefor and such Bank's lending office with respect to such Competitive Bid Loan, provided that if the Payments Administrator in its capacity as a Bank shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 9:30 A.M. (New York time) on the Reply Date. Any Bidder Bank not giving the Payments Administrator the notice specified in the preceding sentence shall not be obligated to, and shall not, make any Competitive Bid Loan as part of such Competitive Bid Borrowing. (c) The Borrower shall, in turn, before 11:00 A.M. (New York time) (x) on the Reply Date in the case of a proposed Absolute Rate Borrowing and (y) on the Business Day following the Reply Date in the case of a proposed Spread Borrowing, either: (i) cancel such Competitive Bid Borrowing by giving the Payments Administrator notice to such effect, or (ii) accept one or more of the offers made by any Bidder Bank or Banks by giving notice (in writing or by telephone confirmed in writing) to the Payments Administrator of the amount of each Competitive Bid Loan (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Payments Administrator on behalf of such Bidder Bank for such Competitive Bid Borrowing) to be made by each Bidder Bank as part of such Competitive Bid Borrowing, and reject any remaining offers made by Banks by giving the Payments Administrator notice to that effect, provided that (x) acceptance of offers may only be made on the basis of ascending Absolute Rates (in the case of an Absolute Rate Borrowing) or Spreads (in the case of a Spread Borrowing), commencing with the lowest rate so offered and (y) if offers are made by two or more Bidder Banks at the same rate and acceptance of all such equal offers would result in a greater principal amount of Competitive Bid Loans being accepted than the aggregate principal amount requested by the Borrower, the Borrower shall then have the right to accept one or more such equal offers in their entirety and reject the other equal offer or offers or to allocate acceptance among all such equal offers (but giving effect to the minimum and maximum amounts specified for each such offer), as the Borrower may elect in its sole discretion, provided further that in no event shall the aggregate principal amount of the Competitive Bid Loans accepted by the Borrower as part of a Competitive Bid Borrowing exceed the amount specified by the Borrower in the related Notice of Competitive Bid Borrowing. -6- (d) If the Borrower notifies the Payments Administrator that such Competitive Bid Borrowing is cancelled, the Payments Administrator shall give prompt notice thereof to the Bidder Banks and such Competitive Bid Borrowing shall not be made. (e) If the Borrower accepts one or more of the offers made by any Bidder Bank or Banks, the Payments Administrator shall in turn promptly notify (x) each Bidder Bank that has made an offer of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Bidder Bank have been accepted by the Borrower and (y) each Bidder Bank that is to make a Competitive Bid Loan as part of such Competitive Bid Borrowing of the amount of each Competitive Bid Loan to be made by such Bidder Bank. (f) On the last Business Day of each calendar quarter, the Payments Administrator shall notify the Banks of the aggregate principal amount of Competitive Bid Loans outstanding at such time. 1.05 Disbursement of Funds. (a) No later than 1:00 P.M. (New York time) on the date of each Borrowing (including Mandatory Borrowings), each Bank will make available its pro rata portion, if any, of each Borrowing requested to be made on such date in the manner provided below. (b) Each Bank shall make available all amounts it is to fund under any Borrowing in U.S. dollars and immediately available funds to the Payments Administrator at the Payments Administrator's Office and the Payments Administrator will (except in the case of Mandatory Borrowings) make available to the Borrower by depositing to its account at the Payments Administrator's Office the aggregate of the amounts so made available in U.S. dollars and the type of funds received. Unless the Payments Administrator shall have been notified by any Bank prior to the date of any such Borrowing that such Bank does not intend to make available to the Payments Administrator its portion of the Borrowing or Borrowings to be made on such date, the Payments Administrator may assume that such Bank has made such amount available to the Payments Administrator on such date of Borrowing, and the Payments Administrator, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Payments Administrator by such Bank and the Payments Administrator has made available same to the Borrower, the Payments Administrator shall be entitled to recover such corresponding amount from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Payments Administrator's demand therefor, the Payments Administrator shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Payments Administrator. The Payments Administrator shall also be entitled to recover from such Bank or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such -7- corresponding amount was made available by the Payments Administrator to the Borrower to the date such corresponding amount is recovered by the Payments Administrator, at a rate per annum equal to (x) if paid by such Bank, the overnight Federal Funds Rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.09, for the respective Loans. (c) Nothing in this Section 1.05 shall be deemed to relieve any Bank from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any default by such Bank hereunder. 1.06 Notes; Register. (a) The Borrower's obligation to pay the principal of, and interest on, the Revolving Loans made by each Bank shall, except as provided in Sections 1.14 and 12.04, be evidenced by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit A with blanks appropriately completed in conformity herewith (each a "Note" and, collectively, the "Notes"). (b) The Note issued to each Bank shall: (i) be payable to the order of such Bank and be dated the Effective Date; (ii) be in a stated principal amount equal to the Commitment of such Bank and be payable in the principal amount of the Revolving Loans evidenced thereby; (iii) mature on such Bank's Maturity Date; and (iv) bear interest as provided in the appropriate clause of Section 1.09 in respect of the Reference Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby. (c) Each Bank will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of its Note endorse on the reverse side thereof the outstanding principal amount of Revolving Loans evidenced thereby. Failure to make any such notation or any error in any such notation shall not affect the Borrower's obligations in respect of such Revolving Loans. (d) The Payments Administrator shall maintain at the Payments Administrator's Office a register for the recordation of the names and addresses of the Banks, the Commitments of the Banks from time to time, and the principal amount of the Revolving Loans, Swingline Loans and Competitive Bid Loans, owing to each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error. The Register shall be available for inspection by the Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. 1.07 Conversions. The Borrower shall have the option to convert on any Business Day all or a portion equal to at least the Minimum Borrowing Amount of the outstanding principal amount of Revolving Loans of one Type into a Borrowing or Borrowings of another Type, provided that: (i) no partial conversion of Eurodollar Loans -8- shall reduce the outstanding principal amount of Eurodollar Loans made pursuant to a single Borrowing to less than the Minimum Borrowing Amount; (ii) Reference Rate Loans may only be converted into Eurodollar Loans if no Event of Default is in existence on the date of the conversion; and (iii) Borrowings resulting from conversions pursuant to this Section 1.07 shall be limited in number as provided in Section 1.02. Each such conversion shall be effected by the Borrower by giving the Payments Administrator at the Payments Administrator's Office prior to 11:00 A.M. (New York time) at least three Business Days' (or one Business Day's in the case of a conversion into Reference Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each a "Notice of Conversion") specifying the Revolving Loans to be so converted, the Type of Revolving Loans to be converted into and, if to be converted into Eurodollar Loans, the Interest Period to be initially applicable thereto. The Payments Administrator shall give each Bank notice as promptly as practicable of any such proposed conversion affecting any of its Revolving Loans. 1.08 Pro Rata Borrowings. All Borrowings of Revolving Loans under this Agreement shall be loaned by the Banks pro rata on the basis of their Percentages, provided that all Borrowings of Revolving Loans made pursuant to a Mandatory Borrowing shall be loaned by the Banks pro rata on the basis of their Adjusted Percentages. All Borrowings of Swingline Loans shall be loaned by the Swingline Lenders pro rata on the basis of their Swingline Commitments. It is understood that no Bank shall be responsible for any default by any other Bank in its obligation to make Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to fulfill its commitments hereunder. 1.09 Interest. (a) The unpaid principal amount of each Reference Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Reference Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Applicable Eurodollar Margin plus the relevant Eurodollar Rate. (c) The unpaid principal amount of each Competitive Bid Loan shall bear interest from the date the proceeds thereof are made available to the Borrower until maturity (whether by acceleration or otherwise) at the rate or rates per annum specified by a Bank or Banks, as the case may be, pursuant to Section 1.04(b) and accepted by the Borrower pursuant to Section 1.04(c). -9- (d) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan shall bear interest at a rate per annum equal to 2% in excess of the Reference Rate in effect from time to time, provided that each Eurodollar Loan and Competitive Bid Loan shall bear interest after maturity (whether by acceleration or otherwise) until the end of the Interest Period then applicable thereto at a rate per annum equal to 2% in excess of the rate of interest applicable thereto at maturity. (e) Interest on each Loan shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable: (i) in respect of each Reference Rate Loan, quarterly in arrears on the 15th day of each January, April, July and October; (ii) in respect of any Competitive Bid Loan, at such times as specified in the Notice of Competitive Bid Borrowing relating thereto; (iii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period; (iv) in respect of each Loan (other than a Reference Rate Loan), on any prepayment (on the amount prepaid); and (v) in respect of each Loan, at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (f) All computations of interest hereunder shall be made in accordance with Section 12.07(b). (g) The Payments Administrator, upon determining the interest rate for any Borrowing of Eurodollar Loans for any Interest Period, shall promptly notify the Borrower and the Banks thereof. 1.10 Interest Periods. At the time the Borrower gives a Notice of Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 11:00 A.M. (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect the Interest Period applicable to such Borrowing by giving the Payments Administrator written notice (or telephonic notice promptly confirmed in writing) thereof, which Interest Period shall, at the option of the Borrower, be a one, two, three or six month period. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Reference Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; -10- (ii) if any Interest Period relating to a Borrowing of Eurodollar Loans or a Spread Borrowing priced by reference to the Eurodollar Rate begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period in respect of a Eurodollar Loan or a Spread Borrowing priced by reference to the Eurodollar Rate would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; and (iv) no Interest Period in respect of Eurodollar Loans shall extend beyond the Final Maturity Date. Notwithstanding the foregoing, if an Event of Default is in existence at the time any Interest Period in respect of any Eurodollar Loans is to expire, such Eurodollar Loans may not be continued as Eurodollar Loans but instead shall be automatically converted on the last day of such Interest Period into Reference Rate Loans. If upon the expiration of any Interest Period in respect of Eurodollar Loans, the Borrower has failed to elect a new Interest Period to be applicable thereto as provided above, the Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Reference Rate Loans effective as of the expiration date of such current Interest Period. 1.11 Increased Costs, Illegality, etc. (a) In the event that (x) in the case of clause (i) below, the Majority SMA or (y) in the case of clauses (ii) and (iii) below, any Bank shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period that, by reason of any changes arising on or after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii) at any time, that such Bank shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans or Competitive Bid Loans because of (x) any change since the date of this Agreement (or, in the case of any such cost or reduction with respect to any Competitive Bid Loan, since the date of the making of such Competitive Bid Loan) -11- in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline or order) (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Eurodollar Rate) and/or (y) other circumstances affecting the interbank Eurodollar market; or (iii) at any time, that the making or continuance of any Loan (other than Reference Rate Loans) has become unlawful by compliance by such Bank in good faith with any law, governmental rule, regulation, guideline or order (or would conflict with any such governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful), or, in the case of a Eurodollar Loan, has become impracticable as a result of a contingency occurring after the date of this Agreement which materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Bank (or the Majority SMA, in the case of clause (i) above) shall on such date give notice (if by telephone confirmed in writing) to the Borrower and to the Payments Administrator of such determination (which notice the Payments Administrator shall promptly transmit to each of the other Banks). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Payments Administrator notifies the Borrower and the Banks that the circumstances giving rise to such notice by the Majority SMA no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower shall pay to such Bank, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its sole discretion shall determine) as shall be required to compensate such Bank for such increased costs or reductions in amounts receivable hereunder (a written notice as to the additional amounts owed to such Bank, showing in reasonable detail the basis for the calculation thereof, submitted to the Borrower by such Bank shall, absent manifest error, be final and conclusive and binding upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.11(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan or Competitive Bid Loan is affected by the circumstances described in Section 1.11(a)(ii) (for Eurodollar Loans only) or (iii), the Borrower may (and in the case of a Eurodollar Loan or Competitive Bid Loan affected pursuant to Section 1.11(a)(iii) shall) either (x) if the affected Eurodollar Loan or Competitive Bid Loan is then being made pursuant to a Borrowing, cancel said Borrowing -12- by giving the Payments Administrator telephonic notice (confirmed promptly in writing) thereof as promptly as practicable after the Borrower was notified by a Bank pursuant to Section 1.11(a)(ii) or (iii), (y) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' notice to the Payments Administrator, require the affected Bank to convert each such Eurodollar Loan into a Reference Rate Loan or (z) if the affected Competitive Bid Loan is then outstanding, prepay such Competitive Bid Loan in full, provided that if more than one Bank is affected in a similar manner at any time, then all such similarly affected Banks must be treated the same pursuant to this Section 1.11(b). (c) If after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Bank or its parent with any request or directive made or adopted after the date hereof regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's or its parents' capital or assets as a consequence of such Bank's commitments or obligations hereunder to a level below that which such Bank or its parent could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Bank's or its parent's policies with respect to capital adequacy), then from time to time, within 15 days after demand by such Bank (with a copy to the Payments Administrator), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank or its parent for such reduction. Each Bank, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.11(c), will give prompt written notice thereof to the Borrower, which notice shall set forth in reasonable detail the basis of the calculation of such additional amounts, although the failure to give any such notice shall not, subject to Section 1.15, release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 1.11(c) upon receipt of such notice. 1.12 Compensation. The Borrower shall compensate each Bank, upon its written request (which request shall set forth in reasonable detail the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Bank to fund its Eurodollar Loans or Competitive Bid Loans but excluding any loss of anticipated profit with respect to such Loans) which such Bank may sustain: (i) if for any reason (other than a default by such Bank or the Payments Administrator) a Borrowing of Eurodollar Loans or Competitive Bid Loans accepted by the Borrower in accordance with Section 1.04(c)(ii) does not occur on a date specified therefor in a Notice of Borrowing, Notice of Competitive Bid Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.11); (ii) if any repayment or conversion of any of its Eurodollar -13- Loans or any repayment of Competitive Bid Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any of its Eurodollar Loans is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Eurodollar Loans or Competitive Bid Loans when required by the terms of this Agreement or (y) an election made pursuant to Section 1.11(b). Calculation of all amounts payable to a Bank under this Section 1.12 in respect of Eurodollar Loans shall be made as though that Bank had actually funded its relevant Eurodollar Loan through the purchase of a Eurodollar deposit bearing interest at the Eurodollar Rate in an amount equal to the amount of that Loan, having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Bank to a domestic office of that Bank in the United States of America; provided however that each Bank may fund each of its Eurodollar Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 1.12. 1.13 Change of Lending Office. Each Bank agrees that, upon the occurrence of any event giving rise to the operation of Section 1.11(a)(ii) or (iii), 2.05 or 4.04 with respect to such Bank, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans affected by such event, provided that such designation is made on such terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 1.13 shall affect or postpone any of the obligations of the Borrower or the right of any Bank provided in Section 1.11, 2.05 or 4.04. 1.14 Replacement of Banks. If (w) any Bank becomes a Non-Continuing Bank, (x) any Bank becomes a Defaulting Bank or otherwise defaults in its obligations to make Loans or fund Unpaid Drawings, (y) any Bank refuses to give timely consent to proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks or (z) any Bank is owed increased costs under Section 1.11, Section 2.05 or Section 4.04 which in the judgment of the Borrower are material in amount and which are not otherwise requested generally by the other Banks, the Borrower shall have the right, if no Event of Default then exists and, in the case of a Bank described in clause (z) above, such Bank has not withdrawn its request for such compensation or changed its applicable lending office with the effect of eliminating or substantially decreasing (to a level which in the judgment of the Borrower is not material) such increased cost, to replace such Bank (the "Replaced Bank") with one or more other Eligible Transferee or Transferees (collectively, the "Replacement Bank") reasonably acceptable to the Majority SMA, provided that (i) at the time of any replacement pursuant to this Section 1.14, the Replacement Bank shall enter into one or more Assignment Agreements pursuant to which the Replacement Bank shall acquire all of the Commitment and outstanding Loans of, and participations in Letters of Credit by, the Replaced Bank -14- and, in connection therewith, shall pay to (x) the Replaced Bank in respect thereof an amount equal to the sum of (a) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Bank, (b) an amount equal to such Replaced Bank's Adjusted Percentage of all Unpaid Drawings that have been funded by such Replaced Bank, together with all then unpaid interest with respect thereto at such time and (c) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to Section 3.01 and (y) the appropriate Letter of Credit Issuer an amount equal to such Replaced Bank's Adjusted Percentage of any Unpaid Drawing not funded by such Replaced Bank, (ii) all obligations of the Borrower owing to the Replaced Bank (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Bank concurrently with such replacement, (iii) the Maturity Date applicable to the Replacement Bank's Commitment shall be the Final Maturity Date then in effect and (iv) in the event that such Replaced Bank is a party to the 364 DF Credit Agreement, the Borrower shall also take the actions specified in Section 1.14 of the 364 DF Credit Agreement and replace such Bank as a Bank thereunder. Upon the execution of the respective assignment documentation, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Bank, delivery to the Replacement Bank of the appropriate Note executed by the Borrower, the Replacement Bank shall become a Bank hereunder and the Replaced Bank shall cease to constitute a Bank hereunder, except with respect to indemnification provisions under this Agreement, which shall survive as to such Replaced Bank. 1.15 Notice of Certain Costs. Notwithstanding anything in this Agreement to the contrary, to the extent any notice required by Section 1.11 or 2.05 is given by any Bank more than 180 days after the occurrence of the event giving rise to the additional cost, reduction in amounts or other additional amounts of the type described in such Section, such Bank shall not be entitled to compensation under Section 1.11 or Section 2.05, as the case may be, for any such amounts incurred or accruing prior to the giving of such notice to the Borrower. 1.16 Commitment Increases. (a) The Banks hereby acknowledge and agree that the Borrower may at any time prior to the Final Maturity Date, but no more than once during any calendar quarter, increase the Total Commitment under this Agreement, in incremental amounts of $10,000,000, by an aggregate amount not in excess of $500,000,000 for all such increases by either requesting a Bank or Banks to increase its Commitment or Commitments (provided that no Bank shall be required to agree to any such increase) or by requesting a financial institution that is an Eligible Transferee to become a party to this Agreement (such institution, a "New Bank"), provided that (i) no Event of Default has occurred and is continuing at the time of any such increase, (ii) the Credit Rating shall be either an Increased Investment Grade Rating or a Maximum Investment Grade Rating at the time of any such increase, (iii) the Borrower shall deliver a notice of -15- such increase to the Payments Administrator describing (x) the amount of such increase and the Total Commitment after giving effect to such increase and (y) the Bank(s) or New Bank(s) agreeing to such increase and the amount of each such entity's Commitment after giving effect to such increase, and (iv) the Borrower and each such Bank or New Bank shall deliver an Agreement of Commitment Increase to the Payments Administrator. Any such Total Commitment increase will become effective upon (A) in the case of New Banks only, the payment to the Payments Administrator of a nonrefundable fee of $2,500 and (B) in all cases, the recording by the Payments Administrator of such addition to the Total Commitment in the Register, the Payments Administrator hereby agreeing to effect such recordation no later than three Business Days after its receipt of an Agreement of Commitment Increase. Upon the effectiveness of any additional Commitment pursuant to this Section 1.16, (x) the New Bank, if any, will become a "Bank" for all purposes of this Agreement and the other Credit Documents with a Commitment as so recorded by the Payments Administrator in the Register and (y) the Borrower shall issue to the respective Bank or New Bank a new Note. The Payments Administrator will prepare on the last Business Day of each calendar quarter during which an increase has become effective pursuant to this Section 1.16 a new Annex I hereto giving effect to all such increases effected during such quarter and will promptly provide same to the Borrower and each of the Banks. (b) If the Total Commitment is increased pursuant to Section 1.16(a) at a time when Loans are outstanding, then the Borrower shall take all such actions as appropriate to repay and reborrow Loans (but without any obligation to repay Eurodollar Loans other than on the last day of an Interest Period applicable thereto and without regard to the provisions of the first sentence of Section 1.08), so that, as soon as practicable, the outstanding principal amount of the Loans of each Non-Defaulting Bank equals such Bank's Percentage of the aggregate outstanding principal amount of all Loans of all Non-Defaulting Banks. 1.17 Maturity Date Extensions. Prior to (but not less than 60 days nor more than 90 days prior to) each anniversary of the Effective Date, the Borrower may make a written request to the Payments Administrator, who shall forward a copy of each such request to each of the Continuing Banks, that the Final Maturity Date then in effect be extended to the date which is one year after the then Final Maturity Date. Such request shall be accompanied by a certificate of an Authorized Officer of the Borrower stating that, as of the date of such request and as of the date of any such extension of the then Final Maturity Date, no Default or Event of Default has occurred and is continuing. If, by the date (a "Response Date") occurring 30 days prior to any such anniversary of the Effective Date, Continuing Banks holding at least 66-2/3% of the Commitments held by Continuing Banks agree thereto in writing, the Final Maturity Date, and the Maturity Date of each Continuing Bank then consenting, shall be automatically extended to the date which is one year after the then existing Final Maturity Date. In the event that the Borrower has not -16- obtained the requisite percentage of Continuing Banks to permit an extension by the relevant Response Date, the Borrower may extend the deadline for obtaining such percentage to the 30th day following such Response Date in order to take such actions, including those contemplated by Section 1.14, with respect to any Bank that is a Non-Continuing Bank after giving effect to such Response Date in order to obtain the requisite percentage of Banks constituting Continuing Banks to permit such extension. The Payments Administrator shall notify the Borrower and each Bank of the effectiveness of any such extension. No Bank shall be obligated to grant any extensions pursuant to this Section 1.17 and any such extension shall be in the sole discretion of each such Bank. A Bank's Maturity Date shall not be so extended pursuant to this Section 1.17 for (x) any Bank that is a Non-Continuing Bank at the time such request for extension is made and (y) any Continuing Bank at the time of such request that has not consented in writing, within the time specified above, to any such request for the extension thereof. SECTION 2. Letters of Credit. 2.01 Letters of Credit. (a) Subject to and upon the terms and conditions herein set forth, the Borrower, at any time and from time to time on or after the Effective Date and prior to the Final Maturity Date, may request that a Letter of Credit Issuer issue, for the account of the Borrower and in support of any Permitted Obligations or in support of such other obligations of the Borrower and/or its Subsidiaries as are acceptable to the Majority SMA, on an offering and as available basis, an irrevocable standby letter of credit or letters of credit in such form as may be approved by such Letter of Credit Issuer and the Majority SMA. (b) Notwithstanding the foregoing: (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings at such time would exceed either (x) $300,000,000 or (y) when added to the sum of the aggregate principal amount of all Revolving Loans made by Non-Defaulting Banks, all Competitive Bid Loans, all Swingline Loans then outstanding and the Commercial Paper Outstandings at such time, the Adjusted Total Commitment; (ii) each Letter of Credit shall have an expiry date occurring no later than the Business Day next preceding the Final Maturity Date; (iii) each Letter of Credit shall be denominated in U.S. dollars or an Approved Alternate Currency; and (iv) no Letter of Credit shall be issued by a Letter of Credit Issuer after it has received a notice in writing from the Required Banks that one or more of the applicable conditions specified in Section 5.02 are not then satisfied. 2.02 Letter of Credit Requests. Whenever the Borrower desires that a Letter of Credit be issued for its account, it shall give the Payments Administrator and the Letter of Credit Issuer or Letter of Credit Issuers that are to issue same at least five Business Days' (or such lesser number of days as may be agreed to by the relevant Letter of Credit Issuer) written notice thereof. Each notice shall be executed by the Borrower and -17- shall be in the form of Exhibit B attached hereto (each a "Letter of Credit Request"). The Payments Administrator shall promptly transmit copies of each Letter of Credit Request to each Bank. 2.03 Letter of Credit Participations. (a) Immediately upon the issuance by a Letter of Credit Issuer of any Letter of Credit, such Letter of Credit Issuer shall be deemed to have sold and transferred to each other Bank (each such other Bank, in its capacity under this Section 2.03, a "Participant"), and each such Participant shall be deemed irrevocably and unconditionally to have purchased and received from such Letter of Credit Issuer, without recourse or warranty, an undivided interest and participation (each a "participation"), to the extent of such Participant's Adjusted Percentage, in such Letter of Credit, each substitute letter of credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto, and any security therefor or guaranty pertaining thereto (although Letter of Credit Fees will be paid directly to the Payments Administrator for the ratable account of the Participants as provided in Section 3.01(c) and the Participants shall have no right to receive any portion of any Facing Fees). Upon any change in the Commitments of the Banks pursuant to Section 1.14, 1.16 or 12.04, the termination of a Commitment of a Non-Continuing Bank or the occurrence of any Bank Default, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 2.03 to reflect the new Adjusted Percentages of the assignor and assignee Bank or of all Non-Defaulting Banks, as the case may be. (b) In determining whether to pay under any Letter of Credit, the Letter of Credit Issuer issuing same shall have no obligation relative to the Participants other than to confirm that any documents required to be delivered under such Letter of Credit have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by a Letter of Credit Issuer under or in connection with any Letter of Credit issued by it, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Letter of Credit Issuer any resulting liability. (c) In the event that any Letter of Credit Issuer makes any payment under any Letter of Credit issued by it and the Borrower shall not have reimbursed such amount in full to such Letter of Credit Issuer pursuant to Section 2.04(a), such Letter of Credit Issuer shall promptly notify the Payments Administrator and each Participant of such failure, and each Participant shall promptly and unconditionally pay to the Payments Administrator for the account of such Letter of Credit Issuer, the amount of such Participant's Adjusted Percentage of such unreimbursed payment in lawful money of the United States of America and in same day funds; provided, however that no Participant shall be obligated to pay to the Payments Administrator for the account of such Letter of Credit Issuer its Adjusted Percentage of such unreimbursed amount for any wrongful payment -18- made by such Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Letter of Credit Issuer. If such Letter of Credit Issuer so notifies, prior to 11:00 A.M. (New York time) on any Business Day, any Participant required to fund a payment under a Letter of Credit, such Participant shall make available to the Payments Administrator for the account of such Letter of Credit Issuer such Participant's Adjusted Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Participant shall not have so made its Adjusted Percentage of the amount of such payment available to the Payments Administrator for the account of such Letter of Credit Issuer, such Participant agrees to pay to the Payments Administrator for the account of such Letter of Credit Issuer, forthwith on demand such amount, together with interest thereon for each day from such date until the date such amount is paid to the Payments Administrator for the account of such Letter of Credit Issuer at the overnight Federal Funds Rate. The failure of any Participant to make available to the Payments Administrator for the account of the applicable Letter of Credit Issuer its Adjusted Percentage of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to the Payments Administrator for the account of such Letter of Credit Issuer its Adjusted Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Payments Administrator such other Participant's Adjusted Percentage of any such payment. (d) Whenever any Letter of Credit Issuer receives a payment in respect of an unpaid reimbursement obligation as to which the Payments Administrator has received for the account of such Letter of Credit Issuer any payments from the Participants pursuant to the preceding clause (c), such Letter of Credit Issuer shall pay to the Payments Administrator and the Payments Administrator shall promptly pay to each Participant which has paid its Adjusted Percentage of such reimbursement obligation, in lawful money of the United States of America and in same day funds, an amount equal to such Participant's share (based upon the proportionate aggregate amount originally funded by such Participant to the aggregate amount funded by all Participants) of the principal amount of such reimbursement obligation and interest thereon accruing after the purchase of the respective participations. (e) The obligations of the Participants to make payments to the Payments Administrator for the account of the Letter of Credit Issuers with respect to Letters of Credit shall be irrevocable and not subject to counterclaim, set-off or other defense or any other qualification or exception whatsoever (except as expressly provided in Section 2.03(c)) and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: -19- (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Payments Administrator, any Letter of Credit Issuer, any Bank, or other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; (v) the occurrence of any Default or Event of Default; or (vi) the failure of any condition precedent set forth in Section 5.02 to have been satisfied at the time of the issuance of any Letter of Credit unless the applicable Letter of Credit Issuer shall have received a notice in writing to such effect from the Required Banks pursuant to Section 2.01(b)(iv) prior to the issuance of such Letter of Credit. 2.04 Agreement to Repay Letter of Credit Drawings. (a) The Borrower hereby agrees to reimburse each Letter of Credit Issuer, by making payment to the Payments Administrator in U.S. dollars and immediately available funds at the Payments Administrator's Office, for any payment or disbursement made by such Letter of Credit Issuer under any Letter of Credit issued by it (each such amount so paid until reimbursed, an "Unpaid Drawing") immediately after, and in any event on the date of, notice given by such Letter of Credit Issuer to the Borrower of such payment (which notice each Letter of Credit Issuer hereby agrees to give promptly after the making of any payment or disbursement under a Letter of Credit), with interest on the amount so paid or disbursed by such Letter of Credit Issuer, to the extent not reimbursed prior to 1:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but excluding the date such Letter of Credit Issuer is reimbursed therefor, at a rate per annum which shall be the Reference Rate as in effect from time to time (plus an additional 2% per annum if not reimbursed by the second Business Day following any such notice of payment or disbursement), such interest to be payable on demand. Notwithstanding the -20- foregoing, to the extent that a Letter of Credit Issuer of a Letter of Credit denominated in a currency other than U.S. dollars has agreed in writing to such arrangement at the time of the issuance of such Letter of Credit, the Borrower shall reimburse any Drawing thereunder in the currency in which such Letter of Credit is denominated, provided that (x) if any such Drawing is made at a time when there exists an Event of Default or (y) if such reimbursement is not made by the close of business two Business Days after the Borrower has received notice of such Drawing, then, in either such case, such reimbursement shall instead be made in U.S. dollars and in immediately available funds. (b) The Borrower's obligations under this Section 2.04 to reimburse each Letter of Credit Issuer with respect to Unpaid Drawings (including, in each case, interest thereon) issued by it shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower or any other Person may have or have had against any Bank (including in its capacity as a Letter of Credit Issuer or as a Participant), including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit (each a "Drawing") to conform to the terms of the Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds of such Drawing, provided that the Borrower shall not be obligated to reimburse the respective Letter of Credit Issuer for any wrongful payment made by such Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Letter of Credit Issuer. 2.05 Increased Costs. If after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or actual compliance by any Letter of Credit Issuer or any Participant with any request or directive made or adopted after the date hereof (whether or not having the force of law), by any such authority, central bank or comparable agency shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against letters of credit issued by such Letter of Credit Issuer, or such Participant's participation therein, or (ii) impose on any Letter of Credit Issuer or any Participant any other conditions affecting its obligations under this Agreement in respect of Letters of Credit or participations therein or any Letter of Credit or such Participant's participation therein; and the result of any of the foregoing is to increase the cost to such Letter of Credit Issuer or such Participant of issuing, maintaining or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Letter of Credit Issuer or such Participant hereunder in respect of Letters of Credit or participations therein, then, upon demand to the Borrower by such Letter of Credit Issuer or such Participant, as the case may be (a copy of which notice shall be sent by such Letter of Credit Issuer or such Participant to each Senior Managing Agent), the Borrower shall pay to such Letter of Credit Issuer or such Participant such additional amount or amounts as will compensate such Letter of Credit Issuer or such Participant for -21- such increased cost or reduction. A certificate submitted to the Borrower by such Letter of Credit Issuer or such Participant, as the case may be (a copy of which certificate shall be sent by such Letter of Credit Issuer or such Participant to each Senior Managing Agent), setting forth in reasonable detail the basis for the determination of such additional amount or amounts necessary to compensate such Letter of Credit Issuer or such Participant as aforesaid shall be conclusive and binding on the Borrower absent manifest error although the failure to deliver any such certificate shall not, subject to Section 1.15, release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 2.05 upon receipt of such certificate. 2.06 Indemnification; Nature of Letter of Credit Issuers' Duties. (a) In addition to its other obligations under this Section 2, the Borrower hereby agrees to protect, indemnify, pay and save each of the Letter of Credit Issuers harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees but excluding those taxes excluded from the definition of Taxes pursuant to Section 4.04) that any such Letter of Credit Issuer may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit or (ii) the failure of any Letter of Credit Issuer to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions, herein called "Government Acts"). (b) As between the Borrower and the Letter of Credit Issuers, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The Letter of Credit Issuers shall not be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon a Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, facsimile transmission or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (vii) for any consequences arising from causes beyond the control of the Letter of Credit Issuers, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of any of the Letter of Credit Issuers' rights or powers hereunder. -22- (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by any Letter of Credit Issuer, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Letter of Credit Issuer under any resulting liability to the Borrower. It is the intention of the parties that this Agreement shall be construed and applied to protect and indemnify the Letter of Credit Issuers against any and all risks involved in the issuance of the Letters of Credit arising from any present or future Government Acts. The Letter of Credit Issuers shall not, in any way, be liable for any failure by the Letter of Credit Issuers or anyone else to pay any Drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Letter of Credit Issuers. (d) Nothing in this Section 2.06 is intended to limit the reimbursement obligation of the Borrower contained in Section 2.04 hereof. The obligations of the Borrower under this Section 2.06 shall survive the termination of this Agreement. No act or omission of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Letter of Credit Issuers to enforce any right, power or benefit under this Agreement. (e) Notwithstanding anything to the contrary contained in this Section 2.06, (i) the Borrower shall have no obligation to indemnify any Letter of Credit Issuer in respect of any liability incurred by such Letter of Credit Issuer arising solely out of the gross negligence or willful misconduct of such Letter of Credit Issuer, as determined by a court of competent jurisdiction and (ii) the Borrower shall have a claim against any Letter of Credit Issuer and such Letter of Credit Issuer shall be liable to the Borrower to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (x) such Letter of Credit Issuer's willful misconduct or gross negligence in determining whether the documents presented under its Letter of Credit complied with the terms of such Letter of Credit or (y) such Letter of Credit Issuer's willful or grossly negligent failure to pay under its Letter of Credit after presentation to it of a drawing certificate and any other documents strictly complying with the terms and conditions of such Letter of Credit. SECTION 3. Fees; Commitments. 3.01 Fees. (a) The Borrower agrees to pay the Payments Administrator a facility fee (the "Facility Fee") for the account of each Non-Defaulting Bank for the period from and including the Effective Date to but not including the Final Maturity Date or, if earlier, the date upon which the Total Commitment has been terminated, computed for each day at a rate equal to the Applicable Facility Fee Percentage for such day multiplied by the Commitment of such Bank on such day. Such Facility Fee shall be due -23- and payable quarterly in arrears on the 15th day of each January, April, July and October and on the date upon which the Total Commitment is terminated. (b) The Borrower agrees to pay to the Payments Administrator a utilization fee (the "Utilization Fee") for the account of the Banks pro rata on the basis of their respective Adjusted Percentages, computed for each day during a Utilization Period at a rate equal to the Applicable Utilization Fee Percentage for such day multiplied by the daily average Total Adjusted Utilization Amount for such Utilization Period. Such Utilization Fee shall be due and payable in arrears on the 15th day of the month following the end of each Utilization Period and on the date upon which the Total Commitment is terminated. (c) The Borrower agrees to pay to the Payments Administrator for the account of the Banks pro rata on the basis of their respective Adjusted Percentages, a fee in respect of each Letter of Credit (the "Letter of Credit Fee") computed for each day at a rate equal to the Applicable Eurodollar Margin for such day multiplied by the then Stated Amount of such Letter of Credit. Such Letter of Credit Fees shall be due and payable quarterly in arrears on the 15th day of each January, April, July and October and on the date upon which the Total Commitment is terminated. (d) The Borrower agrees to pay to the Payments Administrator for the account of each Letter of Credit Issuer a fee in respect of each Letter of Credit issued by it (the "Facing Fee") computed for each day at a rate equal to the Applicable Facing Fee Percentage for such day multiplied by the average daily Stated Amount of such Letter of Credit. Such Facing Fees shall be due and payable quarterly in arrears on the 15th day of each January, April, July and October and on the date upon which the Total Commitment is terminated. (e) The Borrower hereby agrees to pay directly to each Letter of Credit Issuer upon each issuance of, drawing under, and/or amendment of, a Letter of Credit issued by such Letter of Credit Issuer such amount as shall at the time of such issuance, drawing or amendment be the administrative charge which such Letter of Credit Issuer is customarily charging for issuances of, drawings under or amendments of, letters of credit issued by such Letter of Credit Issuer. (f) All computations of Fees shall be made in accordance with Section 12.07(b). 3.02 Voluntary Reduction of Commitments. Upon at least three Business Days' prior written notice (or telephonic notice confirmed in writing) to the Payments Administrator at the Payments Administrator's Office (which notice the Payments Administrator shall promptly transmit to each of the Banks), the Borrower shall have the right, without premium or penalty, to terminate the Total Unutilized Commitment, in part -24- or in whole (or, to the extent that at such time there are no Loans outstanding and no Letter of Credit Outstandings, to terminate the Total Commitment, in whole), provided that (x) any such termination shall apply to proportionately and permanently reduce the Commitment of each of the Banks and (y) any partial reduction pursuant to this Section 3.02 shall be in the amount of at least $50,000,000. 3.03 Mandatory Reduction of Commitments, etc. (a) The Total Commitment and the Total Swingline Commitment (and the Commitment and Swingline Commitment, if any, of each Bank) shall be terminated on the Commitment Termination Date unless the Effective Date has occurred on or before such date. (b) On the date which is the earlier of (x) 30 days after any date on which a Change of Control occurs and (y) the date on which any Indebtedness of the Borrower in excess of $100,000,000 individually or $250,000,000 in the aggregate is required to be repurchased as a result of any such Change of Control, the Total Commitment and Total Swingline Commitment shall be reduced to zero. (c) The Total Commitment shall terminate on the Final Maturity Date. (d) The Total Swingline Commitment shall terminate on the Swingline Maturity Date. (e) Each Bank's Commitment and Swingline Commitment, if any, shall terminate on such Bank's Maturity Date. SECTION 4. Payments. 4.01 Voluntary Prepayments. The Borrower shall have the right to prepay Revolving Loans and Swingline Loans in whole or in part from time to time on the following terms and conditions: (i) the Borrower shall give the Payments Administrator at the Payments Administrator's Office written notice (or telephonic notice promptly confirmed in writing) of its intent to make such prepayment, the amount of such prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which made, which notice shall be given by the Borrower no later than (x) in the case of Revolving Loans, 11:00 A.M. (New York time) one Business Day prior to, or (y) in the case of Swingline Loans, 11:00 A.M. (New York time) on the date of such prepayment and shall promptly be transmitted by the Payments Administrator to each of the Banks or Swingline Lenders, as the case may be; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $25,000,000, provided that no partial prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans; and (iii) each prepayment in respect of any Revolving Loans or -25- Swingline Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans or Swingline Loans, provided that at the Borrower's election in connection with any prepayment pursuant to this Section 4.01, such prepayment shall not be applied to any Revolving Loan of a Defaulting Bank at any time when the aggregate amount of Revolving Loans of any Non-Defaulting Bank exceeds such Non-Defaulting Bank's Percentage of all Revolving Loans then outstanding. The Borrower shall not have the right to voluntarily prepay any Competitive Bid Loans. 4.02 Mandatory Prepayments. (A) Requirements: If on any date the sum of the outstanding principal amount of Revolving Loans made by Non-Defaulting Banks, Swingline Loans and Competitive Bid Loans and the aggregate amount of Letter of Credit Outstandings and Commercial Paper Outstandings (all the foregoing, collectively, the "Aggregate Outstandings") exceeds the Adjusted Total Commitment as then in effect, the Borrower shall repay on such date the principal of Swingline Loans and, after Swingline Loans have been paid in full, Revolving Loans, in an amount equal to such excess. If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Loans, the Aggregate Outstandings exceed the Adjusted Total Commitment then in effect, the Borrower shall pay to the Payments Administrator an amount in cash equal to such excess and the Payments Administrator shall hold such payment as security for the obligations of the Borrower hereunder (including, without limitation, obligations in respect of Letter of Credit Outstandings) pursuant to a cash collateral agreement to be entered into in form and substance satisfactory to the Payments Administrator (which shall permit certain investments in cash equivalents satisfactory to the Payments Administrator, until the proceeds are applied to the secured obligations). If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Loans and the cash collateralization of all Letter of Credit Outstandings as set forth above, the remaining Aggregate Outstandings exceed the Adjusted Total Commitment, the Borrower shall repay on such date the principal of Competitive Bid Loans in an aggregate amount equal to such excess, provided that no Competitive Bid Loan shall be prepaid pursuant to this sentence unless the Bank that made same consents to such prepayment. In addition, the Borrower shall repay the Revolving Loans and Swingline Loans, if any, of each Bank on such Bank's Maturity Date. (B) Application. With respect to each prepayment of Loans required by this Section 4.02, the Borrower may designate the Types of Loans which are to be prepaid and the specific Borrowing(s) pursuant to which made, provided that: (i) if any prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans, such Borrowing shall immediately be converted into Reference Rate Loans; (ii) each prepayment of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans; and (iii) notwithstanding the provisions of the -26- preceding clause (ii), no prepayment made pursuant to Section 4.02(A) of Revolving Loans shall be applied to the Revolving Loans of any Defaulting Bank. In the absence of a designation by the Borrower as described in the preceding sentence, the Payments Administrator shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.12. 4.03 Method and Place of Payment. (a) Except as otherwise specifically provided herein, all payments under this Agreement shall be made to the Payments Administrator for the ratable account of the Banks entitled thereto, not later than 1:00 P.M. (New York time) on the date when due and shall be made in immediately available funds and in lawful money of the United States of America at the Payments Administrator's Office, it being understood that written, telex or facsimile transmission notice by the Borrower to the Payments Administrator to make a payment from the funds in the Borrower's account at the Payments Administrator's Office shall constitute the making of such payment to the extent of such funds held in such account. The Payments Administrator will thereafter cause to be distributed on the same day (if payment was actually received by the Payments Administrator prior to 2:00 P.M. (New York time) on such day) like funds relating to the payment of principal or interest or Fees ratably to the Banks entitled thereto. If and to the extent that any such distribution shall not be so made by the Payments Administrator in full on the same day (if payment was actually received by the Payments Administrator prior to 2:00 P.M. (New York time) on such day), the Payments Administrator shall pay to each Bank its ratable amount thereof and each such Bank shall be entitled to receive from the Payments Administrator, upon demand, interest on such amount at the overnight Federal Funds Rate for each day from the date such amount is paid to the Payments Administrator until the date the Payments Administrator pays such amount to such Bank. (b) Any payments under this Agreement which are made later than 1:00 P.M. (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 4.04 Net Payments. (a) All payments made by the Borrower hereunder will be made without setoff or counterclaim. The Borrower will pay, prior to the date on which penalties attach thereto, all present and future income, stamp and other taxes, levies, or costs and charges whatsoever imposed, assessed, levied or collected on or in respect of a Loan and/or the recording, registration, notarization or other formalization thereof and/or any payments of principal, interest or other amounts made on or in respect of a Loan (all such taxes, levies, costs and charges being herein collectively called "Taxes"; provided that Taxes shall not include taxes imposed on or measured by the overall net income of that -27- Bank (or any alternative tax imposed generally by any relevant jurisdiction in lieu of a tax on net income) by the United States of America or any political subdivision or taxing authority thereof or therein, taxes imposed under Section 884 of the Code or taxes on or measured by the overall net income (or any alternative tax imposed generally by any relevant jurisdiction in lieu of a tax on net income) of that Bank or any foreign office, branch or subsidiary of that Bank by any foreign country or subdivision thereof in which that Bank or that office, branch or subsidiary is doing business). The Borrower shall also pay such additional amounts equal to increases in taxes payable by that Bank described in the foregoing proviso which increases are attributable to payments made by the Borrower described in the immediately preceding sentence of this Section. Promptly after the date on which payment of any such Tax is due pursuant to applicable law, the Borrower will, at the request of that Bank, furnish to that Bank evidence, in form and substance satisfactory to that Bank, that the Borrower has met its obligation under this Section 4.04. The Borrower will indemnify each Bank against, and reimburse each Bank on demand for, any Taxes, as determined by that Bank in its good faith and reasonable discretion. Such Bank shall provide the Borrower with appropriate receipts for any payments or reimbursements made by the Borrower pursuant to this Section 4.04. (b) Each Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes agrees to provide to the Borrower on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.14 or Section 12.04 (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer and such Bank is in compliance with the provisions of this Section 4.04(b)), on the date of such assignment or transfer to such Bank, two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement or any Note. Each Bank that is a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, but that is not a corporation (as such term is defined in Section 7701(a)(3) of the Code) for such purposes, agrees to provide to the Borrower on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.14 or Section 12.04 (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer and such Bank is in compliance with the provisions of this Section 4.04(b)), on the date of such assignment to such Bank, two accurate and complete original signed copies of Internal Revenue Service Form W-9 (or successor form). In addition, each such Bank agrees that from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such -28- Bank to a continued exemption from United States withholding tax with respect to payments under this Agreement or any Note, or it shall immediately notify the Borrower and the Administrative Agent of its inability to deliver any such form. Notwithstanding anything to the contrary contained in Section 4.04(a), (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or other similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for United States federal income tax purposes and which has not provided to the Borrower such forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 4.04(a) to pay a Bank in respect of income or similar taxes imposed by the United States or any additional amounts with respect thereto if such Bank has not provided to the Borrower the Internal Revenue Service forms required to be provided to the Borrower pursuant to this Section 4.04(b). SECTION 5. Conditions. 5.01 Conditions Precedent to the Effective Date. This Agreement shall be effective on the date (the "Effective Date") which is the date on which the following conditions shall have been satisfied: (a) Execution of Agreement. Each of Holdings, the Borrower and each of the Banks shall have signed a copy of this Agreement (whether the same or different copies) and shall have delivered same to the Payments Administrator or, in the case of the Banks, shall have given to the Payments Administrator telephonic (confirmed in writing), written, telex or facsimile notice (actually received) at such office that the same has been signed and mailed to it. (b) Notes; Effectiveness of 364 DF Credit Agreement. On the Effective Date, (i) there shall have been delivered to the Payments Administrator for the account of each Bank the appropriate Note or Notes executed by the Borrower in the amount, maturity and as otherwise provided herein and (ii) the Effective Date under, and as defined in, the 364 DF Credit Agreement shall have occurred. (c) Officer's Certificate. On the Effective Date, the Payments Administrator shall have received certificates dated such date signed by an appropriate officer of each of Holdings and the Borrower stating that all of the applicable conditions set forth in Sections 5.01(b), (g) and (i) and 5.02 exist as of such date. (d) Opinions of Counsel. On the Effective Date, the Payments Administrator shall have received an opinion, or opinions, in form and substance satisfactory to each Senior Managing Agent, addressed to each of the Banks and dated the -29- Effective Date, from (i) James A. Kirkman III, Esq., General Counsel of Holdings and the Borrower, which opinion shall cover the matters contained in Exhibit C-1 hereto and (ii) White & Case, special counsel to the Banks, which opinion shall cover the matters contained in Exhibit C-2 hereto, together with such other opinions covering such matters as the Senior Managing Agents shall reasonably request, from counsel, and in form and substance, satisfactory to the Senior Managing Agents. (e) Corporate Proceedings. On the Effective Date, all corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be satisfactory in form and substance to each Senior Managing Agent, and the Payments Administrator shall have received all information and copies of all certificates, documents and papers, including records of corporate proceedings and governmental approvals, if any, which any Senior Managing Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. (f) Organizational Documentation, etc. On the Effective Date, the Banks shall have received copies of the Certificate of Incorporation and By-Laws of each Credit Party, certified as true and complete by an appropriate corporate officer or governmental authority. (g) Adverse Change, etc. On the Effective Date, (i) nothing shall have occurred which has a material adverse effect on the ability of either Credit Party to perform its obligations to the Banks and (ii) there shall have been no material adverse change in the operations, business, property, assets or financial condition of Holdings and its Subsidiaries taken as a whole from that of Holdings and its Subsidiaries taken as a whole on December 31, 1995. The 1996 Restructuring Charge shall not be deemed to constitute a material adverse change. (h) Litigation. On the Effective Date, except as set forth in Annex IV, there shall be no actions, suits or proceedings pending or threatened with respect to Holdings or any of its Subsidiaries that (i) are reasonably likely to have a material adverse effect on the business, properties, assets, operations, financial condition or prospects of Holdings and its Subsidiaries taken as a whole or (ii) are reasonably likely to have a material adverse effect on the rights or remedies of the Banks or on the ability of either Credit Party to perform its obligations to the Banks hereunder or under any other Credit Document. (i) Termination of the Existing Credit Agreements. On the Effective Date and concurrently with the incurrence of Loans on such date, the total commitments under the Existing Credit Agreements shall have been terminated, and all loans thereunder shall -30- have been repaid in full, together with interest thereon, and all other amounts owing pursuant to the Existing Credit Agreements shall have been repaid in full and the Existing Credit Agreements shall have been terminated and be of no further force or effect (except as to indemnities contained therein which survive the termination of the Existing Credit Agreements in accordance with the terms thereof). 5.02 Conditions Precedent to Each Credit Event. The obligation of each Bank to make any Loans (other than pursuant to a Mandatory Borrowing), and the obligation of each Letter of Credit Issuer to issue Letters of Credit, is subject, at the time of the making of each such Loan and/or the issuance of each such Letter of Credit (except as otherwise hereinafter indicated), to the satisfaction of the following conditions at such time: (a) Effectiveness. The Effective Date shall have occurred. (b) No Default; Representations and Warranties At the time of each Credit Event and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein or in the other Credit Documents (other than, in the case of a CP Refinancing Borrowing, in Section 6.04 and the last sentence of Section 6.09) shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Credit Event. (c) Notice of Borrowing, etc. (i) Prior to the making of each Revolving Loan and each Swingline Loan, the Payments Administrator shall have received a Notice of Borrowing satisfying the requirements of Section 1.03, (ii) prior to the issuance of each Letter of Credit, the Payments Administrator and the Letter of Credit Issuer that is to issue same shall have received a Letter of Credit Request satisfying the requirements of Section 2.02 and (iii) prior to the making of each Competitive Bid Loan, the Payments Administrator shall have received a Notice of Competitive Bid Borrowing satisfying the requirements of Section 1.04(a). The acceptance of the benefits of each Credit Event shall constitute a representation and warranty by each Credit Party to each of the Banks that all of the applicable conditions specified above exist as of that time. All of the certificates, legal opinions and other documents and papers referred to in Section 5.01, unless otherwise specified, shall be delivered to the Payments Administrator at the Payments Administrator's Office for the account of each of the Banks and, except for the Notes, in sufficient counterparts for each of the Banks and shall be satisfactory in form and substance to each Senior Managing Agent. -31- SECTION 6. Representations, Warranties and Agreements. In order to induce the Banks to enter into this Agreement, to make the Loans and issue or participate in Letters of Credit as provided for herein, each of Holdings and the Borrower makes the following representations and warranties to and agreements with the Banks, all of which shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit (with the occurrence of each Credit Event being deemed to constitute a representation and warranty that the matters specified in this Section 6, subject to the exceptions set forth in Section 5.02, are true and correct in all material respects on and as of the date hereof and as of the date of each such Credit Event unless such representation and warranty expressly indicates that it is being made as of any specific date): 6.01 Corporate Status. Each of Holdings and each of its Material Subsidiaries (i) is a duly organized and validly existing corporation or other entity in good standing under the laws of the jurisdiction of its organization and has the corporate or other organizational power and authority to own its property and assets and to transact the business in which it is engaged and (ii) has duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified would have a material adverse effect on the operations, business, properties, assets or financial condition of Holdings and its Subsidiaries taken as a whole. 6.02 Corporate Power and Authority. Each Credit Party has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Credit Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Credit Documents. Each Credit Party has duly executed and delivered each Credit Document to which it is a party and each such Credit Document constitutes the legal, valid and binding obligation of such Person enforceable in accordance with its terms. 6.03 No Violation. Neither the execution, delivery and performance by either Credit Party of the Credit Documents to which it is a party (including, without limitation, the incurrence of Loans by the Borrower hereunder) nor compliance with the terms and provisions thereof, nor the consummation of the transactions contemplated therein (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Holdings or any of its Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of trust, agreement or other instrument to which Holdings or any of its Subsidiaries is a party -32- or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the charter or By-Laws of Holdings or any of its Subsidiaries. 6.04 Litigation. Except as set forth on Annex IV, there are no actions, suits or proceedings pending or threatened with respect to Holdings or any of its Subsidiaries (i) that are reasonably likely to have a material adverse effect on the business, properties, assets, operations, financial condition or prospects of Holdings and its Subsidiaries taken as a whole or (ii) that are reasonably likely to have a material adverse effect on the rights or remedies of the Banks or on the ability of either Credit Party to perform its obligations to them hereunder and under the other Credit Documents to which it is a party. 6.05 Use of Proceeds; Margin Regulations. (a) The proceeds of all Loans shall be utilized by the Borrower (i) to refinance all outstandings under the Existing Credit Agreements and (ii) for general corporate purposes of Holdings and/or its Subsidiaries (including, without limitation, the refinancing of Indebtedness and financing acquisitions). The proceeds of CP Refinancing Borrowings may only be utilized to pay when due Commercial Paper Outstandings. (b) Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. At the time of each Credit Event, not more than 25% of the value of the assets of the Borrower or Holdings and its Subsidiaries on a consolidated basis subject to the restrictions contained in Sections 8.02 and 8.03 will constitute Margin Stock. Notwithstanding the foregoing provisions of this Section 6.05, no proceeds of any Loan will be utilized to purchase any Margin Stock in a transaction, or as part of a series of transactions, the result of which is the ownership by Holdings and/or its Subsidiaries (including, without limitation, the Borrower) of 5% or more of the capital stock of a corporation unless the Board of Directors of such corporation has approved such transaction prior to any public announcement of the purchase, or the intent to purchase, any such Margin Stock. 6.06 Governmental Approvals. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance of any Credit Document or (ii) the legality, validity, binding effect or enforceability of any Credit Document. 6.07 Investment Company Act. Neither Holdings nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. -33- 6.08 True and Complete Disclosure. All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of either Credit Party or any of its Subsidiaries in writing to any Senior Managing Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of such Persons in writing to any Bank will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. 6.09 Financial Condition; Financial Statements. The consolidated balance sheet of each of Holdings and its Subsidiaries and the Borrower and its Subsidiaries at December 31, 1995 and the related consolidated statements of income and cash flows for the fiscal year ended as of said date, which statements have been examined by Deloitte & Touche, independent certified public accountants, who delivered an unqualified opinion in respect thereof, copies of which have heretofore been furnished to each Bank, present fairly the consolidated financial position of each of Holdings and the Borrower, as the case may be, at the date of said statements and the results of operations for the period covered thereby. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements. There has been no material adverse change in the operations, business, property, assets or financial condition of Holdings and its Subsidiaries taken as a whole or of the Borrower and its Subsidiaries taken as a whole from that of Holdings and its Subsidiaries or the Borrower and its Subsidiaries, as the case may be, on December 31, 1995. 6.10 Tax Returns and Payments. Each of Holdings and its Subsidiaries has filed all federal income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, other than those not yet delinquent, those contested in good faith and those for which RJRN is indemnifying Holdings pursuant to the Tax Sharing Agreement. Holdings and each of its Subsidiaries have paid, or have provided adequate reserves (in the good faith judgment of the management of Holdings) for the payment of, all federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. 6.11 Compliance with ERISA. Each Plan is in substantial compliance with ERISA and the Code; no Reportable Event has occurred with respect to any Plan; no Plan is insolvent or in reorganization, no Plan has an Unfunded Current Liability, and no Plan has an accumulated or waived funding deficiency or permitted decreases in its funding standard account within the meaning of Section 412 of the Code; neither Holdings, any Subsidiary nor any ERISA Affiliate has incurred any material liability to or on account of -34- a Plan pursuant to Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or Section 4971 or 4975 of the Code; no proceedings have been instituted to terminate any Plan; no condition exists which presents a material risk to Holdings or any Subsidiary of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code, except to the extent that all events described in the preceding clauses of this Section 6.11 and then in existence would not, in the aggregate, be likely to have a material adverse effect on the business, operations or financial condition of Holdings and its Subsidiaries taken as a whole. With respect to Plans that are multi-employer plans (within the meaning of Section 3(37) of ERISA) and Plans which are not currently maintained or contributed to by Holdings, any Subsidiary or any ERISA Affiliate, the representations and warranties in this Section are made to the best knowledge of Holdings. 6.12 Subsidiaries. Annex III hereto lists each Material Subsidiary of Holdings (and the direct and indirect ownership interest of Holdings therein), in each case existing on the Effective Date. All ownership percentages referred to in Annex III are calculated without regard to directors' or nominees' qualifying shares. 6.13 Patents, etc. Holdings and each of its Subsidiaries have obtained all material patents, trademarks, servicemarks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted. 6.14 Pollution and Other Regulations. Holdings and each of its Subsidiaries are in material compliance with all material laws and regulations relating to pollution and environmental control, equal employment opportunity and employee safety in all domestic jurisdictions in which Holdings and each of its Subsidiaries is presently doing business, and Holdings will comply and cause each of its Subsidiaries to comply with all such laws and regulations which may be imposed in the future in jurisdictions in which Holdings or such Subsidiary may then be doing business other than in each case those the non-compliance with which would not have a material adverse effect on the business, assets, properties or financial condition of Holdings and its Subsidiaries taken as a whole. 6.15 Properties. Holdings and each of its Subsidiaries have good title to all properties owned by Holdings or such Subsidiary and a valid leasehold interest in all properties leased by Holdings or such Subsidiary, in each case, that are necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted, free and clear of all Liens, other than as permitted by this Agreement. SECTION 7. Affirmative Covenants. Holdings hereby covenants and agrees that on the Effective Date and thereafter, for so long as this Agreement is in effect and until the Commitments and each Letter of Credit have terminated and the Loans and -35- Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 7.01 Information Covenants. Holdings will furnish to each Bank: (a) Annual Financial Statements. As soon as available and in any event within 100 days after the close of each fiscal year of Holdings, to the extent prepared to comply with SEC requirements, a copy of the SEC Form 10-Ks filed by Holdings and the Borrower with the SEC for such fiscal year, or, if no such Form 10-K was so filed by Holdings and the Borrower for such fiscal year, the consolidated balance sheet of Holdings and its Subsidiaries and of the Borrower and its Subsidiaries, as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for such fiscal year, setting forth comparative consolidated figures as of the end of and for the preceding fiscal year, and examined by independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit or as to the status of Holdings or the Borrower or any of their respective Subsidiaries as a going concern, together in any event with a certificate of such accounting firm stating that in the course of its regular audit of the business of Holdings and the Borrower, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof. (b) Quarterly Financial Statements. As soon as available and in any event within 55 days after the close of each of the first three quarterly accounting periods in each fiscal year of Holdings, to the extent prepared to comply with SEC requirements, a copy of the SEC Form 10-Qs filed by Holdings and the Borrower with the SEC for each such quarterly period, or, if no such Form 10-Q was so filed by Holdings and the Borrower with respect to any such quarterly period, the consolidated balance sheet of Holdings and its Subsidiaries and of the Borrower and its Subsidiaries, as at the end of such quarterly period and the related consolidated statements of income for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and the related consolidated statement of cash flows for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative consolidated figures as of the end of and for the related periods in the prior fiscal year or, in the case of such consolidated balance sheet, for the last day of the prior fiscal year, all of which shall be certified by the Chief Financial Officer, Controller, Chief Accounting Officer or other Authorized Officer of Holdings or -36- the Borrower, as the case may be, subject to changes resulting from audit and normal year-end audit adjustments. (c) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 7.01(a) and (b), a certificate of the Chief Financial Officer, Controller, Treasurer, Chief Accounting Officer or other Authorized Officer of Holdings to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate shall set forth the calculations required to establish whether Holdings and its Subsidiaries were in compliance with the provisions of Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 as at the end of such fiscal period or year, as the case may be. (d) Notice of Default or Litigation. Promptly, and in any event within three Business Days after any senior financial or legal officer of either Credit Party obtains knowledge thereof, notice of (x) the occurrence of any event which constitutes a Default or Event of Default which notice shall specify the nature thereof, the period of existence thereof and what action Holdings proposes to take with respect thereto and (y) any litigation or governmental proceeding pending against or affecting Holdings or any of its Subsidiaries which is likely to have a material adverse effect on the business, properties, assets, financial condition or prospects of Holdings and its Subsidiaries taken as a whole or the ability of either Credit Party to perform its obligations hereunder or under any other Credit Document. (e) Credit Rating Changes. Promptly after any senior financial or legal officer of either Credit Party obtains knowledge thereof, notice of any change in the Applicable Credit Rating assigned by either Rating Agency. (f) Other Information. Promptly upon transmission thereof, copies of any filings and registrations with, and reports to, the Securities and Exchange Commission or any successor thereto (the "SEC") by Holdings, the Borrower or any of their respective Subsidiaries (other than amendments to any registration statement (to the extent such registration statement, in the form it becomes effective, is delivered to the Banks), exhibits to any registration statement and any registration statements on Form S-8) and copies of all financial statements, proxy statements, notices and reports that Holdings, the Borrower or any of their respective Subsidiaries shall send to analysts or the holders of any publicly issued debt of Holdings and/or any of its Subsidiaries in their capacity as such holders (in each case to the extent not theretofore delivered to the Banks pursuant to this Agreement) and, with reasonable promptness, such other information or documents (financial or otherwise) as any Senior Managing Agent on its own behalf or on behalf of the Required Banks may reasonably request from time to time. -37- 7.02 Books, Records and Inspections. Holdings will, and will cause each of its Subsidiaries to, permit, upon reasonable notice to the Chief Financial Officer, Controller or any other Authorized Officer of the Borrower, officers and designated representatives of any Senior Managing Agent or the Required Banks to visit and inspect any of the properties or assets of Holdings and any of its Subsidiaries in whomsoever's possession, and to examine the books of account of Holdings and any of its Subsidiaries and discuss the affairs, finances and accounts of Holdings and of any of its Subsidiaries with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as any Senior Managing Agent or the Required Banks may desire. 7.03 Insurance. Holdings will, and will cause each of its Subsidiaries to, at all times be covered by or maintain in full force and effect insurance in such amounts, covering such risks and liabilities and with such deductibles or self-insured retentions as are in accordance with normal industry practice. 7.04 Payment of Taxes. Holdings will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which material penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien or charge upon any properties of Holdings or any of its Subsidiaries, provided that neither Holdings nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves (in the good faith judgment of the management of Holdings) with respect thereto in accordance with GAAP. 7.05 Consolidated Corporate Franchises. Holdings will do, and will cause each of its Material Subsidiaries to do, or cause to be done, all things necessary to preserve and keep in full force and effect its existence, rights and authority, provided that any transaction permitted by Section 8.02 will not constitute a breach of this Section 7.05. 7.06 Compliance with Statutes, etc. Holdings will, and will cause each Subsidiary to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls) other than those the non-compliance with which would not have a material adverse effect on the business, properties, assets or financial condition of Holdings and its Subsidiaries taken as a whole or on the ability of either Credit Party to perform its obligations under any Credit Document. -38- 7.07 ERISA. As soon as possible and, in any event, within 10 days after Holdings or any Subsidiary knows or has reason to know of the occurrence of any of the following, Holdings will deliver to each of the Banks a certificate of the Chief Financial Officer, Treasurer or Controller of Holdings setting forth details as to such occurrence and the action, if any, which Holdings, such Subsidiary or an ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by Holdings, such Subsidiary, such ERISA Affiliate, the PBGC, a Plan participant (other than notices relating to an individual participant's benefits) or the Plan administrator with respect thereto: that a Reportable Event has occurred, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan, that a Plan which has an Unfunded Current Liability has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, that a Plan has an Unfunded Current Liability giving rise to a lien under ERISA or the Code, that proceedings may be or have been instituted to terminate a Plan which has an Unfunded Current Liability, that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan, or that Holdings, any Subsidiary or any ERISA Affiliate will or may incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or with respect to a Plan under Section 4971 or 4975 of the Code or Section 409 or 502(i) or 502(l) of ERISA. Upon request of a Bank, Holdings will deliver to such Bank a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Banks pursuant to the first sentence hereof, copies of any notices received by Holdings or any Subsidiary shall be delivered to the Banks no later than 10 days after the later of the date such notice has been filed with the Internal Revenue Service or the PBGC, given to Plan participants (other than notices relating to an individual participant's benefits) or received by Holdings or such Subsidiary. 7.08 Good Repair. Holdings will, and will cause each of its Subsidiaries to, ensure that its properties and equipment used or useful in its business in whomsoever's possession they may be, are kept in good repair, working order and condition, normal wear and tear excepted, and that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner customary for companies in similar businesses. 7.09 End of Fiscal Years; Fiscal Quarters. Holdings will, for financial reporting purposes, cause (i) each of its and the Borrower's fiscal years to end on December 31 of each year, (ii) each of its and the Borrower's fiscal quarters to end on -39- March 31, June 30, September 30 and December 31 of each year and (iii) each of the Subsidiaries of the Borrower to maintain the accounting periods maintained by such Subsidiary on the Effective Date, consistent with the past practice and procedures of each such Subsidiary, provided that any of the foregoing fiscal or reporting periods may be changed if (x) Holdings gives the Banks 30 days' prior written notice of such proposed change and (y) prior to effecting such change Holdings and the Majority SMA shall have agreed upon adjustments, if any, to Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 (and the definitions used therein) the sole purpose of which shall be to give effect to the proposed change in fiscal or accounting periods (it being understood and agreed that to the extent that Holdings and the Majority SMA cannot agree on appropriate adjustments to such Sections (or that no adjustments are necessary), the proposed change may not be effected). 7.10 Commercial Paper and Competitive Bid Loan Outstandings. On the date of the delivery by the Borrower of any Notice of Borrowing, Notice of Competitive Bid Borrowing or Letter of Credit Request at any time when the Borrower shall have knowledge that a mandatory prepayment is required pursuant to Section 4.02(A)(a) of this Agreement and, in any event, on the last Business Day of each fiscal quarter of the Borrower, the Borrower will furnish to the Payments Administrator (with an information copy to each of the other Senior Managing Agents) a statement setting forth the aggregate amount of Commercial Paper Outstandings and the aggregate outstanding principal amount of Competitive Bid Loans at such time. SECTION 8. Negative Covenants. Holdings hereby covenants and agrees that on the Effective Date and thereafter, for so long as this Agreement is in effect and until the Commitments and each Letter of Credit have terminated and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 8.01 Changes in Business. Except as otherwise permitted by Section 8.02, Holdings and its Subsidiaries, taken as a whole, will not substantively alter the character of their business from that conducted by Holdings and its Subsidiaries taken as a whole at the Effective Date. 8.02 Consolidation, Merger, Sale of Assets, etc. Holdings will not, and will not permit any Subsidiary to, wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, sell or otherwise dispose of all or a substantial part of its property or assets or agree to do any of the foregoing at any future time, except that any Subsidiary of Holdings may be merged or consolidated with or into, or be liquidated into, any Person (including Holdings, but only if the Borrower has first merged into or consolidated with Holdings) and any such Subsidiary may convey, lease, sell or transfer all or any part of its business, properties and assets to any such Person, provided that in the event of a merger, consolidation or liquidation of the Borrower with or into any -40- such Person, the surviving corporation, if not the Borrower, shall execute and deliver agreements assuming the obligations of the Borrower under this Agreement and the Notes, which assumption agreements and all related actions and documentation shall be in form and substance satisfactory to the Senior Managing Agents; provided further that if any of the foregoing transactions involves a Material Subsidiary, after giving effect to such transaction, no Event of Default would result therefrom. Notwithstanding anything to the contrary contained in this Section 8.02, no Restricted Sale shall be permitted. 8.03 Liens. Holdings will not, and will not permit any of its Subsidiaries to, (x) create, incur, assume or suffer to exist any Lien in respect of Indebtedness upon any property or assets of any kind (real or personal, tangible or intangible) of Holdings or any such Subsidiary whether now owned or hereafter acquired or (y) assign any right to receive income as security for the payment of Indebtedness, except: (a) Liens existing on the Effective Date securing Indebtedness outstanding on the Effective Date in an aggregate principal amount not exceeding $150,000,000 and Liens securing extensions, renewals or refinancings of any of the Indebtedness referred to in this clause (a) to the extent that any such Indebtedness (x) is not increased from that outstanding at the time of any such extension, renewal or refinancing and (y) is not secured by Liens on any additional assets; (b) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business and which are within the general parameters customary in the industry, securing obligations under Permitted Commodities Agreements; (c) Liens securing reimbursement obligations of the Borrower and its Subsidiaries with respect to trade letters of credit incurred in the ordinary course of business, which are to be repaid in full not more than one year after the date originally incurred to finance the purchase of goods by the Borrower or any of its Subsidiaries, provided that such Liens shall attach only to documents or other property relating to such letters of credit and the products and proceeds thereof; (d) Liens (x) arising pursuant to purchase money mortgages securing Indebtedness (and any extensions, renewals or refinancings of such Indebtedness to the extent not increasing the outstanding principal amount thereof), representing the purchase price (or financing of the purchase price within 180 days after the respective purchase) of assets acquired after the Effective Date, provided that (i) any such Liens attach only to the assets so purchased and (ii) the Indebtedness (including any such permitted extensions, renewals or refinancings) secured by any such Lien does not exceed 100%, nor is less than 70%, of the purchase price of the property being purchased and (y) existing on specific tangible assets at the time -41- acquired by Holdings or any of its Subsidiaries or on assets of a Person at the time such Person first becomes a Subsidiary (together with Liens securing any extensions, renewals or refinancings of the Indebtedness secured thereby to the extent not increasing the outstanding principal amount thereof), provided that (i) any such Liens were not created at the time of or in contemplation of the acquisition of such assets or Person by Holdings and/or its Subsidiaries, (ii) in the case of any such acquisition of a Person, any such Lien attaches only to a specific tangible asset of such Person and not assets of such Person generally and (iii) the Indebtedness secured by any such Lien does not exceed 100% of the fair market value of the asset to which such Lien attaches, determined at the time of the acquisition of such asset or at the time such Person first becomes a Subsidiary, as the case may be; and (e) Liens and assignments not otherwise permitted by the foregoing clauses (a) through (d) securing any Indebtedness of Holdings and/or its Subsidiaries, provided that the aggregate principal amount of Indebtedness on a consolidated basis secured by Liens permitted by this clause (e) shall not exceed an amount equal to 7-1/2% of Consolidated Net Worth at any time. 8.04 Indebtedness. Holdings will not permit any of its Subsidiaries (other than the Borrower) to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Specified Permitted Existing Debt and any extensions, renewals or refinancings of any of the Indebtedness referred to in this clause (a), either by the original obligor thereunder or by another Subsidiary to the extent that such Indebtedness is not increased from that outstanding at the time of any such extension, renewal or refinancing; (b) Obligations under letters of credit described in Section 8.03(c); (c) Indebtedness in respect of Permitted Currency Agreements and Permitted Commodities Agreements; (d) Obligations of Subsidiaries of the Borrower under letters of credit incurred in the ordinary course of business in connection with the purchase of products or goods for use in the day-to-day operations of the Borrower and its Subsidiaries consistent with the Borrower's past practices or then current industry practices; (e) Indebtedness secured by Liens permitted by Section 8.03(d); -42- (f) (i) Indebtedness owing by any such Subsidiary to Holdings or any Wholly-Owned Subsidiary of Holdings and (ii) Indebtedness of any such Subsidiary (x) consisting of Contingent Obligations in respect of, or (y) constituting reimbursement obligations under letters of credit issued in support of, obligations of any Subsidiary of Holdings (other than the Borrower) to the extent such other obligations are permitted by this Agreement; (g) Indebtedness of any such Subsidiary in any manner guaranteeing or intended to guarantee, whether directly or indirectly, any leases, dividends or other monetary obligations of any Person in which such Subsidiary has an ownership interest, provided that the aggregate maximum stated or determinable amount (or, if not stated or determinable, the maximum reasonably anticipated liability in respect of such Indebtedness as determined in good faith by such Subsidiary) of all Indebtedness permitted pursuant to this clause (g) shall not exceed at any time an amount in excess of $150,000,000; (h) Indebtedness of any such Subsidiary with respect to which neither Holdings nor the Borrower (i) is a co-obligor or (ii) has any Contingent Obligation; and (i) Indebtedness not otherwise permitted by the foregoing clauses (a) through (h), provided that the aggregate outstanding principal amount of Indebtedness on a consolidated basis incurred pursuant to this clause (i) shall not exceed an amount equal to the sum of (x) $250,000,000 plus (y) 7-1/2% of Consolidated Net Worth at any time. 8.05 Limitation on Restricted Payments. Neither Holdings nor the Borrower will (A) declare or pay any dividends in respect of its capital stock (other than dividends payable solely in its common stock and all dividends, whether in cash or in kind, on any preferred stock) or return any capital to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration, any shares of any class of its capital stock now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such shares), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of Holdings or the Borrower now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by Holdings or the Borrower with respect to its capital stock) (all of the foregoing "Dividends"), or (B) purchase or otherwise acquire for consideration any shares of any class of the capital stock of any RJRN Entity (now or hereafter outstanding) (or any options or warrants or stock appreciation rights issued by any RJRN Entity with respect to its capital stock) or permit any of its Subsidiaries to do any of the foregoing or (C) make -43- any loan or advance to, or investment in, any RJRN Entity, or permit any of its Subsidiaries to do any of the foregoing (all of clauses (A), (B) and (C), collectively, "Restricted Payments"), provided that, except with respect to the following clauses (i) and (v), so long as no Event of Default then exists: (i) each of Holdings and the Borrower may (x) pay cash in lieu of issuing fractions of shares of its common stock at a time when it issues shares of its common stock upon the exercise of any warrants or options or upon the conversion or redemption of any convertible or redeemable preferred or preference stock and (y) repurchase its common stock and preferred stock (and/or options or warrants in respect thereof) pursuant to, and in accordance with the terms of, management and/or employee stock plans; (ii) Holdings may declare and pay, or otherwise effect, any other Dividend and the Borrower may declare and pay, or otherwise effect, any other Dividend to Persons other than Holdings, provided that the aggregate amount of any such Dividend at the time declared, when added to all Dividends theretofore declared pursuant to this clause (ii) after April 28, 1995, shall not exceed an amount equal to the sum of (x) $300,000,000 plus (y) 50% of Cumulative Consolidated Net Income determined at the time of the declaration thereof, provided that such Dividend is paid within 45 days of the making of such declaration; (iii) the Borrower and any of its Subsidiaries may make additional loans and advances to one or more RJRN Entities that is a Foreign Subsidiary, provided that the aggregate principal amount of such loans and advances made pursuant to this clause (iii) shall not exceed $100,000,000 at any time; (iv) the Borrower may pay Dividends to Holdings; and (v) each of Holdings and the Borrower may issue and exchange shares of any class or series of its common stock now or hereafter outstanding for shares of any other class or series of its common stock at the time outstanding. 8.06 Transactions with Affiliates. Holdings will not, and will not permit any Subsidiary to, enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any Affiliate (other than a Nabisco Entity) other than on terms and conditions substantially as favorable to Holdings or such Subsidiary as would be obtainable by Holdings or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate, provided that the foregoing restrictions shall not apply to: (i) customary fees paid to members of the Board of Directors of Holdings and of its Subsidiaries and (ii) the RJRN Agreements. -44- 8.07 Consolidated Net Worth. Holdings will not permit Consolidated Net Worth at any time to be less than an amount equal to the sum of (x) $3,750,000,000 plus (y) the sum of 25% of Consolidated Net Income, if positive, for each prior fiscal year of Holdings, if any, ending after January 1, 1996. 8.08 Leverage Ratio. Holdings will not permit the ratio of (i) Adjusted Consolidated Debt to (ii) Adjusted Operating Income for any Test Period to be more than 3.95 to 1.00. 8.09 Cash Interest Coverage Ratio. Holdings will not permit the ratio of (i) Adjusted Operating Income to (ii) Consolidated Cash Interest Expense for any Test Period to be less than 3.00 to 1.00. SECTION 9. Events of Default. Upon the occurrence of any of the following specified events (each an "Event of Default"): 9.01 Payments. The Borrower shall (i) default in the payment when due of any principal of the Loans or (ii) default, and such default shall continue for five or more days, in the payment when due of any interest on the Loans or any Fees or any Unpaid Drawings or any other amounts owing hereunder or under any Note; or 9.02 Representations, etc. Any representation, warranty or statement made or deemed made by either Credit Party herein or in any other Credit Document or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 9.03 Covenants. Either Credit Party shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Section 7.10 or 8, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 9.01, 9.02 or clause (a) of this Section 9.03) contained in this Agreement and such default shall continue unremedied for a period of at least 30 days after notice to the Borrower by any Senior Managing Agent or the Required Banks; or 9.04 Default Under Other Agreements. (a) Holdings or any of its Subsidiaries shall (i) default in any payment with respect to any Indebtedness (other than the Obligations) in excess of $75,000,000 individually or $150,000,000 in the aggregate, for Holdings and its Subsidiaries, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any -45- other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice or lapse of time is required, provided that the existence of any Event of Default under this Section 9.04(a)(ii) with respect to Indebtedness outstanding under the 364 DF Credit Agreement shall be determined after giving effect to any notice or lapse of time provided to the Borrower in the 364 DF Credit Agreement), any such Indebtedness to become due prior to its stated maturity; or (b) any such Indebtedness shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment or as a mandatory prepayment (unless such required prepayment or mandatory prepayment results from a default or an event of the type that constitutes an Event of Default), prior to the stated maturity thereof, provided that to the extent Holdings or any of its Subsidiaries incurs (including pursuant to a committed facility not borrowed thereunder but with commitments aggregating) or issues Indebtedness in an aggregate principal amount of at least $100,000,000 at any time that contains any default covering any action, failure to act and/or other circumstances of or affecting any Affiliate of Holdings (other than the Borrower and its Subsidiaries) not included as Events of Default hereunder (other than any of the foregoing relating solely to Holdings and its Subsidiaries), then this Section 9.04 shall be deemed to be automatically amended to include such defaults effective as of the date of the incurrence or issuance of such Indebtedness (it being agreed that the Borrower and Holdings will cooperate with the Senior Managing Agents to obtain an amendment to this Agreement, in form and substance satisfactory to the Majority SMA, formalizing the inclusion of such defaults under this Agreement); or 9.05 Bankruptcy, etc. Holdings or any of its Material Subsidiaries (each a "Designated Party") shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against a Designated Party and the petition is not controverted within 10 days after service of notice of such case on such Designated Party, or is not dismissed within 60 days after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of a Designated Party; or a Designated Party commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to a Designated Party; or there is commenced against a Designated Party any such proceeding which remains undismissed for a period of 60 days; or a Designated Party is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or a Designated Party suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or a Designated Party makes a general assignment for the benefit of creditors; or -46- any corporate action is taken by a Designated Party for the purpose of effecting any of the foregoing; or 9.06 ERISA. (a) A single-employer plan (as defined in Section 4001 of ERISA) maintained or contributed to by Holdings or any of its Subsidiaries or any ERISA Affiliate shall fail to maintain the minimum funding standard required by Section 412 of the Code for any plan year or part thereof or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or shall provide security to induce the issuance of such waiver or extension, (b) any Plan is or shall have been terminated or the subject of termination proceedings under ERISA or an event has occurred entitling the PBGC to terminate a Plan under Section 4042(a) of ERISA, (c) any Plan shall have an Unfunded Current Liability, (d) Holdings or any Subsidiary or any ERISA Affiliate has incurred or is likely to incur a material liability to or on account of a termination of or a withdrawal from a Plan under Section 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA, (e) Holdings or any Subsidiary has incurred, after the Effective Date, liabilities (after giving effect to any reserves applicable thereto and maintained on the Effective Date) pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) which provide benefits to retired employees (other than as required by Section 601 of ERISA) or employee pension benefit plans (as defined in Section 3(2) of ERISA) (except in each case solely as a result of a change in estimate or adjustment of liabilities existing on the Effective Date upon the adoption or implementation of Financial Accounting Statement 106), or (f) Holdings or any Subsidiary or any ERISA Affiliate has incurred a liability under Section 409, 502(i) or 502(l) of ERISA or Section 4971 or 4975 of the Code; and there shall result from any such event or events described in the preceding clauses of this Section 9.06 the imposition of a Lien upon the assets of Holdings or any Subsidiary, the granting of a security interest, or a liability or a material risk of incurring a liability, which Lien, security interest or liability would have a material adverse effect upon the business, operations or financial condition of Holdings and its Subsidiaries taken as a whole; or 9.07 Judgments. One or more judgments or decrees shall be entered against Holdings or any of its Material Subsidiaries involving a liability of $75,000,000 or more in the case of any one such judgment or decree and $150,000,000 or more in the aggregate for all such judgments and decrees for Holdings and its Material Subsidiaries (to the extent not paid or fully covered by insurance) and any such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or 9.08 Guaranty. The Guaranty or any provision thereof shall cease to be in full force or effect, or the Guarantor or any Person acting by or on behalf of the Guarantor shall deny or disaffirm the Guarantor's obligations under the Guaranty or the -47- Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Guaranty; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, any Senior Managing Agent shall, upon the written request of the Required Banks, by written notice to Holdings and the Borrower, take any or all of the following actions, without prejudice to the rights of any Senior Managing Agent or any Bank to enforce its claims against the Borrower, except as otherwise specifically provided for in this Agreement (provided that if an Event of Default specified in Section 9.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by any Senior Managing Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Commitment terminated, whereupon the Commitment and Swingline Commitment, if any, of each Bank shall forthwith terminate immediately and any Facility Fee and Utilization Fee theretofore accrued shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and all Obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by Holdings and the Borrower; (iii) terminate any Letter of Credit which may be terminated in accordance with its terms; and (iv) direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default specified in Section 9.05 with respect to the Borrower, it will pay) to the Payments Administrator at the Payments Administrator's Office such additional amounts of cash, to be held as security for the Borrower's reimbursement obligations for Drawings that may subsequently occur thereunder, equal to the aggregate Stated Amount of all Letters of Credit issued and then outstanding. Notwithstanding anything contained in the foregoing paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to the preceding paragraph, the Borrower shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Defaults (other than non-payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to Section 12.12, then Non-Defaulting Banks holding at least 66-2/3% of the Adjusted Total Commitment (which Banks shall include in any event the Majority SMA), by written notice to Holdings and the Borrower, may at their option rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind the Banks to a decision which may be made at the election of the aforesaid percentage of the Banks and are not intended -48- to benefit the Borrower and do not grant the Borrower the right to require the Banks to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. SECTION 10. Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: "Absolute Rate" shall mean an interest rate (rounded to the nearest .0001) expressed as a decimal. "Absolute Rate Borrowing" shall mean a Competitive Bid Borrowing with respect to which the Borrower has requested that the Banks offer to make Competitive Bid Loans at Absolute Rates. "Adjusted Consolidated Debt" shall mean the sum (without duplication) of (i) notes payable, (ii) the current maturities of long-term debt, (iii) long-term debt and (iv) all other amounts representing liabilities with respect to pay-in-kind interest to the extent included in "Other Liabilities," all as determined for Holdings and its Subsidiaries in accordance with GAAP, it being understood that determinations of the amounts specified in clauses (i), (ii), (iii) and (iv) shall be made on a consistent basis with the methodology utilized by Holdings to determine such amounts on the Effective Date. "Adjusted Operating Income" shall mean for any period (x) the consolidated operating income of Holdings and its Subsidiaries for such period plus (y) the sum of the consolidated depreciation expense and consolidated amortization expense of Holdings and its Subsidiaries for such period, all as determined in accordance with GAAP, it being understood that the determination of the amount specified in clauses (x) and (y) shall be made on a consistent basis with the methodology utilized by Holdings to determine such amount on the Effective Date, provided that (i) for the purposes of Section 8.08 only, for any Test Period during which any acquisition of any Person or business occurs, Adjusted Operating Income shall give pro forma effect to such acquisition as if it occurred on the first day of such Test Period and (ii) for all purposes, for any period which includes any Restructuring Charge Quarter there shall be excluded in determining Adjusted Operating Income any portion of the 1996 Restructuring Charge which reduced the consolidated operating income of Holdings and its Subsidiaries for such period. "Adjusted Percentage" shall mean (x) at a time when no Bank Default exists, for each Bank such Bank's Percentage and (y) at a time when a Bank Default exists (i) for each Bank that is a Defaulting Bank, zero and (ii) for each Bank that is a Non-Defaulting Bank, the percentage determined by dividing such Bank's Commitment at such time by the Adjusted Total Commitment at such time, it being understood that all references herein to Commitments at a time when the Total Commitment has been terminated shall be references -49- to the Commitments in effect immediately prior to such termination, provided that (A) no Bank's Adjusted Percentage shall change upon the occurrence of a Bank Default from that in effect immediately prior to such Bank Default if after giving effect to such Bank Default, and any repayment of Loans at such time pursuant to Section 4.02(A) or otherwise, the sum of (i) the aggregate outstanding principal amount of Loans plus (ii) the Letter of Credit Outstandings exceeds the Adjusted Total Commitment, (B) the changes to the Adjusted Percentage that would have become effective upon the occurrence of a Bank Default but that did not become effective as a result of the preceding clause (A) shall become effective on the first date after the occurrence of the relevant Bank Default on which the sum of (i) the aggregate outstanding principal amount of the Loans plus (ii) the Letter of Credit Outstandings is equal to or less than the Adjusted Total Commitment and (C) if (i) a Non-Defaulting Bank's Adjusted Percentage is changed pursuant to the preceding clause (B) and (ii) any repayment of such Bank's Loans that were made during the period commencing after the date of the relevant Bank Default and ending on the date of such change to its Adjusted Percentage must be returned to the Borrower as a preferential or similar payment in any bankruptcy or similar proceeding of the Borrower, then the change to such Non-Defaulting Bank's Adjusted Percentage effected pursuant to said clause (B) shall be reduced to that positive change, if any, as would have been made to its Adjusted Percentage if (x) such repayments had not been made and (y) the maximum change to its Adjusted Percentage would have resulted in the sum of the outstanding principal of Revolving Loans made by such Bank plus such Bank's new Adjusted Percentage of the outstanding principal amount of Swingline Loans and of Letter of Credit Outstandings equalling such Bank's Commitment at such time. "Adjusted Total Commitment" shall mean at any time the Total Commitment less the aggregate Commitments of all Defaulting Banks. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 20% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Outstandings" shall have the meaning provided in Section 4.02(A)(a). "Agreement" shall mean this Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. -50- "Agreement of Commitment Increase" shall mean an agreement in the form of Exhibit D-3, appropriately completed. "Applicable Credit Rating" shall mean the highest rating level (a rating level being, e.g., each of BBB-, BBB and BBB+, in the case of S&P) assigned by each Rating Agency to any of the Long Term Debt Issues of Holdings or the Borrower. "Applicable Eurodollar Margin" shall mean, in respect of each Interest Period commencing during a period set forth below, the percentage set forth below opposite such period below: Applicable Period Eurodollar Margin ------ ----------------- NIG Period .525% Minimum Investment .325% Grade Period Increased Investment Grade .250% Period Maximum Investment .225% Grade Period "Applicable Facility Fee Percentage" shall mean, at any time during a period set forth below, the percentage set forth opposite such period below: Applicable Facility Period Fee Percentage ------ -------------- NIG Period .200% Minimum Investment .150% Grade Period Increased Investment Grade .125% Period Maximum Investment .100% Grade Period -51- "Applicable Facing Fee Percentage" shall mean, with respect to any Letter of Credit, such percentage or percentages as may be agreed to by the Borrower and the Letter of Credit Issuer issuing such Letter of Credit at the time of the issuance thereof. "Applicable Utilization Fee Percentage" shall mean, at any time during a period set forth below, the percentage set forth opposite such period below: Applicable Period Utilization Fee Percentage ------ -------------------------- NIG Period .250% Minimum Investment .125% Grade Period Increased Investment Grade 0% Period Maximum Investment 0% Grade Period "Approved Alternate Currency" shall mean Canadian Dollars, Pounds Sterling, Dutch Guilders, Deutsche Marks, Japanese Yen, French Francs, Swiss Francs and Belgian Francs. "Assignment Agreement" shall have the meaning provided in Section 12.04(b)(A). "Authorized Officer" shall mean any senior officer of Holdings or the Borrower, as the case may be, designated as such in writing to the Senior Managing Agents by Holdings or the Borrower, in each case to the extent acceptable to the Majority SMA. "Bank" shall have the meaning provided in the first paragraph of this Agreement. "Bank Default" shall mean (i) the refusal (which has not been retracted) of a Bank to make available its portion of any Borrowing or to fund its portion of any unreimbursed payment under Section 2.03(c) or (ii) a Bank having notified any Senior Managing Agent and/or the Borrower that it does not intend to comply with its obligations under Section 1.01(A) or 1.01(C) or under Section 2.03(c), in the case of either clause (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Bank at the direction or request of any regulatory agency or authority. "Bankruptcy Code" shall have the meaning provided in Section 9.05. -52- "Base Rate" shall mean, for any day, the average of the publicly announced prime rates, base rates and/or reference rates on such date of BTCo, Chase and Citibank. "Bidder Bank" shall mean each Bank that has notified in writing (and has not withdrawn such notice) the Payments Administrator that it desires to participate generally in the bidding arrangements relating to Competitive Bid Borrowings. "Borrower" shall have the meaning provided in the first paragraph of this Agreement and shall also include any Person which is the surviving corporation after giving effect to any transaction permitted by Section 8.02 involving the Borrower. "Borrowing" shall mean and include (i) the incurrence of Swingline Loans from the Swingline Lenders on a pro rata basis on a given date, (ii) the incurrence of one Type of Loan by the Borrower from all of the Banks on a pro rata basis on a given date (or resulting from conversions on a given date), having in the case of Eurodollar Loans the same Interest Period, provided that Reference Rate Loans incurred pursuant to Section 1.11(b) shall be considered part of any related Borrowing of Eurodollar Loans and (iii) a Competitive Bid Borrowing. "BTCo" shall mean Bankers Trust Company and any successor corporation thereto by merger, consolidation or otherwise. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the interbank Eurodollar market. "Capital Lease," as applied to any Person, shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of Holdings or any of its Subsidiaries in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Change of Control" shall mean and include (a) at any time Continuing Directors shall not constitute a majority of the Board of Directors of Holdings or the Borrower; and/or (b) any Person or group (as such term is defined in Section 13(d)(3) of -53- the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than RJRN, Holdings and its Subsidiaries, shall acquire, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 and 13d-5 under the Exchange Act) of 30% or more, on a fully diluted basis, of the economic or voting interest in Holdings' capital stock; and/or (c) Holdings shall own less than 80% on a fully diluted basis of (x) the economic interest of the common stock of the Borrower or (y) the voting interest of the capital stock of the Borrower. "Chase" shall mean The Chase Manhattan Bank and any successor corporation thereto by merger, consolidation or otherwise. "Citibank" shall mean Citibank, N.A. and any successor corporation thereto by merger, consolidation or otherwise. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Commercial Paper Outstandings" shall mean, at any time during a CP Period, an amount equal to (I) the sum of (x) the face amount of all commercial paper previously issued by Holdings and/or any of its Subsidiaries (other than Nabisco Ltd) at a discount and outstanding at such time plus (y) the principal amount of all commercial paper previously issued by Holdings and/or any of its Subsidiaries (other than Nabisco Ltd) on an interest bearing basis and outstanding at such time, in each case that will be refinanced, if necessary, pursuant to a CP Refinancing Borrowing less (II) the Commercial Paper Outstandings at such time as defined in the 364 DF Credit Agreement, provided that the Commercial Paper Outstandings that may be refinanced pursuant to CP Refinancing Borrowings shall not exceed at any time an amount equal to (i) the Total Commitment less (ii) the then aggregate principal amount of all Loans made pursuant to CP Refinancing Borrowings. "Commitment" shall mean, with respect to each Bank, the amount set forth opposite such Bank's name in Annex I hereto, as the same may be increased from time to time pursuant to Section 1.16 and/or modified from time to time pursuant to Section 3.02, 3.03, 9 and/or 12.04(b)(A). "Commitment Termination Date" shall mean December 31, 1996. "Committed Loans" shall mean Revolving Loans and Swingline Loans. -54- "Commodities Agreement" shall mean any forward contract, futures contract, option contract or similar agreement or arrangement, in each case intended to protect the Persons entering into same from fluctuations in the price of, or shortage of supply of, commodities. "Competitive Bid Borrowing" shall mean a Borrowing of Competitive Bid Loans pursuant to Section 1.04 with respect to which the Borrower has requested that the Banks offer to make Competitive Bid Loans at Absolute Rates. "Competitive Bid Loans" shall have the meaning provided in Section 1.01(D). "Confidential Information" shall have the meaning provided in Section 12.15. "Consolidated Cash Interest Expense" shall mean, for any period, (i) consolidated interest expense of Holdings and its Subsidiaries, but excluding, however, to the extent included in consolidated interest expense, (x) non-cash interest expense and (y) amortization of debt issuance cost plus (ii) cash dividends paid on all preferred stock of Holdings and its Subsidiaries (except to the extent paid to Holdings or a Wholly-Owned Subsidiary of Holdings) during such period, it being understood that the determination of the amounts specified in clauses (i)(x) and (i)(y) shall be made on a consistent basis with the methodology utilized by Holdings to determine such amounts on the Effective Date. "Consolidated Net Income" shall mean, for any period, for any Person the consolidated net income of such Person and its Subsidiaries, determined in accordance with GAAP, for such period. "Consolidated Net Worth" shall mean, as at any date of determination, the stockholders' equity of Holdings as determined in accordance with GAAP and as would be reflected on a consolidated balance sheet of Holdings prepared as of such date plus any 1996 Restructuring Charge deducted in determining Consolidated Net Worth of Holdings as of such date, it being understood that the determination of such amounts shall be made on a consistent basis with the methodology utilized by Holdings to determine such amount on the Effective Date. "Contingent Obligations" shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other monetary obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance -55- or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof, provided however that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the lesser of (x) the maximum stated or determinable amount of such Contingent Obligation and (y) the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Continuing Bank" shall mean, at any time, each Bank whose Maturity Date is the Final Maturity Date. "Continuing Director" shall mean, at any date, an individual (x) who is a member of the Board of Directors of Holdings or the Borrower, as the case may be, on the date of this Agreement, (y) who, as at such date, has been a member of such Board of Directors for at least the twelve preceding months, or (z) who has been nominated to be a member of such Board of Directors by a majority of the other Continuing Directors then in office. "Corporate Agreement" shall mean the Corporate Agreement, dated as of January 26, 1995, between Holdings and RJRN. "CP Period" shall mean the period from and including the Effective Date to and including the CP Period Termination Date, or such later date or other period as may be established from time to time by the Required Banks at the request of the Borrower while the CP Period is in effect (or in each case such earlier date as established by written notice from the Borrower to the Payments Administrator). "CP Period Termination Date" shall mean the date which is one year after the Effective Date, as the same may be extended from time to time pursuant to the provisions of the following sentence. If within 60 days prior to the then CP Period Termination Date, Continuing Banks holding at least 66-2/3% of the Commitments held by Continuing Banks shall have extended the Final Maturity Date pursuant to the terms of Section 1.17, the CP Period Termination Date then in effect shall be automatically extended to the date which is one year after the then CP Period Termination Date. -56- "CP Refinancing Borrowing" shall mean any Borrowing of Loans incurred during a CP Period, any of the proceeds of which are to be utilized to repay Commercial Paper Outstandings, to the extent such Borrowing is identified as such by the Borrower in the Notice of Borrowing given in respect of such Borrowing. "Credit Documents" shall mean this Agreement and the Notes. "Credit Event" shall mean and include the making of a Loan and/or the issuance of a Letter of Credit. "Credit Party" shall mean each of Holdings and the Borrower. "Credit Rating" shall mean (i) the Applicable Credit Rating assigned by each Rating Agency, if such Applicable Credit Ratings are the same or (ii) if the Applicable Credit Ratings assigned by the Rating Agencies differ, the higher of the Applicable Credit Ratings assigned by the Rating Agencies, provided that in the event the Applicable Credit Rating of any Rating Agency shall be more than one rating level above the Applicable Credit Rating of the other Rating Agency, the Credit Rating shall be one level below the higher Applicable Credit Rating. "Cumulative Consolidated Net Income" shall mean, at any time for any determination thereof, the sum of (i) Consolidated Net Income of Holdings for the period (taken as one accounting period) commencing January 1, 1995 and ending on the last day of the last fiscal quarter of Holdings then ended plus (ii) all losses from debt retirement deducted in determining the Consolidated Net Income of Holdings for the period referred to in clause (i) above plus (iii) any 1996 Restructuring Charge deducted in determining Consolidated Net Income of Holdings for the period referred to in clause (i) above. "Currency Agreement" shall mean any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement designed to protect the Persons entering into same against fluctuations in currency values. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. "Designated Party" shall have the meaning provided in Section 9.05. "Dividends" shall have the meaning provided in Section 8.05. -57- "Drawing" shall have the meaning provided in Section 2.04(b). "Effective Date" shall have the meaning provided in the preamble to Section 5.01. "Eligible Transferee" shall mean and include a commercial bank, financial institution or other "accredited investor" (as defined in SEC Regulation D), provided that Eligible Transferee shall not include any Person (or any Affiliate thereof) who competes with Holdings and its Subsidiaries in the cookie, cracker, snack food or candy business. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with Holdings, a Subsidiary or a Credit Party would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Eurodollar Loans" shall mean each Revolving Loan bearing interest at the rates provided in Section 1.09(b). "Eurodollar Rate" shall mean with respect to each Interest Period for a Eurodollar Loan (or for a Spread Borrowing priced by reference to the Eurodollar Rate), (i) the arithmetic average (rounded to the nearest 1/100 of 1%) of the offered quotation to first-class banks in the interbank Eurodollar market by each Reference Bank for dollar deposits of amounts in same day funds comparable to the outstanding principal amount of the Eurodollar Loan of such Reference Bank for which an interest rate is then being determined with maturities comparable to the Interest Period to be applicable to such Eurodollar Loan (or in the case of such Spread Borrowing, the arithmetic average of the offered rates for deposits in U.S. dollars for the applicable Interest Period (or the period closest to such applicable Interest Period) which appear on the Reuters Screen LIBO Page), determined as of 10:00 A.M. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period, divided (and rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), provided, that if one or more of the Reference Banks fails to provide the Payments Administrator with its aforesaid rate for an Interest Period applicable to Eurodollar Loans, then the Eurodollar -58- Rate for such Interest Period shall be determined based on the rate or rates provided to the Payments Administrator by the other Reference Bank or Banks. "Event of Default" shall have the meaning provided in Section 9. "Exchange Agreement" shall mean the Exchange Agreement, dated as of April 26, 1995, among Holdings, the Borrower and RJRN. "Existing Credit Agreements" shall mean (i) the Credit Agreement, dated as of April 28, 1995, among Holdings, the Borrower, the Senior Managing Agents and the banks party thereto, as in effect on the Effective Date, and (ii) the Credit Agreement, dated as of November 3, 1995, among Holdings, the Borrower, the Senior Managing Agents and the banks party thereto, as in effect on the Effective Date. "Facility Fee" shall have the meaning provided in Section 3.01(a). "Facing Fee" shall have the meaning provided in Section 3.01(d). "Federal Funds Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Payments Administrator from three Federal Funds brokers of recognized standing selected by the Payments Administrator. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 3.01. "Final Maturity Date" shall mean the date which is the fifth anniversary of the Effective Date, as the same may be extended pursuant to Section 1.17. "Foreign Subsidiary" shall mean each Subsidiary of RJRN (other than any Nabisco Entity) doing business primarily outside the United States or any state or territory thereof. "Fuji" shall mean The Fuji Bank, Limited and any successor corporation thereto by merger, consolidation or otherwise. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time; it being understood and agreed that deter- -59- minations in accordance with GAAP for purposes of Section 8, including defined terms as used therein, shall be made pursuant to Section 12.07(a). "Government Acts" shall have the meaning provided in Section 2.06(a). "Guarantor" for purposes of Section 13 of this Agreement shall mean Holdings, to the extent not merged or consolidated with the Borrower in accordance with Section 8.02. "Guaranty" shall mean the guaranty of Holdings set forth in Section 13, as the same may be supplemented, amended or modified from time to time. "Hedging Agreements" shall mean and include Commodities Agreements, Currency Agreements and Interest Rate Agreements. "Holdings" shall have the meaning provided in the first paragraph of this Agreement and shall also include any Person which is the surviving corporation after giving effect to any transaction permitted by Section 8.02 involving Holdings. "Holdings Common Stock" shall mean each class of the common stock of Holdings. "Increased Investment Grade Period" shall mean any period during which the Credit Rating at all times is the Increased Investment Grade Rating. "Increased Investment Grade Rating" shall mean the rating assigned by each Rating Agency which is one rating level above the Minimum Investment Grade Rating, it being understood that as of the date of this Agreement the "Increased Investment Grade Rating" of S&P is BBB and the "Increased Investment Grade Rating" of Moody's is Baa2. "Indebtedness" of any Person shall mean (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder, (iv) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (v) all Capitalized Lease Obligations of such Person, (vi) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, i.e., take-or-pay and similar obligations, (vii) all obligations of such Person under Hedging Agreements and (viii) all Contingent Obligations of such Person, provided that Indebtedness shall not include or be deemed to include (x) trade payables and accrued expenses, in each case arising in the ordinary course of business, (y) -60- any obligation of the Borrower or any Subsidiary thereof to purchase products, services and produce utilized in its business pursuant to the RJRN Agreements or agreements entered into in the ordinary course of business on a basis consistent with Holdings' past practices or then current industry practices and (z) sales of receivables of the Borrower and its Subsidiaries on a non-recourse basis, and provided further, that (a) for the purposes of Section 9.04, the amount of Indebtedness represented by any Hedging Agreement shall be at any time the unrealized net loss position, if any, of the Borrower and/or its Subsidiaries thereunder on a marked to market basis determined no more than one month prior to such time and (b) for the purposes of determining the Indebtedness permitted to be secured by Section 8.03(e) or outstanding under Section 8.04(i), the amount of Indebtedness included in such determination that is attributable to all Hedging Agreements secured or permitted thereunder, as the case may be, shall be the Net Termination Value, if any, of all such Hedging Agreements. "Interest Period" shall mean with respect to (i) any Revolving Loan constituting a Eurodollar Loan, the interest period applicable thereto as determined pursuant to Section 1.10 and (ii) any Competitive Bid Loan, the period from the date of the making thereof to the maturity date thereof as specified in the respective Notice of Competitive Bid Borrowing. "Interest Rate Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate futures contract, interest rate option contract or other similar agreement or arrangement. "Interest Rate Basis" shall mean the Eurodollar Rate and/or such other basis for determining an interest rate as the Borrower and the Payments Administrator may agree upon from time to time. "Letter of Credit" shall mean each standby letter of credit issued pursuant to Section 2.01. "Letter of Credit Fee" shall have the meaning provided in Section 3.01(c). "Letter of Credit Issuer" shall mean and include each Bank requested by the Borrower to issue Letters of Credit to the extent consented to by such Bank. "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning provided in Section 2.02. -61- "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement (other than customary negative pledge clauses) to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" shall mean any Competitive Bid Loan, Revolving Loan or Swingline Loan. "Long Term Debt Issues" shall mean, with respect to each of Holdings and the Borrower, each issuance of long-term senior debt of such Person which ranks on a parity, as to payment and security, with the Guaranty or the Loans, as the case may be. "Majority SMA" shall mean, at any time, at least one-half in number of the Senior Managing Agents. "Mandatory Borrowing" shall have the meaning provided in Section 1.01(C). "Margin Stock" shall have the meaning provided in Regulation U. "Material Subsidiary" shall mean and include, at any time, the Borrower and each other Subsidiary of Holdings to the extent that (x) the aggregate consolidated book value of the assets of such Subsidiary is equal to or more than $300,000,000 or (y) the revenues of such Subsidiary during its then most recently ended fiscal year were equal to or more than $200,000,000. "Maturity Date" shall mean, with respect to each Bank, the date which is the fifth anniversary of the Effective Date, as the same may be extended for such Bank pursuant to Section 1.17. "Maximum Investment Grade Period" shall mean any period during which the Credit Rating is, or is at any level above, the Maximum Investment Grade Rating. "Maximum Investment Grade Rating" shall mean the rating assigned by each Rating Agency which is at least one or more levels above the Increased Investment Grade Rating, it being understood that as of the date of this Agreement the lowest "Maximum Investment Grade Rating" of S&P is BBB+ and the lowest "Maximum Investment Grade Rating" of Moody's is Baa1. "Minimum Borrowing Amount" shall mean (i) with respect to a Borrowing of Revolving Loans, $25,000,000 and (ii) with respect to a Borrowing of Swingline Loans, $5,000,000. -62- "Minimum Investment Grade Period" shall mean any period during which the Credit Rating is at all times the Minimum Investment Grade Rating. "Minimum Investment Grade Rating" shall mean the lowest rating level established as investment grade by each Rating Agency, it being understood that as of the date of this Agreement the "Minimum Investment Grade Rating" of S&P is BBB- and the "Minimum Investment Grade Rating" of Moody's is Baa3. "Moody's" shall mean Moody's Investors Service, Inc., or any successor corporation thereto. "Nabisco Biscuit Division" shall mean the portion of the business of Holdings and its Subsidiaries engaged in the manufacture and sale of crackers and cookies in the United States. "Nabisco Entity" shall mean Holdings and its Subsidiaries. "Nabisco Ltd" shall mean Nabisco Ltd, a Canadian corporation. "Net Termination Value" shall mean at any time, with respect to all Hedging Agreements for which a Net Termination Value is being determined, the excess, if positive, of (i) the aggregate of the unrealized net loss position of the Borrower and/or its Subsidiaries under each of such Hedging Agreements on a marked to market basis determined no more than one month prior to such time less (ii) the aggregate of the unrealized net gain position of the Borrower and/or its Subsidiaries under each of such Hedging Agreements on a marked to market basis determined no more than one month prior to such time. "New Bank" shall have the meaning provided in Section 1.16. "NIG Period" shall mean any period during which the Credit Rating is at all times below the Minimum Investment Grade Rating. "1996 Restructuring Charge" shall mean the restructuring expenses and related costs and expenses in an aggregate amount not in excess of $500,000,000 recorded or accrued during Holdings' 1996 fiscal year. "Non-Continuing Bank" shall mean, at any time, each Bank which is not a Continuing Bank at such time. "Non-Defaulting Bank" shall mean and include each Bank other than a Defaulting Bank. -63- "Note" shall have the meaning provided in Section 1.06(a). "Notice of Borrowing" shall have the meaning provided in Section 1.03. "Notice of Competitive Bid Borrowing" shall have the meaning provided in Section 1.04. "Notice of Conversion" shall have the meaning provided in Section 1.07. "Notifying SL Lender" shall have the meaning provided in Section 1.01(C). "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to any Senior Managing Agent, the Payments Administrator or any Bank pursuant to the terms of this Agreement or any other Credit Document. "Participant" shall have the meaning provided in Section 2.03(a). "Payments Administrator" shall mean Chase, provided that if Chase shall cease to constitute a Senior Managing Agent hereunder, the remaining Senior Managing Agents shall have the option to appoint one of such remaining Senior Managing Agents as the Payments Administrator. "Payments Administrator's Office" shall mean the office of the Payments Administrator located at One Chase Manhattan Plaza, New York, New York 10081, or such other office in New York City as the Payments Administrator may hereafter designate in writing as such to the other parties hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Percentage" shall mean at any time for each Bank, the percentage obtained by dividing such Bank's Commitment by the Total Commitment, provided that at any time when the Total Commitment shall have been terminated each Bank's Percentage shall be the percentage obtained by dividing such Bank's outstanding Revolving Loans by the aggregate outstanding Revolving Loans. "Permitted Commodities Agreement" shall mean any Commodities Agreement entered into in the ordinary course of business by any Subsidiary of the Borrower to the extent consistent with the practices of the Borrower and its Subsidiaries prior to the Effective Date or with then current practices in the industry. -64- "Permitted Currency Agreement" shall mean any Currency Agreement entered into in the ordinary course of business by any Subsidiary of the Borrower to the extent consistent with the practices of the Borrower and its Subsidiaries prior to the Effective Date or with then current practices in the industry, provided that no domestic Subsidiary (other than domestic Subsidiaries of the Borrower all or substantially all of the business and operations of which are conducted outside the United States) may be an obligor under or a guarantor of any such Currency Agreements entered into after the Effective Date. "Permitted Obligations" shall mean and include obligations (i) to pay taxes, (ii) to pay import duties, to post customs bonds and otherwise in connection with customs and trade laws, (iii) to purchase equipment or fixtures and otherwise in connection with capital expenditures, (iv) in connection with the importation or purchase of products or goods for use in the day-to-day operations of the Borrower and its Subsidiaries consistent with the Borrower's practices in effect prior to the Effective Date or with then current practices in the industry, (v) to make utility payments, (vi) in connection with worker's compensation obligations or other employee disability obligations, (vii) to provide credit support for any of the foregoing, (viii) in respect of employee loans made in connection with transfers and (ix) to provide credit support for suppliers and distributors in the ordinary course of business. "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any multiemployer or single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribution of), or at any time during the five calendar years preceding the date of this Agreement was maintained or contributed to by (or to which there was an obligation to contribution of), the Borrower, a Subsidiary or an ERISA Affiliate. "Rating Agency" shall mean each of S&P and Moody's. "Reference Banks" shall mean BTCo, Chase and Citibank. "Reference Rate" shall mean, at any time, the higher of (x) the rate which is 1/2 of 1% in excess of the Federal Funds Rate and (y) the Base Rate as in effect from time to time. "Reference Rate Loan" shall mean each Revolving Loan or Swingline Loan bearing interest at the rates provided in Section 1.09(a). -65- "Register" shall have the meaning provided in Section 1.06(d). "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Reply Date" shall have the meaning provided in Section 1.04(b). "Reportable Event" shall mean an event described in Section 4043(b) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Required Banks" shall mean at any time either (A) (i) the Majority SMA plus (ii) Non-Defaulting Banks (including any of the Senior Managing Agents) holding more than 50% of the Adjusted Total Commitment (or, if the Total Commitment has been terminated, of the Adjusted Total Commitment as in effect immediately prior to such termination), or (B) Non-Defaulting Banks holding more than 66-2/3% of the Adjusted Total Commitment (or, if the Total Commitment has been terminated, of the Adjusted Total Commitment as in effect immediately prior to such termination). "Response Date" shall have the meaning provided in Section 1.17. "Restricted Payments" shall have the meaning provided in Section 8.05. "Restricted Sales" shall mean and include the sale or other disposition, whether such sale or disposition is of capital stock or assets, by Holdings or any of its Subsidiaries to any Person other than the Borrower or a Wholly-Owned Subsidiary of the Borrower in one or more transactions of all or substantially all or any substantial portion of the assets (other than (i) inventory and equipment to the extent sold or disposed of in the ordinary course of business and (ii) receivables pursuant to any receivables facilities of the Borrower and its Subsidiaries) of the Nabisco Biscuit Division as constituted on the Effective Date, provided that Restricted Sales shall not include any issuance by Holdings or the Borrower of its capital stock. "Restructuring Charge Quarter" shall mean any fiscal quarter of Holdings during its 1996 fiscal year in which it has taken some or all of the 1996 Restructuring Charge. -66- "Revolving Loan" shall have the meaning provided in Section 1.01(A). "RJRN" shall mean RJR Nabisco, Inc., a Delaware corporation. "RJRN Agreements" shall mean, collectively, the Corporate Agreement, the Services Agreement, the Tax Sharing Agreement and the Exchange Agreement. "RJRN Entity" shall mean RJRN Holdings and each Subsidiary of RJRN other than Holdings and any of its Subsidiaries. "RJRN Holdings" shall mean RJR Nabisco Holdings Corp., a Delaware corporation. "S&P" shall mean Standard & Poor's Ratings Group, a Division of The McGraw-Hill Companies, Inc., or any successor corporation thereto. "SEC" shall have the meaning provided in Section 7.01(f). "SEC Regulation D" shall mean Regulation D as promulgated under the Securities Act of 1933, as amended, as the same may be in effect from time to time. "Senior Managing Agent" shall mean and include BTCo, Chase, Citibank and Fuji, and any successor to any thereof appointed pursuant to Section 11.09. "Services Agreement" shall mean the Intercompany Services and Operating Agreement, dated as of January 26, 1995, between Holdings and RJRN. "Specified Permitted Existing Debt" shall mean the Indebtedness existing as of the Effective Date as described in Annex IV and such other Indebtedness of Subsidiaries of the Borrower existing as of the Effective Date and not so listed in an aggregate principal amount not to exceed $10,000,000. "Spread" shall mean a percentage per annum (rounded to the nearest .0001%) in excess of, or less than, an Interest Rate Basis. "Spread Borrowing" shall mean a Competitive Bid Borrowing with respect to which the Borrower has requested the Banks to make Competitive Bid Loans at a Spread over or under a specified Interest Rate Basis. "Stated Amount" of any Letter of Credit shall mean the maximum amount available to be drawn thereunder, determined without regard to whether any conditions to drawing could then be met. -67- "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries has more than a 50% equity interest at the time. Unless otherwise expressly provided, all references herein to "Subsidiary" shall mean a Subsidiary of Holdings. "Swingline Commitment" shall mean for each Swingline Lender, $30,000,000. "Swingline Lender" shall mean and include each of BTCo, Chase, Citibank and Fuji, in each case, so long as such entity constitutes a Bank hereunder. "Swingline Loans" shall have the meaning provided in Section 1.01(B). "Swingline Maturity Date" shall mean the date which is five Business Days prior to the Final Maturity Date. "Tax Sharing Agreement" shall mean the agreement, dated as of January 26, 1995, as amended on March 23, 1995, between Holdings and RJRN. "Taxes" shall have the meaning provided in Section 4.04(a). "Test Period" shall mean for any determination under Section 8.08 or 8.09 the four consecutive fiscal quarters of Holdings then last ended. "364 DF Credit Agreement" shall mean the Credit Agreement, dated as of the date hereof, among Holdings, the Borrower and the lending institutions party thereto relating to initial commitments aggregating $1,500,000,000, as the same may be modified, supplemented or amended from time to time. "Total Adjusted Utilization Amount" at any time shall mean the Total Utilization Amount at such time less the aggregate principal amount of all Loans made by Defaulting Banks outstanding at such time. "Total Commitment" shall mean the sum of the Commitments of each Bank. -68- "Total Swingline Commitment" shall mean the sum of the Swingline Commitments of each of the Swingline Lenders, provided that the Total Swingline Commitment shall not at any time exceed the Total Commitment. "Total Unutilized Commitment" shall mean the excess of (x) the Total Commitment over (y) the sum of (i) the aggregate outstanding principal amount of all Revolving Loans, Swingline Loans and Competitive Bid Loans, (ii) the Letter of Credit Outstandings and (iii) the Commercial Paper Outstandings. "Total Utilization Amount" shall mean at any time the sum of (i) the aggregate outstanding principal amount of all Revolving Loans, Competitive Bid Loans and Swingline Loans plus (ii) all Letter of Credit Outstandings plus (iii) the Commercial Paper Outstandings. "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto, i.e., a Reference Rate Loan or Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the present value of the accrued benefits under such Plan as of the close of its most recent plan year, determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by such Plan's actuary in the most recent annual valuation of such Plan, exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. "Unpaid Drawing" shall have the meaning provided in Section 2.04(a). "Utilization Fee" shall have the meaning provided in Section 3.01(b). "Utilization Period" shall mean each of the following periods to the extent that during such period the average daily Total Utilization Amount exceeds 50% of the average daily Total Commitment: (i) the period from and including the Effective Date to and including December 31, 1996, (ii) each successive three month period thereafter; and (iii) if the Total Commitment is terminated during any such period, the period from and including the first day of such period to and including the day on which the Total Commitment is terminated. "Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of such Person to the extent all of the capital stock or other ownership interests in such Subsidiary, other than directors' or nominees' qualifying shares, is directly or indirectly owned by such Person. Establecimiento Modelo Terrabusi SAIC, an Argentine corpora- -69- tion, shall be deemed a Wholly-Owned Subsidiary of the Credit Parties so long as at least 95% of its capital stock is owned, directly or indirectly, by the Borrower. "Written" or "in writing" shall mean any form of written communication or a communication by means of telex, facsimile transmission, telegraph or cable. SECTION 11. The Senior Managing Agents. 11.01 Appointment. Each Bank hereby irrevocably designates and appoints BTCo, Chase, Citibank and Fuji as Senior Managing Agents (such term to include any of the Senior Managing Agents acting as Payments Administrator) of such Bank to act as specified herein and in the other Credit Documents, and each such Bank hereby irrevocably authorizes BTCo, Chase, Citibank, Fuji, as the Senior Managing Agents for such Bank, to take such action on its behalf under the provisions of this Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the respective Senior Managing Agents by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. Each Senior Managing Agent agrees to act as such upon the express conditions contained in this Section 11. Notwithstanding any provision to the contrary elsewhere in this Agreement, no Senior Managing Agent shall have any duties or responsibilities, except those expressly set forth herein or in the other Credit Documents, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against any Senior Managing Agent. The provisions of this Section 11 are solely for the benefit of the Senior Managing Agents and the Banks, and no Credit Party shall have any rights as a third party beneficiary of any of the provisions hereof, provided that Holdings shall have the rights granted to it pursuant to Section 11.09. In performing its functions and duties under this Agreement, each Senior Managing Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for either Credit Party. No Managing Agent, Lead Manager, Manager or Co-Manager shall have any duties or obligations in its capacity as such under this Agreement. 11.02 Delegation of Duties. Each Senior Managing Agent may execute any of its duties under this Agreement or any other Credit Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Senior Managing Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by Section 11.03. 11.03 Exculpatory Provisions. No Senior Managing Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for -70- any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by Holdings, any Subsidiary or any of their respective officers contained in this Agreement, any other Credit Document or in any certificate, report, statement or other document referred to or provided for in, or received by any Senior Managing Agent under or in connection with, this Agreement or any other Credit Document or for any failure of Holdings or any Subsidiary or any of their respective officers to perform its obligations hereunder or thereunder. No Senior Managing Agent shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of Holdings or any Subsidiary. No Senior Managing Agent shall be responsible to any Bank for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any Credit Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by any Senior Managing Agent to the Banks or by or on behalf of the Borrower to any Senior Managing Agent or any Bank or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. 11.04 Reliance by Senior Managing Agents. Each Senior Managing Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile transmission, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Credit Parties), independent accountants and other experts selected by such Senior Managing Agent. Each Senior Managing Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Credit Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each Senior Managing Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Credit Documents in accordance with a request of the Required Banks (or to the extent specifically provided in Section 12.12, all the Banks), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks. -71- 11.05 Notice of Default. No Senior Managing Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless such Senior Managing Agent has received notice from a Bank or the Borrower or Holdings referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that any Senior Managing Agent receives such a notice, such Senior Managing Agent shall give prompt notice thereof to the Banks. Each Senior Managing Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks, provided that, unless and until a Senior Managing Agent shall have received such directions, such Senior Managing Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 11.06 Non-Reliance on Senior Managing Agents and Other Banks. Each Bank expressly acknowledges that no Senior Managing Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by any Senior Managing Agent hereafter taken, including any review of the affairs of Holdings or any Subsidiary, shall be deemed to constitute any representation or warranty by any Senior Managing Agent to any Bank. Each Bank represents to each Senior Managing Agent that it has, independently and without reliance upon any Senior Managing Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of Holdings and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon any Senior Managing Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and creditworthiness of Holdings and its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Payments Administrator hereunder, no Senior Managing Agent shall have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, assets, property, financial and other conditions, prospects or creditworthiness of Holdings or any Subsidiary which may come into the possession of such Senior Managing Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 11.07 Indemnification. The Banks agree to indemnify each Senior Managing Agent in its capacity as such ratably according to their aggregate Commitments (or, if the Total Commitment has been terminated, their aggregate Commitments as in effect -72- immediately prior to such termination), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against such Senior Managing Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Credit Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by any Senior Managing Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by Holdings or any of its Subsidiaries, provided that no Bank shall be liable to any Senior Managing Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from such Senior Managing Agent's gross negligence or willful misconduct. If any indemnity furnished to any Senior Managing Agent for any purpose shall, in the opinion of such Senior Managing Agent, be insufficient or become impaired, such Senior Managing Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 11.07 shall survive the payment of all Obligations. 11.08 Senior Managing Agents in Their Individual Capacities. Each Senior Managing Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with Holdings and its Subsidiaries as though such Senior Managing Agent were not a Senior Managing Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, each Senior Managing Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not a Senior Managing Agent, and the terms "Bank" and "Banks" shall include each Senior Managing Agent in its individual capacity. 11.09 Successor Senior Managing Agents. Any Senior Managing Agent may resign as a Senior Managing Agent upon 20 days' notice to the Banks, provided that prior to, and as a condition of, the last remaining Senior Managing Agent so resigning, the Required Banks shall appoint from among the Banks a successor Senior Managing Agent for the Banks subject to prior approval by Holdings (such approval not to be unreasonably withheld, provided that such Bank agrees to assume the Swingline Commitment of such Senior Managing Agent in full), whereupon such successor agent shall succeed to the rights, powers and duties of the Senior Managing Agents, and the term "Senior Managing Agents" shall include such successor agent effective upon its appointment, and the resigning Senior Managing Agent's rights, powers and duties as a Senior Managing Agent shall be terminated, without any other or further act or deed on the part of such former Senior Managing Agent or any of the parties to this Agreement. After any retiring Senior Managing Agent's resignation hereunder as a Senior Managing Agent, the provisions of this -73- Section 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was a Senior Managing Agent under this Agreement. SECTION 12. Miscellaneous. 12.01 Payment of Expenses, etc. The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses of (x) the Senior Managing Agents, whether or not the transactions herein contemplated are consummated, in connection with the negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of White & Case but of no other counsel) and (y) each Senior Managing Agent and each of the Banks in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for each Senior Managing Agent and for each of the Banks); (ii) pay and hold each of the Banks harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Banks harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iii) indemnify each Bank, its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not any Bank is a party thereto) related to the entering into and/or performance of any Credit Document or the use of the proceeds of any Loans hereunder or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 12.02 Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to either Credit Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of either Credit Party against and on account of the Obligations and liabilities of such Credit Party to such Bank under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of such Credit Party purchased by -74- such Bank pursuant to Section 12.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Bank shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured. 12.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered, if to a Credit Party, at the address specified opposite its signature below; if to any Bank, at its address specified for such Bank on Annex II hereto; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be telegraphed, telexed, telecopied, or cabled or sent by overnight courier, and shall be effective when received. 12.04 Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that no Credit Party may assign or transfer any of its interests hereunder, except to the extent any such assignment results from the consummation of a transaction permitted under Section 8.02, without the prior written consent of the Banks, and provided further, that the rights of each Bank to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth below in this Section 12.04, provided that nothing in this Section 12.04 shall prevent or prohibit any Bank from pledging its rights under this Agreement and/or its Loans and/or Note hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. (b) Each Bank shall have the right to transfer, assign or grant participations in all or any part of its remaining rights and obligations hereunder on the basis set forth below in this clause (b). (A) Assignments. Each Bank may assign pursuant to an Assignment Agreement substantially in the form of Exhibit D-2 hereto (each, an "Assignment Agreement") all or a portion of its rights and obligations hereunder pursuant to this clause (b)(A) to (x) one or more Banks or (y) one or more other Eligible Transferees, provided that (i) the consent of the Borrower shall be required in connection with any assignment pursuant to clause (x) or (y) above (which consent shall not be unreasonably withheld or delayed) and (ii) any such assignment pursuant to clause (y) above shall be in the aggregate amount of at least (I) in the event of an assignment relating to this Agreement only, $10,000,000, except to the extent that after giving effect to any such assignment the assigning Bank shall have reduced its Commitment to zero and (II) in the event of an assignment relating this Agreement and the 364 DF Credit Agreement, $5,000,000, provided, that the -75- aggregate amount of such assignment under this Agreement and the 364 DF Credit Agreement is at least $10,000,000, except to the extent that after giving effect to any such assignment the assigning Bank shall have reduced its Commitment hereunder to zero. Any assignment to another Bank pursuant to this clause (b)(A) will become effective upon the payment to the Payments Administrator by (I) either the assigning or the assignee Bank or (II) in the case of an assignment pursuant to Section 1.14, the Replacement Bank, of a nonrefundable assignment fee of $2,500 and the recording by the Payments Administrator of such assignment, and the resultant effects thereof on the Commitments of the assigning Bank and the assignee Bank, in the Register, the Payments Administrator hereby agreeing to effect such recordation no later than five Business Days after its receipt of a written notification by the assigning Bank and the assignee Bank of the proposed assignment, provided that the Payments Administrator shall not be required to, and shall not, so record any assignment in the Register on or after the date on which any proposed amendment, modification or supplement in respect of this Agreement has been circulated to the Banks for approval until the earlier of (x) the effectiveness of such amendment, modification or supplement in accordance with Section 12.12 or (y) 30 days following the date on which such proposed amendment, modification or supplement was circulated to the Banks. Assignments pursuant to this clause (b)(A) to any Person not theretofore a Bank hereunder will only be effective if the Payments Administrator shall have received a written notice in the form of Exhibit D-1 hereto from the assigning Bank and the assignee Bank and payment of a nonrefundable assignment fee of $2,500 to the Payments Administrator (provided, that in the event of simultaneous assignments relating to this Agreement and the 364 DF Credit Agreement, the fees for such assignment shall total $2,500) by (I) either the assigning or the assignee Bank or (II) in the case of an assignment pursuant to Section 1.14, the Replacement Bank. No later than five Business Days after its receipt of such written notice, the Payments Administrator will record such assignment, and the resultant effects thereof on the Commitment of the assigning Bank, in the Register, at which time such assignment shall become effective, provided that the Payments Administrator shall not be required to, and shall not, so record any assignment in the Register on or after the date on which any proposed amendment, modification or supplement in respect of this Agreement has been circulated to the Banks for approval until the earlier of (x) the effectiveness of such amendment, modification or supplement in accordance with Section 12.12 or (y) 30 days following the date on which such proposed amendment, modification or supplement was circulated to the Banks. Upon the effectiveness of any assignment pursuant to this clause (b)(A), (x) the assignee will become a "Bank" for all purposes of this Agreement and the other Credit Documents with a Commitment as so recorded by the Payments Administrator in the Register, and to the extent of such assignment, the assigning Bank shall be relieved of its obligations hereunder with respect to the portion of its Commitment being assigned and (y) if such -76- assignment occurs after the Effective Date, the Borrower shall issue new Notes (in exchange for the Note of the assigning Bank) to the assigning Bank (to the extent such Bank's Commitment is not reduced to zero as a result of such assignment) and to the assignee Bank, in each case to the extent requested by the assigning Bank or assignee Bank, as the case may be, in conformity with the requirements of Section 1.06 to the extent needed to reflect the revised Commitments of such Banks. The Payments Administrator will prepare on the last Business Day of each calendar quarter during which an assignment has become effective pursuant to this clause (b)(A) a new Annex I giving effect to all such assignments effected during such quarter and will promptly provide same to the Borrower and each of the Banks. (B) Participations. Each Bank may transfer, grant or assign participations in all or any part of such Bank's interests and obligations hereunder pursuant to this clause (b)(B) to any Eligible Transferee, provided that (i) such Bank shall remain a "Bank" for all purposes of this Agreement and the transferee of such participation shall not constitute a Bank hereunder and (ii) no participant under any such participation shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (x) extend the final scheduled maturity of any of the Loans or the Commitment in which such participant is participating or (y) reduce the interest rate (other than as a result of waiving the applicability of any post-default increases in interest rates) or Fees applicable to any of the Loans, Commitments or Letters of Credit or postpone the payment of any thereof or (z) release the Guaranty. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against the granting Bank in respect of such participation to be those set forth in the agreement with such Bank creating such participation) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation, provided that such participant shall be entitled to receive additional amounts under Sections 1.11, 1.12, 2.05 and 4.04 on the same basis as if it were a Bank. In addition, each agreement creating any participation must include an agreement by the participant to be bound by the provisions of Section 12.15 and such participant shall have executed a confidentiality agreement in the form of Exhibit E hereto. (c) Notwithstanding any other provisions of this Section 12.04, no transfer or assignment of the interests or obligations of any Bank hereunder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Borrower or the Guarantor to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any State. -77- (d) Each Bank initially party to this Agreement hereby represents, and each Person that becomes a Bank pursuant to an assignment permitted by the preceding clause (b)(A) will upon its becoming party to this Agreement represent, that it is an Eligible Transferee which makes loans in the ordinary course of its business and that it will make or acquire Loans for its own account in the ordinary course of such business, provided that subject to the preceding clauses (a) through (c), the disposition of any promissory notes or other evidences of or interests in Indebtedness held by such Bank shall at all times be within its exclusive control. 12.05 No Waiver; Remedies Cumulative. No failure or delay on the part of any Senior Managing Agent, Payments Administrator or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between either Credit Party and any Senior Managing Agent or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which any Senior Managing Agent or any Bank would otherwise have. No notice to or demand on either Credit Party in any case shall entitle either Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Senior Managing Agents or the Banks to any other or further action in any circumstances without notice or demand. 12.06 Payments Pro Rata. (a) The Payments Administrator agrees that promptly after its receipt of each payment from or on behalf of either Credit Party in respect of any Obligations of such Credit Party, it shall, except as otherwise provided in this Agreement (or to the extent waived by any Bank), distribute such payment to the Banks pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans or Fees, of a sum which with respect to the related sum or sums received by other Banks is in a greater proportion than the total of such Obligations then owed and due to such Bank bears to the total of such Obligations then owed and due to all of the Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the Obligations to such Banks in such amount as shall result in a proportional participation by all of the Banks in such amount, provided that if all or any portion of such excess amount is thereafter recovered from such Bank, such purchase -78- shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 12.07 Calculations; Computations. (a) The financial statements to be furnished to the Banks pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks), provided that, except as otherwise specifically provided herein, all computations determining compliance with Section 8, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the historical financial statements referred to in Section 6.09(b), provided that in the event GAAP shall be modified from that in effect at the time of the preparation of such financial statements, the Borrower shall be entitled to utilize GAAP, as so modified, for purposes of such computations to the extent that (x) the Borrower gives the Banks 30 days' prior written notice of such proposed modification and (y) prior thereto the Borrower and the Majority SMA shall have agreed upon adjustments, if any, to Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 (and the definitions used therein) the sole purpose of which shall be to give effect to such proposed change (it being understood and agreed that to the extent that the Borrower and the Majority SMA cannot agree on appropriate adjustments to such Sections (or that no adjustments are necessary), the proposed change may not be effected), and provided further, that (i) if at any time the computations determining compliance with Section 8 utilize accounting principles different from those utilized in the financial statements furnished to the Banks, such financial statements shall be accompanied by reconciliation work-sheets and (ii) in the event that the obligations and related receivables under any of the existing receivables facilities of the Borrower and its Subsidiaries or under any replacement facilities (to the extent Liens created thereunder do not attach to assets not subject to Liens under the receivables facility being replaced) are no longer given off-balance sheet treatment, any such obligations, the interest expense or discount thereon and related receivables under such existing or replacement receivables facility shall continue to receive off-balance sheet treatment for purposes of determining compliance with Section 8. (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days. (c) All determinations of the Stated Amount of Letters of Credit and of the principal amount of Unpaid Drawings, in each case to the extent denominated in a currency other than U.S. dollars, shall be made by converting same into U.S. dollars at (x) if a Currency Agreement has been entered into by the Borrower and/or any of its Subsidiaries in connection with such Indebtedness, and is in effect at the time of such determination, the rate provided in such Currency Agreement, provided that this clause (x) shall not be applicable (I) unless the Payments Administrator has received sufficient information from the Borrower to determine the exchange rate established by such Currency Agreement and -79- the duration thereof, or (II) to any determination of the Borrower's obligation to reimburse in U.S. dollars a Drawing under a Letter of Credit denominated in a currency other than U.S. dollars, (y) in the case of a determination of the Borrower's obligation to reimburse in U.S. dollars a Drawing under a Letter of Credit denominated in a currency other than U.S. dollars, the spot exchange rate for the currency in question of the Letter of Credit Issuer on the date of such Drawing or (z) if the provisions of the foregoing clauses (x) and (y) are not applicable, the "official" exchange rate, if applicable, or the spot exchange rate for the currency in question calculated by the Payments Administrator on the last Business Day of each calendar month and at such other times as the Payments Administrator elects to make such determination, it being understood that the Payments Administrator shall have no obligation to make any such other determinations. The Payments Administrator will promptly notify the Borrower and each Letter of Credit Issuer of its determinations hereunder. 12.08 Governing Law; Submission to Jurisdiction; Venue. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, each Credit Party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the respective Credit Party at its address for notices pursuant to Section 12.03, such service to become effective 30 days after such mailing. Each Credit Party hereby irrevocably appoints Nabisco International, Inc., located at 345 Park Avenue, New York, New York 10154 as its agent for service of process in respect of any such action or proceeding. Nothing herein shall affect the right of any Senior Managing Agent or any Bank to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against either Credit Party in any other jurisdiction. (b) Each Credit Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in the preceding clause (a) and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 12.09 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together -80- constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with Holdings and the Payments Administrator. 12.10 Effectiveness. The Payments Administrator will give Holdings and each Bank prompt written notice of the occurrence of the Effective Date. 12.11 Headings Descriptive. The table of contents and the headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 12.12 Amendment or Waiver. Except for deemed amendments provided for in Section 9.04, neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Required Banks, provided that (x) no such change, waiver, discharge or termination shall, without the consent of each Bank (other than a Defaulting Bank) with Obligations being directly affected thereby, (i) extend the scheduled final maturity of any Loan or Note, or any portion thereof, or reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or Fees or reduce the principal amount thereof, or increase the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment shall not constitute a change in the terms of the Commitment of any Bank), (ii) release the Guaranty, (iii) amend, modify or waive any provision of this Section, or Section 1.11, 1.12, 1.17, 2.05, 4.04, 9.01, 11.07, 12.01, 12.02, 12.04, 12.06, 12.07(b) or 12.15, (iv) reduce any percentage specified in, or otherwise modify, the definition of Required Banks or (v) consent to the assignment or transfer by either Credit Party of any of its rights and obligations under this Agreement; and (y) the financial covenants set forth in Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 (and the defined terms used therein) may be adjusted with the consent of Holdings, the Borrower and the Majority SMA to the extent provided in Sections 7.09 and 12.07(a). No provision of Section 11 may be amended or modified without the consent of any Senior Managing Agent adversely affected thereby. The obligations of Swingline Lenders to make Swingline Loans, the terms of any such Swingline Loans and the obligations of the other Banks to fund Mandatory Borrowings shall not be amended or modified without the consent of the Swingline Lenders. The terms of Section 2 shall not be amended or modified without the consent of any Letter of Credit Issuer adversely affected thereby. 12.13 Survival. All indemnities set forth herein including, without limitation, in Section 1.11, 1.12, 2.05, 4.04, 11.07 or 12.01 shall survive the execution and delivery of this Agreement and the making of the Loans, the issuances of Letters of Credit, the repayment of the Obligations and the termination of the Total Commitment. -81- 12.14 Domicile of Loans. Subject to Section 12.04, each Bank may transfer and carry its Loans at, to or for the account of any branch office, subsidiary or affiliate of such Bank, provided that the Borrower shall not be responsible for costs arising under Section 1.11, 1.12, 2.05 or 4.04 resulting from any such transfer (other than a transfer pursuant to Section 1.13) to the extent not otherwise applicable to such Bank prior to such transfer. 12.15 Confidentiality. Subject to Section 12.04, each Bank shall hold all non-public information furnished by or on behalf of Holdings or the Borrower in connection with such Bank's evaluation of whether to become a Bank hereunder or obtained pursuant to the requirements of this Agreement, which has been identified as such by Holdings ("Confidential Information"), in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure reasonably required by any bona fide transferee or participant (which shall be an Eligible Transferee) in connection with the contemplated transfer of any Loans or participations therein or as required or requested by any governmental agency or representative thereof or pursuant to legal process or to such Bank's attorneys, affiliates or independent auditors, provided that, unless specifically prohibited by applicable law or court order, each Bank shall notify Holdings of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Bank by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information, and provided further, that in no event shall any Bank be obligated or required to return any materials furnished by Holdings or any Subsidiary. Each Bank agrees that it will not provide to prospective assignees, transferees or participants any of the Confidential Information unless such Person has executed a Confidentiality Agreement in the form of Exhibit E. 12.16 Waiver of Jury Trial. Each of the parties to this Agreement hereby irrevocably waives all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement, the other Credit Documents or the transactions contemplated hereby or thereby. SECTION 13. Guaranty. 13.01 The Guaranty. In order to induce the Banks to enter into this Agreement and to extend credit hereunder and in recognition of the direct benefits to be received by the Guarantor from the proceeds of the Loans and the issuance of the Letters of Credit, the Guarantor hereby agrees with the Banks as follows: the Guarantor hereby unconditionally and irrevocably guarantees as primary obligor and not merely as surety the full and prompt payment when due, whether upon maturity, by acceleration or otherwise, of any and all indebtedness of the Borrower to the Banks. If any or all of the indebtedness -82- of the Borrower to the Banks becomes due and payable hereunder, the Guarantor unconditionally promises to pay such indebtedness to the Banks, or order, on demand, together with any and all expenses which may be incurred by the Senior Managing Agents or the Banks in collecting any of the indebtedness. The word "indebtedness" is used in this Section 13 in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of the Borrower arising in connection with this Agreement and any other Credit Document, in each case, heretofore, now, or hereafter made, incurred or created, whether voluntarily or involuntarily, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such indebtedness is from time to time reduced, or extinguished and thereafter increased or incurred, whether the Borrower may be liable individually or jointly with others, whether or not recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, and whether or not such indebtedness may be or hereafter become otherwise unenforceable. 13.02 Bankruptcy. Additionally, the Guarantor unconditionally and irrevocably guarantees the payment of any and all indebtedness of the Borrower to the Banks whether or not due or payable by the Borrower upon the occurrence in respect of the Borrower of any of the events specified in Section 9.05, and unconditionally promises to pay such indebtedness to the Banks, or order, on demand, in lawful money of the United States. 13.03 Nature of Liability. The liability of the Guarantor hereunder is exclusive and independent of any security for or other guaranty of the indebtedness of the Borrower whether executed by the Guarantor, any other guarantor or by any other party, and the liability of the Guarantor hereunder shall not be affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, or (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the indebtedness of the Borrower, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, or (e) any payment made to the Senior Managing Agents or the Banks on the indebtedness which the Senior Managing Agents or such Banks repay the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and the Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding. 13.04 Independent Obligation. The obligations of the Guarantor hereunder are independent of the obligations of any other guarantor or the Borrower, and a separate action or actions may be brought and prosecuted against the Guarantor whether or not action is brought against any other guarantor or the Borrower and whether or not any other guarantor or the Borrower be joined in any such action or actions. The Guarantor waives, to the fullest extent permitted by law, the benefit of any statute of limitations affecting its -83- liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to the Guarantor. 13.05 Authorization. The Guarantor authorizes the Senior Managing Agents and the Banks without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the indebtedness or any part thereof in accordance with this Agreement, including any increase or decrease of the rate of interest thereon, (b) take and hold security from any guarantor or any other party for the payment of this guaranty or the indebtedness and exchange, enforce, waive and release any such security, (c) apply such security and direct the order or manner of sale thereof as the Senior Managing Agents and the Banks in their discretion may determine and (d) release or substitute any one or more endorsers, guarantors, the Borrower or other obligors. 13.06 Reliance. It is not necessary for the Senior Managing Agents or the Banks to inquire into the capacity or powers of the Borrower or its Subsidiaries or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 13.07 Subordination. Any indebtedness of the Borrower now or hereafter held by the Guarantor is hereby subordinated to the indebtedness of the Borrower to the Senior Managing Agents and the Banks; and such indebtedness of the Borrower to the Guarantor, if any Senior Managing Agent, after an Event of Default has occurred, so requests, shall be collected, enforced and received by the Guarantor as trustee for the Banks and be paid over to the Banks on account of the indebtedness of the Borrower to the Banks, but without affecting or impairing in any manner the liability of the Guarantor under the other provisions of this Guaranty. Prior to the transfer by the Guarantor of any note or negotiable instrument evidencing any indebtedness of the Borrower to the Guarantor, the Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. 13.08 Waiver. (a) The Guarantor waives any right (except as shall be required by applicable statute and cannot be waived) to require the Senior Managing Agents or the Banks to (a) proceed against the Borrower, any other guarantor or any other party, (b) proceed against or exhaust any security held from the Borrower, any other guarantor or any other party or (c) pursue any other remedy in the Senior Managing Agents' or the Banks' power whatsoever. The Guarantor waives any defense based on or arising out of any defense of the Borrower, any other guarantor or any other party other than payment -84- in full of the indebtedness, including, without limitation, any defense based on or arising out of the disability of the Borrower, any other guarantor or any other party, or the unenforceability of the indebtedness or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the indebtedness. The Senior Managing Agents and the Banks may, at their election, foreclose on any security held by the Senior Managing Agents or the Banks by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Senior Managing Agents and the Banks may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of the Guarantor hereunder except to the extent the indebtedness has been paid. The Guarantor waives any defense arising out of any such election by the Senior Managing Agents and the Banks, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of the Guarantor against the Borrower or any other party or any security. Until all indebtedness of the Borrower to the Banks shall have been paid in full, the Guarantor shall not have any right of subrogation, and waives any right to enforce any remedy which the Senior Managing Agents and the Banks now have or may hereafter have against the Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by the Senior Managing Agents and the Banks. (b) The Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional indebtedness. The Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the indebtedness and the nature, scope and extent of the risks which the Guarantor assumes and incurs hereunder, and agrees that the Senior Managing Agents and the Banks shall have no duty to advise the Guarantor of information known to them regarding such circumstances or risks. 13.09 Limitation on Enforcement. The Banks agree that this Guaranty may be enforced only by the action of a Senior Managing Agent acting upon the instructions of the Required Banks and that no Bank shall have any right individually to seek to enforce or to enforce this Guaranty, it being understood and agreed that such rights and remedies may be exercised by each Senior Managing Agent for the benefit of the Banks upon the terms of this Agreement. * * * -85- EX-10.8 4 CREDIT AGREEMENT (364 DAY NABISCO CREDIT AGRMNT) Exhibit 10.8 364 DF CREDIT AGREEMENT ================================================================================ CREDIT AGREEMENT AMONG NABISCO HOLDINGS CORP., NABISCO, INC. AND BANKERS TRUST COMPANY, THE CHASE MANHATTAN BANK, CITIBANK, N.A. AND THE FUJI BANK, LIMITED, AS SENIOR MANAGING AGENTS AND VARIOUS LENDING INSTITUTIONS ------------------------ Dated as of October 31, 1996 ------------------------ $1,500,000,000 ================================================================================ TABLE OF CONTENTS Page ---- SECTION 1. Amount and Terms of Credit...................................... 1 1.01 Commitments.................................................... 1 1.02 Minimum Amount of Each Borrowing; Maximum Number of Borrowings................................................... 2 1.03 Notice of Borrowing of Revolving Loans......................... 2 1.04 Competitive Bid Borrowings..................................... 3 1.05 Disbursement of Funds.......................................... 5 1.06 Notes; Register................................................ 6 1.07 Conversions.................................................... 6 1.08 Pro Rata Borrowings............................................ 7 1.09 Interest....................................................... 7 1.10 Interest Periods............................................... 8 1.11 Increased Costs, Illegality, etc............................... 9 1.12 Compensation................................................... 11 1.13 Change of Lending Office....................................... 12 1.14 Replacement of Banks........................................... 12 1.15 Notice of Certain Costs........................................ 13 1.16 Commitment Increases........................................... 13 SECTION 2. Fees; Commitments............................................... 14 2.01 Fees........................................................... 14 2.02 Voluntary Reduction of Commitments............................. 15 2.03 Mandatory Reduction of Commitments, etc........................ 15 SECTION 3. Payments........................................................ 15 3.01 Voluntary Prepayments.......................................... 15 3.02 Mandatory Prepayments.......................................... 16 3.03 Method and Place of Payment.................................... 16 3.04 Net Payments................................................... 17 (i) Page ---- SECTION 4. Conditions Precedent to the Effective Date....................... 19 4.01 Execution of Agreement......................................... 19 4.02 Notes; Effectiveness of Nabisco Credit Agreement............... 19 4.03 Officers' Certificate.......................................... 19 4.04 Opinions of Counsel............................................ 19 4.05 Corporate Proceedings.......................................... 19 4.06 Organizational Documentation, etc.............................. 19 4.07 Adverse Change, etc............................................ 20 4.08 Litigation..................................................... 20 4.09 Termination of the Existing Credit Agreements................ 20 SECTION 5. Conditions Precedent to Loans.................................... 20 5.01 Effectiveness.................................................. 20 5.02 No Default; Representations and Warranties..................... 20 5.03 Notice of Borrowing, etc....................................... 21 SECTION 6. Representations, Warranties and Agreements...................... 21 6.01 Corporate Status............................................... 21 6.02 Corporate Power and Authority.................................. 21 6.03 No Violation................................................... 22 6.04 Litigation..................................................... 22 6.05 Use of Proceeds; Margin Regulations............................ 22 6.06 Governmental Approvals......................................... 23 6.07 Investment Company Act......................................... 23 6.08 True and Complete Disclosure................................... 23 6.09 Financial Condition; Financial Statements...................... 23 6.10 Tax Returns and Payments....................................... 23 6.11 Compliance with ERISA.......................................... 24 6.12 Subsidiaries................................................... 24 6.13 Patents, etc................................................... 24 6.14 Pollution and Other Regulations................................ 24 6.15 Properties..................................................... 25 SECTION 7. Affirmative Covenants............................................ 25 7.01 Information Covenants.......................................... 25 7.02 Books, Records and Inspections................................. 27 7.03 Insurance...................................................... 27 7.04 Payment of Taxes............................................... 27 7.05 Consolidated Corporate Franchises.............................. 27 7.06 Compliance with Statutes, etc.................................. 28 7.07 ERISA.......................................................... 28 (ii) Page ---- 7.08 Good Repair.................................................... 29 7.09 End of Fiscal Years; Fiscal Quarters........................... 29 7.10 Commercial Paper and Competitive Bid Loan Outstandings......... 29 SECTION 8. Negative Covenants............................................... 29 8.01 Changes in Business............................................ 29 8.02 Consolidation, Merger, Sale of Assets, etc..................... 30 8.03 Liens.......................................................... 30 8.04 Indebtedness................................................... 31 8.05 Limitation on Restricted Payments.............................. 32 8.06 Transactions with Affiliates................................... 34 8.07 Consolidated Net Worth......................................... 34 8.08 Leverage Ratio................................................. 34 8.09 Cash Interest Coverage Ratio................................... 34 SECTION 9. Events of Default............................................... 34 9.01 Payments....................................................... 34 9.02 Representations, etc........................................... 34 9.03 Covenants...................................................... 34 9.04 Default Under Other Agreements................................. 35 9.05 Bankruptcy, etc................................................ 35 9.06 ERISA.......................................................... 36 9.07 Judgments...................................................... 36 9.08 Guaranty....................................................... 37 SECTION 10. Definitions..................................................... 38 SECTION 11. The Senior Managing Agents...................................... 55 11.01 Appointment................................................... 55 11.02 Delegation of Duties.......................................... 56 11.03 Exculpatory Provisions........................................ 56 11.04 Reliance by Senior Managing Agents............................ 57 11.05 Notice of Default............................................. 57 11.06 Non-Reliance on Senior Managing Agents and Other Banks........ 57 11.07 Indemnification............................................... 58 11.08 Senior Managing Agents in Their Individual Capacities......... 59 11.09 Successor Senior Managing Agents.............................. 59 SECTION 12. Miscellaneous................................................... 59 12.01 Payment of Expenses, etc...................................... 59 12.02 Right of Setoff............................................... 60 (iii) Page ---- 12.03 Notices....................................................... 60 12.04 Benefit of Agreement.......................................... 60 12.05 No Waiver; Remedies Cumulative................................ 63 12.06 Payments Pro Rata............................................. 64 12.07 Calculations; Computations.................................... 64 12.08 Governing Law; Submission to Jurisdiction; Venue.............. 65 12.09 Counterparts.................................................. 65 12.10 Headings Descriptive.......................................... 66 12.11 Amendment or Waiver........................................... 66 12.12 Survival...................................................... 66 12.13 Domicile of Loans............................................. 66 12.14 Confidentiality............................................... 66 12.15 Waiver of Jury Trial.......................................... 67 SECTION 13. Guaranty........................................................ 67 13.01 The Guaranty.................................................. 67 13.02 Bankruptcy.................................................... 68 13.03 Nature of Liability........................................... 68 13.04 Independent Obligation........................................ 68 13.05 Authorization................................................. 68 13.06 Reliance...................................................... 69 13.07 Subordination................................................. 69 13.08 Waiver........................................................ 69 13.09 Limitation on Enforcement..................................... 70 ANNEX I -- List of Banks and Commitments ANNEX II -- Bank Addresses ANNEX III -- Schedule of Material Subsidiaries ANNEX IV -- Certain Litigation ANNEX V -- Specified Permitted Existing Debt EXHIBIT A -- Form of Note EXHIBIT B-1 -- Form of Opinion of General Counsel of the Borrower EXHIBIT B-2 -- Form of Opinion of White & Case, Special Counsel to the Banks EXHIBIT C-1 -- Form of Notice of Assignment EXHIBIT C-2 -- Form of Assignment Agreement EXHIBIT C-3 -- Form of Agreement of Commitment Increase EXHIBIT D -- Form of Confidentiality Agreement (iv) CREDIT AGREEMENT, dated as of October 31, 1996, among NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), NABISCO, INC., a New Jersey corporation (the "Borrower"), and the lending institutions listed from time to time on Annex I hereto (each, a "Bank" and, collectively, the "Banks"). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 10 are used herein as so defined. W I T N E S S E T H : WHEREAS, subject to and upon the terms and conditions herein set forth, the Banks are willing to make available the credit facility provided for herein. NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. 1.01 Commitments. (a) Subject to and upon the terms and conditions herein set forth, each Bank severally agrees to make a loan or loans (each, a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower, which Revolving Loans: (i) shall be made at any time and from time to time on and after the Effective Date and prior to the Commitment Expiry Date; (ii) may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Reference Rate Loans or Eurodollar Loans, provided that all Revolving Loans made by all Banks pursuant to the same Borrowing shall, unless otherwise specifically provided herein, consist entirely of Revolving Loans of the same Type; (iii) may be repaid and reborrowed in accordance with the provisions hereof; and (iv) shall not exceed for any Bank at any time of incurrence thereof and after giving effect thereto and the use of the proceeds thereof that aggregate principal amount which, when added to the product of (x) such Bank's Percentage and (y) the sum of (I) the aggregate outstanding principal amount of all Competitive Bid Loans then outstanding and (II) Commercial Paper Outstandings at such time, equals the Commitment of such Bank at such time. -1- (b) Subject to and upon the terms and conditions herein set forth, each Bank severally agrees that the Borrower may incur a loan or loans (each, a "Competitive Bid Loan" and, collectively, the "Competitive Bid Loans") pursuant to a Competitive Bid Borrowing from time to time on and after the Effective Date and prior to the date which is the third Business Day preceding the date which is 14 days prior to the Commitment Expiry Date, provided, that after giving effect to any Competitive Bid Borrowing and the use of the proceeds thereof, the aggregate outstanding principal amount of Competitive Bid Loans when combined with the aggregate outstanding principal amount of all Revolving Loans then outstanding and the aggregate Commercial Paper Outstandings at such time shall not exceed the Total Commitment at such time. Within the foregoing limits and subject to the conditions set out in Section 1.04, Competitive Bid Loans may be repaid and reborrowed in accordance with the provisions hereof. 1.02 Minimum Amount of Each Borrowing; Maximum Number of Borrowings. The aggregate principal amount of each Borrowing of Revolving Loans shall not be less than the Minimum Borrowing Amount. More than one Borrowing may be incurred on any date; provided that at no time shall there be outstanding more than eight Borrowings of Eurodollar Loans under this Agreement. 1.03 Notice of Borrowing of Revolving Loans. (a) Whenever the Borrower desires to incur Revolving Loans hereunder, it shall give the Payments Administrator at the Payments Administrator's Office (x) prior to 11:00 A.M. (New York time) at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Revolving Loans constituting Eurodollar Loans and (y) prior to 11:00 A.M. (New York time) prior written notice (or telephonic notice promptly confirmed in writing) on the date of each Borrowing of Revolving Loans constituting Reference Rate Loans. Each such notice (each, a "Notice of Borrowing") shall be irrevocable and shall specify: (i) the aggregate principal amount of the Revolving Loans to be made pursuant to such Borrowing; (ii) the date of Borrowing (which shall be a Business Day); and (iii) whether the respective Borrowing shall consist of Reference Rate Loans or Eurodollar Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto. The Payments Administrator shall promptly give each Bank written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing of Revolving Loans, of such Bank's proportionate share thereof and of the other matters covered by the Notice of Borrowing. (b) Without in any way limiting the obligation of the Borrower to confirm in writing any notice it may give hereunder by telephone, the Payments Administrator may act prior to receipt of written confirmation without liability upon the basis of such telephonic notice, believed by the Payments Administrator in good faith to be from the Chairman, Chief Financial Officer or Treasurer of the Borrower, or from any other person designated in writing to the Payments Administrator by the Chief Financial Officer or -2- Treasurer of the Borrower as a person entitled to give telephonic notices under this Agreement on behalf of the Borrower. In each such case the Borrower hereby waives the right to dispute the Payments Administrator's record of the terms of any such telephonic notice. 1.04 Competitive Bid Borrowings. (a) Whenever the Borrower desires to incur a Competitive Bid Borrowing, it shall deliver to the Payments Administrator at the Payments Administrator's Office, prior to 11:00 A.M. (New York time) (x) at least four Business Days prior to the date of such proposed Competitive Bid Borrowing, in the case of a Spread Borrowing, and (y) at least one Business Day prior to the date of such proposed Competitive Bid Borrowing, in the case of an Absolute Rate Borrowing, a written notice (a "Notice of Competitive Bid Borrowing"), which notice shall specify in each case (i) the date (which shall be a Business Day) and the aggregate amount of the proposed Competitive Bid Borrowing, (ii) the maturity date for repayment of each and every Competitive Bid Loan to be made as part of such Competitive Bid Borrowing (which maturity date may be (A) one, two, three or six months after the date of such Competitive Bid Borrowing in the case of a Spread Borrowing and (B) between 7 and 180 days, inclusive, after the date of such Competitive Bid Borrowing in the case of an Absolute Rate Borrowing, provided that in no event shall the maturity date of any Competitive Bid Borrowing be later than the third Business Day preceding the Commitment Expiry Date), (iii) the interest payment date or dates relating thereto, (iv) whether the proposed Competitive Bid Borrowing is to be an Absolute Rate Borrowing or a Spread Borrowing, and if a Spread Borrowing, the Interest Rate Basis, and (v) any other terms to be applicable to such Competitive Bid Borrowing. The Payments Administrator shall promptly notify each Bidder Bank of each such request for a Competitive Bid Borrowing received by it from the Borrower by telecopying to each such Bidder Bank a copy of the related Notice of Competitive Bid Borrowing. (b) Each Bidder Bank shall, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Loans to the Borrower as part of such proposed Competitive Bid Borrowing at a rate or rates of interest (which shall be a specified Spread over or under the Interest Rate Basis in the case of a Spread Borrowing or an Absolute Rate in the case of an Absolute Rate Borrowing) specified by such Bank in its sole discretion and determined by such Bank independently of each other Bank, by notifying the Payments Administrator (which shall give prompt notice thereof to the Borrower) before 10:00 A.M. (New York time) on the date (the "Reply Date") which is (x) in the case of an Absolute Rate Borrowing, the date of such proposed Competitive Bid Borrowing and (y) in the case of a Spread Borrowing, three Business Days before the date of such proposed Competitive Bid Borrowing, of the minimum amount and maximum amount of each Competitive Bid Loan which such Bank would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso to Section 1.01(b), exceed such Bank's Commitment), the rate or rates of interest therefor and such Bank's lending office with respect to such Competitive Bid Loan, provided that -3- if the Payments Administrator in its capacity as a Bank shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 9:30 A.M. (New York time) on the Reply Date. Any Bidder Bank not giving the Payments Administrator the notice specified in the preceding sentence shall not be obligated to, and shall not, make any Competitive Bid Loan as part of such Competitive Bid Borrowing. (c) The Borrower shall, in turn, before 11:00 A.M. (New York time) (x) on the Reply Date in the case of a proposed Absolute Rate Borrowing and (y) on the Business Day following the Reply Date in the case of a proposed Spread Borrowing, either: (i) cancel such Competitive Bid Borrowing by giving the Payments Administrator notice to such effect, or (ii) accept one or more of the offers made by any Bidder Bank or Banks by giving notice (in writing or by telephone confirmed in writing) to the Payments Administrator of the amount of each Competitive Bid Loan (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Payments Administrator on behalf of such Bidder Bank for such Competitive Bid Borrowing) to be made by each Bidder Bank as part of such Competitive Bid Borrowing, and reject any remaining offers made by Banks by giving the Payments Administrator notice to that effect, provided that (x) acceptance of offers may only be made on the basis of ascending Absolute Rates (in the case of an Absolute Rate Borrowing) or Spreads (in the case of a Spread Borrowing), commencing with the lowest rate so offered and (y) if offers are made by two or more Bidder Banks at the same rate and acceptance of all such equal offers would result in a greater principal amount of Competitive Bid Loans being accepted than the aggregate principal amount requested by the Borrower, the Borrower shall then have the right to accept one or more such equal offers in their entirety and reject the other equal offer or offers or to allocate acceptance among all such equal offers (but giving effect to the minimum and maximum amounts specified for each such offer), as the Borrower may elect in its sole discretion, provided further that in no event shall the aggregate principal amount of the Competitive Bid Loans accepted by the Borrower as part of a Competitive Bid Borrowing exceed the amount specified by the Borrower in the related Notice of Competitive Bid Borrowing. (d) If the Borrower notifies the Payments Administrator that such Competitive Bid Borrowing is cancelled, the Payments Administrator shall give prompt notice thereof to the Bidder Banks and such Competitive Bid Borrowing shall not be made. -4- (e) If the Borrower accepts one or more of the offers made by any Bidder Bank or Banks, the Payments Administrator shall in turn promptly notify (x) each Bidder Bank that has made an offer of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Bidder Bank have been accepted by the Borrower and (y) each Bidder Bank that is to make a Competitive Bid Loan as part of such Competitive Bid Borrowing of the amount of each Competitive Bid Loan to be made by such Bidder Bank. (f) On the last Business Day of each calendar quarter, the Payments Administrator shall notify the Banks of the aggregate principal amount of Competitive Bid Loans outstanding at such time. 1.05 Disbursement of Funds. (a) No later than 1:00 P.M. (New York time) on the date of each Borrowing, each Bank will make available its pro rata portion, if any, of each Borrowing requested to be made on such date in the manner provided below. (b) Each Bank shall make available all amounts it is to fund under any Borrowing in U.S. dollars and immediately available funds to the Payments Administrator at the Payments Administrator's Office and the Payments Administrator will make available to the Borrower by depositing to its account at the Payments Administrator's Office the aggregate of the amounts so made available in U.S. dollars and the type of funds received. Unless the Payments Administrator shall have been notified by any Bank prior to the date of any such Borrowing that such Bank does not intend to make available to the Payments Administrator its portion of the Borrowing or Borrowings to be made on such date, the Payments Administrator may assume that such Bank has made such amount available to the Payments Administrator on such date of Borrowing, and the Payments Administrator, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Payments Administrator by such Bank and the Payments Administrator has made available same to the Borrower, the Payments Administrator shall be entitled to recover such corresponding amount from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Payments Administrator's demand therefor, the Payments Administrator shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Payments Administrator. The Payments Administrator shall also be entitled to recover from such Bank or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Payments Administrator to the Borrower to the date such corresponding amount is recovered by the Payments Administrator, at a rate per annum equal to (x) if paid by such Bank, the overnight Federal Funds Rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.09, for the respective Loans. -5- (c) Nothing in this Section 1.05 shall be deemed to relieve any Bank from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any default by such Bank hereunder. 1.06 Notes; Register. (a) The Borrower's obligation to pay the principal of, and interest on, the Revolving Loans made by each Bank shall, except as provided in Sections 1.14 and 12.04, be evidenced by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit A with blanks appropriately completed in conformity herewith (each, a "Note" and, collectively, the "Notes"). (b) The Note issued to each Bank shall: (i) be payable to the order of such Bank and be dated the Effective Date; (ii) be in a stated principal amount equal to the Commitment of such Bank and be payable in the principal amount of the Revolving Loans evidenced thereby; (iii) mature on the Maturity Date; and (iv) bear interest as provided in the appropriate clause of Section 1.09 in respect of the Reference Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby. (c) Each Bank will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of its Note endorse on the reverse side thereof the outstanding principal amount of Revolving Loans evidenced thereby. Failure to make any such notation or any error in any such notation shall not affect the Borrower's obligations in respect of such Revolving Loans. (d) The Payments Administrator shall maintain at the Payments Administrator's Office a register for the recordation of the names and addresses of the Banks, the Commitments of the Banks from time to time, and the principal amount of the Revolving Loans and Competitive Bid Loans owing to each Bank from time to time, together with the maturity and interest rates applicable to each such Competitive Bid Loan and other terms applicable thereto (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error. The Register shall be available for inspection by the Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. 1.07 Conversions. The Borrower shall have the option to convert on any Business Day all or a portion equal to at least the Minimum Borrowing Amount of the outstanding principal amount of Revolving Loans of one Type into a Borrowing or Borrowings of another Type, provided that: (i) no partial conversion of Eurodollar Loans shall reduce the outstanding principal amount of Eurodollar Loans made pursuant to a single Borrowing to less than the Minimum Borrowing Amount; (ii) Reference Rate Loans may only be converted into Eurodollar Loans if no Event of Default is in existence on the date of the conversion; and (iii) Borrowings resulting from conversions pursuant to this Section 1.07 shall be limited in number as provided in Section 1.02. Each such conversion shall -6- be effected by the Borrower by giving the Payments Administrator at the Payments Administrator's Office prior to 11:00 A.M. (New York time) at least three Business Days' (or one Business Day's in the case of a conversion into Reference Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of Conversion") specifying the Revolving Loans to be so converted, the Type of Revolving Loans to be converted into and, if to be converted into Eurodollar Loans, the Interest Period to be initially applicable thereto. The Payments Administrator shall give each Bank notice as promptly as practicable of any such proposed conversion affecting any of its Revolving Loans. 1.08 Pro Rata Borrowings. All Borrowings of Revolving Loans under this Agreement shall be loaned by the Banks pro rata on the basis of their Percentages; provided, that the Borrower may make a Borrowing from an existing Bank or a New Bank which agrees to a commitment increase pursuant to Section 1.16 on a non-pro-rata basis in an amount equal to such Bank's or New Bank's Percentage of the Total Commitment (after giving effect to any such commitment increase). It is understood that no Bank shall be responsible for any default by any other Bank in its obligation to make Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to fulfill its commitments hereunder. 1.09 Interest. (a) The unpaid principal amount of each Reference Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Reference Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Applicable Eurodollar Margin plus the relevant Eurodollar Rate. (c) The unpaid principal amount of each Competitive Bid Loan shall bear interest from the date the proceeds thereof are made available to the Borrower until maturity (whether by acceleration or otherwise) at the rate or rates per annum specified by a Bidder Bank or Banks, as the case may be, pursuant to Section 1.04(b) and accepted by the Borrower pursuant to Section 1.04(c). (d) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan shall bear interest at a rate per annum equal to 2% in excess of the Reference Rate in effect from time to time; provided that each Eurodollar Loan and Competitive Bid Loan shall bear interest after maturity (whether by acceleration or otherwise) until the end of the Interest Period then applicable thereto at a rate per annum equal to 2% in excess of the rate of interest applicable thereto at maturity. -7- (e) Interest on each Loan shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable: (i) in respect of each Reference Rate Loan, quarterly in arrears on the 15th day of each January, April, July and October; (ii) in respect of any Competitive Bid Loan, at such times as specified in the Notice of Competitive Bid Borrowing relating thereto; (iii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period; (iv) in respect of each Loan (other than a Reference Rate Loan), on any prepayment (on the amount prepaid); and (v) in respect of each Loan, at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (f) All computations of interest hereunder shall be made in accordance with Section 12.07(b). (g) The Payments Administrator, upon determining the interest rate for any Borrowing of Eurodollar Loans for any Interest Period, shall promptly notify the Borrower and the Banks thereof. 1.10 Interest Periods. At the time the Borrower gives a Notice of Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 11:00 A.M. (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect the Interest Period applicable to such Borrowing by giving the Payments Administrator written notice (or telephonic notice promptly confirmed in writing) thereof, which Interest Period shall, at the option of the Borrower, be a one, two, three or six month period. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Reference Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) if any Interest Period relating to a Borrowing of Eurodollar Loans or a Spread Borrowing priced by reference to the Eurodollar Rate begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; -8- (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period in respect of a Eurodollar Loan or a Spread Borrowing priced by reference to the Eurodollar Rate would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; and (iv) no Interest Period in respect of Eurodollar Loans shall extend beyond the Maturity Date. Notwithstanding the foregoing, if an Event of Default is in existence at the time any Interest Period in respect of any Eurodollar Loans is to expire, such Eurodollar Loans may not be continued as Eurodollar Loans but instead shall be automatically converted on the last day of such Interest Period into Reference Rate Loans. If upon the expiration of any Interest Period in respect of Eurodollar Loans, the Borrower has failed to elect a new Interest Period to be applicable thereto as provided above, the Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Reference Rate Loans effective as of the expiration date of such current Interest Period. 1.11 Increased Costs, Illegality, etc. (a) In the event that (x) in the case of clause (i) below, the Majority SMA or (y) in the case of clauses (ii) and (iii) below, any Bank shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period that, by reason of any changes arising on or after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii) at any time, that such Bank shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans or Competitive Bid Loans because of (x) any change since the date of this Agreement (or, in the case of any such cost or reduction with respect to any Competitive Bid Loan, since the date of the making of such Competitive Bid Loan) in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline or order) (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the compu- -9- tation of the Eurodollar Rate) and/or (y) other circumstances affecting the interbank Eurodollar market; or (iii) at any time, that the making or continuance of any Loan (other than Reference Rate Loans) has become unlawful by compliance by such Bank in good faith with any law, governmental rule, regulation, guideline or order (or would conflict with any such governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful), or, in the case of a Eurodollar Loan, has become impracticable as a result of a contingency occurring after the date of this Agreement which materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Bank (or the Majority SMA, in the case of clause (i) above) shall on such date give notice (if by telephone confirmed in writing) to the Borrower and to the Payments Administrator of such determination (which notice the Payments Administrator shall promptly transmit to each of the other Banks). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Payments Administrator notifies the Borrower and the Banks that the circumstances giving rise to such notice by the Majority SMA no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower shall pay to such Bank, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its sole discretion shall determine) as shall be required to compensate such Bank for such increased costs or reductions in amounts receivable hereunder (a written notice as to the additional amounts owed to such Bank, showing in reasonable detail the basis for the calculation thereof, submitted to the Borrower by such Bank shall, absent manifest error, be final and conclusive and binding upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.11(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan or Competitive Bid Loan is affected by the circumstances described in Section 1.11(a)(ii) (for Eurodollar Loans only) or (iii), the Borrower may (and in the case of a Eurodollar Loan or Competitive Bid Loan affected pursuant to Section 1.11(a)(iii) shall) either (x) if the affected Eurodollar Loan or Competitive Bid Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Payments Administrator telephonic notice (confirmed promptly in writing) thereof as promptly as practicable after the Borrower was notified by a Bank pursuant to Section 1.11(a)(ii) or (iii), (y) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' notice to the Payments Administrator, require the affected Bank to convert each such Eurodollar Loan into a Reference Rate Loan or (z) if the affected -10- Competitive Bid Loan is then outstanding, prepay such Competitive Bid Loan in full, provided that if more than one Bank is affected in a similar manner at any time, then all such similarly affected Banks must be treated the same pursuant to this Section 1.11(b). (c) If after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Bank or its parent with any request or directive made or adopted after the date hereof regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's or its parents' capital or assets as a consequence of such Bank's commitments or obligations hereunder to a level below that which such Bank or its parent could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Bank's or its parent's policies with respect to capital adequacy), then from time to time, within 15 days after demand by such Bank (with a copy to the Payments Administrator), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank or its parent for such reduction. Each Bank, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.11(c), will give prompt written notice thereof to the Borrower, which notice shall set forth in reasonable detail the basis of the calculation of such additional amounts, although the failure to give any such notice shall not, subject to Section 1.15, release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 1.11(c) upon receipt of such notice. 1.12 Compensation. The Borrower shall compensate each Bank, upon its written request (which request shall set forth in reasonable detail the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Bank to fund its Eurodollar Loans or Competitive Bid Loans but excluding any loss of anticipated profit with respect to such Loans) which such Bank may sustain: (i) if for any reason (other than a default by such Bank or the Payments Administrator) a Borrowing of Eurodollar Loans or Competitive Bid Loans accepted by the Borrower in accordance with Section 1.04(c)(ii) does not occur on a date specified therefor in a Notice of Borrowing, Notice of Competitive Bid Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.11); (ii) if any repayment or conversion of any of its Eurodollar Loans or any repayment of Competitive Bid Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any of its Eurodollar Loans is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Eurodollar Loans or Competitive Bid Loans when required by the terms of this Agreement or (y) an -11- election made pursuant to Section 1.11(b). Calculation of all amounts payable to a Bank under this Section 1.12 in respect of Eurodollar Loans shall be made as though that Bank had actually funded its relevant Eurodollar Loan through the purchase of a Eurodollar deposit bearing interest at the Eurodollar Rate in an amount equal to the amount of that Loan, having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Bank to a domestic office of that Bank in the United States of America; provided, however, that each Bank may fund each of its Eurodollar Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 1.12. 1.13 Change of Lending Office. Each Bank agrees that, upon the occurrence of any event giving rise to the operation of Section 1.11(a)(ii) or (iii) or 3.04 with respect to such Bank, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans affected by such event; provided, that such designation is made on such terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 1.13 shall affect or postpone any of the obligations of the Borrower or the right of any Bank provided in Section 1.11 or 3.04. 1.14 Replacement of Banks. If (x) any Bank becomes a Defaulting Bank or otherwise defaults in its obligations to make Loans, (y) any Bank refuses to give timely consent to proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks or (z) any Bank is owed increased costs under Section 1.11 or Section 3.04 which in the judgment of the Borrower are material in amount and which are not otherwise requested generally by the other Banks, the Borrower shall have the right, if no Event of Default then exists and, in the case of a Bank described in clause (z) above, such Bank has not withdrawn its request for such compensation or changed its applicable lending office with the effect of eliminating or substantially decreasing (to a level which in the judgment of the Borrower is not material) such increased cost, to replace such Bank (the "Replaced Bank") with one or more other Eligible Transferee or Transferees (collectively, the "Replacement Bank") reasonably acceptable to the Majority SMA, provided that (i) at the time of any replacement pursuant to this Section 1.14, the Replacement Bank shall enter into one or more Assignment Agreements pursuant to which the Replacement Bank shall acquire all of the Commitment and outstanding Loans of the Replaced Bank and, in connection therewith, shall pay to (x) the Replaced Bank in respect thereof an amount equal to the sum of (a) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Bank and (b) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to Section 2.01, (ii) all obligations of the Borrower owing to the Replaced Bank (other than those specifically described in clause (i) above in respect of which the -12- assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Bank concurrently with such replacement and (iii) in the event that such Replaced Bank is a party to the Nabisco Credit Agreement, the Borrower shall also take the actions specified in Section 1.14 of the Nabisco Credit Agreement and replace such Bank as a Bank thereunder. Upon the execution of the respective assignment documentation, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Bank, delivery to the Replacement Bank of the appropriate Note executed by the Borrower, the Replacement Bank shall become a Bank hereunder and the Replaced Bank shall cease to constitute a Bank hereunder, except with respect to indemnification provisions under this Agreement, which shall survive as to such Replaced Bank. 1.15 Notice of Certain Costs. Notwithstanding anything in this Agreement to the contrary, to the extent any notice required by Section 1.11 is given by any Bank more than 180 days after the occurrence of the event giving rise to the additional cost, reduction in amounts or other additional amounts of the type described in such Section, such Bank shall not be entitled to compensation under Section 1.11 for any such amounts incurred or accruing prior to the giving of such notice to the Borrower. 1.16 Commitment Increases. (a) The Banks hereby acknowledge and agree that the Borrower may at any time prior to the Commitment Expiry Date, but no more than once during any calendar quarter, increase the Total Commitment under this Agreement, in incremental amounts of $10,000,000, by an aggregate amount not in excess of $500,000,000 for all such increases by either requesting a Bank or Banks to increase its Commitment or Commitments (provided that no Bank shall be required to agree to any such increase) or by requesting a financial institution that is an Eligible Transferee to become a party to this Agreement (such institution, a "New Bank"), provided that (i) no Event of Default has occurred and is continuing at the time of any such increase, (ii) the Credit Rating shall be either an Increased Investment Grade Rating or a Maximum Investment Grade Rating at the time of any such increase, (iii) the Borrower shall deliver a notice of such increase to the Payments Administrator describing (x) the amount of such increase and the Total Commitment after giving effect to such increase and (y) the Bank(s) or New Bank(s) agreeing to such increase and the amount of each such entity's Commitment after giving effect to such increase, and (iv) the Borrower and each such Bank or New Bank shall deliver an Agreement of Commitment Increase to the Payments Administrator. Any such Total Commitment increase will become effective upon (A) in the case of New Banks only, the payment to the Payments Administrator of a nonrefundable fee of $2,500 and (B) in all cases, the recording by the Payments Administrator of such addition to the Total Commitment in the Register, the Payments Administrator hereby agreeing to effect such recordation no later than three Business Days after its receipt of an Agreement of Commitment Increase. Upon the effectiveness of any additional Commitment pursuant to this Section 1.16, (x) the New Bank, if any, will become a "Bank" for all purposes of this -13- Agreement and the other Credit Documents with a Commitment as so recorded by the Payments Administrator in the Register and (y) the Borrower shall issue to the respective Bank or New Bank a new Note. The Payments Administrator will prepare on the last Business Day of each calendar quarter during which an increase has become effective pursuant to this Section 1.16 a new Annex I hereto giving effect to all such increases effected during such quarter and will promptly provide same to the Borrower and each of the Banks. (b) If the Total Commitment is increased pursuant to Section 1.16(a) at a time when Loans are outstanding, then the Borrower shall take all such actions as appropriate to repay and reborrow Loans (but without any obligation to repay Eurodollar Loans other than on the last day of an Interest Period applicable thereto and without regard to the provisions of the first sentence of Section 1.08), so that, as soon as practicable, the outstanding principal amount of the Loans of each Non-Defaulting Bank equals such Bank's Percentage of the aggregate outstanding principal amount of all Loans of all Non-Defaulting Banks. SECTION 2. Fees; Commitments. 2.01 Fees. (a) The Borrower agrees to pay the Payments Administrator a facility fee (the "Facility Fee") for the account of each Non-Defaulting Bank for the period from and including the Effective Date to but not including the Termination Date computed for each day at a rate equal to the Facility Fee Percentage for such day multiplied by the then Commitment of such Bank (or if after the date the Total Commitment has terminated, on the then aggregate outstanding principal amount of Loans made by such Bank). Such Facility Fee shall be due and payable quarterly in arrears on the 15th day of each January, April, July and October and on the Termination Date. (b) The Borrower agrees to pay to the Payments Administrator a utilization fee (the "Utilization Fee") for the account of the Banks pro rata on the basis of their respective Adjusted Percentages, computed for each day during a Utilization Period at a rate equal to the Applicable Utilization Fee Percentage for such day multiplied by the daily average Total Adjusted Utilization Amount for such Utilization Period. Such Utilization Fee shall be due and payable in arrears on the 15th day of the month following the end of each Utilization Period and on the Termination Date. (c) The Borrower shall pay the Payments Administrator for the account of each Senior Managing Agent and each Bank the fees specified in the accepted commitment letter, or related fee letter, executed by such Senior Managing Agent or such Bank, as the case may be, when and as due. -14- (d) All computations of Fees shall be made in accordance with Section 12.07(b). 2.02 Voluntary Reduction of Commitments. Upon at least three Business Days' prior written notice (or telephonic notice confirmed in writing) to the Payments Administrator at the Payments Administrator's Office (which notice the Payments Administrator shall promptly transmit to each of the Banks), the Borrower shall have the right, without premium or penalty, to terminate the Total Unutilized Commitment, in part or in whole (or, to the extent that at such time there are no Loans outstanding, to terminate the Total Commitment, in whole); provided, that (x) any such termination shall apply to proportionately and permanently reduce the Commitment of each of the Banks and (y) any partial reduction pursuant to this Section 2.02 shall be in the amount of at least $50,000,000. 2.03 Mandatory Reduction of Commitments, etc. (a) The Total Commitment (and the Commitment of each Bank) shall be terminated on the Expiration Date unless the Effective Date has occurred on or before such date. (b) On the date which is the earlier of (x) 30 days after any date on which a Change of Control occurs and (y) the date on which any Indebtedness of the Borrower in excess of $100,000,000 individually or $250,000,000 in the aggregate is required to be repurchased as a result of any such Change of Control, the Total Commitment shall be reduced to zero. (c) The Total Commitment shall terminate on the Commitment Expiry Date. SECTION 3. Payments. 3.01 Voluntary Prepayments. The Borrower shall have the right to prepay Revolving Loans in whole or in part from time to time on the following terms and conditions: (i) the Borrower shall give the Payments Administrator at the Payments Administrator's Office written notice (or telephonic notice promptly confirmed in writing) of its intent to make such prepayment, the amount of such prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which made, which notice shall be given by the Borrower no later than 11:00 A.M. (New York time) one Business Day prior to such prepayment and shall promptly be transmitted by the Payments Administrator to each of the Banks; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $25,000,000, provided that no partial prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans; and (iii) each prepayment in respect of any Revolving Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans, provided -15- that at the Borrower's election in connection with any prepayment pursuant to this Section 3.01, such prepayment shall not be applied to any Revolving Loan of a Defaulting Bank at any time when the aggregate amount of Revolving Loans of any Non-Defaulting Bank exceeds such Non-Defaulting Bank's Percentage of all Revolving Loans then outstanding. The Borrower shall not have the right to voluntarily prepay any Competitive Bid Loans. 3.02 Mandatory Prepayments. (A) Requirements. If on any date prior to the Commitment Expiry Date the sum of the outstanding principal amount of Revolving Loans made by Non-Defaulting Banks and Competitive Bid Loans and the aggregate amount of Commercial Paper Outstandings (all the foregoing, collectively, the "Aggregate Outstandings") exceeds the Adjusted Total Commitment as then in effect, the Borrower shall repay on such date the principal of the Revolving Loans in an amount equal to such excess. If, after giving effect to the prepayment of all outstanding Revolving Loans, the Aggregate Outstandings exceed the Adjusted Total Commitment then in effect, the Borrower shall repay on such date the principal of Competitive Bid Loans in an aggregate amount equal to such excess, provided that no Competitive Bid Loan shall be prepaid pursuant to this sentence unless the Bank that made same consents to such prepayment. (B) Application. With respect to each prepayment of Loans required by this Section 3.02, the Borrower may designate the Types of Loans which are to be prepaid and the specific Borrowing(s) pursuant to which made, provided that: (i) if any prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans, such Borrowing shall immediately be converted into Reference Rate Loans; (ii) each prepayment of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans; and (iii) notwithstanding the provisions of the preceding clause (ii), no prepayment made pursuant to Section 3.02(A) of Revolving Loans shall be applied to the Revolving Loans of any Defaulting Bank. In the absence of a designation by the Borrower as described in the preceding sentence, the Payments Administrator shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.12. 3.03 Method and Place of Payment. (a) Except as otherwise specifically provided herein, all payments under this Agreement shall be made to the Payments Administrator for the ratable account of the Banks entitled thereto, not later than 1:00 P.M. (New York time) on the date when due and shall be made in immediately available funds and in lawful money of the United States of America at the Payments Administrator's Office, it being understood that written, telex or facsimile transmission notice by the Borrower to the Payments Administrator to make a payment from the funds in the Borrower's account at the Payments Administrator's Office shall constitute the making of such -16- payment to the extent of such funds held in such account. The Payments Administrator will thereafter cause to be distributed on the same day (if payment was actually received by the Payments Administrator prior to 2:00 P.M. (New York time) on such day) like funds relating to the payment of principal or interest or Fees ratably to the Banks entitled thereto. If and to the extent that any such distribution shall not be so made by the Payments Administrator in full on the same day (if payment was actually received by the Payments Administrator prior to 2:00 P.M. (New York time) on such day), the Payments Administrator shall pay to each Bank its ratable amount thereof and each such Bank shall be entitled to receive from the Payments Administrator, upon demand, interest on such amount at the overnight Federal Funds Rate for each day from the date such amount is paid to the Payments Administrator until the date the Payments Administrator pays such amount to such Bank. (b) Any payments under this Agreement which are made later than 1:00 P.M. (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 3.04 Net Payments. (a) All payments made by the Borrower hereunder will be made without setoff or counterclaim. The Borrower will pay, prior to the date on which penalties attach thereto, all present and future income, stamp and other taxes, levies, or costs and charges whatsoever imposed, assessed, levied or collected on or in respect of a Loan and/or the recording, registration, notarization or other formalization thereof and/or any payments of principal, interest or other amounts made on or in respect of a Loan (all such taxes, levies, costs and charges being herein collectively called "Taxes"; provided that Taxes shall not include taxes imposed on or measured by the overall net income of that Bank (or any alternative tax imposed generally by any relevant jurisdiction in lieu of a tax on net income) by the United States of America or any political subdivision or taxing authority thereof or therein, taxes imposed under Section 884 of the Code or taxes on or measured by the overall net income (or any alternative tax imposed generally by any relevant jurisdiction in lieu of a tax on net income) of that Bank or any foreign office, branch or subsidiary of that Bank by any foreign country or subdivision thereof in which that Bank or that office, branch or subsidiary is doing business). The Borrower shall also pay such additional amounts equal to increases in taxes payable by that Bank described in the foregoing proviso which increases are attributable to payments made by the Borrower described in the immediately preceding sentence of this Section. Promptly after the date on which payment of any such Tax is due pursuant to applicable law, the Borrower will, at the request of that Bank, furnish to that Bank evidence, in form and substance satisfactory to that Bank, that the Borrower has met its obligation under this Section 3.04. The Borrower will indemnify each Bank against, and reimburse each Bank on demand for, -17- any Taxes, as determined by that Bank in its good faith and reasonable discretion. Such Bank shall provide the Borrower with appropriate receipts for any payments or reimbursements made by the Borrower pursuant to this Section 3.04. (b) Each Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes agrees to provide to the Borrower on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.14 or Section 12.04 (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer and such Bank is in compliance with the provisions of this Section 3.04(b)), on the date of such assignment or transfer to such Bank, two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement or any Note. Each Bank that is a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, but that is not a corporation (as such term is defined in Section 7701(a)(3) of the Code) for such purposes, agrees to provide to the Borrower on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.14 or Section 12.04 (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer and such Bank is in compliance with the provisions of this Section 3.04(b)), on the date of such assignment to such Bank, two accurate and complete original signed copies of Internal Revenue Service Form W-9 (or successor form). In addition, each such Bank agrees that from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Bank to a continued exemption from United States withholding tax with respect to payments under this Agreement or any Note, or it shall immediately notify the Borrower and the Administrative Agent of its inability to deliver any such form. Notwithstanding anything to the contrary contained in Section 3.04(a), (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or other similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for United States federal income tax purposes and which has not provided to the Borrower such forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 3.04(a) to pay a Bank in respect of income or similar taxes imposed by the United States or any additional amounts with respect thereto if such Bank has not provided to the Borrower the Internal Revenue Service forms required to be provided to the Borrower pursuant to this Section 3.04(b). -18- SECTION 4. Conditions Precedent to the Effective Date. This Agreement shall become effective on the date (the "Effective Date") on which the following conditions shall have been satisfied: 4.01 Execution of Agreement. Each of Holdings, the Borrower and each of the Banks shall have signed a copy of this Agreement (whether the same or different copies) and shall have delivered same to the Payments Administrator or, in the case of the Banks, shall have given to the Payments Administrator telephonic (confirmed in writing), written, telex or facsimile notice (actually received) at such office that the same has been signed and mailed to it. 4.02 Notes; Effectiveness of Nabisco Credit Agreement. On the Effective Date, (i) there shall have been delivered to the Payments Administrator for the account of each Bank the appropriate Note executed by the Borrower in the amount, maturity and as otherwise provided herein and (ii) the Effective Date under, and as defined in, the Nabisco Credit Agreement shall have occurred. 4.03 Officers' Certificate. On the Effective Date, the Payments Administrator shall have received certificates dated such date signed by an appropriate officer of each of Holdings and the Borrower stating that all of the applicable conditions set forth in Sections 4.02, 4.07, 4.09 and 5 exist as of such date. 4.04 Opinions of Counsel. On the Effective Date, the Payments Administrator shall have received an opinion, or opinions, in form and substance satisfactory to each Senior Managing Agent, addressed to each of the Banks and dated the Effective Date, from (i) James A. Kirkman III, Esq., General Counsel of Holdings and the Borrower, which opinion shall cover the matters contained in Exhibit B-1 hereto and (ii) White & Case, special counsel to the Banks, which opinion shall cover the matters contained in Exhibit B-2 hereto. 4.05 Corporate Proceedings. On the Effective Date, all corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be satisfactory in form and substance to each Senior Managing Agent, and the Payments Administrator shall have received all information and copies of all certificates, documents and papers, including records of corporate proceedings and governmental approvals, if any, which any Senior Managing Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. 4.06 Organizational Documentation, etc. On the Effective Date, the Banks shall have received copies of the Certificate of Incorporation and By-Laws of each Credit -19- Party, certified as true and complete by an appropriate corporate officer or governmental authority. 4.07 Adverse Change, etc. On the Effective Date, (i) nothing shall have occurred which has a material adverse effect on the ability of either Credit Party to perform its obligations to the Banks and (ii) there shall have been no material adverse change in the operations, business, property, assets or financial condition of Holdings and its Subsidiaries taken as a whole from that of Holdings and its Subsidiaries taken as a whole on December 31, 1995. The 1996 Restructuring Charge shall not be deemed to constitute a material adverse change. 4.08 Litigation. On the Effective Date, except as set forth in Annex IV hereto, there shall be no actions, suits or proceedings pending or threatened with respect to Holdings or any of its Subsidiaries that (i) are reasonably likely to have a material adverse effect on the business, properties, assets, operations, financial condition or prospects of Holdings and its Subsidiaries taken as a whole or (ii) are reasonably likely to have a material adverse effect on the rights or remedies of the Banks or on the ability of either Credit Party to perform its obligations to the Banks hereunder or under any other Credit Document to which it is a party. 4.09 Termination of the Existing Credit Agreements. On the Effective Date, the total commitments under the Existing Credit Agreements shall have been terminated, and all loans thereunder shall have been repaid in full, together with interest thereon, and all other amounts owing pursuant to the Existing Credit Agreements shall have been repaid in full and the Existing Credit Agreements shall have been terminated and be of no further force or effect (except as to indemnities contained therein which survive the termination of the Existing Credit Agreements in accordance with the terms thereof). SECTION 5. Conditions Precedent to Loans. The obligation of each Bank to make any Loans is subject, at the time of the making of each such Loan, to the satisfaction of the following conditions at such time: 5.01 Effectiveness. The Effective Date shall have occurred. 5.02 No Default; Representations and Warranties. At the time of the making of each Loan and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein or in the other Credit Documents (other than, in the case of a CP Refinancing Borrowing, in Section 6.04 and the last sentence of Section 6.09) shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Loan. -20- 5.03 Notice of Borrowing, etc. Prior to the making of each Revolving Loan, the Payments Administrator shall have received a Notice of Borrowing meeting the requirements of Section 1.03(a). Prior to the making of each Competitive Bid Loan, the Payments Administrator shall have received a Notice of Competitive Bid Borrowing meeting the requirements of Section 1.04(a). The acceptance of the benefits of each Loan shall constitute a representation and warranty by each Credit Party to each of the Banks that all of the applicable conditions specified above in Section 5 exist as of that time. All of the certificates, legal opinions and other documents and papers referred to in Section 4, unless otherwise specified, shall be delivered to the Payments Administrator at the Payments Administrator's Office for the account of each of the Banks and, except for the Notes, in sufficient counterparts for each of the Banks and shall be satisfactory in form and substance to each Senior Managing Agent. SECTION 6. Representations, Warranties and Agreements. In order to induce the Banks to enter into this Agreement and to make the Loans as provided for herein, each of Holdings and the Borrower makes the following representations and warranties to and agreements with the Banks, all of which shall survive the execution and delivery of this Agreement and the making of the Loans (with the making of each Loan being deemed to constitute a representation and warranty that the matters specified in this Section 6, subject to the exceptions set forth in Section 5.02, are true and correct in all material respects on and as of the date hereof and as of the date of each such Loan unless such representation and warranty expressly indicates that it is being made as of any specific date): 6.01 Corporate Status. Each of Holdings and each of its Material Subsidiaries (i) is a duly organized and validly existing corporation or other entity in good standing under the laws of the jurisdiction of its organization and has the corporate or other organizational power and authority to own its property and assets and to transact the business in which it is engaged and (ii) has duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified would have a material adverse effect on the operations, business, properties, assets or financial condition of Holdings and its Subsidiaries taken as a whole. 6.02 Corporate Power and Authority. Each Credit Party has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Credit Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Credit Documents to which it is a party. Each Credit Party has duly executed and delivered each Credit Document to which it is a party and each such Credit Document constitutes the legal, valid and binding obligation of such Person enforceable in accordance with its terms. -21- 6.03 No Violation. Neither the execution, delivery and performance by either Credit Party of the Credit Documents to which it is a party (including, without limitation, the incurrence of Loans by the Borrower hereunder) nor compliance with the terms and provisions thereof, nor the consummation of the transactions contemplated therein (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Holdings or any of its Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of trust, agreement or other instrument to which Holdings or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the Certificate of Incorporation or By-Laws of Holdings or any of its Subsidiaries. 6.04 Litigation. Except as set forth on Annex IV, there are no actions, suits or proceedings pending or threatened with respect to Holdings or any of its Subsidiaries (i) that are reasonably likely to have a material adverse effect on the business, properties, assets, operations, financial condition or prospects of Holdings and its Subsidiaries taken as a whole or (ii) that are reasonably likely to have a material adverse effect on the rights or remedies of the Banks or on the ability of either Credit Party to perform its obligations to them hereunder and under the other Credit Documents to which it is a party. 6.05 Use of Proceeds; Margin Regulations. (a) The proceeds of all Loans shall be utilized by the Borrower for general corporate purposes of Holdings and/or its Subsidiaries (including, without limitation, the refinancing of Indebtedness and financing acquisitions permitted hereunder). The proceeds of CP Refinancing Borrowings may only be utilized to pay when due Commercial Paper Outstandings. (b) Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. At the time of the making of each Loan, not more than 25% of the value of the assets of the Borrower or Holdings and its Subsidiaries on a consolidated basis subject to the restrictions contained in Sections 8.02 and 8.03 will constitute Margin Stock. Notwithstanding the foregoing provisions of this Section 6.05, no proceeds of any Loan will be utilized to purchase any Margin Stock in a transaction, or as part of a series of transactions, the result of which is the ownership by Holdings and/or its Subsidiaries (including, without limitation, the Borrower) of 5% or more of the capital stock of a corporation unless the Board of Directors of such corporation has approved such transaction prior to any public announcement of the purchase, or the intent to purchase, any such Margin Stock. -22- 6.06 Governmental Approvals. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance of any Credit Document or (ii) the legality, validity, binding effect or enforceability of any Credit Document. 6.07 Investment Company Act. Neither Holdings nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 6.08 True and Complete Disclosure. All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of either Credit Party or any of its Subsidiaries in writing to any Senior Managing Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of such Persons in writing to any Bank will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. 6.09 Financial Condition; Financial Statements. The consolidated balance sheet of each of Holdings and its Subsidiaries and the Borrower and its Subsidiaries at December 31, 1995 and the related consolidated statements of income and cash flows for the fiscal year ended as of said date, which statements have been examined by Deloitte & Touche, independent certified public accountants, who delivered an unqualified opinion in respect thereof, copies of which have heretofore been furnished to each Bank, present fairly the consolidated financial position of each of Holdings and the Borrower, as the case may be, at the date of said statements and the results of operations for the period covered thereby. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements. There has been no material adverse change in the operations, business, property, assets or financial condition of Holdings and its Subsidiaries taken as a whole or of the Borrower and its Subsidiaries taken as a whole from that of Holdings and its Subsidiaries or the Borrower and its Subsidiaries, as the case may be, on December 31, 1995. 6.10 Tax Returns and Payments. Each of Holdings and its Subsidiaries has filed all federal income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, other than those not yet delinquent, those contested in good faith and those for which RJRN is indemnifying Holdings pursuant to the Tax Sharing -23- Agreement. Holdings and each of its Subsidiaries have paid, or have provided adequate reserves (in the good faith judgment of the management of Holdings) for the payment of, all federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. 6.11 Compliance with ERISA. Each Plan is in substantial compliance with ERISA and the Code; no Reportable Event has occurred with respect to any Plan; no Plan is insolvent or in reorganization, no Plan has an Unfunded Current Liability, and no Plan has an accumulated or waived funding deficiency or permitted decreases in its funding standard account within the meaning of Section 412 of the Code; none of Holdings, any of its Subsidiaries or any ERISA Affiliate has incurred any material liability to or on account of a Plan pursuant to Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or Section 4971 or 4975 of the Code; no proceedings have been instituted to terminate any Plan; no condition exists which presents a material risk to Holdings or any of its Subsidiaries of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code, except to the extent that all events described in the preceding clauses of this Section 6.11 and then in existence would not, in the aggregate, be likely to have a material adverse effect on the business, operations or financial condition of Holdings and its Subsidiaries taken as a whole. With respect to Plans that are multiemployer plans (within the meaning of Section 3(37) of ERISA) and Plans which are not currently maintained or contributed to by Holdings, any of its Subsidiaries or any ERISA Affiliate, the representations and warranties in this Section are made to the best knowledge of Holdings. 6.12 Subsidiaries. Annex III hereto lists each Material Subsidiary of Holdings (and the direct and indirect ownership interest of Holdings therein), in each case existing on the Effective Date. All ownership percentages referred to in Annex III are calculated without regard to directors' or nominees' qualifying shares. 6.13 Patents, etc. Holdings and each of its Subsidiaries have obtained all material patents, trademarks, servicemarks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted. 6.14 Pollution and Other Regulations. Holdings and each of its Subsidiaries are in material compliance with all material laws and regulations relating to pollution and environmental control, equal employment opportunity and employee safety in all domestic jurisdictions in which Holdings and each of its Subsidiaries is presently doing business, and Holdings will comply and cause each of its Subsidiaries to comply with all such laws and regulations which may be imposed in the future in jurisdictions in which Holdings or such Subsidiary may then be doing business other than in each case those the non-compliance -24- with which would not have a material adverse effect on the business, assets, properties or financial condition of Holdings and its Subsidiaries taken as a whole. 6.15 Properties. Holdings and each of its Subsidiaries have good title to all properties owned by Holdings or such Subsidiary and a valid leasehold interest in all properties leased by Holdings or such Subsidiary, in each case, that are necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted, free and clear of all Liens, other than as permitted by this Agreement. SECTION 7. Affirmative Covenants. Holdings hereby covenants and agrees that on the Effective Date and thereafter, for so long as this Agreement is in effect and until the Commitments have terminated and the Loans, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 7.01 Information Covenants. Holdings will furnish to each Bank: (a) Annual Financial Statements. As soon as available and in any event within 100 days after the close of each fiscal year of Holdings, to the extent prepared to comply with SEC requirements, a copy of the SEC Form 10-Ks filed by Holdings and the Borrower with the SEC for such fiscal year, or, if no such Form 10-K was so filed by Holdings and the Borrower for such fiscal year, the consolidated balance sheet of Holdings and its Subsidiaries and of the Borrower and its Subsidiaries, as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for such fiscal year, setting forth comparative consolidated figures as of the end of and for the preceding fiscal year, and examined by independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit or as to the status of Holdings or the Borrower or any of their respective Subsidiaries as a going concern, together in any event with a certificate of such accounting firm stating that in the course of its regular audit of the business of Holdings and the Borrower, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof. (b) Quarterly Financial Statements. As soon as available and in any event within 55 days after the close of each of the first three quarterly accounting periods in each fiscal year of Holdings, to the extent prepared to comply with SEC requirements, a copy of the SEC Form 10-Qs filed by Holdings and the Borrower with the SEC for each such quarterly period, or, if no such Form 10-Q was so filed by Holdings and the Borrower with respect to any such quarterly period, the consol- -25- idated balance sheet of Holdings and its Subsidiaries and of the Borrower and its Subsidiaries, as at the end of such quarterly period and the related consolidated statements of income for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and the related consolidated statement of cash flows for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative consolidated figures as of the end of and for the related periods in the prior fiscal year or, in the case of such consolidated balance sheet, for the last day of the prior fiscal year, all of which shall be certified by the Chief Financial Officer, Controller, Chief Accounting Officer or other Authorized Officer of Holdings or the Borrower, as the case may be, subject to changes resulting from audit and normal year-end audit adjustments. (c) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 7.01(a) and (b), a certificate of the Chief Financial Officer, Controller, Treasurer, Chief Accounting Officer or other Authorized Officer of Holdings to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate shall set forth the calculations required to establish whether Holdings and its Subsidiaries were in compliance with the provisions of Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 as at the end of such fiscal period or year, as the case may be. (d) Notice of Default or Litigation. Promptly, and in any event within three Business Days after any senior financial or legal officer of either Credit Party obtains knowledge thereof, notice of (x) the occurrence of any event which constitutes a Default or Event of Default which notice shall specify the nature thereof, the period of existence thereof and what action Holdings proposes to take with respect thereto and (y) any litigation or governmental proceeding pending against or affecting Holdings or any of its Subsidiaries which is likely to have a material adverse effect on the business, properties, assets, financial condition or prospects of Holdings and its Subsidiaries taken as a whole or the ability of either Credit Party to perform its obligations hereunder or under any other Credit Document. (e) Credit Rating Changes. Promptly after any senior financial or legal officer of either Credit Party obtains knowledge thereof, notice of any change in the Applicable Credit Rating assigned by either Rating Agency. (f) Other Information. Promptly upon transmission thereof, copies of any filings and registrations with, and reports to, the Securities and Exchange Commission or any successor thereto (the "SEC") by Holdings, the Borrower or any of their respective Subsidiaries (other than amendments to any registration -26- statement (to the extent such registration statement, in the form it becomes effective, is delivered to the Banks), exhibits to any registration statement and any registration statements on Form S-8) and copies of all financial statements, proxy statements, notices and reports that Holdings, the Borrower or any of their respective Subsidiaries shall send to analysts or the holders of any publicly issued debt of Holdings and/or any of its Subsidiaries in their capacity as such holders (in each case to the extent not theretofore delivered to the Banks pursuant to this Agreement) and, with reasonable promptness, such other information or documents (financial or otherwise) as any Senior Managing Agent on its own behalf or on behalf of the Required Banks may reasonably request from time to time. 7.02 Books, Records and Inspections. Holdings will, and will cause each of its Subsidiaries to, permit, upon reasonable notice to the Chief Financial Officer, Controller or any other Authorized Officer of the Borrower, officers and designated representatives of any Senior Managing Agent or the Required Banks to visit and inspect any of the properties or assets of Holdings and any of its Subsidiaries in whomsoever's possession, and to examine the books of account of Holdings and any of its Subsidiaries and discuss the affairs, finances and accounts of Holdings and of any of its Subsidiaries with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as any Senior Managing Agent or the Required Banks may desire. 7.03 Insurance. Holdings will, and will cause each of its Subsidiaries to, at all times be covered by or maintain in full force and effect insurance in such amounts, covering such risks and liabilities and with such deductibles or self-insured retentions as are in accordance with normal industry practice. 7.04 Payment of Taxes. Holdings will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which material penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien or charge upon any properties of Holdings or any of its Subsidiaries, provided that neither Holdings nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves (in the good faith judgment of the management of Holdings) with respect thereto in accordance with GAAP. 7.05 Consolidated Corporate Franchises. Holdings will do, and will cause each of its Material Subsidiaries to do, or cause to be done, all things necessary to preserve and keep in full force and effect its existence, rights and authority, provided that any transaction permitted by Section 8.02 will not constitute a breach of this Section 7.05. -27- 7.06 Compliance with Statutes, etc. Holdings will, and will cause each Subsidiary to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls) other than those the non-compliance with which would not have a material adverse effect on the business, properties, assets or financial condition of Holdings and its Subsidiaries taken as a whole or on the ability of either Credit Party to perform its obligations under any Credit Document to which it is a party. 7.07 ERISA. As soon as possible and, in any event, within 10 days after Holdings or any of its Subsidiaries knows or has reason to know of the occurrence of any of the following, Holdings will deliver to each of the Banks a certificate of the Chief Financial Officer, Treasurer or Controller of Holdings setting forth details as to such occurrence and the action, if any, which Holdings, such Subsidiary or an ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by Holdings, such Subsidiary, such ERISA Affiliate, the PBGC, a Plan participant (other than notices relating to an individual participant's benefits) or the Plan administrator with respect thereto: that a Reportable Event has occurred, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan, that a Plan which has an Unfunded Current Liability has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, that a Plan has an Unfunded Current Liability giving rise to a lien under ERISA or the Code, that proceedings may be or have been instituted to terminate a Plan which has an Unfunded Current Liability, that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan, or that Holdings, any of its Subsidiaries or any ERISA Affiliate will or may incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or with respect to a Plan under Section 4971 or 4975 of the Code or Section 409 or 502(i) or 502(l) of ERISA. Upon request of a Bank, Holdings will deliver to such Bank a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Banks pursuant to the first sentence hereof, copies of any notices received by Holdings or any of its Subsidiaries shall be delivered to the Banks no later than 10 days after the later of the date such notice has been filed with the Internal Revenue Service or the PBGC, given to Plan participants (other than notices relating to an individual participant's benefits) or received by Holdings or such Subsidiary. -28- 7.08 Good Repair. Holdings will, and will cause each of its Subsidiaries to, ensure that its properties and equipment used or useful in its business in whomsoever's possession they may be, are kept in good repair, working order and condition, normal wear and tear excepted, and that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner customary for companies in similar businesses. 7.09 End of Fiscal Years; Fiscal Quarters. Holdings will, for financial reporting purposes, cause (i) each of its and the Borrower's fiscal years to end on December 31 of each year, (ii) each of its and the Borrower's fiscal quarters to end on March 31, June 30, September 30 and December 31 of each year and (iii) each of the Subsidiaries of the Borrower to maintain the accounting periods maintained by such Subsidiary on the Effective Date, consistent with the past practice and procedures of each such Subsidiary, provided that any of the foregoing fiscal or reporting periods may be changed if (x) Holdings gives the Banks 30 days' prior written notice of such proposed change and (y) prior to effecting such change Holdings and the Majority SMA shall have agreed upon adjustments, if any, to Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 (and the definitions used therein) the sole purpose of which shall be to give effect to the proposed change in fiscal or accounting periods (it being understood and agreed that to the extent that Holdings and the Majority SMA cannot agree on appropriate adjustments to such Sections (or that no adjustments are necessary), the proposed change may not be effected). 7.10 Commercial Paper and Competitive Bid Loan Outstandings. On the date of the delivery by the Borrower of any Notice of Borrowing or Notice of Competitive Bid Borrowing at any time when the Borrower shall have knowledge that a mandatory prepayment is required pursuant to Section 3.02(A) of this Agreement and, in any event, on the last Business Day of each fiscal quarter of the Borrower, the Borrower will furnish to the Payments Administrator (with an information copy to each of the other Senior Managing Agents) a statement setting forth the aggregate amount of Commercial Paper Outstandings and the aggregate outstanding principal amount of Competitive Bid Loans at such time. SECTION 8. Negative Covenants. Holdings hereby covenants and agrees that on the Effective Date and thereafter, for so long as this Agreement is in effect and until the Commitments have terminated and the Loans, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 8.01 Changes in Business. Except as otherwise permitted by Section 8.02, Holdings and its Subsidiaries, taken as a whole, will not substantively alter the character of their business from that conducted by Holdings and its Subsidiaries taken as a whole at the Effective Date. -29- 8.02 Consolidation, Merger, Sale of Assets, etc. Holdings will not, and will not permit any Subsidiary to, wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, sell or otherwise dispose of all or a substantial part of its property or assets or agree to do any of the foregoing at any future time, except that any Subsidiary of Holdings may be merged or consolidated with or into, or be liquidated into, any Person (including Holdings, but only if the Borrower has first merged into or consolidated with Holdings) and any such Subsidiary may convey, lease, sell or transfer all or any part of its business, properties and assets to any such Person, provided that in the event of a merger, consolidation or liquidation of the Borrower with or into any such Person, the surviving corporation, if not the Borrower, shall execute and deliver agreements assuming the obligations of the Borrower under this Agreement and the Notes, which assumption agreements and all related actions and documentation shall be in form and substance satisfactory to the Senior Managing Agents; provided further that if any of the foregoing transactions involves a Material Subsidiary, after giving effect to such transaction, no Event of Default would result therefrom. Notwithstanding anything to the contrary contained in this Section 8.02, no Restricted Sale shall be permitted. 8.03 Liens. Holdings will not, and will not permit any of its Subsidiaries to, (x) create, incur, assume or suffer to exist any Lien in respect of Indebtedness upon any property or assets of any kind (real or personal, tangible or intangible) of Holdings or any such Subsidiary whether now owned or hereafter acquired or (y) assign any right to receive income as security for the payment of Indebtedness, except: (a) Liens existing on the Effective Date securing Indebtedness outstanding on the Effective Date in an aggregate principal amount not exceeding $150,000,000 and Liens securing extensions, renewals or refinancings of any of the Indebtedness referred to in this clause (a) to the extent that any such Indebtedness (x) is not increased from that outstanding at the time of any such extension, renewal or refinancing and (y) is not secured by Liens on any additional assets; (b) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business and which are within the general parameters customary in the industry, securing obligations under Permitted Commodities Agreements; (c) Liens securing reimbursement obligations of the Borrower and its Subsidiaries with respect to trade letters of credit incurred in the ordinary course of business, which are to be repaid in full not more than one year after the date originally incurred to finance the purchase of goods by the Borrower or any of its Subsidiaries, provided that such Liens shall attach only to documents or other property relating to such letters of credit and the products and proceeds thereof; -30- (d) Liens (x) arising pursuant to purchase money mortgages securing Indebtedness (and any extensions, renewals or refinancings of such Indebtedness to the extent not increasing the outstanding principal amount thereof), representing the purchase price (or financing of the purchase price within 180 days after the respective purchase) of assets acquired after the Effective Date, provided that (i) any such Liens attach only to the assets so purchased and (ii) the Indebtedness (including any such permitted extensions, renewals or refinancings) secured by any such Lien does not exceed 100%, nor is less than 70%, of the purchase price of the property being purchased and (y) existing on specific tangible assets at the time acquired by Holdings or any of its Subsidiaries or on assets of a Person at the time such Person first becomes a Subsidiary (together with Liens securing any extensions, renewals or refinancings of the Indebtedness secured thereby to the extent not increasing the outstanding principal amount thereof), provided that (i) any such Liens were not created at the time of or in contemplation of the acquisition of such assets or Person by Holdings and/or its Subsidiaries, (ii) in the case of any such acquisition of a Person, any such Lien attaches only to a specific tangible asset of such Person and not assets of such Person generally and (iii) the Indebtedness secured by any such Lien does not exceed 100% of the fair market value of the asset to which such Lien attaches, determined at the time of the acquisition of such asset or at the time such Person first becomes a Subsidiary, as the case may be; and (e) Liens and assignments not otherwise permitted by the foregoing clauses (a) through (d) securing any Indebtedness of Holdings and/or its Subsidiaries, provided that the aggregate principal amount of Indebtedness on a consolidated basis secured by Liens permitted by this clause (e) shall not exceed an amount equal to 7-1/2% of Consolidated Net Worth at any time. 8.04 Indebtedness. Holdings will not permit any of its Subsidiaries (other than the Borrower) to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Specified Permitted Existing Debt and any extensions, renewals or refinancings of any of the Indebtedness referred to in this clause (a), either by the original obligor thereunder or by another Subsidiary to the extent that such Indebtedness is not increased from that outstanding at the time of any such extension, renewal or refinancing; (b) Obligations under letters of credit described in Section 8.03(c); (c) Indebtedness in respect of Permitted Currency Agreements and Permitted Commodities Agreements; -31- (d) Obligations of Subsidiaries of the Borrower under letters of credit incurred in the ordinary course of business in connection with the purchase of products or goods for use in the day-to-day operations of the Borrower and its Subsidiaries consistent with the Borrower's past practices or then current industry practices; (e) Indebtedness secured by Liens permitted by Section 8.03(d); (f) (i) Indebtedness owing by any such Subsidiary to Holdings or any Wholly-Owned Subsidiary of Holdings and (ii) Indebtedness of any such Subsidiary (x) consisting of Contingent Obligations in respect of, or (y) constituting reimbursement obligations under letters of credit issued in support of, obligations of any Subsidiary of Holdings (other than the Borrower) to the extent such other obligations are permitted by this Agreement; (g) Indebtedness of any such Subsidiary in any manner guaranteeing or intended to guarantee, whether directly or indirectly, any leases, dividends or other monetary obligations of any Person in which such Subsidiary has an ownership interest, provided that the aggregate maximum stated or determinable amount (or, if not stated or determinable, the maximum reasonably anticipated liability in respect of such Indebtedness as determined in good faith by such Subsidiary) of all Indebtedness permitted pursuant to this clause (g) shall not exceed at any time an amount in excess of $150,000,000; (h) Indebtedness of any such Subsidiary with respect to which neither Holdings nor the Borrower (i) is a co-obligor or (ii) has any Contingent Obligation; and (i) Indebtedness not otherwise permitted by the foregoing clauses (a) through (h), provided that the aggregate outstanding principal amount of Indebtedness on a consolidated basis incurred pursuant to this clause (i) shall not exceed an amount equal to the sum of (x) $250,000,000 plus (y) 7-1/2% of Consolidated Net Worth at any time. 8.05 Limitation on Restricted Payments. Neither Holdings nor the Borrower will (A) declare or pay any dividends in respect of its capital stock (other than dividends payable solely in its common stock and all dividends, whether in cash or in kind, on any preferred stock) or return any capital to its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration, any shares of any class of its capital stock now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such shares), or set aside any funds -32- for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of Holdings or the Borrower now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by Holdings or the Borrower with respect to its capital stock) (all of the foregoing, "Dividends"), or (B) purchase or otherwise acquire for consideration any shares of any class of the capital stock of any RJRN Entity (now or hereafter outstanding) (or any options or warrants or stock appreciation rights issued by any RJRN Entity with respect to its capital stock) or permit any of its Subsidiaries to do any of the foregoing or (C) make any loan or advance to, or investment in, any RJRN Entity, or permit any of its Subsidiaries to do any of the foregoing (all of clauses (A), (B) and (C), collectively, "Restricted Payments"), provided that, except with respect to the following clauses (i) and (v), so long as no Event of Default then exists: (i) each of Holdings and the Borrower may (x) pay cash in lieu of issuing fractions of shares of its common stock at a time when it issues shares of its common stock upon the exercise of any warrants or options or upon the conversion or redemption of any convertible or redeemable preferred or preference stock and (y) repurchase its common stock and preferred stock (and/or options or warrants in respect thereof) pursuant to, and in accordance with the terms of, management and/or employee stock plans; (ii) Holdings may declare and pay, or otherwise effect, any other Dividend and the Borrower may declare and pay, or otherwise effect, any other Dividend to Persons other than Holdings, provided that the aggregate amount of any such Dividend at the time declared, when added to all Dividends theretofore declared pursuant to this clause (ii) after April 28, 1995, shall not exceed an amount equal to the sum of (x) $300,000,000 plus (y) 50% of Cumulative Consolidated Net Income determined at the time of the declaration thereof, provided that such Dividend is paid within 45 days of the making of such declaration; (iii) the Borrower and any of its Subsidiaries may make additional loans and advances to one or more RJRN Entities that is a Foreign Subsidiary, provided that the aggregate principal amount of such loans and advances made pursuant to this clause (iii) shall not exceed $100,000,000 at any time; (iv) the Borrower may pay Dividends to Holdings; and (v) each of Holdings and the Borrower may issue and exchange shares of any class or series of its common stock now or hereafter outstanding for shares of any other class or series of its common stock at the time outstanding. -33- 8.06 Transactions with Affiliates. Holdings will not, and will not permit any Subsidiary to, enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any Affiliate (other than a Nabisco Entity) other than on terms and conditions substantially as favorable to Holdings or such Subsidiary as would be obtainable by Holdings or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate; provided, that the foregoing restrictions shall not apply to: (i) customary fees paid to members of the Board of Directors of Holdings and of its Subsidiaries and (ii) the RJRN Agreements. 8.07 Consolidated Net Worth. Holdings will not permit Consolidated Net Worth at any time to be less than an amount equal to the sum of (x) $3,750,000,000 plus (y) the sum of 25% of Consolidated Net Income, if positive, for each prior fiscal year of Holdings, if any, ending after January 1, 1996. 8.08 Leverage Ratio. Holdings will not permit the ratio of (i) Adjusted Consolidated Debt to (ii) Adjusted Operating Income for any Test Period to be more than 3.95 to 1.00. 8.09 Cash Interest Coverage Ratio. Holdings will not permit the ratio of (i) Adjusted Operating Income to (ii) Consolidated Cash Interest Expense for any Test Period to be less than 3.00 to 1.00. SECTION 9. Events of Default. Upon the occurrence of any of the following specified events (each, an "Event of Default"): 9.01 Payments. The Borrower shall (i) default in the payment when due of any principal of the Loans or (ii) default, and such default shall continue for five or more days, in the payment when due of any interest on the Loans or any Fees or any other amounts owing hereunder or under any Note; or 9.02 Representations, etc. Any representation, warranty or statement made or deemed made by either Credit Party herein or in any other Credit Document or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 9.03 Covenants. Either Credit Party shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Section 7.10 or 8, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 9.01, 9.02 or clause (a) of this Section 9.03) contained in this Agreement and such default shall continue unremedied for a period -34- of at least 30 days after notice to the Borrower by any Senior Managing Agent or the Required Banks; or 9.04 Default Under Other Agreements. (a) Holdings or any of its Subsidiaries shall (i) default in any payment with respect to any Indebtedness (other than the Obligations) in excess of $75,000,000 individually or $150,000,000 in the aggregate, for Holdings and its Subsidiaries, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice or lapse of time is required, provided that the existence of any Event of Default under this Section 9.04(a)(ii) with respect to Indebtedness outstanding under the Nabisco Credit Agreement shall be determined after giving effect to any notice or lapse of time provided to the Borrower in the Nabisco Credit Agreement), any such Indebtedness to become due prior to its stated maturity; or (b) any such Indebtedness shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment or as a mandatory prepayment (unless such required prepayment or mandatory prepayment results from a default or an event of the type that constitutes an Event of Default), prior to the stated maturity thereof, provided that to the extent Holdings or any of its Subsidiaries incurs (including pursuant to a committed facility not borrowed thereunder but with commitments aggregating) or issues Indebtedness in an aggregate principal amount of at least $100,000,000 at any time that contains any default covering any action, failure to act and/or other circumstances of or affecting any Affiliate of Holdings (other than the Borrower and its Subsidiaries) not included as Events of Default hereunder (other than any of the foregoing relating solely to Holdings and its Subsidiaries), then this Section 9.04 shall be deemed to be automatically amended to include such defaults effective as of the date of the incurrence or issuance of such Indebtedness (it being agreed that the Borrower and Holdings will cooperate with the Senior Managing Agents to obtain an amendment to this Agreement, in form and substance satisfactory to the Majority SMA, formalizing the inclusion of such defaults under this Agreement); or 9.05 Bankruptcy, etc. Holdings or any of its Material Subsidiaries (each, a "Designated Party") shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against a Designated Party and the petition is not controverted within 10 days after service of notice of such case on such Designated Party, or is not dismissed within 60 days after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of a Designated Party; or a -35- Designated Party commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to a Designated Party; or there is commenced against a Designated Party any such proceeding which remains undismissed for a period of 60 days; or a Designated Party is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or a Designated Party suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or a Designated Party makes a general assignment for the benefit of creditors; or any corporate action is taken by a Designated Party for the purpose of effecting any of the foregoing; or 9.06 ERISA. (a) A single-employer plan (as defined in Section 4001 of ERISA) maintained or contributed to by Holdings or any of its Subsidiaries or any ERISA Affiliate shall fail to maintain the minimum funding standard required by Section 412 of the Code for any plan year or part thereof or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or shall provide security to induce the issuance of such waiver or extension, (b) any Plan is or shall have been terminated or the subject of termination proceedings under ERISA or an event has occurred entitling the PBGC to terminate a Plan under Section 4042(a) of ERISA, (c) any Plan shall have an Unfunded Current Liability, (d) Holdings or any of its Subsidiaries or any ERISA Affiliate has incurred or is likely to incur a material liability to or on account of a termination of or a withdrawal from a Plan under Section 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA, (e) Holdings or any of its Subsidiaries has incurred, after the Effective Date, liabilities (after giving effect to any reserves applicable thereto and maintained on the Effective Date) pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) which provide benefits to retired employees (other than as required by Section 601 of ERISA) or employee pension benefit plans (as defined in Section 3(2) of ERISA) (except in each case solely as a result of a change in estimate or adjustment of liabilities existing on the Effective Date upon the adoption or implementation of Financial Accounting Statement 106), or (f) Holdings or any of its Subsidiaries or any ERISA Affiliate has incurred a liability under Section 409, 502(i) or 502(l) of ERISA or Section 4971 or 4975 of the Code; and there shall result from any such event or events described in the preceding clauses of this Section 9.06 the imposition of a Lien upon the assets of Holdings or any of its Subsidiaries, the granting of a security interest, or a liability or a material risk of incurring a liability, which Lien, security interest or liability would have a material adverse effect upon the business, operations or financial condition of Holdings and its Subsidiaries taken as a whole; or 9.07 Judgments. One or more judgments or decrees shall be entered against Holdings or any of its Material Subsidiaries involving a liability of $75,000,000 or more in the case of any one such judgment or decree and $150,000,000 or more in the -36- aggregate for all such judgments and decrees for Holdings and its Material Subsidiaries (to the extent not paid or fully covered by insurance) and any such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or 9.08 Guaranty. The Guaranty or any provision thereof shall cease to be in full force or effect, or the Guarantor or any Person acting by or on behalf of the Guarantor shall deny or disaffirm the Guarantor's obligations under the Guaranty or the Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Guaranty; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, any Senior Managing Agent shall, upon the written request of the Required Banks, by written notice to Holdings and the Borrower, take any or all of the following actions, without prejudice to the rights of any Senior Managing Agent or any Bank to enforce its claims against the Borrower, except as otherwise specifically provided for in this Agreement (provided that if an Event of Default specified in Section 9.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by any Senior Managing Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Commitment terminated, whereupon the Commitment of each Bank shall forthwith terminate immediately and any Facility Fee and Utilization Fee theretofore accrued shall forthwith become due and payable without any other notice of any kind and (ii) declare the principal of and any accrued interest in respect of all Loans and all Obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by Holdings and the Borrower. Notwithstanding anything contained in the foregoing paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to the preceding paragraph, the Borrower shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Defaults (other than non-payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to Section 12.11, then Non-Defaulting Banks holding at least 66-2/3% of the Adjusted Total Commitment (which Banks shall include in any event the Majority SMA), by written notice to Holdings and the Borrower, may at their option rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind the Banks to a decision which may be made at the election of the aforesaid percentage of the Banks and are not intended -37- to benefit the Borrower and do not grant the Borrower the right to require the Banks to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. SECTION 10. Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: "Absolute Rate" shall mean an interest rate (rounded to the nearest .0001) expressed as a decimal. "Absolute Rate Borrowing" shall mean a Competitive Bid Borrowing with respect to which the Borrower has requested that the Banks offer to make Competitive Bid Loans at Absolute Rates. "Adjusted Consolidated Debt" shall mean the sum (without duplication) of (i) notes payable, (ii) the current maturities of long-term debt, (iii) long-term debt and (iv) all other amounts representing liabilities with respect to pay-in-kind interest to the extent included in "Other Liabilities," all as determined for Holdings and its Subsidiaries in accordance with GAAP, it being understood that determinations of the amounts specified in clauses (i), (ii), (iii) and (iv) shall be made on a consistent basis with the methodology utilized by Holdings to determine such amounts on the Effective Date. "Adjusted Operating Income" shall mean for any period (x) the consolidated operating income of Holdings and its Subsidiaries for such period plus (y) the sum of the consolidated depreciation expense and consolidated amortization expense of Holdings and its Subsidiaries for such period, all as determined in accordance with GAAP, it being understood that the determination of the amount specified in clauses (x) and (y) shall be made on a consistent basis with the methodology utilized by Holdings to determine such amount on the Effective Date, provided that (i) for the purposes of Section 8.08 only, for any Test Period during which any acquisition of any Person or business occurs, Adjusted Operating Income shall give pro forma effect to such acquisition as if it occurred on the first day of such Test Period and (ii) for all purposes, for any period which includes any Restructuring Charge Quarter there shall be excluded in determining Adjusted Operating Income any portion of the 1996 Restructuring Charge which reduced the consolidated operating income of Holdings and its Subsidiaries for such period. "Adjusted Percentage" shall mean (x) at a time when no Bank Default exists, for each Bank such Bank's Percentage and (y) at a time when a Bank Default exists (i) for each Bank that is a Defaulting Bank, zero and (ii) for each Bank that is a Non-Defaulting Bank, the percentage determined by dividing such Bank's Commitment at such time by the Adjusted Total Commitment at such time, it being understood that all references herein to -38- Commitments at a time when the Total Commitment has been terminated shall be references to the Commitments in effect immediately prior to such termination. "Adjusted Total Commitment" shall mean at any time the Total Commitment less the aggregate Commitments of all Defaulting Banks. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 20% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Outstandings" shall have the meaning provided in Section 3.02(A). "Agreement" shall mean this Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. "Agreement of Commitment Increase" shall mean an agreement in the form of Exhibit C-3, appropriately completed. "Applicable Credit Rating" shall mean the highest rating level (a rating level being, e.g., each of BBB-, BBB and BBB+, in the case of S&P) assigned by each Rating Agency to any of the Long Term Debt Issues of Holdings or the Borrower. "Applicable Eurodollar Margin" shall mean, (x) at any time prior to the Commitment Expiry Date, .275% and (y) at any time on and after the Commitment Expiry Date in respect of each Interest Period commencing during a period set forth below, the percentage set forth below opposite such period below: Applicable Period Eurodollar Margin ------ ----------------- NIG Period .625% Minimum Investment .375% Grade Period Increased Investment Grade .275% Period -39- Maximum Investment .225% Grade Period "Applicable Utilization Fee Percentage" shall mean, at any time during a period set forth below, the percentage set forth opposite such period below: Applicable Period Utilization Fee Percentage ------ -------------------------- NIG Period .250% Minimum Investment .125% Grade Period Increased Investment Grade 0% Period Maximum Investment 0% Grade Period "Assignment Agreement" shall have the meaning provided in Section 12.04(b)(A). "Authorized Officer" shall mean any senior officer of Holdings or the Borrower, as the case may be, designated as such in writing to the Senior Managing Agents by Holdings or the Borrower, in each case to the extent acceptable to the Majority SMA. "Bank" shall have the meaning provided in the first paragraph of this Agreement. "Bank Default" shall mean (i) the refusal (which has not been retracted) of a Bank to make available its portion of any Borrowing or (ii) a Bank having notified any Senior Managing Agent and/or the Borrower that it does not intend to comply with its obligations under Section 1.01(a), in the case of either clause (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Bank at the direction or request of any regulatory agency or authority. "Bankruptcy Code" shall have the meaning provided in Section 9.05. "Base Rate" shall mean, for any day, the average of the publicly announced prime rates, base rates and/or reference rates on such date of BTCo, Chase and Citibank. -40- "Bidder Bank" shall mean each Bank that has notified in writing (and has not withdrawn such notice) the Payments Administrator that it desires to participate generally in the bidding arrangements relating to Competitive Bid Borrowings. "Borrower" shall have the meaning provided in the first paragraph of this Agreement and shall also include any Person which is the surviving corporation after giving effect to any transaction permitted by Section 8.02 involving the Borrower. "Borrowing" shall mean and include (i) the incurrence of one Type of Revolving Loan by the Borrower from all of the Banks on a pro rata basis on a given date (or resulting from conversions on a given date), having in the case of Eurodollar Loans the same Interest Period, provided that Reference Rate Loans incurred pursuant to Section 1.11(b) shall be considered part of any related Borrowing of Eurodollar Loans and (ii) a Competitive Bid Borrowing. "BTCo" shall mean Bankers Trust Company and any successor corporation thereto by merger, consolidation or otherwise. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the interbank Eurodollar market. "Capital Lease," as applied to any Person, shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of Holdings or any of its Subsidiaries in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Change of Control" shall mean and include (a) at any time Continuing Directors shall not constitute a majority of the Board of Directors of Holdings or the Borrower; and/or (b) any Person or group (as such term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than RJRN, Holdings and its Subsidiaries, shall acquire, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 and 13d-5 under the Exchange Act) of 30% or more, on a fully diluted basis, of the economic or voting interest in Holdings' capital stock; and/or -41- (c) Holdings shall own less than 80% on a fully diluted basis of (x) the economic interest of the common stock of the Borrower or (y) the voting interest of the capital stock of the Borrower. "Chase" shall mean The Chase Manhattan Bank and any successor corporation thereto by merger, consolidation or otherwise. "Citibank" shall mean Citibank, N.A. and any successor corporation thereto by merger, consolidation or otherwise. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Commercial Paper Outstandings" shall mean, at any time, an amount equal to the lesser of (i) the sum of (x) the face amount of all commercial paper previously issued by Holdings and/or any of its Subsidiaries (other than Nabisco Ltd) at a discount and outstanding at such time plus (y) the principal amount of all commercial paper previously issued by Holdings and/or any of its Subsidiaries (other than Nabisco Ltd) on an interest bearing basis and outstanding at such time, and (ii) the remainder, if any, of (x) the Total Commitment at such time less (y) the then aggregate principal amount of all Loans outstanding at such time. "Commitment" shall mean, with respect to each Bank, the amount set forth opposite such Bank's name in Annex I hereto, as the same may be increased from time to time pursuant to Section 1.16 and/or reduced from time to time pursuant to Section 2.02, 2.03, 9 and/or 12.04(b)(A). "Commitment Expiry Date" shall mean the date which is 364 days after the Effective Date. "Commodities Agreement" shall mean any forward contract, futures contract, option contract or similar agreement or arrangement, in each case intended to protect the Persons entering into same from fluctuations in the price of, or shortage of supply of, commodities. "Competitive Bid Borrowing" shall mean a Borrowing of Competitive Bid Loans pursuant to Section 1.04 with respect to which the Borrower has requested that the Banks offer to make Competitive Bid Loans at Absolute Rates. -42- "Competitive Bid Loans" shall have the meaning provided in Section 1.01(b). "Confidential Information" shall have the meaning provided in Section 12.14. "Consolidated Cash Interest Expense" shall mean, for any period, (i) consolidated interest expense of Holdings and its Subsidiaries, but excluding, however, to the extent included in consolidated interest expense, (x) non-cash interest expense and (y) amortization of debt issuance cost plus (ii) cash dividends paid on all preferred stock of Holdings and its Subsidiaries (except to the extent paid to Holdings or a Wholly-Owned Subsidiary of Holdings) during such period, it being understood that the determination of the amounts specified in clauses (i)(x) and (i)(y) shall be made on a consistent basis with the methodology utilized by Holdings to determine such amounts on the Effective Date. "Consolidated Net Income" shall mean, for any period, for any Person the consolidated net income of such Person and its Subsidiaries, determined in accordance with GAAP, for such period. "Consolidated Net Worth" shall mean, as at any date of determination, the stockholders' equity of Holdings as determined in accordance with GAAP and as would be reflected on a consolidated balance sheet of Holdings prepared as of such date plus any 1996 Restructuring Charge deducted in determining Consolidated Net Worth of Holdings as of such date, it being understood that the determination of such amounts shall be made on a consistent basis with the methodology utilized by Holdings to determine such amount on the Effective Date. "Contingent Obligations" shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other monetary obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof, provided however that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the -43- lesser of (x) the maximum stated or determinable amount of such Contingent Obligation and (y) the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Continuing Director" shall mean, at any date, an individual (x) who is a member of the Board of Directors of Holdings or the Borrower, as the case may be, on the date of this Agreement, (y) who, as at such date, has been a member of such Board of Directors for at least the twelve preceding months, or (z) who has been nominated to be a member of such Board of Directors by a majority of the other Continuing Directors then in office. "Corporate Agreement" shall mean the Corporate Agreement, dated as of January 26, 1995, between Holdings and RJRN. "CP Refinancing Borrowing" shall mean any Borrowing of Revolving Loans, any of the proceeds of which are to be utilized to repay Commercial Paper Outstandings, to the extent such Borrowing is identified as such by the Borrower in the Notice of Borrowing given in respect of such Borrowing. "Credit Documents" shall mean this Agreement and the Notes. "Credit Party" shall mean each of Holdings and the Borrower. "Credit Rating" shall mean (i) the Applicable Credit Rating assigned by each Rating Agency, if such Applicable Credit Ratings are the same or (ii) if the Applicable Credit Ratings assigned by the Rating Agencies differ, the higher of the Applicable Credit Ratings assigned by the Rating Agencies, provided that in the event the Applicable Credit Rating of any Rating Agency shall be more than one rating level above the Applicable Credit Rating of the other Rating Agency, the Credit Rating shall be one level below the higher Applicable Credit Rating. "Cumulative Consolidated Net Income" shall mean, at any time for any determination thereof, the sum of (i) Consolidated Net Income of Holdings for the period (taken as one accounting period) commencing January 1, 1995 and ending on the last day of the last fiscal quarter of Holdings then ended plus (ii) all losses from debt retirement deducted in determining Consolidated Net Income of Holdings for the period referred to in clause (i) above plus (iii) any 1996 Restructuring Charge deducted in determining Consolidated Net Income of Holdings for the period referred to in clause (i) above. -44- "Currency Agreement" shall mean any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement designed to protect the Persons entering into same against fluctuations in currency values. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. "Designated Party" shall have the meaning provided in Section 9.05. "Dividends" shall have the meaning provided in Section 8.05. "Effective Date" shall have the meaning provided in Section 4. "Eligible Transferee" shall mean and include a commercial bank, financial institution or other "accredited investor" (as defined in SEC Regulation D), provided that Eligible Transferee shall not include any Person (or any Affiliate thereof) who competes with Holdings and its Subsidiaries in the cookie, cracker, snack food or candy business. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with Holdings, a Subsidiary or a Credit Party would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Eurodollar Loans" shall mean each Revolving Loan bearing interest at the rates provided in Section 1.09(b). "Eurodollar Rate" shall mean with respect to each Interest Period for a Eurodollar Loan (or for a Spread Borrowing priced by reference to the Eurodollar Rate), (i) the arithmetic average (rounded to the nearest 1/100 of 1%) of the offered quotation to first-class banks in the interbank Eurodollar market by each Reference Bank for dollar deposits of amounts in same day funds comparable to the outstanding principal amount of the Eurodollar Loan of such Reference Bank for which an interest rate is then being determined with maturities comparable to the Interest Period to be applicable to such Eurodollar Loan (or in the case of such Spread Borrowing, the arithmetic average of the -45- offered rates for deposits in U.S. dollars for the applicable Interest Period (or the period closest to such applicable Interest Period) which appear on the Reuters Screen LIBO Page), determined as of 10:00 A.M. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period, divided (and rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), provided, that if one or more of the Reference Banks fails to provide the Payments Administrator with its aforesaid rate for an Interest Period applicable to Eurodollar Loans, then the Eurodollar Rate for such Interest Period shall be determined based on the rate or rates provided to the Payments Administrator by the other Reference Bank or Banks. "Event of Default" shall have the meaning provided in Section 9. "Exchange Agreement" shall mean the Exchange Agreement, dated as of April 26, 1995, among Holdings, the Borrower and RJRN. "Existing Credit Agreements" shall mean (i) the Credit Agreement, dated as of April 28, 1995, among Holdings, the Borrower, the Senior Managing Agents and the banks party thereto, as in effect on the Effective Date, and (ii) the Credit Agreement, dated as of November 3, 1995, among Holdings, the Borrower, the Senior Managing Agents and the banks party thereto, as in effect on the Effective Date. "Expiration Date" shall mean December 31, 1996. "Facility Fee" shall have the meaning provided in Section 2.01(a). "Facility Fee Percentage" shall mean .100%. "Federal Funds Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Payments Administrator from three Federal Funds brokers of recognized standing selected by the Payments Administrator. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 2.01. -46- "Foreign Subsidiary" shall mean each Subsidiary of RJRN (other than any Nabisco Entity) doing business primarily outside the United States or any state or territory thereof. "Fuji" shall mean The Fuji Bank, Limited and any successor corporation thereto by merger, consolidation or otherwise. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time; it being understood and agreed that determinations in accordance with GAAP for purposes of Section 8, including defined terms as used therein, shall be made pursuant to Section 12.07(a). "Guarantor" for purposes of Section 13 of this Agreement shall mean Holdings, to the extent not merged or consolidated with the Borrower in accordance with Section 8.02. "Guaranty" shall mean the guaranty of Holdings set forth in Section 13, as the same may be supplemented, amended or modified from time to time. "Hedging Agreements" shall mean and include Commodities Agreements, Currency Agreements and Interest Rate Agreements. "Holdings" shall have the meaning provided in the first paragraph of this Agreement and shall also include any Person which is the surviving corporation after giving effect to any transaction permitted by Section 8.02 involving Holdings. "Increased Investment Grade Period" shall mean any period during which the Credit Rating at all times is the Increased Investment Grade Rating. "Increased Investment Grade Rating" shall mean the rating assigned by each Rating Agency which is one rating level above the Minimum Investment Grade Rating, it being understood that as of the date of this Agreement the "Increased Investment Grade Rating" of S&P is BBB and the "Increased Investment Grade Rating" of Moody's is Baa2. "Indebtedness" of any Person shall mean (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder, (iv) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (v) all Capitalized Lease Obligations of such Person, (vi) all obligations of such Person to pay a specified purchase price for goods or services -47- whether or not delivered or accepted, i.e., take-or-pay and similar obligations, (vii) all obligations of such Person under Hedging Agreements and (viii) all Contingent Obligations of such Person, provided that Indebtedness shall not include or be deemed to include (x) trade payables and accrued expenses, in each case arising in the ordinary course of business, (y) any obligation of the Borrower or any Subsidiary thereof to purchase products, services and produce utilized in its business pursuant to the RJRN Agreements or agreements entered into in the ordinary course of business on a basis consistent with Holdings' past practices or then current industry practices and (z) sales of receivables of the Borrower and its Subsidiaries on a non-recourse basis, and provided further, that (a) for the purposes of Section 9.04, the amount of Indebtedness represented by any Hedging Agreement shall be at any time the unrealized net loss position, if any, of the Borrower and/or its Subsidiaries thereunder on a marked to market basis determined no more than one month prior to such time and (b) for the purposes of determining the Indebtedness permitted to be secured by Section 8.03(e) or outstanding under Section 8.04(i), the amount of Indebtedness included in such determination that is attributable to all Hedging Agreements secured or permitted thereunder, as the case may be, shall be the Net Termination Value, if any, of all such Hedging Agreements. "Interest Period" shall mean with respect to (i) any Revolving Loan constituting a Eurodollar Loan, the interest period applicable thereto as determined pursuant to Section 1.10 and (ii) any Competitive Bid Loan, the period from the date of the making thereof to the maturity date thereof as specified in the respective Notice of Competitive Bid Borrowing. "Interest Rate Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate futures contract, interest rate option contract or other similar agreement or arrangement. "Interest Rate Basis" shall mean the Eurodollar Rate and/or such other basis for determining an interest rate as the Borrower and the Payments Administrator may agree upon from time to time. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement (other than customary negative pledge clauses) to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" shall mean any Competitive Bid Loan or Revolving Loan. "Long Term Debt Issues" shall mean, with respect to each of Holdings and the Borrower, each issuance of long-term senior debt of such Person which ranks on a parity, as to payment and security, with the Guaranty or the Loans, as the case may be. -48- "Majority SMA" shall mean, at any time, at least one-half in number of the Senior Managing Agents. "Margin Stock" shall have the meaning provided in Regulation U. "Material Subsidiary" shall mean and include, at any time, the Borrower and each other Subsidiary of Holdings to the extent that (x) the aggregate consolidated book value of the assets of such Subsidiary is equal to or more than $300,000,000 or (y) the revenues of such Subsidiary during its then most recently ended fiscal year were equal to or more than $200,000,000. "Maturity Date" shall mean the date which is the third anniversary of the Commitment Expiry Date. "Maximum Investment Grade Period" shall mean any period during which the Credit Rating is, or is at any level above, the Maximum Investment Grade Rating. "Maximum Investment Grade Rating" shall mean the rating assigned by each Rating Agency which is at least one or more levels above the Increased Investment Grade Rating, it being understood that as of the date of this Agreement the lowest "Maximum Investment Grade Rating" of S&P is BBB+ and the lowest "Maximum Investment Grade Rating" of Moody's is Baa1. "Minimum Borrowing Amount" shall mean $25,000,000. "Minimum Investment Grade Period" shall mean any period during which the Credit Rating is at all times the Minimum Investment Grade Rating. "Minimum Investment Grade Rating" shall mean the lowest rating level established as investment grade by each Rating Agency, it being understood that as of the date of this Agreement the "Minimum Investment Grade Rating" of S&P is BBB- and the "Minimum Investment Grade Rating" of Moody's is Baa3. "Moody's" shall mean Moody's Investors Service, Inc., or any successor corporation thereto. "Nabisco Biscuit Division" shall mean the portion of the business of Holdings and its Subsidiaries engaged in the manufacture and sale of crackers and cookies in the United States. "Nabisco Credit Agreement" shall mean the Credit Agreement, dated as of the date hereof, among Holdings, the Borrower, various lending institutions party thereto -49- and the Senior Managing Agents, as the same may be amended, modified or supplemented from time to time. "Nabisco Entity" shall mean Holdings and its Subsidiaries. "Nabisco Ltd" shall mean Nabisco Ltd, a Canadian corporation. "Net Termination Value" shall mean at any time, with respect to all Hedging Agreements for which a Net Termination Value is being determined, the excess, if positive, of (i) the aggregate of the unrealized net loss position of the Borrower and/or its Subsidiaries under each of such Hedging Agreements on a marked to market basis determined no more than one month prior to such time less (ii) the aggregate of the unrealized net gain position of the Borrower and/or its Subsidiaries under each of such Hedging Agreements on a marked to market basis determined no more than one month prior to such time. "NIG Period" shall mean any period during which the Credit Rating is at all times below the Minimum Investment Grade Rating. "1996 Restructuring Charge" shall mean the restructuring expense and related costs and expenses in an aggregate amount not in excess of $500,000,000 recorded or accrued during Holdings' 1996 fiscal year. "Non-Defaulting Bank" shall mean and include each Bank other than a Defaulting Bank. "Note" shall have the meaning provided in Section 1.06(a). "Notice of Borrowing" shall have the meaning provided in Section 1.03. "Notice of Competitive Bid Borrowing" shall have the meaning provided in Section 1.04. "Notice of Conversion" shall have the meaning provided in Section 1.07. "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to any Senior Managing Agent, the Payments Administrator or any Bank pursuant to the terms of this Agreement or any other Credit Document. "Payments Administrator" shall mean Citibank, provided that if Citibank shall cease to constitute a Senior Managing Agent hereunder, the remaining Senior -50- Managing Agents shall have the option to appoint one of such remaining Senior Managing Agents as the Payments Administrator. "Payments Administrator's Office" shall mean the office of the Payments Administrator located at 399 Park Avenue, New York, New York 10043, or such other office in New York City as the Payments Administrator may hereafter designate in writing as such to the other parties hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Percentage" shall mean at any time for each Bank, the percentage obtained by dividing such Bank's Commitment by the Total Commitment, provided that at any time when the Total Commitment shall have been terminated each Bank's Percentage shall be the percentage obtained by dividing such Bank's outstanding Revolving Loans by the aggregate outstanding Revolving Loans. "Permitted Commodities Agreement" shall mean any Commodities Agreement entered into in the ordinary course of business by any Subsidiary of the Borrower to the extent consistent with the practices of the Borrower and its Subsidiaries prior to the Effective Date or with then current practices in the industry. "Permitted Currency Agreement" shall mean any Currency Agreement entered into in the ordinary course of business by any Subsidiary of the Borrower to the extent consistent with the practices of the Borrower and its Subsidiaries prior to the Effective Date or with then current practices in the industry, provided that no domestic Subsidiary (other than domestic Subsidiaries of the Borrower all or substantially all of the business and operations of which are conducted outside the United States) may be an obligor under or a guarantor of any such Currency Agreements entered into after the Effective Date. "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any multiemployer or single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribution of), or at any time during the five calendar years preceding the date of this Agreement was maintained or contributed to by (or to which there was an obligation to contribution of), the Borrower, a Subsidiary or an ERISA Affiliate. "Rating Agency" shall mean each of S&P and Moody's. -51- "Reference Banks" shall mean BTCo, Chase and Citibank. "Reference Rate" shall mean, at any time, the higher of (x) the rate which is 1/2 of 1% in excess of the Federal Funds Rate and (y) the Base Rate as in effect from time to time. "Reference Rate Loan" shall mean each Revolving Loan bearing interest at the rates provided in Section 1.09(a). "Register" shall have the meaning provided in Section 1.06(d). "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Reply Date" shall have the meaning provided in Section 1.04(b). "Reportable Event" shall mean an event described in Section 4043(b) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Required Banks" shall mean at any time either (A) (i) the Majority SMA plus (ii) Non-Defaulting Banks (including any of the Senior Managing Agents) holding more than 50% of the Adjusted Total Commitment (or, if the Total Commitment has been terminated, of the aggregate principal amount of Loans held by Non-Defaulting Banks), or (B) Non-Defaulting Banks holding more than 66-2/3% of the Adjusted Total Commitment (or, if the Total Commitment has been terminated, of the aggregate principal amount of Loans held by Non-Defaulting Banks). "Restricted Payments" shall have the meaning provided in Section 8.05. "Restricted Sales" shall mean and include the sale or other disposition, whether such sale or disposition is of capital stock or assets, by Holdings or any of its Subsidiaries to any Person other than the Borrower or a Wholly-Owned Subsidiary of the Borrower in one or more transactions of all or substantially all or any substantial portion of the assets (other than (i) inventory and equipment to the extent sold or disposed of in the ordinary course of business and (ii) receivables pursuant to any receivables facilities of the Borrower and its Subsidiaries) of the Nabisco Biscuit Division as constituted on the -52- Effective Date, provided that Restricted Sales shall not include any issuance by Holdings or the Borrower of its capital stock. "Restructuring Charge Quarter" shall mean any fiscal quarter of Holdings during its 1996 fiscal year in which it has taken some or all of the 1996 Restructuring Charge. "Revolving Loan" shall have the meaning provided in Section 1.01(a). "RJRN" shall mean RJR Nabisco, Inc., a Delaware corporation. "RJRN Agreements" shall mean, collectively, the Corporate Agreement, the Services Agreement, the Tax Sharing Agreement and the Exchange Agreement. "RJRN Entity" shall mean RJRN Holdings and each Subsidiary of RJRN other than Holdings and any of its Subsidiaries. "RJRN Holdings" shall mean RJR Nabisco Holdings Corp., a Delaware corporation. "S&P" shall mean Standard & Poor's Ratings Group, a Division of The McGraw-Hill Companies, Inc., or any successor corporation thereto. "SEC" shall have the meaning provided in Section 7.01(f). "SEC Regulation D" shall mean Regulation D as promulgated under the Securities Act of 1933, as amended, as the same may be in effect from time to time. "Senior Managing Agent" shall mean and include BTCo, Chase, Citibank and Fuji, and any successor to any thereof appointed pursuant to Section 11.09. "Services Agreement" shall mean the Intercompany Services and Operating Agreement, dated as of January 26, 1995, between Holdings and RJRN. "Specified Permitted Existing Debt" shall mean the Indebtedness existing as of the Effective Date as described in Annex IV and such other Indebtedness of Subsidiaries of the Borrower existing as of the Effective Date and not so listed in an aggregate principal amount not to exceed $10,000,000. "Spread" shall mean a percentage per annum (rounded to the nearest .0001%) in excess of, or less than, an Interest Rate Basis. -53- "Spread Borrowing" shall mean a Competitive Bid Borrowing with respect to which the Borrower has requested the Banks to make Competitive Bid Loans at a Spread over or under a specified Interest Rate Basis. "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries has more than a 50% equity interest at the time. Unless otherwise expressly provided, all references herein to "Subsidiary" shall mean a Subsidiary of Holdings. "Tax Sharing Agreement" shall mean the agreement, dated as of January 26, 1995, as amended on March 23, 1995, between Holdings and RJRN. "Taxes" shall have the meaning provided in Section 3.04(a). "Termination Date" shall mean the first date after the Effective Date on which the Total Commitment is zero and there are no outstanding Loans. "Test Period" shall mean for any determination under Section 8.08 or 8.09 the four consecutive fiscal quarters of Holdings then last ended. "Total Adjusted Utilization Amount" at any time shall mean the Total Utilization Amount at such time less the aggregate principal amount of all Loans made by Defaulting Banks outstanding at such time. "Total Commitment" shall mean the sum of the Commitments of each Bank. "Total Unutilized Commitment" shall mean the excess of (x) the Total Commitment over (y) the sum of (i) the aggregate outstanding principal amount of all Revolving Loans and Competitive Bid Loans and (ii) at any time on or prior to the Commitment Expiry Date, the Commercial Paper Outstandings. "Total Utilization Amount" shall mean at any time the sum of (i) the aggregate outstanding principal amount of all Revolving Loans and Competitive Bid Loans plus (ii) at any time on or prior to the Commitment Expiry Date, the Commercial Paper Outstandings. -54- "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto, i.e., a Reference Rate Loan or Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the present value of the accrued benefits under such Plan as of the close of its most recent plan year, determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by such Plan's actuary in the most recent annual valuation of such Plan, exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. "Utilization Fee" shall have the meaning provided in Section 2.01(b). "Utilization Period" shall mean each calendar quarter (or portion thereof) ending on or prior to the Termination Date to the extent that during such period the average daily Total Utilization Amount exceeds (x) at all times on or prior to the Commitment Expiry Date, 50% of the average daily Total Commitment and (y) at all times thereafter, 50% of the Total Commitment on the Commitment Expiry Date. "Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of such Person to the extent all of the capital stock or other ownership interests in such Subsidiary, other than directors' or nominees' qualifying shares, is directly or indirectly owned by such Person. Establecimiento Modelo Terrabusi SAIC, an Argentine corporation, shall be deemed a Wholly-Owned Subsidiary of the Credit Parties so long as at least 95% of its capital stock is owned, directly or indirectly, by the Borrower. "Written" or "in writing" shall mean any form of written communication or a communication by means of telex, facsimile transmission, telegraph or cable. SECTION 11. The Senior Managing Agents. 11.01 Appointment. Each Bank hereby irrevocably designates and appoints BTCo, Chase, Citibank and Fuji as Senior Managing Agents (such term to include any of the Senior Managing Agents acting as Payments Administrator) of such Bank to act as specified herein and in the other Credit Documents, and each such Bank hereby irrevocably authorizes BTCo, Chase, Citibank, Fuji, as the Senior Managing Agents for such Bank, to take such action on its behalf under the provisions of this Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the respective Senior Managing Agents by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. Each Senior Managing Agent agrees to act as such upon the express conditions contained -55- in this Section 11. Notwithstanding any provision to the contrary elsewhere in this Agreement, no Senior Managing Agent shall have any duties or responsibilities, except those expressly set forth herein or in the other Credit Documents, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against any Senior Managing Agent. The provisions of this Section 11 are solely for the benefit of the Senior Managing Agents and the Banks, and no Credit Party shall have any rights as a third party beneficiary of any of the provisions hereof, provided that Holdings shall have the rights granted to it pursuant to Section 11.09. In performing its functions and duties under this Agreement, each Senior Managing Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for either Credit Party. No Managing Agent, Lead Manager, Manager or Co-Manager shall have any duties or obligations in its capacity as such under this Agreement. 11.02 Delegation of Duties. Each Senior Managing Agent may execute any of its duties under this Agreement or any other Credit Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Senior Managing Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by Section 11.03. 11.03 Exculpatory Provisions. No Senior Managing Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by Holdings, any Subsidiary or any of their respective officers contained in this Agreement, any other Credit Document or in any certificate, report, statement or other document referred to or provided for in, or received by any Senior Managing Agent under or in connection with, this Agreement or any other Credit Document or for any failure of Holdings or any Subsidiary or any of their respective officers to perform its obligations hereunder or thereunder. No Senior Managing Agent shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of Holdings or any Subsidiary. No Senior Managing Agent shall be responsible to any Bank for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any Credit Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by any Senior Managing Agent to the Banks or by or on behalf -56- of the Borrower to any Senior Managing Agent or any Bank or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. 11.04 Reliance by Senior Managing Agents. Each Senior Managing Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile transmission, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Credit Parties), independent accountants and other experts selected by such Senior Managing Agent. Each Senior Managing Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Credit Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each Senior Managing Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Credit Documents in accordance with a request of the Required Banks (or to the extent specifically provided in Section 12.11, all the Banks), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks. 11.05 Notice of Default. No Senior Managing Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless such Senior Managing Agent has received notice from a Bank or the Borrower or Holdings referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that any Senior Managing Agent receives such a notice, such Senior Managing Agent shall give prompt notice thereof to the Banks. Each Senior Managing Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks, provided that, unless and until a Senior Managing Agent shall have received such directions, such Senior Managing Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 11.06 Non-Reliance on Senior Managing Agents and Other Banks. Each Bank expressly acknowledges that no Senior Managing Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by any Senior Managing Agent hereafter taken, including any review of the affairs of Holdings or any Subsidiary, shall be deemed to constitute any representation or warranty by any Senior Managing Agent to any Bank. Each Bank -57- represents to each Senior Managing Agent that it has, independently and without reliance upon any Senior Managing Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of Holdings and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon any Senior Managing Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and creditworthiness of Holdings and its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Payments Administrator hereunder, no Senior Managing Agent shall have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, assets, property, financial and other conditions, prospects or creditworthiness of Holdings or any Subsidiary which may come into the possession of such Senior Managing Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 11.07 Indemnification. The Banks agree to indemnify each Senior Managing Agent in its capacity as such ratably according to their aggregate Commitments (or, if the Total Commitment has been terminated, their aggregate Commitments as in effect immediately prior to such termination), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against such Senior Managing Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Credit Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by any Senior Managing Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by Holdings or any of its Subsidiaries, provided that no Bank shall be liable to any Senior Managing Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from such Senior Managing Agent's gross negligence or willful misconduct. If any indemnity furnished to any Senior Managing Agent for any purpose shall, in the opinion of such Senior Managing Agent, be insufficient or become impaired, such Senior Managing Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 11.07 shall survive the payment of all Obligations. -58- 11.08 Senior Managing Agents in Their Individual Capacities. Each Senior Managing Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with Holdings and its Subsidiaries as though such Senior Managing Agent were not a Senior Managing Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, each Senior Managing Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not a Senior Managing Agent, and the terms "Bank" and "Banks" shall include each Senior Managing Agent in its individual capacity. 11.09 Successor Senior Managing Agents. Any Senior Managing Agent may resign as a Senior Managing Agent upon 20 days' notice to the Banks, provided that prior to, and as a condition of, the last remaining Senior Managing Agent so resigning, the Required Banks shall appoint from among the Banks a successor Senior Managing Agent for the Banks subject to prior approval by Holdings (such approval not to be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Senior Managing Agents, and the term "Senior Managing Agents" shall include such successor agent effective upon its appointment, and the resigning Senior Managing Agent's rights, powers and duties as a Senior Managing Agent shall be terminated, without any other or further act or deed on the part of such former Senior Managing Agent or any of the parties to this Agreement. After any retiring Senior Managing Agent's resignation hereunder as a Senior Managing Agent, the provisions of this Section 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was a Senior Managing Agent under this Agreement. SECTION 12. Miscellaneous. 12.01 Payment of Expenses, etc. The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses of (x) the Senior Managing Agents, whether or not the transactions herein contemplated are consummated, in connection with the negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of White & Case but of no other counsel) and (y) each Senior Managing Agent and each of the Banks in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for each Senior Managing Agent and for each of the Banks); (ii) pay and hold each of the Banks harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Banks harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iii) indemnify each Bank, its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages -59- or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not any Bank is a party thereto) related to the entering into and/or performance of any Credit Document or the use of the proceeds of any Loans hereunder or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 12.02 Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to either Credit Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of either Credit Party against and on account of the Obligations and liabilities of such Credit Party to such Bank under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of such Credit Party purchased by such Bank pursuant to Section 12.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Bank shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured. 12.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered, if to a Credit Party, at the address specified opposite its signature below; if to any Bank, at its address specified for such Bank on Annex II hereto; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be telegraphed, telexed, telecopied, or cabled or sent by overnight courier, and shall be effective when received. 12.04 Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that no Credit Party may assign or transfer any of its interests hereunder, except to the extent any such assignment results from the consummation of a transaction permitted under Section 8.02, without the prior written consent of the Banks, and provided further, that the rights of each Bank to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth below in this Section -60- 12.04, provided that nothing in this Section 12.04 shall prevent or prohibit any Bank from pledging its rights under this Agreement and/or its Loans and/or Note hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. (b) Each Bank shall have the right to transfer, assign or grant participations in all or any part of its remaining rights and obligations hereunder on the basis set forth below in this clause (b). (A) Assignments. Each Bank may assign pursuant to an Assignment Agreement substantially in the form of Exhibit C-2 hereto (each, an "Assignment Agreement") all or a portion of its rights and obligations hereunder pursuant to this clause (b)(A) to (x) one or more Banks or (y) one or more other Eligible Transferees, provided that (i) the consent of the Borrower shall be required in connection with any assignment pursuant to clause (x) or (y) above (which consent shall not be unreasonably withheld or delayed) and (ii) any such assignment pursuant to clause (y) above shall be in the aggregate amount of at least (I) in the event of an assignment relating to this Agreement only, $10,000,000, except to the extent that after giving effect to any such assignment the assigning Bank shall have reduced its Commitment to zero and (II) in the event of an assignment relating to this Agreement and the Nabisco Credit Agreement, $5,000,000, provided that the aggregate amount of such assignment under this Agreement and the Nabisco Credit Agreement is at least $10,000,000, except to the extent that after giving effect to any such assignment the assigning Bank shall have reduced its Commitment hereunder to zero. Any assignment to another Bank pursuant to this clause (b)(A) will become effective upon the payment to the Payments Administrator by (I) either the assigning or the assignee Bank or (II) in the case of an assignment pursuant to Section 1.14, the Replacement Bank, of a nonrefundable assignment fee of $2,500 and the recording by the Payments Administrator of such assignment, and the resultant effects thereof on the Commitments of the assigning Bank and the assignee Bank, in the Register, the Payments Administrator hereby agreeing to effect such recordation no later than five Business Days after its receipt of a written notification by the assigning Bank and the assignee Bank of the proposed assignment, provided that the Payments Administrator shall not be required to, and shall not, so record any assignment in the Register on or after the date on which any proposed amendment, modification or supplement in respect of this Agreement has been circulated to the Banks for approval until the earlier of (x) the effectiveness of such amendment, modification or supplement in accordance with Section 12.11 or (y) 30 days following the date on which such proposed amendment, modification or supplement was circulated to the Banks. Assignments pursuant to this clause (b)(A) to any Person not theretofore a Bank hereunder will only be effective if the Payments Administrator shall have received a written notice in the form of Exhibit -61- C-1 hereto from the assigning Bank and the assignee Bank and payment of a nonrefundable assignment fee of $2,500 to the Payments Administrator (provided, that in the event of simultaneous assignments relating to this Agreement and the Nabisco Credit Agreement, the fees for such assignments shall total $2,500) by (I) either the assigning or the assignee Bank or (II) in the case of an assignment pursuant to Section 1.14, the Replacement Bank. No later than five Business Days after its receipt of such written notice, the Payments Administrator will record such assignment, and the resultant effects thereof on the Commitment of the assigning Bank, in the Register, at which time such assignment shall become effective, provided that the Payments Administrator shall not be required to, and shall not, so record any assignment in the Register on or after the date on which any proposed amendment, modification or supplement in respect of this Agreement has been circulated to the Banks for approval until the earlier of (x) the effectiveness of such amendment, modification or supplement in accordance with Section 12.11 or (y) 30 days following the date on which such proposed amendment, modification or supplement was circulated to the Banks. Upon the effectiveness of any assignment pursuant to this clause (b)(A), (x) the assignee will become a "Bank" for all purposes of this Agreement and the other Credit Documents with a Commitment as so recorded by the Payments Administrator in the Register, and to the extent of such assignment, the assigning Bank shall be relieved of its obligations hereunder with respect to the portion of its Commitment being assigned and (y) if such assignment occurs after the Effective Date, the Borrower shall issue new Notes (in exchange for the Note of the assigning Bank) to the assigning Bank (to the extent such Bank's Commitment is not reduced to zero as a result of such assignment) and to the assignee Bank, in each case to the extent requested by the assigning Bank or assignee Bank, as the case may be, in conformity with the requirements of Section 1.06 to the extent needed to reflect the revised Commitments of such Banks. The Payments Administrator will prepare on the last Business Day of each calendar quarter during which an assignment has become effective pursuant to this clause (b)(A) a new Annex I giving effect to all such assignments effected during such quarter and will promptly provide same to the Borrower and each of the Banks. (B) Participations. Each Bank may transfer, grant or assign participations in all or any part of such Bank's interests and obligations hereunder pursuant to this clause (b)(B) to any Eligible Transferee, provided that (i) such Bank shall remain a "Bank" for all purposes of this Agreement and the transferee of such participation shall not constitute a Bank hereunder and (ii) no participant under any such participation shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (x) extend the final scheduled maturity of any of the Loans or the Commitment in which such participant is participating or (y) reduce the interest rate (other than as a result of waiving the applicability of any post-default increases in -62- interest rates) or Fees applicable to any of the Loans or Commitments or postpone the payment of any thereof or (z) release the Guaranty. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against the granting Bank in respect of such participation to be those set forth in the agreement with such Bank creating such participation) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation, provided that such participant shall be entitled to receive additional amounts under Sections 1.11, 1.12 and 3.04 on the same basis as if it were a Bank. In addition, each agreement creating any participation must include an agreement by the participant to be bound by the provisions of Section 12.14 and such participant shall have executed a confidentiality agreement in the form of Exhibit D hereto. (c) Notwithstanding any other provisions of this Section 12.04, no transfer or assignment of the interests or obligations of any Bank hereunder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Borrower or the Guarantor to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any State. (d) Each Bank initially party to this Agreement hereby represents, and each Person that becomes a Bank pursuant to an assignment permitted by the preceding clause (b)(A) will upon its becoming party to this Agreement represent, that it is an Eligible Transferee which makes loans in the ordinary course of its business and that it will make or acquire Loans for its own account in the ordinary course of such business, provided that subject to the preceding clauses (a) through (c), the disposition of any promissory notes or other evidences of or interests in Indebtedness held by such Bank shall at all times be within its exclusive control. 12.05 No Waiver; Remedies Cumulative. No failure or delay on the part of any Senior Managing Agent, Payments Administrator or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between either Credit Party and any Senior Managing Agent or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which any Senior Managing Agent or any Bank would otherwise have. No notice to or demand on either Credit Party in any case shall entitle either Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Senior Managing Agents or the Banks to any other or further action in any circumstances without notice or demand. -63- 12.06 Payments Pro Rata. (a) The Payments Administrator agrees that promptly after its receipt of each payment from or on behalf of either Credit Party in respect of any Obligations of such Credit Party, it shall, except as otherwise provided in this Agreement (or to the extent waived by any Bank), distribute such payment to the Banks pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans or Fees, of a sum which with respect to the related sum or sums received by other Banks is in a greater proportion than the total of such Obligations then owed and due to such Bank bears to the total of such Obligations then owed and due to all of the Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the Obligations to such Banks in such amount as shall result in a proportional participation by all of the Banks in such amount, provided that if all or any portion of such excess amount is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 12.07 Calculations; Computations. (a) The financial statements to be furnished to the Banks pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks), provided that, except as otherwise specifically provided herein, all computations determining compliance with Section 8, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the historical financial statements referred to in Section 6.09, provided that in the event GAAP shall be modified from that in effect at the time of the preparation of such financial statements, the Borrower shall be entitled to utilize GAAP, as so modified, for purposes of such computations to the extent that (x) the Borrower gives the Banks 30 days' prior written notice of such proposed modification and (y) prior thereto the Borrower and the Majority SMA shall have agreed upon adjustments, if any, to Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 (and the definitions used therein) the sole purpose of which shall be to give effect to such proposed change (it being understood and agreed that to the extent that the Borrower and the Majority SMA cannot agree on appropriate adjustments to such Sections (or that no adjustments are necessary), the proposed change may not be effected), and provided further, (i) that if at any time the computations determining compliance with Section 8 utilize accounting principles different from those utilized in the financial statements furnished to the Banks, such financial statements shall be accompanied by -64- reconciliation work-sheets and (ii) in the event that the obligations and related receivables under any of the existing receivables facilities of the Borrower and its Subsidiaries or under any replacement facilities (to the extent the Liens created thereunder do not attach to assets not subject to Liens under the receivables facility being replaced) are no longer given off-balance sheet treatment, any such obligations, the interest expense or discount thereon and related receivables under such existing or replacement receivables facility shall continue to receive off-balance sheet treatment for purposes of determining compliance with Section 8. (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days. 12.08 Governing Law; Submission to Jurisdiction; Venue. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, each Credit Party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the respective Credit Party at its address for notices pursuant to Section 12.03, such service to become effective 30 days after such mailing. Each Credit Party hereby irrevocably appoints Nabisco International, Inc., located at 345 Park Avenue, New York, New York 10154 as its agent for service of process in respect of any such action or proceeding. Nothing herein shall affect the right of any Senior Managing Agent or any Bank to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against either Credit Party in any other jurisdiction. (b) Each Credit Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in the preceding clause (a) and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 12.09 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with Holdings and the Payments Administrator. -65- 12.10 Headings Descriptive. The table of contents and the headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 12.11 Amendment or Waiver. Except for deemed amendments provided for in Section 9.04, neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Required Banks, provided that (x) no such change, waiver, discharge or termination shall, without the consent of each Bank (other than a Defaulting Bank) with Obligations being directly affected thereby, (i) extend the scheduled final maturity of any Loan or Note, or any portion thereof, or reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or Fees or reduce the principal amount thereof, or increase the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment shall not constitute a change in the terms of the Commitment of any Bank), (ii) release the Guaranty, (iii) amend, modify or waive any provision of this Section, or Section 1.11, 1.12, 3.04, 9.01, 11.07, 12.01, 12.02, 12.04, 12.06, 12.07(b) or 12.14, (iv) reduce any percentage specified in, or otherwise modify, the definition of Required Banks or (v) consent to the assignment or transfer by either Credit Party of any of its rights and obligations under this Agreement; and (y) the financial covenants set forth in Sections 8.03(e), 8.04(i), 8.05, 8.07, 8.08 and 8.09 (and the defined terms used therein) may be adjusted with the consent of Holdings, the Borrower and the Majority SMA to the extent provided in Sections 7.09 and 12.07(a). No provision of Section 11 may be amended or modified without the consent of any Senior Managing Agent adversely affected thereby. 12.12 Survival. All indemnities set forth herein including, without limitation, in Section 1.11, 1.12, 3.04, 11.07 or 12.01 shall survive the execution and delivery of this Agreement and the making of the Loans, the repayment of the Obligations and the termination of the Total Commitment. 12.13 Domicile of Loans. Subject to Section 12.04, each Bank may transfer and carry its Loans at, to or for the account of any branch office, subsidiary or affiliate of such Bank, provided that the Borrower shall not be responsible for costs arising under Section 1.11, 1.12 or 3.04 resulting from any such transfer (other than a transfer pursuant to Section 1.13) to the extent not otherwise applicable to such Bank prior to such transfer. 12.14 Confidentiality. Subject to Section 12.04, each Bank shall hold all non-public information furnished by or on behalf of Holdings or the Borrower in connection with such Bank's evaluation of whether to become a Bank hereunder or obtained pursuant -66- to the requirements of this Agreement, which has been identified as such by Holdings ("Confidential Information"), in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure reasonably required by any bona fide transferee or participant (which shall be an Eligible Transferee) in connection with the contemplated transfer of any Loans or participations therein or as required or requested by any governmental agency or representative thereof or pursuant to legal process or to such Bank's attorneys, affiliates or independent auditors, provided that, unless specifically prohibited by applicable law or court order, each Bank shall notify Holdings of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Bank by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information, and provided further, that in no event shall any Bank be obligated or required to return any materials furnished by Holdings or any Subsidiary. Each Bank agrees that it will not provide to prospective assignees, transferees or participants any of the Confidential Information unless such Person has executed a Confidentiality Agreement in the form of Exhibit D. 12.15 Waiver of Jury Trial. Each of the parties to this Agreement hereby irrevocably waives all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement, the other Credit Documents or the transactions contemplated hereby or thereby. SECTION 13. Guaranty. 13.01 The Guaranty. In order to induce the Banks to enter into this Agreement and to extend credit hereunder and in recognition of the direct benefits to be received by the Guarantor from the proceeds of the Loans, the Guarantor hereby agrees with the Banks as follows: the Guarantor hereby unconditionally and irrevocably guarantees as primary obligor and not merely as surety the full and prompt payment when due, whether upon maturity, by acceleration or otherwise, of any and all indebtedness of the Borrower to the Banks. If any or all of the indebtedness of the Borrower to the Banks becomes due and payable hereunder, the Guarantor unconditionally promises to pay such indebtedness to the Banks, or order, on demand, together with any and all expenses which may be incurred by the Senior Managing Agents or the Banks in collecting any of the indebtedness. The word "indebtedness" is used in this Section 13 in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of the Borrower arising in connection with this Agreement and any other Credit Document, in each case, heretofore, now, or hereafter made, incurred or created, whether voluntarily or involuntarily, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such indebtedness is from time to time reduced, or extinguished and thereafter increased or incurred, whether the Borrower may be liable -67- individually or jointly with others, whether or not recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, and whether or not such indebtedness may be or hereafter become otherwise unenforceable. 13.02 Bankruptcy. Additionally, the Guarantor unconditionally and irrevocably guarantees the payment of any and all indebtedness of the Borrower to the Banks whether or not due or payable by the Borrower upon the occurrence in respect of the Borrower of any of the events specified in Section 9.05, and unconditionally promises to pay such indebtedness to the Banks, or order, on demand, in lawful money of the United States. 13.03 Nature of Liability. The liability of the Guarantor hereunder is exclusive and independent of any security for or other guaranty of the indebtedness of the Borrower whether executed by the Guarantor, any other guarantor or by any other party, and the liability of the Guarantor hereunder shall not be affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, or (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the indebtedness of the Borrower, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, or (e) any payment made to the Senior Managing Agents or the Banks on the indebtedness which the Senior Managing Agents or such Banks repay the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and the Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding. 13.04 Independent Obligation. The obligations of the Guarantor hereunder are independent of the obligations of any other guarantor or the Borrower, and a separate action or actions may be brought and prosecuted against the Guarantor whether or not action is brought against any other guarantor or the Borrower and whether or not any other guarantor or the Borrower be joined in any such action or actions. The Guarantor waives, to the fullest extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to the Guarantor. 13.05 Authorization. The Guarantor authorizes the Senior Managing Agents and the Banks without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the indebtedness or any part thereof in accordance with this Agreement, including any increase or decrease of the -68- rate of interest thereon, (b) take and hold security from any guarantor or any other party for the payment of this guaranty or the indebtedness and exchange, enforce, waive and release any such security, (c) apply such security and direct the order or manner of sale thereof as the Senior Managing Agents and the Banks in their discretion may determine and (d) release or substitute any one or more endorsers, guarantors, the Borrower or other obligors. 13.06 Reliance. It is not necessary for the Senior Managing Agents or the Banks to inquire into the capacity or powers of the Borrower or its Subsidiaries or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 13.07 Subordination. Any indebtedness of the Borrower now or hereafter held by the Guarantor is hereby subordinated to the indebtedness of the Borrower to the Senior Managing Agents and the Banks; and such indebtedness of the Borrower to the Guarantor, if any Senior Managing Agent, after an Event of Default has occurred, so requests, shall be collected, enforced and received by the Guarantor as trustee for the Banks and be paid over to the Banks on account of the indebtedness of the Borrower to the Banks, but without affecting or impairing in any manner the liability of the Guarantor under the other provisions of this Guaranty. Prior to the transfer by the Guarantor of any note or negotiable instrument evidencing any indebtedness of the Borrower to the Guarantor, the Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. 13.08 Waiver. (a) The Guarantor waives any right (except as shall be required by applicable statute and cannot be waived) to require the Senior Managing Agents or the Banks to (a) proceed against the Borrower, any other guarantor or any other party, (b) proceed against or exhaust any security held from the Borrower, any other guarantor or any other party or (c) pursue any other remedy in the Senior Managing Agents' or the Banks' power whatsoever. The Guarantor waives any defense based on or arising out of any defense of the Borrower, any other guarantor or any other party other than payment in full of the indebtedness, including, without limitation, any defense based on or arising out of the disability of the Borrower, any other guarantor or any other party, or the unenforceability of the indebtedness or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the indebtedness. The Senior Managing Agents and the Banks may, at their election, foreclose on any security held by the Senior Managing Agents or the Banks by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Senior Managing Agents and the Banks may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability -69- of the Guarantor hereunder except to the extent the indebtedness has been paid. The Guarantor waives any defense arising out of any such election by the Senior Managing Agents and the Banks, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of the Guarantor against the Borrower or any other party or any security. Until all indebtedness of the Borrower to the Banks shall have been paid in full, the Guarantor shall not have any right of subrogation, and waives any right to enforce any remedy which the Senior Managing Agents and the Banks now have or may hereafter have against the Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by the Senior Managing Agents and the Banks. (b) The Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional indebtedness. The Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the indebtedness and the nature, scope and extent of the risks which the Guarantor assumes and incurs hereunder, and agrees that the Senior Managing Agents and the Banks shall have no duty to advise the Guarantor of information known to them regarding such circumstances or risks. 13.09 Limitation on Enforcement. The Banks agree that this Guaranty may be enforced only by the action of a Senior Managing Agent acting upon the instructions of the Required Banks and that no Bank shall have any right individually to seek to enforce or to enforce this Guaranty, it being understood and agreed that such rights and remedies may be exercised by each Senior Managing Agent for the benefit of the Banks upon the terms of this Agreement. * * * -70- EX-11.1 5 RJR NBISCO HOLDINGS COMP OF EARNINGS PER SHARE EXHIBIT 11.1 RJR NABISCO HOLDINGS CORP. COMPUTATIONS OF EARNINGS PER SHARE (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996(A) 1995(A) 1994(A) ----------------------- ----------------------- ----------------------- FULLY FULLY FULLY PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED --------- ------------ --------- ------------ --------- ------------ Average number of common and common equivalent shares outstanding during the period (in thousands): Average number of shares of common stock outstanding during the period............... 324,917 324,917 325,476 325,476 270,406 270,406 Average number of stock options outstanding during the period........................... 1,585 1,958 1,167 1,320 2,483 2,726 ESOP convertible preferred stock.............. -- 2,957 -- 3,032 -- 3,094 Average number of Series C depositary shares issued during the period.................... -- -- -- -- 34,736 34,736 --------- ------------ --------- ------------ --------- ------------ Average number of common and common equivalent shares outstanding during the period (in thousands).................................. 326,502 329,832 326,643 329,828 307,625 310,962 --------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------ Net income applicable to common stock: Income before extraordinary item.............. $ 611 $ 611 $ 627 $ 627 $ 764 $ 764 Preferred stock dividends..................... (43) (28) (110) (95) (131) (116) Dilutive effect of Nabisco Holdings' common stock equivalents (B)....................... -- -- -- -- -- -- Income tax benefit on ESOP convertible preferred stock dividends................... -- (3) -- (3) -- (2) --------- ------------ --------- ------------ --------- ------------ Income before extraordinary item applicable to common stock................................ 568 580 517 529 633 646 Extraordinary item--loss on early extinguishments of debt, net of income taxes and minority interest....................... -- -- (16) (16) (245) (245) --------- ------------ --------- ------------ --------- ------------ Net income applicable to common stock......... $ 568 $ 580 $ 501 $ 513 $ 388 $ 401 --------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------ Net income (loss) per common and common equivalent share: Income before extraordinary item.............. $ 1.74 $ 1.76 $ 1.58 $ 1.60 $ 2.06 $ 2.08 Extraordinary item............................ -- -- (0.05) (0.05) (0.79) (0.78) --------- ------------ --------- ------------ --------- ------------ Net income.................................... $ 1.74 $ 1.76 $ 1.53 $ 1.55 $ 1.27 $ 1.30 --------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------
- --------------- (A) The calculations of fully diluted earnings per share are antidilutive; therefore, primary earnings per share are used for financial statement purposes. (B) The dilutive effect of Nabisco Holdings' stock options was insignificant for 1996 and 1995. EX-12.1 6 RJR NBISCO INC. COMPUTATION OF RATIO EXHIBIT 12.1 RJR NABISCO, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- Earnings before fixed charges: Income before income taxes............................................. $ 1,288 $ 1,291 $ 1,376 $ 112 $ 1,476 Less minority interest in pre-tax income of Nabisco Holdings........... 22 105 -- -- -- --------- --------- --------- --------- --------- Adjusted income before income taxes.................................... 1,266 1,186 1,376 112 1,476 Interest and debt expense.............................................. 832 872 1,065 1,186 1,359 Interest portion of rental expense..................................... 56 54 51 52 49 --------- --------- --------- --------- --------- Earnings before fixed charges............................................ $ 2,154 $ 2,112 $ 2,492 $ 1,350 $ 2,884 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Fixed charges: Interest and debt expense.............................................. $ 832 $ 872 $ 1,065 $ 1,186 $ 1,359 Interest portion of rental expense..................................... 56 54 51 52 49 Capitalized interest................................................... 15 12 11 9 5 --------- --------- --------- --------- --------- Total fixed charges.................................................. $ 903 $ 938 $ 1,127 $ 1,247 $ 1,413 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to fixed charges....................................... 2.4 2.3 2.2 1.1 2.0 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
EX-21 7 SUBSIDIARIES Exhibit 21 RJR NABISCO HOLDINGS CORP.
Date of Place of Name of Subsidiary Incorporation Incorporation - ----------------------------------------------------------------------------------------------------------------------- RJR Nabisco Holdings Corp. Oct 25, 1988 Delaware RJR Nabisco, Inc. Mar 04, 1970 Delaware ABCO Sp. Z o.o Sept 24, 1995 Poland Airco IHC, Inc. Mar 22, 1989 Delaware AO ISMA (60%) ** Nov 09, 1992 Russia AO3T Kabisco (90%) *** Jul 05, 1994 Kazakhstan A/O Nabisco Aug 16, 1994 Russia AO Vostanovlenniy Tabak (48.46%) *** Oct 26, 1994 Russia Arjay Equipment Corporation Nov 08, 1968 Delaware Arjay Holdings, Inc. May 07, 1984 Delaware Arrimo Fomento Comercial Ltda. * Oct 27, 1987 Brazil Avare (I.C.P.A. Cerqeirense Ltda) May 11, 1971 Brazil Batavia Inc. Jul 31, 1951 New Jersey Beech - Nut Life Savers (Panama) S.A. Jul 12, 1963 Panama Beijing Nabisco Food Company Ltd. (91.9%) Mar 16, 1995 China Bisco Services B.V. Dec 22, 1988 Netherlands Camel Racing Inc.* Jun 22, 1989 Canada Carnes y Conservas Espanolas, S.A. (CARCESA) Dec 02, 1975 Spain Cartera e Inversiones S.A.* Mar 05, 1979 Peru CGM - Cooperation GmbH Jan 15, 1990 Germany China - American Cigarette Company Limited (50%) *** May 29, 1984 China Club - Cigarettenfabrik GmbH * Aug 27, 1990 Germany Colophon Company Limited ** Jul 09, 1981 Bermuda Comercial Benut, S.A. de C.V. ** Mar 16, 1977 Mexico Companhia Produtos Pilar June 23, 1934 Brazil Compania Venezolana de Conservas C.A. (COVENCO) Jul 25, 1969 Venezuela Consiber, S.A. Mar 31, 1979 Spain Covenco Holding C.A. Nov 26, 1991 Venezuela Dely, S.A. Dec 18, 1960 Guatemala Distribuidora Pan Americana, S.A. Oct 22, 1974 Panama Establecimiento Modelo Terrabusi S.A. (99.2%) Dec 20, 1929 Argentina Exhold Limited * Oct 03, 1989 Liberia Export "A" Inc. Mar 31, 1989 Canada Fleischmann Argentina S.A. * Dec 13, 1990 Argentina Fleischmann Corporation, The Nov 02, 1929 Delaware Fleischmann International, Inc. Nov 20, 1944 Delaware Fleischmann Peruana Inc. Sep 01, 1939 Delaware Fleischmann Uruguaya S.A. Mar 09, 1961 Uruguay * Inactive Page 1 ** In Liquidation SUB-1996 *** Partnership/Joint Venture/Trust December 31, 1996 **** Nameholder Revised 3/4/97
Date of Place of Name of Subsidiary Incorporation Incorporation - ----------------------------------------------------------------------------------------------------------------------- Freezer Queen Foods (Canada) Limited Nov 03, 1967 Ontario, Canada Fulmer Corporation Limited May 15, 1981 Bahamas Galletas Artiach, S.A. Jul 23, 1932 Spain Galletas Fontaneda, S.A. ? Spain Gelatinas Ecuatorianas S.A. (66.7%) Nov 21, 1978 Ecuador GEM: Global Event Management, Ltd. Jun 27, 1991 England Global Events Management, Inc. Sep 05, 1991 Delaware GMB, Inc. May 09, 1996 N. Carolina Grupo Gamesa, S.A. de C.V. (1%) Jul 29, 1981 Mexico Hanover Servicing, Inc. Apr 13, 1992 Delaware Haus Neuerburg GmbH * Feb 25, 1977 Germany Hervin Company, The May 28, 1965 Oregon Hervin Holdings, Inc. Mar 29, 1988 Delaware Hickey & Nicholson Tobacco Company, Ltd., The * Apr 30, 1906 Prnc Ed Is., Can. Huntley & Palmer Foods Pensions Limited ? 1967 England IGB - Industria Grafica Brasiliera S.A. Jul 07, 1945 Brazil Industria de Colores y Sabores S.A. * Jun 21, 1967 Colombia Industria de Laticinios Gloria Ltda. * Jan 18, 1978 Brazil Industrias Alimenticias Maguary Ltda. May 07, 1953 Brazil Iracema Industrias de Caju Ltda Aug 08, 1978 Brazil Joshua Partners & Co. Mar 08, 1996 Cyprus Jupiter Produtos Alimenticios Ltda. Mar 02, 1962 Brazil Knox Company, The Dec 30, 1991 New Jersey Landers Centro Americana Fabricantes de Molinos Marca "Corona", S.A. de C.V. (95%) ** Jan 09, 1979 Honduras Landers y Cia, S.A. Oct 01, 1951 Colombia Leite Gloria do Nordeste S.A. May 16, 1968 Brazil Life Savers Manufacturing, Inc. Apr 21, 1976 Delaware Lowney Inc. Jan 01, 1983 Federal, Canada Luis Vizzolini e Hijos S.A.I.C. Jun 12, 1961 Argentina Mahachai Holding Co. Ltd. (49%) Jan 07, 1986 Thailand Marbu, S.A. Oct 26, 1967 Spain Merola Finance B.V. * May 09, 1995 Netherlands MEX Holdings, Ltd. Nov 27, 1991 Delaware Modi RJR Limited (50%) *** Sep 24, 1993 India Mont Pelrin Inc. May 05, 1954 New Jersey NABEC, S.A. Nov 17, 1982 Ecuador * Inactive Page 2 ** In Liquidation SUB-1996 *** Partnership/Joint Venture/Trust December 31, 1996 **** Nameholder Revised 3/4/97
Date of Place of Name of Subsidiary Incorporation Incorporation - ----------------------------------------------------------------------------------------------------------------------- Nabisco Arabia Co. Ltd. *** Jan 29, 1996 Saudi Arabia Nabisco Argentina S.A. Mar 14, 1994 Argentina Nabisco Biscuit Manufacturing (Midwest), Inc. Dec 21, 1988 Delaware Nabisco Biscuit Manufacturing (West), Inc. Dec 21, 1988 Delaware Nabisco Brands Company Aug 01, 1995 Delaware Nabisco Brands Holdings Denmark Limited Apr 17, 1989 Liberia Nabisco Brands Nominees Limited * Aug 22, 1983 England Nabisco Brazil, Inc. May 10, 1990 Delaware Nabisco Caribbean Export, Inc. Jun 13, 1984 Delaware Nabisco/Cetus Food Biotechnology Research Partnership (80%) *** Mar 01, 1984 Delaware Nabisco (China) Limited Aug 29, 1995 China Nabisco Chongqing Food Company Ltd. * Mar 01, 1995 China Nabisco de Nicaragua, S.A. (60%) Dec 10, 1965 Nicaragua Nabisco de Puerto Rico, Inc. Sep 21, 1951 New York Nabisco Direct, Inc. Aug 23, 1995 Delaware Nabisco Dominicana, S.A. Dec 11, 1995 Dom. Repub. Nabisco England IHC, Inc. Mar 29, 1989 Delaware Nabisco Enterprises IHC, Inc. Mar 22, 1989 Delaware Nabisco Europe, Middle East and Africa Trading, S.A. Oct 28, 1992 Spain Nabisco Food (Suzhou) Co. Ltd. Mar 16, 1995 China Nabisco Group Ltd. Jun 02, 1995 Delaware Nabisco Group Pensions Investments Ltd. Jun 07, 1962 England Nabisco Group Pensions Limited Sep 13, 1977 England Nabisco Holdings I B.V. May 3, 1996 Netherlands Nabisco Holdings II B.V. May 28, 1996 Netherlands Nabisco Holdings Corp. (80.5%) Apr 21, 1981 Delaware Nabisco Holdings IHC, Inc. Mar 22, 1989 Delaware Nabisco Hong Kong Limited Apr 12, 1994 Hong Kong Nabisco Iberia Lda. Dec 23, 1916 Portugal Nabisco Iberia, S.L. (98.06%) Jul 15, 1993 Spain Nabisco, Inc. Feb 03, 1898 New Jersey Nabisco, Inc. Foreign Sales Corporation Dec 17, 1991 US Virgin Is. * Inactive Page 3 ** In Liquidation SUB-1996 *** Partnership/Joint Venture/Trust December 31, 1996 **** Nameholder Revised 3/4/97
Date of Place of Name of Subsidiary Incorporation Incorporation - ----------------------------------------------------------------------------------------------------------------------- Nabisco International, Inc. Jul 29, 1947 Delaware Nabisco International Limited Dec 11, 1987 Nevada Nabisco International M.E./Africa L.L.C. (49%) ? Dubai, U.A.E. Nabisco International Market Development Group, Inc. Mar 22, 1989 Delaware Nabisco International, S.A. Nov 26, 1953 Panama Nabisco Investments, Inc. Mar 22, 1989 Delaware Nabisco Investments Ltd Jan 30, 1996 Federal, Canada Nabisco Ltd Jan 01, 1993 Federal, Canada Nabisco Music Publishers, Inc. Mar 24, 1986 Delaware Nabisco Music Ventures, Inc. Mar 24, 1986 Delaware Nabisco (New Zealand) Limited **** Mar 30, 1990 New Zealand Nabisco Pension Trust Limited Aug 31, 1956 England Nabisco Peru S.A. Jan 28, 1972 Peru Nabisco Royal Argentina Inc. Sep 29, 1934 Delaware Nabisco Royal Chile Limitada Mar 22, 1978 Chile Nabisco Royal Colombiana Inc. Jan 03, 1938 Delaware Nabisco Royal de Honduras, S.A. Jul 22, 1982 Honduras Nabisco Royal del Ecuador, S.A. Sep 16, 1977 Ecuador Nabisco Royal Inc. Sep 03, 1932 Delaware Nabisco Royal Panama, S.A. Mar 07, 1979 Panama Nabisco S.A. de C.V. (99.5%) Jun 15, 1992 Mexico Nabisco Taiwan Corporation May 27, 1996 Taiwan Nabisco Technology Company Dec 13, 1996 Delaware Nabisco Trading AG Aug 02, 1960 Switzerland Nabisco Tunisia S.A. Jul 02, 1976 Tunisia Nabisco Venezuela, C.A. Nov 26, 1991 Venezuela National Biscuit Company **** Jan 17, 1971 Delaware Northern Brands International, Inc. Dec 10, 1992 Delaware Nova Zembla Inc. Aug 19, 1975 New Jersey Outdoor Traders International S.r.L. ** Jan 17, 1991 Italy Plush Pippin Corporation Aug 06, 1986 Washington Plush Pippin Restaurants, Inc. Aug 29, 1974 Oregon Posto Apolo Ltda. Dec 05, 1984 Brazil Productos Alimenticios Royal S.A. Jan 01, 1966 Costa Rica Productos Capri S.A.I.C.I. May 18, 1971 Argentina Productos Confitados Salvavidas de Guatemala, S.A. Jul 03, 1974 Guatemala Productos Mayco S.A.I.C.I.F. May 11, 1962 Argentina Productos Royal S.A. * Dec 27, 1977 Argentina Produtos Alimenticios Fleischmann e Royal Ltda. Nov 28, 1964 Brazil PT Nabisco Foods ? Indonesia * Inactive Page 4 ** In Liquidation SUB-1996 *** Partnership/Joint Venture/Trust December 31, 1996 **** Nameholder Revised 3/4/97
Date of Place of Name of Subsidiary Incorporation Incorporation - ----------------------------------------------------------------------------------------------------------------------- R. J. Reynolds Berhad (60%) Jan 29, 1970 Malaysia R. J. Reynolds (Cyprus) Limited Feb 20, 1990 Cyprus R. J. Reynolds - Da Nang Tobacco Company Limited (70%) *** Jan 24, 1995 Vietnam R. J. Reynolds Espana, S.L. (50%) Dec 16, 1992 Spain R. J. Reynolds Europe, Inc. Apr 24, 1992 Delaware R. J. Reynolds Finance S.A. Sep 17, 1982 Switzerland R. J. Reynolds Finland OY Apr 27, 1994 Finland R. J. Reynolds Iberia S.L. Nov 27, 1996 Spain R. J. Reynolds, Inc. Oct 09, 1985 Delaware R. J. Reynolds International B.V. Oct 30, 1995 Netherlands R. J. Reynolds International, Inc. * Dec 13, 1985 Delaware R. J. Reynolds Italia S.r.l. Feb 09, 1989 Italy R. J. Reynolds (Korea) Ltd. ** Mar 09, 1989 Korea R. J. Reynolds/M.C. Tobacco Company, Limited (70%) Jul 01, 1982 Japan R. J. Reynolds Overseas Finance Co. N.V. Oct 21, 1977 Neth. Antilles R. J. Reynolds (Portugal) Empresa Comercial de Tabacos, Ltda. Jul 20, 1980 Portugal R. J. Reynolds Processing (Romania) S.R.L. Dec 28, 1995 Romania R. J. Reynolds (PVT) Limited Dec 28, 1994 Pakistan R. J. Reynolds Reklam Ve Pazarlama A.S. Mar 22, 1990 Turkey R. J. Reynolds Scandinavia A.B. Apr 12, 1969 Sweden R. J. Reynolds (Sea) Sdn. Bhd. Aug 29, 1992 Malaysia R. J. Reynolds (Slovakia) Spol. s.r.o. Sep 20, 1993 Slovak Republic R. J. Reynolds (Thailand) Inc. Aug 06, 1992 Delaware R. J. Reynolds Tobacco A.G. Dagmersellen Mar 03, 1966 Switzerland R. J. Reynolds Tobacco B.V. Sep 24, 1973 Netherlands R. J. Reynolds Tobacco Company Apr 04, 1899 New Jersey R. J. Reynolds Tobacco Company Aug 08, 1969 Delaware R. J. Reynolds Tobacco Company (Hong Kong) Limited Apr 07, 1970 Hong Kong R. J. Reynolds Tobacco Company, S.A.E. Apr 27, 1971 Spain R. J. Reynolds Tobacco Company Sdn. Bhd. Oct 10, 1973 Malaysia R. J. Reynolds Tobacco Company (Taiwan), Inc. Apr 14, 1988 Delaware R. J. Reynolds Tobacco (Croatia) Ltd. * Dec 21, 1992 Croatia R. J. Reynolds Tobacco Foreign Sales Corporation Dec 19, 1984 US Virgin Is. R. J. Reynolds Tobacco France S.A. Aug 21, 1976 France R. J. Reynolds Tobacco GmbH Nov 30, 1957 Germany R. J. Reynolds Tobacco Hellas A.E.B.E. Sep 24, 1981 Greece R. J. Reynolds Tobacco International (Asia Pacific), Inc. Nov 27, 1978 Delaware R. J. Reynolds Tobacco International B.V. Sep 02, 1963 Netherlands R. J. Reynolds Tobacco International (Hong Kong) Limited Jul 28, 1987 Hong Kong R. J. Reynolds Tobacco International, Inc. Jan 12, 1976 Delaware R. J. Reynolds Tobacco International (Korea), Inc. Jan 17, 1991 Delaware R. J. Reynolds Tobacco International (Mexico), Inc. Jun 24, 1981 Delaware R. J. Reynolds Tobacco International OY ** Jun 14, 1995 Finland R. J. Reynolds Tobacco International S.A. Nov 03, 1966 Switzerland * Inactive Page 5 ** In Liquidation SUB-1996 *** Partnership/Joint Venture/Trust December 31, 1996 **** Nameholder Revised 3/4/97
Date of Place of Name of Subsidiary Incorporation Incorporation - ----------------------------------------------------------------------------------------------------------------------- R. J. Reynolds Tobacco - Kazakhstan (80%) *** Jun 30, 1994 Kazakhstan R. J. Reynolds Tobacco - Kremenchuk (70%) *** Jun 10, 1993 Ukraine R. J. Reynolds Tobacco Limited * Jun 18, 1975 New Zealand R. J. Reynolds Tobacco Ltd May 16, 1995 Slovenia R. J. Reynolds Tobacco - Lviv JSC (70%) *** Oct 28, 1993 Ukraine R. J. Reynolds Tobacco (Magyarorszag) Kft Feb 27, 1991 Hungary R. J. Reynolds Tobacco (MAK) * Jul 25, 1994 Macedonia R. J. Reynolds Tobacco (Philippines), Inc. Apr 22, 1992 Philippines R. J. Reynolds Tobacco (Poland) Ltd. Jan 07, 1991 Poland R. J. Reynolds Tobacco (Romania) Ltd. Jul 06, 1993 Romania R. J. Reynolds Tobacco Rt Jul 28, 1992 Hungary R. J. Reynolds Tobacco Spol. s.r.o. Apr 12, 1991 Czech Republic R. J. Reynolds Tobacco (UK) Limited Nov 18, 1980 England R. J. Reynolds Trading Company Sdn. Bhd. Nov 06, 1987 Malaysia R. J. Reynolds Tutun Sanayi A.S. Jan 21, 1993 Turkey Reynolds Manufacturing (Bulgaria) Ltd. (67%) * Dec 29, 1993 Bulgaria Reynolds Manufacturing (Romania) SRL (99%) Jul 12, 1993 Romania Reynolds Technologies, Inc. Mar 01, 1994 Delaware REYTAB Tutun Sanayi ve Ticaret AS Jun 10, 1986 Turkey Ritz Biscuit Company Limited **** Sep 28, 1989 England RJR - Armavirtabak (91.25%) *** Oct 24, 1994 Russia RJR (Bulgaria) Ltd. * Oct 27, 1993 Bulgaria RJR Central Asia * Mar 10, 1995 Kazakhstan RJR Comercial Ltda. ** Aug 18, 1977 Brazil RJR - Consults Ltd. Feb 20, 1996 Cyprus RJR Group, Inc., The Dec 13, 1985 Delaware RJR Industries, Inc. Dec 29, 1975 Delaware RJR Industries (U.K.) Limited ** Jun 01, 1982 England RJR - Macdonald Inc. Sep 12, 1978 Federal, Canada RJR Marketing and Sales JSC Feb 16, 1995 Russia RJR Mauritius Private Limited Sep 27, 1993 Mauritius RJR Merchandise Marketing Company Aug 22, 1994 Delaware RJR Nabisco & Company (99%) *** Mar 20, 1992 Cyprus RJR Nabisco China Limited Dec 28, 1979 Hong Kong RJR Nabisco (Cyprus) Limited Mar 29, 1990 Cyprus RJR Nabisco Holdings Capital Trust I (3%) *** Jun 20, 1995 Delaware RJR - Nabisco Industries, Inc. Dec 13, 1985 Delaware RJR Nabisco Securities Ltd. Sep 28, 1987 Federal, Canada * Inactive Page 6 ** In Liquidation SUB-1996 *** Partnership/Joint Venture/Trust December 31, 1996 **** Nameholder Revised 3/4/97
Date of Place of Name of Subsidiary Incorporation Incorporation - ----------------------------------------------------------------------------------------------------------------------- RJR - Petro (92%) *** May 07, 1992 Russia RJR Realty Relocation Services, Inc. Nov 01, 1994 N. Carolina RJR Sales Co. Feb 18, 1993 Delaware RJR Technical Company May 16, 1991 Delaware RJR Tobacco Company, Inc. Dec 30, 1982 N. Carolina RJR Tobacco Consolidated IHC, Inc. Mar 22, 1989 Delaware RJR Tobacco Eurasia, Inc. May 26, 1994 Delaware RJR Tobacco Holdings IHC, Inc. Mar 22, 1989 Delaware RJR Tobacco Holdings II, B.V. Apr 17, 1985 Netherlands RJR Tobacco International Holding B.V. Nov 22, 1996 Netherlands RJR Tobacco (Kiev) JSC Apr 09, 1993 Ukraine RJR Tobacco Russia Dec 05, 1991 Russia RJR Trade Promotion Company Feb 18, 1993 Delaware Royal Beech - Nut (Proprietary) Ltd. (49%) Jan 02, 1945 S. Africa Royal Holding C.A. Nov 26, 1991 Venezuela Royal Productos Alimenticios, C.A. Jul 26, 1971 Venezuela Salem Holidays Sdn. Bhd. Oct 03, 1994 Malaysia Salem Power Station Sdn. Bhd. Sep 18, 1993 Malaysia Salem Servicing, Inc. Jan 12, 1990 Delaware Salvavidas S. de R.L. de C.V. ** Mar 30, 1967 Mexico Saria Inc. Mar 09, 1956 New Jersey S. F. Imports, Inc. May 26, 1994 Delaware Smiths Foods ** Jul 26, 1922 England Smooth Events, Inc. Jan 26, 1996 Canada Sports Marketing Enterprises, Inc. **** Apr 14, 1988 N. Carolina STAR Cooperation GmbH * Jan 29, 1960 Germany Stella D'oro Biscuit Co., Inc. Jan 02, 1948 New York Sunrise Biosystems, Inc. (50%) *** Mar 01, 1994 Delaware Tabandor S.A. (33%) Feb 28, 1995 Andorra Tanzanian Cigarette Company (45%) *** Jan 28, 1995 Tanzania Tevalca Holding C.A. Nov 26, 1991 Venezuela Transnational Services, Inc. Jan 06, 1988 Delaware Transapolo - Transportes Rodoviarios Apolo Ltda. Oct 24, 1984 Brazil 20th Century Denmark Limited Mar 06, 1990 Liberia Vantage Arts Inc. * Jun 22, 1989 Canada WBI (International) S.A. ** Nov 22, 1988 Switzerland West Indies Yeast Company Limited (72%) Nov 29, 1965 Jamaica Worldwide Brands, Inc. Oct 18, 1983 Delaware Worldwide Brands Inc. Sdn. Bhd. Mar 30, 1991 Malaysia Worldwide Brands International (Hong Kong) Limited Jan 19, 1988 Hong Kong Yili - Nabisco Biscuit & Food Company Limited (51%) *** Jan 29, 1985 China * Inactive Page 7 ** In Liquidation SUB-1996 *** Partnership/Joint Venture/Trust December 31, 1996 **** Nameholder Revised 3/4/97
EX-23 8 CONSENT OF IND. AUDITORS EXHIBIT 23 CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 33-39791, 33-39725, 33-40400, 33-40395, 33-40396, 33-66084, 33-54397, 33-54399, 33-54393 and 33-40702 of RJR Nabisco Holdings Corp. on Form S-8 and Registration Statement No. 33-60803 of RJR Nabisco, Inc. on Form S-3 of our report dated January 28, 1997 (March 13, 1997 as to note 9) appearing in this Annual Report on Form 10-K of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the year ended December 31, 1996. DELOITTE & TOUCHE LLP New York, New York March 13, 1997 EX-24 9 POWERS OF ATTORNEY POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of each of RJR NABISCO HOLDINGS CORP. and RJR NABISCO, INC., each a Delaware corporation (the "Companies"), do hereby make, constitute and appoint Robert F. Sharpe, Jr., H. Colin McBride, David F. Sternlieb and Sara L. Silbiger, and each of them, attorneys-in-fact and agents of the undersigned with full power and authority of substitution and resubstitution, in any and all capacities, to execute for and on behalf of the undersigned the ANNUAL REPORT ON FORM 10-K of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc., for the fiscal year ended December 31, 1996, and any and all amendments or supplements to the foregoing Annual Report and any other documents and instruments incidental thereto, and to deliver and file the same, with all exhibits thereto, and all documents and instruments in connection therewith, with the Securities and Exchange Commission, and with each exchange on which any class of securities of the Companies is registered, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing that said attorneys-in-fact and agents, and each of them, deem advisable or necessary to enable the Companies to effectuate the intents and purposes hereof, and the undersigned hereby fully ratify and confirm all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed his or her name, this 28th day of February, 1997. /s/ Steven F. Goldstone Chairman of the Board, President, - ------------------------------ Chief Executive Officer and Director Steven F. Goldstone /s/ Robert S. Roath Senior Vice President and Chief - ------------------------------ Financial Officer Robert S. Roath /s/ Richard G. Russell Senior Vice President and Controller - ------------------------------ Richard G. Russell Page 2 /s/ John T. Chain, Jr. Director - ------------------------------ John T. Chain, Jr. /s/ Julius L. Chambers Director - ------------------------------ Julius L. Chambers /s/ John L. Clendenin Director - ------------------------------ John L. Clendenin /s/ Ray J. Groves Director - ------------------------------ Ray J. Groves /s/ L. Dennis Kozlowski Director - ------------------------------ L. Dennis Kozlowski /s/ H. Eugene Lockhart Director - ------------------------------ H. Eugene Lockhart /s/ John G. Medlin, Jr. Director - ------------------------------ John G. Medlin, Jr. /s/ Rozanne L. Ridgway Director - ------------------------------ Rozanne L. Ridgway EX-27.1 10 RJR NABISCO HOLDINGS CORP. FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN HOLDINGS' CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000847903 RJR NABISCO HOLDINGS CORP. 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 252 0 1,418 0 2,636 4,751 8,837 (3,002) 31,289 4,306 9,256 957 534 3 9,608 31,289 17,063 17,063 7,973 7,973 1,064 0 927 1,199 585 614 0 0 0 611 1.74 1.76
EX-27.2 11 RJR NABISCO INC. FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000083612 RJR NABISCO, INC. 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 251 0 1,413 0 2,636 4,745 8,837 (3,002) 31,260 4,124 9,256 0 0 0 11,669 31,260 17,063 17,063 7,973 7,973 1,064 0 832 1,288 619 669 0 0 0 666 0.00 0.00
EX-99 12 EXH 99 - EXPANDED LITIGATION DISCLOSURE EXHIBIT 99 EXPANDED LITIGATION DISCLOSURE TOBACCO-RELATED LITIGATION OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJR Nabisco, Inc. ("RJRN")) or indemnitees, including those claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During 1996, 203 new actions were filed or served against RJRT and/or its affiliates or indemnitees and 103 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. There have been noteworthy increases in the number of these cases pending. On December 31, 1996 there were 234 active cases pending, as compared with 132 on December 31, 1995 and only 54 on December 31, 1994. As of February 28, 1997, 270 active cases were pending against RJRT and/or its affiliates or indemnitees, 268 in the United States, one in Canada and one in Puerto Rico. The United States cases are in 33 states and are distributed as follows: 117 in Florida, 36 in Texas, 26 in New York, 15 in Louisiana, eight in Alabama, seven in California, six in each of Kansas, Mississippi and Indiana, five in New Jersey, three in each of Minnesota, Ohio, Pennsylvania and Tennessee, two in each of Colorado, Connecticut, Maryland, Massachusetts and Michigan, and one each in Arizona, Arkansas, District of Columbia, Illinois, Iowa, Nevada, New Mexico, New Hampshire, Oklahoma, Rhode Island, Utah, Washington, West Virginia, and Wisconsin. Of the 268 active cases in the United States, 170 are in state court and 98 in federal court. Most of these cases are brought by individual plaintiffs, but an increasing number, discussed below, seek recovery on behalf of states or large classes of claimants. THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a variety of legal theories, including, among others, strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, anti-trust, Racketeer Influenced and Corrupt Organizations Act ("RICO"), indemnity and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. Seven of the 268 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. Nineteen cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, flight attendants alleging personal injury from exposure to environmental tobacco smoke ("ETS") in their workplace and Blue Cross Blue Shield subscribers claiming reimbursement for premiums paid. Twenty-seven of the active cases seek, INTER ALIA, recovery of the cost of Medicaid funds paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco. DEFENSES. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act ("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; statutes of limitations or repose; and, in the attorneys general cases (discussed below), additional constitutional defenses. RJRN has asserted additional defenses, including jurisdictional defenses, in many of the cases in which it is named. Juries have found for plaintiffs in three smoking and health cases in which RJRT was not a defendant, but in one such case, no damages were awarded and the judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on appeal and the case was subsequently dismissed. In the third such case, on August 9, 1996, a Florida jury awarded damages of $750,000 to an individual plaintiff. The defendants in that case, CARTER V. BROWN & WILLIAMSON, are seeking to reverse the judgment on appeal. On June 24, 1992, the United States Supreme Court in CIPOLLONE held that claims that tobacco companies failed adequately to 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 Supreme Court also held that certain claims sounding in breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. CLASS ACTIONS A smoking and health class action against United States cigarette manufacturers including RJRT, has been pending in Florida state court since October 1991, in which a class has been certified consisting of "all non-smoking flight attendants who are or have been employed by airlines based in the United States" and who are allegedly suffering from exposure to ETS aboard aircraft. BROIN, ET AL. V. PHILIP MORRIS, INCORPORATED, ET AL., Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida, Case No. 91-49738-CA-20. Various challenges to the class certification have been denied on appeal, and the case is currently set for trial in June 1997. Page 2 Another smoking and health class action against United States cigarette manufacturers including RJRT, has been pending in Florida state court since May 1994 in which a class has been certified consisting of all Florida citizens and residents and their survivors who have suffered injury "caused by their addiction to cigarettes that contain nicotine." ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida, Case No. 94-08273-CA-20. Various challenges to the class certification have been denied on appeal, and the case is currently set for trial in September 1997. In March 1994, a smoking and health class action was filed in Alabama state court against three United States cigarette manufacturers including RJRT, and was subsequently removed to federal court. LACEY, ET AL. V. LORILLARD TOBACCO COMPANY, INC., ET AL., United States District Court, Northern District of Alabama, Jasper Division, Civil Action No. 94-4-B-0901-J. Plaintiffs, claiming to represent all smokers who have smoked or are smoking cigarettes sold by defendants in the State of Alabama, seek compensatory and punitive damages not to exceed $48,500 per each class member as well as injunctive relief arising from defendants' alleged failure to disclose additives used in their cigarettes. On January 31, 1997, the judge granted defendants' motion for summary judgment based on preemption by the Cigarette Act. In March 1994, a smoking and health class action was filed in federal district court in Louisiana against United States cigarette manufacturers including RJRT, and others, including RJRN, seeking certification of a purported class consisting of all United States residents who allege that they are addicted, or are the legal survivors of persons who were addicted, to tobacco products. CASTANO, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., United States District Court, Eastern District of Louisiana, Case No. 94-1044. Plaintiffs alleged that the cigarette manufacturers concealed and/or misrepresented information regarding the addictive nature of nicotine and manipulated the levels of nicotine in their tobacco products to make such products addictive. In February 1995, the trial court certified the class and in May 1996, the Fifth Circuit Court of Appeals reversed the trial court's class certification and remanded the case with instructions that the class allegations be dismissed. The class has been decertified. Summary judgment motions against the two remaining named plaintiffs in this case were denied on February 21, 1997. In September 1994, a smoking and health class action was filed in federal district court in Louisiana against United States cigarette manufacturers including RJRT, and others, including RJRN, seeking certification of a purported class of all residents or domiciliaries of the United States who have used and became addicted to tobacco products. GRANIER V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court, Eastern District of Louisiana, Case No. 94-3096. In November 1994, on the plaintiffs' motion, a motion to consolidate the case with CASTANO was stayed pending the decision on the issue of class certification in CASTANO. The case remains inactive. Page 3 Following the announcement of the Fifth Circuit's class decertification decision in CASTANO, lawyers for the plaintiffs announced that they would file "state-wide" smoking and health class actions in state courts. Subsequently, smoking and health class actions based on claims similar to those in CASTANO (a "nicotine-dependence class action") and, in some cases, claims of physical injury as well (a "physical injury class action") were filed in a number of states, as described below. Immediately prior to the Fifth Circuit's decision in the CASTANO case, a purported nicotine-dependence class action was filed in Indiana state court against United States cigarette manufacturers, including RJRT, and others, including RJRN Holdings. In June 1996, defendants removed the case to federal court. NORTON, ET AL. V. RJR NABISCO HOLDINGS CORPORATION, ET AL., United States District Court for the Southern District of Indiana, Case No. IP96-0798-C-M/S. Plaintiffs' motion to remand the case to state court is pending. In May 1996, a purported physical injury and nicotine-dependence class action was filed in Maryland state court against United States cigarette manufacturers and others, including RJRN. The case was removed by defendants to federal court and was subsequently remanded to state court. RICHARDSON, ET AL. V. PHILIP MORRIS, INCORPORATED, ET AL., Circuit Court for Baltimore City, No. 96145050. In May 1996, a purported nicotine-dependence class action was filed in Louisiana state court against four United States cigarette manufacturers, including RJRT, and others, including RJRN. SCOTT, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., Civil District Court for the Parish of Orleans, State of Louisiana, Docket No. 96-8461. A hearing on plaintiffs' motion for class certification was held in February 1997. In June 1996, a purported nicotine-dependence class action was filed in New York state court against RJRT, RJRN, The Tobacco Institute and The Council for Tobacco Research, HOSKINS, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., Supreme Court of the State of New York, County of New York, Case No. 96110951. In December 1996, defendants filed motions to dismiss the complaint and to deny class certification. In June 1996, a purported physical injury and nicotine-dependence class action was filed in the Superior Court of the District of Columbia against United States cigarette manufacturers and others, including RJRN. REED V. PHILIP MORRIS INCORPORATED, ET AL., Superior Court of the District of Columbia, Case No. CA-05070-96. A hearing on whether plaintiffs can pursue a class action has been scheduled for June 1997. In August 1996, a purported nicotine-dependence class action was filed in Pennsylvania state court against United States cigarette manufacturers, including RJRT, and others, including RJRN, and was subsequently removed to federal court. ARCH, ET AL. Page 4 V. AMERICAN TOBACCO COMPANY, INC., ET AL., United States District Court for the Eastern District of Pennsylvania, Case No. 96-5903-CN. A hearing on class certification is set for March 1997, and the trial is scheduled for October, 1997. In August 1996, a purported nicotine-dependence class action was filed in Alabama state court, on behalf of Alabama and North Carolina residents, against four United States cigarette manufacturers including RJRT, and others. In September 1996, the case was removed by defendants to federal court. LYONS, ET AL. V. THE AMERICAN TOBACCO CO., INC., ET AL., United States District Court for the Southern District of Alabama, Southern Division, Civil Action No. 96-0881-BH-S. Plaintiffs' motion to remand the case to state court is pending. In August 1996, a purported nicotine-dependence class action was filed in Ohio state court against United States cigarette manufacturers including RJRT, and others, including RJRN, on behalf of Ohio residents and was subsequently removed to federal court in September, 1996. CHAMBERLAIN, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., United States District Court, Northern District of Ohio, Case No. 1:96CV2005. Plaintiffs' motion to remand the case to state court is pending. In September 1996, a purported class action was filed in Tennessee state court against four United States cigarette manufacturers including RJRT, and others, on behalf of all individuals and entities in the United States who have paid premiums to a Blue Cross or Blue Shield organization for medical insurance. The complaint alleges that defendants' actions have resulted in increased medical insurance premiums for all class members and seeks recovery under various consumer protection statutes as well as under theories of breach of special duty and unjust enrichment. This case was removed by defendants to federal court. PERRY, ET AL. V. PHILIP MORRIS, INCORPORATED, ET AL., United States District Court for the Eastern District of Tennessee, Winchester Division, Civil Action No. 4:96-CV-106. Plaintiffs' motion to remand the case to state court is pending. In September 1996, a purported nicotine-dependence class action was filed in Minnesota state court against four United States cigarette manufacturers including RJRT, and others, including RJRN. The case was removed by defendants to federal court in September 1996. MASEPOHL, ET AL. V. THE AMERICAN TOBACCO CO., INC., ET AL., United States District Court, District of Minnesota, Third Division, Case No. CV3-96-888. Plaintiffs' motion to remand the case to state court is pending. In October 1996, a purported nicotine-dependence class action was filed in New Mexico state court against four United States cigarette manufacturers including RJRT, and others, including RJRN. CONNOR, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Second Judicial District Court, County of Bernalillo, State of New Mexico, Case No. CV-96-9422. Page 5 In October 1996, a purported nicotine-dependence class action was filed in federal court in Puerto Rico against four United States cigarette manufacturers including RJRT, and others. RUIZ, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., United States District Court for the District of Puerto Rico, Civil Action No. 96-2300. In November 1996, a purported nicotine-dependence class action was filed in federal court in Arkansas against United States cigarette manufacturers including RJRT, and others, including RJRN. MCGINTY, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., United States District Court for the Eastern District of Arkansas, Western Division, Case No. LRC 96-881. In January 1995, a purported class action was filed in the Ontario Court of Justice, Toronto, Canada against RJR-MacDonald, Inc. and two other Canadian cigarette manufacturers. LETOURNEAU V. ROTHMANS ET AL., Ontario Court of Justice, Toronto, Canada, Court File No. 95-CU-82186 (now captioned CAPUTO V. IMPERIAL TOBACCO LIMITED, ET AL.). The lawsuit seeks damages in the amount of $1,000,000 (Canadian) per class member and punitive and exemplary damages and an order requiring the funding of rehabilitation centers. Plaintiffs seek certification of a class of persons consisting of all current and former cigarette smokers in Ontario, their families and the estates of deceased smokers. Plaintiffs have filed class certification materials, most recently in January, 1997, but no motion has yet been made for class certification. In March, 1996, PRO SE prisoners filed a purported class action against United States cigarette manufacturers including RJRT, and others, seeking class certification on behalf of prisoners in two Mississippi prisons based on alleged exposure to ETS. LYLE, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., United States District Court for the Northern District of Mississippi, Civil Action No. 3:96-CV-268WS. In October 1996, the court issued an order dismissing the action. In addition, there are four other purported class actions which have been filed against four United States cigarette manufacturers, including RJRT, and others, including in some, RJRN, but not yet served on RJRT or RJRN. In September 1996, a purported physical injury class action was filed in Florida state court against United States cigarette manufacturers, including RJRT, and others. WALTERS, ET AL. V. BROWN & WILLIAMSON TOBACCO CORP., ET AL., Circuit Court, Fourth Judicial District, Duval County, Florida. In January 1997, a purported nicotine-dependence class action was filed in West Virginia state court against United States cigarette manufacturers, including RJRT, and others, including RJRN. Despite the fact that RJRT and RJRN had not been served, they joined with other defendants in removing the case to federal court in February 1997. Page 6 MCCUNE V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court, Southern District of West Virginia at Charleston, Case No. CV 2:97-024. In February 1997, a purported nicotine-dependence class action was filed in Hawaii state court against United States cigarette manufacturers, including RJRT, and others, including RJRN. PETERSON V. THE AMERICAN TOBACCO COMPANY, ET AL., Circuit Court, First Circuit, Honolulu, Case No. CV97-0490-02. In February 1997, a purported nicotine-dependence class action was filed in Kansas state court against United States cigarette manufacturers, including RJRT, and others, including RJRN. EMIG V. THE AMERICAN TOBACCO COMPANY, ET AL., 18th Judicial District Court, Sedgwick County, Wichita, Civil Division, Case No. 97-C-379. HEALTH CARE COST RECOVERY LITIGATION In certain of the pending proceedings, state and local government entities and others seek reimbursement for Medicaid and/or other health care expenditures allegedly caused by tobacco products. The claims asserted in these health care cost recovery actions vary. All plaintiffs assert the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. The plaintiffs in these various health care cost recovery actions also assert one or more of the following additional claims: the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under the Federal Racketeer Influenced and Corrupt Organization Act ("RICO") or state RICO statutes. Each plaintiff seeks reimbursement of Medicaid and/or other health care costs. Other relief sought by some but not all plaintiffs includes punitive damages, treble damages for alleged antitrust law violations, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, disclosure of nicotine yields and payment of attorney and expert witness fees. Defenses raised by defendants include failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot recover because they participated in, and benefited from, the sale of cigarettes), lack of antitrust injury, federal preemption, lack of proximate cause and statute of limitations. In addition, defendants argue that they should be entitled to "set-off" any alleged damages to the Page 7 extent a state benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that all of these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer or a state) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring an action on behalf of each individual health care recipient and should be subject to all defenses available against the allegedly injured party. In several states certain cigarette companies, including RJRT have filed related declaratory judgment actions which challenge the ability of the plaintiffs to use contingency fee counsel to prosecute these actions and/or the procedural capacity of the state attorney general to bring the health care cost recovery action absent the approval of the relevant executive officer charged with responsibility for certain of the health care programs at issue. The following is a summary of certain developments in each of the health care cost recovery suits pending against RJRT and, in some cases, RJRN, and the related declaratory judgment actions filed by certain of the cigarette manufacturers. FLORIDA. In May 1994, the State of Florida enacted a statute which purports, among other things, to grant the state a direct cause of action for the recovery of Medicaid costs and to abolish affirmative defenses in Medicaid recovery actions. In June 1994, Philip Morris, Inc. and others filed suit in Florida state court challenging the constitutionality of the statute. ASSOCIATED INDUSTRIES OF FLORIDA, INC., ET AL. V. STATE OF FLORIDA AGENCY FOR HEALTH CARE ADMINISTRATION, ET AL., Circuit Court of the Second Judicial Circuit in and for Leon County, Florida, Case No. 94-3128. In June 1996, the Florida Supreme Court ruled that the provisions of the statute that permitted the state to pursue its action without identifying individual Medicaid recipients violated defendants' due process rights under the Florida constitution and that defendants may rebut the state's claims of causation and damages on a recipient-by-recipient basis. The court held constitutional on its face the statutory provision abolishing affirmative defenses normally available to a third party, including assumption of the risk, but stated that this provision might be unconstitutional as applied in the state's case. The court also held that the state's independent cause of action created by the statute only applied to Medicaid costs paid after the amendment became effective in July 1994. Prior to that date, the state could proceed only on the basis of traditional subrogation rights, subject to any defenses that might be asserted against individuals that brought actions against a cigarette manufacturer. In its opinion, the court also held that defendants could be held individually liable under a market share theory, that the state could use statistical evidence to present its case, and the agency charged with enforcing the statute was constitutionally established. In September 1996, plaintiffs' petition for rehearing on the Florida Supreme Court's rulings on abrogation of affirmative defenses and application of Page 8 the statute to conduct occurring before July 1994 was denied. In December 1996, Philip Morris, Inc. and another party filed a petition for a writ of certiorari to the United States Supreme Court on the grounds that the statute violates due process because it creates a unique cause of action on behalf of the state which abrogates certain common law and equitable principles, including affirmative defenses. In February 1995, the State of Florida filed a health care cost recovery action under the statute in Florida state court. THE STATE OF FLORIDA, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida, Case No. CL 95 1466 AO. In September 1996, the trial court dismissed all of the state's claims except for its negligence and strict liability counts arising from Medicaid payments made after July 1, 1994, and its count for injunctive relief. The court also ordered the state to disclose the identity of the Medicaid recipients. In October 1996, the state filed a coded listing (without names) for all Medicaid recipients with alleged smoking-related illnesses. The trial court accepted the coded listing and, in January 1997, the Florida Supreme Court determined not to hear and denied defendants' challenge to the sufficiency of the state's purported identification of Medicaid recipients. In November 1996, plaintiffs amended their complaint to add claims for violations of Florida's RICO and consumer protection statutes. In December 1996, the court granted defendants' motion to dismiss various claims brought under state statutes and denied the motion to dismiss claims based on Florida's RICO statute and on a state false advertising statute. In January 1997, defendants waived their rights to a pretrial determination of whether plaintiffs can amend their complaint to include a punitive damages claim. Defendants have reserved their rights to challenge the punitive damages claim on factual or legal bases. Plaintiffs have filed motions to strike defendants' affirmative defenses. These motions have been granted in part and denied in part. The trial in this case is scheduled to begin in August 1997. MISSISSIPPI. In May 1994, the Attorney General of Mississippi filed a health care cost recovery action in Mississippi state court. MOORE V. THE AMERICAN TOBACCO COMPANY, ET AL., Chancery Court of Jackson County, Mississippi, Case No. 94-1429. In February 1995, the court granted plaintiff's motion to strike certain of defendants' challenges to the sufficiency of the complaint and denied defendants' motion for judgment on the pleadings. In July 1995, plaintiff filed a motion seeking to preclude defendants from asserting their "set off" defenses. That motion is pending. The Governor of Mississippi and defendants have filed petitions with the Mississippi Supreme Court challenging the authority of the Attorney General to pursue this action. The Mississippi Supreme Court heard arguments on both petitions in September 1996, but has not issued a decision on either petition. The trial is scheduled to begin in June 1997. MINNESOTA. In August 1994, the Attorney General of Minnesota and Blue Cross and Blue Shield of Minnesota filed a health care cost recovery action in Minnesota state Page 9 court. MINNESOTA, ET AL. V. PHILIP MORRIS, INCORPORATED, ET AL., Minnesota District Court, Second Judicial District, County of Ramsey, Case No. C1-94-8565. In July 1996, the Minnesota Supreme Court ruled that Blue Cross did not have standing to pursue its tort claims against defendants, but that it could proceed against defendants for claims brought under antitrust and consumer protection statutes. The Supreme Court also held that Blue Cross could pursue directly its equitable claims, but only for injunctive (not monetary) relief. The case is scheduled to go to trial in January 1998. WEST VIRGINIA. In September 1994, the Attorney General of West Virginia filed a health care cost recovery action in West Virginia state court. MCGRAW V. THE AMERICAN TOBACCO COMPANY, ET AL., Circuit Court of Kanawha County, West Virginia, Case No. 94-1707. In October 1995, the court dismissed eight of ten counts of the complaint and granted defendants' motion to prohibit prosecution of this case pursuant to a contingent fee agreement with private counsel. In June 1996, the Attorney General filed a second amended complaint that added the Public Employees' Insurance Agency as a plaintiff. In November 1996, the Attorney General filed a third amended complaint that added the West Virginia Department of Health and Human Resources as a plaintiff, and three law firms as defendants, and asserted additional counts under theories of indemnity, negligent misrepresentation, negligence, and strict product liability. In December 1996, the court heard oral argument on defendants' motion to dismiss common law and equitable claims contained in plaintiffs' third amended complaint. In a letter ruling issued February 13, 1997, the court ruled that neither of the West Virginia agencies had implied or express statutory authority to maintain the challenged causes of action. Motions to dismiss the remaining counts of the third amended complaint are pending. TEXAS. In March 1996, the Texas Attorney General filed a health care cost recovery action in federal court in Texas. THE STATE OF TEXAS V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court, Eastern District of Texas, Civil No. 5-96CV91. Trial in this action is set for September 1997 and defendants have filed a number of motions to dismiss it. Defendants and others had previously filed an action in Texas state court in November 1995, seeking a declaration that the Texas Attorney General cannot pursue a health care cost recovery action. PHILIP MORRIS, INCORPORATED, ET AL. V. DAN MORALES, ATTORNEY GENERAL FOR THE STATE OF TEXAS, ET AL., District Court of Travis County, Texas, No. 94-14807. The state court has stayed the action for declaratory relief pending the outcome of the Attorney General's suit. MASSACHUSETTS. In December 1995, the Massachusetts Attorney General filed a health care cost recovery action in Massachusetts state court. COMMONWEALTH OF MASSACHUSETTS V. PHILIP MORRIS, INC., ET AL., Superior Court, Middlesex County, Civil Action No. 95-7378. Defendants have moved to dismiss the complaint. Defendants had previously filed an action in Massachusetts federal court in November 1995, seeking to enjoin the Attorney General from prosecuting a health care cost recovery action. PHILIP MORRIS INCORPORATED, ET AL. V. SCOTT HARSHBARGER, United States District Court, District of Page 10 Massachusetts, Case No. 95-12574-GAO. In November 1996, the federal district court denied the Attorney General's motion to dismiss the complaint and stayed the injunction action. MARYLAND. In May 1996, the State of Maryland filed a health care cost recovery action in Maryland state court. STATE OF MARYLAND V. PHILIP MORRIS INCORPORATED, ET AL., Circuit Court for Baltimore County, Maryland, Case No. 96-122017/CL211017. Defendants' motion to dismiss the state's complaint was argued on January 28, 1997. The trial is scheduled for January 1999. Defendants and others had previously filed a separate action in Maryland state court seeking to enjoin the Maryland Attorney General from prosecuting a health care cost recovery action pursuant to a contingent fee arrangement with special counsel. PHILIP MORRIS INCORPORATED, ET AL. V. PARRIS N. GLENDENING, GOVERNOR OF THE STATE OF MARYLAND, ET AL., Circuit Court for Talbot County, Maryland, Case No. CG 2829. In August 1996, the court granted defendants' motion for summary judgment and dismissed the injunction action. Plaintiffs have appealed. LOUISIANA. In March 1996, the Attorney General of Louisiana filed a health care cost recovery action in Louisiana state court. IEYOUB, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., 14th Judicial District Court, Parish of Calcasieu, Louisiana, Case No. 96-1209. In January 1997, the court denied defendants' motion to dismiss which argued that the Attorney General lacked the authority to bring this action. Defendants are seeking a supervisory writ of review of this decision. SAN FRANCISCO. In June 1996, the City and County of San Francisco filed a health care cost recovery action in California federal court and has since been joined by ten other California counties. CITY AND COUNTY OF SAN FRANCISCO, ET AL. V. PHILIP MORRIS, INC. ET AL., United States District Court, Northern District of California, Civil No. C 96-2090. In January 1997, the court denied defendants' motion to disqualify plaintiffs' contingency-fee counsel. In February 1997, the court dismissed all of the plaintiffs' claims. Two clams (implied warranty and conspiracy) were dismissed with prejudice. Plaintiffs were granted leave to file an amended complaint with respect to their remaining claims. In September 1996, plaintiffs in the federal court action, joined by several medical associations, filed an action in California state court seeking, among other things, injunctive relief and disgorgement of profits for alleged violations of California's consumer protection statutes. PEOPLE OF THE STATE OF CALIFORNIA, ET AL. V. PHILIP MORRIS, INC., ET AL., San Francisco Superior Court, County of San Francisco, Case No. 980864. In January 1997, the court granted in part defendants' motion to dismiss by requiring plaintiffs to replead certain causes of action and denied the motion on other grounds. WASHINGTON. In June 1996, the Attorney General of the State of Washington filed a health care cost recovery action in Washington state court. STATE OF WASHINGTON V. AMERICAN TOBACCO CO., INC., ET AL., Superior Court of Washington, King County, No. 96-2-15056-8. In November 1996, the court dismissed claims based on special duty, unjust Page 11 enrichment and restitution to the state, but did not dismiss claims brought under Washington's antitrust laws. The State of Washington recently moved to amend its complaint with the stated intention of correcting deficiencies found by the court to exist in the special duty and unjust enrichment claims and to add a claim for restitution under Washington's consumer protection statute. Trial is scheduled for September 1998. CONNECTICUT. In July 1996, the State of Connecticut filed a health care cost recovery action in Connecticut state court. STATE OF CONNECTICUT V. PHILIP MORRIS INC., ET AL., Superior Court, Judicial District of Litchfield, Case No. CV-96-01534405. Defendants had previously filed an action in federal district court in June 1996, seeking to enjoin the Connecticut Attorney General from bringing the health care cost recovery action. PHILIP MORRIS INC., ET AL. V. RICHARD BLUMENTHAL, United States District Court, District of Connecticut, Case No. 396CV01221 (PCD). This injunction action was dismissed in December 1996 and, in January 1997, plaintiffs appealed the dismissal. UTAH. In September 1996, the Utah Attorney General filed a health care cost recovery action in federal court in Utah. STATE OF UTAH V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., United States District Court, District of Utah, Case No. 2:96CV 0829W. Defendants had previously filed an action in Utah state court in July 1996, challenging the right of the Attorney General to bring such an action and to prosecute the case pursuant to a contingent fee arrangement with special counsel. PHILIP MORRIS INCORPORATED, ET AL. V. JANET C. GRAHAM, ATTORNEY GENERAL OF THE STATE OF UTAH, ET AL., Third Judicial District Court of Salt Lake County, Utah, Case No. 960904948CV. The parties have agreed that the state court action will be stayed while the federal action is proceeding, except for the challenge to the Attorney General's contingent fee arrangement with special counsel. In December 1996, a motion for partial summary judgment challenging the contingent fee arrangement was argued before the state court. In February 1997, the court denied the cigarette manufacturers' motion and granted the state's motion to dismiss three counts of the declaratory judgment action. LOS ANGELES. In August 1996, the County of Los Angeles filed a health care cost recovery action in California state court. COUNTY OF LOS ANGELES V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., Superior Court of California, San Diego County, No. 707651. On February 14, 1996, defendants demurred to four of the five causes of action asserted by plaintiffs. The hearing on defendants' demurrer is scheduled for March 21, 1997. ALABAMA. In August 1996, a health care cost recovery action was filed in Alabama state court as a putative class action on behalf of taxpayers of the State of Alabama. Following local rules, the state court entered an order conditionally certifying the class. This action was subsequently removed by defendants to federal court. CROZIER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court for the Middle District of Alabama, Case No. 96-A-1403-N. Plaintiffs' motion to remand to state court is pending. Page 12 KANSAS. In August 1996, the Attorney General of Kansas filed a health care cost recovery action in Kansas state court. STATE OF KANSAS, EX REL. CARLA J. STOVALL, ATTORNEY GENERAL V. R.J. REYNOLDS TOBACCO CO., ET AL., District Court of Shawnee County, Kansas, Case No. 96-CV-919. Defendants' motion to dismiss this case is scheduled to be heard in April 1997. MICHIGAN. In August 1996, the Attorney General of Michigan filed a health care cost recovery action in Michigan state court. FRANK J. KELLEY, ATTORNEY GENERAL, EX REL. STATE OF MICHIGAN V. PHILIP MORRIS, INCORPORATED, ET AL., Circuit Court for the 30th Judicial Circuit, Ingham County, Michigan, Case No. 96-84281-CZ. In October 1996, defendants moved to dismiss certain counts of the complaint and to strike claims for compensatory and punitive damages. OKLAHOMA. In August 1996, the Attorney General of Oklahoma filed a health care cost recovery action in Oklahoma state court. STATE OF OKLAHOMA ET AL. R.J. REYNOLDS TOBACCO CO., ET AL., District Court for Cleveland County, Oklahoma, Case No. CJ-96-1499-L. ARIZONA. In August 1996, the Attorney General of Arizona filed a health care cost recovery action in Arizona state court. STATE OF ARIZONA, ET AL. V. AMERICAN TOBACCO CO., INC. ET AL., Superior Court, Maricopa County, Arizona, No. CV 96-14769. The Governor of Arizona has instructed the Attorney General to dismiss the case. Subsequently, the Attorney General filed an amended complaint that abandons claims for Medicaid payments, but seeks recovery of other health care costs as well as other damages and forms of relief. Motions to dismiss the compliant are pending. The trial is scheduled for October 1998. HAWAII. In August 1996, Reynolds and three other cigarette manufacturers filed suit against the Hawaii Attorney General in federal district court in Hawaii seeking declaratory and injunctive relief invalidating a threatened health care cost recovery action by Hawaii. A hearing on defendant's motion to dismiss is scheduled for March 1997. The action is scheduled to go to trial in December 1997. PHILIP MORRIS INC., ET AL. V. MARGERY BRONSTER, United States District Court, Hawaii, Civ. No. 96-00722 HG. In January 1997, the Attorney General of Hawaii filed a health care recovery action in Hawaii state court. STATE OF HAWAII, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., Circuit Court of the First Circuit, No. 97-0441-01. In February 1997, the state filed its first amended complaint. OHIO. In September 1996, two Ohio local officials filed a health care cost recovery action in Ohio state court, purportedly on behalf of the State of Ohio and all Ohio taxpayers. Defendants removed the case to federal court in Ohio and have filed a motion to dismiss challenging the standing of plaintiffs to bring this action. STATE EX REL. Page 13 COYNE, JR., ET AL. V. THE AMERICAN TOBACCO CO., ET AL., United States District Court, Northern District of Ohio, Case No. 96-2247. Plaintiffs' motion to remand this action to state court is pending. NEW JERSEY. In September 1996, the New Jersey Attorney General filed a health care cost recovery action in New Jersey state court. THE STATE OF NEW JERSEY V. R.J. REYNOLDS TOBACCO COMPANY, ET AL. Chancery Court, Middlesex County, Case No. C-254-96. In August 1996, defendants filed a separate suit challenging the right of the Attorney General to bring such an action and to prosecute the case pursuant to a contingent fee arrangement with special counsel. PHILIP MORRIS, INCORPORATED, ET AL. V. PETER VERNIERO, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, ET AL., Superior Court of New Jersey, Chancery Division, Mercer County, Case No. MER-C-000114-96. Defendants' motion to dismiss the complaint and plaintiffs' motion for summary judgment are pending. NEW YORK CITY. In October 1996, the City of New York and the New York City Health and Hospitals Corporation filed a health care cost recovery action in New York state court. CITY OF NEW YORK, ET AL. V. THE TOBACCO INSTITUTE, ET AL., Supreme Court of the State of New York, County of New York, Case No. 406225/96. In January 1997, plaintiffs filed an amended complaint. In February 1997, the case was removed to the United States District Court for the Southern District of New York, Case No. 97CIV0904(LMM). ILLINOIS. In November 1996, the Attorney General of Illinois filed a health care cost recovery action in Illinois state court. PEOPLE OF THE STATE OF ILLINOIS V. PHILIP MORRIS, INC., ET AL., Circuit Court of Cook County, Illinois, Case No. 96 L 13146. IOWA. In November 1996, the State of Iowa filed a health care cost recovery action in Iowa state court. STATE OF IOWA, EX REL. THOMAS J. MILLER, IN HIS CAPACITY AS ATTORNEY GENERAL OF THE STATE OF IOWA V. R.J. REYNOLDS TOBACCO CO., ET AL., District Court for Polk County, Iowa, Case No. CL71048. ALASKA. In January 1997, Reynolds and three other cigarette manufacturers filed suit against the Alaska Attorney General in federal district court seeking declaratory and injunctive relief to prohibit a threatened health care cost recovery action by Alaska on grounds that it would violate federal law. PHILIP MORRIS, INC., ET AL. V. BRUCE BOTELHO, United States District Court, Alaska, No. A 97-003 Civil (JWS). ERIE COUNTY. In January 1997, the County of Erie filed a health care cost recovery action in New York state court. COUNTY OF ERIE V. THE TOBACCO INSTITUTE, INC., ET AL., Supreme Court of the State of New York, County of Erie, Case No. I1997/359. NEW YORK. In January 1997, the Attorney General of New York filed a health care cost recovery action in New York state court. STATE OF NEW YORK, ET AL. V. PHILIP Page 14 MORRIS INCORPORATED, ET AL., Supreme Court of the State of New York, County of New York, Case No. 400306/97. That action has not been served on RJRT. In February 1997, the case was removed to federal court. THE STATE OF NEW YORK, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., United States District Court for the Southern District of New York, Case No. 97CIV0794(LMM). WISCONSIN. In February 1997, the Attorney General of Wisconsin filed a health care cost recovery action in Wisconsin state court. STATE OF WISCONSIN V. PHILIP MORRIS INCORPORATED, ET AL., Circuit Court (Dane County), Case No. 97CV0328. INDIANA. In February 1997, the Attorney General of Indiana filed a health care cost recovery action in Indiana state court. STATE OF INDIANA V. PHILIP MORRIS, INCOPORATED, ET AL., Marion County Superior Court, Case No. 49D079702 CT0236. Other state and local government entities have announced that they are considering filing similar health care cost recovery actions. 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