-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, pIp1eXAQhwDXdYNC+rC8Povtfq0zS9Om11Y8Y/rfabt1T/tdDJnS1miXQ8GVrxEx zBVBAyNAe/JdgQZLOrTIkA== 0000950112-95-000460.txt : 19950224 0000950112-95-000460.hdr.sgml : 19950224 ACCESSION NUMBER: 0000950112-95-000460 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950223 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10215 FILM NUMBER: 95514540 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: COOKIES & CRACKERS [2052] IRS NUMBER: 560950247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06388 FILM NUMBER: 95514541 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-K 1 RJR NABISCO INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1994 ------------------- RJR NABISCO HOLDINGS CORP. (Exact name of registrant as specified in its charter)
DELAWARE 1-10215 13-3490602 (State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.) incorporation or organization)
RJR NABISCO, INC. (Exact name of registrant as specified in its charter) DELAWARE 1-6388 56-0950247 (State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.) incorporation or organization)
1301 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (212) 258-5600 (Address, including zip code, and telephone number, including area code, of the principal executive offices of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc.) ------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - ------------------------------------------------------ RJR NABISCO HOLDINGS CORP. Common Stock, par value $.01 per share New York Series B Depositary Shares New York Series C Depositary Shares New York RJR NABISCO, INC. 8.30% Senior Notes due April 15, 1999 New York 8.75% Senior Notes due April 15, 2004 New York 7 5/8% Notes due September 15, 2003 New York 8 5/8% Notes due 2002 New York 8% Notes due 2000 New York 9 1/4% Debentures due 2013 New York 8 3/4% Notes due 2005 New York SUBSIDIARIES OF THE REGISTRANTS Nabisco, Inc. 7 3/4% Sinking Fund Debentures due May 1, 2001 New York 7 3/4% Sinking Fund Debentures due November 1, 2003 New York Standard Brands Incorporated 7 3/4% Sinking Fund Debentures, due May 1, 2001 New York SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO __ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANTS' KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF RJR NABISCO HOLDINGS CORP. ON JANUARY 31, 1995 WAS APPROXIMATELY $5.9 BILLION. CERTAIN AFFILIATES OF KKR ASSOCIATES AND DIRECTORS OF RJR NABISCO HOLDINGS CORP. ARE CONSIDERED AFFILIATES FOR PURPOSES OF THIS CALCULATION BUT SHOULD NOT NECESSARILY BE DEEMED AFFILIATES FOR ANY OTHER PURPOSE. NONE OF THE VOTING STOCK OF RJR NABISCO, INC. IS HELD BY ANY NON-AFFILIATE. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS' CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: JANUARY 31, 1995: RJR NABISCO HOLDINGS CORP.: 1,362,133,648 SHARES OF COMMON STOCK, PAR VALUE, $.01 PER SHARE RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER SHARE ------------------- 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, 1995 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....................... 3 (c) Narrative Description of Business................................... 3 Tobacco........................................................... 3 Food.............................................................. 13 Other Matters..................................................... 17 (d) Financial Information about Foreign and Domestic Operations 17 and Export Sales.................................................. Item 2. Properties.................................................................. 18 Item 3. Legal Proceedings........................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders......................... 18 Executive Officers of the Registrants....................................... 19 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 21 Item 6. Selected Financial Data..................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and 24 Results of Operations..................................................... Item 8. Financial Statements and Supplementary Data................................. 38 Item 9. Changes in and Disagreements with Accountants on Accounting and 38 Financial Disclosure...................................................... PART III Item 10. Directors and Executive Officers of the Registrants......................... 39 Item 11. Executive Compensation...................................................... 39 Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 39 Item 13. Certain Relationships and Related Transactions.............................. 39 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 40
PART I ITEM 1. BUSINESS (a) General Development of Business The operating subsidiaries of RJR Nabisco Holdings Corp. ("Holdings") and its wholly-owned subsidiary, RJR Nabisco, Inc. ("RJRN") (collectively the "Registrants") comprise one of the largest tobacco and food companies in the world. In the United States, the tobacco business is conducted by R. J. Reynolds Tobacco Company ("RJRT"), the second largest manufacturer of cigarettes, and the packaged food business is conducted by Nabisco Holdings Corp. ("Nabisco Holdings") through its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"), the largest manufacturer and marketer of cookies and crackers. Outside the United States, the tobacco operations are conducted by R. J. Reynolds Tobacco International, Inc. ("Tobacco International"), and the food operations are conducted by Nabisco International, Inc. ("Nabisco International") and Nabisco Brands Ltd. RJRT's and Tobacco International's tobacco products are sold around the world under a variety of brand names. Nabisco's food products are sold in the United States, Canada, Latin America and certain other international markets. For financial information with respect to RJRN's industry segments, lines of business and operations in various geographic locations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 15 to the consolidated financial statements, and the related notes thereto, of Holdings and RJRN as of December 31, 1994 and 1993 and for each of the years in the three-year period ended December 31, 1994 (the "Consolidated Financial Statements"). Holdings was organized as a Delaware corporation in 1988 at the direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), a Delaware limited partnership, to effect the acquisition of RJRN, which was completed on April 28, 1989 (the "Acquisition"). As a result of the Acquisition, RJRN became an indirect, wholly owned subsidiary of Holdings. After a series of holding company mergers completed on December 17, 1992, RJRN became a direct, wholly owned subsidiary of Holdings. The business of Holdings is conducted through RJRN. RJRN was incorporated as a holding company in 1970. RJRT can trace its origins back to its formation in 1875. Activities were confined to the tobacco industry until the 1960's, when diversification led to investments in transportation, energy and food. With the acquisition of Del Monte Corporation ("Del Monte") in 1979 (which was sold in 1989), RJRN began to concentrate its focus on consumer products. This strategy led to the acquisition of Nabisco Holdings Corp. (formerly Nabisco Brands, Inc.) in 1985. In recent years subsidiaries of the Registrants have completed a number of acquisitions. In 1994, these acquisitions included (i) the KNOX gelatin brand; (ii) an approximately 99% interest in Establecimiento Modelo Terrabusi S.A., Argentina's second largest biscuit and pasta maker; (iii) a 76% interest in the Yelets tobacco processing plant in Russia; (iv) a controlling interest in a cigarette manufacturer in the Krasnodar region of southern Russia; and (v) a 90% interest in Shimkent Confectionery Enterprises and a site for a new cigarette factory in Kazakhstan. In February 1995, Tobacco International acquired Oy P.C. Rettig Ab, Finland's second largest tobacco company. In 1993, these acquisitions included (i) a 50% interest (increased to 100% in 1994) in Royal Brands, S.A. in Spain and Royal Brands Portugal; (ii) a 95% interest in Cia. Arturo Field y la Estrella Ltda., S.A., the leading biscuit maker in Peru; (iii) the remaining interest in Compania Nacional de Galletas Nabisco La Favorita, C.A., a Venezuelan biscuit maker, which as a result became a wholly-owned indirect subsidiary of Nabisco International; and (iv) a 70% interest in two cigarette factories in Ukraine. 1 In 1992, these acquisitions included (i) the assets of New York Style Bagel Chip Company, Inc., the country's leading producer and marketer of bagel chips and pita chips; (ii) Plush Pippin Corporation ("Plush Pippin"), a leading regional supplier of frozen pies to in-store supermarket bakeries; (iii) Stella D'oro Biscuit Co., Inc., a New York based specialty bakery ("Stella D'oro") that manufactures breadsticks, breakfast biscuits, specialty cakes, pastries and snacks; (iv) Industrias Alimenticias Maguary S.A., Brazil's largest producer and marketer of packaged fruit-based beverages; (v) the NOW & LATER confection brand, a fruit chewy taffy product; (vi) Lance S.A. de C.V., one of Mexico's leading biscuit and pasta manufacturers; (vii) six food and pet food businesses in Mexico in exchange for Nabisco International's previous minority interest in a joint venture operating those and other businesses in Mexico; and (viii) a 52% interest (increased to 80% in 1994) in a cigarette factory in St. Petersburg, Russia. RJRN will continue to assess its businesses to evaluate their consistency with strategic objectives. Although RJRN may acquire and/or divest additional businesses in the future, no other decisions have been made with respect to any such acquisitions or divestitures. The Registrants' credit agreement, dated as of December 1, 1991, as amended (the "1991 Credit Agreement"), and credit agreement, dated as of April 5, 1993, as amended (the "1993 Credit Agreement" and, together with the 1991 Credit Agreement, the "Credit Agreements"), prohibit the sale of all or substantially all or any substantial portion of the business of certain subsidiaries of RJRN. On January 26, 1995, Nabisco Holdings completed the initial public offering of 51,750,000 shares of its Class A Common Stock at an initial offering price of $24.50 per share. Nabisco used all of the approximately $1.2 billion of net proceeds from the initial public offering to repay a portion of its initial borrowing under its credit agreement, dated as of December 6, 1994 (the "Nabisco 1994 Credit Agreement"). RJRN owns 100% of the outstanding Class B Common Stock of Nabisco Holdings, which represents approximately 80.5% of the economic interest in Nabisco Holdings and approximately 97.6% of the total voting power of Nabisco Holdings' outstanding common stock. In connection with the offering, Holdings, RJRN and Nabisco Holdings entered into agreements to exchange certain services, to establish tax sharing arrangements and to provide RJRN with certain preemptive and registration rights with respect to Nabisco Holdings and Nabisco securities. Certain provisions in approximately $6 billion of RJRN's publicly held debt limit the ability of its subsidiaries to incur long-term debt. RJRN and Nabisco are currently considering a transaction in which they would seek to obtain consents to remove such limitations in order to permit Nabisco to establish long-term borrowing capacity independent of RJRN and to reduce its intercompany debt to RJRN. It is anticipated that such consents would be sought in connection with offers by Nabisco or RJRN to exchange debt of Nabisco for, or to pay certain cash consent solicitation fees in respect of, all or a portion of such RJRN debt. RJRN believes that any such transaction would not materially change the amount of consolidated indebtedness of either RJRN or Nabisco, although any newly issued debt of RJRN or Nabisco incurred in connection with the transaction may have maturities, interest rates or other terms that are less attractive to RJRN or Nabisco, respectively, than the terms of their existing debt. No assurance can be given that any such restructuring will be pursued or consummated or as to the timing of any such restructuring. During 1994, the percentage voting power of Holdings held by partnerships affiliated with KKR (the "KKR Partnerships") decreased substantially. This reduction was principally the result of transactions in connection with the acquisition of Borden, Inc. ("Borden") by certain of the KKR Partnerships. As of December 31, 1993, an aggregate of approximately 46.16% (approximately 38.28% on a fully diluted basis) of the total voting power of Holdings was held by the KKR Partnerships. As of December 31, 1994, after giving effect to certain transactions in connection with the acquisition of Borden by the KKR Partnerships, the KKR Partnerships held or controlled an aggregate of approximately 24.95% (approximately 20.28% on a fully diluted basis) of the total voting power of Holdings, including 51,106,768 shares of Holdings Common Stock, par value $.01 per share (the "Common Stock"), held by Borden. Subsequent to December 31, 1994, Borden acquired 68,893,232 additional 2 shares of Holdings Common Stock from the KKR Partnerships. On February 16, 1995, Borden sold 120,000,000 shares of Holdings Common Stock in a public offering (the "Borden Offering"). After giving effect to the Borden Offering and the projected completion in March 1995 of the remaining steps in the acquisition of Borden by the KKR Partnerships and assuming that no further options for Borden common stock are exercised, the KKR Partnerships will hold or control an aggregate of approximately 7.95% (approximately 6.56% on a fully diluted basis) of the total voting power of Holdings based on the number of shares of Holdings Common Stock outstanding as of January 31, 1995. (b) Financial Information about Industry Segments During 1994, 1993 and 1992, the Registrants' industry segments were tobacco and food. For information relating to industry segments for the years ended December 31, 1994, 1993 and 1992, see Note 15 to the Consolidated Financial Statements. (c) Narrative Description of Business TOBACCO The tobacco line of business is conducted by RJRT and Tobacco International, which manufacture, distribute and sell cigarettes. Cigarettes are manufactured in the United States by RJRT and in over 30 foreign countries and territories by Tobacco International and subsidiaries or licensees of RJRT and are sold throughout the United States and in more than 160 markets around the world. In 1994, approximately 60% of total tobacco segment net sales (after deducting excise taxes) and approximately 66% of total tobacco segment operating income (before amortization of trademarks and goodwill) were attributable to domestic tobacco operations. DOMESTIC TOBACCO OPERATIONS The domestic tobacco business is conducted by RJRT, which is the second largest cigarette manufacturer in the United States. RJRT's largest selling cigarette brands in the United States include WINSTON, DORAL, CAMEL, SALEM, MONARCH and VANTAGE. RJRT's other cigarette brands, including MORE, NOW, BEST VALUE, STERLING, MAGNA and CENTURY, are marketed to meet a variety of smoker preferences. All RJRT brands are marketed in a variety of styles. Based on data collected for RJRT by an independent market research firm, RJRT had an overall share of retail consumer cigarette sales during 1994 of 27.8%, a decrease of approximately 2 share points from 1993. During 1994, RJRT and the largest domestic cigarette manufacturer, Philip Morris U.S.A., together sold, on a shipment basis, approximately 73% of all cigarettes sold in the United States. In November 1994, RJRT confirmed press reports that it was developing ECLIPSE, a cigarette that primarily heats rather than burns tobacco and thereby substantially reduces second-hand smoke. The cigarette remains under development, and RJRT continues to assess a possible introduction of an ECLIPSE cigarette. A primary long-term objective of RJRT is to increase earnings and cash flow through selective marketing investments in its key brands and continual improvements in its cost structure and operating efficiency. Marketing programs for full-price brands are designed to build brand awareness and add value to the brands in order to build brand loyalty among current adult smokers and attract adult smokers of competitive brands. In 1994, these efforts included the introduction and expansion of conversion, continuity and relationship-building programs such as the CAMEL Genuine Taste Mission, CAMEL Cash, CAMEL Insider, WINSTON Winners Club and WINSTON Select Weekends and the 3 regional introduction of the SALEM Preferred line extension. RJRT believes it is essential to compete in all segments of the cigarette market, and accordingly it offers a range of lower-priced brands including DORAL, MONARCH and BEST VALUE intended to appeal to more cost-conscious adult smokers. For a discussion on competition in the tobacco business, see "Tobacco--Competition" in this Item 1 and "Impact of Competitive Activity" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." RJRT's domestic manufacturing facilities, consisting principally of factories and leaf storage facilities, are located in or near Winston-Salem, North Carolina and are owned by RJRT. Cigarette production is conducted at the Tobaccoville cigarette manufacturing plant (approximately two million square feet) and the Whitaker Park cigarette manufacturing complex (approximately one and one-half million square feet). RJRT believes that its cigarette manufacturing facilities are among the most technologically advanced in the United States. RJRT also has significant research and development facilities in Winston-Salem, North Carolina. RJRT's cigarettes are sold in the United States primarily to chain stores, other large retail outlets and through distributors to other retail and wholesale outlets. Except for McLane Company, Inc., which represented approximately 13% of RJRT's sales, no RJRT customers accounted for more than 10% of sales for 1994. RJRT distributes its cigarettes primarily to public warehouses located throughout the United States that serve as local distribution centers for RJRT's customers. RJRT's products are sold to adult smokers primarily through retail outlets. RJRT employs a decentralized marketing strategy that permits RJRT's sales force to be flexible in responding to local market dynamics by designing individual in-store programs to fit varying consumption patterns. RJRT utilizes print media, billboards, point-of-sale displays and other methods of advertising. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States. INTERNATIONAL TOBACCO OPERATIONS Tobacco International operates in over 160 markets around the world. Although overall foreign cigarette sales (excluding China, in which production data indicates an approximate 2% per annum growth rate) have increased at a rate of only 1% per annum in recent years, Tobacco International believes that the American Blend segment, in which Tobacco International primarily competes, is growing significantly faster. Although Tobacco International is the second largest of two international cigarette producers that have significant positions in the American Blend segment, its share of sales of this segment is approximately one-third of the share of Philip Morris International Inc., the largest American Blend producer. Tobacco International has strong brand presence in Western Europe and is well established in its other key markets in the Middle East/Africa, Asia and Canada. Tobacco International is aggressively pursuing development opportunities in Eastern Europe and the former Soviet Union. Tobacco International markets over 55 brands of which WINSTON, CAMEL and SALEM, all American Blend cigarettes, are its international leaders. WINSTON, Tobacco International's largest selling international brand, has a significant presence in Puerto Rico and has particular strength in the Western Europe and Middle East/Africa regions. CAMEL is sold in approximately 135 markets worldwide and is Tobacco International's second largest selling international brand. SALEM is the world's largest selling menthol cigarette and has particular strength in Far East markets. Tobacco International also markets a number of local brands in various foreign markets. None of Tobacco International's customers accounted for more than 10% of sales for 1994. Approximately 22% of Tobacco International's cigarette volume for 1994 was manufactured by RJRT in the United States for sale in foreign markets. The remainder was manufactured overseas, 4 principally in owned manufacturing facilities or by licensees or joint ventures. In addition to its new operations in the former Soviet Union, Tobacco International operates two tobacco manufacturing facilities in Germany and one located in each of Canada, Hong Kong, Hungary, Malaysia, Poland, Puerto Rico, Switzerland and Turkey. Tobacco International also opened a factory in the People's Republic of China in 1988 as part of the first cigarette manufacturing joint venture in that country. Certain of Tobacco International's foreign operations are subject to local regulations that set import quotas, restrict financing flexibility, affect repatriation of earnings or assets and limit advertising. In recent years, certain trade barriers for cigarettes, particularly in Asia and Eastern Europe, have been liberalized. This may provide opportunities for all international cigarette manufacturers, including Tobacco International, to expand operations in such markets; however, there can be no assurance that the liberalizing trends will be maintained or extended or that Tobacco International will be successful in pursuing such opportunities. RAW MATERIALS In its domestic production of cigarettes, RJRT primarily uses domestic burley and flue cured leaf tobaccos purchased at domestic auction. RJRT also purchases oriental tobaccos, grown primarily in Turkey and Greece, and certain other non-domestic tobaccos. Tobacco International uses a variety of tobacco leaf from both United States and international sources. RJRT and Tobacco International believe there is a sufficient supply of tobacco in the worldwide tobacco market to satisfy their current production requirements. Tobacco leaf is an agricultural commodity subject in the United States to government production controls and price supports that can affect market prices substantially. The tobacco leaf price support program is subject to Congressional review and may be changed at any time. In addition, Congress enacted the Omnibus Budget Reconciliation Act of 1993, which assesses financial penalties against manufacturers if cigarettes produced in the United States do not contain at least 75% (by weight) domestically grown flue cured and burley tobaccos. In December 1994, Congress enacted the Uruguay Round Agreements Act to replace this domestic content requirement with a tariff rate quota system that keys tariffs to import volumes. The tariff rate quotas are currently being negotiated by the United States and overseas tobacco producers. Compliance with import restrictions increased raw material costs slightly in 1994 and may cause increases in the future. COMPETITION Generally, the markets in which RJRT and Tobacco International conduct their businesses are highly competitive, with a number of large participants. Competition is conducted on the basis of brand recognition, brand loyalty, quality and price. For most of RJRT's and Tobacco International's brands, substantial advertising and promotional expenditures are required to maintain or improve a brand's market position or to introduce a new brand. Anti-smoking groups have undertaken activities designed to inhibit cigarette sales, the form and content of cigarette advertising and the testing and introduction of new cigarette products. Because television and radio advertising for cigarettes is prohibited in the United States and brand loyalty has tended to be higher in the cigarette industry than in other consumer product industries, established cigarette brands in the United States have a competitive advantage. RJRT has repositioned or introduced brands designed to appeal to adult smokers of the largest selling cigarette brand in the United States, but there can be no assurance that such efforts will be successful. In addition, increased selling prices and taxes on cigarettes have resulted in additional price sensitivity of cigarettes at the consumer level and in a proliferation of discounted brands in the savings 5 segment of the market. Generally, sales of cigarettes in the savings segment are not as profitable as those in other segments. LEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY The advertising, sale and use of cigarettes has been under attack by government and health officials in the United States and in other countries for many years, principally due to claims that cigarette smoking is harmful to health. This attack has resulted in a number of substantial restrictions on the marketing, advertising and use of cigarettes, diminishing social acceptability of smoking and activities by anti-smoking groups designed to inhibit cigarette sales, the form and content of cigarette advertising and the testing and introduction of new cigarette products. Together with manufacturers' price increases in recent years and substantial increases in state and federal excise taxes on cigarettes, this has had and will likely continue to have an adverse effect on cigarette sales. Cigarettes are subject to substantial excise taxes in the United States and to similar taxes in many foreign markets. The federal excise tax per pack of 20 cigarettes increased from 16 cents to 20 cents on January 1, 1991 and to 24 cents on January 1, 1993. In addition, all states and the District of Columbia impose excise taxes at levels ranging from a low of 2.5 cents to a high of 75 cents per pack on cigarettes. Increases in these state excise taxes could also have an adverse effect on cigarette sales. In 1993, thirteen states and the District of Columbia enacted excise tax increases ranging from less than 2 cents to 41 cents per pack. In 1994, the cigarette excise tax in five states was increased by amounts which ranged from 7.5 cents to 50 cents per pack. In January 1993, the U.S. Environmental Protection Agency (the "EPA") released a report on the respiratory effects of environmental tobacco smoke ("ETS") which concludes that ETS is a known human lung carcinogen in adults and in children causes increased respiratory tract disease and middle ear disorders and increases the severity and frequency of asthma. RJRT has joined other segments of the tobacco and distribution industries in a lawsuit against the EPA seeking a determination that the EPA did not have the statutory authority to regulate ETS, and that, given the current body of scientific evidence and the EPA's failure to follow its own guidelines in making the determination, the EPA's classification of ETS was arbitrary and capricious. In February 1994, the Commissioner of the U.S. Food and Drug Administration (the "FDA"), which historically has refrained from asserting jurisdiction over cigarette products, stated that he intended to cause the FDA to work with the U.S. Congress to resolve the regulatory status of cigarettes under the Food, Drug and Cosmetic Act. During the second quarter of 1994, hearings were held in this regard, and RJRT and other members of the United States cigarette industry were asked to provide voluntarily certain documents and other information to Congress. RJRT is unable to predict the outcome of any Congressional deliberations or the likelihood that the FDA will assert jurisdiction over cigarettes in some manner. Were the FDA to assert jurisdiction in a manner that materially restricts the availability of cigarettes to consumers, it would likely have a significant adverse effect on RJRT. In March 1994, the U.S. Occupational Safety and Health Administration ("OSHA") announced proposed regulations that would restrict smoking in the workplace to designated smoking rooms that are separately exhausted to the outside. Although RJRT cannot predict the form of any regulations that may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT expects that many employers who have not already done so would prohibit smoking in the workplace rather than make expenditures necessary to establish designated smoking areas to accommodate smokers. Because many employers currently do not permit smoking in the workplace, RJRT cannot predict the effect of any regulations that may be adopted, but incremental restrictions on smokers could have an adverse effect on cigarette sales and RJRT. 6 In July 1994, an amendment to a Florida statute became effective which allows the state of Florida to bring an action in its own name against the tobacco industry to recover amounts paid by the state under its Medicaid program to treat illnesses statistically associated with cigarette smoking. The amended statute does not require the state to identify the individual who received medical care, permits a lawsuit to be filed as a class action, and eliminates the comparative negligence and assumption of risk defenses. Similar legislation, without Florida's elimination of these defenses, has been introduced in the Massachusetts and New Jersey legislatures. RJRT is unable to predict whether other states will enact similar legislation, whether lawsuits will be filed under these statutes, or their outcome if filed. The Florida statute is being challenged on state and federal constitutional grounds in a lawsuit brought by Philip Morris Companies Inc., Associated Industries of Florida, Publix Supermarkets, and National Association of Convenience Stores in June 1994. On February 20, 1995, RJRT and Philip Morris Incorporated filed a petition with the Supreme Court of Florida to prohibit Florida's Agency for Health Care Administration and the Department of Business and Professional Regulation from filing and maintaining a lawsuit against the tobacco industry under this statute. A suit against the tobacco industry was filed under the Florida statute on February 21, 1995. See "Litigation Affecting the Cigarette Industry" below in this Item 1. Legislation imposing various restrictions on public smoking has also been enacted in forty-eight states and many local jurisdictions, and many employers have initiated programs restricting or eliminating smoking in the workplace. Seventeen states have enacted legislation designating a portion of increased cigarette excise taxes to fund either anti-smoking programs, health care programs or cancer research. Federal law prohibits smoking on all domestic airline flights of six hours duration or less and the U.S. Interstate Commerce Commission has banned smoking on buses transporting passengers inter-state. Certain common carriers have imposed additional restrictions on passenger smoking. A number of foreign countries have also taken steps to discourage cigarette smoking, to restrict or prohibit cigarette advertising and promotion and to increase taxes on cigarettes. Such restrictions are, in some cases, more onerous than restrictions imposed in the United States. In June 1988, Canada enacted a ban on cigarette advertising, the constitutionality of which is before the Supreme Court of Canada. In 1990, RJRN and other U.S. cigarette manufacturers, through The Tobacco Institute, announced a tobacco industry initiative to assist retailers in enforcing minimum age laws on the sale of cigarettes, to support the enactment of state laws requiring the adult supervision of cigarette vending machines in places frequented by minors, to seek the uniform establishment of 18 as the minimum age for the purchase of cigarettes in all states, to distribute informational materials to assist parents in combatting peer pressure on their children to smoke and to limit voluntarily certain cigarette advertising and promotional practices. In 1992, the Alcohol, Drug Abuse and Mental Health Act was signed into law. This Act requires states to adopt a minimum age of 18 for purchases of tobacco products and to establish a system to monitor, report and reduce the illegal sale of tobacco products to minors in order to continue receiving federal funding for mental health and drug abuse programs. In 1964, the Report of the Advisory Committee to the Surgeon General of the U.S. Public Health Service concluded that cigarette smoking was a health hazard of sufficient importance to warrant appropriate remedial action. Since 1966, federal law has required a warning statement on cigarette packaging. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States. Cigarette advertising in other media in the United States is required to include information with respect to the "tar" and nicotine content of cigarettes, as well as a warning statement. During the past three decades, various legislation affecting the cigarette industry has been enacted. In 1984, Congress enacted the Comprehensive Smoking Education Act (the "Smoking Education Act"). Among other things, the Smoking Education Act: (i) establishes an interagency committee on smoking and health that is charged with carrying out a program to inform the public of any dangers to human health presented by cigarette smoking; (ii) requires a series of four new health warnings to be 7 printed on cigarette packages and advertising on a rotating basis; (iii) increases type size and area of the warning on cigarette advertisements; and (iv) requires that cigarette manufacturers provide annually, on a confidential basis, a list of ingredients used in the manufacture of cigarettes to the Secretary of Health and Human Services. The warnings currently required on cigarette packages and advertisements (other than billboards) are as follows: (i) "Surgeon General's Warning: Smoking Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy"; (ii) "Surgeon General's Warning: Quitting Smoking Now Greatly Reduces Serious Risks To Your Health"; (iii) "Surgeon General's Warning: Smoking By Pregnant Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight"; and (iv) "Surgeon General's Warning: Cigarette Smoke Contains Carbon Monoxide." Similar warnings are required on outdoor billboards. In 1990, the Fire Safe Cigarette Act of 1990 was enacted, which directed the Consumer Product Safety Commission to conduct and oversee research begun under the direction of the Cigarette and Little Cigar Fire Safety Act of 1984 to assess the practicability of developing a performance standard to reduce cigarette ignition propensity. The Commission presented a final report to Congress in 1993 describing the results of the research. The Commission concluded that, while "it is practicable to develop a performance standard to reduce cigarette ignition propensity, it is unclear that such a standard would effectively address the number of cigarette-ignited fires." The Commission further found that additional work would be required before the actual development of a performance standard. Nevertheless, the Commission reported that a test method developed by the National Institute of Standards and Technology was valid and reliable within reasonable limits and could be suitable for use in a performance standard. Although RJRT cannot predict whether further legislation on this subject may be enacted, some form of regulation of cigarettes based on their propensity to ignite soft furnishings may result. Since the initial report in 1964, the Secretary of Health, Education and Welfare and the Surgeon General have issued a number of other reports which purport to link cigarette smoking with certain health hazards, including various types of cancer, coronary heart disease and chronic obstructive lung disease. These reports have recommended various governmental measures to reduce the incidence of smoking. In addition to the foregoing, legislation and regulations potentially detrimental to the cigarette industry, generally relating to the taxation of cigarettes and regulation of advertising, labeling, promotion, sale and smoking of cigarettes, have been proposed from time to time at various levels of the federal government. During the last Congress, the Clinton Administration and federal legislators introduced bills that would have significantly increased the federal excise tax on cigarettes, eliminated the deductibility of a portion of the cost of tobacco advertising, banned smoking in public buildings and workplaces, added additional health warnings on cigarette packaging and advertising, further restricted the marketing of tobacco products and authorized the Attorney General of the United States to seek to recover federal Medicaid and Medicare payments used to treat illnesses allegedly related to the use of tobacco products from their manufacturers. This legislation was not enacted. Similarly, in recent years various Congressional committees and subcommittees have approved other legislation that (i) would subject cigarettes to regulation in various ways under the U.S. Department of Health and Human Services, (ii) would subject cigarettes generally to regulation under the Consumer Products Safety Act, (iii) could increase manufacturers' costs, (iv) would mandate anti-smoking education campaigns or establish anti-smoking programs, (v) would provide additional funding for federal and state anti-smoking activities, (vi) would require a new list of six health warnings on cigarette packages and advertising, expand the number or required size of the warnings and restrict the contents of cigarette advertising and promotional activities, (vii) would provide that neither the provisions of the Federal Cigarette Labeling and Advertising Act, as amended (the "Cigarette Act"), nor the Smoking Education Act should be interpreted to relieve any person from liability under common law or state statutory law and (viii) would permit state and local governments to restrict the sale and distribution of cigarettes and the placement of billboard and transit advertising of tobacco products. 8 It is not possible to determine what additional federal, state, local or foreign legislation or regulations relating to smoking or cigarettes will be enacted or to predict any resulting effect thereof on RJRT, Tobacco International or the cigarette industry generally, but such legislation or regulations could have an adverse effect on RJRT, Tobacco International or the cigarette industry generally. LITIGATION AFFECTING THE CIGARETTE INDUSTRY Various legal actions, proceedings and claims are pending or may be instituted against RJRT or its affiliates or indemnitees, including those claiming that lung cancer and other diseases have resulted from the use of or exposure to RJRT's tobacco products. During 1994, 32 new actions were filed or served against RJRT and/or its affiliates or indemnitees and 14 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. A total of 54 such actions in the United States and one against RJRT's Canadian subsidiary were pending on December 31, 1994. As of February 17, 1995, 55 active cases were pending against RJRT and/or its affiliates or indemnitees, 54 in the United States and one in Canada. The United States cases are in 23 states and are distributed as follows: thirteen in Louisiana, eight in Texas, three in each of Indiana, Mississippi and Tennessee, two in each of Alabama, California, Florida, Minnesota, New Jersey and West Virginia and one in each of Colorado, Ohio, Illinois, Kansas, Washington, Oklahoma, Massachusetts, Nevada, South Carolina, New Hampshire, New York and Pennsylvania. Of the 54 active cases in the United States, 33 are pending in state court and 21 in federal court. Five of the 54 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. Seven cases, which are described more specifically below, purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, flight attendants alleging personal injury from exposure to environmental tobacco smoke in their workplace and, in one case, parents claiming that an RJRT advertising campaign constitutes an unfair trade practice. The plaintiffs in these actions seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligence, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, unjust enrichment, indemnity and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions of dollars, are specifically pleaded in 27 cases in addition to compensatory and other damages. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Cigarette Act of some or all such claims arising after 1969; the lack of any defect in the product; assumption of the risk; comparative fault; lack of proximate cause; and statutes of limitations or repose. Juries have found for plaintiffs in two smoking and health cases in which RJRT was not a defendant, but in one such case, which has been appealed by both parties, no damages were awarded. The jury awarded plaintiffs $400,000 in the other such case, Cipollone v. Liggett Group, Inc., et. al., which award was overturned on appeal and the case was subsequently dismissed. On June 24, 1992, the United States Supreme Court in Cipollone held that claims that tobacco companies failed to adequately warn of the risks of smoking after 1969 and claims that their advertising and promotional practices undermined the effect of warnings after that date were preempted by the Cigarette Act. The Court also held that claims of breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's decision was announced through a plurality opinion, and further definition of how Cipollone will apply to other cases must await rulings in those cases. Certain legislation proposed in recent years in Congress, among other things, would eliminate any such preemptive effect on common law damage actions for personal injuries. RJRT is unable to predict whether such legislation will be enacted and, if so, in what form, or whether such legislation would be 9 intended by Congress to apply retroactively. The passage of such legislation could increase the number of cases filed against cigarette manufacturers, including RJRT. Set forth below are descriptions of class action lawsuits, a suit in which plaintiffs seek to act as private attorneys general, actions brought by state attorneys general in Minnesota, Mississippi and West Virginia, an action brought by the State of Florida and pending investigations relating to RJRT's tobacco business. In 1991, Broin v. Philip Morris Company, Inc. et al., a purported class action against certain tobacco industry defendants, including RJRT, was brought by flight attendants, claiming to represent a class of 60,000 individuals, alleging personal injury caused by exposure to environmental tobacco smoke in their workplace. In December 1994, the Florida state court certified a class consisting of "all non-smoking flight attendants who are or have been employed by airlines based in the United States and are suffering from diseases and disorders caused by their exposure to secondhand cigarette smoke in airline cabins." The defendants have appealed the ruling to the Florida Third District Court of Appeal. In March 1994, Castano v. The American Tobacco Company, et. al., a purported class action, was filed in the United States District Court for the Eastern District of Louisiana against tobacco industry defendants, including RJRT, seeking certification of a class action on behalf of all United States residents who allegedly are or claim to be addicted, or are the legal survivors of persons who allegedly were addicted, to tobacco products manufactured by defendants. The complaint alleges that cigarette manufacturers manipulated the levels of nicotine in their tobacco products to induce addiction in smokers. Plaintiffs' motion for certification of the class was granted in part on February 17, 1995. The district court certified core liability issues (fraud, negligence, breach of warranty, both express and implied, intentional tort, strict liability and consumer protection statutes), and punitive damages. Not certified were issues of injury-in-fact, proximate cause, reliance, affirmative defenses, and compensatory damages. The defendants plan to pursue appellate remedies. In March 1994, Lacey v. Lorillard Tobacco Company, Inc., et. al., a purported class action, was filed in Circuit Court, Fayette County, Alabama against three cigarette manufacturers, including RJRT. Plaintiff, who claims to represent all smokers who have smoked or are smoking cigarettes manufactured and sold by defendants in the state of Alabama, seeks compensatory and punitive damages not to exceed $48,500 per class member and injunctive relief arising from defendants' alleged failure to disclose additives used in their cigarettes. In April 1994, defendants removed the case to the United States District Court for the Northern District of Alabama. In April 1994, Sparks v. R.J. Reynolds Tobacco Company, et al. was brought in Washington state court on behalf of a purported class of "parents with a conscience" alleging that an RJRT advertising campaign targets minors and constitutes an unfair trade practice under Washington state law. In 1994, the case was removed to the United States District Court for the Western District of Washington. Defendants' motion to dismiss the case on preemption grounds was granted on December 9, 1994. Plaintiffs have filed a notice of appeal. In May 1994, Engle v. R.J. Reynolds Tobacco Company, et al. was filed in Circuit Court, Eleventh Judicial District, Dade County, Florida against tobacco manufacturers, including RJRT, and other members of the industry, by plaintiffs who allege injury and purport to represent a class of all United States citizens and residents who claim to be addicted, or who claim to be legal survivors of persons who allegedly were addicted, to tobacco products. On October 28, 1994, a state court judge in Miami granted plaintiffs' motion to certify the class. The defendants have appealed that ruling to the Florida Third District Court of Appeal. In September 1994, Granier v. American Tobacco Company, et al., a purported class action apparently patterned after the Castano case, was filed in the United States District Court for the 10 Eastern District of Louisiana against tobacco industry defendants, including RJRT. Plaintiffs seek certification of a class action on behalf of all residents of the United States who have used and purportedly became addicted to tobacco products manufactured by defendants. The complaint alleges that cigarette manufacturers manipulated the levels of nicotine in tobacco products for the purpose of addicting consumers. By agreement of the parties, all action in this case is stayed pending determination of the motion for class certification in the Castano case. In January 1995, a purported class action was filed in the Ontario Canada Court of Justice against RJR-MacDonald, Inc. and two other Canadian cigarette manufacturers. The lawsuit, Le Tourneau, et al. v. Imperial Tobacco Company, Ltd., et al., seeks certification of a class of persons who have allegedly become addicted to the nicotine in cigarettes or who had such alleged addiction heightened or maintained through the use of cigarettes, and who have allegedly suffered loss, injury, and damage in consequence, together with persons with Family Law Act claims in respect to the claims of such allegedly addicted persons, and the estates of such allegedly addicted persons. Theories of recovery pleaded include negligence, strict liability, failure to warn, deceit, negligent misrepresentation, implied warranty and conspiracy. The relief sought consists of damages of three million dollars, punitive damages, funding of nicotine addiction rehabilitation centers, interest and costs. As of February 21, 1995, RJR-MacDonald, Inc. had not yet been served with a copy of the complaint. In March 1994, Allman v. Philip Morris, Inc., et al. and Higley v. Philip Morris, Inc., et al. were filed in the United States District Court for the Southern District of California against industry members and others, including RJRT, on behalf of a purported class of persons claiming to be addicted to cigarettes who had been prescribed treatment using the nicotine transdermal system. Plaintiffs assert a violation of the Racketeer Influenced and Corrupt Organizations Act and claim unspecified actual and treble damages. In April 1994, the two cases were combined into a single amended complaint and plaintiffs' counsel agreed to dismiss the Higley case. On September 28, 1994, the court granted the defendants' motion to dismiss the remaining case with prejudice. Plaintiffs filed a notice of appeal, but the parties later stipulated to a dismissal. An order was entered February 13, 1995 dismissing the case. In June 1994, in Mangini v. R.J. Reynolds Tobacco Company, et al., the California Supreme Court ruled that the plantiffs' claim that an RJRT advertising campaign constitutes unfair competition under the California Business and Professions Code was not preempted by the Cigarette Act. The suit is similar to the Sparks case pending in Washington except that the plantiffs here are acting as private attorneys general rather than on behalf of a purported class. This opinion allows the plaintiffs to pursue their lawsuit which had been dismissed at the trial court level. On September 28, 1994, the defendants in this case filed a Petition for Certiorari to the United States Supreme Court, which was denied on December 28, 1994. The case has been remanded to the trial court where additional defendants, including RJRN, have been added. In June 1994, in Moore v. The American Tobacco Company, et al., RJRN and RJRT were named along with other industry members as defendants in an action brought by the Mississippi state attorney general on behalf of the state to recover state funds paid for health care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. This suit, which was brought in Chancery (non-jury) Court, Jackson County, Mississippi also seeks an injunction from "promoting" or "aiding and abetting" the sale of cigarettes to minors. Both actual and punitive damages are sought in unspecified amounts. Motions by the defendants to dismiss the case or to transfer it to circuit (jury) court were denied on February 21, 1995 and the case will proceed in Chancery Court. The defendants are considering their options regarding appeal. In August 1994, RJRT and other U.S. cigarette manufacturers were named as defendants in an action instituted on behalf of the state of Minnesota and on behalf of Blue Cross and Blue Shield of Minnesota to recover the costs of medical expenses paid by the state and by Blue Cross/Blue Shield that were incurred in the treatment of diseases allegedly caused by cigarette smoking. The suit, Minnesota v. 11 Philip Morris, et al., alleges consumer fraud, unlawful and deceptive trade practices, false advertising and restraint of trade, and it seeks injunctive relief and money damages, trebled for violations of the state antitrust law. In September 1994, the Attorney General of West Virginia filed suit against RJRT, RJRN and twenty-one additional defendants in state court in West Virginia. The lawsuit, McGraw v. American Tobacco Company, et al., is similar to those previously filed in Mississippi and Minnesota. It seeks recovery for medical expenses incurred by the state in the treatment of diseases statistically associated with cigarette smoking and requests an injunction against the promotion and sale of cigarettes and tobacco products to minors. The lawsuit also seeks a declaration that the state of West Virginia, as plaintiff, is not subject to the defenses of statute of repose, statute of limitations, contributory negligence, comparative negligence, or assumption of the risk. On February 21, 1994, the state of Florida filed a suit against RJRT and RJRN, along with other industry members, their holding companies and other entities, under the Florida statute described above in "Legislation and Other Matters Affecting the Cigarette Industry". In addition to Medicaid reimbursement under various theories of liability, the suit seeks injunctive relief to: prevent the defendants from engaging in consumer fraud; disclose and publish all research conducted directly or indirectly by the industry; fund a corrective public education campaign on the issues of smoking and health in Florida; prevent the distribution and sale of cigarettes to minors under the age of eighteen; fund clinical smoking cessation programs in the state of Florida; dissolve the Council for Tobacco Research and the Tobacco Institute or divest ownership, sponsorship or membership in both; and disgorge all profits from sales of cigarettes in Florida. Neither RJRT nor RJRN has been served with a copy of the complaint as of February 21, 1995. RJRT understands that a grand jury investigation being conducted in the Eastern District of New York is examining possible violations of criminal law in connection with activities relating to the Council for Tobacco Research--USA, Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this investigation. RJRT received a civil investigative demand dated January 11, 1994 from the U.S. Department of Justice requesting broad documentary information from RJRT. Although the request appears to focus on tobacco industry activities in connection with product development efforts, it also requests general information concerning contacts with competitors. RJRT is unable to predict the outcome of this investigation. ------------------- Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJRT or its affiliates or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and increase the number of such claims. Although it is impossible to predict the outcome of such events or their effect on RJRT, a significant increase in litigation activities could have an adverse effect on RJRT. RJRT believes that it has a number of valid defenses to any such actions, including but not limited to those defenses based on preemption under the Cipollone decision, and RJRT intends to defend vigorously all such actions. The Registrants believe that the ultimate outcome of all pending litigation matters should not have a material adverse effect on the financial position of either of the Registrants; however, it is possible that the results of operations or cash flows of the Registrants in particular quarterly or annual periods or the financial condition of the Registrants could be materially affected by the ultimate outcome of certain pending litigation matters. Management is unable to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. 12 FOOD The food line of business is conducted by operating subsidiaries of Nabisco Holdings. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco Holdings, which represents approximately 80.5% of the economic interest in Nabisco Holdings and approximately 97.6% of the total voting power of Nabisco Holdings' outstanding common stock. Nabisco's business in the United States is comprised of the Nabisco Biscuit, Specialty Products, LifeSavers, Planters, Food Service and Fleischmann's Companies (collectively, the "Domestic Food Group"). Nabisco's business outside the United States is conducted by Nabisco Brands Ltd and Nabisco International (collectively, the "International Food Group"). Nabisco Brands Ltd was recently shifted from the Domestic Food Group (formerly the North American Food Group) to the International Food Group. Food products are sold under trademarks owned or licensed by Nabisco and brand recognition is considered essential to their successful marketing. None of Nabisco's customers accounted for more than 10% of sales for 1994. DOMESTIC FOOD GROUP OPERATIONS Nabisco Biscuit Company. Nabisco Biscuit Company is the largest manufacturer and marketer in the United States cookie and cracker industry with nine of the ten top selling brands, each of which had annual net sales of over $100 million in 1994. Overall, in 1994, Nabisco Biscuit had a 41.6% share of the domestic cookie category and a 54.8% share of the domestic cracker category, in the aggregate more than three times the share of its closest competitor. Leading Nabisco Biscuit cookie brands include OREO, CHIPS AHOY!, NEWTONS and SNACKWELL'S. Leading Nabisco Biscuit cracker brands include RITZ, PREMIUM, NABISCO HONEY MAID GRAHAMS, WHEAT THINS and TRISCUIT. OREO and CHIPS AHOY! are the two largest selling cookies in the United States. OREO, the leading sandwich cookie, is Nabisco Biscuit's largest selling cookie brand. Line extensions such as OREO DOUBLE STUF, FUDGE COVERED OREO and Reduced Fat OREO continue to increase the brand's appeal to targeted consumer groups. CHIPS AHOY! is the leader in the chocolate chip cookie segment with line extensions such as CHUNKY CHIPS AHOY! and CHEWY CHIPS AHOY! broadening its appeal and adding incremental sales. NEWTONS, the oldest Nabisco Biscuit cookie brand, is the third leading cookie brand in the United States. The introduction of FAT FREE FIG and APPLE NEWTONS in 1992 and FAT FREE CRANBERRY, RASPBERRY and STRAWBERRY NEWTONS in 1993 has expanded the appeal of NEWTONS and added incremental sales. Nabisco Biscuit's cracker business is led by RITZ, the largest selling cracker in the United States, as well as RITZ BITS and RITZ BITS SANDWICHES, successful product line extensions which, together with RITZ, accounted for 12.2% of cracker sales in the United States in 1994. In addition, PREMIUM, the oldest Nabisco cracker brand and the leader in the saltine cracker segment, is joined by NABISCO HONEY MAID GRAHAMS, WHEAT THINS and TRISCUIT to comprise, along with RITZ, five of the six largest selling cracker brands in the United States. In 1991, Nabisco Biscuit introduced MR. PHIPPS PRETZEL CHIPS, the first such product of its kind. Nabisco Biscuit expanded the MR. PHIPPS line with the introduction of MR. PHIPPS TATER CRISPS in 1992, which deliver salty snack taste with only half the fat of potato chips. In 1992, Nabisco Biscuit became the leading manufacturer and marketer of no fat/reduced fat cookies and crackers with the introduction of the SNACKWELL'S line. Nabisco Biscuit also acquired Stella d'Oro, a leading producer of breadsticks, breakfast biscuits, specialty cakes, pastries and snacks. This line of specialty items gave Nabisco Biscuit access to new areas within supermarkets, further broadening Nabisco's cookie and cracker portfolio. 13 Nabisco Biscuit's other cookie and cracker brands, which include NUTTER BUTTER, NILLA WAFERS, BARNUM'S ANIMAL CRACKERS, BETTER CHEDDARS, HARVEST CRISPS, CHICKEN IN A BISKIT and CHEESE NIPS, compete in consumer niche segments. Many are the first or second largest selling brands in their respective segments. Nabisco Biscuit's products are manufactured in 13 Nabisco Biscuit-owned bakeries and in 16 facilities with which Nabisco Biscuit has production agreements. These facilities are located throughout the United States. Nabisco Biscuit is in the process of modernizing certain of its facilities. Nabisco Biscuit also operates a flour mill in Toledo, Ohio which supplies 85% of its flour needs. Nabisco Biscuit's products are sold to major grocery and other large retail chains through Nabisco Biscuit's direct store delivery system. The system is supported by a distribution network utilizing 10 major distribution warehouses and 125 shipping branches where shipments are consolidated for delivery to approximately 111,000 separate delivery points. Nabisco believes this sophisticated distribution and delivery system provides it with a significant service advantage over its competitors. Specialty Products Company. The Specialty Products Company manufacturers and markets a broad range of food products, with sauces and condiments, pet snacks, Mexican foods and hot cereals representing the largest categories. Many of its products are first or second in their product categories. Well-known brand names include A.1. steak sauces, GREY POUPON mustards, MILK-BONE pet snacks, ORTEGA Mexican foods, CREAM OF WHEAT hot cereals, ROYAL desserts and COLLEGE INN broths. Specialty Products' primary entries in the sauce and condiment segments are A.1. and A.1. BOLD steak sauces, the leading lines of steak sauces, and GREY POUPON mustards, which include the leading Dijon mustard. Specialty Products also markets REGINA wine vinegar, the leader in its segment of the vinegar market. A.1., GREY POUPON and REGINA products are manufactured in one facility. Specialty Products is the leading manufacturer of pet snacks in the United States with MILK-BONE dog biscuits. MILK-BONE products include MILK-BONE ORIGINAL BISCUITS, FLAVOR SNACKS, DOG TREATS and BUTCHER'S CHOICE. Pet snacks are produced at a single manufacturing facility. Specialty Products produces shelf-stable Mexican foods under its ORTEGA brand name. Specialty Products also participates in the dry mix dessert category with ROYAL gelatins and puddings and the non-dessert gelatin category with KNOX unflavored gelatins and has lines of regional products including COLLEGE INN broths, VERMONT MAID syrup, MY-T-FINE puddings, DAVIS baking powder and BRER RABBIT molasses and syrup. ROYAL gelatins and puddings, KNOX gelatins and MY-T-FINE puddings are manufactured in one facility. Nabisco, through the Specialty Products Company, manufactures hot cereals, participating in the cook-on-stove and mix-in-bowl segments of the category. CREAM OF WHEAT, the leading wheat-based hot cereal, and CREAM OF RICE participate in the cook-on-stove segment and eight varieties of INSTANT CREAM OF WHEAT participate in the mix-in-bowl segment. Hot cereals are manufactured in one facility. Quaker Oats Company is the most significant participant in the hot cereal category. Specialty Products sells to retail grocery chains through independent brokers and to drugstores, mass merchandisers and other major retail outlets through a direct sales force. The products are sold and distributed by Nabisco's Sales & Integrated Logistics Group. LifeSavers Company. The LifeSavers Company manufactures and markets hard roll and bite-size candy and gum primarily for sale in the United States. LifeSavers' well-known brands include LIFE SAVERS hard roll and bite-size candy, BREATH SAVERS sugar free mints, BUBBLE YUM bubble gum, CARE*FREE sugarless gum, NOW & LATER fruit chewy taffy and LIFE SAVERS GUMMI 14 SAVERS fruit chewy candy. Based on 1994 net sales, LIFE SAVERS is the largest selling hard roll candy in the United States, with a 21.4% share of the hard roll candy category, BREATH SAVERS is the largest selling sugar free breath mint in the United States and BUBBLE YUM is the largest selling chunk bubble gum in the United States. LifeSavers' products are seasonally strongest in the fourth quarter. LifeSavers sells its products in the United States primarily to grocery stores, drug stores, mass merchandisers, convenience stores, membership club stores and food service, military and vending machine suppliers. The products are sold and distributed by Nabisco's Sales & Integrated Logistics Group. LifeSavers currently owns and operates four manufacturing facilities. Planters Company. The Planters Company produces and/or markets nuts and snacks largely for sale in the United States, primarily under the PLANTERS trademark. PLANTERS nuts are the clear leader in the packaged nut category, with a market share of six times that of its nearest competitor. Planters' products are commodity oriented and are seasonally strongest in the fourth quarter. Planters sells its products in the United States primarily to grocery stores, drug stores, mass merchandisers, convenience stores, membership club stores and food service, military and vending machine suppliers. The products are sold and distributed by Nabisco's Sales & Integrated Logistics Group. Planters currently owns and operates two manufacturing facilities. Food Service Company. The Food Service Company sells through non-grocery channels a variety of specially packaged food products of the Nabisco Biscuit, LifeSavers, Planters, Fleischmann's and Specialty Products Companies, including cookies, crackers, hot cereals, sauces and condiments for the food service and vending machine industry. Food Service is also a leading regional supplier of premium frozen pies to in-store supermarket bakeries, wholesale clubs and food service accounts through Plush Pippin Corporation. Food Service provides Nabisco with an additional distribution method for its products. The Food Service products are distributed by Nabisco's Sales & Integrated Logistics Group. Fleischmann's Company. The Fleischmann's Company manufactures and markets various margarines and spreads as well as a no-fat egg product, EGG BEATERS. Fleischmann's margarine business is the second largest margarine producer in the United States. Fleischmann's currently participates in all segments of the margarine category, with FLEISCHMANN'S, BLUE BONNET and MOVE OVER BUTTER. Fleischmann's margarines are manufactured in three facilities. Fleischmann's is the market leader in the healthy packaged egg category with EGG BEATERS. Distribution for the Fleischmann's Company is principally direct from plant to retailer warehouse and through Nabisco's Sales & Integrated Logistics Group. Sales and Integrated Logistics Group. The Sales & Integrated Logistics Group handles sales and distribution for the Specialty Products, LifeSavers, Planters and Fleischmann's Companies and distribution for the Food Service Company. Their products are sold to retail grocery chains through independent brokers and a direct sales force, and to drug stores, mass merchandisers and other major retail outlets through the direct sales force. The products are distributed from twelve distribution centers located throughout the United States. INTERNATIONAL FOOD GROUP OPERATIONS Nabisco Brands Ltd. Nabisco Brands Ltd conducts Nabisco's Canadian operations through a biscuit division, a grocery division and a food service division. Excluding private label brands, the biscuit division produced nine of the top ten cookies and nine of the top ten crackers in Canada in 1994. Nabisco Brands Ltd's cookie and cracker brands in Canada include OREO, CHIPS AHOY!, FUDGEE-O, PEEK FREANS, DAD'S, DAVID, PREMIUM PLUS, RITZ, TRISCUIT and STONED WHEAT THINS. These products are manufactured in five bakeries in Canada and are sold through a direct store delivery system, utilizing 11 sales offices and distribution centers and a combination of public and private carriers. Nabisco Brands Ltd also markets a variety of single-serve 15 cookies, crackers and salty snacks under such brand names as MINI OREO, RITZ BITS SANDWICHES and CRISPERS. Nabisco Brands Ltd's grocery division produces and markets canned fruits and vegetables, fruit juices and drinks and pet snacks. The grocery division is the leading canned fruit producer in Canada and is the second largest canned vegetable producer in Canada. Canned fruits, vegetables, soups and fruit juices and drinks are marketed under the DEL MONTE trademark, pursuant to a license from the Del Monte Corporation, and under the AYLMER trademark. The grocery division also markets MILK-BONE pet snacks and MAGIC baking powder, each a leading brand in Canada. Nabisco Brands Ltd's grocery division operated six manufacturing facilities in 1994, five of which were devoted to canned products, principally fruits and vegetables, and one of which produced pet snacks. The grocery division's products are sold directly to retail chains and are distributed through six regional warehouses. Nabisco Brands Ltd's food service division sells a variety of specially packaged food products including cookies, crackers and canned fruits and vegetables as well as condiments to non-grocery outlets. The food service division has its own sales and marketing organization and sources product from Nabisco Brands Ltd's other divisions. Nabisco International. Nabisco International is a leading producer of biscuits, powdered dessert and drink mixes, baking powder, other grocery items, industrial yeast and bakery ingredients. Nabisco International also exports a variety of Nabisco, Inc. products to markets in Europe and Asia from the United States. Nabisco International is one of the largest multinational packaged food businesses in Latin America. Nabisco International manufactures and markets biscuits and crackers under the NABISCO brand, yeast, baking powder and bakery ingredients under the FLEISCHMANN'S and ROYAL brands, desserts and drink mixes under the ROYAL brand, processed milk products under the GLORIA brand and canned fruits and vegetables under the DEL MONTE brand pursuant to a license from the Del Monte Corporation. Nabisco International's largest market is Brazil, where it operates 15 plants. Nabisco International is the market leader in powdered desserts in most of Latin America, the yeast category in Brazil and certain other Latin American countries, biscuits in Peru, Spain, Venezuela and Uruguay, and canned vegetables in Venezuela. Nabisco International also maintains a strong position in the processed milk category in Brazil. In Argentina, Nabisco International acquired 71% of Establecimiento Modelo Terrabusi S.A. in April 1994 and increased its interest in the Argentine biscuit and pasta company to approximately 99% in October and November 1994. Nabisco International now has operations in 17 Latin American countries. Nabisco International significantly increased its presence in Europe through the 1993 acquisition of 50% of each of Royal Brands S.A. in Spain and Royal Brands Portugal. The remaining 50% of each was purchased in May 1994. Nabisco International's products in Spain now include biscuits marketed under the ARTIACH and MARBU trademarks, powdered dessert mixes marketed under the ROYAL trademark and various other foods, including canned meats and juices. Nabisco International's grocery products are sold to retail outlets through its own sales forces and independent wholesalers and distributors. Industrial yeast and bakery products are sold to the bakery trade through Nabisco International's own sales forces and independent distributors. RAW MATERIALS Various agricultural commodities constitute the principal raw materials used by Nabisco in its food businesses. These raw materials are purchased on the commodities market and through supplier contracts. Prices of agricultural commodities tend to fluctuate due to various seasonal, climatic and economic factors which generally also affect Nabisco's competitors. Nabisco believes that all of the raw 16 materials for its products are in plentiful supply and are readily available from a variety of independent suppliers. COMPETITION Generally, the markets in which the Domestic Food Group and the International Food Group conduct their business are highly competitive. Competition consists of large domestic and international companies, local and regional firms and generic and private label products of food retailers. Competition is conducted on the basis of brand recognition, brand loyalty, quality and price. Substantial advertising and promotional expenditures are required to maintain or improve a brand's market position or to introduce a new product. The trademarks under which the Domestic Food Group and the International Food Group market their products are generally registered in the United States and other countries in which such products are sold and are generally renewable indefinitely. Nabisco and certain of its subsidiaries have from time to time granted various parties exclusive licenses to use one or more of their trademarks in particular locations. Nabisco does not believe that such licensing arrangements have a material effect on the conduct of its domestic or international business. OTHER MATTERS ENVIRONMENTAL MATTERS The U.S. Government and various state and local governments have enacted or adopted laws and regulations concerning protection of the environment. The regulations promulgated by the Environmental Protection Agency and other governmental agencies under various statutes have resulted in, and will likely continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities. Certain subsidiaries of the Registrants have been named "potentially responsible parties" with third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to fifteen sites. The Registrants' subsidiaries have been engaged in a continuing program to assure compliance with such laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and to estimate the cost of resolving these CERCLA matters, the Registrants do not expect such expenditures or other costs to have a material adverse effect on the financial condition of either of the Registrants. EMPLOYEES At December 31, 1994, the Registrants together with their subsidiaries had approximately 70,600 full time employees. None of RJRT's operations are unionized. Most of the unionized workers at Nabisco's operations are represented under a national contract with the Bakery, Confection and Tobacco Workers Union, which was ratified in September 1992 and which will expire in September 1996. Other unions represent the employees of a number of Nabisco's operations and several of Tobacco International's operations are unionized. RJRN believes that its relations with these employees and with their unions are good. (d) Financial Information about Foreign and Domestic Operations and Export Sales For information about foreign and domestic operations and export sales for the years 1992 through 1994, see "Geographic Data" in Note 15 to the Consolidated Financial Statements. 17 ITEM 2. PROPERTIES For information pertaining to the Registrants' assets by lines of business and geographic areas as of December 31, 1994 and 1993, see Note 15 to the Consolidated Financial Statements. For information on properties, see Item 1. ITEM 3. LEGAL PROCEEDINGS In September 1994, nine putative class and derivative actions were filed by purported Holdings' stockholders in the Court of Chancery of the State of Delaware in and for New Castle County against members of the Holdings' board of directors, KKR and Holdings, as nominal defendant, challenging the proposed acquisition by Holdings of any interest in Borden. These actions alleged, among other things, that the agreement in principle for Holdings to purchase a 20% stake in Borden constituted a breach of fiduciary duty and waste of corporate assets in that the price paid by Holdings for its Borden stake would be inflated because it would include a control premium and that the issuance of new Holdings Common Stock would substantially dilute the cash value and shareholdings of the noncontrolling public stockholders of Holdings. On October 25, 1994, Holdings and KKR concluded that they were unable to reach a definitive agreement for the transaction contemplated by their agreement in principle. Shortly thereafter, the nine actions were consolidated. In December 1994, the parties entered into a proposed stipulation and order dismissing the litigation with prejudice and on the merits, but providing that the court would retain jurisdiction to consider an application by the plantiffs for fees and expenses. The order was entered by the court on February 11, 1995. For information about other litigation and legal proceedings, see "Litigation Affecting the Cigarette Industry" and "Other Matters--Environmental Matters" in Item 1. ------------------------ Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJRT or its affiliates or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and increase the number of such claims. Although it is impossible to predict the outcome of such events or their effect on RJRT, a significant increase in litigation activities could have an adverse effect on RJRT. RJRT believes that it has a number of valid defenses to any such actions, including but not limited to those defenses based on preemption under the Cipollone decision, and RJRT intends to defend vigorously all such actions. The Registrants believe that the ultimate outcome of all pending litigation matters should not have a material adverse effect on the financial position of either of the Registrants; however, it is possible that the results of operations or cash flows of the Registrants in particular quarterly or annual periods or the financial condition of the Registrants could be materially affected by the ultimate outcome of certain pending litigation matters. Management is unable to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 EXECUTIVE OFFICERS OF THE REGISTRANTS EXECUTIVE OFFICERS OF HOLDINGS The executive officers of Holdings are Charles M. Harper (Chairman of the Board and Chief Executive Officer), Lawrence R. Ricciardi (President and General Counsel), Eugene R. Croisant (Executive Vice President), Stephen R. Wilson (Executive Vice President and Chief Financial Officer), Robert S. Roath (Senior Vice President and Controller), John J. Delucca (Senior Vice President and Treasurer) and Jo-Ann Ford (Senior Vice President, Law). Mr. Roath and Ms. Ford are married. The following table sets forth certain information regarding such officers.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME AGE EMPLOYMENT HISTORY - ------------------------- --- ------------------------------------------------------------ Charles M. Harper 67 May 1993-Present, Chairman and Chief Executive Officer; prior thereto, Chairman and Chief Executive Officer, ConAgra, Inc., 1981-1993. Lawrence R. Ricciardi(1) 54 May 1993-Present, President and General Counsel; prior thereto, Co-Chairman and Chief Executive Officer and General Counsel, March 1993-May 1993; Executive Vice President and General Counsel, 1989-1993. Eugene R. Croisant(2) 57 1989-Present, Executive Vice President of Human Resources and Administration. Stephen R. Wilson 48 May 1993-Present, Executive Vice President and Chief Financial Officer; prior thereto, Senior Vice President, Corporate Development, 1990-1993; General Manager, North America, Franklin Mint, 1989-1990. Robert S. Roath 52 1991-Present, Senior Vice President and Controller; prior thereto, Vice President and Controller, 1990-1991; Vice President and Corporate Controller, Colgate-Palmolive Company, 1988-1990. John J. Delucca 51 September 1993-Present, Senior Vice President and Treasurer; Treasurer of Nabisco Holdings Corp. October 1994-February 1995; prior thereto, Managing Director and Chief Financial Officer, Hascoe Associates, 1991-1993; President and Chief Financial Officer, Lexington Group, 1990-1991; Senior Vice President, Finance and Managing Director, Trump Group, 1988-1990. Jo-Ann Ford 39 Effective March 3, 1995, Senior Vice President, Law and Secretary; Vice President, Assistant General Counsel and Secretary since July 1994; prior thereto, Vice President and Assistant General Counsel, 1991-1994; Senior Counsel, 1990-1991; Counsel, Exxon Corporation, 1988-1990.
- ------------ (1) Mr. Ricciardi, in anticipation of retirement, will cease to be an executive officer of Holdings effective March 3, 1995. Steven F. Goldstone, has been appointed General Counsel effective March 3, 1995. Mr. Goldstone will remain a partner of Davis Polk & Wardwell, and has been a partner of such law firm since 1978. (2) Mr. Croisant, in anticipation of retirement, will cease to be an executive officer of Holdings effective March 3, 1995. Mr. Gerald I. Angowitz, Vice President, Human Resources and Administration of RJRN since 1993, has been appointed Senior Vice President, Human Resources and Administration of Holdings, effective March 3, 1995. Mr. Angowitz was Vice President, Benefits of RJRN, 1991-1993, and was previously a principal in Kwasha Lipton, an international benefits consulting firm. 19 EXECUTIVE OFFICERS OF RJRN NOT LISTED ABOVE Set forth below are the names, ages, positions and offices held and a brief account of the business experience during the past five years of each executive officer of RJRN, other than those listed above.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME AGE EMPLOYMENT HISTORY - ----------------------- --- ------------------------------------------------------------ H. John Greeniaus 50 October 1994-Present, President, Chief Executive Officer and Director, Nabisco Holdings Corp. and Nabisco, Inc.; prior thereto, Chairman and Chief Executive Officer, Nabisco, Inc., 1993-October 1994. President, Nabisco Holdings Corp., 1992-1993, President and Chief Executive Officer, Nabisco Holdings Corp., 1987-1991. James W. Johnston 48 1989-Present, Chairman and Chief Executive Officer, R. J. Reynolds Tobacco Company; Chairman, R. J. Reynolds Tobacco International, Inc. since 1993. Anthony J. Butterworth 57 1993-Present, President and Chief Executive Officer, R. J. Reynolds Tobacco International, Inc.; prior thereto, Managing Director and Chief Executive Officer, London International Group plc, 1991-1993; Chief Operating Officer, London International Group plc, 1989-1991. James J. Postl 49 December 1994-Present, President and Chief Executive Officer, Nabisco International, Inc. and Senior Vice President, Nabisco Holdings Corp.; prior thereto, President and Chief Operating Officer, Nabisco International, Inc., February-December 1994; President, Hostess Frito-Lay, Canada and President, Americas, PepsiCo Foods International, 1991-1994; Area/Group Vice President, PepsiCo Foods International, 1986-1991. M.B. Oglesby, Jr. 52 1989-Present, Senior Vice President, Government Affairs. J. Thomas Pearson 53 1988-Present, Senior Vice President, Taxation. Jason H. Wright 34 February 1994-Present, Senior Vice President of Worldwide Communications; prior thereto, Vice President of Worldwide Communications, 1993-1994; Vice President of Financial Communications, 1990-1993; Director of Corporate Communications, Aetna Life & Casualty, 1988-1990. Jeffrey A. Kuchar 40 1993-Present, Vice President and General Auditor; prior thereto, Director of Finance and Business Development, Specialty Products Company, Nabisco, Inc., 1993; Director of Financial Planning, Specialty Products Company, Nabisco, Inc., 1992-1993; Assistant Corporate Controller, 1987-1991.
20 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed and traded on the New York Stock Exchange (the "NYSE"). Since completion of the Acquisition there has been no public trading market for the common stock of RJRN. As of January 31, 1995, there were approximately 65,000 record holders of the Common Stock. All of the common stock of RJRN is owned by Holdings. The Common Stock closing price on the NYSE for February 17, 1995 was $5 5/8. The following table sets forth, for the calendar periods indicated, the high and low sales prices per share for the Common Stock on the NYSE Composite Tape, as reported in the Wall Street Journal:
HIGH LOW ------------- ------------- 1994: First Quarter..................................... $ 8 1/8 $ 5 5/8 Second Quarter.................................... 7 5 1/2 Third Quarter..................................... 7 1/8 5 5/8 Fourth Quarter.................................... 7 1/4 5 5/16 HIGH LOW ------------- ------------- 1993: First Quarter..................................... $ 9 1/4 $ 7 5/8 Second Quarter.................................... 8 1/8 5 1/8 Third Quarter..................................... 5 7/8 4 1/2 Fourth Quarter.................................... 7 3/8 4 3/8
The Board of Directors of Holdings has declared an initial quarterly cash dividend of $.075 per share payable on April 1, 1995 to holders of record as of March 10, 1995. Holdings expects to continue to pay a quarterly cash dividend on its common stock of $.075 per share or $.30 per share on an annualized basis. Cash dividends paid by RJRN to Holdings are set forth in the Consolidated Statements of Cash Flows in the Consolidated Financial Statements. The operations of the Registrants are conducted through RJRN's subsidiaries and, therefore, the Registrants are dependent on the earnings and cash flow of RJRN's subsidiaries to satisfy their respective obligations and other cash needs. The Credit Agreements and certain policies adopted by the Board of Directors of Holdings limit the payment by Holdings of dividends on the Common Stock in excess of certain specific amounts. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Financial Condition" and "-Holdings' Board of Directors Policies" and Note 10 to the Consolidated Financial Statements. Holdings does not believe that the provisions of its Credit Agreements or its adopted policies concerning distributions to stockholders will limit its ability to pay its anticipated quarterly dividends. The Board of Directors of Holdings has approved a one-for-five reverse split of the Common Stock, which will be submitted to Holdings' stockholders for approval at its annual meeting in April 1995. If approved, the reverse stock split would result in a dividend and earnings per share that are five times higher with a corresponding reduction in the number of shares outstanding. Holdings has indicated that, under normal circumstances, it does not plan to issue additional equity securities for purposes of balance sheet improvement. 21 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data of RJR Nabisco Holdings Corp. ("Holdings") presented below as of December 31, 1994 and 1993 and for each of the years in the three-year period ended December 31, 1994 was derived from the consolidated financial statements of Holdings (the "Consolidated Financial Statements"), which have been audited by Deloitte & Touche LLP, independent auditors. In addition, the consolidated financial data of Holdings presented below as of December 31, 1992, 1991 and 1990 and for each of the years in the two year period ended December 31, 1991 was derived from the audited consolidated financial statements of Holdings as of December 31, 1992, 1991 and 1990 and for the years ended December 31, 1991 and 1990, and are not presented herein. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1994 1993 1992 1991 1990 ------- ------- ------- ------- ------- RESULTS OF OPERATIONS Net sales....................................... $15,366 $15,104 $15,734 $14,989 $13,879 ------- ------- ------- ------- ------- Cost of products sold........................... 6,977 6,640 6,326 6,088 5,652 Selling, advertising, administrative and general expenses.............................. 5,210 5,731 5,788 5,358 4,801 Amortization of trademarks and goodwill......... 629 625 616 609 608 Restructuring expense........................... -- 730 106 -- -- ------- ------- ------- ------- ------- Operating income(1)........................... 2,550 1,378 2,898 2,934 2,818 Interest and debt expense....................... (1,065) (1,209) (1,449) (2,217) (3,176) Other income (expense), net..................... (110) (58) 7 (69) (44) ------- ------- ------- ------- ------- Income (loss) before income taxes............. 1,375 111 1,456 648 (402) Provision for income taxes...................... 611 114 680 280 60 ------- ------- ------- ------- ------- Income (loss) before extraordinary item....... 764 (3) 776 368 (462) Extraordinary item--(loss) gain on early extinguishments of debt, net of income taxes............................................ (245) (142) (477) -- 33 ------- ------- ------- ------- ------- Net income (loss)............................... 519 (145) 299 368 (429) Preferred stock dividends....................... 131 68 31 173 50 ------- ------- ------- ------- ------- Net income (loss) applicable to common stock.... $ 388 $ (213) $ 268 $ 195 $ (479) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- PER SHARE DATA Income (loss) before extraordinary item per common and common equivalent share(2)......... $ 0.41 $ (0.05) $ 0.55 $ 0.22 $ (1.19) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Pro forma income (loss) before extraordinary item per common and common equivalent share(3)...................................... $ 2.06 $ (0.26) $ 2.73 $ 1.10 $ (5.93) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Dividends per share of Series A Preferred Stock(4)......................................... $ 2.92 $ 3.34 $ 3.34 $ 0.49 -- Dividends per share of Series C Preferred Stock(4)......................................... $ 3.94 -- -- -- -- BALANCE SHEET DATA (AT END OF PERIODS) Working capital(5).............................. $(1,231) $ 202 $ 730 $ 165 $(1,089) Total assets.................................... 31,408 31,295 32,041 32,131 32,915 Total debt(5)................................... 11,149 12,448 14,218 14,531 18,918 Redeemable preferred stock(6)................... -- -- -- -- 1,795 Stockholders' equity(7)......................... 10,908 9,070 8,376 8,419 2,494
(Footnotes on following page) 22 (Footnotes from preceding page) - ------------ (1) The 1992 amount includes a gain of $98 million on the sale of the ready-to-eat cold cereal business. (2) The loss before extraordinary item per common and common equivalent share reported for the year ended December 31, 1993 would have increased by $.17 per share if the weighted average number of shares of Series A Depositary Shares (as defined below) outstanding during the period had been excluded from the earnings per share calculation. (3) Amounts reflect a one-for-five reverse split approved by the Board of Directors of Holdings which will be submitted to Holdings' stockholders for approval at its annual meeting in April 1995. (4) On November 8, 1991, Holdings issued 52,500,000 shares of Series A Conversion Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), and sold 210,000,000 $.835 depositary shares (the "Series A Depositary Shares"), each of which represented one-quarter of a share of Series A Preferred Stock. On May 6, 1994, Holdings issued 26,675,000 shares of Series C Conversion Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), and sold 266,750,000 Series C Depositary Shares (the "Series C Depositary Shares"), each of which represented one-tenth of a share of Series C Preferred Stock. On November 15, 1994, each outstanding Series A Depositary Share converted into one share of Holdings Common Stock. (5) Working capital at December 31, 1994 included $1.35 billion of borrowings under the Nabisco 1994 Credit Agreement, a substantial portion of which was used in connection with the refinancing of certain debt. On January 26, 1995, such borrowings were substantially reduced through the application of approximately $1.2 billion of net proceeds received from the initial public offering of 51,750,000 shares of Nabisco's Class A Common Stock. (6) On December 16, 1991, an amendment to the Amended and Restated Certificate of Incorporation of Holdings was filed which deleted the provisions providing for the mandatory redemption of the redeemable preferred stock of Holdings on November 1, 2015. Accordingly, such securities were presented as a component of Holdings' stockholders' equity as of December 31, 1992 and 1991. Such securities were redeemed on December 6, 1993. (7) Holdings' stockholders' equity at December 31 of each year from 1994 to 1990 includes non-cash expenses related to accumulated trademark and goodwill amortization of $3.644 billion, $3.015 billion, $2.390 billion, $1.774 billion and $1.165 billion, respectively. See Notes to Consolidated Financial Statements. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RJR Nabisco, Inc.'s ("RJRN") operating subsidiaries comprise one of the largest tobacco and food companies in the world. In the United States, the tobacco business is conducted by R. J. Reynolds Tobacco Company ("RJRT"), the second largest manufacturer of cigarettes, and the packaged food business is conducted by Nabisco Holdings Corp. ("Nabisco Holdings") through its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"), the largest manufacturer and marketer of cookies and crackers. Tobacco operations outside the United States are conducted by R. J. Reynolds Tobacco International, Inc. ("Tobacco International") and food operations outside the United States are conducted by Nabisco International, Inc. ("Nabisco International") and Nabisco Brands Ltd. The following is a discussion and analysis of the consolidated financial condition and results of operations of RJR Nabisco Holdings Corp. ("Holdings"), the parent company of RJRN. The discussion and analysis should be read in connection with the historical financial information included in the Consolidated Financial Statements. RESULTS OF OPERATIONS Summarized financial data for Holdings is as follows:
% CHANGE FROM PRIOR YEAR -------------- 1994 1993 1992 1994 1993 ------- ------- ------- ----- ---- (DOLLARS IN MILLIONS) Net Sales: RJRT........................................... $ 4,570 $ 4,949 $ 6,165 (8)% (20)% Tobacco International.......................... 3,097 3,130 2,862 (1)% 9% ------- ------- ------- Total Tobacco.................................. 7,667 8,079 9,027 (5)% (11)% Total Food..................................... 7,699 7,025 6,707 10% 5% ------- ------- ------- $15,366 $15,104 $15,734 2% (4)% ------- ------- ------- ------- ------- ------- Operating Company Contribution(1): RJRT........................................... $ 1,475 $ 1,200 $ 2,112 23% (43)% Tobacco International.......................... 755 644 575 17% 12% ------- ------- ------- Total Tobacco.................................. 2,230 1,844 2,687 21% (31)% Total Food..................................... 1,156 995 947 16% 5% Headquarters................................... (207) (106) (112) (95)% 5% ------- ------- ------- $ 3,179 $ 2,733 $ 3,522 16% (22)% ------- ------- ------- ------- ------- ------- Operating Income: RJRT........................................... $ 1,110 $ 480 $ 1,704 131% (72)% Tobacco International.......................... 716 413 537 73% (23)% ------- ------- ------- Total Tobacco.................................. 1,826 893 2,241 104% (60)% Total Food..................................... 931 624 769 49% (19)% Headquarters................................... (207) (139) (112) (49)% (24)% ------- ------- ------- $ 2,550 $ 1,378 $ 2,898 85% (52)% ------- ------- ------- ------- ------- -------
INDUSTRY SEGMENTS The percentage contributions of each of Holdings' industry segments to net sales and operating company contribution during the last five years were as follows:
1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Net Sales: Total Tobacco................................... 50 % 53 % 57 % 57 % 58 % Total Food...................................... 50 47 43 43 42 ---- ---- ---- ---- ---- 100 % 100 % 100 % 100 % 100 % ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Operating Company Contribution(1)(2): Total Tobacco................................... 66 % 65 % 74 % 75 % 77 % Total Food...................................... 34 35 26 25 23 ---- ---- ---- ---- ---- 100 % 100 % 100 % 100 % 100 % ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Footnotes on following page) 24 (Footnotes from preceding page) - ------------ (1) Operating income before amortization of trademarks and goodwill and exclusive of restructuring expenses (RJRT: 1993-$355 million, 1992-$43 million; Tobacco International: 1993-$189 million, 1992-$0; Total Food: 1993-$153 million, 1992-$63 million; Headquarters: 1993-$33 million, 1992- $0) and a 1992 gain ($98 million) on the sale of Holdings' ready-to-eat cold cereal business as discussed below. (2) Contributions by industry segments were computed without effects of Headquarters' expenses. TOBACCO The tobacco business is conducted by RJRT and Tobacco International. 1994 vs. 1993. Despite declines in net sales for both the domestic and international tobacco businesses, the worldwide tobacco business reported profit gains for 1994. RJRT's net sales decline resulted principally from overall lower pricing and volume which more than offset the impact of a higher proportion of sales from full price brands. Tobacco International's net sales decline was primarily attributable to a reduction in trade inventory levels and price repositioning in Canada and Puerto Rico which more than offset higher selling prices and volume. Overall, net sales from the worldwide tobacco business amounted to $7.67 billion in 1994, a decline of 5% from the 1993 level of $8.08 billion. Worldwide volume for 1994 was flat compared to 1993. Operating company contribution for the worldwide tobacco business grew to $2.23 billion in 1994 from $1.84 billion in 1993, an increase of 21% that resulted from improved margins in both the domestic and international businesses. Operating income for the worldwide tobacco business rose to $1.83 billion in 1994, an increase of 104% from the 1993 level of $893 million, as a result of the increase in operating company contribution discussed above and the 1993 restructuring expense of $544 million. Net sales for RJRT amounted to $4.57 billion in 1994, a decrease of 8% from the 1993 level of $4.95 billion. The decrease primarily reflects the impact of industry-wide price reductions on full price brands (approximately $500 million) which went into effect during the second half of 1993, lower volume in the savings segment (approximately $60 million) primarily due to RJRT's decision to be more selective in its participation in that segment and lower volume in the full price segment (approximately $300 million) primarily due to increased competitor activities during the second half of 1994. These factors more than offset the impact of a higher proportion of sales from full price brands (approximately $400 million), higher selling prices in the savings segment (approximately $60 million) and higher selling prices in the full price segment during the fourth quarter of 1994 as compared to the fourth quarter of 1993 (approximately $40 million). RJRT's operating company contribution was $1.48 billion in 1994, a 23% increase from the 1993 level of $1.20 billion, as reduced promotional and selling expenses (approximately $650 million) more than offset the decline in net sales. RJRT's operating income was $1.11 billion in 1994, an increase of 131% from the 1993 level of $480 million. The increase in operating income for 1994 from the prior year reflects the increase in RJRT's operating company contribution discussed above and the 1993 restructuring expense of $355 million. Tobacco International recorded net sales of $3.10 billion in 1994, a decrease of 1% from the 1993 level of $3.13 billion. The net sales decrease for 1994 primarily resulted from a reduction in trade inventory levels (approximately $75 million), repositioning of prices in Canada and Puerto Rico to enhance brand competitiveness (approximately $60 million), and unfavorable foreign exchange developments, primarily in Europe and the Middle East (approximately $30 million), which were offset in part by higher selling prices throughout Tobacco International's international markets (approximately $70 million) and an increase in volume in certain regions (approximately $60 million). Tobacco International's operating company contribution rose to $755 million in 1994, an increase of 17% compared to the 1993 level of $644 million. The increase in operating company contribution for 1994 was due to lower product costs in all regions (approximately $100 million), reduced promotional expenses (approximately $70 million), the higher selling prices (approximately $70 million) and higher 25 volume (approximately $15 million), which more than offset price repositioning in Canada and Puerto Rico (approximately $50 million), the reduction in trade inventories (approximately $30 million), higher operating expenses to support expansion of business activity primarily in Eastern Europe (approximately $30 million) and unfavorable foreign exchange developments (approximately $20 million). Tobacco International's operating income was $716 million in 1994, an increase of 73% from the 1993 level of $413 million. The increase in operating income reflects the increase in Tobacco International's operating company contribution discussed above and the 1993 restructuring expense of $189 million. 1993 vs. 1992. The worldwide tobacco business experienced continued net sales growth in its international business which was more than offset by a significant sales decline in the domestic business, resulting in reported net sales of $8.08 billion in 1993, a decline of 11% from the 1992 level of $9.03 billion. Operating company contribution for the worldwide tobacco business of $1.84 billion in 1993 declined 31% from the 1992 level of $2.69 billion, reflecting sharp reductions for the domestic business which were partially offset by gains in the international business. Operating income for the worldwide tobacco business in 1993 of $893 million declined 60% from $2.24 billion in 1992, reflecting the lower operating company contribution and a $544 million restructuring expense in 1993 versus a restructuring expense of $43 million in 1992. The 1993 restructuring expense includes expenses to streamline both the domestic and international operations through administrative, manufacturing and sales personnel reductions and the rationalization of manufacturing and office facilities. Net sales for RJRT amounted to $4.95 billion in 1993, a decline of 20% from the 1992 level, reflecting the impact of industry-wide price reductions and price discounting on higher price brands (approximately $700 million), a higher proportion of sales from lower price brands (approximately $600 million) and an overall volume decline of approximately 3.6% (approximately $300 million), that more than offset benefits of earlier price increases in full price brands (approximately $400 million). The impact of the 1993 decrease in overall volume resulted mainly from the decline in the full-price segment. Growth in lower price brands was slowed in the second half of 1993 by net price reductions on full-price brands. RJRT's operating company contribution was $1.20 billion in 1993, a 43% decline from the 1992 level of $2.11 billion, primarily due to the lower net sales (approximately $1.2 billion), offset in part by lower promotional expenses on savings brands (approximately $200 million). RJRT's operating income was $480 million in 1993, a decline of 72% from $1.7 billion in 1992. The decline in operating income reflected the lower RJRT operating company contribution as well as a restructuring expense of $355 million in 1993 which is significantly higher than the $43 million restructuring expense recorded in 1992. Tobacco International recorded net sales of $3.13 billion in 1993, an increase of 9% from the 1992 level, due to higher volume in all regions of business (approximately $274 million), favorable pricing in certain regions (approximately $71 million), the expansion of markets through ventures in Eastern Europe and Turkey (approximately $23 million) and contract sales to the Russian Federation (approximately $9 million), which more than offset unfavorable currency developments in Western Europe (approximately $104 million). Tobacco International's operating company contribution rose to $644 million in 1993, an increase of 12% compared to the prior year due to higher volume (approximately $112 million) and pricing (approximately $71 million) which was offset in part by higher operating expenses (approximately $80 million) and to a lesser extent foreign currency developments (approximately $12 million) and unfavorable product mix (approximately $17 million). Tobacco International's operating income was $413 million for 1993, a decline of 23% from the 1992 level. The decline in operating income reflects a restructuring expense of $189 million in 1993 that more than offset the increase in operating company contribution. 26 Impact of Competitive Activity RJRT's largest U.S. competitor announced competitive initiatives in April 1993 that ultimately resulted in significant changes in the U.S. cigarette market. These competitive actions and responses by RJRT and other competitors effectively lowered the retail price of full price cigarette brands and raised the price of the most highly discounted brands in the second half of 1993. This resulted in a market comprised of a full price tier and a lower price tier of products (as opposed to the three or more tiers that had previously existed) and in smaller relative price differences between brands in different tiers. The costs of responding to these competitive initiatives and the decrease in list prices for full price cigarette brands of approximately 40 cents per pack were primarily responsible for the sharp decline in RJRT's operating company contribution in 1993 because net price increases of approximately 12 cents per pack (including the price increase referenced below) in the most highly discounted brands did not and are not expected to offset the lower margins on full price brands. Notwithstanding these lower margins, full price brands remain more profitable than lower price brands, which consist of certain national brands designed to have a lower price and private label brands for retailers and distributors. The private label brands are generally the least profitable of RJRT's brands, but are important to facilitate RJRT's service to wholesale and retail customers. Although RJRT's full price volume as a percentage of total volume declined to 56% in 1993 from 65% in 1992, lower retail prices on full price brands since the third quarter of 1993 have resulted in an increase in full price volume as a percentage of total volume to 60% in 1994. The higher mix of full price volume occurred despite significantly reduced promotional expenses on full price brands during this period. During the fourth quarter of 1993, RJRT increased the list price of all of its brands by 4 cents per pack, a move that its competitors generally matched. The increases reflected an improvement in the stability of the competitive environment that began in the fourth quarter of 1993. This improved stability continued through 1994 and, together with operating cost reductions and favorable product mix shifts, improved margins. However, 1994 profit margins remain below first quarter 1993 levels and experienced some deterioration in the last quarter of 1994 as a result of increases in marketing expenses to protect and build market share. RJRT is unable to predict whether 1994's pricing stability and profit margins are sustainable. 1994 Governmental Activity. Congress enacted legislation effective January 1, 1994 (the Omnibus Budget Reconciliation Act of 1993) that assesses financial penalties against manufacturers if cigarettes produced in the United States do not contain at least 75% (by weight) domestically grown flue cured and burley tobaccos. In December 1994, Congress enacted the Uruguay Round Agreements Act to replace this domestic content requirement with a tariff rate quota system that keys tariffs to import volumes. The tariff rate quotas are currently being negotiated by the United States and overseas tobacco producers. Domestic content requirements and tariff rate quotas increased raw material costs slightly in 1994 and may do so again in the future. RJRT is unable to predict the impact of these import barriers on raw material costs while the tariff rate quotas are still being negotiated. In February 1994, the Commissioner of the U.S. Food and Drug Administration (the "FDA"), which historically has refrained from asserting jurisdiction over cigarette products, stated that he intended to cause the FDA to work with the U.S. Congress to resolve the regulatory status of cigarettes under the Food, Drug and Cosmetic Act. During the second quarter of 1994, hearings were held in this regard and RJRT and other members of the U.S. cigarette industry were asked to provide voluntarily certain documents and other information to Congress and the FDA. RJRT is unable to predict the outcome of any Congressional deliberations or the likelihood that the FDA will assert jurisdiction over cigarettes in some manner. Were the FDA to assert jurisdiction in a manner that materially restricts the availability of cigarettes to consumers, it would likely have a significant adverse effect on RJRT. 27 In March 1994, the U.S. Occupational Safety and Health Administration ("OSHA") announced proposed regulations that would restrict smoking in the workplace to designated smoking rooms that are separately exhausted to the outside. Although RJRT cannot predict the form of any regulations that may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT expects that many employers who have not already done so would prohibit smoking in the workplace rather than make expenditures necessary to establish designated smoking areas to accommodate smokers. Because many employers currently do not permit smoking in the workplace, RJRT cannot predict the effect of any regulations that may be adopted, but incremental restrictions on smokers could have an adverse effect on cigarette sales and RJRT. In July 1994, an amendment to a Florida statute became effective which allows the state of Florida to bring an action in its own name against the tobacco industry to recover amounts paid by the state under its Medicaid program to treat illnesses statistically associated with cigarette smoking. The amended statute does not require the state to identify the individual who received medical care, permits a lawsuit to be filed as a class action and eliminates the comparative negligence and assumption of risk defenses. Similar legislation, without Florida's elimination of these defenses, has been introduced in the Massachusetts and New Jersey legislatures. RJRT is unable to predict whether other states will enact similar legislation and whether lawsuits will be filed under these statutes or their outcome if filed. The Florida statute is being challenged on state and federal constitutional grounds in a lawsuit brought by Philip Morris Companies Inc., Associated Industries of Florida, Publix Supermarkets, and National Association of Convenience Stores in June 1994. On February 20, 1995, RJRT and Philip Morris Companies Incorporated filed a petition with the Supreme Court of Florida to prohibit Florida's Agency for Health Care Administration and the Department of Business and Professional Regulation from filing and maintaining a lawsuit against the tobacco industry under this statute. A suit against the tobacco industry under this statute was filed on February 21, 1995. See Note 11 to the Consolidated Financial Statements. Various states and local jurisdictions enacted legislation imposing various restrictions on public smoking, increasing excise taxes and designating a portion of the increased cigarette excise taxes to fund anti-smoking programs, health care programs or cancer research. Many employers also initiated programs restricting or eliminating smoking in the workplace. It is not possible to determine what additional federal, state or local legislation or regulations relating to smoking or cigarettes will be enacted or to predict any resulting effect thereof on RJRT, Tobacco International or the cigarette industry generally, but such legislation or regulations could have an adverse effect on RJRT, Tobacco International or the cigarette industry generally. For a description of certain litigation affecting RJRT and its affiliates, see Note 11 to the Consolidated Financial Statements. FOOD The food business is conducted by operating subsidiaries of Nabisco Holdings. Nabisco's businesses in the United States are comprised of the Nabisco Biscuit, Specialty Products, LifeSavers, Planters, Food Service and Fleischmann's Companies (collectively, the "Domestic Food Group"). Nabisco's businesses outside the United States are conducted by Nabisco Brands Ltd and Nabisco International (collectively, the "International Food Group"). Nabisco Brands Ltd was recently shifted from the Domestic Food Group (formerly the North American Food Group) to the International Food Group. Accordingly, prior periods have been restated to conform to the 1994 presentation. 1994 vs. 1993. Nabisco reported net sales of $7.70 billion in 1994, an increase of 10% from the 1993 level of $7.03 billion, with the Domestic Food Group up 4% and the International Food Group up 28%. The Domestic Food Group increase was primarily attributable to significant volume gains at Nabisco Biscuit Company, reflecting the success of new product introductions and product line extensions in the U.S. biscuit market (approximately $215 million) and volume increases from the Specialty Products Company (approximately $13 million). The International Food Group increase was primarily the result of the favorable impact of recent acquisitions (approximately $345 million) and 28 improved business conditions in Brazil (approximately $70 million) as a result of its second-half economic recovery. Nabisco's operating company contribution was $1.16 billion in 1994, an increase of 16% from the 1993 level of $995 million, with the Domestic Food Group up 14% and the International Food Group up 27%. The Domestic Food Group increase for 1994 was primarily due to the increase in net sales (approximately $40 million) and savings from productivity programs (approximately $135 million), including previously established restructuring programs, which were offset in part by competitive pricing pressures (approximately $35 million) and the absence of a 1993 gain on the sale of certain assets (approximately $17 million). The International Food Group increase in operating company contribution for 1994 was primarily due to recent acquisitions (approximately $40 million) and strong results in Canada (approximately $7 million), partially offset by unfavorable business results in Mexico (approximately $7 million). The devaluation of the Mexican peso was not material to earnings in 1994. Nabisco's operating income was $931 million in 1994, an increase of 49% from the 1993 level of $624 million, as a result of the increase in operating company contribution discussed above and the 1993 restructuring expense of $153 million. 1993 vs. 1992. Nabisco reported net sales of $7.03 billion in 1993, an increase of 5% from 1992. Excluding the 1992 operating results of the ready-to-eat cold cereal business, which was sold at the end of that year, net sales in 1993 increased 9% from 1992, resulting from higher volume (approximately $260 million), sales from recently acquired businesses (approximately $270 million) and modest price increases in both the Domestic Food Group (approximately $65 million) and the International Food Group (approximately $15 million). The Domestic Food Group's volume increase (approximately $210 million) was primarily attributable to the success of new product introductions in the U.S., including the SNACKWELL'S line of low fat/fat free cookies and crackers, FAT FREE NEWTONS, LIFE SAVERS GUMMI SAVERS candy and the PLANTERS stand-up bag line of peanuts and snacks. The International Food Group's net sales increased as a result of the 1993 acquisitions in Spain and Peru (approximately $108 million) and higher volume (approximately $50 million) and prices (approximately $15 million) from its Latin American businesses. Nabisco's operating company contribution of $995 million in 1993 was 5% higher than the 1992 amount. Excluding the 1992 operating results of the ready-to-eat cold cereal business, operating company contribution increased 14%, with the Domestic Food Group up 15% and the International Food Group up 5%. The Domestic Food Group's increase was primarily due to the gain in net sales (approximately $45 million), savings from productivity programs (approximately $150 million), contributions from the recently acquired businesses (approximately $15 million) and the $17 million gain on sale of certain assets, offset in part by higher expenses for consumer marketing programs (approximately $40 million) and competitive pricing pressures (approximately $75 million). The International Food Group increased operating company contribution through acquisitions (approximately $10 million). Nabisco's operating income was $624 million in 1993, a decrease of 19% from 1992, as a result of the $153 million restructuring expense in 1993, which was significantly higher than the restructuring expense of $63 million recorded in 1992. The effect of the restructuring expenses more than offset the gain in operating company contribution. Excluding the 1992 operating results of the ready-to-eat cold cereal business and the related gain on its sale, as well as the restructuring expenses in both 1993 and 1992, Nabisco's operating income was up 16% as a result of the increase in operating company contribution. The 1993 restructuring expense primarily consists of expenses related to the reorganization and downsizing of manufacturing and sales functions which reduced personnel costs, both domestically and internationally, in order to improve productivity and, to a lesser extent, the rationalization of facilities. 29 RESTRUCTURING EXPENSE Holdings recorded a pre-tax restructuring expense of $730 million in the fourth quarter of 1993 ($467 million after-tax) related to a program announced on December 7, 1993. The restructuring program was undertaken in response to a changing consumer product business environment and to streamline operations and improve profitability. The program was implemented in the latter part of 1993. Approximately 75% of the restructuring program will require cash outlays of which approximately $300 million was spent as of the end of 1994. As an offset to the cash outlays, after-tax cash savings of approximately $140 million were realized as of the end of 1994. Holdings expects future annual after-tax cash savings to be in the range of approximately $200 million to $225 million. The cost of providing severance pay and benefits for the reduction of approximately 6,000 employees (approximately 4,400 positions eliminated by the end of 1994) throughout the domestic and international food and tobacco businesses was approximately $400 million of the pre-tax charge and is primarily a cash expense. Actual charges for severance pay and benefits through December 31, 1994 amounted to approximately $250 million. The workforce reduction was undertaken in order to make fundamental changes to the cost structure of the domestic tobacco business in the face of acute competitive activity in that business and to take advantage of cost savings opportunities in other businesses through process efficiency improvements. Legislation enacted during the third quarter of 1993 stipulated that, effective January 1, 1994, financial penalties would be assessed against manufacturers if cigarettes produced in the United States did not contain at least 75% (by weight) domestically grown flue cured and burley tobaccos. As a result, the domestic and international tobacco businesses accrued approximately $70 million of related restructuring charges resulting from a reassessment of raw material sourcing and production arrangements. In addition, a shift in pricing strategy designed to gain market share by RJRT's largest competitor led to a redeployment of spending and changes in sales and distribution strategies that resulted in a restructuring charge of approximately $80 million primarily related to contract termination costs. Abandonment of leases related to the above changes in the businesses resulted in approximately $60 million of restructuring charges. The remainder of the charge, approximately $120 million, represents primarily non-cash costs to rationalize and close manufacturing and sales facilities in both the tobacco and food businesses to facilitate cost improvements. Charges related to these items amounted to approximately $250 million through December 31, 1994. As of December 31, 1994, the original estimates related to the food businesses have remained unchanged. However, changes have occurred in the original tobacco estimates. Due to stronger than anticipated demand for domestic tobacco products, the estimate of the amount of domestic production to be moved off-shore has been reduced, causing a domino-effect on domestic and international raw material sourcing and production strategies. The end result will be a reduction in the amount of domestic production moved to off-shore facilities and significant changes in sourcing and production among off-shore production facilities. As a result of this change, approximately 300 domestic tobacco employees originally anticipated to be terminated will be retained and approximately 200 additional international tobacco employees will be terminated. The financial impact of these changes is a credit to income of approximately $23 million related to the reduction in the cost of providing severance pay and benefits to domestic tobacco employees and an increase in the cost of providing such benefits to terminated international tobacco employees. In addition, the cost associated with the rationalization and abandonment of manufacturing and sales facilities was increased by approximately $21 million as it became evident that the original plan to find an alternative manufacturing use for a tobacco blending facility would not come to fruition. The net adjustment to operating income of the above changes is included in selling, advertising, administrative and general expense. 30 INTEREST EXPENSE 1994 vs. 1993. Consolidated interest and debt expense of $1.06 billion in 1994 decreased 12% from 1993, primarily as a result of refinancings of debt during 1993 and 1994 and lower debt levels resulting primarily from the application of proceeds from the issuance of preferred stock to repay debt. These factors more than offset the impact of higher market interest rates during 1994, including the effects thereof on RJRN's interest rate derivative instruments described below. RJRN manages its interest rate exposure by adjusting its mix of floating rate debt and fixed rate debt. As part of such management of interest rate exposure, RJRN has entered into interest rate swaps, options, caps and other interest rate arrangements, including written options and other financial instruments having a risk profile substantially similar to written options. As a result of the impact of higher market interest rates during 1994, RJRN recognized additional interest expense of approximately $22 million associated with its interest rate derivative instruments. However, such interest rate derivative instruments resulted in lower interest expense during 1993 and 1992 of approximately $70 million and $15 million, respectively. Included in the 1994 additional interest expense is approximately $45 million related to RJRN's outstanding written options and interest rate derivatives with embedded written optionality, all of which were cancelled during 1994. Also as part of RJRN's ongoing management of its interest rate exposure during 1994, RJRN effectively neutralized the effects of any further changes in market interest rates on the remainder of its outstanding derivative interest rate instruments through the purchase of offsetting positions. Accordingly, as a result of higher interest rates on the above instruments, approximately $39 million, $28 million and $5 million of additional interest expense remains to be recognized in 1995, 1996 and 1997, respectively. In 1994, RJRN adopted a policy to utilize interest rate derivative transactions that will adjust the mix of floating rate debt and fixed rate debt on a one for one basis. 1993 vs. 1992. Consolidated interest and debt expense of $1.21 billion in 1993 decreased 17% from 1992, primarily as a result of the refinancings of debt that were completed during 1992 and 1993, lower debt levels from the application of net proceeds from the issuance of preferred stock in 1993 and lower effective interest rates which were partly attributable to declining market interest rates in 1993. INCOME TAXES Holdings' provision for income taxes for 1993 was increased by $96 million as a result of the enactment of certain federal tax legislation during the third quarter of 1993 which increased federal corporate income tax rates to 35% from 34%, retroactively to January 1, 1993. The components of this increase to Holdings' provision for income taxes included an $86 million non-cash charge resulting primarily from the remeasurement of the balance of deferred federal income taxes at the date of enactment of the new federal tax legislation for the change in the income tax rates, and a $10 million charge resulting from the increase in current federal income taxes accrued for the change in the income tax rates and other effects of the new tax legislation. Also during 1993, Holdings' provision for income taxes was decreased by a $108 million credit primarily resulting from a change in the functional currency, for U.S. federal income tax purposes, relating to foreign branch operations. NET INCOME 1994 vs. 1993. Holdings' net income of $519 million in 1994 includes an after-tax extraordinary loss of $245 million related to the repurchase and redemption of debt during the year. Excluding the extraordinary loss in 1994, as well as a similar extraordinary item which resulted in a $142 million after-tax loss in 1993, Holdings would have reported net income of $764 million for 1994, an increase of $767 million from 1993. The increase results primarily from the improvement in operating company contribution by both the Tobacco and Food operations, the impact of lower interest expense and the 31 1993 restructuring expense of $730 million, offset in part by a $65 million charge related to the realignment of Headquarters' functions at the holding company discussed below. During the fourth quarter of 1994, Holdings approved and adopted a plan to realign Headquarters' functions, transferring certain responsibilities to the operating companies and significantly streamlining the holding company. The plan reflects expectations of a lower level of financings and other activities at the holding company as Holdings concludes the post-LBO period. The costs and expenses associated with this decision resulted in a charge of approximately $65 million before tax, a significant portion of which is a cash expense. The majority of the charge is related to accrued employee termination benefits for the 25% of Headquarters' employees terminated (approximately $40 million). This cost was incurred pursuant to a continuing plan for employee termination benefits that provides for the payment of specified amounts of severance and benefits to terminated employees. The remainder of the charge (approximately $25 million) is related to the abandonment of leases of certain corporate office facilities as a result of the realignment and streamlining and the reduced need for office space. The plan was implemented in the first quarter of 1995 and will be completed by year-end 1995. Anticipated annual future cash savings flowing from the plan are estimated at approximately $25 million before tax (approximately $16 million after tax). 1993 vs. 1992. Holdings reported a net loss of $145 million in 1993, a decrease of $444 million from 1992. Included in Holdings' 1993 net loss is an after-tax extraordinary loss of $142 million related to the repurchases of high cost debt during 1993 and an after-tax restructuring expense of $467 million. Excluding the extraordinary loss and restructuring expense recorded in 1993, Holdings would have reported net income of $464 million in 1993. Excluding a similar after-tax extraordinary loss and an after-tax restructuring expense of $477 million and $66 million, respectively, in 1992, as well as a 1992 after-tax gain on the sale of Holdings' ready-to-eat cold cereal business of $30 million, Holdings would have reported net income of $812 million in 1992. The decrease in net income in 1993 from 1992, after such exclusions, is due to the lower operating income offset in part by lower interest expense. Holdings' net income (loss) applicable to its common stock for 1994, 1993 and 1992 of $388 million, ($213) million and $268 million, respectively, includes a deduction for preferred stock dividends of $131 million, $68 million and $31 million, respectively. 32 LIQUIDITY AND FINANCIAL CONDITION DECEMBER 31, 1994 Holdings continued to generate significant free cash flow in 1994. Free cash flow, which represents cash available for the repayment of debt and certain other corporate purposes before the consideration of any debt and equity financing transactions, acquisition expenditures and divestiture proceeds, was $0.8 billion for 1994 and $1.0 billion for 1993. The lower level of free cash flow for 1994 primarily reflects increased capital expenditures, higher taxes, interest and preferred stock dividends paid and an increase in operating working capital (primarily restructuring payments) which more than offset the higher operating company contribution by both the Tobacco and Food operations. The components of free cash flow are as follows:
YEAR ENDED DECEMBER 31, ----------------- 1994 1993 ------ ------- (DOLLARS IN MILLIONS) OPERATING INCOME......................................................... $2,550 $ 1,378 Amortization of intangibles............................................ 629 625 Restructuring expense.................................................. -- 730 ------ ------- OPERATING COMPANY CONTRIBUTION........................................... 3,179 2,733 Depreciation and other amortization.................................... 522 524 Increase in operating working capital.................................. (414) (121) Capital expenditures................................................... (670) (615) Change in other assets and liabilities................................. 12 (21) ------ ------- OPERATING CASH FLOW*..................................................... 2,629 2,500 Taxes paid............................................................. (496) (332) Interest paid.......................................................... (986) (912) Dividends paid......................................................... (395) (241) Other, net............................................................. 17 19 ------ ------- FREE CASH FLOW........................................................... $ 769 $ 1,034 ------ ------- ------ -------
- ------------ * Operating cash flow, which is used as an internal measurement for evaluating business performance, includes, in addition to net cash flow from (used in) operating activities as recorded in the Consolidated Statement of Cash Flows, proceeds from the sale of capital assets less capital expenditures, and is adjusted to exclude income taxes paid and items of a financial nature (such as interest paid, interest income, and other miscellaneous financial income or expense items). ------------ During 1994, Holdings and RJRN continued to enter into a series of transactions designed to refinance long-term debt, lower debt levels and lower interest costs, thereby improving the consolidated debt cost and maturity structure. As more fully described below, these transactions included the issuance of preferred stock and repurchase and redemption of certain debt obligations. As a result of these transactions, Holdings reduced the effective interest rate on its consolidated long-term debt from 8.4% at December 31, 1993 to 7.7% at December 31, 1994 despite the impact of higher market interest rates during 1994, including the effects thereof on RJRN's interest rate derivative instruments. Future effective interest rates may vary as a result of changing market interest rates as well as refinancing activities and changes in the ratings assigned to RJRN's debt securities by independent rating agencies. In addition, Holdings' outstanding total debt (notes payable and long-term debt, including current maturities) and total capital (total debt and total stockholders' equity) levels at December 31, 1994 amounted to approximately $11.1 billion and $22.1 billion, respectively, of which total debt is lower by approximately $1.3 billion and total capital is higher by approximately $539 million than the corresponding amounts at December 31, 1993. Furthermore, Holdings' ratio of total debt to total stockholders' equity at December 31, 1994 improved to 1.0-to-1 from 1.4-to-1 at December 31, 1993. RJRN's 33 ratio of total debt to common equity at December 31, 1994 was 1.0-to-1 compared with 1.3-to-1 at December 31, 1993. Total current liabilities and long-term debt of RJRN's subsidiaries was approximately $4.8 billion at December 31, 1994. On May 6, 1994, Holdings completed the issuance of 26,675,000 shares of Series C Conversion Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), in connection with the sale of 266,750,000 Series C Depositary Shares (the "Series C Depositary Shares") at $6.50 per depositary share. Approximately $900 million of the net proceeds from the sale of the Series C Depositary Shares was applied to the redemption of RJRN's subordinated debentures on May 15, 1994 as discussed below. The remaining proceeds from the sale of the Series C Depositary Shares were used to repay indebtedness under the Registrants' credit agreement, dated as of December 1, 1991, as amended (the "1991 Credit Agreement"), and for short-term liquid investments until they were applied to redeem certain of RJRN's sinking fund debentures as discussed below. On May 15, 1994, RJRN redeemed substantially all of its approximately $2 billion in outstanding subordinated debentures. The subordinated debentures redeemed consisted of the Subordinated Discount Debentures due May 15, 2001, the 15% Payment-in-Kind Subordinated Debentures due May 15, 2001 and the 13 1/2% Subordinated Debentures due May 15, 2001 (the "13 1/2% Subordinated Debentures") at redemption prices of 107 1/2%, 107 1/2% and 106 3/4%, respectively, plus accrued interest. Approximately $1.2 billion principal or accreted amount of such debentures was refinanced with proceeds of debt securities maturing after 1998 that were issued during 1993. Such proceeds had been used to temporarily reduce indebtedness under the 1991 Credit Agreement. On November 15, 1994, the 210,000,000 outstanding $.835 Depositary Shares ("Series A Depositary Shares"), which represented 52,500,000 shares of Series A Conversion Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), issued by Holdings on November 8, 1991, converted into 210,000,000 shares of common stock of Holdings, par value $.01 per share (the "Common Stock"). On November 30, 1994, RJRN redeemed $1.5 billion of 10 1/2% Senior Notes due 1998, $373.5 million of 8 3/8% Sinking Fund Debentures due 2017 and approximately $24.8 million of 7 3/8% Sinking Fund Debentures due 2001. On December 2, 1994, RJRN redeemed $100 million of the 13 1/2% Subordinated Debentures. The redemption price for the 10 1/2% Senior Notes due 1998 was equal to $1,071 plus accrued interest for each $1,000 principal amount of notes. The redemption price for the 8 3/8% Sinking Fund Debentures due 2017 was equal to $1,054.44 plus accrued interest for each $1,000 principal amount of debentures. The redemption price for the 7 3/8% Sinking Fund Debentures due 2001 was equal to $1,005.60 plus accrued interest for each $1,000 principal amount of debentures. The redemption price for the 13 1/2% Subordinated Debentures was equal to $1,067.50 plus accrued interest for each $1,000 principal amount of debentures. These redemptions were funded with borrowings under the 1991 Credit Agreement, internally generated cash flow and, in the case of the 8 3/8% Sinking Fund Debentures due 2017, proceeds from Holdings' Series C Preferred Stock offering. On December 7, 1994, Nabisco borrowed $1.35 billion under its credit agreement, dated as of December 6, 1994 (the "Nabisco 1994 Credit Agreement"), to repay a portion of Nabisco's intercompany indebtedness to RJRN. RJRN used the proceeds of the repayment to reduce its borrowings under the 1991 Credit Agreement. Management expects to consider opportunities to improve Holdings' and its subsidiaries' capital and/or cost structure as they arise. Such opportunities, if pursued, could involve further acquisitions, from time to time, of substantial amounts of securities of Holdings or its subsidiaries through open market purchases, redemptions, privately negotiated transactions, tender or exchange offers and/or the issuance, from time to time, of additional securities by Holdings or its subsidiaries. Acquisitions of securities at prices above their book value, together with the accelerated amortization of deferred financing fees attributable to the acquired securities, as applicable, would reduce reported net income and/or stockholders' equity, depending upon the price paid and related financing fees of such acquisitions. Holdings' and its subsidiaries' ability to take advantage of such opportunities is subject to 34 restrictions in RJRN debt indentures, the 1991 Credit Agreement, the Registrants' credit agreement, dated as of April 5, 1993, as amended (the "1993 Credit Agreement" and, together with the 1991 Credit Agreement, the "Credit Agreements"), and the Nabisco 1994 Credit Agreement. For information concerning a transaction that RJRN and Nabisco are seeking to pursue, see "Subsequent Events" below. The 1991 Credit Agreement is a revolving bank credit facility that provides for the issuance of up to $800 million of irrevocable letters of credit. Availability under the 1991 Credit Agreement is reduced by an amount equal to the stated amount of the letters of credit outstanding, by borrowings under the facility and by commercial paper borrowings in excess of $1.0 billion. On December 1, 1994, the Registrants reduced the commitment under the 1991 Credit Agreement from $6.5 billion to $6.0 billion and agreed to reduce availability by the amount of borrowings and the stated amount of letters of credit issued under the Nabisco 1994 Credit Agreement. The amendment to the 1991 Credit Agreement imposed additional restrictions on dividends and distributions, as described below, and extended the term of the facility from December 31, 1996 to December 31, 1997. At December 31, 1994, approximately $412 million stated amount of letters of credit and $1.75 billion in borrowings were outstanding under the 1991 Credit Agreement, and $1.35 billion in borrowings (but no letters of credit) were outstanding under the Nabisco 1994 Credit Agreement. Accordingly, the amount available under the 1991 Credit Agreement at December 31, 1994 was $2.49 billion. The 1993 Credit Agreement, under which commitments terminate on April 3, 1995, provides a back-up line of credit to support commercial paper issuances of up to $1.0 billion. Availability thereunder is reduced by an amount equal to the aggregate amount of domestic commercial paper outstanding. At December 31, 1994, approximately $864 million of commercial paper was outstanding. Accordingly, $136 million was available under the 1993 Credit Agreement at December 31, 1994. Holdings and RJRN expect to obtain bank consent to extend the maturity date of the 1993 Credit Agreement for an additional 364 days. The Nabisco 1994 Credit Agreement is a 364 day, $1.5 billion revolving bank credit facility that provides for the issuance of up to $200 million of irrevocable letters of credit. Availability under the Nabisco 1994 Credit Agreement is reduced by an amount equal to the stated amount of the letters of credit outstanding and by amounts borrowed under the facility. At December 31, 1994, $1.35 billion in borrowings and no letters of credit were outstanding under the Nabisco 1994 Credit Agreement. Accordingly, the amount available under the Nabisco 1994 Credit Agreement at December 31, 1994 was $150 million. The aggregate consolidated indebtedness subject to fluctuating interest rates approximated $4.3 billion at December 31, 1994. This represents a decrease of $1.2 billion from the year end 1993 level of $5.5 billion, primarily due to Holdings' on-going management of its interest rate exposure and activities associated with RJRN's interest rate derivative instruments discussed above. As a result of the level of market interest rates at December 31, 1994 and 1993 compared with the interest rates associated with Holdings' consolidated debt obligations, the estimated fair value amounts of Holdings' long-term debt reflected in its Consolidated Balance Sheets is lower by $444 million and higher by $400 million than the carrying amounts (book value) of such debt at December 31, 1994 and 1993, respectively. For additional disclosures concerning the fair value of Holdings' consolidated indebtedness as well as the fair value of its interest rate arrangements at December 31, 1994 and 1993, see Notes 10 and 11 to the Consolidated Financial Statements. Capital expenditures were $670 million, $615 million and $519 million for 1994, 1993 and 1992, respectively. The current level of expenditures planned for 1995 is expected to be in the range of approximately $750 million to $850 million (approximately 60% Food and 40% Tobacco), which will be funded primarily by cash flows from operating activities. Management expects that its capital expenditure program will continue at a level sufficient to support the strategic and operating needs of Holdings' operating subsidiaries. 35 Holdings' subsidiaries have operations in many countries, utilizing 35 functional currencies in its foreign subsidiaries and branches. Significant foreign currency net investments are located in Germany, Canada, Hong Kong, Brazil and Spain. Changes in the strength of these countries' currencies relative to the U.S. dollar result in direct charges or credits to equity for non-hyperinflationary countries and direct charges or credits to the income statement for hyperinflationary countries. Translation gains or losses, resulting from foreign-denominated borrowings that are accounted for as hedges of certain foreign currency net investments, also result in charges or credits to equity. Holdings' subsidiaries also have significant exposure to foreign exchange sale and purchase transactions in currencies other than its functional currency. The exposures include the U.S. dollar, German mark, Japanese yen, Swiss franc, Hong Kong dollar, Singapore dollar and cross-rate exposure among the French franc, British pound, Italian lira and the German mark. These exposures are managed to minimize the effects of foreign currency transactions on its cash flows. Nabisco Holdings has advised RJRN that, commencing after the second quarter of 1995, it anticipates paying a quarterly cash dividend on its outstanding stock of $.1375 per share or $.55 per share on an annualized basis. This policy would provide RJRN with dividends on the 213,250,000 shares of Nabisco Holdings Class B Common Stock held by it of approximately $58.6 million in 1995 and approximately $117 million annually thereafter. In general, the Nabisco 1994 Credit Agreement limits prepayments of Nabisco's indebtedness to RJRN and limits dividends and distributions by Nabisco to $300 million plus 50% of Nabisco's cumulative consolidated net income commencing January 1, 1995. Loans and advances by Nabisco to RJRN are generally subject to a $100 million limit. The Nabisco 1994 Credit Agreement also limits the ability of Nabisco to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell certain assets and securities and engage in certain mergers or consolidations. These limitations are not expected to have a material effect on the ability of Nabisco Holdings to pay its anticipated dividends to RJRN, or on the ability of RJRN to meet its obligations. The Credit Agreements limit the payment of dividends by Holdings. Specifically, these Credit Agreements generally restrict dividends and distributions by Holdings to $1 billion, plus 50% of cumulative consolidated net income commencing January 1, 1995, plus the net cash proceeds of up to $250 million in any twelve month period from issuances of its equity securities. These credit agreements and certain other financing agreements limit the ability of Holdings and its subsidiaries to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell or dispose of certain assets and certain subsidiaries' stock and engage in certain mergers or consolidations. Holdings and RJRN believe that they and their subsidiaries are currently in compliance with all covenants and restrictions imposed by the terms of their indebtedness. ENVIRONMENTAL MATTERS RJRN's subsidiaries have been engaged in a continuing program to assure compliance with U.S. Government and various state and local government laws and regulations concerning the protection of the environment. Certain of these subsidiaries have been named "potentially responsible parties" with third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to approximately fifteen sites. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and to estimate the cost of resolving these CERCLA matters, the Registrants do not expect such expenditures or other costs to have a material adverse effect on the financial condition of either of the Registrants. HOLDINGS' BOARD OF DIRECTORS POLICIES The Board of Directors of Holdings has adopted a policy stating that Holdings will limit, until December 31, 1998, the aggregate amount of cash dividends on its capital stock. Under this policy, 36 during that period Holdings will not pay any extraordinary cash dividends and will limit the aggregate amount of its cash dividends, cash distributions and repurchases for cash of capital stock and subordinated debt to an amount equal to the sum of $500 million plus (i) 65% of Holdings' cumulative consolidated net income before extraordinary gains or losses and restructuring charges subsequent to December 31, 1994 and (ii) net cash proceeds of up to $250 million in any year from the sale of capital stock of Holdings or its subsidiaries (other than proceeds from the Nabisco Holdings initial public offering) to the extent used to repay, purchase or redeem debt or preferred stock. The Board of Directors of Holdings has adopted a policy providing that Holdings will not declare a dividend or distribution to its stockholders of the shares of capital stock of a subsidiary before December 31, 1996. Holdings has also adopted a policy setting forth its intention not to make such a distribution prior to December 31, 1998 if that distribution would cause the ratings of the senior indebtedness of RJRN to be reduced from investment grade to non-investment grade or if, after giving effect to such distribution, any publicly-held senior indebtedness of the distributed company would not be rated investment grade. There is no assurance that any such distribution will take place. Additional policies provide that an amount equal to the net cash proceeds from any issuance and sale of equity by Holdings or from any sale outside the ordinary course of business of material assets owned or used by subsidiaries in the tobacco business, in each case before December 31, 1998, will be used either to repay, purchase or redeem consolidated indebtedness or to acquire properties, assets or businesses to be used in existing or new lines of business and that an amount equal to the net cash proceeds of any secondary sale of shares of Nabisco Holdings before December 31, 1998 will be used to repay, purchase or redeem consolidated debt. No assurance can be given that Holdings will issue or sell any equity or sell any material assets outside the ordinary course of business. SUBSEQUENT EVENTS On January 26, 1995, Nabisco Holdings completed the initial public offering of 51,750,000 shares of its Class A Common Stock at an initial offering price of $24.50 per share. Nabisco used all of the approximately $1.2 billion of net proceeds from the initial public offering to repay a portion of its initial borrowing under the Nabisco 1994 Credit Agreement. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco Holdings, which represents approximately 80.5% of the economic interest in Nabisco Holdings and approximately 97.6% of its voting power. In connection with the offering, Holdings, RJRN and Nabisco Holdings entered into agreements to exchange certain services, to establish tax sharing arrangements and to provide RJRN with certain preemptive and registration rights with respect to Nabisco Holdings and Nabisco securities. Certain provisions in approximately $6 billion of RJRN's publicly held debt limit the ability of Nabisco Holdings and Nabisco to incur long-term debt. RJRN and Nabisco are currently considering a transaction in which they would seek to obtain consents to remove such limitations in order to permit Nabisco to establish long-term borrowing capacity independent of RJRN and to reduce its intercompany debt to RJRN. It is anticipated that such consents would be sought in connection with offers by Nabisco or RJRN to exchange debt of Nabisco for, or to pay certain cash consent solicitation fees in respect of, all or a portion of such RJRN debt. RJRN believes that any such transaction would not materially change the amount of consolidated indebtedness of either RJRN or Nabisco, although any newly issued debt of RJRN or Nabisco incurred in connection with the transaction may have maturities, interest rates or other terms that are less attractive to RJRN or Nabisco, respectively, than the terms of their existing debt. No assurance can be given that any such restructuring will be pursued or consummated or as to the timing of any such restructuring. The Board of Directors of Holdings has declared an initial quarterly dividend of $.075 per share payable on April 1, 1995 to holders of record as of March 10, 1995. Holdings expects to continue to pay a quarterly cash dividend on the Common Stock of $.075 per share or $.30 per share on an annualized basis. Holdings does not believe that the provisions of its Credit Agreements or its adopted policies concerning distributions to stockholders will limit its ability to pay its anticipated quarterly dividends. 37 The Board of Directors of Holdings approved a one-for-five reverse split of the Common Stock, which will be submitted to Holdings' stockholders for approval at its annual meeting in April 1995. If approved, the reverse stock split would result in a dividend and earnings per share that are five times higher with a corresponding reduction in the number of shares outstanding. Holdings has indicated that, under normal circumstances, it does not plan to issue additional equity securities for purposes of balance sheet improvement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the Index to Financial Statements and Financial Statement Schedules on page 43, for the required information. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 38 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS Item 10 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1995. Reference is also made regarding the executive officers of the Registrants to "Executive Officers of the Registrants" following Item 4 of Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION Item 11 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 12 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1995. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 13 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1995. 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. The financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this report. 2. The financial statement schedules listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this report. 3. The exhibits listed in the accompanying Index to Exhibits are filed as part of this report. (b) Reports on Form 8-K filed in Fourth Quarter 1994 None. (c) Exhibits See Exhibit Index. (d) Financial Statement Schedules. See Index to Financial Statements and Financial Statement Schedules.
40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on February 23, 1995. RJR NABISCO HOLDINGS CORP. By: /s/ CHARLES M. HARPER (Charles M. Harper) Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 1995.
SIGNATURE TITLE - -------------------------------- -------------------------------- /s/ CHARLES M. HARPER Chairman of the Board and Chief ................................ Executive Officer (principal (Charles M. Harper) executive officer) and Director /s/ STEPHEN R. WILSON Executive Vice President and ................................ Chief Financial Officer (Stephen R. Wilson) (principal financial officer) Senior Vice President and /s/ ROBERT S. ROATH Controller (principal ................................ accounting officer) (Robert S. Roath) Director ................................ (John T. Chain, Jr.) * Director ................................ (Julius L. Chambers) * Director ................................ (John L. Clendenin) * Director ................................ (James H. Greene, Jr.) * Director ................................ (H. John Greeniaus) Director ................................ (James W. Johnston) * Director ................................ (Henry R. Kravis) * Director ................................ (John G. Medlin, Jr.) * Director ................................ (Paul E. Raether) * Director ................................ (Lawrence R. Ricciardi) * Director ................................ (Rozanne L. Ridgway) Director ................................ (Clifton S. Robbins) Director ................................ (George R. Roberts) * Director ................................ (Scott M. Stuart) Director ................................ (Michael T. Tokarz)
*By: /s/ JO-ANN FORD (Jo-Ann Ford) Attorney-in-Fact 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on February 23, 1995. RJR NABISCO, INC. By: /s/ CHARLES M. HARPER (Charles M. Harper) Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 1995.
SIGNATURE TITLE - -------------------------------- -------------------------------- /s/ CHARLES M. HARPER Chairman of the Board and Chief ................................ Executive Officer (principal (Charles M. Harper) executive officer) and Director /s/ STEPHEN R. WILSON Executive Vice President and ................................ Chief Financial Officer (Stephen R. Wilson) (principal financial officer) Senior Vice President and /s/ ROBERT S. ROATH Controller (principal ................................ accounting officer) (Robert S. Roath) Director ................................ (John T. Chain, Jr.) * Director ................................ (Julius L. Chambers) * Director ................................ (John L. Clendenin) * Director ................................ (James H. Greene, Jr.) * Director ................................ (H. John Greeniaus) Director ................................ (James W. Johnston) * Director ................................ (Henry R. Kravis) * Director ................................ (John G. Medlin, Jr.) * Director ................................ (Paul E. Raether) * Director ................................ (Lawrence R. Ricciardi) * Director ................................ (Rozanne L. Ridgway) Director ................................ (Clifton S. Robbins) Director ................................ (George R. Roberts) * Director ................................ (Scott M. Stuart) Director ................................ (Michael T. Tokarz)
*By: /s/ JO-ANN FORD (Jo-Ann Ford) Attorney-in-Fact 42 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE --------- FINANCIAL STATEMENTS Report of Deloitte & Touche LLP, Independent Auditors......................... F-1 Summary of Significant Accounting Policies.................................... F-2-F-3 Consolidated Statements of Income and Retained Earnings--Years Ended December 31, 1994, 1993 and 1992..................................................... F-4 Consolidated Statements of Cash Flows--Years Ended December 31, 1994, 1993 and 1992............................................................... F-5 Consolidated Balance Sheets--December 31, 1994 and 1993....................... F-6 Notes to Consolidated Financial Statements.................................... F-7-F-39
FINANCIAL STATEMENT SCHEDULES For the years ended December 31, 1994, 1993 and 1992: Schedule I --Condensed Financial Information of Registrants................... S-1-S-8 Schedule II --Valuation and Qualifying Accounts................................ S-9
43 REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS RJR Nabisco Holdings Corp.: RJR Nabisco, Inc.: We have audited the accompanying consolidated balance sheets of RJR Nabisco Holdings Corp. ("Holdings") and RJR Nabisco, Inc. ("RJRN") as of December 31, 1994 and 1993, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1994. Our audits also include the financial statement schedules of Holdings and RJRN as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994 as listed in the accompanying index to financial statements and financial statement schedules. These financial statements and financial statement schedules are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Holdings and RJRN at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP New York, New York January 30, 1995 (February 21, 1995 as to Notes 11 and 17) F-1 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED FINANCIAL STATEMENTS The Summary of Significant Accounting Policies below and the notes to consolidated financial statements on pages F-7 through F-39 are integral parts of the accompanying consolidated financial statements of RJR Nabisco Holdings Corp. ("Holdings") and RJR Nabisco, Inc. ("RJRN" and, collectively with Holdings, the "Registrants") (the "Consolidated Financial Statements"). SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This Summary of Significant Accounting Policies is presented to assist in understanding the Consolidated Financial Statements included in this report. These policies conform to generally accepted accounting principles. Consolidation Consolidated Financial Statements include the accounts of each Registrant and its subsidiaries. Cash Equivalents Cash equivalents include all short-term, highly liquid investments that are readily convertible to known amounts of cash and so near maturity (three months or less) that they present an insignificant risk of changes in value because of changes in interest rates. Inventories Inventories are stated at the lower of cost or market. Various methods are used for determining cost. The cost of U.S. tobacco inventories is determined principally under the LIFO method. The cost of remaining inventories is determined under the FIFO, specific lot and weighted average methods. In accordance with recognized trade practice, stocks of tobacco, which must be cured for more than one year, are classified as current assets. Depreciation Property, plant and equipment are depreciated principally by the straight-line method. Trademarks and Goodwill Values assigned to trademarks are based on appraisal reports and are amortized on the straight-line method over a 40 year period. Goodwill is also amortized on the straight-line method over a 40 year period. In evaluating the value and future benefits of trademarks and goodwill, the recoverability from operating income is measured. Under this approach, the carrying value of goodwill and trademarks would be reduced if it is probable that management's best estimate of future operating income before amortization of trademarks and goodwill from related operations, on an undiscounted basis, will be less than the carrying amount of trademarks and goodwill over the remaining amortization period. Other Income (Expense), Net Interest income, gains and losses on foreign currency transactions and other financial items are included in "Other income (expense), net". F-2 Income Taxes Income taxes are calculated for each Registrant on a separate return basis. Excise Taxes Excise taxes are excluded from "Net sales" and "Cost of products sold". Reclassifications and Restatements Certain reclassifications have been made to prior years' amounts to conform to the 1994 presentation. Advertising Advertising costs are generally expensed as incurred. F-3 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ----------------------- ----------------------- ----------------------- HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN ---------- ---------- ---------- ---------- ---------- ---------- NET SALES (NOTE 1)............ $ 15,366 $ 15,366 $ 15,104 $ 15,104 $ 15,734 $ 15,734 ---------- ---------- ---------- ---------- ---------- ---------- Costs and expenses (Note 1): Cost of products sold........ 6,977 6,977 6,640 6,640 6,326 6,326 Selling, advertising, administrative and general expenses...................... 5,210 5,198 5,731 5,723 5,788 5,776 Amortization of trademarks and goodwill............... 629 629 625 625 616 616 Restructuring expense........ -- -- 730 730 106 106 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME......... 2,550 2,562 1,378 1,386 2,898 2,910 Interest and debt expense (Notes 8 and 10)............. (1,065) (1,065) (1,209) (1,186) (1,449) (1,359) Other income (expense), net... (110) (121) (58) (88) 7 (75) ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes......................... 1,375 1,376 111 112 1,456 1,476 Provision for income taxes (Note 3)...................... 611 614 114 116 680 693 ---------- ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............ 764 762 (3) (4) 776 783 Extraordinary item--loss on early extinguishments of debt, net of income taxes (Note 4)...................... (245) (245) (142) (135) (477) (464) ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS)........ 519 517 (145) (139) 299 319 Less preferred stock dividends..................... 131 -- 68 -- 31 -- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to common stock......................... 388 517 (213) (139) 268 319 Retained earnings (accumulated deficit) at beginning of period........................ (883) (459) (738) (320) (1,037) (639) Dividends paid to parent and charged to retained earnings.. -- (42) -- -- -- -- Add preferred stock dividends charged to paid-in capital.... 131 -- 68 -- 31 -- ---------- ---------- ---------- ---------- ---------- ---------- RETAINED EARNINGS (ACCUMULATED DEFICIT) AT END OF PERIOD (NOTE 13)..................... $ (364) $ 16 $ (883) $ (459) $ (738) $ (320) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per common and common equivalent share (Note 2): Income (loss) before extraordinary item............ $ 0.41 -- $ (.05) -- $ 0.55 -- Extraordinary item........... (0.16) -- (.10) -- (0.35) -- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)........ $ 0.25 -- $ (.15) -- $ 0.20 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income (loss) per common and common equivalent share (Note 2).... $ 1.26 -- $ (.79) -- $ .98 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Dividends per share of Series A Preferred Stock (Note 12)........................... $ 2.92 -- $ 3.34 -- $ 3.34 -- Dividends per share of Series C Preferred Stock (Note 12)........................... $ 3.94 -- -- -- -- -- Average number of common and common equivalent shares outstanding (in thousands) (Note 2)...................... 1,538,127 -- 1,349,196 -- 1,363,549 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements. F-4 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------------ ------------------ ------------------ HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN -------- -------- -------- -------- -------- -------- NET CASH FLOWS FROM OPERATING ACTIVITIES (NOTE 5)................................. $ 1,754 $ 1,719 $ 1,769 $ 1,604 $ 2,307 $ 2,455 -------- -------- -------- -------- -------- -------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Capital expenditures.................... (670) (670) (615) (615) (519) (519) Proceeds from disposition of business... -- -- 450 450 -- -- Acquisitions of businesses.............. (510) (510) (128) (128) (385) (385) Other, net.............................. 39 39 32 32 11 11 -------- -------- -------- -------- -------- -------- Net cash flows used in investing activities............................... (1,141) (1,141) (261) (261) (893) (893) -------- -------- -------- -------- -------- -------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Net borrowings (repayments) under credit agreements............................... 2,911 2,911 (2,614) (2,614) (620) (620) Net proceeds from the issuance (repayments) of commercial paper...... (49) (49) 342 342 571 571 Proceeds from issuance of other long-term debt........................ 16 16 1,965 1,965 3,155 3,155 Repayments of other long-term debt...... (4,666) (4,666) (1,977) (1,429) (4,549) (4,298) Increase (decrease) in notes payable.... 18 18 (24) (24) (25) (25) Proceeds from issuance of common stock and exercise of warrants.............. 54 -- 9 -- 1 -- Proceeds from issuance of Series B Preferred Stock....................... -- -- 1,250 -- -- -- Proceeds from issuance of Series C Preferred Stock....................... 1,734 -- -- -- -- -- Financing and advisory fees paid........ (60) (6) (48) (9) (35) (33) Capital contributions from/issuance of common stock to parent................... -- 1,680 -- 1,214 -- -- Dividends paid to parent................ -- (42) -- (48) -- (278) Preferred stock dividends paid.......... (395) -- (241) -- (214) -- Repurchase of preferred stock........... (3) -- (105) -- -- -- Repurchases and cancellations of common stock, stock options and warrants........ (1) -- (1) -- (89) -- Other, net--including intercompany transfers................................ 42 (230) 62 (621) 62 (363) -------- -------- -------- -------- -------- -------- Net cash flows used in financing activities............................... (399) (368) (1,382) (1,224) (1,743) (1,891) -------- -------- -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents.................... (6) (6) (10) (10) (6) (6) -------- -------- -------- -------- -------- -------- Net change in cash and cash equivalents.............................. 208 204 116 109 (335) (335) Cash and cash equivalents at beginning of period................................... 215 205 99 96 434 431 -------- -------- -------- -------- -------- -------- Cash and cash equivalents at end of period................................... $ 423 $ 409 $ 215 $ 205 $ 99 $ 96 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
See Notes to Consolidated Financial Statements. F-5 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31, 1994 1993 ----------------- ----------------- HOLDINGS RJRN HOLDINGS RJRN -------- ------- -------- ------- ASSETS Current assets: Cash and cash equivalents (Note 5)........................ $ 423 $ 409 $ 215 $ 205 Accounts and notes receivable, net (Note 5)............... 934 934 856 847 Inventories (Note 6)...................................... 2,580 2,580 2,700 2,700 Prepaid expenses and excise taxes......................... 426 426 374 374 -------- ------- -------- ------- TOTAL CURRENT ASSETS.................................. 4,363 4,349 4,145 4,126 -------- ------- -------- ------- Property, plant and equipment--at cost...................... 7,767 7,767 7,166 7,166 Less accumulated depreciation............................... (2,333) (2,333) (1,998) (1,998) -------- ------- -------- ------- Net property, plant and equipment (Note 7)................ 5,434 5,434 5,168 5,168 -------- ------- -------- ------- Trademarks, net of accumulated amortization of $1,491 and $1,223, respectively........................................ 8,506 8,506 8,727 8,727 Goodwill, net of accumulated amortization of $2,124 and $1,767, respectively........................................ 12,681 12,681 12,851 12,851 Other assets and deferred charges........................... 424 423 404 400 -------- ------- -------- ------- $ 31,408 $31,393 $ 31,295 $31,272 -------- ------- -------- ------- -------- ------- -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable (Note 8).................................... $ 296 $ 296 $ 301 $ 301 Accounts payable.......................................... 548 548 515 515 Accrued liabilities (Note 9).............................. 2,532 2,488 2,751 2,705 Current maturities of long-term debt (Notes 10 and 17).... 1,970 1,970 142 142 Income taxes accrued (Note 3)............................. 248 248 234 234 -------- ------- -------- ------- TOTAL CURRENT LIABILITIES............................. 5,594 5,550 3,943 3,897 -------- ------- -------- ------- Long-term debt (less current maturities) (Notes 10 and 17)......................................................... 8,883 8,883 12,005 12,005 Other noncurrent liabilities................................ 2,235 1,836 2,503 2,353 Deferred income taxes (Note 3).............................. 3,788 3,714 3,774 3,701 Commitments and contingencies (Note 11) Stockholders' equity (Notes 12, 13 and 17): ESOP convertible preferred stock--15,315,130 and 15,573,973 shares issued and outstanding at December 31, 1994 and 1993, respectively............................. 245 -- 249 -- Series A convertible preferred stock--52,500,000 shares issued and outstanding at December 31, 1993............. -- -- 2 -- Series B preferred stock--50,000 shares issued and outstanding at December 31, 1994 and 1993................... 1,250 -- 1,250 -- Series C preferred stock--26,675,000 shares issued and outstanding at December 31, 1994............................ 3 -- -- -- Common stock--1,361,656,883 and 1,138,011,292 shares issued and outstanding at December 31, 1994 and 1993, respectively................................................ 13 -- 11 -- Paid-in capital........................................... 10,147 11,558 8,778 9,877 Cumulative translation adjustments........................ (164) (164) (102) (102) Retained earnings (accumulated deficit)................... (364) 16 (883) (459) Receivable from ESOP...................................... (186) -- (211) -- Loans receivable from employees........................... (14) -- (18) -- Unamortized value of restricted stock..................... (22) -- (6) -- -------- ------- -------- ------- TOTAL STOCKHOLDERS' EQUITY............................ 10,908 11,410 9,070 9,316 -------- ------- -------- ------- $ 31,408 $31,393 $ 31,295 $31,272 -------- ------- -------- ------- -------- ------- -------- -------
See Notes to Consolidated Financial Statements. F-6 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--OPERATIONS Net sales and cost of products sold exclude excise taxes of $3.578 billion, $3.757 billion and $3.560 billion for 1994, 1993 and 1992, respectively. During the fourth quarter of 1994, Holdings approved and adopted a plan to realign Headquarters' functions, transferring certain responsibilities to the operating companies and significantly streamlining the holding company. The plan reflects expectations of a lower level of financings and other activities at the holding company as Holdings concludes the post-LBO period. The costs and expenses associated with this decision resulted in a charge of approximately $65 million before tax, a significant portion of which is a cash expense. The majority of the charge is related to accrued employee termination benefits for the 25% of Headquarters' employees terminated (approximately $40 million). This cost was incurred pursuant to a continuing plan for employee termination benefits that provides for the payment of specified amounts of severance and benefits to terminated employees. The remainder of the charge (approximately $25 million) is related to the abandonment of leases of certain corporate office facilities as a result of the realignment and streamlining and the reduced need for office space. The plan was implemented in the first quarter of 1995 and will be completed by year-end 1995. Anticipated annual future cash savings flowing from the plan are estimated at approximately $25 million before tax (approximately $16 million after tax). Operating income in the fourth quarter of 1993 was reduced by a $730 million restructuring expense for a program initiated at the domestic tobacco operations ($355 million), the international tobacco operations ($189 million), the food operations ($153 million) and Headquarters ($33 million). Such restructuring program was undertaken in response to a changing consumer product business environment and to streamline operations and improve profitability. The program was implemented in the latter part of 1993. Approximately 75% of the restructuring program will require cash outlays of which approximately $300 million was spent as of the end of 1994. As an offset to the cash outlays, after-tax cash savings of approximately $140 million were realized as of the end of 1994. Holdings expects future annual after-tax cash savings to be in the range of approximately $200 million to $225 million. The cost of providing severance pay and benefits for the reduction of approximately 6,000 employees (approximately 4,400 positions eliminated by the end of 1994) throughout the domestic and international food and tobacco businesses was approximately $400 million of the pre-tax charge and is primarily a cash expense. Actual charges for severance pay and benefits through December 31, 1994 amounted to approximately $250 million. The workforce reduction was undertaken in order to establish fundamental changes to the cost structure of the domestic tobacco business in the face of acute competitive activity in that business and to take advantage of cost savings opportunities in other businesses through process efficiency improvements. Legislation enacted during the third quarter of 1993 stipulated that, effective January 1, 1994, financial penalties would be assessed against manufacturers if cigarettes produced in the United States did not contain at least 75% (by weight) domestically grown flue cured and burley tobaccos. As a result, the domestic and international tobacco businesses accrued approximately $70 million of related restructuring charges resulting from a reassessment of raw material sourcing and production arrangements. In addition, a shift in pricing strategy designed to gain market share by RJRT's largest competitor led to a redeployment of spending and changes in sales and distribution strategies that resulted in a restructuring charge of approximately $80 million primarily related to contract termination costs. Abandonment of leases related to the above changes in the businesses resulted in approximately $60 million of restructuring charges. The remainder of the F-7 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 1--OPERATIONS--(CONTINUED) charge, approximately $120 million, represents primarily non-cash costs to rationalize and close manufacturing and sales facilities in both the tobacco and food businesses to facilitate cost improvements. Charges related to these items amounted to approximately $250 million through December 31, 1994. As of December 31, 1994, the original estimates related to the food businesses have remained unchanged. However, changes have occurred in the original tobacco estimates. Due to stronger than anticipated demand for domestic tobacco products, the estimate of the amount of domestic production to be moved off-shore has been reduced, causing a domino-effect on domestic and international raw material sourcing and production strategies. The end result will be a reduction in the amount of domestic production moved to off-shore facilities and significant changes in sourcing and production among off-shore production facilities. As a result of this change, approximately 300 domestic tobacco employees originally anticipated to be terminated will be retained and approximately 200 additional international tobacco employees will be terminated. The financial impact of these changes is a credit to income of approximately $23 million related to the reduction in the cost of providing severance pay and benefits to domestic tobacco employees and an increase in the cost of providing such benefits to terminated international tobacco employees. In addition, the cost associated with the rationalization and abandonment of manufacturing and sales facilities was increased by approximately $21 million as it became evident that the original plan to find an alternative manufacturing use for a tobacco blending facility would not come to fruition. The net adjustment to operating income as a result of the above changes (approximately $2 million) is included in selling, advertising, administrative and general expense. The major components of restructuring reserves are as follows:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ------------ Severance pay and benefits......................................... $147 $323 Manufacturing/sales facilities..................................... 26 100 Contract termination costs......................................... -- 75 Abandonment of leases.............................................. 15 45 Reassessment of sourcing/product arrangements...................... 38 67 ----- ----- $226 $610 ----- ----- ----- -----
During the fourth quarter of 1992, operating income was reduced by a net charge of $8 million as a result of a $106 million restructuring expense recorded at the tobacco operations ($43 million) and the food operations ($63 million), partially offset by a $98 million gain recognized from the sale of Holdings' ready-to-eat cold cereal business for $456 million in cash, prior to post-closing adjustments. The restructuring expense was incurred in connection with a restructuring plan at the tobacco operations, the purpose of which was to improve productivity by realigning operations in the sales, manufacturing, research and development, and administrative areas and a restructuring plan at the food operations, the purpose of which was to reduce costs and improve productivity by realigning sales operations and implementing a previously announced voluntary separation program. The receivable established at December 31, 1992 for the sale of the ready-to-eat cold cereal business was collected on January 4, 1993, except for certain escrow amounts which were subsequently collected. F-8 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares of Holdings' common stock, par value $.01 per share (the "Common Stock"), $.835 Depositary Shares ("Series A Depositary Shares") and Series C Depositary Shares ("Series C Depositary Shares") outstanding during the period and common stock assumed to be outstanding to reflect the effect of dilutive warrants and options. Holdings' other potentially dilutive securities are not included in the earnings per share calculation because the effect of excluding interest and dividends on such securities for the period would exceed the earnings allocable to the common stock into which such securities would be converted. Accordingly, Holdings' earnings per share and fully diluted earnings per share are the same. The net loss per common and common equivalent share reported for the year ended December 31, 1993 would have increased by $.19 per share if the weighted average number of shares of Series A Depositary Shares outstanding during the period had been excluded from the earnings per share calculation. The pro forma net income (loss) per common and common equivalent share for each of the years within the three year period ended December 31, 1994 reflects a one-for-five reverse split approved by the Board of Directors of Holdings which will be submitted to Holdings' stockholders for approval at its annual meeting in April 1995. (See Note 17 to the Consolidated Financial Statements.) NOTE 3--INCOME TAXES The provision for income taxes consisted of the following:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ----------------- ---------------- ---------------- HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN -------- ---- -------- ---- -------- ---- Current: Federal................................ $401 $466 $295 $366 $165 $115 Foreign and other...................... 221 221 169 169 216 216 -------- ---- -------- ---- -------- ---- 622 687 464 535 381 331 -------- ---- -------- ---- -------- ---- Deferred: Federal................................ (40) (102) (298) (367) 300 363 Foreign and other...................... 29 29 (52) (52 ) (1) (1 ) -------- ---- -------- ---- -------- ---- (11) (73 ) (350) (419) 299 362 -------- ---- -------- ---- -------- ---- Provision for income taxes............... $611 $614 $114 $116 $680 $693 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ----
F-9 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--INCOME TAXES--(CONTINUED) The components of the deferred income tax liability disclosed on the Consolidated Balance Sheet at December 31, 1994 and 1993 included the following:
DECEMBER 31, 1994 DECEMBER 31, 1993 ------------------ ------------------ HOLDINGS RJRN HOLDINGS RJRN -------- ------ -------- ------ Deferred tax assets: Pension liabilities............................ $ (88) $ (88) $ (123) $ (123) Other postretirement liabilities............... (326) (326) (342) (342) Restructure and other accrued liabilities...... (226) (226) (325) (325) -------- ------ -------- ------ Total deferred tax assets................ (640) (640) (790) (790) -------- ------ -------- ------ Deferred tax liabilities: Property and equipment......................... 1,049 1,049 1,154 1,154 Trademarks..................................... 2,784 2,784 2,913 2,913 Other.......................................... 531 457 465 392 -------- ------ -------- ------ Total deferred tax liabilities........... 4,364 4,290 4,532 4,459 -------- ------ -------- ------ Net deferred tax liabilities before valuation allowance.............................. 3,724 3,650 3,742 3,669 Valuation allowance............................ 64 64 32 32 -------- ------ -------- ------ Net deferred income taxes...................... $3,788 $3,714 $3,774 $3,701 -------- ------ -------- ------ -------- ------ -------- ------
Pre-tax income (loss) before extraordinary item for domestic and foreign operations is shown in the following table:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------------ ------------------ ------------------ HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN -------- ------ -------- ------ -------- ------ Domestic (includes U.S. exports)....... $ 867 $ 868 $ (169) $ (168) $1,052 $1,072 Foreign................................ 508 508 280 280 404 404 -------- ------ -------- ------ -------- ------ Pre-tax income......................... $1,375 $1,376 $ 111 $ 112 $1,456 $1,476 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
F-10 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--INCOME TAXES--(CONTINUED) The differences between the provision for income taxes and income taxes computed at statutory U.S. federal income tax rates are explained as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 --------------- ---------------- ------------------ HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN -------- ---- -------- ----- -------- ------- Income taxes computed at statutory U.S. federal income tax rates........ $481 $481 $ 39 $ 39 $ 495 $ 502 State taxes, net of federal benefit.............................. 54 54 23 23 54 54 Goodwill amortization................ 124 124 125 125 122 122 Asset sale........................... -- -- -- -- 33 33 Federal rate change impact on deferred income taxes.............. -- -- 86 86 -- -- Decrease in deferred tax amounts, primarily for a change in the functional currency relating to foreign branch operations............ -- -- (108) (108) -- -- Taxes on foreign operations at rates different than statutory U.S. federal rate....................... (6) (6) (14) (14) 15 15 FSC income exclusion................. (14) (14) (14) (14) (10) (10) Other items, net..................... (28) (25) (23) (21) (29) (23) -------- ---- -------- ----- -------- ------- Provision for income taxes........... $611 $614 $ 114 $ 116 $ 680 $ 693 -------- ---- -------- ----- -------- ------- -------- ---- -------- ----- -------- ------- Effective tax rate................... 44.5% 44.7% 102.7% 103.8% 46.7% 47.0% -------- ---- -------- ----- -------- ------- -------- ---- -------- ----- -------- -------
At December 31, 1994, there was $1.444 billion of accumulated and undistributed income of foreign subsidiaries. These earnings are intended by management to be reinvested abroad indefinitely. Accordingly, no applicable U.S. federal deferred income taxes or foreign withholding taxes have been provided nor is a determination of the amount of unrecognized U.S. federal deferred income taxes practicable. During 1994, $64 million of previously recognized deferred income tax benefits for minimum tax credit carryforwards were realized for U.S. federal tax purposes. Effective January 1, 1993, Holdings and RJRN adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS No. 109 superseded Statement of Financial Accounting Standards No. 96, the method of accounting for income taxes previously followed by the Registrants. The adoption of SFAS No. 109 did not have a material impact on the financial statements of either Holdings or RJRN. Holdings' provision for income taxes for 1993 was increased by $96 million as a result of the enactment of certain federal tax legislation during the third quarter of 1993 which increased federal corporate income tax rates to 35% from 34%, retroactively to January 1, 1993. The components of this increase to Holdings' provision for income taxes included an $86 million non-cash charge resulting primarily from the remeasurement of the balance of deferred federal income taxes at the date of enactment of the new federal tax legislation for the change in the income tax rates, and a $10 million charge resulting from the increase in current federal income taxes accrued for the change in the income F-11 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--INCOME TAXES--(CONTINUED) tax rates and other effects of the new tax legislation. Also during 1993, Holdings' provision for income taxes was decreased by a $108 million credit primarily resulting from a change in the functional currency, for U.S. federal income tax purposes, relating to foreign branch operations. During 1993, $101 million of previously recognized deferred income tax benefits for operating loss carryforwards ($36 million), minimum tax credit carryforwards ($44 million) and other carryforward items ($21 million) were realized for federal tax purposes. NOTE 4--EXTRAORDINARY ITEM The extinguishments of debt of Holdings and RJRN resulted in the following extraordinary losses:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ---------------- ---------------- ---------------- HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN -------- ----- -------- ----- -------- ----- Cash paid in excess of net carrying amount (book value) of debentures extinguished................. $ (348) $(348) $ (206) $(196) $ (636) $(616) Write-off of debt issuance costs.................. (29) (29) (12) (12) (40) (40) -------- ----- -------- ----- -------- ----- Extraordinary item--loss on early extinguishments of debt before income taxes..................... (377) (377) (218) (208) (676) (656) Benefit for income taxes.......................... 132 132 76 73 199 192 -------- ----- -------- ----- -------- ----- Extraordinary item--loss on early extinguishments of debt, net of income taxes.................... $ (245) $(245) $ (142) $(135) $ (477) $(464) -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
F-12 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION A reconciliation of net income (loss) to net cash flows from operating activities follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------------ ------------------ ------------------ HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN -------- ------ -------- ------ -------- ------ CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income (loss)..................... $ 519 $ 517 $ (145) $ (139) $ 299 $ 319 -------- ------ -------- ------ -------- ------ Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation of property, plant and equipment............................... 454 454 448 448 455 455 Amortization (principally intangibles)............................ 698 698 701 701 691 691 Deferred income tax provision (benefit)............................... (11) (73) (350) (419) 299 362 Non-cash interest and debt expense................................. 119 119 295 273 454 375 Extraordinary item--loss on early extinguishments of debt................. 377 377 218 208 676 656 Gain on sale of ready-to-eat cold cereal business......................... -- -- -- -- (98) (98) (Increase) decrease in accounts and notes receivable........................ (69) (61) 75 84 (180) (180) (Increase) decrease in inventories............................. 111 111 80 80 (102) (102) Increase in prepaid expenses and excise taxes............................ (18) (18) (37) (37) (53) (53) (Increase) decrease in other assets and deferred charges.............. (55) (57) (4) 43 (186) (185) Increase (decrease) in accounts payable and accrued liabilities......... (363) (363) 308 312 70 84 Increase (decrease) in income taxes accrued................................. 26 51 (53) 54 38 128 Increase (decrease) in other noncurrent liabilities.................. (37) (37) 215 24 (110) (96) Other, net.......................... 3 1 18 (28) 54 99 -------- ------ -------- ------ -------- ------ Total adjustments............... 1,235 1,202 1,914 1,743 2,008 2,136 -------- ------ -------- ------ -------- ------ Net cash flows from operating activities.............................. $1,754 $1,719 $1,769 $1,604 $2,307 $2,455 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Cash payments for income taxes and interest were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ---------------- ---------------- ------------------ HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN -------- ---- -------- ---- -------- ------ Income taxes paid, net of refunds.......... $496 $496 $408 $408 $ 116 $ 116 Interest paid.............................. $986 $986 $912 $912 $1,102 $1,102
F-13 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION--(CONTINUED) Cash equivalents at December 31, 1994 and 1993, valued at cost (which approximates market value), totaled $364 million and $215 million, respectively, and consisted principally of domestic and Eurodollar time deposits and certificates of deposit. At December 31, 1994 and 1993, cash of $60 million and $62 million, respectively, was held in escrow as collateral for letters of credit issued in connection with certain foreign currency debt. On February 7, 1990, RJRN entered into an arrangement in which it agreed to sell for cash substantially all of its subsidiaries' domestic trade accounts receivable generated during a five-year period to a financial institution. Pursuant to amendments entered into in 1992, the length of the receivable program was extended an additional year. The accounts receivable have been and will continue to be sold with limited recourse at purchase prices reflecting the rate applicable to the cost to the financial institution of funding its purchases of accounts receivable and certain administrative costs. During 1994, 1993, and 1992, total proceeds of approximately $7.9 billion, $8.2 billion and $8.5 billion, respectively, were received by RJRN in connection with this arrangement. At December 31, 1994 and 1993, the accounts receivable balance has been reduced by approximately $524 million and $437 million, respectively, due to the receivables sold. For information regarding certain non-cash financing activities, see Notes 10 and 12 to the Consolidated Financial Statements. NOTE 6--INVENTORIES The major classes of inventory are shown in the table below:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ------------ Finished products........................................ $ 771 $ 771 Leaf tobacco............................................. 1,299 1,458 Raw materials............................................ 206 208 Other.................................................... 304 263 ------------ ------------ $2,580 $2,700 ------------ ------------ ------------ ------------
At December 31, 1994 and 1993, approximately $1.2 billion and $1.4 billion, respectively, of inventory was valued under the LIFO method. The current cost of LIFO inventories at December 31, 1994 and 1993 was greater than the amount at which these inventories were carried on the Consolidated Balance Sheets by $141 million and $284 million, respectively. For the years ended December 31, 1994, 1993 and 1992, net income was increased by $10 million, $6 million, and $4 million, respectively, as a result of LIFO inventory liquidations. The LIFO liquidations resulted from programs to reduce leaf durations consistent with forecasts of future operating requirements. F-14 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 7--PROPERTY, PLANT AND EQUIPMENT Components of property, plant and equipment were as follows:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ------------ Land and land improvements.............................. $ 323 $ 308 Buildings and leasehold improvements.................... 1,856 1,771 Machinery and equipment................................. 5,056 4,624 Construction-in-process................................. 532 463 ------------ ------------ 7,767 7,166 Less accumulated depreciation........................... (2,333) (1,998) ------------ ------------ Net property, plant and equipment................... $ 5,434 $ 5,168 ------------ ------------ ------------ ------------
NOTE 8--NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ------------ Notes payable to foreign banks........................... $ 296 $ 301 ------------ ------------ ------------ ------------
Weighted average interest rate for notes payable consisted of the following: Notes payable to foreign banks........................... 9.77% 8.37% ------------ ------------ ------------ ------------
NOTE 9--ACCRUED LIABILITIES Accrued liabilities consisted of the following:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ------------ Marketing and advertising................................ $ 553 $ 643 Payroll and employee benefits............................ 380 325 Excise taxes............................................. 260 226 Accrued interest......................................... 189 260 Restructuring............................................ 146 377 Other.................................................... 1,004 920 ------------ ------------ $2,532 $2,751 ------------ ------------ ------------ ------------
NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE Interest and debt expense consisted of the following:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Cash interest..................................... $ 946 $ 914 $ 995 Non-cash interest and debt expense................ 119 295 454 ------ ------ ------ $1,065 $1,209 $1,449 ------ ------ ------ ------ ------ ------
F-15 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED) Long-term debt consisted of the following:
DECEMBER 31, 1994 DECEMBER 31, 1993 ---------------------- ------------------- DUE DUE DUE DUE WITHIN AFTER WITHIN AFTER ONE YEAR ONE YEAR(1) ONE YEAR ONE YEAR -------- ----------- -------- -------- Long-term Debt: 8.625-9.25% Debentures with annual sinking fund payments through 2017 (net of $59 million and $160 million of such debentures held by RJRN on December 31, 1994 and 1993, respectively, for future sinking fund requirements)................................. $ 400 $ 634 $ -- $ 1,464 5.09-9.25% Notes, due 1995 through 2013.............. 200 4,932 -- 6,631 5.375-10%, foreign currency debt, due 2000 to 2001... -- 500 123 472 1991 Credit Agreement, variable interest (varies with prime rate and LIBOR--weighted average interest rate of 6.68% at December 31, 1994), due December 31, 1997(2)........................................ -- 1,750 -- 328 Nabisco 1994 Credit Agreement, variable interest (varies with prime rate and LIBOR--weighted average interest rate of 6.55% at December 31, 1994), due December 5, 1995(3)................................ 1,350 -- -- -- Commercial paper(4).................................. -- 864 -- 913 Other indebtedness................................... 20 203 19 247 Subordinated Debentures: 15% Subordinated Debentures, net of discount of $18 million at December 31, 1993........................... -- -- -- 280 Subordinated Discount Debentures, net of discount of $133 million at December 31, 1993.................. -- -- -- 1,393 Other Subordinated Debentures, fixed rate of 13 1/2%................................................... -- -- -- 277 -------- ----------- -------- -------- Total long-term debt(5).......................... $1,970 $ 8,883 $142 $ 12,005 -------- ----------- -------- -------- -------- ----------- -------- --------
- ------------ (1) The payment of debt through December 31, 1999 is due as follows (in millions): 1996--$143; 1997--$1,826; 1998--$217 and 1999--$612. (2) RJRN maintains a revolving credit facility of $6.0 billion, as amended (the "1991 Credit Agreement"), of which $4.25 billion was unused at December 31, 1994. At December 31, 1994, availability of the unused portion is reduced by $412 million for the extension of irrevocable letters of credit issued under the 1991 Credit Agreement and by $1.35 billion for borrowings under the Nabisco, Inc. credit agreement, dated as of December 6, 1994 (the "Nabisco 1994 Credit Agreement"). A commitment fee of 1/4% per annum is payable on the unused portion of the facility. (3) The Nabisco 1994 Credit Agreement provides a 364 day revolving credit facility of $1.5 billion of which $150 million was unused at December 31, 1994. A commitment fee of 1/5% per annum is payable on the full amount of the commitment. (4) RJRN maintains a back-up line of credit to support commercial paper issuances of up to $1 billion. Commercial paper outstanding in excess of $1 billion is supported by the 1991 Credit Agreement. (5) As a result of certain activities associated with RJRN's interest rate derivative instruments during 1994, the effective interest rate on certain debt may differ from that disclosed in the table. See Note 11 to the Consolidated Financial Statements. F-16 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED) ------------------- On May 15, 1992, RJR Nabisco Capital Corp. ("Capital") merged with and into its wholly-owned subsidiary, RJRN. As a result of the merger, RJR Nabisco Holdings Group, Inc. ("Group") became the direct parent of RJRN and RJRN assumed all of the obligations of Capital under the 1991 Credit Agreement and with respect to the following debt securities: Subordinated Discount Debentures due May 15, 2001 (the "Subordinated Discount Debentures"); 15% Payment-in-Kind Subordinated Debentures due May 15, 2001 (the "15% Subordinated Debentures"); 13 1/2% Subordinated Debentures due May 15, 2001 (the "13 1/2% Subordinated Debentures" and, collectively with the Subordinated Discount Debentures and the 15% Subordinated Debentures, the "Subordinated Debentures"); 10 1/2% Senior Notes due 1998 (the "10 1/2% Senior Notes"); 8.30% Senior Notes due April 15, 1999 (the "8.30% Senior Notes"); and 8.75% Senior Notes due April 15, 2004 (the "8.75% Senior Notes" and, collectively with the 8.30% Senior Notes, the "1992 Senior Notes"). Prior to this merger, RJRN had guaranteed all of Capital's obligations with respect to such indebtedness, and the financial statements of RJRN had reflected such indebtedness and all debt related costs. On December 17, 1992, Group merged with and into its wholly-owned subsidiary, RJRN. Also during 1992, Holdings entered into the following refinancing transactions: (i) the redemption on February 15, 1992 of $250 million principal amount of Capital's Subordinated Floating Rate Notes due 1999 (the "Subordinated Floating Rate Notes") at a price of $1,005 for each $1,000 principal amount of Subordinated Floating Rate Notes plus accrued and unpaid interest thereon, (ii) the early extinguishments by Capital of approximately $1 billion aggregate principal amount of certain of Capital's subordinated debentures in a privately negotiated transaction (the "1992 Capital Debenture Repurchase") for approximately $995 million in cash, consisting of $165 million aggregate principal amount of its 15% Subordinated Debentures, $85 million aggregate principal amount of its 13 1/2% Subordinated Debentures and $750 million aggregate principal amount (approximately $550 million accreted amount) of its Subordinated Discount Debentures, (iii) the issuance by Capital on April 9, 1992 of $600 million principal amount of 8.30% Senior Notes and $600 million principal amount of 8.75% Senior Notes and the application of substantially all of the net proceeds from the issuance of the 1992 Senior Notes to repay a portion of the funds temporarily drawn under the 1991 Credit Agreement for the redemption of the Subordinated Floating Rate Notes and for the 1992 Capital Debenture Repurchase, (iv) the retirement on May 15, 1992 of $225 million aggregate principal amount of Capital's Subordinated Extendible Reset Debentures due May 15, 1991 (the "Subordinated Reset Debentures") at a price of $1,010 for each $1,000 principal amount of Subordinated Reset Debentures plus accrued and unpaid interest thereon with the remaining proceeds available from the 1992 Senior Notes plus temporary borrowings under the 1991 Credit Agreement, which were repaid with proceeds of medium-term notes and (v) the additional repurchases during 1992 for approximately $1.822 billion in cash of certain of RJRN's subordinated debentures consisting of $690 million aggregate principal amount of its 15% Subordinated Debentures, $81 million aggregate principal amount of its 13 1/2% Subordinated Debentures and $941 million aggregate principal amount (approximately $728 million accreted amount) of its Subordinated Discount Debentures. The principal or accreted amount of the debentures in item (v) was refinanced with proceeds of debt securities maturing in the years 1999-2004. The purchase of most of such amount had been temporarily funded with borrowings under the 1991 Credit Agreement. Also during 1992, Holdings repurchased $126 million aggregate principal amount (approximately $209 million including accrued interest) of its Senior Converting Debentures due 2009 F-17 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED) (the "Converting Debentures") for $229 million in cash, and RJRN repurchased $229 million aggregate principal amount of various other debentures for $240 million in cash. The funds for the repurchase of Converting Debentures and various other debentures of RJRN and for a portion of the purchase price of the Subordinated Debentures in item (v) were provided from the issuance of medium- term notes maturing in the years 1995-1997, borrowings under the 1991 Credit Agreement and cash flow from operations. During 1993, RJRN repurchased for approximately $1.0 billion in cash certain of its subordinated debentures consisting of $153 million aggregate principal amount of its 15% Subordinated Debentures, $82 million aggregate principal amount of its 13 1/2% Subordinated Debentures and $768 million aggregate principal amount (approximately $671 million accreted amount) of its Subordinated Discount Debentures. The principal or accreted amounts of such debentures was refinanced from proceeds of debt securities maturing after 1998, including debt securities issued during 1993. The purchase of most of such amount had been temporarily funded with borrowings under the 1991 Credit Agreement. The remaining portion of a participation in an employee stock ownership plan established by Holdings (the "ESOP") was repurchased on January 15, 1993 for cash, plus accrued and unpaid interest thereon. Holdings redeemed on May 1, 1993, 100% of the aggregate principal amount of its outstanding Converting Debentures at a price of $1,000 for each $1,000 principal amount of Converting Debentures, plus accrued and unpaid interest thereon, for the period from February 9, 1989 through April 30, 1993, of $937.54 for each $1,000 principal amount of Converting Debentures. During 1993, RJRN issued $750 million principal amount of 8% Notes due 2000, $500 million principal amount of 8 3/4% Notes due 2005 and $500 million principal amount of 9 1/4% Debentures due 2013. Also during 1993, RJRN issued medium-term notes maturing in the years 1995-1998 having an aggregate initial offering price of approximately $230 million. The net proceeds from the sale of these debt securities and the Series B Preferred Stock Offering (as hereinafter defined) were used for general corporate purposes, which included refinancings of indebtedness, working capital, capital expenditures, acquisitions and repurchases and redemptions of securities. Pending such uses, proceeds were used to repay indebtedness under the 1991 Credit Agreement or for short-term liquid investments. A portion of the net proceeds collected from the sale of Holdings' ready-to-eat cold cereal business was used on February 5, 1993 to redeem $216 million principal amount of RJRN's 9 3/8% Sinking Fund Debentures due 2016 (the "9 3/8% Debenture") at a price of $1,065.63 for each $1,000 principal amount of 9 3/8% Debentures, plus accrued and unpaid interest thereon. On May 15, 1994, RJRN redeemed substantially all of its approximately $2 billion in outstanding subordinated debentures. The subordinated debentures redeemed consisted of the Subordinated Discount Debentures, the 15% Subordinated Debentures and the 13 1/2% Subordinated Debentures at redemption prices of 107 1/2%, 107 1/2% and 106 3/4%, respectively, plus accrued interest. Approximately $1.2 billion principal or accreted amount of such debentures was refinanced with proceeds of debt securities maturing after 1998 that were issued during 1993. Such proceeds had been used to temporarily reduce indebtedness under the 1991 Credit Agreement. In addition, the redemption of such debentures was funded with approximately $900 million of net proceeds from the sale of 266,750,000 Series C Depositary Shares F-18 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED) completed on May 6, 1994 in connection with the issuance of 26,675,000 shares of Series C Conversion Preferred Stock, par value $.01 per share ("Series C Preferred Stock"). On November 30, 1994, RJRN redeemed $1.5 billion of 10 1/2% Senior Notes; $373.5 million of 8 3/8% Sinking Fund Debentures due 2017 and approximately $24.8 million of 7 3/8% Sinking Fund Debentures due 2001. On December 2, 1994, RJRN redeemed $100 million of the 13 1/2% Subordinated Debentures. The redemption price for the 10 1/2% Senior Notes was equal to $1,071 plus accrued interest for each $1,000 principal amount of notes. The redemption price for the 8 3/8% Sinking Fund Debentures due 2017 was equal to $1,054.44 plus accrued interest for each $1,000 principal amount of debentures. The redemption price for the 7 3/8% Sinking Fund Debentures due 2001 was equal to $1,005.60 plus accrued interest for each $1,000 principal amount of debentures. The redemption price for the 13 1/2% Subordinated Debentures was equal to $1,067.50 plus accrued interest for each $1000 principal amount of debentures. These redemptions were funded with borrowings under the 1991 Credit Agreement, internally generated cash flow, and, in the case of the 8 3/8% Sinking Fund Debentures due 2017, proceeds from Holdings' Series C Preferred Stock offering. On December 7, 1994, Nabisco, Inc. borrowed $1.35 billion under the Nabisco 1994 Credit Agreement to repay a portion of Nabisco's intercompany indebtedness to RJRN. RJRN used the proceeds of the repayment to reduce borrowings under the 1991 Credit Agreement. The Registrants' credit agreement dated as of April 5, 1993, as amended (the "1993 Credit Agreement" and, together with the 1991 Credit Agreement, the "Credit Agreements"), under which commitments terminate on April 3, 1995, provides a back-up line of credit to support commercial paper issuances of up to $1 billion. Availability thereunder is reduced by an amount equal to the aggregate amount of domestic commercial paper outstanding. At December 31, 1994, approximately $864 million of commercial paper was outstanding. Accordingly, $136 million was available under the 1993 Credit Agreement at December 31, 1994. Holdings and RJRN expect to obtain bank consent to extend the maturity date of the 1993 Credit Agreement for an additional 364 days. Based on RJRN's intention and ability to continue to refinance, for more than one year, the amount of its commercial paper borrowings outstanding either in the commercial paper market or with additional borrowings under the 1991 Credit Agreement, the commercial paper borrowings have been included under "Long-term debt". The payment of dividends and the making of distributions by Holdings to its stockholders and by Nabisco to RJRN are subject to direct and indirect restrictions under certain financing agreements and debt instruments of the Registrants and their subsidiaries. With certain exceptions, the Nabisco 1994 Credit Agreement limits prepayments of Nabisco's indebtedness to RJRN and restricts dividends and distributions by Nabisco to $300 million plus 50% of Nabisco's cumulative consolidated net income since January 1, 1995. Loans and advances by Nabisco to RJRN are generally subject to a $100 million limit. The Nabisco 1994 Credit Agreement also limits the ability of Nabisco to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell certain assets and securities and engage in certain mergers or consolidations. These restrictions have not had and are not expected to have a material effect on the ability of Nabisco Holdings Corp. to pay its anticipated dividends to RJRN, or on the ability of RJRN to meet its obligations. F-19 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED) The Credit Agreements limit the payment of dividends by Holdings. Specifically, the Credit Areements generally restrict dividends and distributions by Holdings to $1 billion, plus 50% of cumulative consolidated net income since January 1, 1995, plus the net cash proceeds of up to $250 million in any twelve month period from issuances of its equity securities. The Credit Agreements and certain other financing agreements limit the ability of Holdings and its subsidiaries to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell or dispose of certain assets and certain subsidiaries' stock and engage in certain mergers or consolidations. Holdings and RJRN believe that they and their subsidiaries are currently in compliance with all convenants and restrictions imposed by the terms of their indebtedness. The estimated fair value of Holdings' consolidated long-term debt as of December 31, 1994 and 1993 was approximately $10.7 billion and $12.4 billion, respectively, based on available market quotes, discounted cash flows and book values, as appropriate. The estimated fair value is lower by $444 million and higher by $400 million than the carrying amounts of Holdings' long-term debt at December 31, 1994 and 1993, respectively, as a result of the level of market interest rates at December 31, 1994 and 1993 compared with the interest rates associated with Holdings' debt obligations. Considerable judgment was required in interpreting market data to develop the estimates of fair value. In addition, the use of different market assumptions and/or estimation methodologies may have had a material effect on the estimated fair value amounts. Accordingly, the estimated fair value of Holdings' consolidated long-term debt as of December 31, 1994 and 1993 is not necessarily indicative of the amounts that Holdings could realize in a current market exchange. NOTE 11--COMMITMENTS AND CONTINGENCIES TOBACCO-RELATED LITIGATION Various legal actions, proceedings and claims are pending or may be instituted against R. J. Reynolds Tobacco Company ("RJRT") or its affiliates or indemnitees, including those claiming that lung cancer and other diseases have resulted from the use of or exposure to RJRT's tobacco products. During 1994, 32 new actions were filed or served against RJRT and/or its affiliates or indemnitees and 14 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. A total of 54 such actions in the United States and one against RJRT's Canadian subsidiary were pending on December 31, 1994. As of February 17, 1995, 55 active cases were pending against RJRT and/or its affiliates or indemnitees, 54 in the United States and one in Canada. The United States cases are in 23 states and are distributed as follows: thirteen in Louisiana, eight in Texas, three in each of Indiana, Mississippi and Tennessee, two in each of Alabama, California, Florida, Minnesota, New Jersey and West Virginia and one in each of Colorado, Ohio, Illinois, Kansas, Washington, Oklahoma, Massachusetts, Nevada, South Carolina, New Hampshire, New York and Pennsylvania. Of the 54 active cases in the United States, 33 are pending in state court and 21 in federal court. Five of the 54 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. Seven cases, which are described more specifically below, purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, flight attendants alleging personal injury from F-20 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) exposure to environmental tobacco smoke in their workplace and, in one case, parents claiming that an RJRT advertising campaign constitutes an unfair trade practice. The plaintiffs in these actions seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligence, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, unjust enrichment, indemnity and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions of dollars, are specifically pleaded in 27 cases in addition to compensatory and other damages. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Liability and Advertising Act, as amended (the "Cigarette Act") of some or all such claims arising after 1969; the lack of any defect in the product; assumption of the risk; comparative fault; lack of proximate cause; and statutes of limitations or repose. Juries have found for plaintiffs in two smoking and health cases in which RJRT was not a defendant, but in one such case, which has been appealed by both parties, no damages were awarded. The jury awarded plaintiffs $400,000 in the other such case, Cipollone v. Liggett Group, Inc., et al., which award was overturned on appeal and the case was subsequently dismissed. On June 24, 1992, the United States Supreme Court in Cipollone held that claims that tobacco companies failed to adequately warn of the risks of smoking after 1969 and claims that their advertising and promotional practices undermined the effect of warnings after that date were preempted by the Cigarette Act. The Court also held that claims of breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's decision was announced through a plurality opinion, and further definition of how Cipollone will apply to other cases must await rulings in those cases. Certain legislation proposed in recent years in Congress, among other things, would eliminate any such preemptive effect on common law damage actions for personal injuries. RJRT is unable to predict whether such legislation will be enacted and, if so, in what form, or whether such legislation would be intended by Congress to apply retroactively. The passage of such legislation could increase the number of cases filed against cigarette manufacturers, including RJRT. Set forth below are descriptions of class action lawsuits, a suit in which plaintiffs seek to act as private attorneys general, actions brought by state attorneys general in Minnesota, Mississippi and West Virginia, an action brought by the State of Florida and pending investigations relating to RJRT's tobacco business. In 1991, in Broin v. Philip Morris Company, Inc. et al., a purported class action against certain tobacco industry defendants, including RJRT, was brought by flight attendants, claiming to represent a class of 60,000 individuals, alleging personal injury caused by exposure to environmental tobacco smoke in their workplace. In December 1994, the Florida state court certified a class consisting of "all non-smoking flight attendants who are or have been employed by airlines based in the United States and are suffering from diseases and disorders caused by their exposure to secondhand cigarette smoke in airline cabins." The defendants have appealed the ruling to the Florida Third District Court of Appeal. In March 1994, Castano v. The American Tobacco Company, et. al., a purported class action, was filed in the United States District Court for the Eastern District of Louisiana against tobacco industry defendants, including RJRT, seeking certification of a class action on behalf of all United States residents who allegedly are or claim to be addicted, or are the legal survivors of persons who allegedly F-21 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) were addicted, to tobacco products manufactured by defendants. The complaint alleges that cigarette manufacturers manipulated the levels of nicotine in their tobacco products to induce addiction in smokers. Plaintiffs' motion for certification of the class was granted in part on February 17, 1995. The district court certified core liability issues (fraud, negligence, breach of warranty, both express and implied, intentional tort, strict liability and consumer protection statutes), and punitive damages. Not certified were issues of injury-in-fact, proximate cause, reliance, affirmative defenses, and compensatory damages. The defendants plan to pursue appellate remedies. In March 1994, Lacey v. Lorillard Tobacco Company, Inc., et. al. a purported class action, was filed in Circuit Court, Fayette County, Alabama against three cigarette manufacturers, including RJRT. Plaintiff, who claims to represent all smokers who have smoked or are smoking cigarettes manufactured and sold by defendants in the state of Alabama, seeks compensatory and punitive damages not to exceed $48,500 per class member and injunctive relief arising from defendants' alleged failure to disclose additives used in their cigarettes. In April 1994, defendants removed the case to the United States District Court for the Northern District of Alabama. In April 1994, Sparks v. R.J. Reynolds Tobacco Company, et al. was brought in Washington state court on behalf of a purported class of "parents with a conscience" alleging that an RJRT advertising campaign targets minors and constitutes an unfair trade practice under Washington state law. In 1994, the case was removed to the United States District Court for the Western District of Washington. Defendants' motion to dismiss the case on preemption grounds was granted on December 9, 1994. Plaintiffs have filed a notice of appeal. In May 1994, Engle v. R.J. Reynolds Tobacco Company, et al., was filed in Circuit Court, Eleventh Judicial District, Dade County, Florida against tobacco manufacturers, including RJRT, and other members of the industry, by plaintiffs who allege injury and purport to represent a class of all United States citizens and residents who claim to be addicted, or who claim to be legal survivors of persons who allegedly were addicted, to tobacco products. On October 28, 1994, a state court judge in Miami granted plaintiffs' motion to certify the class. The defendants have appealed that ruling to the Florida Third District Court of Appeal. In September 1994, Granier v. American Tobacco Company, et al., a purported class action apparently patterned after the Castano case, was filed in the United States District Court for the Eastern District of Louisiana against tobacco industry defendants, including RJRT. Plaintiffs seek certification of a class action on behalf of all residents of the United States who have used and purportedly became addicted to tobacco products manufactured by defendants. The complaint alleges that cigarette manufacturers manipulated the levels of nicotine in tobacco products for the purpose of addicting consumers. By agreement of the parties, all action in this case was stayed pending determination of the motion for class certification in the Castano case. In January 1995, a purported class action was filed in the Ontario Canada Court of Justice against RJR-MacDonald, Inc. and two other Canadian cigarette manufacturers. The lawsuit, Le Tourneau, et al. v. Imperial Tobacco Company, Ltd., et al., seeks certification of a class of persons who have allegedly become addicted to the nicotine in cigarettes or who had such alleged addiction heightened or maintained through the use of cigarettes, and who have allegedly suffered loss, injury, and damage in consequence, together with persons with Family Law Act claims in respect to the claims of such allegedly addicted persons, and the estates of such allegedly addicted persons. Theories of recovery F-22 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) pleaded include negligence, strict liability, failure to warn, deceit, negligent misrepresentation, implied warranty, and conspiracy. The relief sought consists of damages of three million dollars, punitive damages, funding of nicotine addiction rehabilitation centers, interest and costs. As of February 21, 1995, RJR-MacDonald, Inc. had not yet been served with a copy of the complaint. In March 1994, Allman v. Philip Morris, Inc., et al. and Higley v. Philip Morris, Inc., et al. were filed in the United States District Court for the Southern District of California against industry members and others, including RJRT, on behalf of a purported class of persons claiming to be addicted to cigarettes who had been prescribed treatment using the nicotine transdermal system. Plaintiffs assert a violation of the Racketeer Influenced and Corrupt Organizations Act and claim unspecified actual and treble damages. In April 1994, the two cases were combined into a single amended complaint and plaintiffs' counsel agreed to dismiss the Higley case. On September 28, 1994, the court granted the defendants' motion to dismiss the remaining case with prejudice. Plaintiffs filed a notice of appeal, but the parties later stipulated to a dismissal. An order was entered on February 13, 1995 dismissing the case. In June 1994, in Mangini v. R.J. Reynolds Tobacco Company, et al., the California Supreme Court ruled that the plaintiffs' claim that an RJRT advertising campaign constitutes unfair competition under the California Business and Professions Code was not preempted by the Cigarette Act. The suit is similar to the Sparks case pending in Washington, except that the plantiffs here are acting as private attorneys general rather than on behalf of a purported class. This opinion allows plaintiffs to pursue their lawsuit which had been dismissed at the trial court level. On September 28, 1994, the defendants in this case filed a Petition for Certiorari to the United States Supreme Court, which was denied on December 28, 1994. The case has been remanded to the trial court where additional defendants, including RJRN, have been added. In June 1994, in Moore v. The American Tobacco Company, et al., RJRN and RJRT were named along with other industry members as defendants in an action brought by the Mississippi state attorney general on behalf of the state to recover state funds paid for health care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. This suit, which was brought in Chancery (non-jury) Court, Jackson County, Mississippi also seeks an injunction from "promoting" or "aiding and abetting" the sale of cigarettes to minors. Both actual and punitive damages are sought in unspecified amounts. Motions by the defendants to dismiss the case or to transfer it to circuit (jury) court were denied on February 21, 1995 and the case will proceed in Chancery Court. The defendants are considering their options regarding appeal. In August 1994, RJRT and other U.S. cigarette manufacturers were named as defendants in an action instituted on behalf of the state of Minnesota and on behalf of Blue Cross and Blue Shield of Minnesota to recover the costs of medical expenses paid by the state and by Blue Cross/Blue Shield that were incurred in the treatment of diseases allegedly caused by cigarette smoking. The suit, Minnesota v. Philip Morris, et al., alleges consumer fraud, unlawful and deceptive trade practices, false advertising and restraint of trade, and it seeks injunctive relief and money damages, trebled for violations of the state antitrust law. In September 1994, the Attorney General of West Virginia filed suit against RJRT, RJRN and twenty-one additional defendants in state court in West Virginia. The lawsuit, McGraw v. American Tobacco Company, et al., is similar to those previously filed in Mississippi and Minnesota. It seeks F-23 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) recovery for medical expenses incurred by the state in the treatment of diseases statistically associated with cigarette smoking and requests an injunction against the promotion and sale of cigarettes and tobacco products to minors. The lawsuit also seeks a declaration that the state of West Virginia, as plaintiff, is not subject to the defenses of statute of repose, statute of limitations, contributory negligence, comparative negligence, or assumption of the risk. On February 21, 1995, the state of Florida filed a suit against RJRT and RJRN, along with other industry members, their holding companies and other entities. The state is seeking Medicaid reimbursement under various theories of liability and injunctive relief to: prevent the defendants from engaging in consumer fraud; disclose and publish all research conducted directly or indirectly by the industry; fund a corrective public education campaign on the issues of smoking and health in Florida; prevent the distribution and sale of cigarettes to minors under the age of eighteen; fund clinical smoking cessation programs in the state of Florida; dissolve the Council for Tobacco Research and the Tobacco Institute or divest ownership, sponsorship, or membership in both; and disgorge all profits from sales of cigarettes in Florida. Neither RJRT nor RJRN has been served with a copy of the complaint as of February 21, 1995. The suit by the state of Florida was brought under a statute which was amended effective July 1994 to allow the state to bring an action in its own name against the tobacco industry to recover amounts paid by the state under its Medicaid program to treat illnesses statistically associated with cigarette smoking. The amended statute does not require the state to identify the individual who received medical care, permits a lawsuit to be filed as a class action and eliminates the compartive negligence and assumption of risk defenses. The Florida statute is being challenged on state and federal constitutional grounds in a lawsuit brought by Philip Morris Companies Inc., Associated Industries of Florida, Publix Supermarkets, and National Association of Convenience Stores in June 1994. On February 20, 1995, RJRT and Philip Morris Incorporated filed a petition with the Supreme Court of Florida to prohibit Florida's Agency for Health Care Administration and the Department of Business and Professional Regulation from filing and maintaining a lawsuit against the tobacco industry under this statute. RJRT understands that a grand jury investigation being conducted in the Eastern District of New York is examining possible violations of criminal law in connection with activities relating to the Council for Tobacco Research--USA, Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this investigation. RJRT received a civil investigative demand dated January 11, 1994 from the U.S. Department of Justice requesting broad documentary information from RJRT. Although the request appears to focus on tobacco industry activities in connection with product development efforts, it also requests general information concerning contacts with competitors. RJRT is unable to predict the outcome of this investigation. ------------------- Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJRT or its affiliates or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and increase the number of such claims. Although it is impossible to predict the outcome of such events or their effect on RJRT, a significant increase in litigation activities could have an adverse effect on RJRT. RJRT believes that it has a number of valid defenses to any such F-24 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) actions, including but not limited to those defenses based on preemption under the Cipollone decision, and RJRT intends to defend vigorously all such actions. The Registrants believe that the ultimate outcome of all pending litigation matters should not have a material adverse effect on the financial position of either of the Registrants; however, it is possible that the results of operations or cash flows of the Registrants in particular quarterly or annual periods or the financial condition of the Registrants could be materially affected by the ultimate outcome of certain pending litigation matters. Management is unable to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. COMMITMENTS At December 31, 1994, other commitments totalled approximately $556 million, principally for minimum operating lease commitments, the purchase of machinery and equipment and other contractual arrangements. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT CONCENTRATIONS OF CREDIT RISK Certain financial instruments with off-balance sheet risk have been entered into by RJRN to manage its interest rate and foreign currency exposures. Interest Rate Arrangements RJRN manages its interest rate exposure by adjusting its mix of floating rate debt and fixed rate debt. As part of such management of interest rate exposure, RJRN has entered into interest rate swaps, options, caps and other interest rate arrangements, including written options and other financial instruments having a risk profile substantially similar to written options. As a result of the impact of higher market interest rates during 1994, RJRN recognized additional interest expense of approximately $22 million associated with its interest rate derivative instruments. However, such interest rate derivative instruments resulted in lower interest expense during 1993 and 1992 of approximately $70 million and $15 million, respectively. Included in the 1994 additional interest expense is approximately $45 million related to RJRN'S outstanding written options and interest rate derivatives with embedded written optionality, all of which were canceled during 1994. Also as part of RJRN's ongoing management of its interest rate exposure during 1994, RJRN effectively neutralized the effects of any further changes in market interest rates on the remainder of its outstanding derivative interest rate instruments (approximately $1.8 billion notional amount at December 31, 1994) through the purchase of offsetting positions (approximately $1.8 billion notional amount at December 31, 1994). Accordingly, as a result of higher interest rates on the above instruments, approximately $39 million, $28 million and $5 million of additional interest expense remains to be recognized in 1995, 1996 and 1997, respectively. At December 31, 1994 and 1993, RJRN had outstanding interest rate swaps, options, caps and other interest rate arrangements with financial institutions having a total gross notional principal amount of $3.6 billion and $5.7 billion, respectively. Although the F-25 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) arrangements outstanding at December 31, 1994 have a net notional amount of $0, these arrangements mature as follows:
NOTIONAL PRINCIPAL AMOUNT ---------------------------------------------------- TYPE OF INSTRUMENT 1995 1996 1997 1998 TOTAL - --------------------------------------- ---- ------ ------ ------ ------ (AMOUNTS IN MILLIONS) Variable rate pay swaps................ $400 $ 600 $ 750 $ 50 $1,800 Fixed rate pay swaps................... 400 600 750 50 1,800 ---- ------ ------ ------ ------ $800 $1,200 $1,500 $ 100 $3,600 ---- ------ ------ ------ ------ ---- ------ ------ ------ ------
In 1994, RJRN adopted a policy to utilize interest rate derivative transactions that will adjust the mix of floating rate debt and fixed rate debt on a one for one basis. The estimated fair value of these arrangements as of December 31, 1994 and 1993 was unfavorable by approximately $72 million and favorable by approximately $37 million, respectively, based on calculations from independent third parties for similar arrangements. When interest rate swaps and purchased options and other interest rate arrangements effectively hedge interest rate exposures, the differential to be paid or received is accrued and recognized in interest expense and may change as market interest rates change. If an arrangement is terminated or effectively terminated prior to maturity, then the realized or unrealized gain or loss is effectively recognized over the remaining original life of the agreement if the hedged item remains outstanding, or immediately, if the underlying hedged instrument does not remain outstanding. If the arrangement is not terminated or effectively terminated prior to maturity, but the underlying hedged instrument is no longer outstanding, then the unrealized gain or loss on the related interest rate swap, option, cap or other interest rate arrangement is recognized immediately. In addition, for written options and other financial instruments (or components thereof) having a risk profile substantially similar to written options, changes in market value result in the current recognition of any related gains or losses. Foreign Currency Arrangements At December 31, 1994 and 1993, RJRN had outstanding forward foreign exchange contracts with banks to purchase or sell an aggregate notional principal amount of $807 million and $476 million, respectively. Such contracts were primarily entered into to hedge future commitments. The purpose of RJRN's foreign currency hedging activities is to protect RJRN from risk that the eventual dollar cash flows resulting from transactions with international parties will be adversely affected by changes in exchange rates. The estimated fair value of these arrangements as of December 31, 1994 and 1993 was unfavorable by approximately $4 million and favorable by approximately $3 million, respectively, based on calculations from independent third parties for similar arrangements. The forward foreign exchange contracts and other hedging arrangements entered into by RJRN generally mature at the time the hedged foreign currency transactions are settled. Gains or losses on forward foreign currency transactions are determined by changes in market rates and are generally included at settlement in the basis of the underlying hedged transaction. To the extent that the foreign currency transaction does not occur, gains and losses are recognized immediately. F-26 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) The above interest rate and foreign currency arrangements entered into by RJRN involve, to varying degrees, elements of market risk as a result of potential changes in future interest and foreign currency exchange rates. To the extent that the financial instruments entered into remain outstanding as effective hedges of existing interest rate and foreign currency exposure, the impact of such potential changes in future interest and foreign currency exchange rates on the financial instruments entered into would offset the related impact on the items being hedged. Also, RJRN may be exposed to credit losses in the event of non-performance by the counterparties to these financial instruments. However, RJRN continually monitors its positions and the credit rating of its counterparties and therefore, does not anticipate any non-performance. There are no significant concentrations of credit risk with any individual counterparties or groups of counterparties as a result of any financial instruments entered into including those financial instruments discussed above. SUMMARY FINANCIAL INSTRUMENTS FAIR VALUE INFORMATION At December 31, 1994, the carrying amounts and estimated fair values of RJRN's financial instruments were as follows:
ASSETS/(LIABILITIES) ---------------------------- FINANCIAL INSTRUMENTS CARRYING VALUE FAIR VALUE - -------------------------------------------------------------------- -------------- ---------- (AMOUNTS IN MILLIONS) Interest rate swaps: Variable rate pay swaps........................................... $ (2) $ (76) -------------- ---------- Fixed rate pay swaps.............................................. $ -- $ 4 -------------- ---------- Forward foreign exchange contracts.................................. $ (1) $ (4) -------------- ---------- Total debt.......................................................... $(11,161) $ (10,717) -------------- ----------
F-27 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL The changes in Common Stock and paid-in capital are shown as follows:
1994 1993 ------------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT ------------- ------- ------------- ------ (DOLLARS IN MILLIONS) Common Stock--$0.01 par value--authorized 2,200,000,000 shares at December 31, 1994: Balance at beginning of year.................................... 1,138,011,292 $ 11 1,134,648,542 $ 11 Shares issued during the period................................. 13,907,874 -- 3,692,911 -- Conversion of Series A Preferred Stock.......................... 210,000,000 2 -- -- Management shares repurchased and cancelled..................................................... (262,283) -- (330,161) -- ------------- ------- ------------- ------ Balance at end of year...................................... 1,361,656,883 $ 13 1,138,011,292 $ 11 ------------- ------- ------------- ------ ------------- ------- ------------- ------ Paid-in capital: Balance at beginning of year.................................... $ 8,778 $9,048 Shares issued during the period, net of stock issuance costs.... 1,754 (16) Tax benefits recorded on shares issued to management and ESOP shares allocated................................................. 9 3 Management shares and stock options repurchased and cancelled... (1) (2) Preferred stock dividends....................................... (393) (246) Warrants repurchased and cancelled.............................. -- -- Other........................................................... -- (9) ------- ------ Balance at end of year...................................... $10,147 $8,778 ------- ------ ------- ------ 1992 ------------------------ SHARES AMOUNT ------------- ------ Common Stock--$0.01 par value--authorized 2,200,000,000 shares at December 31, 1994: Balance at beginning of year.................................... 1,121,658,569 $ 11 Shares issued during the period................................. 13,117,248 -- Conversion of Series A Preferred Stock.......................... -- -- Management shares repurchased and cancelled..................................................... (127,275) -- ------------- ------ Balance at end of year...................................... 1,134,648,542 $ 11 ------------- ------ ------------- ------ Paid-in capital: Balance at beginning of year.................................... $9,352 Shares issued during the period, net of stock issuance costs.... (8 ) Tax benefits recorded on shares issued to management and ESOP shares allocated................................................. 4 Management shares and stock options repurchased and cancelled... (6 ) Preferred stock dividends....................................... (207 ) Warrants repurchased and cancelled.............................. (87 ) Other........................................................... -- ------ Balance at end of year...................................... $9,048 ------ ------
The changes in stock options are shown as follows:
1994 1993 1992 --------------------------- --------------------------- -------------------------- OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ----------- ----------- ---------- ------------ ---------- ----------- Balance at beginning of year: Stock Option Plan...................... 23,240,112 $5.00-10.45 25,355,948 $ 5.00-10.45 25,814,648 $5.00- 5.75 Long Term Incentive Plan............... 64,632,634 4.52-11.56 19,654,600 7.50-11.56 12,990,600 7.50-11.63 Options granted to management investors and directors: Stock Option Plan...................... 160,800 6.88 2,400 5.00 Long Term Incentive Plan............... 1,777,000 5.50-7.44 49,213,100 4.52- 9.13 7,004,000 8.25-10.125 Management options exercised: Stock Option Plan...................... (4,594,737) 5.00-5.75 (1,116,046) 5.00 Long Term Incentive Plan............... (35,855) 5.56 Management options repurchased and cancelled: Stock Option Plan...................... (32,813) 5.00-11.25 (999,790) 5.00- 8.55 (461,100) 5.00-10.45 Long Term Incentive Plan............... (4,315,524) 5.56-10.13 (4,235,066) 5.56-10.00 (340,000) 7.50-11.63 ----------- ---------- ---------- Balance at end of year: Stock Option Plan...................... 18,773,362 5.00-10.45 23,240,112 5.00-10.45 25,355,948 5.00-10.45 Long Term Incentive Plan............... 62,058,255 4.52-11.56 64,632,634 4.52-11.56 19,654,600 7.50-11.56 ----------- ---------- ---------- 80,831,617 4.52-11.56 87,872,746 4.52-11.56 45,010,548 5.00-11.56 ----------- ---------- ---------- ----------- ---------- ----------
At December 31, 1994, options were exercisable as to 43,974,207 shares, compared with 20,018,041 shares at December 31, 1993, and 15,590,909 shares at December 31, 1992. As of December 31, 1994, options for 100,351,127 shares of Common Stock were available for future grant. F-28 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED) To provide an incentive to attract and retain key employees responsible for the management and administration of the business affairs of Holdings and its subsidiaries, on June 15, 1989 the board of directors of Holdings adopted the Stock Option Plan for Directors and Key Employees of RJR Holdings Corp. and Subsidiaries (the "Stock Option Plan") pursuant to which options to purchase Common Stock may be granted. On June 16, 1989 the Stock Option Plan was approved by the written consent of the holders of a majority of the Common Stock. Non-employee directors or key employees of Holdings or any subsidiary of Holdings are eligible to be granted options under the Stock Option Plan. A maximum of 30,000,000 shares of Common Stock (which may be adjusted in the event of certain capital changes) may be issued under the Stock Option Plan. The options to key employees granted under the Stock Option Plan generally vest over a five year period and the exercise price of such options is generally the fair market value of the Common Stock on the date of grant. Each eligible director is, upon becoming a director, granted an option under the Stock Option Plan to purchase 30,000 shares of Common Stock. The options have an exercise price equal to the fair market value of the Common Stock on the date of grant. They cannot be exercised for six months following the date of grant but, thereafter, are exercisable for ten years from the date of grant. In addition, each eligible director receives an annual grant of stock options which, beginning in 1995, will be made on the date of the director's election or re-election to the Board of Directors. The annual grant is intended to deliver a predetermined value, and the number of shares of Common Stock subject to the option is determined based on an internal valuation methodology. In 1994, each eligible director received a stock option to purchase 5,900 shares of Common Stock. The annually granted stock options have a 15 year term and vest over three years (33% on the first and second anniversaries of the date of grant and 34% on the third anniversary). On August 1, 1990, the board of directors of Holdings adopted the 1990 Long Term Incentive Plan (the "1990 LTIP") which was approved on such date by the written consent of the holders of a majority of the Common Stock. The 1990 LTIP authorizes grants of incentive awards ("Grants") in the form of "incentive stock options" under Section 422 of the Internal Revenue Code, other stock options, stock appreciation rights, restricted stock, purchase stock, dividend equivalent rights, performance units, performance shares or other stock-based grants. Awards under the 1990 LTIP may be granted to key employees of, or other persons having a unique relationship to, Holdings and its subsidiaries. Directors who are not also employees of Holdings and its subsidiaries are ineligible for Grants. A maximum of 105,000,000 shares of Common Stock (which may be adjusted in the event of certain capital changes) may be issued under the 1990 LTIP pursuant to Grants. The 1990 LTIP also limits the amount of shares which may be issued pursuant to "incentive stock options" and the amount of shares subject to Grants which may be issued to any one participant. As of December 31, 1994, purchase stock, stock options other than incentive stock options, restricted stock, performance shares, performance units and other stock-based grants have been granted under the 1990 LTIP. The options granted before 1993 under the 1990 LTIP generally will vest over a three year period ending December 31, 1995. Prior to January 1, 1993, such options had vested over a six to eight year period. Options granted in 1994 vest over a three year period beginning from the date of grant. The exercise prices of such options are between $5.50 and $7.44 per share. In connection with the purchase stock grants awarded during 1994, 1993 and 1992, 0 shares, 622,222 shares and 495,000 shares, respectively, of Common Stock were purchased and options to purchase four shares were granted for every share of such Common Stock purchased. In addition, arrangements were made enabling purchasers to borrow on a secured basis from Holdings the price of the stock purchased, as well as the taxes due on any taxable income F-29 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED) recognized in connection with such purchases. The current annual interest rate on such arrangements, which was set in July 1994 at the then applicable federal rate for long-term loans, is 6.37%. These borrowings plus accrued interest and taxes must generally be repaid within two years following termination of active employment. During 1994, 4,420,500 shares of Common Stock were awarded in connection with restricted stock grants made. These shares are subject to restrictions that will lapse on July 15, 1997 (or earlier under certain circumstances). Other stock-based awards were made in 1994 under the 1990 LTIP to individuals who previously acquired certain purchase stock under the 1990 LTIP. Under this program, such individuals receive grants of Common Stock or cash at the Company's election on either three or four annual grant dates beginning July 1994 and ending either July 1, 1996 or July 1, 1997. The fair market value of Common Stock to be awarded on each grant date is equal to the excess, if any, of (i) 33% or 25%, respectively, of the maximum amount the individual could have borrowed to acquire purchase stock, over (ii) the then fair market value of the same percentage of such individual's purchase stock. The grant is increased by the amount of presumed borrowing costs and the amount necessary to hold the individual harmless from income taxes due as a result of the grant. No grant will be made on a grant date if, on such grant date, the amount determined under clause (ii) above equals or exceeds the amount determined in clause (i) above. In connection with the initial public offering of shares of Nabisco in January 1995, the board of directors of Nabisco adopted the Nabisco Holdings Corp. 1994 Long Term Incentive Plan (the "Nabisco LTIP") which is substantially similar to the LTIP except that stock-based awards are denominated in shares of Class A Common Stock of Nabisco. On January 19, 1995 and on January 27, 1995, employees of Nabisco with outstanding stock options under the LTIP were permitted to elect to surrender 100% of their outstanding LTIP stock options in exchange for the grant of options under the Nabisco LTIP. Charles M. Harper, as chairman of the board of directors of Nabisco, was permitted to surrender 50% of his outstanding LTIP options on January 19, 1995 in exchange for Nabisco LTIP options. Options to purchase a total of 24,686,068 shares of Common Stock were surrendered pursuant to this program. Also on January 19, 1995, Holdings purchased one-half of Mr. Harper's restricted LTIP purchase shares (311,111 shares) at the then fair market value ($5.625 per share), and he used the proceeds to acquire similarly restricted shares of Class A Common Stock of Nabisco. In addition to the shares purchased under the 1990 LTIP, approximately 550,000 shares of Common Stock were sold during 1991 to certain management investors. No such sales occurred in 1993 or 1994. Unlike the shares sold under the 1990 LTIP, a portion of these shares remain subject to significant restrictions on transferability. At December 31, 1994, Holdings' outstanding classes of capital stock consisted of the following: the Common Stock, the Series B Cumulative Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), and the ESOP Convertible Preferred Stock, stated value of $16.00 per share and par value of $.01 per share (the "ESOP Preferred Stock"). In addition, Holdings had its Cumulative Convertible Preferred Stock, stated value of $25 per share and par value of $.01 per share (the "Cumulative Convertible Preferred Stock"), outstanding until the fourth quarter of 1993 and its Series A Conversion Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), outstanding until the fourth quarter of 1994. All of the classes of preferred stock of Holdings rank senior to the Common Stock as to dividends and preferences in liquidation. Holdings' charter authorized 150,000,000 preferred shares at December 31, 1994 and 1993. F-30 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED) On November 1, 1990, Holdings issued and/or registered 72,032,000 shares of the Cumulative Convertible Preferred Stock. The Cumulative Convertible Preferred Stock paid cash dividends at a rate of 11.5% of stated value per annum, payable quarterly in arrears commencing January 15, 1991. The Cumulative Convertible Preferred Stock was convertible after May 1, 1991 into shares of Common Stock at a conversion price of $9 of stated value per share of Common Stock. Holders of the Cumulative Convertible Preferred Stock converted 379 shares of the stock into 1,051 shares of Common Stock during 1992 and another 123,523 shares into 342,976 shares of Common Stock during 1993. On December 6, 1993, the outstanding Cumulative Convertible Preferred Stock was redeemed at a redemption price of $27.0125 per share plus accrued and unpaid dividends. On November 8, 1991, Holdings issued 52,500,000 shares of Series A Preferred Stock and sold 210,000,000 Series A Depositary Shares, each of which represented one-quarter of a share of Series A Preferred Stock. Each share of Series A Preferred Stock paid cash dividends at a rate of $3.34 per annum, payable quarterly in arrears commencing February 18, 1992. On November 15, 1994, the 210,000,000 Series A Depository Shares converted automatically into 210,000,000 shares of Common Stock. On August 18, 1993, Holdings issued 50,000 shares of Series B Preferred Stock, and sold 50,000,000 depositary shares ("Series B Depositary Shares") at $25 per Series B Depositary Share ($1.25 billion) in connection with such issuance (the "Series B Preferred Stock Offering"). Each share of Series B Preferred Stock bears cumulative cash dividends at a rate of $2,312.50 per annum, or $2.3125 per Series B Depositary Share, and is payable quarterly in arrears commencing December 1, 1993. Each Series B Depositary Share represents .001 ownership interest in a share of Series B Preferred Stock of Holdings. At Holdings' option, on or after August 19, 1998, Holdings may redeem shares of the Series B Preferred Stock (and the Depositary will redeem the number of Series B Depositary Shares representing the shares of Series B Preferred Stock) at a redemption price equivalent to $25 per Series B Depositary Share plus accrued and unpaid dividends thereon. Holdings' ability to redeem the Series B Preferred Stock is subject to certain restrictions in its credit agreements. On May 6, 1994, Holdings completed the issuance of 26,675,000 shares of Series C Preferred Stock in connection with the sale of 266,750,000 Series C Depositary Shares at $6.50 per depositary share. Approximately $900 million of the net proceeds from the sale of the Series C Depositary Shares was applied to the redemption of RJRN's subordinated debentures on May 15, 1994. The remaining proceeds from the sale of the Series C Depositary Shares were used to repay indebtedness under the 1991 Credit Agreement and for short-term liquid investments until they were applied to redeem certain of RJRN's sinking fund debentures. Each share of Series C Preferred Stock bears cumulative cash dividends at a rate of $6.012 per annum, or $.6012 per Series C Depositary Share, payable quarterly in arrears. Each Series C Depositary Share represents a one tenth ownership interest in a share of Series C Preferred Stock of Holdings. Each share of Series C Preferred Stock will mandatorily convert into ten shares of Holdings Common Stock on May 15, 1997, subject to adjustment in certain events, plus accrued and unpaid dividends thereon. In addition, at Holdings' option, Holdings may redeem shares of the Series C Preferred Stock (and the Depositary will redeem the number of Series C Depositary Shares representing such shares of Series C Preferred Stock) at a redemption price to be paid in shares of Holdings Common Stock (or, following certain circumstances, other consideration), plus accrued and F-31 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED) unpaid dividends. The optional redemption price declines from $112.286 per share by $.01656 per share on each day following May 6, 1994 to $95.246 per share on March 15, 1997 and is $94.25 thereafter. On April 10, 1991, the ESOP borrowed $250 million from Holdings (the "ESOP Loan") to purchase 15,625,000 shares of ESOP Preferred Stock. The ESOP Loan, which was renegotiated in 1993, has a final maturity in 2006 and bears interest at the rate of 8.2% of its stated value per annum. At December 31, 1994, the ESOP Preferred Stock is convertible into 15,315,130 shares of Common Stock, subject to adjustment in certain events, and bears cumulative dividends at a rate of 7.8125% of stated value per annum at least until April 10, 1999, payable semi-annually in arrears commencing January 2, 1992, when, as and if declared by the board of directors of Holdings. The ESOP Preferred Stock is redeemable at the option of Holdings, in whole or in part, at any time on or after April 10, 1999, at an initial optional redemption price of $16.250 per share. The initial optional redemption price declines thereafter on an annual basis in the amount of $.125 a year to $16 per share on April 10, 2001, plus accrued and unpaid dividends. Holders of ESOP Preferred Stock have voting rights with respect to certain matters submitted to a vote of the holders of the Common Stock. Effective January 1, 1992, RJRN's matching contributions to eligible employees under its Capital Investment Plan are being made in the form of ESOP Preferred Stock. RJRN's matching contribution obligation in respect of each participating employee is equal to $.50 for every pre-tax dollar contributed by the employee, up to 6% of the employee's pay. The shares of ESOP Preferred Stock are allocated at either the floor value of $16 a share or the fair market value of Common Stock, whichever is higher. During 1994 and 1993, approximately $22 million and $29 million, respectively, was contributed to the ESOP by RJRN or Holdings and approximately $19 million and $20 million, respectively, of ESOP dividends were used to service the ESOP's debt to Holdings. On February 9, 1989, 15,254,238 warrants were issued to purchase 15,254,238 shares of Common Stock. Such warrants were initially exercisable at an exercise price of $5.00 per share, subject to adjustment in certain events, at any time prior to February 9, 1999. On November 8, 1991, the exercise price for the warrants and the number of shares of Common Stock issuable upon exercise thereof were adjusted to $4.9164 and 1.017, respectively. During the third quarter of 1992, Holdings repurchased from a limited partnership of which KKR Associates, an affiliate of Kohlberg Kravis Roberts & Co., L.P, is the sole general partner and certain affiliates of Merrill Lynch & Co., Inc. 6,182,586 warrants of the 15,254,238 warrants issued on February 9, 1989 for approximately $36 million in cash. During October 1992, Holdings repurchased from the same parties the remaining 9,071,652 warrants for approximately $51 million in cash. Each of these warrants allowed the holder to purchase 1.017 shares of Common Stock for an exercise price of $4.9164 at any time on or prior to February 8, 1999. Warrants to purchase 45,529,024 shares of Common Stock were issued in connection with the sale of the 15% Subordinated Debentures and the Subordinated Discount Debentures. Such warrants were initially exercisable at an exercise price of $0.07 per share, subject to adjustment in certain events, and expired January 31, 1992. On November 8, 1991, the exercise price for the warrants and the number of shares of Common Stock issuable upon exercise thereof were adjusted to $0.0688 and 1.017, respectively. During 1992, 12,370,936 warrants were exercised at $0.0688 per share. The pro forma net income (loss) per common and common equivalent share for each of the years within the three year period ended December 31, 1994 reflects a one-for-five reverse split approved by the Board of Directors of Holdings which will be submitted to Holdings' stockholders for approval at its Annual Meeting in April 1995. (See Note 17 to the Consolidated Financial Statements). F-32 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 13--RETAINED EARNINGS AND CUMULATIVE TRANSLATION ADJUSTMENTS Retained earnings (accumulated deficit) at December 31, 1994, 1993 and 1992 includes non-cash expenses related to accumulated trademark and goodwill amortization of $3.644 billion, $3.015 billion and $2.390 billion, respectively. The changes in cumulative translation adjustments are shown as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Balance at beginning of period......................... $ (102) $ (47) $ 11 Translation and other adjustments.................... (62) (55) (58) ------ ------ ----- Balance at end of period............................... $ (164) $ (102) $(47) ------ ------ ----- ------ ------ -----
NOTE 14--RETIREMENT BENEFITS RJRN sponsors a number of non-contributory defined benefit pension plans covering most U.S. and certain foreign employees. Plans covering regular full-time employees in the tobacco operations as well as the majority of salaried employees in the corporate groups and food operations provide pension benefits that are based on credits, determined by age, earned throughout an employee's service and final average compensation before retirement. Plan benefits are offered as lump sum or annuity options. Plans covering hourly as well as certain salaried employees in the corporate groups and food operations provide pension benefits that are based on the employee's length of service and final average compensation before retirement. RJRN's policy is to fund the cost of current service benefits and past service cost over periods not exceeding 30 years to the extent that such costs are currently tax deductible. Additionally, RJRN participates in several multi-employer and other defined contribution plans, which provide benefits to certain of RJRN's union employees. Employees in foreign countries who are not U.S. citizens are covered by various post-employment benefit arrangements, some of which are considered to be defined benefit plans for accounting purposes. A summary of the components of pension expense for RJRN-sponsored plans follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Defined benefit pension plans: Service cost--benefits earned during the period......... $ 97 $ 76 $ 84 Interest cost on projected benefit obligation........... 256 255 251 Less actual return on plan assets....................... (260) (262) (259) Net amortization and deferral........................... (2) (4) (4) ------ ------ ------ Total............................................... 91 65 72 Multi-employer and other defined contribution plans....... 36 32 31 ------ ------ ------ Total pension expense............................... $ 127 $ 97 $ 103 ------ ------ ------ ------ ------ ------
F-33 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 14--RETIREMENT BENEFITS--(CONTINUED) The principal plans used the following actuarial assumptions for accounting purposes:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ------------ Weighted average discount rate................. 8.75% 7.50% Rate of increase in compensation levels........ 5.00% 5.00% Expected long-term rate of return on assets.... 9.50% 9.50%
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at December 31, 1994 and 1993 for RJRN's defined benefit pension plans.
U.S. PLANS FOREIGN PLANS ------------------------------------------------------------------------ -------------------------------- DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1994 ----------------------------------- ----------------------------------- -------------------------------- PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS BENEFITS ASSETS(1) BENEFITS ASSETS(1) BENEFITS EXCEEDED ASSETS --------------- ------------------ --------------- ------------------ --------------- --------------- Actuarial present value of: Vested benefits..... $ 2,318 $ 89 $ 2,252 $ 272 $ 143 $ 187 Non-vested benefits..... 26 2 225 5 5 25 ----- --- ----- --- --- --- Accumulated benefit obligation... 2,344 91 2,477 277 148 212 Effect of future salary increases.... 252 8 296 29 39 40 ----- --- ----- --- --- --- Projected benefit obligation... 2,596 99 2,773 306 187 252 Plan assets at fair market value........ 2,542 40 2,529 204 170 106 ----- --- ----- --- --- --- Plan assets in excess of (less than) projected benefit obligation... (54) (59) (244) (102) (17) (146) Unrecognized net (gain) loss......... (256) (6) (68) 3 6 29 Unrecognized prior service cost......... (30) (6) (31) (10) (7) 23 ----- --- ----- --- --- --- Net pension liabilities recognized in the Consolidated Balance Sheets....... $ (340) $(71) $ (343) $ (109) $ (18) $ (94) ----- --- ----- --- --- --- ----- --- ----- --- --- --- DECEMBER 31, 1993 -------------------------------- PLANS WHOSE PLANS WHOSE ASSETS EXCEEDED ACCUMULATED ACCUMULATED BENEFITS BENEFITS EXCEEDED ASSETS --------------- --------------- Actuarial present value of: Vested benefits..... $ 148 $ 186 Non-vested benefits..... 6 23 --- --- Accumulated benefit obligation... 154 209 Effect of future salary increases.... 42 31 --- --- Projected benefit obligation... 196 240 Plan assets at fair market value........ 172 109 --- --- Plan assets in excess of (less than) projected benefit obligation... (24) (131) Unrecognized net (gain) loss......... 17 26 Unrecognized prior service cost......... (8) 14 --- --- Net pension liabilities recognized in the Consolidated Balance Sheets....... $ (15) $ (91) --- --- --- ---
- ------------ (1) Of the net pension liability, $(2) million and $34 million were related to qualified plans at December 31, 1994 and 1993, respectively. At December 31, 1994, approximately 99 percent of the plans' assets were invested in listed stocks and bonds and other highly liquid investments. The balance consisted of various income producing investments. F-34 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 14--RETIREMENT BENEFITS--(CONTINUED) In addition to providing pension benefits, RJRN provides certain health care and life insurance benefits for retired employees and their dependents. Substantially all of its regular full-time employees, including certain employees in foreign countries, may become eligible for those benefits if they reach retirement age while working for RJRN. Effective January 1, 1992, RJRN adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS No. 106"). Under SFAS No. 106, RJRN is required to accrue the costs for retirees' health and other postretirement benefits other than pensions and recognize the unfunded and unrecognized accumulated benefit obligation for these benefits. RJRN had previously accrued a liability for postretirement benefits other than pensions and as a result, SFAS No. 106 did not have a material impact on RJRN's financial statements. Net postretirement health and life insurance benefit cost consisted of the following:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Service cost--benefits earned during the period........ $ 17 $ 16 $ 12 Interest cost on accumulated postretirement benefit obligation........................................... 62 60 58 --- --- --- Net postretirement health care and life insurance costs.............................................. $ 79 $ 76 $ 70 --- --- --- --- --- ---
RJRN's postretirement health and life insurance benefit plans currently are not funded. The status of the plans was as follows:
DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ------------ Actuarial present value of accumulated postretirement benefit obligation: Retirees......................................................... $638 $693 Fully eligible active plan participants.......................... 95 88 Other active plan participants................................... 216 263 Unrecognized actuarial amounts..................................... 49 (58) ----- ----- Accrued postretirement health care and life insurance costs............................................................ $998 $986 ----- ----- ----- -----
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9% in 1994, 8% in 1995 and 7% in 1996 gradually declining to 5% by the year 2000 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 and the 1994 net postretirement health care and life insurance costs by approximately 5.8% and 5.2%, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8.75% and 7.50% as of December 31, 1994 and 1993, respectively. Effective January 1, 1993, RJRN adopted Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS No. 112"). Under SFAS No. 112, RJRN is required to accrue the costs for preretirement postemployment benefits provided to former or inactive employees and recognize an obligation for these benefits. The adoption of SFAS No. 112 did not have a material impact on the financial statements of either Holdings or RJRN. F-35 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--SEGMENT INFORMATION Industry Segment Data Holdings classifies its continuing operations into two industry segments which are described in Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere herein. Summarized financial information for these operations is shown in the following tables.
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Net sales: Tobacco.............................................. $ 7,667 $ 8,079 $ 9,027 Food................................................. 7,699 7,025 6,707 ------------ ------------ ------------ Consolidated net sales............................. $ 15,366 $ 15,104 $ 15,734 ------------ ------------ ------------ ------------ ------------ ------------ Operating income: Tobacco(1)(2)........................................ $ 1,826 $ 893 $ 2,241 Food(1)(2)........................................... 931 624 769 Headquarters (2)..................................... (207) (139) (112) ------------ ------------ ------------ Consolidated operating income...................... $ 2,550 $ 1,378 $ 2,898 ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures: Tobacco.............................................. $ 215 $ 224 $ 189 Food................................................. 455 391 330 ------------ ------------ ------------ Consolidated capital expenditures.................. $ 670 $ 615 $ 519 ------------ ------------ ------------ ------------ ------------ ------------ Depreciation expense: Tobacco.............................................. $ 228 $ 237 $ 252 Food................................................. 218 207 197 Headquarters......................................... 8 4 6 ------------ ------------ ------------ Consolidated depreciation expense.................. $ 454 $ 448 $ 455 ------------ ------------ ------------ ------------ ------------ ------------
Assets: DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ----------------- Tobacco............................................... $19,420 $19,904 Food.................................................. 11,917 11,270 Headquarters(3)....................................... 71 121 -------- -------- Consolidated assets................................. $31,408 $31,295 -------- -------- -------- --------
- ------------ (1) Includes amortization of trademarks and goodwill for Tobacco and Food, respectively, for the year ended December 31, 1994, of $404 million and $225 million; for the year ended December 31, 1993, of $407 million and $218 million and for the year ended December 31, 1992, of $404 million and $212 million. (2) The 1993 and 1992 amounts include the effects of the restructuring expense at Tobacco (1993-- $544 million; 1992--$43 million), Food (1993--$153 million; 1992--$63 million) and Headquarters (1993--$33; 1992--$0), and the 1992 gain ($98 million) from the sale of Holdings' ready-to-eat cold cereal business (See Note 1 to the Consolidated Financial Statements). (3) Cash and cash equivalents for the domestic operating companies are included in Headquarters' assets. F-36 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--SEGMENT INFORMATION--(CONTINUED) Geographic Data The following tables show certain financial information relating to Holdings' continuing operations in various geographic areas.
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Net sales: United States (including U.S. export sales).......... $ 11,144 $ 11,570 $ 13,182 Europe............................................... 1,934 1,671 1,109 Other geographic areas............................... 3,039 2,794 1,855 Less transfers between geographic areas(1)........... (751) (931) (412) ------------ ------------ ------------ Consolidated net sales............................. $ 15,366 $ 15,104 $ 15,734 ------------ ------------ ------------ ------------ ------------ ------------ Operating income:(2) United States........................................ $ 2,159 $ 1,284 $ 2,634 Europe............................................... 272 40 138 Other geographic areas............................... 326 193 238 Headquarters......................................... (207) (139) (112) ------------ ------------ ------------ Consolidated operating income(3)................... $ 2,550 $ 1,378 $ 2,898 ------------ ------------ ------------ ------------ ------------ ------------
DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ----------------- Assets: United States......................................... $26,447 $27,143 Europe................................................ 2,141 1,820 Other geographic areas................................ 2,749 2,211 Headquarters.......................................... 71 121 -------- -------- Consolidated assets................................. $31,408 $31,295 -------- -------- -------- -------- Liabilities of Holdings' continuing operations located in foreign countries.................................. $ 1,725 $ 1,689 -------- -------- -------- --------
- ------------ (1) Transfers between geographic areas (which consist principally of tobacco transferred principally from the United States to Europe) are generally made at fair market value. (2) The 1993 and 1992 amounts include the effects of the restructuring expense of $730 million and $106 million, respectively, and a 1992 gain ($98 million) on the sale of Holdings' ready-to-eat cold cereal business (see Note 1 to the Consolidated Financial Statements). (3) Includes amortization of trademarks and goodwill of $629 million, $625 million and $616 million for the 1994, 1993 and 1992 periods, respectively. F-37 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 16--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for Holdings for the quarterly periods of 1994 and 1993: (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH ------ ------ ------ ------ 1994 Net sales................................................. $3,572 $3,784 $3,966 $4,044 Operating income.......................................... 632 675 678 565 Income before extraordinary item.......................... 194 192 216 162 Net income................................................ 195 46 216 62 Income before extraordinary item per common share(1)...... 0.12 0.11 0.11 0.08 Net income per common share(1)............................ 0.12 0.01 0.11 0.02
FIRST SECOND THIRD FOURTH ------ ------ ------ ------ 1993 Net sales................................................. $3,736 $3,719 $3,598 $4,051 Operating income (loss)................................... 683 582 431 (318) Income (loss) before extraordinary item................... 210 142 74 (429) Net income (loss)......................................... 163 77 76 (461) Income (loss) before extraordinary item per common share(1).................................................... 0.15 0.10 0.04 (0.34) Net income (loss) per common share(1)..................... 0.12 0.05 0.04 (0.36)
- ------------ (1) Earnings per share is computed independently for each of the periods presented; therefore, the sum of the earnings per share amounts for the quarters may not equal the total for the year. NOTE 17--SUBSEQUENT EVENTS ---------------------------- On January 26, 1995, Nabisco Holdings completed the initial public offering of 51,750,000 shares of its Class A Common Stock at an initial offering price of $24.50 per share. Nabisco used all of the approximately $1.2 billion of net proceeds from the initial public offering to repay a portion of its initial borrowing under the Nabisco 1994 Credit Agreement. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco Holdings, which represents approximately 80.5% of the economic interest in Nabisco Holdings and approximately 97.6% of its voting power. In connection with the offering, Holdings, RJRN and Nabisco Holdings entered into agreements to exchange certain services, to establish tax sharing arrangements and to provide RJRN with certain preemptive and registration rights with respect to Nabisco Holdings and Nabisco securities. Certain provisions in approximately $6 billion of RJRN's publicly held debt limit the ability of Nabisco Holdings and Nabisco to incur long-term debt. RJRN and Nabisco are currently considering a transaction in which they would seek to obtain consents to remove such limitations in order to permit Nabisco to establish long-term borrowing capacity independent of RJRN and to reduce its intercompany debt to RJRN. It is anticipated that such consents would be sought in connection with offers by Nabisco or RJRN to exchange debt of Nabisco for, or to pay certain cash consent solicitation fees in respect of, all or a portion of such RJRN debt. RJRN believes that any such transaction would not materially change the amount of consolidated indebtedness of either RJRN or Nabisco, although any newly issued debt of RJRN or Nabisco incurred in connection with the transaction may have maturities, interest rates or other terms that are less attractive to RJRN or Nabisco, respectively, than the terms of their existing debt. No assurance can be given that any such restructuring will be pursued or consummated or as to the timing of any such restructuring. F-38 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 17--SUBSEQUENT EVENTS --(CONTINUED) The Board of Directors of Holdings has declared an initial quarterly dividend of $.075 per share payable on April 1, 1995 to holders of record as of March 10, 1995. Holdings expects to continue to pay a quarterly cash dividend on the Common Stock of $.075 per share or $.30 per share on an annualized basis. Holdings believes that its adopted policies concerning distributions to stockholders and the provisions of its credit agreements will not limit its ability to pay quarterly dividends. The Board of Directors of Holdings approved a one-for-five reverse split of the Common Stock, which will be submitted to Holdings' stockholders for approval at its annual meeting in April 1995. If approved, the reverse stock split would result in a dividend and earnings per share that are five times higher with a corresponding reduction in the number of shares outstanding. F-39 SCHEDULE I RJR NABISCO HOLDINGS CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Administrative expenses................................ $ (12) $ (8) $ (12) Interest and debt expense.............................. -- (23) (90) Other income (expense), net............................ 11 30 82 ------------ ------------ ------------ Income (loss) before income taxes................ (1) (1) (20) Provision (benefit) for income taxes................... (3) (2) (13) ------------ ------------ ------------ 2 1 (7) Equity in income (loss) of subsidiary, net of income taxes.................................................. 762 (4) 783 ------------ ------------ ------------ Income (loss) before extraordinary item.......... 764 (3) 776 Extraordinary item--loss on early extinguishments of debt, net of income taxes (including extraordinary losses of $135 and $464 from subsidiary for 1993 and 1992, respectively).................................. (245) (142) (477) ------------ ------------ ------------ Net income (loss)................................ 519 (145) 299 Less preferred stock dividends......................... 131 68 31 ------------ ------------ ------------ Net income (loss) applicable to common stock..... 388 (213) 268 Retained earnings (accumulated deficit) at beginning of period................................................. (883) (738) (1,037) Add preferred stock dividends charged to paid-in capital................................................ 131 68 31 ------------ ------------ ------------ Retained earnings (accumulated deficit) at end of period................................................. $ (364) $ (883) $ (738) ------------ ------------ ------------ ------------ ------------ ------------
See Notes to Condensed Financial Information. S-1 SCHEDULE I RJR NABISCO HOLDINGS CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ----------------- ------------ ------------ CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income (loss)................................. $ 519 $ (145) $ 299 ------- ------------ ------------ Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities: Deferred income tax provision (benefit)......... 62 69 (63) Non-cash interest and debt expense.............. -- 22 79 Extraordinary item--loss on early extinguishments of debt....................... -- 10 20 Equity in (income) loss of subsidiary, net of income taxes........................... (517) 139 (319) Other, net...................................... (29) 70 (164) ------- ------------ ------------ Total adjustments........................... (484) 310 (447) ------- ------------ ------------ Net cash flows from (used in) operating activities.......................................... 35 165 (148) ------- ------------ ------------ CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Dividends received from subsidiary................ 42 48 278 Investment in subsidiary.......................... (1,680) (1,214) -- ------- ------------ ------------ Net cash flows from (used in) investing activities.......................................... (1,638) (1,166) 278 ------- ------------ ------------ CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES (NOTE A): Repayments of long-term debt...................... -- (548) (251) Proceeds from issuance of common stock and exercised warrants.................................. 54 9 1 Proceeds from issuance of Series B Preferred Stock............................................... -- 1,250 -- Proceeds from issuance of Series C Preferred Stock............................................... 1,734 -- -- Preferred stock dividends paid.................... (395) (241) (214) Financing and advisory fees paid.................. (54) (39) (2) Repurchase of preferred stock..................... (3) (105) -- Repurchases and cancellations of common stock, stock options and warrants.......................... (1) (1) (89) Other, net--including intercompany transfers...... 272 683 425 ------- ------------ ------------ Net cash flows from (used in) financing activities.......................................... 1,607 1,008 (130) ------- ------------ ------------ Net change in cash and cash equivalents......... 4 7 -- Cash and cash equivalents at beginning of period.... 10 3 3 ------- ------------ ------------ Cash and cash equivalents at end of period.......... $ 14 $ 10 $ 3 ------- ------------ ------------ ------- ------------ ------------
See Notes to Condensed Financial Information. S-2 SCHEDULE I RJR NABISCO HOLDINGS CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents................................ $ 14 $ 10 Accounts and notes receivable............................ -- 9 -------- ------- TOTAL CURRENT ASSETS............................... 14 19 -------- ------- Investment in subsidiary................................... 11,410 9,316 Other assets and deferred charges.......................... 1 4 -------- ------- $11,425 $ 9,339 -------- ------- -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................. $ 44 $ 46 -------- ------- TOTAL CURRENT LIABILITIES.......................... 44 46 -------- ------- Intercompany payable, net.................................. 399 150 Deferred income taxes...................................... 74 73 Commitments and contingencies (Note B)..................... Stockholders' equity (Note C): ESOP convertible preferred stock--15,315,130 and 15,573,973 shares issued and outstanding at December 31, 1994 and 1993, respectively........................ 245 249 Series A convertible preferred stock--52,500,000 shares issued and outstanding at December 31, 1993............ -- 2 Series B preferred stock--50,000 shares issued and outstanding at December 31, 1994 and 1993.............. 1,250 1,250 Series C preferred stock--26,675,000 shares issued and outstanding at December 31, 1994....................... 3 -- Common stock--1,361,656,883 and 1,138,011,292 shares issued and outstanding at December 31, 1994 and 1993, respectively........................................... 13 11 Paid-in capital.......................................... 10,147 8,778 Cumulative translation adjustments....................... (164) (102) Retained earnings (accumulated deficit).................. (364) (883) Receivable from ESOP..................................... (186) (211) Loans receivable from employees.......................... (14) (18) Unamortized value of restricted stock.................... (22) (6) -------- ------- TOTAL STOCKHOLDERS' EQUITY......................... 10,908 9,070 -------- ------- $11,425 $ 9,339 -------- ------- -------- -------
See Notes to Condensed Financial Information. S-3 SCHEDULE I RJR NABISCO HOLDINGS CORP. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION NOTE A--SUPPLEMENTAL CASH FLOWS INFORMATION For information regarding certain non-cash financing activities, see Notes 10 and 12 to the Consolidated Financial Statements. NOTE B--COMMITMENTS AND CONTINGENCIES Holdings has guaranteed the indebtedness of RJRN under the 1991 Credit Agreement and the 1993 Credit Agreement. For a discussion of certain restrictive covenants associated with these debt obligations, see Note 10 to the Consolidated Financial Statements. For disclosure of additional contingent liabilities, see Note 11 to the Consolidated Financial Statements. NOTE C--STOCKHOLDERS' EQUITY The Board of Directors of Holdings approved a one-for-five reverse split of the Common Stock which will be submitted to Holdings' stockholders for approval at its Annual Meeting in April 1995. For additional information, see Notes 2 and 17 to the Consolidated Financial Statements. S-4 SCHEDULE I RJR NABISCO INC. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ------------ ------------ ------------ Administrative expenses................................ $ (99) $ (7) $ 2 Restructuring expense.................................. -- (33) -- Interest and debt expense.............................. (1,009) (1,105) (1,265) Other income (expense), net............................ 1,153 1,391 2,252 ------------ ------------ ------------ Income (loss) before income taxes................ 45 246 989 Provision (benefit) for income taxes................... (17) 40 208 ------------ ------------ ------------ 62 206 781 Equity in income (loss) of subsidiary, net of income taxes.................................................. 700 (210) 2 ------------ ------------ ------------ Income (loss) before extraordinary item.......... 762 (4) 783 Extraordinary item-loss on early extinguishments of debt, net of income taxes............................ (245) (135) (464) ------------ ------------ ------------ Net income (loss)...................................... 517 (139) 319 Retained earnings (accumulated deficit) at beginning of period............................................... (459) (320) (639) Dividend paid to Parent and charged to retained earnings............................................. (42) -- -- ------------ ------------ ------------ Retained earnings (accumulated deficit) at end of period............................................... $ 16 $ (459) $ (320) ------------ ------------ ------------ ------------ ------------ ------------
See Notes to Condensed Financial Information. S-5 SCHEDULE I RJR NABISCO INC. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 ----------------- ------------ ------------ CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income (loss)................................. $ 517 $ (139) $ 319 ------- ------------ ------------ Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities: Deferred income tax provision (benefit)......... (56) (154) 244 Non-cash interest and debt expense.............. 117 264 364 Extraordinary item-loss on early extinguishments of debt............................................. 377 208 656 Equity in (income) loss of subsidiary, net of income taxes........................... (700) 210 (2) Other, net...................................... (375) (107) (454) ------- ------------ ------------ Total adjustments........................... (637) 421 808 ------- ------------ ------------ Net cash flows from (used in) operating activities.......................................... (120) 282 1127 ------- ------------ ------------ CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Distribution to parent............................ (42) (48) (276) Capital expenditures.............................. (1) (1) (1) Investment in subsidiary.......................... -- -- -- ------- ------------ ------------ Net cash flows used in investing activities..... (43) (49) (277) ------- ------------ ------------ CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES (NOTE A): Net borrowings (repayments) under the credit agreements.......................................... 1,561 (2,614) (620) Net proceeds from the issuance (repayment) of commercial paper.................................... (49) 342 571 Proceeds from issuance of other long-term debt.... -- 1,942 3,124 Repayments of long-term debt...................... (4,648) (1,376) (4,210) Financing and advisory fees paid.................. (6) (9) (33) Other, net--including intercompany transfers...... 3,294 1,518 45 ------- ------------ ------------ Net cash flows from (used in) financing activities.......................................... 152 (197) (1213) ------- ------------ ------------ Net change in cash and cash equivalents......... (11) 36 (363) Cash and cash equivalents at beginning of period.... 51 15 378 ------- ------------ ------------ Cash and cash equivalents at end of period.......... $ 40 $ 51 $ 15 ------- ------------ ------------ ------- ------------ ------------
See Notes to Condensed Financial Information. S-6 SCHEDULE I RJR NABISCO INC. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents................................ $ 40 $ 51 Accounts and notes receivable............................ 13 45 Prepaid expenses......................................... 2 3 -------- ------- TOTAL CURRENT ASSETS............................... 55 99 -------- ------- Intercompany receivable, net............................... 12,875 13,392 Investment in subsidiary................................... 8,794 9,643 Property, plant and equipment, net......................... 11 18 Goodwill, net.............................................. -- 16 Other assets and deferred charges.......................... 147 177 -------- ------- 21,882 23,345 -------- ------- -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................. $ 346 $ 477 Current maturities of long-term debt..................... 600 226 Income taxes accrued..................................... 74 38 -------- ------- TOTAL CURRENT LIABILITIES.......................... 1,020 741 -------- ------- Long-term debt (less current maturities)................... 8,683 11,621 Other noncurrent liabilities............................... 62 1,375 Deferred income taxes...................................... 707 292 Commitments and contingencies (Note B)..................... Stockholders' equity: Paid-in capital.......................................... 11,558 9,877 Cumulative translation adjustments....................... (164) (102) Retained earnings (accumulated deficit).................. 16 (459) -------- ------- TOTAL STOCKHOLDERS' EQUITY......................... 11,410 9,316 -------- ------- $21,882 $23,345 -------- ------- -------- -------
See Notes to Condensed Financial Information. S-7 SCHEDULE I RJR NABISCO INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION NOTE A--SUPPLEMENTAL CASH FLOWS INFORMATION For information regarding certain non-cash financing activities, see Notes 10 and 12 to the Consolidated Financial Statements. NOTE B--COMMITMENTS AND CONTINGENCIES Holdings has guaranteed the indebtedness of RJRN under the 1991 Credit Agreement and the 1993 Credit Agreement. For a discussion of certain restrictive covenants associated with these debt obligations, see Note 10 to the Consolidated Financial Statements. For disclosure of additional contingent liabilities, see Note 11 to the Consolidated Financial Statements. S-8 SCHEDULE II RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (DOLLARS IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------- ADDITIONS -------------------- (1) (2) CHARGED CHARGED BALANCE AT TO COSTS TO OTHER BALANCE AT BEGINNING AND ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES (A) (B) PERIOD(C) - ------------------------------------------------------------------------------------------- Those valuation and qualifying accounts which are deducted in the balance sheet from the assets to which they apply: Year ended December 31, 1994: For discounts and doubtful accounts...... $ 59 $ 16 $ 1 $(13) $ 63 Other assets............................. 46 34 8 (35) 53 ----- --- --- ----- ----- $105 $ 50 $ 9 $(48) $116 ----- --- --- ----- ----- ----- --- --- ----- ----- Year ended December 31, 1993: For discounts and doubtful accounts...... $ 84 $ 23 $ 8 $(56) $ 59 Other assets............................. 38 26 -- (18) 46 ----- --- --- ----- ----- $122 $ 49 $ 8 $(74) $105 ----- --- --- ----- ----- ----- --- --- ----- ----- Year ended December 31, 1992: For discounts and doubtful accounts...... $ 99 $ 15 $ 3 $(33) $ 84 Other assets............................. 30 25 -- (17) 38 ----- --- --- ----- ----- $129 $ 40 $ 3 $(50) $122 ----- --- --- ----- ----- ----- --- --- ----- -----
- ------------ (A) Miscellaneous adjustments. (B) Principally charges against the accounts. (C) Excludes valuation allowance accounts for deferred tax assets. S-9 EXHIBIT INDEX
EXHIBIT NO. - --------- 3.1 Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp., filed October 1, 1990 (incorporated by reference to Exhibit 3.1 to Amendment No. 4, filed on October 2, 1990, to the Registration Statement on Form S-4 of RJR Nabisco Holdings Corp., Registration No. 33-36070, filed on July 25, 1990, as amended (the "Form S-4, Registration No. 33-36070")). 3.1(a) Certificate of Amendment to Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp., filed January 29, 1991 (incorporated by reference to Exhibit 3.1(a) to Amendment No. 3, filed on January 31, 1991, to the Registration Statement on Form S-4 of RJR Nabisco Holdings Corp., Registration No. 33-38227). 3.1(b) Certificate of Designation of ESOP Convertible Preferred Stock, filed April 10, 1991 (incorporated by reference to Exhibit 3.1(b) to Amendment No. 2, filed on April 11, 1991, to the Registration Statement on Form S-1 of RJR Nabisco Holdings Corp., Registration No. 33-39532, filed on March 20, 1991). 3.1(c) Certificate of Designation of Series A Conversion Preferred Stock, filed November 7, 1991 (incorporated by reference to Exhibit 3.1(c) to Amendment No. 3, filed on November 1, 1991, to the Registration Statement on Form S-1 of RJR Nabisco Holdings Corp., Registration No. 33-43137, filed October 2, 1991 (the "Form S-1, Registration No. 33-43137")). 3.1(d) Certificate of Amendment to Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp., filed December 16, 1991 (incorporated by reference to Exhibit 3.1(d) of the Annual Report on Form 10-K of RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR Nabisco Capital Corp. and RJR Nabisco, Inc. for the fiscal year ended December 31, 1991, File Nos. 1-10215, 1-10214, 1-10248 and 1-6388 (the "1991 Form 10-K")). 3.1(e) Certificate of Amendment to the Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp., filed April 6, 1993 (incorporated by reference to Exhibit 3.3 of the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended March 31, 1993, filed April 30, 1993 (the "March 1993 Form 10-Q")). 3.1(f) Certificate of Designation of Series B Cumulative Preferred Stock, filed August 16, 1993 (incorporated by reference to Exhibit 3.1(f) of the Annual Report on Form 10-K of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal year ended December 31, 1993, file numbers 1-10215 and 1-6388, filed on February 24, 1994 (the "1993 Form 10-K"). 3.1(g) Certificate of Designation of Series C Conversion Preferred Stock (incorporated by reference to Exhibit 4.1(h) to the Registration Statement on Form S-3 of RJR Nabisco Holdings Corp., Registration No. 33-52381 filed on February 2, 1994, as amended ("Form S-3 Registration No. 33-52381"). 3.1(h) Certificate of Elimination of Cumulative Convertible Preferred Stock of RJR Nabisco Holdings Corp., filed July 7, 1994 (incorporated by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended June 30, 1994 (the "June 1994 Form 10-Q")). 3.1(i) Certificate of Retirement of Series A Conversion Preferred Stock of RJR Nabisco Holdings Corp., filed effective November 21, 1994. *3.1(j) A composite of the Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp., as amended to November 21, 1994.
EXHIBIT NO. - --------- 3.2 Amended and Restated By-Laws of RJR Nabisco Holdings Corp., as amended, effective January 20, 1994 (incorporated by reference to Exhibit 3.2 to the 1993 Form 10-K). *3.2(a) Certificate of Retirement of Series A Conversion Preferred Stock of Nabisco Holdings Corp. dated November 18, 1994. 3.3 Restated Certificate of Incorporation of RJR Nabisco, Inc. (incorporated by reference to Exhibit 3.9 to Amendment No. 2, filed on May 12, 1989, to the Registration Statement on Form S-1 of RJR Holdings Capital Corp., RJR Holdings Corp., RJR Holdings Group, Inc. and RJR Nabisco, Inc., Registration No. 33-27891, filed on April 4, 1989 (the "Form S-1, Registration No. 33-27891")). 3.3(a) Certificate of Amendment of the Certificate of Incorporation of RJR Nabisco, Inc., filed September 22, 1989 (incorporated by reference to Exhibit 3.7(b) to the Registration Statement on Form S-1 of RJR Holdings Capital Corp., RJR Holdings Corp., RJR Holdings Group, Inc. and RJR Nabisco, Inc., Registration No. 33-31937, filed on November 3, 1989, as amended (the "Form S-1, Registration No. 33-31937")). 3.3(b) Certificate of Change of Location of Registered Office and of Registered Agent of RJR Nabisco, Inc., filed July 5, 1990 (incorporated by reference to Exhibit 3.7(b) of the Annual Report on Form 10-K of RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR Nabisco Capital Corp. and RJR Nabisco, Inc. for the year ended December 31, 1990, File Nos. 1-10215, 1-10214, 1-10248 and 1-6388 (the "1990 Form 10-K")). 3.3(c) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of RJR Nabisco, Inc., filed May 13, 1994 (incorporated by reference to the June 30, 1994 Form 10-Q). *3.3(d) A composite of the Certificate of Incorporation of RJR Nabisco, Inc., as amended to May 13, 1994. 3.4 Amended and Restated By-laws of RJR Nabisco, Inc., as amended, effective January 20, 1994 (incorporated by reference to Exhibit 3.4 of the 1993 Form 10-K). 4.1 Credit Agreement ("1991 Credit Agreement") dated as of December 1, 1991 among RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR Nabisco Capital Corp., RJR Nabisco, Inc. and the lending institutions party thereto (the "Credit Agreement") (incorporated by reference to Exhibit 4.1 of the 1991 Form 10-K). 4.1(a) Amendment No. 1 to 1991 Credit Agreement, dated as of October 21, 1992 (incorporated by reference to Exhibit 4.1(a) of the Annual Report on Form 10-K of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal year ended December 31, 1992, File Nos. 1-10215 and 1-6388 (the "1992 Form 10-K")). 4.1(b) Second Amendment to 1991 Credit Agreement, dated as of March 4, 1993 (incorporated by reference to Exhibit 4.2 of the March 1993 Form 10-Q). 4.1(c) Third Amendment to 1991 Credit Agreement, dated as of October 12, 1993 (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended September 30, 1993, filed October 29, 1993 (the "September 1993 Form 10-Q")). 4.1(d) Fourth Amendment to 1991 Credit Agreement, dated as of November 2, 1994 (incorporated by reference to Exhibit 4.1(d) to Post-Effective Amendment No. 2 filed February 1, 1995 to the Registration Statement on Form S-4 of RJR Nabisco Holdings Corp., Registration Statement No. 33-55767, filed October 5, 1994, as amended, (the "Form S-4, Registration No. 33-55767"). 4.1(e) Fifth Amendment to 1991 Credit Agreement, dated as of December 2, 1994 (incorporated by reference to Exhibit 4.1(e) to the Form S-4, Registration No. 33-55767).
EXHIBIT NO. - --------- 4.2 Credit Agreement ("1993 Credit Agreement") dated as of April 5, 1993 among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and the lending institutions party thereto (incorporated by reference to Exhibit 4.3 of the March 1993 Form 10-Q). 4.2(a) First Amendment to Credit Agreement dated as of October 12, 1993 (incorporated by reference to Exhibit 10.1 of the September 1993 Form 10-Q). 4.2(b) Second Amendment to the Credit Agreement dated as of , 1994 (incorporated by reference to Exhibit 4.2 of the March 1994 Form 10-Q). 4.2(c) Third Amendment to 1993 Credit Agreement, dated as of November 2, 1994 (incorporated by reference to Exhibit 4.1(d) hereof). 4.2(d) Fourth Amendment to 1993 Credit Agreement, dated as of December 2, 1994 (incorporated by reference to Exhibit 4.1(e) hereof). 4.4 Credit Agreement dated as of December 6, 1994 between Nabisco, Inc. and the lending institutions party thereto. 4.6 The Registrants agree to furnish copies of any instrument defining the rights of holders of long-term debt of the Registrants and their consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrants and their consolidated subsidiaries to the Commission upon request. 10.1 Registration Rights Agreement, dated as of February 9, 1989, among RJR Holdings Corp., RJR Associates, L.P., KKR Partners II, L.P., Drexel Burnham Lambert Incorporated and Merrill Lynch & Co. (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1 of RJR Holdings Corp., Registration No. 33-29401, filed on June 20, 1989, as amended (the "Form S-1, Registration No. 33-29401")). 10.2 Retirement Plan for Directors of RJR Nabisco, Inc. as amended and restated on January 1, 1989 (incorporated by reference to Exhibit 10(a) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1988, file number 1-6388, filed on March 9, 1989, as amended through April 14, 1989 (the "1988 Form 10-K")). 10.3 Retirement Trust Agreement, made as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-4 of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No. 33-27894, filed April 5, 1989, as amended (the "Form S-4, Registration No. 33-27894")). 10.4 Agreement Containing Consent Order to Cease and Desist, dated January 30, 1989, among KKR Associates, the general partners of KKR Associates, Kohlberg Kravis Roberts & Co., L.P., the general partners of Kohlberg Kravis Roberts & Co., L.P., RJR Associates, L.P., RJR Holdings Corp., RJR Holdings Group, Inc., RJR Acquisition Corporation and the Federal Trade Commission (incorporated by reference to Exhibit 10.2 to the Form S-4, Registration No. 33-27894). 10.5 Form of Employment Agreement containing Change of Control provision (incorporated by reference to Exhibit 10.8 to the Form S-4, Registration No. 33-27894). 10.6 Special Addendum to Form of Employment Agreement filed as Exhibit 10.22, dated December 20, 1988 (incorporated by reference to Exhibit 10(d)(ii) to the 1988 Form 10-K). 10.7 Form of Agreement containing Gross-Up provisions, dated January 27, 1989 (incorporated by reference to Exhibit 10(d)(iii) to the 1988 Form 10-K). 10.8 Trust Agreement between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A., Trustee, dated January 27, 1989 (incorporated by reference to Exhibit 10(d)(iv) to the 1988 Form 10-K).
EXHIBIT NO. - --------- 10.9 Form of Employment Agreement Without Change of Control provision (incorporated by reference to Exhibit 10.16 to the Form S-4, Registration No. 33-27894). 10.10 Special Addendum, dated December 20, 1988 (incorporated by reference to Exhibit 10(d)(ii) to the 1988 Form 10-K). 10.11 Master Trust Agreement, as amended and restated as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by reference to Exhibit 10.18 to the Form S-4, Registration No. 33-27894). 10.11(a) Amendment No. 1 to Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(g)(ii) to the 1988 Form 10-K). 10.11(b) Amendment No. 2 to Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(g)(iii) to the 1988 Form 10-K). 10.12 Excess Benefit Master Trust Agreement, as amended and restated as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by reference to Exhibit 10.21 to the Form S-4, Registration No. 33-27894). 10.12(a) Amendment No. 1 to Excess Benefit Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(h)(ii) to the 1988 Form 10-K). 10.13 Supplemental Benefits Plan of RJR Nabisco, Inc. and Participating Companies, as amended on October 12, 1988 (incorporated by reference to Exhibit 10.25 to the Form S-4, Registration No. 33-27894). 10.13(a) Amendment to Supplemental Benefits Plan, dated November 23, 1988 (incorporated by reference to Exhibit 10(k)(ii) to the 1988 Form 10-K). 10.13(b) Amendment No. 2 to Supplemental Benefits Plan, dated January 27, 1989 (incorporated by reference to Exhibit 10(k)(iii) to the 1988 Form 10-K). 10.14 Additional Benefits Plan of RJR Nabisco, Inc. and Participating Companies, effective October 12, 1988 (incorporated by reference to Exhibit 10.28 to the Form S-4, Registration No. 33-27894). 10.14(a) Amendment to Additional Benefits Plan, dated October 28, 1988 (incorporated by reference to Exhibit 10(l)(ii) to the 1988 Form 10-K). 10.14(b) Amendment to Additional Benefits Plan, dated November 23, 1988 (incorporated by reference to Exhibit 10(l)(iii) to the 1988 Form 10-K). 10.14(c) Amendment to Additional Benefits Plan No. 3, dated January 27, 1989 (incorporated by reference to Exhibit 10(l)(iv) to the 1988 Form 10-K). 10.15 RJR Nabisco, Inc. Supplemental Executive Retirement Plan, as amended on July 21, 1988 (incorporated by reference to Exhibit 10.32 to the Form S-4, Registration No. 33-27894). 10.15(a) Amendment to Supplemental Executive Retirement Plan, dated November 23, 1988 (incorporated by reference to Exhibit 10(m)(ii) to the 1988 Form 10-K). 10.15(b) Amendment No. 2 to Supplemental Executive Retirement Plan, dated January 27, 1989 (incorporated by reference to Exhibit 10(m)(iii) to the 1988 Form 10-K). 10.15(c) Amendment to Supplemental Executive Retirement Plan, dated April 10, 1993 (incorporated by reference to the 1993 Form 10-K). 10.16 Form of Common Stock Subscription Agreement between RJR Holdings Corp. and the purchaser named therein (incorporated by reference to Exhibit A to Post-Effective Amendment No. 2, filed on August 21, 1989, to the Form S-1, Registration No. 33-29401 (the "Post-Effective Amendment No. 2 to the Form S-1, Registration No. 33-29401")).
EXHIBIT NO. - --------- 10.17 Form of Non-Qualified Stock Option Agreement between RJR Holdings Corp. and the optionee named therein (incorporated by reference to Exhibit B to Post-Effective Amendment No. 2 to the Form S-1, Registration No. 33-29401). 10.18 Non-Qualified Stock Option Agreement, dated December 31, 1993, between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to the 1993 Form 10-K). *10.18(a) Non-Qualified Stock Option Agreement, dated December 31, 1994, between RJR Nabisco Holdings Corp. and Charles M. Harper. 10.19 Employment Agreement, dated May 27, 1993, by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Charles M. Harper (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended June 30, 1993, filed August 3, 1993 (the "June 1993 Form 10-Q")). 10.20 Amendment No. 1 dated March 8, 1994 to Employment Agreement dated May 27, 1993 by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Charles M. Harper dated as of March 1, 1994 (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended March 31, 1994 filed May 12, 1994 (the "March 1994 Form 10-Q"). 10.21 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and Charles M. Harper (incorporated by reference to Exhibit 10.2 of the June 1993 Form 10-Q). 10.22 Employment Agreement, dated July 19, 1993, by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Lawrence R. Ricciardi (incorporated by reference to Exhibit 10.3 of the June 1993 Form 10-Q). 10.23 Letter Agreement, dated July 27, 1989, between RJR Holdings Corp. and Lawrence R. Ricciardi (incorporated by reference to Exhibit 10.71 to the Form S-1, Registration No. 33-31937). 10.24 Letter Agreement, dated January 20, 1994, between RJR Nabisco Holdings Corp. and Lawrence R. Ricciardi (incorporated by reference to Exhibit 10.24 the 1993 Form 10-K). *10.25 Letter Agreement, dated February 14, 1995, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Lawrence R. Ricciardi. *10.26 Consulting Agreement, dated February 14, 1995, among RJR Nabisco Holdings Corp., R.J. Reynolds Tobacco Company, Nabisco Holdings Corp. and Lawrence R. Ricciardi. 10.27 Amended and Restated Employment Agreement, dated as of September 1, 1993, by and among R.J. Reynolds Tobacco Company, R.J. Reynolds Tobacco International Inc., RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Mr. James W. Johnston (incorporated by reference to Exhibit 10.2 to the September 1993 Form 10-Q). 10.28 Letter Agreement, dated March 30, 1993, between RJR Nabisco, Inc. and Mr. Eugene R. Croisant (incorporated by reference to Exhibit 10.4 to the March 1993 Form 10-Q). 10.29 Equity Securities Purchase Agreement dated as of July 15, 1990 between RJR Nabisco Holdings Corp. and Whitehall Associates, L.P. (incorporated by reference to Exhibit 4.4 to the Form S-4, Registration No. 33-36070). 10.30 Letter Agreement dated June 10, 1994 among Eugene R. Croisant, RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. (incorporated by reference to the June 1994 Form 10-Q). *10.31 Letter Agreement, dated February 14, 1995, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Eugene R. Croisant. *10.32 Consulting Agreement, dated February 14, 1995, among RJR Nabisco Holdings Corp., Nabisco Holdings Corp. and Eugene R. Croisant.
EXHIBIT NO. - --------- 10.33 Registration Rights Agreement (Common Stock), dated as of July 15, 1990, between RJR Nabisco Holdings Corp. and Whitehall Associates, L.P. (incorporated by reference to Exhibit 4.5 to the Form S-4, Registration No. 33-36070). 10.34 Amended and Restated RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the March 1993 Form 10-Q). 10.35 Form of Purchase Stock Agreement between RJR Nabisco Holdings Corp. and purchaser named therein (1991 Grant) (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of RJR Nabisco Holdings Corp., Registration No. 33-39791, filed on April 5, 1991 (the "Form S-8, Registration No. 33-39791"). 10.36 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the senior executive optionee named therein (1991 Grant) (incorporated by reference to Exhibit 4.4(a) to Form S-8, Registration No. 33-39791). 10.37 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the executive or management optionee named therein (1991 Grant) (incorporated by reference to Exhibit 4.4(b) to Form S-8, Registration No. 33-39791). 10.38 Form of Secured Promissory Note of purchaser named therein in favor of RJR Nabisco Holdings Corp. (1991 Grant) (incorporated by reference to Exhibit 4.5 to Form S-8, Registration No. 33-39791). 10.38(a) Form of Amendment and Exchange of Secured Promissory Note, dated July 1, 1993 (1991 Grant) (incorporated by reference to Exhibit 10.33(a) to the 1993 Form 10-K). 10.39 Form of Purchase Stock Agreement between RJR Nabisco Holdings Corp. and the purchaser named therein (1992 Grant) (incorporated by reference to Exhibit 10.34 of the 1991 Form 10-K). 10.40 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the senior executive optionee named therein (1992 Grant/cycle) (incorporated by reference to Exhibit 10.35 of the 1991 Form 10-K). 10.41 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the senior executive optionee named therein (1992 Grant/5-year) (incorporated by reference to Exhibit 10.36 of the 1991 Form 10-K). 10.42 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the executive or management optionee named therein (1992 Grant) (incorporated by reference to Exhibit 10.37 of the 1991 Form 10-K). 10.43 Form of Restated Non-Qualified Stock Option Agreement under the 1990 Long Term Incentive Plan, between RJR Nabisco Holdings Corp. and the optionee named therein (incorporated by reference to Exhibit 10.38 to the 1993 Form 10-K). 10.44 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the optionee name therein (1993 Grant) (incorporated by reference to Exhibit 10.39 of the 1992 Form 10-K). 10.45 Performance Share Program under RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (incorporated by reference to Exhibit 10.40 of the 1992 Form 10-K). 10.46 Form of Performance Share Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1993 Grant) (incorporated by reference to Exhibit 10.41 of the 1992 Form 10-K). 10.47 Restricted Stock Program under the 1990 Long Term Incentive Plan (incorporated by reference to Exhibit 10.42 to the 1993 Form 10-K).
EXHIBIT NO. - ------------ 10.48 Form of Restricted Stock Agreement under the 1990 Long Term Incentive Plan between RJR Nabisco Holdings Corp. and the grantee named therein (1993 Grant) (incorporated by reference to Exhibit 10.1 the March 1993 Form 10-Q). 10.49 Form of Executive Equity Program Agreement under the 1990 Long Term Incentive Plan, between RJR Nabisco Holdings Corp. and the grantee named therein (3 year) (incorporated by reference to Exhibit 10.44 to the 1993 Form 10-K). 10.50 Form of Executive Equity Program Agreement under the 1990 Long Term Incentive Plan, between RJR Nabisco Holdings Corp. and the grantee named therein (4 year) (incorporated by reference to Exhibit 10.45 to the 1993 Form 10-K). 10.51 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the Consultant named therein (1991 Grant) (incorporated by reference to Exhibit 10.42 of the 1992 Form 10-K). 10.52 Form of Secured Promissory Note of purchaser named therein in favor of RJR Nabisco Holdings Corp. (1992 Grant) (incorporated by reference to Exhibit 10.38 of the 1991 Form 10-K). 10.52(a) Form of Amendment and Exchange of Secured Promissory Note, dated July 1, 1993 (1992 Grant) (incorporated by reference to Exhibit 10.47(a) to the 1993 Form 10-K). 10.53 Registration Rights Agreement (Preferred Stock), dated as of July 15, 1990, between RJR Nabisco Holdings Corp. and Whitehall Associates, L.P. (incorporated by reference to Exhibit 4.6 to the Form S-4, Registration No. 33-36070). 10.54 Preferred Stock Exchange Agreement dated as of October 1, 1990 between RJR Nabisco Holdings Corp. and Whitehall Associates, L.P. (incorporated by reference to Exhibit 4.8 to the Form S-4, Registration No. 33-36070). *10.55 Restated and Amended Stock Option Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. dated as of October 4, 1994. 10.56 Performance Unit Program under RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the March 1994 Form 10-Q). 10.57 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1994 Grant--1 Year Period) (incorporated by reference to Exhibit 10.4 to the March 1994 Form 10-Q). 10.58 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1994 Grant--3 Year Period) (incorporated by reference to Exhibit 10.5 to the March 1994 10-Q). *11. RJR Nabisco Holdings Corp. Computation of Earnings Per Share for the years ended December 31, 1994, 1993 and 1992. *12. RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges/Deficiency in the Coverage of Fixed Charges by Earnings before Fixed Charges for each of the periods within the five year period ended December 31, 1994. *21. Subsidiaries of the Registrants. *23. Consent of Independent Auditors. *24. Powers of Attorney.
- --------------- *Filed herewith. EX-3.1(J) 2 EXHIBIT 3.1(j) [Composite, as amended to and including November 21, 1994] AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF RJR NABISCO HOLDINGS CORP. (Originally incorporated as RJR Holdings Corp. on October 25, 1988) ARTICLE FIRST The name of the Corporation is RJR Nabisco Holdings Corp. ARTICLE SECOND The registered office and registered agent of the Corporation is The Prentice-Hall Corporation System, Inc., 32 Loockerman Square, Suite L-100, City of Dover, County of Kent, Delaware 19901. ARTICLE THIRD The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE FOURTH The total number of shares of capital stock that the Corporation is authorized to issue is 2,350,000,000 shares of which 2,200,000,000 shares are Common Stock, par value $.01 each, and 150,000,000 shares of which are shares of preferred stock, par value $.01 each (hereinafter referred to as "Preferred Stock"). The Preferred Stock may be issued from time to time in one or more series with such distinctive designations as may be stated in resolution or resolutions providing for the issue of such stock from time to time adopted by the Board of Directors or a duly authorized committee thereof. The resolution or resolutions providing for the issue of shares of a particular series shall fix, subject to applicable laws and the provisions of this ARTICLE FOURTH, for each such series the number of shares constituting such series and the designations and powers, 2 preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limiting the generality of the foregoing, such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by resolution or resolutions of the Board of Directors or a duly authorized committee thereof under the General Corporation Law of the State of Delaware. The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock of the Corporation irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware or any corresponding provision hereinafter enacted. The following is a statement of the number, designation, powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the ESOP Convertible Preferred Stock of the Corporation: (1) Designation; Issuance. (i) The designation of the series of Preferred Stock authorized by this resolution shall be "ESOP Convertible Preferred Stock" (the "ESOP Convertible Preferred Stock") consisting of 15,625,000 shares. The stated value of the ESOP Convertible Preferred Stock shall be $16.00 per share, which value does not represent a determination by the Board of Directors for the purposes of the capital accounts. (ii) Shares of ESOP Convertible Preferred Stock shall be issued only to a trustee acting on behalf of an employee stock ownership plan or other employee benefit plan of the Corporation. In the event of any transfer of shares of ESOP Convertible Preferred Stock except for (a) any transfer to any such plan trustee or (b) any transfer to, or with respect to, a participant in any such plan to, or with respect to, whom ESOP Convertible Preferred Stock is distributed by any such plan trustee in satisfaction of the distribution requirements of any such plan or any investment elections provided to participants pursuant to any such plan, unless the Corporation shall have otherwise previously consented to such transfer, the shares of ESOP Convertible Preferred Stock so transferred, upon such transfer and without any further action by the Corporation or the holder, shall be automatically converted into shares of Common Stock (as defined in paragraph (2) hereof) on the terms otherwise provided for the conversion of shares of ESOP Convertible Preferred Stock into shares of Common Stock pursuant to paragraph (7) hereof and no such transferee shall have any of the powers (including voting powers), preferences and relative, participating, optional or special rights ascribed to shares of ESOP Convertible Preferred Stock hereunder but, rather, only the powers (including voting powers) and rights pertaining to the Common Stock into which such 3 shares of ESOP Convertible Preferred Stock shall be so converted. Certificates representing shares of ESOP Convertible Preferred Stock shall be legended to reflect such restrictions on transfer. Notwithstanding the foregoing provisions of this paragraph (1)(ii), shares of ESOP Convertible Preferred Stock (a) shall be redeemable by the Corporation upon the terms and conditions provided by paragraphs (5), (6) and (9) hereof and (b) may be converted into shares of Common Stock as provided by paragraph (7) hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law. (2) Rank. The ESOP Convertible Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank prior to the Common Stock, par value $0.01 per share (the "Common Stock"), of the Corporation and on a parity with the Cumulative Convertible Preferred Stock, par value $0.01 per share, stated value $25.00 per share, of the Corporation (the "Cumulative Convertible Preferred Stock"). All equity securities of the Corporation to which the ESOP Convertible Preferred Stock ranks prior, including the Common Stock, are collectively referred to herein as the "Junior Securities," all equity securities of the Corporation with which the ESOP Convertible Preferred Stock ranks on a parity, including Cumulative Convertible Preferred Stock, are collectively referred to herein as the "Parity Securities" and all equity securities of the Corporation (other than convertible debt securities) to which the ESOP Convertible Preferred Stock ranks junior, whether with respect to dividends or upon liquidation, dissolution, winding-up or otherwise, are collectively referred to herein as the "Senior Securities." The ESOP Convertible Preferred Stock shall be subject to the creation of Junior Securities, Parity Securities and Senior Securities. (3) Dividends. (i)(a) Subject to paragraph (3)(i)(b), the holders of the shares of ESOP Convertible Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends initially at the rate of 7.8125% of the stated value ($1.25) per share per annum (the "Dividend Rate"), and no more. Subject to paragraph (3)(i)(b), such dividends shall be payable in semi-annual payments, one half on January 2, (or, at the option of the Corporation, the preceding December 27) and one half on July 2 of each year commencing with January 2, 1992 (or, at the option of the Corporation, December 27, 1991) (each of such dates being a "Dividend Payment Date"), in preference to dividends on the Junior Securities. Subject to paragraph (3)(i)(b), such dividends shall be paid to the holders of record at the close of business on the tenth business day immediately preceding each Dividend Payment Date (each of such dates being a "Dividend Payment Record Date"). Subject to paragraph (3)(i)(b), each of such semi-annual dividends shall be fully cumulative and shall accrue (whether or not declared), without interest, from the previous Dividend Payment Date, except 4 that with respect to the first dividend, such dividend shall accrue from the date of initial issuance. Dividends payable for the first dividend period and any partial dividend period (excluding for this purpose dividends paid on December 27 in lieu of January 2) shall be calculated on the basis of a 360-day year of twelve 30-day months. (b) Notwithstanding anything to the contrary in paragraph (3)(i)(a), in the event that after the eighth (8th) anniversary of the initial date of issuance, for at least twenty (20) trading days within any period of thirty (30) consecutive trading days (such thirty (30) day period being hereinafter referred to as the "Adjustment Period"), the closing price on the New York Stock Exchange Consolidated Tape (or any successor composite tape reporting transactions on national securities exchanges) or, if such a composite tape shall not be in use or shall not report transactions in the Common Stock, the last reported sales price regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of Common Stock has been traded during such Adjustment Period) or, if there is no transaction on any such day in any such situation, the mean of the bid and asked prices on such day or, if the Common Stock is not listed or admitted to trading on any such exchange, the closing price, if reported, or, if the closing price is not reported, the average of the closing bid and asked prices as reported by the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or a similar source selected from time to time by the Corporation for the purpose, of the Common Stock equals or exceeds one hundred percent (100%) of the Conversion Price (as defined in paragraph (7) hereof) (giving effect to any adjustments required by paragraph (7) hereof), the Corporation may elect, in its sole discretion, to cease to pay dividends on the ESOP Convertible Preferred Stock on the Dividend Payment Dates at the Dividend Rate. Notice of the Corporation's election to discontinue paying dividends on the ESOP Convertible Preferred Stock at the Dividend Rate shall be given within ten (10) trading days of the conclusion of the Adjustment Period. Upon the Corporation giving notice of its election as set forth above, the Dividend Rate shall cease to be effective as the applicable rate for subsequent ESOP Convertible Preferred Stock dividend periods commencing the next succeeding regular Dividend Payment Date (the "Adjustment Date") provided that following the payment of the dividend due pursuant to paragraph (3)(i)(a) on such date there shall be no cumulative dividends on the ESOP Convertible Preferred Stock remaining accrued and unpaid. Notice shall be given by first class mail, postage prepaid, to each holder of record as of the conclusion of the Adjustment Period of the shares at such holder's address as the same appears on the stock register of the Corporation. 5 Commencing on the Adjustment Date, dividends, if any, on the ESOP Convertible Preferred Stock will be payable, when, as and if declared, in amounts equal to such dividends as may be declared and paid on the Common Stock, if any, multiplied by the number of shares of Common Stock issuable upon the conversion of the ESOP Convertible Preferred Stock on the record date or record dates for such Common Stock dividends (calculated quarterly if dividends are then paid quarterly on the Common Stock, without interest), and no more. After the Adjustment Date, dividends, if any, on the ESOP Convertible Preferred Stock will paid be on the next succeeding Common Stock dividend payment date and thereafter semi-annually on the same date as Common Stock dividends are paid; provided, however, that the dividends payable in respect of the first ESOP Convertible Preferred Stock dividend payment period following the Adjustment Date shall be adjusted as set forth in paragraph (3)(a) to the extent that the number of days in such dividend payment period is less than the number of days in the corresponding Common Stock quarterly dividend payment period. The record dates for such ESOP Convertible Preferred Stock dividends shall be the same date as may be established as the record date for the corresponding Common Stock dividend. Notwithstanding the foregoing, in the event that a Common Stock dividend is paid in respect of the initial quarterly period comprising any semi-annual dividend payment period for the ESOP Convertible Preferred Stock but no dividend is declared and paid in respect of the Common Stock for the second quarterly period comprising any such semi-annual dividend payment period for the ESOP Convertible Preferred Stock, a dividend equal to the dividend paid on the Common Stock for the initial quarterly period and no more shall be paid on the ESOP Convertible Preferred Stock on the date 90 days from the date that the last dividend was paid on the Common Stock (or, if such date is not a business day, on the next succeeding business day) and the record date for such dividend on the ESOP Convertible Preferred Stock shall be the date 90 days from the record date in respect of such last dividend paid on the Common Stock (or, if such date is not a business day, on the next succeeding business day). In the event that no dividends are paid on the Common Stock in respect of the two calendar quarters comprising an ESOP Convertible Preferred Stock dividend payment period, no dividends will be payable or paid on the ESOP Convertible Preferred Stock in respect of such period. Notwithstanding anything to the contrary contained herein, no dividends shall be payable pursuant to this paragraph (3)(i)(b) to the extent that the corresponding Common Stock dividend is paid other than in cash. (ii) All dividends paid with respect to shares of the ESOP Convertible Preferred Stock pursuant to paragraph (3)(i) hereof shall be paid pro rata to the holders entitled thereto. (iii) Prior to the Adjustment Date, no full dividends shall be declared by the Board of Directors or paid or set apart for payment by the Corporation on any Parity Securities for any period unless full dividends calculated in accordance with 6 paragraph (3)(i) have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment on the ESOP Convertible Preferred Stock for all dividend periods terminating on or prior to the date of payment, or setting apart for payment, of such full dividends on such Parity Securities. Prior to the Adjustment Date, if any dividends are not paid in full as aforesaid upon the shares of the ESOP Convertible Preferred Stock and any other Parity Securities, all dividends declared upon shares of the ESOP Convertible Preferred Stock and any other Parity Securities shall be declared pro rata so that the amount of dividends declared per share of the ESOP Convertible Preferred Stock and such Parity Securities shall in all cases bear to each other the same ratio that accrued dividends per share on the ESOP Convertible Preferred Stock and such Parity Securities bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the ESOP Convertible Preferred Stock or any other Parity Securities which may be in arrears. Any dividend not paid pursuant to paragraph (3)(i)(a) hereof or this paragraph (3)(iii) shall be fully cumulative and shall accrue (whether or not declared), without interest, as set forth in paragraph (3)(i)(a) hereof. On and after the Adjustment Date, dividends on the ESOP Convertible Preferred Stock shall cease to be cumulative. (iv) (a) Holders of shares of the ESOP Convertible Preferred Stock shall be entitled to receive the dividends provided for in paragraph (3)(i) hereof in preference to and in priority over any dividends upon any of the Junior Securities. (b) So long as any shares of the ESOP Convertible Preferred Stock are outstanding, the Board of Directors shall not declare, and the Corporation shall not pay or set apart for payment any dividend on any of the Junior Securities or make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the repurchase, redemption or other retirement of, any of the Junior Securities or Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Junior Securities or Parity Securities (other than purchases or redemptions pursuant to or in accordance with employee stock subscription agreements entered into between the Corporation and certain of its or its subsidiaries' directors, officers and key employees and purchases and redemptions pursuant to employee benefit plans and other than the repurchase, redemption or other retirement of any Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Parity Securities made pursuant to the requirements of paragraph (5)(ii) hereof and other than the repurchase, redemption or other retirement of debentures or other debt securities that are convertible or exchangeable into any of the Junior Securities or Parity Securities), or make any distribution in respect of the Junior Securities, either directly or indirectly, and whether in cash, obligations or shares of the Corporation or other property (other than distributions or 7 dividends in Junior Securities to the holders of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase or redeem any of the Junior Securities or Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities or Parity Securities (other than purchases or redemptions pursuant to or in accordance with employee stock subscription agreements entered into between the Corporation and certain of its or its subsidiaries' directors, officers and key employees and purchases and redemptions pursuant to employee benefit plans and other than the repurchase, redemption or other retirement of any Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Parity Securities made pursuant to the requirements of paragraph (5)(ii) hereof and other than the repurchase, redemption or other retirement of debentures or other debt securities that are convertible or exchangeable into any of the Junior Securities or Parity Securities) unless prior to or concurrently with such declaration, payment, setting apart for payment, repurchase, redemption or other retirement or distribution, as the case may be, any and all accrued and unpaid dividends on shares of the ESOP Convertible Preferred Stock not paid on the dates provided for in paragraph (3)(i) hereof (including any and all accrued dividends not paid by reason of the terms and conditions of paragraph (3)(i)(a) or paragraph (3)(iii) hereof but excluding any and all accrued dividends not yet payable by reason of the terms and conditions of paragraph (3)(i)(b) hereof) shall have been or be paid. (v) Subject to the foregoing provisions of this paragraph (3) and paragraph (7)(vi)(c), the Board of Directors may declare and the Corporation may pay or set apart for payment dividends and other distributions on any of the Junior Securities or Parity Securities, and may repurchase, redeem or otherwise retire any of the Junior Securities or Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Junior Securities or Parity Securities, and the holders of the shares of the ESOP Convertible Preferred Stock shall not be entitled to share therein. (4) Liquidation Preference. (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of shares of ESOP Convertible Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders an amount in cash equal to $16.00 for each share outstanding, plus an amount in cash equal to any and all accrued but unpaid dividends thereon to the date of liquidation, dissolution or winding up before any payment shall be made or any assets distributed to the holders of any of the Junior Securities; provided, however, that for the purposes of this paragraph (4)(i), to the extent that after the Adjustment Date dividends have been declared and paid on the Common Stock and the corresponding dividend has not yet been paid on the ESOP 8 Convertible Preferred Stock, the amount to be paid in respect of the ESOP Convertible Preferred Stock in accordance with paragraph (3)(i)(b) in light of the declaration and payment of such dividend on the Common Stock shall be deemed to be an accrued but unpaid dividend. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the ESOP Convertible Preferred Stock and any Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of ESOP Convertible Preferred Stock and the holders of outstanding shares of such Parity Securities are entitled were paid in full. Except as provided in this paragraph (4)(i), holders of ESOP Convertible Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (ii) For the purposes of this paragraph (4), neither the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more other corporations nor the consolidation or merger of one or more corporations with or into the Corporation shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up. (5) Redemption. (i) The Corporation may redeem at its option the ESOP Convertible Preferred Stock, at any time in whole or from time to time in part after the eighth (8th) anniversary of the initial date of issuance or on or before said date if permitted by paragraphs (5)(iv) through (5)(viii) or paragraph (9) at the redemption price per share set forth below, together with accrued and unpaid dividends thereon to the date of redemption (or, if pursuant to paragraphs (5)(iv), (5)(v), (5)(vii) and (5)(viii), at the redemption price set forth therein), without interest, to the extent the Corporation shall have funds legally available for such payment. For the purposes of this paragraph (5)(i), to the extent that after the Adjustment Date dividends have been declared and paid on the Common Stock and the corresponding dividend has not yet been paid on the ESOP Convertible Preferred Stock, the amount to be paid in respect of the ESOP Convertible Preferred Stock in accordance with paragraph (3)(i)(b) in light of the declaration and payment of such dividend on the Common Stock shall be deemed to be an accrued but unpaid dividend. If redeemed during the 12 month period beginning on April 10 in each of the years set forth below, the redemption price per share shall be as follows: 9 Year Redemption Price Per Share ---- -------------------------- 1991 $ 17.250 1992 17.125 1993 17.000 1994 16.875 1995 16.750 1996 16.625 1997 16.500 1998 16.375 1999 16.250 2000 16.125 2001 and thereafter 16.000 (ii) So long as any shares of the ESOP Convertible Preferred Stock are outstanding, any repurchase, redemption or other retirement of any Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Parity Securities (other than the repurchase, redemption or other retirement of debentures or other debt securities that are convertible or exchangeable into any Parity Securities) must be made on a pro rata basis with the ESOP Convertible Preferred Stock so that the total redemption prices of the shares redeemed of ESOP Convertible Preferred Stock and such Parity Securities shall in all cases bear to each other the same ratio that the total redemption prices of all shares outstanding on the applicable date of ESOP Convertible Preferred Stock and such Parity Securities bear to each other, unless prior to or concurrently with such repurchase, redemption or other retirement, as the case may be, any and all accrued and unpaid dividends on shares of the ESOP Convertible Preferred Stock not paid on the dates provided for in paragraph (3)(i) hereof (including any and all accrued dividends not paid by reason of the terms and conditions of paragraph (3)(i) or paragraph (3)(iii) hereof) shall have been or be paid. (iii) Shares of ESOP Convertible Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock. (iv) In the event of a change in the federal tax law or regulations of the United States of America or of an interpretation or application of such law or regulations or of a determination by a court of competent jurisdiction, which in any case has the effect of precluding the Corporation from claiming (other than for purposes of calculating any alternative minimum tax) any of the tax deductions for dividends paid on the ESOP 10 Convertible Preferred Stock when such dividends are used as provided under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), as in effect on the date shares of ESOP Convertible Preferred Stock are initially issued, the Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph (5)(i) hereof, elect to redeem any or all of the ESOP Convertible Preferred Stock for (a) the amount payable in respect of such shares upon liquidation of the Corporation pursuant to paragraph (4) hereof, if such election is made within one year of the occurrence of such event or (b) the amount payable in respect of such shares as set forth in paragraph (5)(i) hereof, if such election is made after one year from the occurrence of such event. (v) In the event that the Corporation certifies to the holders of the ESOP Convertible Preferred Stock that the Corporation has determined in good faith that either the RJR Nabisco Capital Accumulation Plan, as amended as of March 15, 1991, as the same may be further amended, or any successor plan (the "Plan") is not qualified within the meaning of Section 401(a) of the Code or the RJR Nabisco Employee Stock Ownership Program forming a part thereof, as the same may be amended, or any successor program (the "Program"), is not an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Code, the Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph (5)(i) hereof, elect to redeem any or all of the ESOP Convertible Preferred Stock for (a) the amount payable in respect of such shares upon liquidation of the Corporation pursuant to paragraph (4) hereof, if such election is made within one year of the occurrence of such event or (b) the amount payable in respect of such shares as set forth in paragraph (5)(i) hereof, if such election is made after one year from the occurrence of such event. (vi) In the event that the Plan or the Program is, or contributions thereto are, expressly terminated by the Corporation, the Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph (5)(i) hereof, elect to redeem any or all the ESOP Convertible Preferred Stock for the amount payable in respect of such shares as set forth in paragraph (5)(i) hereof. (vii) In the event and to the extent that redemption of shares of ESOP Convertible Preferred Stock is necessary or appropriate to provide for the distributions required to be made under, or to satisfy an investment election provided to participants in accordance with, the Program, the Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph (5)(i) hereof, elect to redeem any or all ESOP Convertible Preferred Stock for the amount payable in respect of such shares upon liquidation of the Corporation pursuant to paragraph (4) hereof. 11 (viii) In the event and to the extent that shares of ESOP Convertible Preferred Stock are transferred to a participant in the Plan, the Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph (5)(i) hereof, elect to redeem such shares of ESOP Convertible Preferred Stock for the amount payable in respect of such shares upon liquidation of the Corporation pursuant to paragraph (4) hereof. (ix) In the event and to the extent that the Corporation is required under Section 409(h)(1)(B) of the Code or any successor provision of law to redeem shares of ESOP Convertible Preferred Stock, the Corporation shall, notwithstanding anything to the contrary contained in paragraph (5)(i) hereof, redeem such shares of ESOP Convertible Preferred Stock for the amount equal to the greater of (i) the value as of the applicable valuation date (as determined under the Program) of the shares of Common Stock into which such shares of ESOP Convertible Preferred Stock are convertible as of such date or (ii) the amount payable in respect of such shares of upon liquidation of the Corporation pursuant to paragraph (4) hereof. (x) Notwithstanding anything to the contrary contained herein, subject to the final sentence of this paragraph (5)(x), if there is, or if as a result of any redemption pursuant to paragraph (5)(ix) hereof there would be, a default or event of default under any debt instrument or agreement of the Corporation or any of its subsidiaries or any other material obligation of the Company or any of its subsidiaries, or an impairment of capital or violation of the General Corporation Law of the State of Delaware (collectively, an "Event"), then any such redemption shall be deferred until the first business day that such redemption may occur without any such Event existing or resulting. If at any time consummation of any redemptions to be made by the Corporation pursuant to paragraph (5)(ix) would result in an Event, then the Corporation shall make redemptions of shares of ESOP Convertible Preferred Stock pro rata (on the basis of the proportion of the number of shares of ESOP Convertible Preferred Stock which each holder shall have specified to be redeemed for the maximum number of shares of ESOP Convertible Preferred Stock permitted without resulting in an Event; provided, however, that the provisions of the first sentence of this paragraph (5)(x) shall apply in respect of all shares of ESOP Convertible Preferred Stock not redeemed. Until all of such ESOP Convertible Preferred Stock is redeemed and paid for by the Corporation, the shares of ESOP Convertible Preferred Stock which are required to be redeemed under Section 409(h)(1)(B) of the Code or any successor provision of law which are not redeemed in accordance with this paragraph (5)(x) shall have priority, on a pro rata basis, over other redemptions by the Corporation pursuant to this paragraph (5). Notwithstanding the terms of this paragraph (5)(x) or paragraph (5)(ix), to the extent the deferral provided for by this paragraph (5)(x) would not be permitted by the Code or the Employee Retirement Income 12 Security Act of 1974, as amended ("ERISA"), or any successor provision of law, the provisions of paragraph (5)(ix) shall, to the extent permitted by the Code and ERISA, be of no force or effect where an Event would occur without regard to such deferral. (xi) The Corporation, at its option, may make payment of the redemption price required to be paid upon redemption of shares of ESOP Convertible Preferred Stock (other than pursuant to paragraph (9)(iv)) in cash or in shares of Common Stock, or in securities of comparable value that constitute "qualifying employer securities" with respect to a holder of ESOP Convertible Preferred Stock within the meaning of Section 409(1) of the Code and Section 407(d)(5) of ERISA or any successor provisions of law ("Qualifying Employer Securities") or in any combination of such shares, Qualifying Employer Securities and cash, any such shares and Qualifying Employer Securities to be valued for such purpose at their Fair Market Value (as defined in paragraph (7)(vi)(e) hereof) as of the date of redemption. (6) Procedure for Redemption. (i) In the event that fewer than all the outstanding shares of ESOP Convertible Preferred Stock are to be redeemed other than pursuant to paragraph (5)(vii), (5)(viii) or (5)(ix) or paragraph (9)(iv), the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be selected pro rata, except that in any redemption of fewer than all the outstanding shares of ESOP Convertible Preferred Stock, the Corporation may redeem all shares held by any holders of a number of shares not to exceed 100, including all shares held by holders who, after giving effect to such redemption, would hold less than 100 shares, as may be specified by the Corporation. (ii) In the event the Corporation shall redeem shares of ESOP Convertible Preferred Stock other than pursuant to paragraph 5(vii), 5(viii) or (5)(ix) or paragraph (9)(iv), subject to applicable law, written notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 20 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of ESOP Convertible Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state: (a) the redemption date; (b) the number of shares of ESOP Convertible Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed from such holder, the number of shares to be redeemed from such holder; (c) the redemption price; (d) that shares of ESOP Convertible Preferred Stock called for redemption may be 13 converted in accordance with, and subject to the terms of, paragraph (7) hereof at any time prior to the date fixed for redemption (unless the Corporation shall default in payment of the redemption price, in which case such right shall not terminate at such date); (e) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (f) the method and form of payment of the redemption price; and (g) that dividends on the shares to be redeemed will cease to accrue on such redemption date. (iii) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing cash, Qualifying Employer Securities or shares of Common Stock for the payment of the redemption price of the shares called for redemption) dividends on the shares of ESOP Convertible Preferred Stock so called for redemption, to the extent theretofore accruing, shall cease to accrue and said shares shall no longer be deemed to be outstanding and shall have the status of authorized but unissued shares of Preferred Stock, undesignated as to series, and all rights of the holders thereof as holders of the ESOP Convertible Preferred Stock (except the right to receive from the Corporation the redemption price and any and all accrued and unpaid dividends) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price aforesaid together with payment of any and all accrued and unpaid dividends, without interest. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (7) Conversion. (i) Upon the terms and in the manner set forth in this paragraph (7) and subject to the provisions for adjustment contained in paragraph (7)(vi), each share of the ESOP Convertible Preferred Stock shall be convertible, at the option of the holder thereof at any time, upon surrender to the Corporation of the certificates for the shares to be converted, into a number of fully paid and nonassessable shares of Common Stock equal to the aggregate stated value of the ESOP Convertible Preferred Stock to be converted divided by a conversion price (the "Conversion Price") of $16.00; provided, however, that the right to convert shares of ESOP Convertible Preferred Stock that have been called for redemption pursuant to paragraphs (5), (6) and (9)(iii) shall terminate at the close of business on the date fixed for redemption, unless the Corporation shall default in making payment of the amount payable upon such redemption and provided, further, that the right to convert shares of ESOP Convertible Preferred Stock as to which a notice of redemption has been delivered pursuant to paragraph (9)(iv) shall terminate 14 at the close of business on the fifth (5th) business day prior to the consummation of the transaction described in paragraph (9)(ii), unless the Corporation or the successor of the Corporation shall default in making payment of the amount payable upon such redemption. (ii) In order to convert shares of the ESOP Convertible Preferred Stock, the holder thereof shall (a) deliver a properly completed and duly executed written notice of election to convert specifying the number of the shares of the ESOP Convertible Preferred Stock to be converted and the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued to the Corporation at its principal office or at the office of any agency which may be maintained for such purpose (the "Conversion Agent"), (b) surrender the certificate for such shares of ESOP Convertible Preferred Stock to the Corporation or the Conversion Agent, accompanied, if so required by the Corporation or the Conversion Agent, by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation or the Conversion Agent duly executed by the holder or his attorney duly authorized in writing, and (c) pay any transfer or similar tax required by paragraph (7)(viii). (iii) (a) Conversion shall be deemed to have been effected at the close of business on the date (the "Conversion Date") on which the Corporation or the Conversion Agent shall have received the notice of election to convert, the surrendered certificate, any required payments and all other required documents. Immediately upon conversion, the rights of the holders of converted shares of ESOP Convertible Preferred Stock shall cease and the persons entitled to receive the shares of Common Stock upon the conversion of such shares of ESOP Convertible Preferred Stock shall be treated for all purposes as having become the record owners of such shares of Common Stock but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock of record on any date prior to the Conversion Date. Conversion shall be at the Conversion Price in effect at such time on such date, unless the stock transfer books of the Corporation shall be closed on that date, in which event such person or persons shall be deemed to have become such holder or holders of record of the Common Stock at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such shares shall have been surrendered and such notice and any required payments received by the Corporation. (b) As promptly as practicable after the Conversion Date, the Corporation shall deliver or cause to be delivered at the office or agency of the Conversion Agent, to or upon the written order of the holder of the surrendered shares of ESOP Convertible Preferred Stock, a certificate or certificates 15 representing the number of fully paid and nonassessable shares of Common Stock into which such shares of ESOP Convertible Preferred Stock have been converted in accordance with the provisions of this paragraph (7), and any cash payable in respect of fractional shares as provided in paragraph (7)(iv). (c) Upon the surrender of a certificate representing shares of ESOP Convertible Preferred Stock that is converted in part, the Corporation shall issue or cause to be issued for the holder a new certificate representing shares of ESOP Convertible Preferred Stock equal in number to the unconverted portion of the shares of ESOP Convertible Preferred Stock represented by the certificate so surrendered. (iv) (a) No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon the conversion of any shares of ESOP Convertible Preferred Stock. Instead of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of a share of ESOP Convertible Preferred Stock, the Corporation shall either (A) pay to the holder of such share (a "Fractional Shareholder") an amount in cash (computed to the nearest cent) equal to the Fair Market Value thereof (as defined in paragraph (7)(vi)(e)) on the business day next preceding the Conversion Date or (B) follow the procedures set forth in paragraph (7)(iv)(b). If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate stated value of the shares of ESOP Convertible Preferred Stock so surrendered. (b) The Corporation may, in lieu of paying cash to Fractional Shareholders as provided in paragraph (7)(iv)(a), issue, in full payment of the Corporation's obligation with respect to such fractional interests, shares of Common Stock equal to the aggregate of such fractional interests of such Fractional Shareholder and other Fractional Shareholders (aggregated over a reasonable period of time, but not in any event more than 20 business days, and rounded upwards to the nearest whole share) to an agent (which, without limiting the generality of the foregoing, may be the trustee under the Plan or Program, the Corporation or the Conversion Agent) (the "Transfer Agent") appointed by the Corporation for such Fractional Shareholders for sale promptly by the Transfer Agent on behalf of the Fractional Shareholders. The Transfer Agent will remit promptly to such Fractional Shareholders their proportionate interest in the net proceeds (following the deduction of applicable transaction costs and computed to the nearest cent) from such sale. (v) The holders of shares of ESOP Convertible Preferred Stock at the close of business on a record date for an ESOP Convertible Preferred Stock dividend (including a Dividend 16 Payment Record Date) shall be entitled to receive the dividend payable on such shares (except that holders of shares called for redemption on a redemption date occurring between such record date and the corresponding dividend payment date (including a corresponding Dividend Payment Date) shall not be entitled to receive such dividend on such dividend payment date (including a Dividend Payment Date) but instead will receive accrued and unpaid dividends to such redemption date) on the corresponding dividend payment date (including a Dividend Payment Date) notwithstanding the conversion thereof or the Corporation's default in payment of the dividend due on such dividend payment date (including a Dividend Payment Date). (vi) The Conversion Price shall be subject to adjustment as follows: (a) If the Corporation shall (v) declare or pay a dividend on its outstanding Common Stock in shares of Common Stock or make a distribution to all holders of its Common Stock in shares of Common Stock, (w) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, (x) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (y) issue by reclassification of its shares of Common Stock other securities of the Corporation, then the Conversion Price in effect immediately prior thereto shall be adjusted so that the holder of any shares of ESOP Convertible Preferred Stock thereafter converted shall be entitled to receive the number and kind of shares of Common Stock or other securities that the holder would have owned or have been entitled to receive after the happening of any of the events described above had such shares of ESOP Convertible Preferred Stock been converted immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (7)(vi)(a) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Such adjustment shall be made successively. (b) If the Corporation shall issue to all holders of its Common Stock rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock at a price per share that is lower than the then Fair Market Value per share of Common Stock (as defined in paragraph (7)(vi)(e) below) at the record date mentioned below, the Conversion Price shall be adjusted in accordance with the following formula: 17 ( N x P ) ----- AC = C x O + ( M ) ------------- O + N where AC = the adjusted Conversion Price. C = the current Conversion Price. O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock offered. P = the offering price per share of the additional shares. M = the Fair Market Value per share of Common Stock on the record date. The adjustment shall be made successively whenever any such rights, options, warrants or convertible or exchangeable securities are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, options, warrants or convertible or exchangeable securities. Upon the expiration of any such rights, options, warrants or convertible or exchangeable securities, if any thereof shall not have been exercised, then the Conversion Price shall be increased by the amount of the initial adjustment of the Conversion Price pursuant to this paragraph (7)(vi)(b) in respect of such expired rights, options, warrants or convertible or exchangeable securities. (c) In case the Corporation shall distribute to all holders of its outstanding Common Stock any shares of capital stock of the Corporation (other than Common Stock) or evidences of its indebtedness or assets (excluding ordinary cash dividends, which may be an initial cash dividend, payable out of consolidated earnings or earned surplus (both of which to be calculated for these purposes excluding charges for amortization of goodwill and other intangibles) and dividends or distributions referred to in paragraphs (7)(vi)(a) and (b) above and, after the Adjustment Date, excluding all cash dividends) or rights or warrants to subscribe for or purchase any of its securities (excluding those referred to in paragraph (7)(vi)(b) above) (any of the foregoing being hereinafter in this paragraph (7)(vi)(c) called the "Securities or Assets"), then in each such case, unless the Corporation elects to reserve shares or other units of such Securities or Assets for distribution to the holders of the ESOP Convertible Preferred Stock upon the conversion of the shares of ESOP Convertible Preferred Stock so that any such holder converting shares of ESOP Convertible Preferred Stock will 18 receive upon such conversion, in addition to the shares of the Common Stock to which such holder is entitled, the amount and kind of such Securities or Assets which such holder would have received if such holder had, immediately prior to the record date for the distribution of the Securities or Assets, converted its shares of ESOP Convertible Preferred Stock into Common Stock, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the Fair Market Value per share (as defined in paragraph (7)(vi)(e) below) of the Common Stock on the record date mentioned below less the then fair market value (as determined by the Board of Directors, whose determination shall, if made in good faith, be conclusive, final and binding) of the portion of the capital stock or assets or evidences of indebtedness so distributed or of such rights or warrants applicable to one share of Common Stock, and of which the denominator shall be the Fair Market Value per share of the Common Stock on such record date. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution, except as provided in paragraph (7)(vi)(h) below. (d) If the Corporation shall, after the date hereof, sell and issue any shares of Common Stock, rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding (i) shares of Common Stock, rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock issued in any of the transactions described in paragraphs (7)(vi)(a) and (7)(vi)(b) above; (ii) stock options and shares of Common Stock issued to, or issuable upon the exercise of stock options granted to or to be granted to, employees or directors of the Corporation or its subsidiaries; (iii) shares of Common Stock issuable upon exercise of warrants previously issued; (iv) shares issued upon conversion of the Senior Converting Debentures Due 2009 of the Corporation; and (v) shares issued upon conversion of shares of ESOP Convertible Preferred Stock), at a price per share (determined, in the case of rights, options, warrants or convertible or exchangeable securities, by dividing (x) the total amount received or receivable by the Corporation in consideration of the sale and issuance of such rights, options, warrants or convertible or exchangeable securities, plus the total consideration payable to the Corporation upon exercise or conversion or exchange thereof, by (y) the total number of shares of Common Stock covered by such rights, options, warrants or convertible or exchangeable securities) that is lower than the then Fair Market Value per share of Common Stock immediately 19 prior to such sale and issuance, then in each case the Conversion Price shall be adjusted in accordance with the following formula: ( N x P ) ----- O + ( M ) ------------- AC = C x O + N where AC = the adjusted Conversion Price. C = the current Conversion Price. O = the number of shares of Common Stock outstanding on the issue date. N = the number of additional shares of Common Stock offered. P = the offering price per share of the additional shares. M = the Fair Market Value per share of Common Stock on the issue date. For the purposes of such adjustments, the shares of Common Stock which the holder of any such rights, options, warrants, or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance, and the consideration received or receivable by the Corporation therefor shall be deemed to be the consideration received or receivable by the Corporation (plus any discounts or commissions in connection therewith) for such rights, options, warrants or convertible or exchangeable securities, plus the consideration or premiums stated in such rights, options, warrants or convertible or exchangeable securities to be paid for the shares of Common Stock purchasable thereby. In case the Corporation shall (i) sell and issue shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent or (ii) sell and issue shares of Common Stock together with one or more other securities as part of a unit at a price per unit, then in determining the "price per share" and the "consideration received or receivable by the Corporation" for purposes of the first sentence and the immediately preceding sentence of this paragraph (7)(vii)(d), the Board of Directors shall determine, in its discretion, the fair market value of said property or the shares of Common Stock then being sold as part of such unit, as the case may be, and such determinations, if made in good faith, shall be conclusive, final and binding. The adjustment shall be made successively whenever any such shares of Common Stock, rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase 20 shares of Common Stock are issued for less than the Fair Market Value, subject to the exceptions noted above, and shall become effective immediately after the issue date. Notwithstanding the foregoing, no adjustments of any kind under this paragraph (7)(vi)(d) shall be made with respect to the sale and issuance by the Corporation of any shares of Common Stock, rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock in connection with either (1) an underwritten public offering or (2) any transaction as to which the Corporation has received a written opinion of a nationally recognized investment bank stating that the transaction is fair to the Corporation from a financial point of view. (e) For the purposes of any computation under paragraphs (7)(vi)(b), (c) and (d) and for the purposes of paragraphs (5)(xi), (7)(iv)(a) and (9)(iii), the Fair Market Value as to shares of Common Stock or any other class of capital stock or securities of the Corporation or any other issuer that are traded shall at any date shall be deemed to be the average of the daily closing prices for the twenty (20) consecutive trading days commencing on the thirtieth (30th) trading day prior to the date in question. The closing price for each day shall be (x) if the shares of Common Stock or any other class of capital stock or securities of the Corporation or any other issuer are listed or admitted to trading on a national securities exchange, the closing price on the New York Stock Exchange Consolidated Tape (or any successor composite tape reporting transactions on national securities exchanges) or, if such a composite tape shall not be in use or shall not report transactions in such securities, the last reported sales price regular way on the principal national securities exchange on which such securities are listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of stock or the greatest aggregate principal amount of debt securities has been traded during such twenty (20) consecutive trading days), or, if there is no transaction on any such day in any such situation, the mean of the bid and asked prices on such day, or (y) if such securities are not listed or admitted to trading on any such exchange, the closing price, if reported, or, if the closing price is not reported, the average of the closing bid and asked prices as reported by NASDAQ or a similar source selected from time to time by the Corporation for the purpose. In the event such closing prices are unavailable, the Fair Market Value shall be deemed to be, subject to applicable law, the fair market value as determined in good faith by the Board of Directors, on the basis of such relevant factors as it in good faith considers, in the reasonable judgment of the Board of Directors, appropriate. (f) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or 21 decrease of at least 1% of such price; provided, however, that any adjustments which by reason of this paragraph (7)(vi)(f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph (7)(vi) shall be made to the nearest one-hundredth of a cent or to the nearest one-hundredth of a share, as the case may be. (g) For the purposes of this paragraph (7)(vi) and paragraph (7)(ix), the term "shares of Common Stock" shall mean (x) the class of stock designated as the Common Stock of the Corporation at the date hereof or (y) any other class of stock resulting from successive changes or reclassifications of such shares consisting solely of changes in par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to paragraphs (7)(vi)(a) or (c) above, the holders of ESOP Convertible Preferred Stock shall become entitled to receive any securities other than shares of Common Stock, thereafter the number of such other securities so issuable upon conversion of the shares of ESOP Convertible Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of ESOP Convertible Preferred Stock contained in this paragraph (7)(vi). (h) Notwithstanding the foregoing, in any case in which this paragraph (7)(vi) provides that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any share of ESOP Convertible Preferred Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of any fraction pursuant to paragraph (7)(iv). (i) If the Corporation shall make any dividend or distribution on the Common Stock or issue any Common Stock, other capital stock or other security of the Corporation or any rights or warrants to purchase or acquire any such security, which transaction does not result in an adjustment to the Conversion Price pursuant to the foregoing provisions of this paragraph (7)(vi), the Board of Directors of the Corporation may consider whether such action is of such a nature that an adjustment to the Conversion Price should equitably be made in respect of such transaction. If in such case the Board of Directors of the Corporation determines that an adjustment to the Conversion Price should be made, an adjustment shall be made effective as of such date as is determined by the Board of Directors of the Corporation. The determination of the Board of Directors of the Corporation as to whether an adjustment to the Conversion Price should be made pursuant to the foregoing provisions of this paragraph (7)(vi)(i), and, if so, as to what adjustment should be 22 made and when, shall be conclusive, final and binding on the Corporation and all stockholders of the Corporation. The Corporation shall be entitled to make such additional adjustments in the Conversion Price, in addition to those required by the foregoing provisions of this paragraph (7)(vi), as shall be necessary in order that any dividend or distribution in shares of capital stock of the Corporation, subdivision, reclassification or combination of shares of stock of the Corporation or any recapitalization of the Corporation shall not be taxable to holders of the Common Stock. (vii) Whenever the Conversion Price is adjusted as herein provided, the Chief Financial Officer, Treasurer or Controller of the Corporation shall compute the adjusted Conversion Price in accordance with the foregoing provisions and shall prepare a certificate setting forth such adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, which certificate shall be conclusive, final and binding evidence of the correctness of the adjustment. A copy of such certificate shall be filed promptly with any Conversion Agent. Promptly after delivery of any such certificate, the Corporation shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which such adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each share of ESOP Convertible Preferred Stock at his last address as shown on the stock books of the Corporation. (viii) The Corporation will pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on the conversion of shares of ESOP Convertible Preferred Stock; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any registration of transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the registered holder of ESOP Convertible Preferred Stock converted or to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (ix) (a) The Corporation shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its issued Common Stock held in its treasury, or both, for the purpose of effecting the conversion of the ESOP Convertible Preferred Stock, the full number of shares of Common Stock then deliverable upon the conversion of all outstanding shares of the ESOP Convertible Preferred Stock. 23 (b) Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value (if any) of the Common Stock issuable upon conversion of the ESOP Convertible Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price. (8) Voting Rights. (i) The holders of record of shares of ESOP Convertible Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph (8) or as otherwise provided by law. The holders of ESOP Convertible Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of Common Stock of the Corporation, voting together with the holders of Common Stock as one class; provided, however, that the ESOP Convertible Preferred Stock shall not be entitled to vote on any increase or decrease in the number of authorized shares of any class or classes of stock. Each share of the ESOP Convertible Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of ESOP Convertible Preferred Stock could be converted on the record date for determining the stockholders entitled to vote, rounded to the nearest one-tenth of a vote; it being understood that whenever the Conversion Price is adjusted as provided in paragraph (7) hereof, the voting rights of the ESOP Convertible Preferred Stock shall also be similarly adjusted. (ii) So long as any shares of the ESOP Convertible Preferred Stock are outstanding (except when notice of the redemption of all outstanding shares of ESOP Convertible Preferred Stock has been given pursuant to paragraphs (5) and (6) or paragraph (9)(iii) and cash, Qualifying Employer Securities or shares of Common Stock have been deposited in trust for such redemption), the Corporation shall not, without the affirmative vote or consent of the holders of at least a majority of the shares of ESOP Convertible Preferred Stock and any other series of Preferred Stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, amend the Certificate of Incorporation or this Certificate of Designation so as to affect materially and adversely the specified rights, preferences, privileges or voting rights of shares of ESOP Convertible Preferred Stock. (iii) (a) The creation, authorization or issuance of any shares of any Junior Securities, Parity Securities or Senior Securities, (b) the creation of any indebtedness of any kind of the Corporation, or (c) subject to paragraph (8)(i), the increase or decrease in the amount of authorized capital stock of any class, including Preferred Stock, shall not require the consent 24 of the holders of ESOP Convertible Preferred Stock and shall not be deemed to affect materially and adversely the rights, preferences, privileges or voting rights of shares of ESOP Convertible Preferred Stock. (9) Consolidation, Merger, etc. (i) In the event that the Corporation shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into shares of any successor or resulting company (including the Corporation) that constitute Qualifying Employer Securities that are common stock or common equity with respect to a holder of ESOP Convertible Preferred Stock within the meaning of Section 409(1) of the Code and Section 407(d)(5) of ERISA, or any successor provision of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, then, in such event, the shares of ESOP Convertible Preferred Stock of such holder shall be converted into or exchanged for and shall become preferred shares of such successor or resulting company, having in respect of such company insofar as possible (taking into account, without limitation, any requirements relating to the listing of such preferred shares on any national securities exchange or the qualification of such preferred shares for trading in any over-the-counter market) the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by paragraphs (5) and (6) hereof and this paragraph (9)), and the qualifications, limitations or restrictions thereon, that the ESOP Convertible Preferred Stock had immediately prior to such transaction; provided, however, that after such transaction each share of stock into which the ESOP Convertible Preferred Stock is so converted or for which it is exchanged shall be convertible, pursuant to the terms and conditions provided by paragraph (7) hereof, into the number and kind of Qualifying Employer Securities receivable by a holder of the number of shares of Common Stock into which such shares of ESOP Convertible Preferred Stock could have been converted pursuant to paragraph (7) hereof immediately prior to such transaction and provided, further, that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, then such election shall be deemed to be solely for Qualifying Employer Securities (together, if applicable, with a cash payment in lieu of fractional shares) with the effect provided above on the basis of the number and kind of Qualifying Employer Securities receivable by a holder of the number of shares of Common Stock into which the shares of ESOP Convertible Preferred Stock could have been converted pursuant to paragraph (7) hereof immediately prior to such transaction (it being understood that if the kind or amount of Qualifying Employer Securities receivable in respect of each share of Common Stock 25 upon such transaction is not the same for each such share, then the kind and amount of Qualifying Employer Securities deemed to be receivable in respect of each share of Common Stock for purposes of this proviso shall be the kind and amount so receivable per share of Common Stock by a plurality of such shares). The rights of the ESOP Convertible Preferred Stock as preferred shares of such successor resulting company shall successively be subject to adjustments pursuant to paragraph (7) hereof after any such transaction as nearly equivalent to the adjustments provided for by such paragraph prior to such transaction. (ii) In the event that the Corporation shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other shares or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of Qualifying Employer Securities that are common stock or common equity (as referred to in paragraph (9)(i)) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of ESOP Convertible Preferred Stock shall, without any action on the part of the Corporation or any holder thereof but subject to paragraph (9)(iii) and (9)(iv), be automatically converted immediately prior to the consummation of such merger, consolidation or similar transaction into shares of Common Stock at the conversion rate then in effect so that each share of ESOP Convertible Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of shares, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of ESOP Convertible Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of shares, securities, cash or other property receivable upon such transaction (provided that, if the kind or amount of shares, securities, cash or other property receivable upon such transaction is not the same for each non- electing share, then the kind and amount of shares, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of non-electing shares). (iii) In the event the Corporation shall enter into any agreement providing for any consolidation or merger or similar transaction described in paragraph (9)(ii), then the Corporation shall as soon as practicable thereafter (and in any event at least ten (10) business days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of ESOP Convertible Preferred Stock and 26 the Corporation shall have the right to elect, to the extent permitted by applicable law, by written notice to the holders, to redeem such ESOP Convertible Preferred Stock upon consummation of such transaction (if and when such transaction is consummated), out of funds legally available therefor, in lieu of any cash or other securities which such holder would otherwise be entitled to receive under paragraph (9)(ii) hereof, for the amount payable in respect of shares of ESOP Convertible Preferred Stock upon a redemption by the Corporation pursuant to paragraph (5)(i) hereof, which amount may be paid in cash or in shares of Common Stock or common stock of the successor of the Corporation or in Qualifying Employer Securities of the Corporation or the successor of the Corporation or in any combination thereof, any such shares and Qualifying Employer Securities to be valued for such purpose at their Fair Market Value (as defined in paragraph (7)(vi)(e). No such notice of redemption shall be effective unless given to the holders prior to the close of business of the tenth (10th) business day prior to consummation of such transaction, unless the holders shall waive such prior notice, but any notice or redemption so given prior to such time may be withdrawn by notice of withdrawal given to the holders prior to the close of business on the tenth (10th) business day prior to consummation of such transaction. (iv) In the event the Corporation shall enter into any agreement providing for any consolidation or merger or similar transaction described in paragraph (9)(ii) and the Corporation shall not elect pursuant to paragraph (9)(iii) to redeem the ESOP Convertible Preferred Stock, to the extent permitted by applicable law, each such holder shall have the right to elect, by written notice to the Corporation, to receive, upon consummation of such transaction (if and when such transaction is consummated), out of funds legally available therefor, from the Corporation or the successor of the Corporation, in redemption of such ESOP Convertible Preferred Stock, in lieu of any cash or other securities which such holder would otherwise be entitled to receive under paragraph (9)(ii) hereof, a cash payment equal to the amount payable in respect of shares of ESOP Convertible Preferred Stock upon a redemption by the Corporation pursuant to paragraph (5)(i) hereof. No such notice of redemption shall be effective unless given to the Corporation prior to the close of business of the fifth (5th) business day prior to consummation of such transaction, unless the Corporation or the successor of the Corporation shall waive such prior notice, but any notice or redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Corporation prior to the close of business on the fifth (5th) business day prior to consummation of such transaction. (10) Limitations. Except as may otherwise be required by law, the shares of ESOP Convertible Preferred Stock shall not have any powers, preferences or relative, participating, optional or other special rights other than those specifically set forth 27 in this resolution (as such resolution may be amended from time to time) or otherwise in the Certificate of Incorporation of the Corporation. The following is a statement of the number, designation, powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the Series B Cumulative Preferred Stock of the Corporation: (1) Designation. The designation of the series of Preferred Stock authorized by this resolution shall be "Series B Cumulative Preferred Stock" (the "Series B Preferred Stock") consisting of 50,000 shares. The stated value of the Series B Preferred Stock shall be $25,000 per share, which value does not represent a determination by the Board of Directors for the purposes of the capital accounts. (2) Rank. The Series B Preferred Stock shall, with respect to dividend rights and rights on liquidation, dissolution and winding up, rank prior to the Common Stock, par value $0.01 per share (the "Common Stock"), of the Corporation and on a parity with the Cumulative Convertible Preferred Stock, par value $0.01 per share and stated value $25.00 per share (the "Cumulative Convertible Preferred Stock"), and the ESOP Convertible Preferred Stock, par value $0.01 per share and stated value $16.00 per share (the "ESOP Convertible Preferred Stock"), of the Corporation. All equity securities of the Corporation to which the Series B Preferred Stock ranks prior, including the Common Stock, are collectively referred to herein as the "Junior Securities," all equity securities of the Corporation with which the Series B Preferred Stock ranks on a parity, including the Cumulative Convertible Preferred Stock and the ESOP Convertible Preferred Stock, are collectively referred to herein as the "Parity Securities" and all equity securities of the Corporation (other than convertible debt securities) to which the Series B Preferred Stock ranks junior, whether with respect to dividends or upon liquidation, dissolution, winding-up or otherwise, are collectively referred to herein as the "Senior Securities." The Series B Preferred Stock shall be subject to the creation of Junior Securities, Parity Securities and Senior Securities. (3) Dividends. (i) The holders of outstanding shares of Series B Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential cash dividends at the rate per annum of 9 1/4% of the stated value ($25,000) per share and no more, payable in arrears on the first business day of each March, June, September and December, commencing December 1, 1993 (each of such dates being a "Dividend Payment Date"). If any Dividend Payment Date shall be or be declared a national or New York State holiday or if banking 28 institutions in the State of New York shall be closed because of a banking moratorium or otherwise on such date, then the Dividend Payment Date shall be on the next succeeding day on which such banks shall be open. Each such dividend shall be payable to holders of record as they appear on the stock books of the Corporation at the close of business on each record date, which shall be the 15th day immediately preceding each such Dividend Payment Date (each of such dates being a "Dividend Payment Record Date"). Each of such quarterly dividends shall be fully cumulative and shall accrue (whether or not declared) on a daily basis, without interest, from the previous Dividend Payment Date, except that the first dividend shall accrue, without interest, from the date of initial issuance of the Series B Preferred Stock. Accrued and unpaid dividends shall not bear interest. Dividends will cease to accrue in respect of the Series B Preferred Stock on the date of their earlier redemption pursuant to paragraph (4), unless the Corporation shall default in providing funds for the payment of the redemption price of the shares called for redemption pursuant to paragraphs (4) and (5). Dividends payable on the Series B Preferred Stock for the first dividend period and any partial dividend period will be computed on the basis of a 360-day year consisting of twelve 30-day months. (ii) No full dividends shall be declared by the Board of Directors or paid or set apart for payment by the Corporation on any Parity Securities for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment on the Series B Preferred Stock through the most recent Dividend Payment Date. If any dividends are not paid or set apart in full, as aforesaid, upon the shares of the Series B Preferred Stock and any Parity Securities, all dividends declared upon shares on the Series B Preferred Stock and any Parity Securities shall be declared pro rata so that the amount of dividends declared per share on the Series B Preferred Stock and such Parity Securities shall in all cases bear to each other the same ratio that accrued dividends per share on the Series B Preferred Stock and such Parity Securities bear to each other. Unless full cumulative dividends, if any, accrued on all outstanding shares of the Series B Preferred Stock have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment through the most recent Dividend Payment Date, no dividend shall be declared or paid or set apart for payment or other distribution declared or made on any Junior Securities (other than a dividend or distribution paid in shares of, or warrants, rights or options exercisable for or convertible into, any Junior Securities), nor shall any Junior Securities be redeemed, purchased or otherwise retired for any consideration, nor may any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such securities, by the Corporation (other than redemptions and purchases pursuant to or in accordance with employee stock subscription agreements entered into between the Corporation and certain of its or its 29 subsidiaries' directors, officers and key employees), except by conversion into or exchange for Junior Securities. Holders of the shares of the Series B Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in paragraph 3(i). (iii) Subject to the foregoing provisions of this paragraph (3), the Board of Directors may declare and the Corporation may pay or set apart for payment dividends and other distributions on any of the Junior Securities or Parity Securities, and may redeem, purchase, or otherwise retire any Junior Securities, and the holders of the shares of the Series B Preferred Stock shall not be entitled to share therein. (iv) Any dividend payment made on shares of the Series B Preferred Stock shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of the Series B Preferred Stock. (v) All dividends paid with respect to shares of the Series B Preferred Stock pursuant to this paragraph (3) shall be paid pro rata to the holders entitled thereto. (vi) Holders of shares of the Series B Preferred Stock shall be entitled to receive the dividends provided for in this paragraph (3) in preference to and in priority over any dividends upon any of the Junior Securities. (4) Redemption. (i) The shares of the Series B Preferred Stock shall not be redeemable prior to August 18, 1998. On and after August 18, 1998, the Corporation, at its option, may redeem shares of the Series B Preferred Stock, as a whole or in part, at any time or from time to time, at a redemption price per share of $25,000, plus, in each case, an amount equal to accrued and unpaid dividends thereon to the date fixed for redemption, without interest, to the extent the Corporation shall have funds legally available for such payment. (ii) So long as any shares of the Series B Preferred Stock are outstanding, any repurchase, redemption or other retirement of any Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Parity Securities (other than the repurchase, redemption or other retirement of debentures or other debt securities that are convertible or exchangeable into any Parity Securities) must be made on a pro rata basis with the Series B Preferred Stock so that the total redemption prices of the shares redeemed of Series B Preferred Stock and such Parity Securities shall in all cases bear to each other the same ratio that the total redemption prices of all shares outstanding on the applicable date of Series B Preferred Stock and such Parity Securities bear to each other, unless prior to or concurrently with such repurchase, redemption or other retirement, as the case may be, all accrued and unpaid 30 dividends on shares of the Series B Preferred Stock not paid on the dates provided for in paragraph (3)(i) hereof (including accrued dividends not paid by reason of the terms and conditions of paragraph (3)(i) or paragraph (3)(ii) hereof) shall have been or be paid. (iii) The holders of shares of Series B Preferred Stock at the close of business on a Dividend Payment Record Date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the call for redemption thereof (except that holders of shares called for redemption on a date occurring between such Record Date and the Dividend Payment Date shall not be entitled to receive such dividend on such Dividend Payment Date) or the Corporation's default in payment of the dividend due on such Dividend Payment Date. (iv) Shares of Series B Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock. (5) Procedure for Redemption. (i) In the event that fewer than all the outstanding shares of Series B Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be selected pro rata (as nearly as may be practicable without creating fractional shares) or by any other means determined by the Board of Directors in its sole discretion to be equitable, except the Corporation may redeem all shares held by any holders of a number of shares not to exceed 100, including all shares held by holders who, after giving effect to such redemption, would hold less than 100 shares, as may be specified by the Corporation. (ii) In the event the Corporation shall redeem shares of Series B Preferred Stock, written notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of Series B Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (a) the redemption date; (b) the number of shares of Series B Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed from such holder, the number of shares to be redeemed from such holder; (c) the 31 redemption price including an amount equal to any accrued and unpaid dividends to the redemption date; (d) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date (unless the Corporation shall default in providing funds for the payment of the redemption price of the shares called for redemption at the time and place specified in such notice). (iii) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing funds for the payment of the redemption price of the shares called for redemption), notwithstanding that the certificates evidencing any shares of Series B Preferred Stock so called for redemption shall not have been surrendered, dividends on the shares of Series B Preferred Stock so called for redemption shall cease to accrue and shall be redeemed and, upon the taking of any action required by applicable law, said shares shall no longer be deemed to be outstanding and shall have the status of authorized but unissued shares of Preferred Stock, undesignated as to series, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price and any accrued and unpaid dividends) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price aforesaid plus an amount equal to any accrued and unpaid dividends, without interest. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (iv) The Corporation's obligation to provide funds for the payment of the redemption price (including an amount equal to any accrued and unpaid dividends to the redemption date) of the shares called for redemption shall be deemed fulfilled if, on or before a redemption date, the Corporation shall deposit, with a bank or trust company, or an affiliate of a bank or trust company, having an office or agency in New York City and having a capital and surplus of at least $50,000,000, such funds sufficient to pay the redemption price (including an amount equal to any accrued and unpaid dividends to the redemption date) of the shares called for redemption, in trust for the account of the holders of the shares to be redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds be delivered upon redemption of the shares of Series B Preferred Stock so called for redemption. Any interest accrued on such funds shall be paid to the Corporation from time to time. Any funds so deposited and unclaimed at the end of two years from such redemption date shall be repaid and released to the 32 Corporation, after which the holder or holders of such shares of Series B Preferred Stock so called for redemption shall look only to the Corporation for delivery of such funds. (6) Liquidation Preference. (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after payment or provision for payment of any Senior Securities, an amount per share of Series B Preferred Stock in cash equal to the sum of $25,000 plus an amount equal to all accrued and unpaid dividends thereon to the date of liquidation, dissolution or winding up, before any payment shall be made or any assets distributed to the holders of any of the Junior Securities in connection with such liquidation, dissolution or winding up. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series B Preferred Stock and any Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series B Preferred Stock and the holders of outstanding shares of such Parity Securities are entitled were paid in full. Except as provided in this paragraph (6)(i), holders of Series B Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (ii) For the purposes of this paragraph (6), neither the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more other corporations nor the consolidation or merger of one or more corporations with or into the Corporation shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up. (7) Voting Rights. (i) The holders of record of shares of Series B Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph (7) or as otherwise provided by law. (ii) (a) If at any time or times dividends payable on all series of Preferred Stock, including the Series B Preferred Stock, shall be in arrears and unpaid for the six quarterly periods, then the number of directors constituting the Board of Directors, without further action, shall be increased by two (2) and the holders of shares of Series B Preferred Stock shall have the right, together with the holders of all other outstanding series of the Preferred Stock entitled to vote thereon (other than the Cumulative Convertible Preferred Stock), to elect the 33 directors of the Corporation to fill such newly created directorships, the remaining directors to be elected by the other class or classes of stock entitled to vote therefor, at each meeting of stockholders held for the purpose of electing directors; provided, that in no event shall such holders have the right to elect more than 25% of the total number of directors of the Corporation; provided, further, that, notwithstanding the foregoing proviso, such holders shall have the right to elect not less than one director pursuant to this paragraph (7)(ii)(a). (b) Whenever such voting right shall have vested, such right may be exercised initially either at a special meeting of the holders of shares of Series B Preferred Stock together with the holders of all other outstanding series of the Preferred Stock entitled to vote thereon (other than the Cumulative Convertible Preferred Stock), called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such meetings or by the written consent of such holders pursuant to Section 228 of the General Corporation Law of the State of Delaware. Such voting right shall continue until such time as all cumulative dividends accumulated on all outstanding series of Preferred Stock shall have been paid in full or declared and set aside for payment in full, at which time such voting right of such holders shall terminate, subject to revesting in the event of each and every subsequent failure of the Corporation to pay dividends for the requisite number of quarters as described above. (c) At any time when such voting right shall have vested in the holders of shares of Series B Preferred Stock together with all other series of Preferred Stock entitled to vote thereon (other than the Cumulative Convertible Preferred Stock) and if such right shall not already have been initially exercised, a proper officer of the Corporation shall, upon the written request of 10% of the holders of record of shares of such series of Preferred Stock then outstanding, addressed to the Secretary of the Corporation, call a special meeting of holders of shares of such series of Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Corporation or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by the proper officers of the Corporation within 30 days after the personal service of such written request upon the Secretary of the Corporation, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of 10% of the shares of such series of Preferred Stock then outstanding may designate in writing a holder of shares of such series of Preferred Stock to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required 34 for annual meetings of stockholders and shall be held at the same place as is elsewhere provided in this paragraph (7)(ii)(c). Any holder of shares of such series of Preferred Stock that would be entitled to vote at such meeting shall have access to the stock books of the Corporation for such series of Preferred Stock for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this paragraph. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called during a period within 90 days immediately preceding the date fixed for the next annual meeting of stockholders. (d) At any meeting held for the purpose of electing directors at which the holders of shares of Series B Preferred Stock together with all other series of Preferred Stock entitled to vote thereon (other than the Cumulative Convertible Preferred Stock) shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of at least a majority of the then outstanding shares of such series of Preferred Stock shall be required and be sufficient to constitute a quorum of such series for the election of directors by such series. At any such meeting or adjournment thereof (x) the absence of a quorum of the holders of shares of such series of Preferred Stock shall not prevent the election of directors other than those to be elected by the holders of stock of such series of Preferred Stock and the absence of a quorum or quorums of the holders of capital stock entitled to elect such other directors shall not prevent the election of directors to be elected by the holders of shares of such series of Preferred Stock and (y) in the absence of a quorum of the holders of shares of such series of Preferred Stock, a majority of such holders present in person or by proxy shall have the power to adjourn the meeting for the election of directors which the holders of shares of such series of Preferred Stock may be entitled to elect, from time to time, without notice (except as required by law) other than announcement at the meeting, until a quorum shall be present. (e) The term of office of all directors elected by the holders of shares of Series B Preferred Stock together with all other series of Preferred Stock entitled to vote thereon (other than Cumulative Convertible Preferred Stock) pursuant to paragraph (7)(ii)(a) in office at any time when the aforesaid voting rights are vested in the holders of shares of such series of Preferred Stock shall terminate upon the election of their successors at any meeting of stockholders for the purpose of electing directors. Upon any termination of the aforesaid voting rights in accordance with paragraph (7)(ii)(b), the term of office of all directors elected by the holders of shares of such series of Preferred Stock pursuant to paragraph (7)(ii)(a) then in office shall thereupon terminate and upon such termination the number of directors constituting the Board of Directors shall, without further action, be reduced by two (2) (or such other lesser number by which the number of directors constituting the 35 Board of Directors shall have been increased pursuant to paragraph (7)(ii)(a) hereof), subject always to the increase of the number of directors pursuant to paragraph (7)(ii)(a) in case of the future right of the holders of shares of such series of Preferred Stock to elect directors as provided herein. (f) In case of any vacancy occurring among the directors elected pursuant to paragraph (7)(ii)(a), the remaining director who shall have been so elected may appoint a successor to hold office for the unexpired term of the director whose place shall be vacant. If all directors so elected by the holders of shares of Series B Preferred Stock together with all other series of Preferred Stock entitled to vote thereon (other than Cumulative Convertible Preferred Stock) shall cease to serve as directors before their terms shall expire, the holders of shares of such series of Preferred Stock then outstanding may, at a special meeting of the holders called as provided above, elect successors to hold office for the unexpired terms of the directors whose places shall be vacant. (iii) So long as any shares of the Series B Preferred Stock are outstanding (except when notice of the redemption of all outstanding shares of Series B Preferred Stock has been given pursuant to paragraphs (5) and (6) and funds have been deposited in trust for such redemption), the Corporation shall not, without the affirmative vote or consent of the holders of at least a majority of the shares of Series B Preferred Stock and any other series of Preferred Stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, authorize any new class of Parity Securities. (iv) So long as any shares of the Series B Preferred Stock are outstanding (except when notice of the redemption of all outstanding shares of Series B Preferred Stock has been given pursuant to paragraphs (5) and (6) and funds have been deposited in trust for such redemption), the Corporation shall not, without the affirmative vote or consent of the holders of at least 66- 2/3% of the shares of Series B Preferred Stock and any other series of Preferred Stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, authorize any new class of Senior Securities or designate a new series of Senior Securities from an existing class of Preferred Stock. (v) So long as any shares of the Series B Preferred Stock are outstanding (except when notice of the redemption of all outstanding shares of Series B Preferred Stock has been given pursuant to paragraphs (5) and (6) and funds have been deposited in trust for such redemption), the Corporation shall not, without 36 the affirmative vote or consent of the holders of at least 66- 2/3% of the shares of Series B Preferred Stock and any other series of Preferred Stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, amend the Certificate of Incorporation or this Certificate of Designation so as to affect materially and adversely the specified rights, preferences, privileges or voting power of holders of shares of Series B Preferred Stock. (vi) Except as set forth in paragraph (7)(iii) and paragraph (7)(iv) above, the creation, authorization or issuance of any shares of any Junior Securities, Parity Securities or Senior Securities, the creation of any indebtedness of any kind of the Corporation, or the increase or decrease in the amount of authorized capital stock of any class, including Preferred Stock, shall not require the consent of the holders of Series B Preferred Stock and shall not be deemed to affect materially and adversely the rights, preferences, privileges or voting power of holders of shares of Series B Preferred Stock. (vii) When voting together as one class with the holders of any other series of Preferred Stock, the holders of Series B Preferred Stock shall be entitled to 1,000 votes per share. (8) Increase in Shares. The number of shares of Series B Preferred Stock may, to the extent of the Corporation's authorized and unissued Preferred Stock, be increased by further resolution duly adopted by the Board of Directors and the filing of a certificate of increase with the Secretary of State of the State of Delaware. (9) Limitations. Except as may otherwise be required by law, the shares of Series B Preferred Stock shall not have any powers, preferences or relative, participating, optional or other special rights other than those specifically set forth in this resolution (as such resolution may be amended from time to time) or otherwise in the Certificate of Incorporation of the Corporation. The following is a statement of the number, designation, powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the Series C Conversion Preferred Stock of the Corporation: (1) Designation. The designation of the series of Preferred Stock authorized by this resolution shall be "Series C Conversion Preferred Stock" (the "Series C Preferred Stock") consisting of 26,675,000 shares. 37 (2) Rank. The Series C Preferred Stock shall, with respect to dividend rights and rights upon liquidation, dissolution and winding up, rank prior to the Common Stock, par value $0.01 per share (the "Common Stock"), of the Corporation and on a parity with the Series B Cumulative Preferred Stock, par value $0.01 per share (the "Series B Cumulative Preferred Stock"), and the ESOP Convertible Preferred Stock, par value $0.01 per share and stated value $16.00 per share (the "ESOP Convertible Preferred Stock"), of the Corporation. All equity securities of the Corporation to which the Series C Preferred Stock ranks prior, including the Common Stock, are collectively referred to herein as the "Junior Securities," all equity securities of the Corporation with which the Series C Preferred Stock ranks on a parity, including the Series B Cumulative Preferred Stock and the ESOP Convertible Preferred Stock, are collectively referred to herein as the "Parity Securities" and all equity securities of the Corporation (other than convertible debt securities) to which the Series C Preferred Stock ranks junior, whether with respect to dividends or upon liquidation, dissolution, winding-up or otherwise, are collectively referred to herein as the "Senior Securities." The Series C Preferred Stock shall be subject to the creation of Junior Securities, Parity Securities and Senior Securities. (3) Dividends. (a) The holders of outstanding shares of the Series C Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential cash dividends accruing at the per share rate of $1.503 per quarter and no more, payable in arrears on each February 15, May 15, August 15 and November 15, respectively (each such date being hereinafter referred to as a "Dividend Payment Date"), commencing on August 15, 1994. If any Dividend Payment Date shall be or be declared a national or New York State holiday or if banking institutions in the State of New York shall be closed because of a banking moratorium or otherwise on such date, then such dividends shall be paid on the next succeeding day on which such banks shall be open. Each such dividend will be payable to holders of record as they appear on the stock books of the Corporation on such record dates, not less than 10 nor more than 50 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Dividends on the Series C Preferred Stock shall accrue (whether or not declared) on a daily basis from the previous Dividend Payment Date, except that the first dividend shall accrue from the date of issuance of the Series C Preferred Stock. Accrued and unpaid dividends shall not bear interest. Dividends will cease to accrue in respect of the Series C Preferred Stock on the Mandatory Conversion Date (as defined in paragraph (4)(a)) or on the date of their earlier redemption or conversion, unless the Corporation shall default in delivering the shares of Common Stock or other kind of security or other property and cash, if any, payable by the Corporation upon such redemption or conversion pursuant to paragraph (4). Dividends (or cash amounts equal to accrued and unpaid dividends) 38 payable on the Series C Preferred Stock for any period shorter than a quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. (b) No full dividends shall be declared by the Board of Directors or paid or set apart for payment by the Corporation on any Parity Securities for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment on the Series C Preferred Stock through the most recent Dividend Payment Date. If any dividends are not paid or set apart in full, as aforesaid, upon the shares of the Series C Preferred Stock and any Parity Securities, all dividends declared upon the Series C Preferred Stock and any Parity Securities shall be declared pro rata so that the amount of dividends declared per share on the Series C Preferred Stock and such Parity Securities shall in all cases bear to each other the same ratio that accrued dividends per share on the Series C Preferred Stock and such Parity Securities bear to each other. Unless full cumulative dividends, if any, accrued on all outstanding shares of the Series C Preferred Stock have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment through the most recent Dividend Payment Date, no dividend shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other Junior Securities (other than a dividend or distribution paid in shares of, or warrants, rights or options exercisable for or convertible into, Common Stock or any other Junior Securities), nor shall any Common Stock nor any other Junior Securities be redeemed, purchased or otherwise acquired for any consideration, nor may any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such securities, by the Corporation (other than redemptions and purchases pursuant to or in accordance with employee stock subscription agreements entered into between the Corporation and its subsidiaries' directors, officers and key employees), except by conversion into or exchange for Junior Securities. Except as provided in paragraph 4(d), holders of the shares of the Series C Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in paragraph 3(a). (c) Subject to the foregoing provisions of this paragraph (3) and paragraph (4)(d), the Board of Directors may declare and the Corporation may pay or set apart for payment dividends and other distributions on any of the Junior Securities or Parity Securities, and may redeem, purchase or otherwise acquire out of funds legally available therefor any Junior Securities, and the holders of the shares of the Series C Preferred Stock shall not be entitled to share therein. (d) Any dividend payment made on shares of the Series C Preferred Stock shall first be credited against the earliest 39 accrued but unpaid dividend due with respect to shares of the Series C Preferred Stock. (e) All dividends paid with respect to shares of the Series C Preferred Stock pursuant to this paragraph (3) shall be paid pro rata to the holders entitled thereto. (f) Holders of shares of the Series C Preferred Stock shall be entitled to receive the dividends provided for in this paragraph (3) in preference to and in priority over any dividends upon any of the Junior Securities. (4) Redemptions or Conversions. (a) Conversion on ------------- Mandatory Conversion Date. Unless earlier called for redemption ------------------------- in accordance with the provisions hereof, on May 15, 1997 (the "Mandatory Conversion Date"), each outstanding share of the Series C Preferred Stock shall convert into: (i) subject to paragraph (4)(b)(vii) and (4)(d)(vi), shares of Common Stock at the Common Equivalent Rate (determined as provided in this paragraph (4)) in effect on the Mandatory Conversion Date; and (ii) the right to receive an amount in cash equal to all accrued and unpaid dividends on such share of Series C Preferred Stock to and including the Mandatory Conversion Date, whether or not declared, out of funds legally available for the payment of dividends (and dividends shall cease to accrue on such share as of the Mandatory Conversion Date). Subject to paragraphs 4(b)(i)(D), 4(b)(vii) and 4(d)(vi), the Corporation shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its issued Common Stock held in its treasury or both, for the purpose of effecting conversion of the Series C Preferred Stock pursuant to this paragraph 4(a), the full number of shares of Common Stock then deliverable upon such conversion of all outstanding shares of Series C Preferred Stock. (b) Conversion Upon the Occurrence of Certain Events. ------------------------------------------------ (i) If there shall occur a merger or consolidation of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) (other than a merger or consolidation of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) with or into a wholly owned subsidiary of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity)) that results in the conversion or exchange of Common Stock into, or the right to receive, other securities or other property (whether of the Corporation or any other entity) ("Merger Consideration") (any such merger or consolidation is referred to herein as a "Merger or Consolidation"), then (subject 40 to the following provisions of this paragraph (4)(b) and paragraph 4(c)), each outstanding share of the Series C Preferred Stock shall, at the option of the Corporation: (A) (x) immediately prior to the Merger or Consolidation, convert into, subject to paragraphs (4)(b)(vii) and (4)(d)(vi), shares of Common Stock at the Common Equivalent Rate in effect immediately prior to such Merger or Consolidation; plus (y) the right to receive an amount in cash equal to all accrued and unpaid dividends on such share of the Series C Preferred Stock to and including the Settlement Date (as defined in paragraph 4(i)(v)), whether or not declared, out of funds legally available therefor (and dividends shall cease to accrue on such share as of the Settlement Date); plus (z) the right to receive an amount of cash initially equal to $18.036, declining by $.01656 on each day following the date of issuance of the Series C Preferred Stock (computed on the basis of a 360-day year of twelve 30- day months) to $.996 on March 15, 1997, and equal to zero thereafter, in each case determined with reference to the Settlement Date, out of funds legally available therefor; provided, that if the Call Price (as defined in paragraph -------- (4)(i)(ii)) on the Settlement Date is less than the sum of (I) the product of (1) the Current Market Price (as defined in paragraph (4)(d)(viii)) of a share of Common Stock on the Settlement Date (which Current Market Price shall be appropriately adjusted for the purposes of this proviso if the Corporation has made any antidilution adjustment to the Common Equivalent Rate pursuant to paragraph 4(d) with respect to an event which has not occurred as of such Settlement Date) and (2) the number of shares of Common Stock issuable upon conversion of a share of Series C Preferred Stock pursuant to clause 4(b)(i)(A)(x) above, and (II) the amount of cash to be received with respect to an outstanding share of Series C Preferred Stock pursuant to clause 4(b)(i)(A)(z) above, then the number of shares of Common Stock issuable pursuant to clause 4(b)(i)(A)(x) above shall be reduced so that the sum referred to above in this proviso equals the Call Price on the Settlement Date, and provided, further, that the Corporation (or following the -------- ------- application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) may, at its option, deliver on the Settlement Date, in lieu of some or all of the cash consideration described in clauses 4(b)(i)(A)(y) and (z) above, a number of shares of Common Stock (subject to paragraphs 4(b)(vii) and 4(d)(vi)) to be determined by dividing the amount of cash consideration that the Corporation has elected to pay in Common Stock by the Current Market Price of the Common Stock determined as of 41 the Settlement Date (which Current Market Price shall be appropriately adjusted, if necessary, for the purposes of this proviso if (I) the Corporation has made any antidilution adjustment to the Common Equivalent Rate pursuant to paragraph 4(d) with respect to an event which has not occurred as of such Settlement Date or (II) the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) has distributed cash or other property pursuant to clause (2) of paragraph 4(d)(iii), shares or other units of securities or assets pursuant to clause (2) of paragraph 4(d)(iv) or shares of capital stock of the Spinoff Corporation (as defined in paragraph 4(d)(v)) pursuant to clause (2) of paragraph 4(d)(v)). Notwithstanding the foregoing terms of this paragraph 4(b)(i)(A), if there shall have occurred an adjustment pursuant to paragraph (4)(d)(vi) as a result of a conversion or exchange or merger or consolidation referred to in such paragraph prior to the Settlement Date, then with respect to the exercise of any such option referred to in this paragraph 4(b)(i)(A) (including the exercise of the option referred to in the foregoing proviso by the Corporation (or its successor)), the Corporation shall deliver out of funds legally available therefor on such Settlement Date, in lieu of shares of Common Stock as described in this paragraph 4(b)(i)(A), the kind of securities or other property received by holders of Common Stock as a result of such conversion or exchange or merger or consolidation, in the same relative proportions (if more than one kind of securities or other property was so received) as exist in the Common Equivalent Rate on such Settlement Date, with an aggregate market price (determined for any security or other property, to the extent possible, in the manner that the Current Market Price is determined for the Common Stock, and otherwise determined by the Board of Directors of the Corporation (or its successor), whose determination shall be conclusive), as of such Settlement Date, equal to the amount of cash consideration that the Corporation has elected to pay in such securities or other property (the option set forth in this paragraph 4(b)(i)(A) being hereinafter referred to as the "Common Conversion Option"); or (B) be converted into the right to receive (at the time such Merger Consideration is distributed to holders of shares of Common Stock) in such Merger or Consolidation (subject to provision being made therefor in an applicable agreement with respect to such Merger or Consolidation) in exchange for such share of Series C Preferred Stock one share or other unit of a security (whether debt or equity or any depositary receipt representing such a security) (the "Issuing Entity Preferred Stock") of the Issuing Entity (as defined in paragraph 4(b)(ii)) having terms substantially equivalent to the Series C Preferred Stock (except that upon call or conversion such Issuing Entity Preferred Stock shall 42 convert into Issuing Entity Common Equity (as defined in paragraph 4(b)(ii)) (the option set forth in this paragraph 4(b)(i)(B) being hereinafter referred to as the "Issuing Entity Preferred Stock Conversion Option"); or (C) be converted into the right to receive (at the time such Merger Consideration is distributed to holders of Common Stock) in such Merger or Consolidation (subject to provision being made therefor in an applicable agreement with respect to such Merger or Consolidation) in exchange for such share of Series C Preferred Stock one share of a new series of Preferred Stock of the Corporation (or depositary receipts representing such Preferred Stock) ("New Preferred Stock") having terms substantially equivalent to the Series C Preferred Stock, except that (A) upon call or conversion such New Preferred Stock shall be exchanged (either against the Corporation or the Issuing Entity as provided in the agreement with respect to such Merger or Consolidation) into Issuing Entity Common Equity, out of funds legally available therefor, and (B) such New Preferred Stock need not provide holders thereof with the right to vote on all matters submitted to a vote of holders of Common Stock as provided in paragraph 6(b) (the option set forth in this paragraph 4(b)(i)(C) being hereinafter referred to as the "Corporation Preferred Stock Conversion Option"); or (D) remain outstanding after such Merger or Consolidation, but only if the agreement with respect to such Merger or Consolidation requires that following the effective time of the Merger or Consolidation (a) upon call or conversation of the Series C Preferred Stock, in lieu of the Corporation delivering, out of funds legally available therefor, shares of its Common Stock, the Issuing Entity shall be obligated to deliver, out of legally available funds, Issuing Entity Common Equity directly to holders of the Series C Preferred Stock, (b) the Issuing Entity shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Issuing Entity Common Equity and its issued common equity held in its treasury, for the purpose of effecting any conversion of the Series C Preferred Stock, the full number of shares or other units of common equity deliverable upon any such call or conversion of all outstanding shares of Series C Preferred Stock, (c) the Issuing Entity shall have the right to call the Series C Preferred Stock and to cause the exchange of the Series C Preferred Stock for its Issuing Entity Common Equity upon such call and (d) the Corporation shall relinquish the right to call the Series C Preferred Stock and its obligations upon conversion of the Series C Preferred Stock. In such event, from and after such effective time, (x) holders of shares of Series C Preferred Stock will no longer have any right to receive any consideration from the Corporation upon call or conversion of the Series C Preferred Stock and (y) 43 all references in this paragraph (4) and in paragraphs (6)(d), (e) and (f) to Common Stock shall thereafter mean Issuing Entity Common Equity and (z) the Corporation may, without a vote of the holders of Series C Preferred Stock, amend this Certificate of Designation to make any incidental and conforming modifications to reflect the provisions contained in this paragraph 4(b)(i)(D) (the option set forth in this paragraph 4(b)(i)(D) being hereinafter referred to as the "Existing Preferred Stock Option"). Whether the Issuing Entity Preferred Stock or the New Preferred Stock has terms substantially equivalent to the Series C Preferred Stock will be determined by the Board of Directors of the Corporation (or its successor), whose determination shall be conclusive; provided that if the Corporation elects the Issuing -------- Entity Preferred Stock Conversion Option and the Issuing Entity is not a corporation or other entity organized under the laws of the United States or any State thereof or the District of Columbia (a "non-U.S. entity"), the Issuing Entity Preferred Stock may be considered substantially equivalent to the Series C Preferred Stock notwithstanding that, among other things, (i) a holder of Issuing Entity Preferred Stock is not entitled to the dividends received deduction under Section 243 or Section 245 of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) the tax treatment of a holder of Issuing Entity Preferred Stock differs from the tax treatment of a holder of Series C Preferred Stock, including by reason of a future change in U.S. law, (iii) the Issuing Entity Preferred Stock does not provide voting rights to the holders thereof to the same extent as the Series C Preferred Stock, so long as the Issuing Entity Preferred Stock provides voting rights to the fullest extent permitted by the law applicable to such securities, (iv) the Issuing Entity Preferred Stock does not provide that any or all cash payments will be made in U.S. dollars so long as such payments may not be made in U.S. dollars under applicable law, provided that the amount of -------- currency other than U.S. dollars (the "Foreign Currency") payable on any given date is adjusted (by reference to the noon U.S. dollar buying rate for the Foreign Currency for cable transfers quoted in the City of New York on the business day next preceding such payment, as certified for customs purposes by the Federal Reserve Bank of New York) to equal the number of U.S. dollars which would have been payable on such date if payment had been permitted to be made in U.S. dollars, (v) the Issuing Entity is prohibited by its certificate of incorporation or by-laws (or equivalent constituent documents) or by the laws of the jurisdiction of its establishment from issuing Issuing Entity Preferred Stock that automatically converts into Issuing Entity Common Equity (or, upon the distribution of the capital stock of the Spinoff Corporation (as defined in paragraph 4(d)(v)), into Spinoff Corporation Preferred Stock (as defined in paragraph 4(d)(v)), so long as the terms of such Issuing Entity Preferred Stock (or other agreements relating thereto) provide for conversion into Issuing Entity Common Equity (or, upon the distribution of the capital stock of the Spinoff Corporation, 44 into Spinoff Corporation Preferred Stock) not later than the same date as such automatic conversion would have occurred and in a manner which gives a holder thereof substantially the same rights as if such Issuing Entity Preferred Stock had automatically converted or (vi) the Issuing Entity is prohibited by its certificate of incorporation or by-laws (or equivalent constituent documents) or by the laws of the jurisdiction of its establishment from issuing such Issuing Entity Preferred Stock with a liquidation preference subject to adjustment as set forth in paragraph 5 hereof. The Corporation will not elect the Issuing Entity Preferred Stock Conversion Option if the Issuing Entity is a non-U.S. entity, unless provision is made in the Issuing Entity Preferred Stock to gross up the amount paid to U.S. persons (as defined in paragraph 4(i)(ix)) in respect of any then existing or future tax, assessment or governmental charge imposed by the laws of the jurisdiction in which the Issuing Entity is established or organized or any political subdivision or taxing authority thereof or therein with respect to, and withheld on the making of, such payment; provided, however, that -------- ------- no gross up shall be required (a) if such holder is liable for such tax, assessment or governmental charge in respect of the Series C Preferred Stock by reason of such holder's having some connection with the jurisdiction in which the Issuing Entity is established or organized other than being a holder of such Series C Preferred Stock or (b) if the Corporation has notified such holder of the obligation to withhold taxes and requested but not received from such holder the appropriate documentation or certification in support of any claim for exemption and such withholding or deduction would not have been required had such documentation or certification been received. The Corporation's right to elect the Corporation Preferred Stock Conversion Option and the Existing Preferred Stock Option is subject to the conditions that (1) the Corporation shall survive as a subsidiary of the Issuing Entity and (2) the Issuing Entity shall have common equity which is publicly traded immediately after the effectiveness of the Merger or Consolidation (provided that the Issuing Entity Common Equity -------- need not be publicly traded in the United States). (ii) Notwithstanding the Corporation's election of the Issuing Entity Preferred Stock Conversion Option, the Corporation Preferred Stock Conversion Option or the Existing Preferred Stock Option, if the Merger Consideration (excluding consideration in connection with fractional shares or the exercise of appraisal rights) consists of both common equity (or any depository receipts representing such common equity) of the entity issuing such Merger Consideration (which could be a U.S. or non-U.S. entity) (the "Issuing Entity") in the Merger or Consolidation ("Issuing Entity Common Equity") and property which is not Issuing Entity Common Equity ("Non-Common Equity Merger Consideration"), then, in addition to having the rights arising out of the Corporation's election of one of the foregoing Options, such holder shall be entitled to receive, at the time 45 such Merger Consideration is distributed to holders of Common Stock, an amount of Non-Common Equity Merger Consideration equal to the amount of Non-Common Equity Merger Consideration that such holder would have been entitled to receive in the Merger or Consolidation had (A) such holder's Series C Preferred Stock been converted into shares of Common Stock at the Common Equivalent Rate in effect immediately prior to the Merger or Consolidation and (B) such shares of Common Stock been exchanged in the Merger or Consolidation for the amount of Merger Consideration which would have given a holder the maximum possible number of shares of Issuing Entity Common Equity pursuant to the agreement applicable to such Merger or Consolidation with respect to a share of Common Stock; provided that if the Call Price on the -------- Settlement Date is less than the fair value of such Non-Common Equity Merger Consideration per share of Series C Preferred Stock (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) as of the Settlement Date (the "Non-Common Equity Fair Value"), then the amount of Non-Common Equity Merger Consideration that a holder of Series C Preferred Stock shall be entitled to receive with respect to each share of Series C Preferred Stock will be reduced so that the Non-Common Equity Fair Value thereof equals the Call Price on the Settlement Date. If the Merger Consideration consists solely of Non-Common Equity Merger Consideration, the Corporation must elect the Common Conversion Option. (iii) If the Corporation elects the Issuing Entity Preferred Stock Conversion Option or the Corporation Preferred Stock Conversion Option, the initial common equivalent rate on the Issuing Entity Preferred Stock or the New Preferred Stock, as the case may be, shall be equal to the Common Equivalent Rate on the Series C Preferred Stock in effect immediately prior to the Merger or Consolidation adjusted to reflect the ratio by which one share of Common Stock is exchanged for shares of Issuing Entity Common Equity in the Merger or Consolidation, and if the Corporation elects the Existing Preferred Stock Option, the Common Equivalent Rate on the Series C Preferred Stock immediately following the Merger or Consolidation shall be equal to the Common Equivalent Rate on the Series C Preferred Stock in effect immediately prior to the Merger or Consolidation adjusted to reflect the ratio by which one share of Common Stock is exchanged for shares of Issuing Entity Common Equity in the Merger or Consolidation. (iv) If the Corporation fails to make the election set forth in paragraph 4(b)(i) prior to the date of effectiveness of the Merger or Consolidation, then the Corporation shall be deemed to have elected the Common Conversion Option. (v) Notwithstanding the foregoing provisions of this paragraph 4(b), if the Corporation elects any of the options set forth in paragraph 4(b)(i)(B), (C) or (D) each holder of a share of Series C Preferred Stock will have the right (the "Holder Opt- Out Right") to elect that, in lieu of such holder's shares of 46 Series C Preferred Stock being subject to the Issuing Entity Preferred Stock Conversion Option, the Corporation Preferred Stock Conversion Option or the Existing Preferred Stock Option, as the case may be, each share of Series C Preferred Stock held by such holder will convert, in whole (but not in part), immediately prior to the effectiveness of the Merger or Consolidation into (A) subject to paragraphs (4)(b)(vii) and (4)(d)(vi), shares of Common Stock at the Common Equivalent Rate in effect immediately prior to such Merger or Consolidation (provided that if the Call Price on the Settlement Date is less -------- than the product of (x) the Current Market Price of a share of Common Stock on the Settlement Date (which Current Market Price shall be appropriately adjusted for the purposes of this proviso if the Corporation has made any antidilution adjustment to the Common Equivalent Rate pursuant to paragraph 4(d) with respect to an event which has not occurred as of such Settlement Date) and (y) the number of shares of Common Stock issuable upon conversion of a share of Series C Preferred Stock pursuant to the Holder Opt-Out Right, then the number of shares of Common Stock issuable pursuant to the Holder Opt-Out Right shall be reduced so that product referred to above equals the Call Price on the Settlement Date), plus (B) the right to receive an amount in cash equal to all accrued and unpaid dividends on the Series C Preferred Stock to and including the Settlement Date, whether or not declared, out of funds legally available for the payment of dividends (and dividends shall cease to accrue on such share as of the Settlement Date); provided that the Corporation (or following the -------- application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) may, at its option, deliver on the Settlement Date, in lieu of some or all of the cash consideration described in clause (B), a number of shares of Common Stock (subject to paragraphs 4(b)(vii) and 4(d)(vi)) to be determined by dividing the amount of cash consideration that the Corporation has elected to pay in Common Stock by the Current Market Price of the Common Stock determined as of the Settlement Date (which Current Market Price shall be appropriately adjusted, if necessary, for the purposes of this proviso if (x) the Corporation has made any antidilution adjustment to the Common Equivalent Rate pursuant to paragraph 4(d) with respect to an event which has not occurred as of such Settlement Date or (y) the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) has distributed cash or other property pursuant to clause (2) of paragraph 4(d)(iii) or shares or other units of securities or assets pursuant to clause (2) of paragraph 4(d)(iv) or shares of capital stock of the Spinoff Corporation pursuant to clause (2) of paragraph 4(d)(v)). Notwithstanding the foregoing terms of this paragraph 4(b)(v), if there shall have occurred an adjustment pursuant to paragraph 4(d)(vi) as a result of a conversion or exchange or merger or consolidation referred to in such paragraph prior to the Settlement Date, then with respect to the exercise of any such option referred to in this paragraph 4(b)(v) (including the exercise of the option referred to in the foregoing proviso by the Corporation (or its successor)), the Corporation shall deliver out of funds legally available therefor 47 on such Settlement Date, in lieu of shares of Common Stock as described in this paragraph 4(b)(v), the kind of securities or other property received by holders of Common Stock as a result of such conversion or exchange or merger or consolidation, in the same relative proportions (if more than one kind of securities or other property was so received) as exist in the Common Equivalent Rate on such Settlement Date, with an aggregate market price (determined for any security or other property, to the extent possible, in the manner that the Current Market Price is determined for the Common Stock, and otherwise determined by the Board of Directors of the Corporation (or its successor), whose determination shall be conclusive), as of such Settlement Date, equal to the amount of cash consideration that the Corporation has elected to pay in such securities or other property. (vi) In order to exercise the Holder Opt-Out Right, a holder of Series C Preferred Stock shall (a) deliver a properly completed and duly executed written notice of election to convert, specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock (subject to paragraphs 4(b)(vii) and 4(d)(vi)) to be issued to the Corporation at its principal office or at the office of the agency which may be maintained for such purpose (the "Conversion Agent") at least one business day prior to the effectiveness of the Merger or Consolidation, (b) surrender the certificate for such shares of Series C Preferred Stock to the Corporation or the Conversion Agent, accompanied, if so required by the Corporation or the Conversion Agent, by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation or the Conversion Agent duly executed by the holder or his attorney duly authorized in writing, and (c) pay any transfer or similar tax required by paragraph 4(n). Conversion shall be deemed to have been effected immediately prior to the effective time of the Merger or Consolidation. Immediately upon conversion, the rights of the holders of converted shares of Series C Preferred Stock shall cease and the persons entitled to receive the shares of Common Stock (subject to paragraphs 4(b)(vii) and 4(d)(vi)) upon the conversion of such shares of Series C Preferred Stock shall be treated for all purposes as having become the beneficial owners of such shares of Common Stock (subject to paragraphs 4(b)(vii) and 4(d)(vi)). (vii) If there shall occur a Merger or Consolidation of the Corporation and the Corporation elects the Existing Preferred Stock Option, then (A) the Series C Preferred Stock will, from and after the effective time of the Merger or Consolidation, no longer be subject to conversion into shares of Common Stock pursuant to paragraphs (4)(a), (4)(b), 4(c) and 4(e), but instead will be subject to conversion out of funds legally available therefor into the Issuing Entity Common Equity and (B) in such event, from and after the effective time of the Merger or Consolidation, the number of such shares of Issuing Entity Common Equity so issuable upon conversion of the shares of Series C Preferred Stock shall be subject to adjustment from time 48 to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in paragraphs 4(b)(iii) and (4)(d). (c) Right to Call for Redemption. At any time and ---------------------------- from time to time prior to the Mandatory Conversion Date, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall have the right to call, in whole or in part, the outstanding shares of the Series C Preferred Stock for redemption (subject to the notice provisions set forth in paragraph (4)(j)). Upon the redemption date, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall deliver to the holders thereof in exchange for each such share called for redemption, (i) a number of shares of Common Stock (subject to paragraphs 4(b)(vii) and 4(d)(vi)) equal to the Call Price in effect on the redemption date divided by the Current Market Price of the Common Stock determined as of the second Trading Date (as defined in paragraph 4(i)(vi)) immediately preceding the Notice Date (as defined in paragraph 4(i)(iv)) and (ii) an amount in cash equal to all accrued and unpaid dividends on such share of Series C Preferred Stock to and including the redemption date (and dividends shall cease to accrue on such share as of such date), whether or not declared, out of funds legally available therefor; provided that if there shall have occurred an adjustment pursuant to paragraph (4)(d)(vi) as a result of a conversion or exchange or merger or consolidation referred to in such paragraph prior to the redemption date, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall deliver out of funds legally available therefor on the redemption date to the holders of shares of Series C Preferred Stock in exchange for each share thereof called for redemption, in lieu of shares of Common Stock as described in this paragraph (4)(c), the kind of securities or other property received by holders of Common Stock as a result of such conversion or exchange or merger or consolidation, in the same relative proportions (if more than one kind of securities or other property was so received) as exist in the Common Equivalent Rate on the redemption date, with an aggregate market price (determined for any security or other property, to the extent possible, in the manner that the Current Market Price is determined for the Common Stock, and otherwise determined by the Board of Directors of the Corporation (or its successor), whose determination shall be conclusive), as of the second Trading Date immediately preceding the Notice Date, equal to the Call Price in effect on the redemption date. If fewer than all the outstanding shares of Series C Preferred Stock are to be called for redemption, shares to be redeemed shall be selected by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) from outstanding shares of Series C Preferred Stock not previously redeemed by lot or pro rata (as nearly as may be practicable without creating fractional shares) or by any other method determined by the Board of 49 Directors of the Corporation in its sole discretion to be equitable. (d) Common Equivalent Rate; Adjustments. The Common ----------------------------------- Equivalent Rate to be used to determine the number of shares of Common Stock to be delivered on the conversion of the Series C Preferred Stock into shares of Common Stock pursuant to paragraph (4)(a) or (b) shall be initially ten shares of Common Stock for each share of Series C Preferred Stock; provided, however, that -------- ------- such Common Equivalent Rate shall be subject to adjustment from time to time as provided in paragraph 4(b)(iii) and in this paragraph (4)(d). All adjustments to the Common Equivalent Rate shall be calculated to the nearest 1/100th of a share of Common Stock. Such rate in effect at any time is herein called the "Common Equivalent Rate." (i) If the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall either: (A) pay a dividend or make a distribution with respect to Common Stock in shares of Common Stock, (B) subdivide or split its outstanding shares of Common Stock into a greater number of shares, (C) combine its outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of its shares of Common Stock any shares of common stock of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity), then, in any such event, the Common Equivalent Rate in effect immediately prior thereto shall be adjusted so that the holder of a share of the Series C Preferred Stock shall be entitled to receive on the conversion of such share of the Series C Preferred Stock, the number of shares of common stock of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) which such holder would have owned or been entitled to receive after the happening of any of the events described above had such share of the Series C Preferred Stock been converted at the Common Equivalent Rate in effect immediately prior to such event or any record date with respect thereto. Such adjustment shall become effective as of the close of business on the record date for determination of stockholders entitled to receive such dividend or distribution in the case of a dividend or distribution, and shall become effective immediately after the effective date in case of a 50 subdivision, split, combination or reclassification; and any shares of Common Stock issuable in payment of a dividend shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend for purposes of calculating the number of outstanding shares of Common Stock under clauses (ii), (iii), (iv) and (v) below. Such adjustment shall be made successively. (ii) If the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall, after the date hereof, issue rights or warrants to all holders of its Common Stock entitling them (for a period not exceeding 45 days from the date of such issuance) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price of the Common Stock (determined pursuant to paragraph (4)(d)(viii)) on the record date for the determination of stockholders entitled to receive such rights or warrants, then in each case the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect immediately prior to the date of issuance of such rights or warrants by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of additional shares of Common Stock offered for subscription or purchase pursuant to such rights or warrants, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase pursuant to such rights or warrants would purchase at such Current Market Price (determined by multiplying such total number of shares by the exercise price of such rights or warrants and dividing the product so obtained by such Current Market Price). Such adjustment shall become effective as of the close of business on the record date for the determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Common Equivalent Rate shall be readjusted to the Common Equivalent Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock actually delivered. Such adjustment shall be made successively. (iii) If the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall distribute cash (other than any Permitted Quarterly Dividend (as defined in this paragraph 4(d)(iii)), any cash distributed in consideration of fractional shares of Common Stock, any cash distributed in accordance with paragraph 4(d)(iii)(2) or 4(d)(iv)(2) and any cash distributed in a Merger or Consolidation ("Excluded Distributions")), by dividend or otherwise, to all holders of its Common Stock or make an Excess Purchase Payment 51 (as defined in this paragraph 4(d)(iii)) then, at the option of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity), the Corporation shall make the adjustment set forth in clause (1) below if such option is chosen by the Corporation (or the Issuing Entity) or shall make the distribution (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity shall make the distribution) set forth in clause (2) below if such option is chosen by the Corporation (or the Issuing Entity): (1) if the option set forth in this clause (1) is chosen, the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect on the record date with respect to such distribution or the payment date with respect to such Excess Purchase Payments by a fraction, of which the numerator shall be the Current Market Price per share of the Common Stock (determined pursuant to paragraph 4(d)(viii)) on such record date or payment date and of which the denominator shall be such Current Market Price per share of Common Stock less the amount of such distribution applicable to one share of Common Stock which would not be a Permitted Quarterly Dividend (or in the case of an Excess Purchase Payment, less the aggregate amount of such Excess Purchase Payments divided by the number of outstanding shares of Common Stock on the relevant payment date) (provided that the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall not be permitted to elect the option described in this clause (1) if (a) the amount of such distribution applicable to one share of Common Stock which would not be a Permitted Quarterly Dividend (or in the case of an Excess Purchase Payment, the aggregate amount of such Excess Purchase Payments divided by the number of outstanding shares of Common Stock on the relevant payment date) is greater than or equal to 95% of such Current Market Price per share of Common Stock, in each case as of such record date or payment date, or (b) with respect to such cash distribution (other than an Excess Purchase Payment), the day on which such record date is fixed by the Board of Directors of the Corporation is less than twenty-one consecutive Trading Days prior to such record date); or (2) if the option set forth in this clause (2) is chosen, there shall be distributed, out of legally available funds, at the time such cash distribution or Excess Purchase Payment is made to the holders of its Common Stock, to the holders of Series C Preferred Stock (as of the record date for the determination of holders of Common Stock entitled to receive such dividend or distribution (or in the case of an Excess Purchase Payment, as of the purchase date)) an amount of cash or other assets per share of Series C Preferred Stock as such holder would have been entitled to receive if such Series C Preferred Stock had been converted into shares 52 of Common Stock (and in the case of an Excess Purchase Payment had participated on a pro rata basis (assuming the participation of all outstanding shares of Common Stock) in such tender offer or exchange offer) at the Common Equivalent Rate in effect immediately prior to the record date for such distribution or the payment date for such Excess Purchase Payment less, in the case of a cash distribution, the amount of such distribution which would have been a Permitted Quarterly Dividend. The adjustment provided in clause (1) above shall become effective as of the close of business on the record date for the determination of stockholders entitled to receive such dividend or distribution or the payment date with respect to such Excess Purchase Payment. If the amount of cash or, in the case of an Excess Purchase Payment, the value of the assets (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) to be distributed in accordance with clause (2) above exceeds the Call Price as of such record date or payment date, the amount of cash or other assets to be distributed with respect to each share of Series C Preferred Stock shall be reduced so that the amount to be distributed equals the Call Price on such record date or payment date. As used in this paragraph 4(d)(iii), the term "Permitted Quarterly Dividend" means any quarterly cash dividend in respect of the Common Stock to the extent that the per share amount of such dividend does not exceed the greater of (x) the amount per share of Common Stock of the next preceding quarterly cash dividend on the Common Stock which did not at the record date therefor require an adjustment to the Common Equivalent Rate or a distribution in accordance with clause (2) above and (y) 15% of the Current Market Price per share of Common Stock, determined on the record date for such quarterly dividend, less the sum of the per share amounts (appropriately adjusted to account for any of the events described in paragraph 4(d)(i)) of all quarterly dividends, if any, in respect of the Common Stock with a record date less than one year prior to the record date for such quarterly dividend. As used in this paragraph 4(d)(iii), the term "Excess Purchase Payment" means the excess, if any, of (A) the cash and the value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) of all other consideration paid by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) with respect to one share of Common Stock acquired in a tender offer or exchange offer by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) over (B) the Current Market Price per share of Common Stock on the payment date for such Excess Purchase Payment. (iv) If the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall pay a dividend or make a distribution to all holders of its Common Stock of evidence of its indebtedness, other securities or other assets (including shares of capital stock of the 53 Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) (other than Common Stock) and shares of capital stock of any subsidiary of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) (other than as set forth in paragraph 4(d)(v)) but excluding any distributions and dividends referred to in paragraphs 4(d)(i) and (iii) above or any other cash dividends or distributions), or shall issue to all holders of its Common Stock rights or warrants to subscribe for or purchase any of its securities (other than those referred to in paragraph 4(d)(ii) above), then in each such case at the option of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity), the Corporation shall make the adjustment set forth in clause (1) below if such option is chosen by the Corporation (or the Issuing Entity) or shall make the distribution (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity shall make the distribution) set forth in clause (2) below if such option is chosen by the Corporation (or the Issuing Entity): (1) if the option set forth in this clause (1) is chosen, the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect on the record date for the distribution of the securities or assets by a fraction, of which the numerator shall be the Current Market Price per share of the Common Stock (determined pursuant to paragraph (4)(d)(viii)) on the record date for the determination of stockholders entitled to receive such dividend or distribution, and of which the denominator shall be such Current Market Price per share of Common Stock less the fair value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) as of such record date of the portion of the securities or assets so distributed, or of such rights or warrants, applicable to one share of Common Stock (the "Distribution Fair Value") (provided that the Corporation (or following -------- the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall not be permitted to elect the option described in this clause (1) if (a) such determination of fair value by the Board of Directors of the Corporation applicable to one share of Common Stock is greater than or equal to 95% of such Current Market Price per share of Common Stock, in each case as of such record date, or (b) the day on which such record date is fixed by the Board of Directors of the Corporation is less than twenty-one consecutive Trading Days prior to such record date; or (2) if the option set forth in this clause (2) is chosen, there shall be distributed, out of funds legally available therefor, at the time such dividend, distribution or issuance is made to the holders of its Common Stock, to the holders of shares of Series C Preferred Stock (as of the record date for the determination of holders of Common Stock 54 entitled to receive such dividend, distribution or issuance) the kind and amount of such securities or assets of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) as such holder would have been entitled to receive if such shares of Series C Preferred Stock had been converted into shares of Common Stock at the Common Equivalent Rate in effect immediately prior to the record date for such dividend or distribution. The adjustment provided in clause (1) shall become effective as of the close of business on the record date for the determination of stockholders entitled to receive such dividend or distribution. If the Distribution Fair Value of the shares or other units of securities or assets distributed with respect to each share of Series C Preferred Stock in accordance with clause (2) above would, as of the record date of such distribution, exceed the Call Price as of such record date, the amount of shares or other units of securities or assets to be distributed with respect to each share of Series C Preferred Stock shall be reduced so that the Distribution Fair Value thereof equals the Call Price on such record date. (v) If the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall pay a dividend or makes a distribution to all holders of its Common Stock of shares of capital stock of any subsidiary of the Corporation (the "Spinoff Corporation"), which Spinoff Corporation represents all or substantially all of the Corporation's interest in either of the two principal lines of business of RJR Nabisco Holdings Corp. and its subsidiaries as of May 6, 1994, then, at the option of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity), the Corporation shall, out of legally available funds, effect the conversion set forth in clause (1) below if such option is chosen by the Corporation (or the Issuing Entity) or shall make the distribution (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity shall make the distribution) set forth in clause (2) below if such option is chosen by the Corporation (or the Issuing Entity): (1) if the option set forth in this clause (1) is chosen, subject to the proviso set forth in clause (2) below, each share of Series C Preferred Stock will be converted into the right of the holder of such share of Series C Preferred Stock as of the Common Stock Record Date (as defined in this paragraph 4(d)(v)) to receive (at the time such capital stock is distributed to holders of Common Stock): (a) one half of a share of a security (the "Spinoff Corporation Preferred Stock") of the Spinoff Corporation having terms substantially equivalent to the Series C Preferred Stock (except that (i) upon call 55 or conversion such Spinoff Corporation Preferred Stock shall convert into common stock of Spinoff Corporation, (ii) the initial common equivalent rate per share of Spinoff Corporation Preferred Stock (as of the record date for the determination of holders of Common Stock entitled to receive such dividend or distribution (the "Common Stock Record Date")) shall equal a fraction, of which the numerator shall be the product of (A) the Current Market Price per share of the Common Stock (determined pursuant to paragraph 4(d)(viii)) on the Common Stock Record Date and (B) the Common Equivalent Rate on the Common Stock Record Date, and of which the denominator shall be the Spinoff Fair Value (as defined in this paragraph 4(d)(v)), (iii) all references to Common Stock shall mean the common stock of the Spinoff Corporation, (iv) all references to the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall mean the Spinoff Corporation, (v) any notice given to the holders of record of shares of Series C Preferred Stock on the Common Stock Record Date will be valid notice to the record holders of the Spinoff Corporation Preferred Stock for the purpose of giving notice required by the terms of the Spinoff Corporation Preferred Stock to such holders prior to the issuance thereof and (vi) the liquidation preference per share of Spinoff Corporation Preferred Stock shall be equal to the greater of (A) the liquidation preference per share of the Series C Preferred Stock prior to the date of conversion and (B) the fair market value per share of Spinoff Corporation Preferred Stock (as determined, on or within five business days after the date of issuance of the Spinoff Corporation Preferred Stock, by the board of directors of the Spinoff Corporation, whose determination shall be conclusive) as of the date of their issuance); and (b) one half of a share of Series C Preferred Stock; provided that following such conversion in accordance with this paragraph 4(d)(v)(1)(b), (i) the Common Equivalent Rate per share of Series C Preferred Stock (as of the Common Stock Record Date) shall equal a fraction, of which the numerator shall be the product of (A) the Current Market Price per share of the Common Stock on the Common Stock Record Date and (B) the Common Equivalent Rate on the Common Stock Record Date, and of which the denominator shall be the excess of (x) the Current Market Price per share of the Common Stock on the Common Stock Record Date over (y) the Spinoff Fair Value and (ii) the liquidation preference per share of Series C Preferred Stock from and after the time of conversion shall be equal to the greater of (A) the liquidation preference per share of the Series C Preferred Stock prior to the date of conversion and (B) the fair market value per share of the Series C 56 Preferred Stock (as determined, on or within five business days after the date of issuance of the Spinoff Corporation Preferred Stock, by the board of directors of the Corporation, whose determination shall be conclusive) as of the date of issuance of the Spinoff Corporation Preferred Stock; or (2) if the option set forth in this clause (2) is chosen, there shall be distributed, at the time such dividend or distribution is made to the holders of its Common Stock, to the holders of shares of Series C Preferred Stock as of the Common Stock Record Date that number of shares of capital stock of the Spinoff Corporation as such holder would have been entitled to receive if such shares of Series C Preferred Stock had been converted into shares of Common Stock at the Common Equivalent Rate in effect immediately prior to the record date for such dividend or distribution; provided that the Corporation (or following -------- the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall elect the option described in this clause (2) if (a) the fair value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) as of the Common Stock Record Date of the portion of the capital stock so distributed applicable to one share of Common Stock (assuming the conversion of the Series C Preferred Stock into Spinoff Corporation Preferred Stock) (the "Spinoff Fair Value") is greater than or equal to 95% of the Current Market Price per share of Common Stock as of the Common Stock Record Date, or (b) the day on which such record date is fixed by the Board of Directors of the Corporation is less than twenty-one consecutive Trading Days prior to such record date. As of the Common Stock Record Date (or as of any date thereafter until the distribution of the Spinoff Corporation Preferred Stock), the holders of record of shares of Series C Preferred Stock will be considered the holders of record of any Spinoff Corporation Preferred Stock for purposes of the Certificate of Designation and for purposes of the certificate of designation with respect to the Spinoff Corporation Preferred Stock, including the giving of notice or voting thereunder. If the Spinoff Fair Value of the shares of capital stock of the Spinoff Corporation distributed with respect to each share of Series C Preferred Stock pursuant to clause (2) above would, as of the Common Stock Record Date, exceed the Call Price as of such record date, the number of shares of such capital stock to be distributed with respect to each share of Series C Preferred Stock shall be reduced so that the Spinoff Fair Value thereof equals the Call Price on such record date. Whether, after the distribution of the capital stock of the Spinoff Company, the Spinoff Preferred Stock has terms substantially equivalent to the Series C Preferred Stock prior to 57 such distribution will be determined by the Board of Directors of the Corporation (or its successor), whose determination shall be conclusive. Such Spinoff Company Preferred Stock may be considered substantially equivalent to the Series C Preferred Stock notwithstanding that, among other things, the tax treatment of a holder of Spinoff Company Preferred Stock differs from the tax treatment of a holder of Series C Preferred Stock, including by reason of a future change in U.S. law. (vi) If there shall occur a conversion or exchange of the Common Stock into, or the right to receive, other securities or other property of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) or a wholly owned subsidiary of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) (in each case other than in connection with a Merger or Consolidation) or if there shall occur a merger or consolidation of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) with or into a wholly owned subsidiary of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) that results in the conversion or exchange of the Common Stock into, or the right to receive, other securities or other property (whether of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) or any other entity), then the Series C Preferred Stock will thereafter no longer be subject to conversion or redemption into shares of Common Stock pursuant to paragraphs (4)(a), (4)(b), 4(c) and 4(e), but instead will be subject to conversion or redemption into the kind and amount of securities or other property which the holder of such shares of Series C Preferred Stock would have owned immediately after such conversion or exchange or merger or consolidation if such shares of Series C Preferred Stock had been converted or redeemed into shares of Common Stock immediately before the effective time of such conversion or exchange or merger or consolidation. If this paragraph (4)(d)(vi) applies, then no adjustment in respect of the same conversion or exchange or merger or consolidation shall be made pursuant to the other provisions of this paragraph (4)(d). In the event that at any time, as a result of an adjustment made pursuant to this paragraph (4)(d)(vi), the Series C Preferred Stock shall become subject to conversion or redemption into any securities other than shares of Common Stock, thereafter the number of such other securities so issuable upon conversion or redemption of the shares of Series C Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Series C Preferred Stock contained in this paragraph (4)(d). (vii) Anything in this paragraph (4) notwithstanding, the Corporation shall be entitled to make such adjustments in the Common Equivalent Rate, in addition to those required by this paragraph (4), as the Corporation in its sole discretion may 58 determine to be advisable, in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock (or any transaction which could be treated as any of the foregoing transactions pursuant to Section 305 of the Internal Revenue Code of 1986, as amended) hereafter made by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) or any other entity) to its stockholders shall not be taxable. If the Corporation determines that an adjustment to the Common Equivalent Rate should be made pursuant to this paragraph 4(d)(vii), an adjustment shall be made effective as of such date as is determined by the Board of Directors of the Corporation. The determination of the Board of Directors of the Corporation as to whether an adjustment to the Common Equivalent Rate should be made pursuant to the foregoing provisions of this paragraph 4(d)(vii), and, if so, as to what adjustment should be made and when, shall be conclusive, final and binding on the Corporation and all stockholders of the Corporation. (viii) As used in this paragraph (4), the "Current Market Price" of a share of Common Stock on any date shall be, except as otherwise specifically provided, the average of the daily Closing Prices (as defined in paragraph 4(i)(iii)) for the twenty consecutive Trading Dates ending on and including the date of determination of the Current Market Price; provided, however, that for purposes of paragraph 4(c), the Current Market Price shall be the average of the daily Closing Prices for the five consecutive Trading Days ending on and including the date of determination of the Current Market Price unless the Closing Price for the Trading Date next following such five-day period (the "next-day closing price") is less than 95% of such average, then the Current Market Price per share of Common Stock on such date of determination shall be the next-day closing price; and provided, further, that, with respect to any redemption, conversion or antidilution adjustment if any event that results in an adjustment of the Common Equivalent Rate occurs during the period beginning on the first day of the applicable determination period and ending on the applicable redemption or conversion date, the Current Market Price as determined pursuant to the foregoing will be appropriately adjusted to reflect the occurrence of such event. (ix) In any case in which paragraph (4)(d) shall require that an adjustment as a result of any event become effective as of the close of business on the record date and the date fixed for conversion pursuant to paragraph (4)(a), 4(b), 4(c) or 4(e) occurs after such record date, but before the occurrence of such event the Corporation may in its sole discretion elect to defer the following until after the occurrence of such event: (A) issuing to the holder of any converted shares of the Series C Preferred Stock the additional shares of Common Stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder 59 any amount in cash in lieu of a fractional share of Common Stock pursuant to paragraph (4)(g). (x) Before taking any action which would cause an adjustment to the Common Equivalent Rate that would cause the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) to issue shares of Common Stock for consideration below the then par value (if any) of the Common Stock upon conversion of the Series C Preferred Stock, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Common Equivalent Rate. (e) Optional Tender Offer Conversion. (i) If pursuant -------------------------------- to the rules promulgated under the Securities Exchange Act of 1934, as amended, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) has recommended acceptance of (or has expressed no opinion and is remaining neutral toward) a tender offer which would result in the ownership by the bidder (as defined in paragraph (i)(vii)) therein (or an affiliate (as defined in paragraph (i)(viii)) of the bidder) of more than 50% of the then outstanding shares of Common Stock of the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) (a "Recommended Tender Offer"), then prior to the expiration of such Recommended Tender Offer the Corporation shall give notice to each holder of record of Series C Preferred Stock that such holder may, at its option, convert (an "Optional Tender Offer Conversion") its shares of Series C Preferred Stock, in whole (but not in part), (A) into shares of Common Stock at the Common Equivalent Rate in effect at the close of business on the date prior to the date of expiration or termination of such Recommended Tender Offer (the "Tender Offer Measurement Date") (provided that if the Call Price on the Tender Offer Measurement -------- Date is less than the product of (x) the Current Market Price of a share of Common Stock on the Tender Offer Measurement Date (which Current Market Price shall be appropriately adjusted for the purposes of this proviso if the Corporation has made any antidilution adjustment to the Common Equivalent Rate pursuant to paragraph 4(d) with respect to an event which has not occurred as of such Tender Offer Measurement Date) and (y) the number of shares of Common Stock issuable upon conversion of a share of Series C Preferred Stock pursuant to the Optional Tender Offer Conversion, then the number of shares of Common Stock with respect to each share of Series C Preferred Stock issuable pursuant to the Optional Tender Offer Conversion shall be reduced so that the product referred to above in this proviso equals the Call Price on the Tender Offer Measurement Date), plus (B) the right to receive an amount of cash equal to all accrued and 60 unpaid dividends on the Series C Preferred Stock to and including the Tender Offer Measurement Date, whether or not declared, out of funds legally available therefor (and dividends shall cease to accrue on such share as of the Tender Offer Measurement Date); provided that the Corporation (or following the application of -------- the terms of paragraph 4(b)(i)(D), the Issuing Entity) may, at its option, deliver on the Tender Offer Measurement Date, in lieu of some or all of the cash consideration described in paragraph 4(e)(i)(B), a number of shares of Common Stock (subject to paragraphs 4(b)(vii) and 4(d)(vi)) to be determined by dividing the amount of cash consideration that the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) has elected to pay in Common Stock by the Current Market Price of the Common Stock determined as of such Tender Offer Measurement Date (which Current Market Price shall be appropriately adjusted, if necessary, for the purposes of this proviso if either (x) the Corporation has made any antidilution adjustment to the Common Equivalent Rate pursuant to paragraph 4(d) with respect to an event which has not occurred as of such Tender Offer Measurement Date or (y) the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) has distributed cash or other property pursuant to clause (2) of paragraph 4(d)(iii), shares or other units of securities or assets pursuant to clause (2) of paragraph 4(d)(iv) or shares of capital stock of the Spinoff Corporation pursuant to clause (2) of paragraph 4(d)(v)). Notwithstanding the foregoing terms of this paragraph 4(e), if there shall have occurred an adjustment pursuant to paragraph 4(d)(vi) as a result of a conversion or exchange or merger or consolidation referred to in such paragraph prior to the Tender Offer Measurement Date, then with respect to the exercise of any such option referred to in the foregoing proviso by the Corporation (or its successor), the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall deliver out of funds legally available therefor on such Settlement Date, in lieu of shares of Common Stock as described in this paragraph 4(e), the kind of securities or other property received by holders of Common Stock as a result of such conversion or exchange or merger or consolidation, in the same relative proportions (if more than one kind of securities or other property was so received) as exist in the Common Equivalent Rate on the Tender Offer Measurement Date, with an aggregate market price (determined for any security or other property, to the extent possible, in the manner that the Current Market Price is determined for the Common Stock, and otherwise determined by the Board of Directors of the Corporation (or its successor), whose determination shall be conclusive), as of such Settlement Date, equal to the amount of cash consideration that the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) has elected to pay in such securities or other property. (ii) The Corporation will provide notice of a Recommended Tender Offer to holders of record of the Series C Preferred Stock not less than fifteen business days prior to the 61 expiration of such tender offer. Such notice shall specify the date of expiration or termination (as of the date of such notice) of such Recommended Tender Offer and that if such holder elects to convert its shares of Series C Preferred Stock into shares of Common Stock, dividends on such Series C Preferred Stock will cease to accrue dividends on the date they are converted. If the date of expiration of the Recommended Tender Offer is extended, the Corporation will be under no obligation to notify any holder of Series C Preferred Stock of such extension. (iii) In order to exercise the Optional Tender Offer Conversion, a holder of Series C Preferred Stock shall (a) deliver a properly completed and duly executed written notice of election to convert on or prior to the Tender Offer Measurement Date, specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued to the Corporation at its principal office or to the Conversion Agent, (b) surrender the certificate for such shares of Series C Preferred Stock to the Corporation or the Conversion Agent, accompanied, if so required by the Corporation or the Conversion Agent, by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation or the Conversion Agent duly executed by the holder or his attorney duly authorized in writing and (c) pay any transfer or similar tax required by paragraph (4)(n). (iv) (A) Conversion shall be deemed to have been effected immediately prior to the termination or expiration of the Recommended Tender Offer (the "Conversion Date") on which the Corporation or the Conversion Agent shall have received the notice of election to convert, the surrendered certificate, any required payments and all other required documents. Immediately upon conversion, the rights of the holders of converted shares of Series C Preferred Stock shall cease and the persons entitled to receive the shares of Common Stock upon the conversion of such shares of Series C Preferred Stock shall be treated for all purposes as having become the owners of such shares of Common Stock. (B) As promptly as practicable after the Conversion Date, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall, unless otherwise instructed by the holder, deliver or cause to be delivered at the office or agency of the Conversion Agent, to or upon the written order of the holder of the surrendered shares of Series C Preferred Stock, a certificate or certificates representing the number of fully paid and nonassessable shares of Common Stock into which such shares of Series C Preferred Stock have been converted in accordance with the provisions of this paragraph (4)(e), and any cash payable in respect of fractional shares as provided in paragraph (4)(g). 62 (f) Notice of Adjustments. Whenever the Common --------------------- Equivalent Rate is adjusted as herein provided, the Corporation shall: (i) forthwith compute the adjusted Common Equivalent Rate in accordance with this paragraph (4) and prepare a certificate signed by the Chief Financial Officer, any Vice President, the Treasurer or Controller of the Corporation setting forth the adjusted Common Equivalent Rate, the method of calculation thereof in reasonable detail and the facts requiring such adjustment and upon which such adjustment is based, which certificate shall be conclusive, final and binding evidence of the correctness of the adjustment, and file such certificate forthwith with the transfer agent or agents for the Series C Preferred Stock and the Common Stock; and (ii) mail a notice stating that the Common Equivalent Rate has been adjusted, the facts requiring such adjustment and the facts upon which such adjustment is based and setting forth the adjusted Common Equivalent Rate to the holders of record of the outstanding shares of the Series C Preferred Stock at or prior to the time the Corporation mails an interim statement to its stockholders covering the fiscal quarter during which the facts requiring such adjustment occurred, but in any event within 45 days of the end of such fiscal quarter. (g) No Fractional Shares. (i) No fractional shares or -------------------- scrip representing fractional shares of Common Stock or other kind of security (including upon a distribution of the capital stock of the Spinoff Company, the Series C Preferred Stock and the Spinoff Company Preferred Stock) shall be issued upon the redemption or conversion of any shares of Series C Preferred Stock. Instead of any fractional interest in a share of Common Stock or such other security which would otherwise be deliverable upon the redemption or conversion of a share of Series C Preferred Stock, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall either (A) pay to the holder of such share (a "Fractional Shareholder") an amount in cash (computed to the nearest cent) equal to (x) in the case of fractional shares of Common Stock, the same fraction of the Current Market Price of the Common Stock determined as of the Settlement Date, Conversion Date or the second Trading Date immediately preceding the relevant Notice Date, as the case may be, (y) in the case of fractional shares of Spinoff Corporation Preferred Stock and Series C Preferred Stock otherwise issuable upon a distribution of shares of capital stock of the Spinoff Corporation, an amount in cash equal, with respect to the Spinoff Corporation Preferred Stock, to the same fraction of the product of the Spinoff Fair Value per share of Common Stock and the common equivalent rate applicable to the Spinoff Corporation Preferred Stock and an amount in the cash equal, with respect to the Series C Preferred Stock, to the same fraction of 63 the product of (A) the Current Market Price, as of the Common Stock Record Date, less the Spinoff Fair Value, and (B) the Common Equivalent Rate after giving effect to the issuance of the Spinoff Corporation Preferred Stock and (z) in the case of fractional shares of capital stock of the Spinoff Corporation, an amount in cash equal to the same fraction of the Spinoff Fair Value per share of Common Stock or (B) follow the procedures set forth in paragraph (g)(ii). If more than one share of Series C Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series C Preferred Stock so surrendered. (ii) The Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) may, in lieu of paying cash to Fractional Shareholders as provided in paragraph (g)(i), issue, in full payment of the Corporation's (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity's) obligation with respect to such fractional interests, shares of stock equal to the aggregate of such fractional interests of such Fractional Shareholder and other Fractional Shareholders (aggregated over a reasonable period of time, but not in any event more than 20 business days, and rounded upwards to the nearest whole share) to an agent (the "Transfer Agent") appointed by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) for such Fractional Shareholders for sale promptly by the Transfer Agent on behalf of the Fractional Shareholders. The Transfer Agent will remit promptly to such Fractional Shareholders their proportionate interest in the net proceeds (following the deduction of applicable transaction costs and computed to the nearest cent) from such sale. (h) Cancellation. Shares of Series C Preferred Stock ------------ that have been issued and reacquired in any manner, including shares purchased, exchanged, redeemed or converted, shall not be reissued as part of the Series C Preferred Stock and shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock. (i) Definitions. As used in this paragraph (4): ----------- (i) the term "business day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close; provided that, from and after the effective time of a Merger or Consolidation in connection with which the Corporation elects the Existing Preferred Stock Option, the term "business day" shall mean any day other than a Saturday, 64 Sunday or a day on which banking institutions in the State of New York and in the place where the Issuing Entity has its headquarters are authorized by law to close; (ii) the term "Call Price" shall mean the per share price (payable in shares of Common Stock) at which the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) may redeem shares of Series C Preferred Stock, which shall be initially equal to $112.286 declining by $.01656 on each day following the date of issuance of the Series C Preferred Stock (computed on the basis of a 360-day year of twelve 30-day months) to $95.246 on March 15, 1997 and equal to $94.25 thereafter, if not sooner redeemed; provided that if the Corporation (or -------- following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) distributes cash or other property as provided in paragraph 4(d)(iii)(2), shares or other units of securities or assets as provided in paragraph 4(d)(iv)(2), shares of capital stock of the Spinoff Corporation as provided in paragraph 4(d)(v)(2) or if Non- Common Equity Merger Consideration is distributed in connection with a Merger or Consolidation, then (i) in the case of a distribution described in paragraph 4(d)(iii)(2), from and after the close of business on the record date related to such distribution (or in the case of an Excess Purchase Payment, from and after the close of business on the payment date related to such Excess Purchase Payment) the Call Price per share for any day shall be reduced by the amount of cash or the value of other property (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) to be distributed pursuant thereto, (ii) in the case of a distribution described in paragraph 4(d)(iv)(2), from and after the close of business on the record date related to such distribution, the Call Price per share for any day shall be reduced by the Distribution Fair Value of such shares or other units of securities or assets, (iii) in the case of a distribution described in paragraph 4(d)(v)(2), from and after the close of business on the record date related to such distribution, the Call Price per share for any day shall be reduced by the Spinoff Fair Value of such shares of capital stock and (iv) in the case of a distribution of Non-Common Equity Merger Consideration, from and after the close of business on the Settlement Date related to the Merger or Consolidation, the Call Price per share shall be reduced by the Non-Common Equity Fair Value of such Non-Common Equity Merger Consideration; provided further that in no event shall the -------- effect of the foregoing proviso be to reduce the Call Price per share to an amount less than $0.01; the Corporation will provide notice (subsequent to such reduction) of any reduction in the Call Price as a result of the application of the first proviso in this definition to each holder of record of Series C Preferred Stock at such holder's address as it appears on the stock register of the Corporation 65 (provided, however, that no failure to give such notice nor -------- ------- any defect therein shall affect the validity of the related reduction in the Call Price); (iii) the term "Closing Price" on any day shall mean the closing sale price regular way (with any relevant due bills attached) on such day, or in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way (with any relevant due bills attached), in each case on the New York Stock Exchange Consolidated Tape (or any successor composite tape reporting transactions on national securities exchanges), or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of Common Stock has been traded during the five consecutive Trading Dates ending on and including the date of determination of the Current Market Price), or, if not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices regular way (with any relevant due bills attached) of the Common Stock on the over-the-counter market on the day in question as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or a similarly generally accepted reporting service, or if not so available as determined in good faith by the Board of Directors, on the basis of such relevant factors as it in good faith considers, in the reasonable judgment of the Board of Directors, appropriate. Notwithstanding the foregoing, from and after the effective time of a Merger or Consolidation in connection with which the Corporation elects the Existing Preferred Stock Option, if the Issuing Entity Common Equity is not trading on the New York Stock Exchange (or other national securities exchange or reported on NASDAQ as described above), "Closing Price" shall be (i) determined by reference to the principal trading market on which the Issuing Entity Common Equity is traded and (ii) converted, if necessary, into U.S. dollars by reference to the spot rate at noon local time in the relevant market at which, in accordance with the normal banking procedures, U.S. dollars could be purchased with the currency in which the Closing Price is denominated from major banks located in New York City or London, England; (iv) the term "Notice Date" with respect to any notice given by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) in connection with a redemption or conversion of any of the Series C Preferred Stock shall be the commencement of the mailing of such notice to the holders of the Series C Preferred Stock in accordance with paragraph (4)(j); 66 (v) the term "Settlement Date" shall mean the business day immediately prior to the effective date of a Merger or Consolidation; (vi) the term "Trading Date" shall mean a date on which the New York Stock Exchange (or any successor to such Exchange) is open for the transaction of business. Notwithstanding the foregoing, from and after the effective time of a Merger or Consolidation in connection with which the Corporation elects the Existing Preferred Stock Option, if the Issuing Entity Common Equity is not traded on the New York Stock Exchange (or other national securities exchange or reported on NASDAQ as described under paragraph 4(i)(ii)), "Trading Date" shall be determined by reference to the principal trading market on which the Issuing Entity Common Equity is traded; (vii) the term "bidder" shall have the meaning set forth in Rule 14d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended; (viii) the term "affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended; and (ix) the term "U.S. person" shall mean any citizen or resident of the United States and any domestic corporation, partnership, estate or trust. (j) Notice of Redemption or Conversion. The ---------------------------------- Corporation will provide notice of (i) any redemption or conversion (other than an Optional Tender Offer Conversion, but including any potential conversion upon the effectiveness of a Merger or Consolidation) of shares of Series C Preferred Stock to holders of record of the Series C Preferred Stock to be called or converted not less than 30 nor more than 60 days prior to the date fixed for such redemption or conversion, as the case may be, and (ii) the election of any of the options set forth in paragraph 4(b)(i) to the holders of record of the Series C Preferred Stock at least 30 days prior to the anticipated effective date of the Merger or Consolidation; provided, that the Corporation shall be under no obligation to notify any holder of any extension of such effective date. Such notice shall be provided by mailing such notice first class postage prepaid, to each holder of record of the Series C Preferred Stock, at such holder's address as it appears on the stock register of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption or conversion of any shares of Series C Preferred Stock to be redeemed or converted except as to the holder to whom the Corporation has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state, as appropriate and to the extent determinable, the following: 67 (A) the redemption, conversion or exchange date; (B) that all outstanding shares of Series C Preferred Stock are to be redeemed or converted or, in the case of a call for redemption pursuant to paragraph 4(c) of fewer than all outstanding shares of Series C Preferred Stock pursuant to paragraph (4)(c), the number of such shares held by such holder to be redeemed; (C) in the case of a call for redemption pursuant to paragraph (4)(c), the Call Price, the number of shares of Common Stock deliverable upon redemption of each share of Series C Preferred Stock to be redeemed and the Current Market Price used to calculate such number of shares of Common Stock subject to any subsequent adjustments pursuant to paragraph 4(d); (D) whether the Corporation is exercising any option to deliver shares of Common Stock in lieu of cash (in the case of a conversion pursuant to paragraph (4)(b)(i)(A) or (4)(b)(v)), the method of calculating the Current Market Price to be used to calculate the number of such shares of Common Stock and, if the Corporation is exercising such option in respect of less than all the cash that is deliverable by the Corporation upon such conversion, the portion of such cash in lieu of which Common Stock will be delivered; (E) whether the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) is electing to exercise the Common Conversion Option, the Issuing Entity Preferred Stock Conversion Option, the Corporation Preferred Stock Conversion Option or the Existing Preferred Stock Option (in the case of a conversion pursuant to paragraph (4)(b)), and if the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) elects the Issuing Entity Preferred Stock Conversion Option, the Corporation Preferred Stock Conversion Option or the Existing Preferred Stock Option, that such holder shall be entitled to exercise the Holder Opt-Out Right; (F) the place or places where certificates for such shares are to be surrendered for redemption or conversion; and (G) that dividends on the shares of Series C Preferred Stock to be redeemed or converted will cease to accrue on such redemption or conversion date or, in the case of a conversion pursuant to paragraph (4)(b), on the related Settlement Date, unless the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall default in delivering the shares of 68 Common Stock and cash, if any, payable by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) pursuant to this paragraph (4), at the time and place specified in such notice. (k) Deposit of Shares and Funds. The Corporation's --------------------------- (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity's) obligation to deliver shares of Common Stock and provide funds in accordance with this paragraph (4) shall be deemed fulfilled if, on or before a redemption or conversion date, the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) shall deposit, with a bank or trust company, or an affiliate of a bank or trust company, having an office or agency in New York City and having a capital and surplus of at least $50,000,000, such number of shares of Common Stock as are required to be delivered by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) pursuant to this paragraph (4) upon the occurrence of the related redemption or conversion (including any payment of fractional share amounts pursuant to paragraph (4)(g)(i)), together with funds (or, in the case of a conversion pursuant to paragraph 4(b), shares of Common Stock and/or funds) sufficient to pay all accrued and unpaid dividends on the shares to be redeemed or converted as required by this paragraph (4), in trust for the account of the holders of the shares to be redeemed or converted (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such shares and funds be delivered upon redemption or conversion of the shares of Series C Preferred Stock so called for redemption or converted. Any interest accrued on such funds shall be paid to the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) from time to time. Any shares of Common Stock or funds so deposited and unclaimed at the end of two years from such redemption or conversion date shall be repaid and released to the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity), after which the holder or holders of such shares of Series C Preferred Stock so called for redemption or converted shall look only to the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) for delivery of such shares of Common Stock or funds. (l) Surrender of Certificates; Status. Each holder of --------------------------------- shares of Series C Preferred Stock to be redeemed or converted shall surrender the certificates evidencing such shares (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state) to the Corporation at the place designated in the notice of such redemption or conversion and shall thereupon be entitled to receive certificates evidencing shares of Common Stock and to receive any funds payable pursuant to this paragraph 4 following such surrender and following the date of such redemption or conversion. In case fewer than all the shares represented by any 69 such surrendered certificate are called for redemption, a new certificate shall be issued at the expense of the Corporation representing the unredeemed shares. If such notice of redemption or conversion shall have been given, and if on the date fixed for redemption or conversion shares of Common Stock and funds necessary for the redemption or conversion shall have been either set aside by the Corporation (or following the application of the terms of paragraph 4(b)(i)(D), the Issuing Entity) separate and apart from its other funds or assets in trust for the account of the holders of the shares to be redeemed or converted (and so as to be and continue to be available therefor) or deposited with a bank or trust company or affiliate thereof as provided in paragraph 4(k), then, notwithstanding that the certificates evidencing any shares of Series C Preferred Stock so called for redemption or subject to conversion shall not have been surrendered, the shares represented thereby so called for redemption or subject to conversion shall be deemed no longer outstanding, dividends with respect to the shares so called for redemption or subject to conversion shall cease to accrue after the date fixed for redemption or conversion or, in the case of a conversion pursuant to paragraph (4)(b), on the related Settlement Date, and all rights with respect to the shares so called for redemption or subject to conversion shall forthwith after such date cease and terminate, except for the right of the holders to receive the shares of Common Stock and funds, if any, payable pursuant to this paragraph 4 without interest upon surrender of their certificates therefor. (m) Dividend Payments. The holders of shares of ----------------- Series C Preferred Stock at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the call or conversion thereof (except that holders of shares called for redemption or to be converted on a date occurring between such record date and the Dividend Payment Date or on such Dividend Payment Date shall not be entitled to receive such dividend on such Dividend Payment Date but instead will receive an amount equal to accrued and unpaid dividends to such date or the related Settlement Date, as the case may be) or the Corporation's default in payment of the dividend due on such Dividend Payment Date. (n) Payment of Taxes. The Corporation will pay any ---------------- and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on the redemption or conversion of shares of Series C Preferred Stock pursuant to this paragraph (4); provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any registration of transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the registered holder of Series C Preferred Stock redeemed or converted or to be redeemed or converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the 70 Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (o) Notwithstanding any other provision of this paragraph 4, no dividend, redemption, repurchase, exchange or conversion or other distribution shall be made to or from the holders of Series C Preferred Stock other than out of funds legally available therefor. (5) Liquidation Preference. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after payment or provision for payment of any Senior Securities, an amount per share of Series C Preferred Stock in cash equal to the sum of (i) $65.00 (or, following any issuance of Spinoff Corporation Preferred Stock, the greater of $65.00 and the fair market value per share of Series C Preferred Stock (as determined, on or within five business days after the date of issuance of the Spinoff Corporation Preferred Stock, by the Board of Directors of the Corporation, whose determination shall be conclusive) as of such date of issuance), plus (ii) all accrued and unpaid dividends thereon to the date of liquidation, dissolution or winding up, before any payment shall be made or any assets distributed to the holders of any of the Junior Securities. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series C Preferred Stock and any Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series C Preferred Stock and the holders of outstanding shares of such Parity Securities are entitled were paid in full. Except as provided in this paragraph (5)(a), holders of Series C Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. The Corporation will provide notice to holder of record of Series C Preferred Stock not more than thirty days after any adjustment to the liquidation preference of the Series C Preferred in connection with the issuance of the Spinoff Corporation Preferred Stock. (b) For the purposes of this paragraph (5), neither the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more other corporations nor the consolidation or merger of one or more corporations with or into the Corporation shall be 71 deemed to be a voluntary or involuntary liquidation, dissolution or winding up. (6) Voting Rights. (a) The holders of record of shares of Series C Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph (6) or as otherwise provided by law. (b) The holders of shares of Series C Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of Common Stock, voting together with the holders of Common Stock (and any other capital stock of the Corporation entitled to vote together with the Common Stock) as one class; provided, however, that the holders of Series C Preferred Stock shall not be entitled to vote on any increase or decrease in the number of authorized shares of any class or classes of stock; and provided further that in the event of a Merger or Consolidation in which the Corporation elects the Existing Preferred Stock Option, the holders of shares of Series C Preferred Stock will no longer be entitled to vote on such matters submitted to a vote of the holders of Common Stock, unless the Board of Directors of the Corporation specifically provides otherwise. Each share of the Series C Preferred Stock shall be entitled to a number of votes equal to one-tenth of the Common Equivalent Rate; it being understood that whenever the Common Equivalent Rate is adjusted as provided in paragraph 4(d) hereof, the voting rights of the Series C Preferred Stock shall also be similarly adjusted. (c) (i) If at any time or times dividends payable on all series of Preferred Stock, including the Series C Preferred Stock, shall be in arrears and unpaid for six quarterly periods, then the number of directors constituting the Board of Directors, without further action, shall be increased by two (2) and the holders of shares of Series C Preferred Stock shall have the right, together with the holders of all other outstanding series of the Preferred Stock entitled to vote thereon, to elect the directors of the Corporation to fill such newly created directorships, the remaining directors to be elected by the other class or classes of stock entitled to vote therefor, at each meeting of stockholders held for the purpose of electing directors; provided, that in no event shall such holders have the right to elect more than 25% of the total number of directors of the Corporation; provided, further, that, notwithstanding the foregoing proviso, such holders shall have the right to elect not less than one director pursuant to this paragraph (6)(c)(i). While holders of shares of such series of Preferred Stock are entitled to elect two directors, they shall not be entitled to participate with the holders of Common Stock in the election of any other directors, but shall continue to be entitled to vote with the holders of Common Stock upon each other matter coming before any meeting of the stockholders. (ii) Whenever such voting right shall have vested, such right may be exercised initially either at a special meeting 72 of the holders of shares of Series C Preferred Stock together with the holders of all other outstanding series of the Preferred Stock entitled to vote thereon, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such meetings or by the written consent of such holders pursuant to Section 228 of the General Corporation Law of the State of Delaware. Such voting right shall continue until such time as all cumulative dividends accumulated on all outstanding series of Preferred Stock shall have been paid in full or declared and set aside for payment in full, at which time such voting right of such holders shall terminate, subject to revesting in the event of each and every subsequent failure of the Corporation to pay dividends for the requisite number of quarters as described above. (iii) At any time when such voting right shall have vested in the holders of shares of Series C Preferred Stock together with all other series of Preferred Stock entitled to vote thereon and if such right shall not already have been initially exercised, a proper officer of the Corporation shall, upon the written request of 10% of the holders of record of shares of such series of Preferred Stock then outstanding, addressed to the Secretary of the Corporation, call a special meeting of holders of shares of such series of Preferred Stock. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Corporation or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by the proper officers of the Corporation within 30 days after the personal service of such written request upon the Secretary of the Corporation, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of 10% of the shares of such series of Preferred Stock then outstanding may designate in writing a holder of shares of such series of Preferred Stock to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the same place as is elsewhere provided in this paragraph (6)(c)(iii). Any holder of shares of such series of Preferred Stock that would be entitled to vote at such meeting shall have access to the stock books of the Corporation for such series of Preferred Stock for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this paragraph. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called during a period within 90 days immediately preceding the date fixed for the next annual meeting of stockholders. (iv) At any meeting held for the purpose of electing directors at which the holders of shares of Series C Preferred 73 Stock together with all other series of Preferred Stock entitled to vote thereon shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of at least a majority of the then outstanding shares of such series of Preferred Stock shall be required and be sufficient to constitute a quorum of such series for the election of directors by such series. At any such meeting or adjournment thereof (x) the absence of a quorum of the holders of shares of such series of Preferred Stock shall not prevent the election of directors other than those to be elected by the holders of stock of such series and the absence of a quorum or quorums of the holders of capital stock entitled to elect such other directors shall not prevent the election of directors to be elected by the holders of shares of such series of Preferred Stock and (y) in the absence of a quorum of the holders of shares of such series of Preferred Stock, a majority of such holders present in person or by proxy shall have the power to adjourn the meeting for the election of directors which the holders of shares of such series of Preferred Stock may be entitled to elect, from time to time, without notice (except as required by law) other than announcement at the meeting, until a quorum shall be present. (v) The term of office of all directors elected by the holders of shares of Series C Preferred Stock together with all other series of Preferred Stock entitled to vote thereon pursuant to paragraph (6)(c)(i) in office at any time when the aforesaid voting rights are vested in the holders of shares of such series of Preferred Stock shall terminate upon the election of their successors at any meeting of stockholders for the purpose of electing directors. Upon any termination of the aforesaid voting rights in accordance with paragraph (6)(c)(ii), the term of office of all directors elected by the holders of shares of such series of Preferred Stock pursuant to paragraph (6)(c)(i) then in office shall thereupon terminate and upon such termination the number of directors constituting the Board of Directors shall, without further action, be reduced by two (2) (or such other lesser number by which the number of directors constituting the Board of Directors shall have been increased pursuant to paragraph (6)(c)(i) hereof), subject always to the increase of the number of directors pursuant to paragraph (6)(c)(i) in case of the future right of the holders of shares of such series of Preferred Stock to elect directors as provided herein. (vi) In case of any vacancy occurring among the directors elected pursuant to paragraph (6)(c)(i), the remaining director who shall have been so elected may appoint a successor to hold office for the unexpired term of the director whose place shall be vacant. If all directors so elected by the holders of shares of Series C Preferred Stock together with all other series of Preferred Stock entitled to vote thereon shall cease to serve as directors before their terms shall expire, the holders of shares of such series of Preferred Stock then outstanding may, at a special meeting of the holders called as provided above, elect 74 successors to hold office for the unexpired terms of the directors whose places shall be vacant. (d) So long as any shares of the Series C Preferred Stock are outstanding (except when notice of the redemption or conversion of all outstanding shares of Series C Preferred Stock has been given pursuant to paragraph (4)(j) and shares of Common Stock and any necessary funds have been deposited in trust for such redemption or conversion pursuant to paragraph (4)(k)), the Corporation shall not, without the affirmative vote or consent of the holders of at least a majority of the shares of Series C Preferred Stock and any other series of Preferred Stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, authorize any new class of Parity Securities. (e) So long as any shares of the Series C Preferred Stock are outstanding (except when notice of the redemption or conversion of all outstanding shares of Series C Preferred Stock has been given pursuant to paragraph (4)(j) and shares of Common Stock and any necessary funds have been deposited in trust for such redemption or conversion pursuant to paragraph (4)(k)), the Corporation shall not, without the affirmative vote or consent of the holders of at least 66-2/3% of the shares of Series C Preferred Stock and any other series of Preferred Stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, authorize any new class of Senior Securities. (f) Except for the amendments contemplated by the exercise of the Existing Preferred Stock Option, so long as any shares of the Series C Preferred Stock are outstanding (except when notice of the redemption or conversion of all outstanding shares of Series C Preferred Stock has been given pursuant to paragraph (4)(j) and shares of Common Stock and any necessary funds have been deposited in trust for such redemption or conversion pursuant to paragraph (4)(k)), the Corporation shall not, without the affirmative vote or consent of the holders of at least 66-2/3% of the shares of Series C Preferred Stock and any other series of Preferred Stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, amend the Certificate of Incorporation or this Certificate of Designation so as to affect materially and adversely the specified rights, preferences, privileges or voting rights of holders of shares of Preferred Stock. (g) (i) Except as set forth in paragraphs (6)(d) and (6)(e) above, the creation, authorization or issuance of any 75 shares of any Junior Securities, Parity Securities or Senior Securities, (ii) the creation of any indebtedness of any kind of the Corporation, or (iii) the increase or decrease in the amount of authorized capital stock of any class, including Preferred Stock, shall not require the consent of the holders of Series C Preferred Stock and shall not be deemed to affect materially and adversely the rights, preferences, privileges or voting rights of holders of shares of Series C Preferred Stock. (7) Increase in Shares. The number of shares of Series C Preferred Stock may, to the extent of the Corporation's authorized and unissued Preferred Stock, be increased by further resolution duly adopted by the Board of Directors and the filing of a certificate of increase with the Secretary of State of the State of Delaware. (8) Limitations. Except as may otherwise be required by law, the shares of Series C Preferred Stock shall not have any powers, preferences or relative, participating, optional or other special rights other than those specifically set forth in this resolution (as such resolution may be amended from time to time) or otherwise in the Certificate of Incorporation of the Corporation. ARTICLE FIFTH The Board of Directors of the Corporation, acting by majority vote, may alter, amend or repeal the By-Laws of the Corporation. ARTICLE SIXTH Except as otherwise provided by the Delaware General Corporation Law as the same exists or may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this Article SIXTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE SEVENTH So long as the Corporation's Senior Converting Debentures Due 2009 are outstanding, the Corporation and its Subsidiaries shall not engage in, directly or indirectly, any purchase, sale, or other acquisition or disposition of a material amount of assets of the Corporation and its Subsidiaries, taken as a whole, with any Affiliate of the Corporation (other than a wholly owned subsidiary of the Corporation) except on terms that are not less favorable to the Corporation than those which would have been obtainable at the time of such transaction from a 76 person who is not such an Affiliate, without the approval of the holders of a majority of shares of the common stock of the Corporation issued and then outstanding not held by Affiliates of the Corporation; provided, however, than any purchase, sale or other acquisition or disposition of a material amount of assets of the Corporation with any Affiliate of the Corporation shall be deemed to be on terms that are not less favorable to the Corporation than those which would have been obtainable at the time of the transaction from a person who is not an Affiliate if the Corporation receives a written opinion from a nationally recognized investment bank stating that the transaction is fair to the Corporation from a financial point of view. For the purposes of this Article SEVENTH and Article EIGHTH, the terms "Affiliate" and "Subsidiary" shall have the meanings set forth in the indenture relating to the Senior Converting Debentures Due 2009. ARTICLE EIGHTH If Senior Converting Debentures shall have been converted into not less than a number of shares of common stock of the Corporation equal to 12 1/2% of the fully diluted common stock of the Corporation at the Conversion Date (as defined in the indenture pursuant to which the Senior Converting Debentures have been issued), the Corporation shall not, without approval of the holders of a majority of shares of the common stock of the Corporation issued and then outstanding not held by Affiliates of the Corporation, engage in any transaction subject to Rule 13e-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 13e-3"), during the period from the fourth anniversary of the effective time of the merger of RJR Acquisition Corporation with and into RJR Nabisco, Inc. (the "Effective Time") to the fifth anniversary of the Effective Time. For the purposes of this Article EIGHTH only, it is assumed that the common stock of the Corporation is subject to the application of Rule 13e-3. 77 IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation, having been duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Section 242 and Section 245 of the General Corporation Law of the State of Delaware, has been executed this ____ day of ___________, 199__. RJR NABISCO HOLDINGS CORP. By: __________________________ Jo-Ann Ford Vice President and Secretary [CORPORATE SEAL] Attest: By: __________________________ Suzanne P. Jenney Assistant Secretary EX-3.2(A) 3 EXHIBIT 3.2(a) CERTIFICATE OF RETIREMENT of Series A Conversion Preferred Stock of RJR NABISCO HOLDINGS CORP. (Pursuant to Section 243 of the Delaware General Corporation Law) In accordance with Section 243 of the General Corporation Law of the State of Delaware, RJR Nabisco Holdings Corp., a Delaware corporation (the "Corporation"), does hereby certify that the following resolutions respecting its Series A Conversion Preferred Stock were duly adopted by the Corporation's Board of Directors: RESOLVED, that, following the conversion of all shares of the Company's Series A Conversion Preferred Stock (the "Series A Conversion Preferred Stock") into shares of Common Stock on November 15, 1994 (the "Conversion Date"), all of the authorized shares of Series A Conversion Preferred Stock will be retired and the reissuance of any shares of Series A Conversion Preferred Stock as part of such series of Preferred Stock will be prohibited under the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"); and RESOLVED, that, upon such retirement of all of the authorized shares of Series A Conversion Preferred Stock effective on the Conversion Date, the officers of the Company are hereby authorized, empowered and directed to file with the Secretary of State of the State of Delaware a certificate pursuant to Section 243 of the General Corporation Law of the State of Delaware setting forth these resolutions in order to eliminate from the Certificate of Incorporation all reference to the Series A Conversion Preferred Stock. IN WITNESS WHEREOF, RJR Nabisco Holdings Corp. has caused this Certificate to be signed by Jo-Ann Ford, its Vice President and Secretary, and attested by Suzanne P. Jenney, its Assistant Secretary, this 18th day of November, 1994. By: /s/ Jo-Ann Ford -------------------------- Jo-Ann Ford Vice President & Secretary ATTEST: /s/Suzanne P. Jenney - -------------------- Suzanne P. Jenney Assistant Secretary EX-3.3(D) 4 EXHIBIT 3.3(d) [Composite, as amended to and including May 13, 1994] RESTATED CERTIFICATE OF INCORPORATION OF RJR NABISCO, INC. (Originally incorporated under the name of R.J. Reynolds Industries, Inc. on March 4, 1970) ARTICLE I The name of the Corporation is RJR Nabisco, Inc. (the "Corporation"). ARTICLE II The address of the registered office of the Corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover 19901, County of Kent. The name of its registered agent at that address is The Prentice-Hall Corporation System, Inc. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV The total number of shares of capital stock that the Corporation is authorized to issue is four thousand (4,000) shares of Common Stock, par value $1,000.00 each. ARTICLE V The Board of Directors of the Corporation is expressly authorized to make, alter, amend or repeal the By-Laws of the Corporation. ARTICLE VI 1. A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended. No repeal or modification of the foregoing provisions of this Section 1 nor, to the fullest extent permitted by law, any modifications of law, shall adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. 2. Each person who is or was a director, officer, employee or agent of the Corporation (and the heirs, executors or administrators of such person) who was or is made a party to, or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by applicable law as the same exists or may hereafter be amended. The right to indemnification conferred in this Section 2 shall also include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition to the fullest extent authorized by applicable law as the same exists or may hereafter be amended. The right to indemnification conferred in this Section 2 shall be a contract right. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any expense, liability or loss incurred by such person in any such capacity, whether or not the Corporation would have the power to indemnify such person in any such capacity and whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under applicable law as the same exists or may hereafter be amended. The rights and authority conferred in this Section 2 shall not be exclusive of any other right which any person may have or hereafter acquire under any statue, provision of the Certificate of Incorporation or By-Laws of the Corporation, agreement, vote of stockholders or disinterested directors or otherwise. No repeal or modification of the foregoing provisions of this Section 2 nor, to the fullest extent permitted by law, any modification of law, shall adversely affect any right or protection of a director, officer, employee or agent of the Corporation or any other person existing at the time of such repeal or modification. EX-10.18(A) 5 EXHIBIT 10.18(a) Name of the Optionee: Number of Shares for Which Option may be Exercised: Charles M. Harper 750,000 Grant Date: December 31, 1994 RJR NABISCO HOLDINGS CORP. 1990 LONG TERM INCENTIVE PLAN NON-QUALIFIED STOCK OPTION AGREEMENT WITNESSETH: ARTICLE I GRANT OF OPTION SECTION 1.1 Grant of Option. Pursuant to the provisions of the RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (the "Plan"), and for good and valuable consideration, on and as of the date hereof (the "Grant date") RJR Nabisco Holdings Corp. ("Holdings"), in consideration of Optionee's agreement to purchase the Purchased Stock set forth in the Employment Agreement dated May 27, 1993 by and among Holdings, RJR Nabisco, Inc. and the Optionee (the "Employment Agreement"), irrevocably grants (the "Grant") to the Optionee above named the option to purchase any part or all of an aggregate of the number of shares set forth on the first page hereof of its Common Stock upon the terms and conditions set forth in this Agreement and has directed the undersigned officer to execute this Agreement. A copy of the Plan is incorporated by reference and made a part of this Agreement with the same effect as if set forth in the Agreement itself. A copy of the Employment Agreement is incorporated by reference and made a part of this Agreement with the same effect as if set forth in the Agreement itself. All capitalized terms used below shall have the meaning set forth in the Plan or the Employment Agreement, as the case may be, unless the context requires a different meaning. SECTION 1.2 Exercise Price. The exercise price of the shares of Common Stock covered by the Option shall be $5.50 per share without commission or other charge. SECTION 1.3 Consideration to Holdings. In consideration of the granting of this Option by Holdings, the Optionee agrees to render faithful and efficient services to the Corporation, with such duties and responsibilities the Corporation shall from time to time prescribe, consistent with the terms of the Employment Agreement. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Corporation or shall interfere with or restrict in any way the rights of the Corporation, which are hereby expressly reserved, to terminate the employment of the Optionee at any time for any reason whatsoever, with or without cause, subject to the terms of the Employment Agreement. SECTION 1.4 Adjustments in Option. Subject to Section 8 of the Plan, in the event that the outstanding shares of the Common Stock subject to the Option are, from time to time, changes into or exchanged for a different number or kind of shares of Holdings or other securities of Holdings or another corporation by reason of a merger, consideration, recapitalization, reclassification, stock split, stock dividend, combination of shares, or otherwise, or in the event of an extraordinary transaction involving the Holdings capital stock or assets or the capital stock or assets of an affiliated corporation, an appropriate and equitable adjustment shall be made in the number and kind of shares or other consideration as to which the option, or portions thereof then unexercised, shall be exercisable. ARTICLE II PERIOD OF EXERCISABILITY SECTION 2.1 Commencement of Exercisability. The Option shall become exercisable as follows: Percentage of Total Shares As Date Option Becomes Exercisable to Which Option is Exercisable - ------------------------------- ------------------------------ Grant Date through May 30, 1995 0% May 31, 1995 - May 30, 1996 33 1/3% May 31, 1996 - May 30, 1997 66 2/3% May 31, 1997 - thereafter 100% 2 (a) Notwithstanding the foregoing, the Option shall immediately become exercisable as to all shares following the termination of employment of the Optionee for any reason other than a termination of employment by Holdings for Cause or a termination of employment by executive without Good Reason. (b) The Optionee shall be deemed to have a "Permanent Disability" if he becomes totally and permanently disable (as defined in the Company's Long Term Disability Plan applicable to senior executive officers as in effect on the date hereof), or if the Board of Directors or any committee thereof so determines. (c) "Retirement" shall mean retirement on or after May 31, 1997, or earlier with the consent of the Committee. (d) "Termination of employment" as used herein means termination from active employment; it does not mean termination of payment or benefits at the end of salary continuation or other form of severance or pay in lieu of salary. SECTION 2.2 Expiration of Option. The option may not be exercised to any extent by Optionee and shall expire or terminate after the first to occur to the following events: (a) The fifteenth anniversary of the Grant date; or (b) The first anniversary of the date of the Optionee's termination of employment for any reason, other than by reason of Retirement or for Cause; or (c) The third anniversary of the date of Optionee's termination of employment by reason of Retirement or Permanent Disability. (d) Immediately upon the Optionee's termination of employment for Cause; or (e) If applicable, the date the Option is terminated pursuant to the Employment Agreement. 3 ARTICLE III EXERCISE OF OPTION SECTION 31.1 Person Eligible to Exercise. During the lifetime of the Optionee, only the Optionee may exercise the Option or any portion thereof. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the option becomes unexercisable and expires under Section 2.2, be exercised by his personal representative or by any person empowered to do so under the Optionee's will or under the then applicable laws of descent and distribution. SECTION 3.2 Partial Exercise. Any exercisable portion of the option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable and expires under Section 2.2; provided, however, that any partial exercise shall be for whole shares only. SECTION 3.3 Manner of Exercise. The Option, or any exercisable portion thereof, may be exercised solely by delivering to the Corporate Secretary of Holdings (the "Secretary") or his office all of the following prior to the time when the Option or such portion becomes unexercisable under Section 2.2: (a) Notice in writing signed by the Optionee or the other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Committee; (b) Full payment by; (i) tender to Holdings of cash for the full purchase price of the shares with respect to which such Option or portion thereof is exercised; (ii) The unsecured, demand borrowing by Optionee from Holdings on an open account maintained solely for this purpose in the amount of the full exercise price together with the instruction from Optionee to sell the shares exercised on the open market through a duly registered broker-dealer with which Holdings makes an arrangement for the sale of such shares under the Plan. This method is known as the "broker-dealer exercise method" and is subject to the terms and conditions set forth herein, in the Plan and in guidelines established by the Committee. The option 4 shall be deemed to be exercised simultaneously with the sale of the shares by the broker-dealer. If the shares purchased upon the exercise of an Option or a portion thereof cannot be sold for a price equal to or greater than the full exercise price plus direct costs of the sales, then there is no exercise of the Option. Election of this method authorizes Holdings to deliver shares to the broker-dealer and authorizes the broker- dealer to sell said shares on the open market. The broker-dealer will remit proceeds of the sale to Holdings which will remit net proceeds of the sale to Holdings which will remit net proceeds to Optionee after repayment of the borrowing, deduction of costs, if any, and withholding of taxes. Optionee's borrowing from Holdings on an open account shall be a personal obligation of Optionee which shall bear interest at the published Applicable Federal Rate (AFR) for short-term loans and shall be payable upon demand by Holdings. Such borrowing may be authorized by telephone or other telecommunications acceptable to Holdings. Upon such borrowing and the exercise of the Option or portion thereof, title to the shares shall pass to the Optionee whose election hereunder shall constitute instruction to Holdings to register the shares in the name of the broker-dealer or its nominee. Holdings reserves the right to discontinue this broker-dealer exercise method at any time for any reason whatsoever. Optionee agrees that if this broker-dealer exercise method under this Paragraph 3.3(b)(ii) hereof is used, Optionee promises unconditionally to pay Holdings the full balance in his open account at any time upon demand. Optionee also agrees to pay interest on the account balance at the AFR for short-term loans from and after demand. (c) Full payment to Holdings of all amounts which, under federal, state or local law, it is required to withhold upon exercise of the Option; and (d) In the event the Option or portion thereof shall be exercised pursuant to Section 3.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option. (e) This Option shall not be exercisable prior to six months after the Date of Grant. SECTION 3.4 Conditions of Issuance of Stock Certificates. The shares of Common Stock deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by Holdings. Such shares shall be duly and validly issued, fully paid and nonassessable. Holdings shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of Common Stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee shall deem necessary; and (c) The obtaining of approval or other clearance from any state of federal governmental agency which the Committee shall determine to be necessary; and (d) The payment to Holdings of all amounts which, under federal, state or local law, it is required to withhold upon exercise of the Option; and (e) The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience. SECTION 3.5 Rights as Stockholder. The holder of the Option shall not be, nor have any of the rights or privileges of, a stockholder of Holdings in respect of any shares purchasable upon the exercise of the Option or any portion thereof unless and until certificates representing such shares shall have been issued by Holdings to such holder. ARTICLE IV MISCELLANEOUS SECTION 4.1 Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the 6 Optionee, Holdings and all other interested persons, subject to the terms of the Employment Agreement. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement. SECTION 4.2 Option Not Transferable. Neither the Option nor any interest or right therein or part thereof shall be liable for the debts, contracts or obligations of the Optionee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 4.2 shall not prevent transfers by will or by, the applicable laws of descent and distribution. SECTION 4.3 Shares to Be reserved; Other Covenants. .1 Holdings shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement; and .2 Holdings shall take all actions necessary to satisfy the conditions set forth in clauses (a), (b) and (c) of Section 3.4 hereof so that such conditions shall remain satisfied so long as any of the Options remain outstanding. SECTION 4.4 Notices. Any notice to be given under the terms of this Agreement to Holdings shall be addressed to Holdings in care of its Secretary, and any notice to be given to the Optionee shall be addressed to him at the address appearing beneath his signature on the final page of this Agreement. By a notice given pursuant to this Section 4.4, either party may hereafter designate different address for notices to be given to him. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased, be given to the Optionee's personal representative if such representative has previously informed Holdings of his status and address by written notice under this Section 4.4. Any notice shall have been deemed duly given when enclosed in a properly sealed envelope addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service. 7 SECTION 4.5 Termination for Cause. For purposes of this Agreement, an Optionee's employment shall be deemed to have been terminated for "Cause" only as such term is defined in the Employment Agreement. SECTION 4.6 Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. SECTION 4.7 Applicability of Plan and the Employment Agreement. The Option and the shares of Common Stock issued to the Optionee upon exercise of this Option shall be subject to all of the terms and provisions of the Plan and the Employment Agreement, to the extent applicable to this Option and such shares. In the event of any conflict between the Plan, this Agreement and/or the Employment Agreement, the terms of the Employment Agreement shall control. Notwithstanding anything to the contrary contained herein, this Agreement shall be null and void and of no effect unless the Optionee has purchased the Purchased Stock pursuant to the Employment Agreement, unless such purchase is not consummated for reasons beyond the control of Optionee. SECTION 4.8 Amendment. This Agreement may be amended only by a writing executed by the parties hereto which specifically states that it is amending this Agreement. SECTION 4.9 Pronouns. The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. SECTION 4.10 GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. SECTION 4.11 Jurisdiction. Any suit, action or proceeding against the Optionee with respect to this Agreement, or any judgment entered by any court in respect of any thereof, may be brought in any court of competent jurisdiction in the State of Delaware or New York, as Holdings may elect in its sole discretion, and the 8 Optionee hereby submits to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. By the execution and delivery of this Agreement, the Optionee appoints The Prentice-Hall Corporation at its office at 15 Columbus Circle, New York, NY 10023-7773 as his agent upon which process may be served in any such suit, action or proceeding. Service of process upon such agent, together with notice of such service given to the Optionee in the manner provided in section 4.4, hereof, shall be deemed in every respect effective service of process upon him in any suit, action or proceeding. Nothing herein shall in any way be deemed to limit the ability of Holdings to serve any such writs, process or summonses in any other manner permitted by applicable law or to obtain jurisdiction over the Optionee, in such other manner permitted by applicable law or to obtain jurisdiction over the Optionee, in such other jurisdictions, and in such manner, as may be permitted by applicable law. The Optionee hereby irrevocably waives any objections which he may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware or New York, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. Holdings hereby submits to the jurisdiction of such courts for the purpose of any such suit, action or proceeding. SECTION 4.12 Taxes. Any taxes required by federal, state, or local laws to be withheld by the Company (i) on exercise by the Optionee of the Option for Common Stock, or (ii) at the time an election, if any, is made by the Optionee pursuant to Section 83(b) of the internal Revenue Code, as amended, shall be paid to the Company before delivery of the Common Stock is made to the Optionee. When the Option is exercised under the broker-dealer exercise method, the full amount of any taxes required to be withheld by the Company on exercise of stock options shall be deducted by the Company from the proceeds. SECTION 4.13 Signatures. This Agreement may be executed by Holdings by manual or facsimile signature of any duly authorized officer of Holdings. SECTION 4.14 Counterparts. This Agreement may be executed in two or more counterparts. 9 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. RJR NABISCO HOLDINGS, CORP. By_________________________________ _____________________________ Charles M. Harper Optionee's Taxpayer Identification Number: _____________________________ Optionee's Address: Suite 1500 One Central Park Plaza Omaha, Nebraska 68102 Dated: EX-10.25 6 EXHIBIT 10.25 February 14, 1995 Lawrence R. Ricciardi 45 Vineyard Lane Greenwich, CT 06831 Dear Larry: This letter constitutes the entire agreement among RJR Nabisco Holdings Corp., RJR NABISCO, INC., (collectively, the "Company"), its successors, affiliates and/or assigns, and you regarding the termination of your employment relationship with the Company, and implements the termination provisions of your Employment Agreement dated July 19, 1993 with the Company (the "Employment Agreement") together with additional provisions under the 1995 Headquarters Continuing Excellence Recognition Program (the "Protection Program"). 1. a) The date of your termination is March 3, 1995 (your "SBC Date"). Your Compensation Continuance commences March 4, 1995 and continues through March 3, 1998, which will be your official "Separation Date" for Company records. Your Compensation Continuance determined under your Employment Agreement is as follows: Annual rate of base salary $ 600,000 Highest Annual Bonus (including special $300,000 additional 1994 bonus) $ 1,350,000 ----------- Total payable each 12 month period, beginning March 4, 1995, during Compensation Continuance total period of 36 months $ 1,950,000 Based on the foregoing, Compensation Continuance will be paid semi- monthly at the rate of $81,250 for the period March 4, 1995 to March 3, 1998 and will be subject to deductions for income tax withholding, FICA, employee benefit plan contributions and other authorized deductions. b) Additionally, if you remain employed through March 3, 1995 (your "Job Completion Date" under the Protection Program), you shall be paid in a lump sum an amount equal to 6 months base salary ($300,000) on or about July 1, 1995. This amount is subject to deductions for income tax withholding and FICA, but shall not be includable for any benefit plan or SERP calculations. 2. Compensation Continuance is provided in order to preserve the Company's access to you although you will be relieved of all your normal duties and responsibilities. You agree that you will personally provide reasonable assistance and cooperation in locating or obtaining information concerning the Company (past or present) about which you are knowledgeable. You acknowledge that as of March 3, 1995, your active employment with the Company will end irrevocably and will not be resumed again at any time in the future, except upon mutual agreement of the parties hereto. Except as otherwise noted, Compensation Continuance and the other benefits described herein continue through your Separation Date without regard to whether or not you become employed by an employer not affiliated with the Company. 3. If you become disabled for more than ten consecutive business days after Compensation Continuance begins, and provide acceptable medical documentation of a bonafide disability, your Compensation Continuance will be suspended until you recover or could return to work if you were an active employee, or until Long Term Disability benefits are denied or cease. During the period of disability, you will receive the Short Term and/or Long Term Disability benefits for which you otherwise qualify. Compensation Continuance resumes for the balance of the period of Compensation Continuance when the period of disability ends. 2 If you die during Compensation Continuance, Compensation Continuance payments will cease, but any amounts that would have been paid to you had you lived until your Separation Date will be paid in a lump sum to your spouse, or if you do not have a spouse at the time of death, to your designated beneficiary under the Company's SELECT Core Life Insurance plan. 4. As of your SBC Date, no further vacation will accrue. Unused vacation plus vacation accrued during the calendar year in which your SBC Date occurs will be paid in a lump sum at the end of Compensation Continuance. Vacation accrues up to your SBC Date at 1/12 of your vacation entitlement for each full or partial month of active employment. Your vacation entitlement is determined as of the beginning of the calendar year. Based on 24 days of such unused and accrued vacation, you will be paid $55,384.62. Vacation taken prior to your SBC Date will reduce this amount. 5. a) During Compensation Continuance, you may continue to participate in the employee benefit programs in which you participated as of your SBC Date except as otherwise provided in this letter agreement or by the terms of the individual program. You may participate as though you were an active employee, subject to the continuation of applicable payroll deductions. "Employee benefit programs" do not include the Annual Incentive Award Plan ("AIAP") or the Long Term Incentive Plan ("LTIP"), the disposition of which are detailed by other provisions of this Agreement. Unless otherwise specified by the Company, changes in the employee benefit programs after the date of this letter will not apply to you, except as required by law. New benefit programs which replace or supersede current programs will apply to you if the Company chooses not to continue to make the current programs available to employees on Compensation Continuance. b) The following is a summary of benefit continuation: Your participation in SELECT Flexible Benefits Program will continue during Compensation Continuance until the end of the month in which your Separation Date occurs. Since the Compensation Continuance period extends into several new SELECT Plan Years, you will be required to re- enroll each year in the same manner as active employees. Should you become employed by an employer not affiliated with the Company, health care coverage provided by your new employer will be coordinated with health care benefits under SELECT. If you elect COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) continuation coverage under 3 SELECT after your Separation Date, the premium for the initial six months will be the monthly equivalent of the active employee cost. Thereafter, coverage may continue for up to an additional 12 months at a monthly premium equal to the full 102% of actual plan cost. Specific costs and details will be provided on a timely basis. If at the end of Compensation Continuance, the Company provides retiree medical, dental and life insurance for its retirees, you shall be eligible for such insurance at the Company and retiree contribution rate for a retiree with 25 years of service at retirement. You are vested in the Retirement Plan for Employees of RJR Nabisco, Inc., (the "Retirement Plan"). At your Separation Date you will have an irrevocable choice of receiving your benefit as a lump sum or an immediate annuity, or electing a deferred annuity which can commence no earlier than age 65. Appropriate election forms will be provided to you on or about your Separation Date. During Compensation Continuance, you may continue to make contributions to the RJR Nabisco Capital Investment Plan, and you retain all other rights under the plan, including the right to transfer investments between funds, change your contribution amount, and to request withdrawals. However, no loan applications will be approved during Compensation Continuance. Following your Separation Date, your account balance will be distributed to you in accordance with the terms of the Plan. You are fully vested in your account. Until the end of the calendar year in which your SBC Date occurs, you may utilize the Company's New York City Health Club arrangements if you are a member on your SBC Date. Provision of this benefit is taxable to you. c) In addition to your benefit payable under the Retirement Plan, you shall be paid a benefit at the end of Compensation Continuance under the Supplemental Executive Retirement Plan ("SERP") which shall be the maximum benefit payable under the SERP, and shall, upon final calculation prior to payment, be without reduction for early commencement. The SERP payment is in excess of the Retirement Plan benefit and includes any amounts payable from the nonqualified defined benefit plans of the Company, the Supplemental Benefits Plan and the Additional Benefits Plan. The benefit payable from the SERP shall include the amounts of Compensation Continuance detailed in paragraph 1 4 herein; provided, however, only $260,000 of the $300,000 special additional 1994 bonus referenced in paragraph 1 shall be included in the SERP benefit calculation. The Protection Program Completion Bonus and the Protection Program AIAP award of 6 months additional AIAP for 1995 shall not be included in the SERP benefit calculation. Funding for the estimated SERP benefit accrued through December 31, 1994, except for $260,000 of the $300,000 special 1994 bonus, and not reflecting a reduction for early retirement, has already been secured through the purchase of annuity contracts from John Hancock Mutual Life Insurance Company, American International Life Assurance Company, and Metropolitan Life Insurance Company. The estimated total after-tax annuity account, including prior funding, as of your SBC Date is $7,228,000. This amount may be subject to change due to changes in interest rates, tax rates, retroactive changes in your tax status imposed by a state or local taxing authority, and other actuarial factors as they may be in effect on March 4, 1998. Therefore, a calculation will be done in March 4, 1998 to determine if any funding through the purchase of a annuity on a tax grossed-up basis is required as of March 4, 1998 to deliver your benefit; provided, however, if any funding is made prior to March 4, 1998 for other SERP participants on Compensation Continuance, you will be included in any required funding. Nothing herein shall affect the validity of SERP funding acknowledgment waivers previously executed by you, and they are specifically incorporated by reference into this Agreement. Additionally, you agree that a pre-condition to any funding of your SERP benefit is the execution by you of any additional acknowledgment waivers requested by the Company. The provisions of the SERP shall govern the payment of your SERP benefit in the event of your death; provided, however, if you should die prior to March 4, 1998, your spouse shall receive the same lump sum you would have received if you retired on your date of death and elected a lump sum. d) Your Employment Agreement provides that in addition to any Employee Benefit or Flexible Perquisite Program, the Company would provide you with a $3,000,000 term life insurance benefit. In lieu of this term insurance, you elected to be covered by a premium equivalent $1,000,000 variable premium whole life policy. The premium on this policy shall continue to be paid by the Company on a taxed grossed-up basis during Compensation Continuance. On or about March 3, 1998 you will be given the option of continuing premiums on this policy at your own expense at the premium rate then in effect. 5 6. a) Except as indicated below, you will continue to receive the benefits of the Flexible Perquisite Program during Compensation Continuance. Your perquisite allowances during Compensation Continuance for calendar years 1995, 1996, 1997 and 1998 shall be as follows: 1995 - $39,583 less any amount in excess of $7,917 paid for the period January 1, 1995 to March 3, 1995. 1996 - $47,500 1997 - $47,500 1998 - $7,917 b) No new car or lease will be provided during Compensation Continuance; provided, however, the car currently leased for you by the Company shall have its title transferred to you at the end of Compensation Continuance term on a tax grossed-up basis. c) For security reasons, you were provided at Company expense, while actively employed, a Company car, driver and a home security system. The arrangement for a car and driver shall end as of your SBC date, but due to continuing security concerns based on your extensive knowledge of the Company, the Company will continue to pay for the maintenance of your home security system during Compensation Continuance. 7. a) You will be paid a prorated award under the Annual Incentive Award Plan for your 2 months of active employment during the 1995 Plan year, scored at the higher of target or actual financial performance of the Company. This award will be paid to you at the same time as other Plan participants; cannot be deferred; and is the last AIAP award to be made to you. Payment of any such award will be subject to appropriate taxes and a CIP contribution, if applicable. As a participant in AIAP, you will be paid your highest AIAP over the period of Compensation Continuance, as set forth in paragraph 1 above. This was determined by dividing your highest AIAP amount by the number of pay periods in a year and including such amount with each Compensation Continuance payment. Thus, there will be no lump sum AIAP award payment for the period of Compensation Continuance. 6 b) In addition, you shall be paid a Protection Program special award equal to one half (6 months) your regular AIAP award for 1995, scored at the higher of target or actual financial performance of the Company. At target, this award is estimated to be $210,000 and shall be paid when other 1995 AIAP awards are paid, which is scheduled to be in early 1996. This award is subject to deductions for income tax withholding and FICA, but is not includable for any benefit calculations. 8. Prior to your SBC Date, you are expected to submit Expense Reports for all outstanding travel, entertainment and other business expenses cash advances. If any expense report(s) reflect any amounts owing to the Company, they will be deducted from Compensation Continuance payments, as necessary. In addition, prior to your Separation Date you must return all Company equipment such as personal computers. 9. a) Under the MEPP Non-Qualified Stock Option Agreement, your Non- Qualified Stock Options are 100% vested and may be exercised anytime up to May 1, 1999. The exercise of your stock options is governed by the terms of your Non-Qualified Stock Option Agreement with Holdings. No further MEPP stock option awards will be made to you. b) Under the 1990 Long-Term Incentive Plan ("LTIP") Non-Qualified Stock Option Agreements, your nonqualified stock options are 100% vested as of March 3, 1995 and may be exercised anytime up to the exercise expiration date as indicated in each individual stock option agreement. The exercise of your stock options is governed by the terms of your Non- Qualified Stock Option agreement with Holdings. No new LTIP Awards of any kind will be made to you. c) Your current Performance Shares and Performance Units granted under the LTIP shall be scored at actual performance and prorated for your service to March 3, 1995. Your Performance Unit payment shall be 14/36 of the award, scored at actual performance, and paid on or after December 31, 1996 (14/36 of this award is estimated to be $661,111, subject to actual performance). Your Performance Share award payment shall be 26/36 of the award, subject to adjustment for actual performance and share price, and shall be paid on or after January 1, 1996 (26/36 of this award is estimated to be $325,000, subject to actual performance and share price). Determination of the actual payment amount shall be in accordance with your respective Performance Share Plan Agreement and Performance Unit Plan Agreement. No 1995 or other new Performance Share Awards or Performance Unit Awards shall be made to you. 7 d) Under the Executive Equity Program as modified by the Protection Program, all Common Stock pledged for payment of the Promissory Note executed by you shall be sold on March 3, 1995. After application of the proceeds of the foregoing sale, any outstanding balance, shall be paid in cash by the Company to the Promissory Note holder to fully extinguish the loan balance and completely satisfy the Promissory Note, together with any gross-up to you for federal, state and local income tax incurred by you as a result of the transaction. 10. Until March 3, 1996, you are entitled to use the outplacement counseling service designated by the Company for which the Company will pay not more than the normal and reasonable fee, which is not to exceed 18% of the amount of your annual base salary. You are not obligated to use this service, but the Company urges you to consider this service as one of the avenues to finding new employment. In addition, you may, in the sole discretion of the Company, apply the foregoing allowance to organization membership fees which aid in job networking. 11. a) The Company shall hold you harmless from any golden parachute tax imposed by any federal, state or local taxing authority as a result of any of the payments made pursuant to this Agreement. Payment of such golden parachute tax plus any additional taxes imposed as a result of the payment by the Company of such golden parachute tax, shall be made at the time you are required to pay such golden parachute tax. You agree to cooperate fully with the Company in any protester appeal by the Company in the event of the imposition of golden parachute tax. b) You shall be covered by the same liability and indemnification programs afforded to other officers and directors for acts that occurred while you were an officer or director of the Company and/or its affiliates. 12. If all the requirements of the Tuition Refund Plan are fulfilled, you will continue to be eligible for tuition aid reimbursement during Salary Continuation or for courses completed during Salary Continuation. 8 13. You may continue to participate or newly enroll in the Medsave Retiree Savings Plan and Scholastic Savings Plan during Salary Continuation. Upon your Separation Date, no further contributions will be permitted; however, your account(s) including any Company match will be maintained with continued interest growth. Distribution of your accounts(s) will be processed in accordance with program rules for active employees. In addition, you may apply for any of the education loans available in the RJR Nabisco Scholastic Loan Program during Salary Continuation. You will continue to be eligible for the interest credit reimbursement feature of the RJRN Plus loan for the life of the loans. 14. You shall maintain the terms and conditions of this Agreement in confidence. In addition, you will not disclose to any other employer or person any trade secrets or other proprietary or confidential information pertaining to the Company. In accordance with normal ethical and professional standards, you will refrain from taking actions or making statements, written or oral, which defame or denigrate the goodwill or reputation of the Company, its properties, products, directors, officers, executives and employees or which constitute willful conduct under circumstances where it is reasonable for you to anticipate or to expect that the natural consequences of such conduct by you will be to affect adversely the morale of other employees. 15. a) You agree that you will personally provide reasonable assistance and cooperation to the Company in activities related to the prosecution or defense of any pending or future lawsuits or claims involving the Company. b) You will promptly notify the Company if you receive any requests from anyone other than an employee or agent of the Company for information regarding the Company or if you become aware of any potential claim or proposed litigation against the Company. c) You will refrain from providing any information related to any claim or potential litigation against the Company to any non-Company representatives without either the Company's written permission or being required to provide information pursuant to legal process. d) If required by law to provide sworn testimony regarding any Company-related matter, you will consult with and have Company-designated legal counsel present for such testimony. e) The Company will be responsible for the costs of such designated counsel and you will bear no cost for same. f) You will confine your testimony to items about which you have knowledge rather than speculation, unless otherwise directed by legal process. g) You will cooperate with the Company's attorneys to assist their efforts, 9 especially on matters you have been privy to, holding all privileged attorney-client matters in strictest confidence. Nothing in sentences c-g of the above paragraph is intended to apply to governmental or judicial investigations; provided, however, the Company will reimburse you for legal expenses if you are compelled to appear in a governmental or judicial investigation. 16. Except as otherwise stated herein, no benefits (other than those provided by a tax-qualified plan or trust) or promise hereunder shall be secured by any specific assets of the Company. The payments under this Agreement shall not be assigned by you or anticipated in any way and any such attempted assignment will be void. 17. You agree not to apply for unemployment insurance attributable to your period of compensation continuance. 18. IN CONSIDERATION OF THE COMPENSATION AND BENEFITS SET FORTH IN THIS AGREEMENT AND EXCEPT FOR THE COMPANY'S OBLIGATIONS TO HOLD YOU HARMLESS AND INDEMNIFY UNDER PARAGRAPH 11 HEREIN, YOU VOLUNTARILY, KNOWINGLY AND WILLINGLY RELEASE AND FOREVER DISCHARGE THE COMPANY, ITS PARENTS, SUBSIDIARIES AND AFFILIATES, TOGETHER WITH THEIR RESPECTIVE OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS, AND EACH OF THEIR PREDECESSORS, SUCCESSORS AND ASSIGNS, FROM ANY AND ALL CHARGES, COMPLAINTS, CLAIMS, PROMISES, AGREEMENTS, CONTROVERSIES, CAUSES OF ACTION AND DEMANDS OF ANY NATURE WHATSOEVER WHICH AGAINST THEM YOU OR YOUR EXECUTORS, ADMINISTRATORS, SUCCESSORS OR ASSIGNS EVER HAD, NOW HAVE OR HEREAFTER CAN, SHALL OR MAY HAVE BY REASON OF ANY MATTER, CAUSE OR THING WHATSOEVER ARISING TO THE TIME YOU SIGN THIS AGREEMENT. YOU FURTHER AGREE THAT YOU WILL NOT SEEK OR BE ENTITLED TO ANY AWARD OF EQUITABLE OR MONETARY RELIEF IN ANY PROCEEDING OF ANY NATURE BROUGHT ON YOUR BEHALF ARISING OUT OF ANY OF THE MATTERS RELEASED BY THIS PARAGRAPH. THIS RELEASE INCLUDES, BUT IS NOT LIMITED TO, ANY RIGHTS OR 10 CLAIMS RELATING IN ANY WAY TO YOUR EMPLOYMENT RELATIONSHIP WITH THE COMPANY, OR THE TERMINATION THEREOF, OR UNDER ANY STATUTE, INCLUDING THE AGE DISCRIMINATION IN EMPLOYMENT ACT, TITLE VII OF THE CIVIL RIGHTS ACT, THE AMERICANS WITH DISABILITIES ACT, THE NEW YORK STATE AND CITY HUMAN RIGHTS LAWS OR ANY OTHER FEDERAL, STATE OR LOCAL LAW. 19. By signing this Agreement, you represent that you have not commenced any proceeding against the Company in any forum (administrative or judicial) concerning your employment or the termination thereof. You further acknowledge that you were given sufficient notice under the Worker Adjustment and Retraining Notification Act (the "WARN Act") and that the termination of your employment does not give rise to any claim or right to notice, or pay or benefits in lieu of notice under the WARN Act. In the event any WARN Act issue does exist or arises in the future, you agree and acknowledge that the payments and benefits set forth in this Agreement shall be applied to any pay or benefits in lieu of notice required by the WARN Act, provided that any such offset shall not impair or affect the validity of any provision of this Agreement, including the release set forth in paragraph 18. 20. The Company advises you that you may wish to consult with an attorney of your choosing prior to signing this Agreement. You understand and agree that you have the right and have been given the opportunity to review this Agreement and, specifically, the release in paragraph 18, with an attorney of your choice should you so desire. You also understand and agree that the Company is under no obligation to offer you the additional compensation and benefits of the Protection Program and that you are under no obligation to consent to the release set forth in paragraph 18 and that you have entered into this Agreement freely, knowingly and voluntarily. 21. You will be reimbursed for travel, food, lodging or similar out-of- pocket expense incurred at the Company's request in discharging any of your obligations under this agreement. If the Company reasonably determines that you have materially violated any of your obligations under this Agreement, then the Company may, at its option, terminate the Compensation Continuance and any other benefits hereunder. The Company may demand the return of all Salary Continuation payments already made 11 and you hereby agree to return such payments upon such demand. If after such demand you fail to return said payments, the Company has the right to commence judicial proceedings against you to recover said payments and any and all of its attorney's fees and costs. 22. This Agreement may not be amended except in writing signed by you and the Company and no amendments or modifications are contemplated at this time. This Agreement shall not be construed to provide any rights to anyone other than you and the Company. 23. If you have any questions about this Agreement, contact Gerald I. Angowitz. 24. You have at least twenty-one (21) days to consider the terms of this Agreement, although you may sign and return it sooner if you wish. This Agreement may be revoked by you for a period of seven (7) consecutive calendar days after you have signed and dated it, and after such seven (7) days, it becomes final. Please indicate your acceptance of the terms of this Agreement by signing this letter and the attached duplicate and returning one signed original to me. Sincerely, RJR NABISCO, INC. RJR NABISCO HOLDINGS CORP. --------------------------------- Charles M. Harper, Chairman and Chief Executive Officer Understood and Agreed: - --------------------- Lawrence R. Ricciardi Date:________________ 12 EX-10.26 7 EXHIBIT 10.26 CONSULTING AGREEMENT This CONSULTING AGREEMENT, made as of the 14th day of February, 1995, among RJR Nabisco Holdings Corp. ("RJR"), R. J. Reynolds Tobacco Company ("RJRT"), and Nabisco Holdings Corp. ("Nabisco"), (collectively, the "Company"), and Lawrence R. Ricciardi, an individual ("Consultant"). RECITALS -------- WHEREAS, Consultant has experience and insight into the business, litigation and legal matters, and various projects of the Company; and WHEREAS, the Company desires Consultant to perform consulting services in connection with the aforesaid matters and projects of the Company, and Consultant is willing to provide such services. NOW, THEREFORE, in consideration of the promises contained in this Agreement, the Company and Consultant agree as follows: 1. Consulting Services ------------------- Consultant agrees to act as a consultant to the Company from time to time at the request of the Company in connection with matters concerning the worldwide business of the Company. Consultant will be notified of such requests as they are assigned by the Chairman of RJR and/or Nabisco, the General Counsel of RJR and the Chief Legal Officers of RJR, RJRT, and Nabisco. Except as provided hereinafter, Consultant shall be available, on a mutually agreeable basis, to render services for 50 days during the term of this Agreement. If Consultant shall have other commitments, he shall, nevertheless, give first priority to the services requested by the Company. Requests for the services of Consultant is the sole discretion of the Chairman of RJR and/or Nabisco, the General Counsel of RJR and the Chief Officers of RJR, RJRT and Nabisco and availability, in the sole discretion of the Company, shall be either Consultant's actual presence at a designated site or availability by telecommunication. Consultant shall, during the Term of this Agreement, keep his location, address and telephone number consistently updated with the Company so that he may be reached at any time. 2. Consulting Fees --------------- a) The consulting fees hereunder are (i) a paid retainer for 50 days availability during the Term of Agreement and (ii) actual payment for any services. b) As consideration for the services under Paragraph 1 that Consultant will render, and for Consultant's availability during the term of this Agreement to provide such services for 50 days, RJR agrees to pay to Consultant a fee at the monthly rate of $16,667 ($200,000 per year) which shall be paid at the beginning of each month during the Term of the Agreement. c) Consultant shall be paid $4,000 per day for each day services are performed in excess of 50 days during the Term of this Agreement. d) If the Agreement is terminated pursuant to 3(b), payment at a rate of $4,000 per day shall be made for the excess of actual days worked over the number of days attributable to the retainer paid pursuant to 2(b) through the date of cancellation. e) Any election to defer consulting fees shall be made before a consulting fee becomes payable and shall be on a form prescribed by the Company. Any deferrals shall be by means of a cash credit, and the deferral shall be payable January 1 of the calendar following the calendar year in which the last consulting services are performed. The cash credit account shall be credited, as of the date that payment of the award would otherwise have been made, with the dollar amount of the portion of the award deferred by means of a cash credit. In addition, the Consultant's cash credit account shall be credited as of the last day of each calendar month with an interest equivalent in an amount determined by applying to the current balance in the account the interest rate for the immediately preceding month which, when annualized, shall be the average prime rate of Morgan Guaranty Trust Company of New York during such immediately preceding month. Interest shall be credited for the actual number of days in the month and shall be calculated based upon a 365-day year. 2 3. Term ---- (a) The Term of this Agreement shall be for 12 months commencing March 4, 1995. (b) Either party may cancel this Agreement on 30 days written notice. 4. Billing and Reimbursement of Expenses ------------------------------------- (a) The Company will reimburse Consultant for authorized travel, living and other business expenses incurred by Consultant for services which Consultant performs at the Company's request. Consultant will make monthly billings to the Company for any travel, living and other business expenses reimbursable to Consultant hereunder. Travel by air shall be at the first class rate. (b) In lieu of reimbursement for office and secretarial services, the Company will provide Consultant with the use of the Company office space and secretarial and support services when on site at RJR, RJRT or Nabisco. 5. Death Benefits -------------- In the event of the death of Consultant during the Term of the Agreement, the Company will pay to Consultant's designated beneficiary the fees for the balance of the Term of the Agreement and the Agreement shall be cancelled. In the absence of a designated beneficiary, any amounts payable shall be paid to Consultant's wife unless she predeceases Consultant, in which event such amounts shall be paid to Consultant's estate. 6. Independent Contractor ---------------------- Consultant is an independent contractor in all respects. Consultant shall not be entitled to any benefits afforded by the Company to its employees or employees of its affiliates by reason of the services performed under this Agreement. The Company shall not deduct from the consulting fees paid under this Agreement any taxes, payments for unemployment compensation, social security or other expense unless required by law. 3 In connection with the performance of Consultant's services, the Company shall provide Consultant with the same liability and indemnification programs it affords to its' officers and directors. 7. Non-Disclosure and Non-Competition ---------------------------------- (a) During the term of this Agreement, Consultant will not, without the prior written consent of the Company, perform advisory or consulting services for, or become employed by, any person, firm or corporation that competes directly or indirectly with the Company or its affiliates. (b) Any information disclosed to Consultant by the Company or any of its affiliates shall be regarded as confidential, and given the fact that Consultant is an attorney, shall be subject to attorney-client privilege. Such information will be used solely in connection with work performed by Consultant for the Company, and Consultant shall not disclose such information to any third party unrelated to the Company at any time during the term of this Agreement or thereafter without the prior written approval of the Company. 8. Miscellaneous ------------- (a) This is an agreement for the personal services of Consultant. Consultant's rights and obligations hereunder may not be assigned by Consultant without prior written consent of the Company. (b) This Agreement constitutes the entire agreement of the parties, and any amendments hereto shall be in writing, signed by both parties hereto. (c) This Agreement shall be governed by the laws of the State of Delaware. 4 (d) No benefit or promise hereunder shall be secured by any specific assets of the Company. Consultant shall have only the right of an unsecured general creditor in seeking satisfaction of such benefits or promises. No benefit or promise hereunder may be assigned or anticipated in any way. IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as of the date first written above. RJR Nabisco Holdings, Inc. Nabisco Holdings, Inc. By:___________________________ Chairman _______________________________ Lawrence R. Ricciardi 5 EX-10.31 8 EXHIBIT 10.31 February 14, 1995 Eugene R. Croisant 475 Poplar Street Winnetka, IL 60093 Dear Gene: This letter constitutes the entire agreement among RJR Nabisco Holdings Corp., RJR NABISCO, INC., (collectively, the "Company"), its successors, affiliates and/or assigns, and you regarding the termination of your employment relationship with the Company, and implements the termination provisions of your Employment Agreement dated June 10, 1994 with the Company (the "Employment Agreement") together with additional provisions under the 1995 Headquarters Continuing Excellence Recognition Program (the "Protection Program"). 1. a) The date of your termination is March 3, 1995 (your "SBC Date"). Your Compensation Continuance commences March 4, 1995 and continues through March 3, 1998, which will be your official "Separation Date" for Company records. Your Compensation Continuance determined under your Employment Agreement is as follows: Annual rate of base salary $ 475,000 Target Annual Bonus $ 333,000 ------------ Total payable each 12 month period, beginning March 4, 1995, during Compensation Continuance total period of 36 months $ 808,000 Based on the foregoing, Compensation Continuance will be paid semi- monthly at the rate of $33,666.67 for the period March 4, 1995 to March 3, 1998 and will be subject to deductions for income tax withholding, FICA, employee benefit plan contributions and other authorized deductions. b) Additionally, if you remain employed through March 3, 1995 (your "Job Completion Date" under the Protection Program), you shall be paid in a lump sum an amount equal to 6 months base salary ($237,500) on or about July 1, 1995. This amount is subject to deductions for income tax withholding and FICA, but shall not be includable for any benefit plan or SERP calculations. 2. Compensation Continuance is provided in order to preserve the Company's access to you although you will be relieved of all your normal duties and responsibilities. You agree that you will personally provide reasonable assistance and cooperation in locating or obtaining information concerning the Company (past or present) about which you are knowledgeable. You acknowledge that as of March 3, 1995, your active employment with the Company will end irrevocably and will not be resumed again at any time in the future, except upon mutual agreement of the parties hereto. Except as otherwise noted, Compensation Continuance and the other benefits described herein continue through your Separation Date without regard to whether or not you become employed by an employer not affiliated with the Company. 3. If you become disabled for more than ten consecutive business days after Compensation Continuance begins, and provide acceptable medical documentation of a bonafide disability, your Compensation Continuance will be suspended until you recover or could return to work if you were an active employee, or until Long Term Disability benefits are denied or cease. During the period of disability, you will receive the Short Term and/or Long Term Disability benefits for which you otherwise qualify. Compensation Continuance resumes for the balance of the period of Compensation Continuance when the period of disability ends. 2 If you die during Compensation Continuance, Compensation Continuance payments will cease, but any amounts that would have been paid to you had you lived until your Separation Date will be paid in a lump sum to your spouse, or if you do not have a spouse at the time of death, to your designated beneficiary under the Company's SELECT Core Life Insurance plan. 4. As of your SBC Date, no further vacation will accrue. Unused vacation plus vacation accrued during the calendar year in which your SBC Date occurs will be paid in a lump sum at the beginning of Compensation Continuance. Vacation accrues up to your SBC Date at 1/12 of your vacation entitlement for each full or partial month of active employment. Your vacation entitlement is determined as of the beginning of the calendar year. Based on 28 days of such unused and accrued vacation, you will be paid $51,153.84. Vacation taken prior to your SBC Date will reduce this amount. 5. a) During Compensation Continuance, you may continue to participate in the employee benefit programs in which you participated as of your SBC Date except as otherwise provided in this letter agreement or by the terms of the individual program. You may participate as though you were an active employee, subject to the continuation of applicable payroll deductions. "Employee benefit programs" do not include the Annual Incentive Award Plan ("AIAP") or the Long Term Incentive Plan ("LTIP"), the disposition of which are detailed by other provisions of this Agreement. Unless otherwise specified by the Company, changes in the employee benefit programs after the date of this letter will not apply to you, except as required by law. New benefit programs which replace or supersede current programs will apply to you if the Company chooses not to continue to make the current programs available to employees on Compensation Continuance. b) The following is a summary of benefit continuation: Your participation in SELECT Flexible Benefits Program will continue during Compensation Continuance until the end of the month in which your Separation Date occurs. Since the Compensation Continuance period extends into several new SELECT Plan Years, you will be required to re- enroll each year in the same manner as active employees. Should you become employed by an employer not affiliated with the Company, health care coverage provided by your new employer will be coordinated with health care benefits under SELECT. If you elect COBRA (Consolidated 3 Omnibus Budget Reconciliation Act of 1985) continuation coverage under SELECT after your Separation Date, the premium for the initial six months will be the monthly equivalent of the active employee cost. Thereafter, coverage may continue for up to an additional 12 months at a monthly premium equal to the full 102% of actual plan cost. Specific costs and details will be provided on a timely basis. If at the end of Compensation Continuance, the Company provides retiree medical, dental and life insurance for its retirees, you shall be eligible for such insurance at the Company and retiree contribution rate for a retiree with 23 years of service at retirement. You are vested in the Retirement Plan for Employees of RJR Nabisco, Inc., (the "Retirement Plan"). At your retirement you will have an irrevocable choice of receiving your benefit as a lump sum or an immediate annuity, or electing a deferred annuity which can commence no earlier than age 65. Appropriate election forms will be provided to you on or about your Separation Date. During Compensation Continuance unless you have retired, you may continue to make contributions to the RJR Nabisco Capital Investment Plan, and you retain all other rights under the plan, including the right to transfer investments between funds, change your contribution amount, and to request withdrawals. If you are not permitted to make contributions during Compensation Continuance, the Company match will, nevertheless, be made to the Additional Benefits Plan. No loan applications will be approved during Compensation Continuance. Following Compensation Continuance, your account balance will be distributed to you in accordance with the terms of the Plan. You are fully vested in your account. Until the end of the first calendar year during Compensation Continuance, you may utilize the Company's New York City health club arrangements if you are a member of the Club on your SBC Date. Provision of this benefit is taxable to you. c) In addition to your benefit payable under the Retirement Plan, you shall be paid a benefit at retirement under the Supplemental Executive Retirement Plan ("SERP") which shall be the maximum benefit payable under the SERP, and shall be without reduction for early commencement. The SERP payment is in excess of the Retirement Plan benefit and includes any amounts payable from the nonqualified defined benefit plans of the Company, the Supplemental Benefits Plan and the Additional Benefits Plan. The Protection Program Completion Bonus and the 4 Protection Program AIAP award of 6 months additional AIAP for 1995 shall not be included in the SERP benefit calculation. Funding for the estimated SERP benefit accrued through December 31, 1994, and not reflecting a reduction for early retirement, has already been secured through the purchase of annuity contracts from John Hancock Mutual Life Insurance Company, American International Life Assurance Company, and Metropolitan Life Insurance Company. The estimated total after-tax annuity account, including prior funding, as of your SBC Date is $4,100,000. Nothing herein shall affect the validity of SERP funding acknowledgment waivers previously executed by you, and they are specifically incorporated by reference into this Agreement. Additionally, you agree that a pre-condition to any funding of your SERP benefit is the execution by you of any additional acknowledgment waivers requested by the Company. The provisions of the SERP shall govern the payment of your SERP benefit in the event of your death; provided, however, if you should die prior to March 3, 1995, your spouse shall receive the same lump sum you would have received if you retired on your date of death and elected a lump sum. 6. a) Except as indicated below, you will continue to receive the benefits of the Flexible Perquisite Program during Compensation Continuance. Your perquisite allowances during Compensation Continuance for calendar years 1995, 1996, 1997 and 1998 shall be as follows: 1995 - $39,583 less any amount in excess of $7,917 paid for the period January 1, 1995 to March 3, 1995. 1996 - $47,500 1997 - $47,500 1998 - $7,917 b) No new car or lease will be provided during Compensation Continuance; provided, however, the car currently leased for you by the Company shall have its title transferred to you at the end of Compensation Continuance term on a tax grossed-up basis. 5 c) In consideration of the fact that, at the request of the Company, you remained actively employed after the date you could have otherwise retired, the Company shall reimburse, or otherwise hold you harmless, on a tax grossed-up basis for lease payments on your New York City residence and shall relocate your household goods from that residence to your retirement residence. 7. a) You will be paid a prorated award under the Annual Incentive Award Plan for your 2 months of active employment during the 1995 Plan year, scored at the higher of target or actual financial performance of the Company. This award will be paid to you at the same time as other Plan participants; cannot be deferred; and is the last AIAP award to be made to you. Payment of any such award will be subject to appropriate taxes and a CIP contribution, if applicable. As a participant in AIAP, you will be paid your target AIAP over the period of Compensation Continuance, as set forth in paragraph 1 above. This was determined by dividing your target AIAP amount by the number of pay periods in a year and including such amount with each Compensation Continuance payment. Thus, there will be no lump sum AIAP award payment for the period of Compensation Continuance. b) In addition, you shall be paid a Protection Program special award equal to one half (6 months) your regular AIAP award for 1995, scored at the higher of target or actual financial performance of the Company. At target, this award is estimated to be $166,500 and shall be paid when other 1995 AIAP awards are paid, which is scheduled to be in early 1996. This award is subject to deductions for income tax withholding and FICA, but is not includable for any benefit calculations. 8. Prior to your SBC Date, you are expected to submit Expense Reports for all outstanding travel, entertainment and other business expenses cash advances. If any expense report(s) reflect any amounts owing to the Company, they will be deducted from Compensation Continuance payments, as necessary. In order to preserve the Company's access to you, you may retain Company equipment, such as the fax machine and cellular phone until the end of Compensation Continuance, at which time such equipment will be transferred to you at book value and a Form 1099 shall be issued to you for such transfer. 6 9. a) Under the MEPP Non-Qualified Stock Option Agreement, your Non- Qualified Stock Options are 100% vested and may be exercised anytime up to May 1, 1999. The exercise of your stock options is governed by the terms of your Non-Qualified Stock Option Agreement with Holdings. No further MEPP stock option awards will be made to you. b) Under the 1990 Long-Term Incentive Plan ("LTIP") Non-Qualified Stock Option Agreements, your nonqualified stock options are 100% vested as of March 3, 1995 and may be exercised anytime up to the exercise expiration date as indicated in each individual stock option agreement. The exercise of your stock options is governed by the terms of your Non- Qualified Stock Option agreement with Holdings. No new LTIP Awards of any kind will be made to you. c) Your current Performance Shares and Performance Units granted under the LTIP shall be scored at actual performance and prorated for your service to March 3, 1995. Your Performance Unit payment shall be 14/36 of the award, scored at actual performance, and paid on or after December 31, 1996 (14/36 of this award is estimated to be $661,111, subject to actual performance). Your Performance Share award payment shall be 26/36 of the award, subject to adjustment for actual performance and share price, and shall be paid on or after January 1, 1996 (26/36 of this award is estimated to be $227,500, subject to actual performance and share price). Determination of the actual payment amount shall be in accordance with your respective Performance Share Plan Agreement and Performance Unit Plan Agreement. No 1995 or other new Performance Share Awards or Performance Unit Awards shall be made to you. d) Under the Executive Equity Program as modified by the Protection Program, all Common Stock pledged for payment of the Promissory Note executed by you shall be sold on March 3, 1995. After application of the proceeds of the foregoing sale, any outstanding balance, shall be paid in cash by the Company to the Promissory Note holder to fully extinguish the loan balance and completely satisfy the Promissory Note, together with any gross-up to you for federal, state and local income tax incurred by you as a result of the transaction. 7 10. Until March 3, 1996, you are entitled to use the outplacement counseling service designated by the Company for which the Company will pay not more than the normal and reasonable fee, which is not to exceed 18% of the amount of your annual base salary. You are not obligated to use this service, but the Company urges you to consider this service as one of the avenues to finding new employment. In addition, you may, in the sole discretion of the Company, apply the foregoing allowance to organization membership fees which aid in job networking. 11. a) The Company shall hold you harmless from any golden parachute tax imposed by any federal, state or local taxing authority as a result of any of the payments made pursuant to this Agreement. Payment of such golden parachute tax plus any additional taxes imposed as a result of the payment by the Company of such golden parachute tax, shall be made at the time you are required to pay such golden parachute tax. You agree to cooperate fully with the Company in any protester appeal by the Company in the event of the imposition of golden parachute tax. b) You shall be covered by the same liability and indemnification programs afforded to other officers and directors for acts that occurred while you were an officer or director of the Company and/or its affiliates. 12. If all the requirements of the Tuition Refund Plan are fulfilled, you will continue to be eligible for tuition aid reimbursement during Salary Continuation or for courses completed during Salary Continuation. 13. You may continue to participate or newly enroll in the Medsave Retiree Savings Plan and Scholastic Savings Plan during Salary Continuation. Upon your Separation Date, no further contributions will be permitted; however, your account(s) including any Company match will be maintained with continued interest growth. Distribution of your accounts(s) will be processed in accordance with program rules for active employees. In addition, you may apply for any of the education loans available in the RJR Nabisco Scholastic Loan Program during Salary Continuation. You will continue to be eligible for the interest credit reimbursement feature of the RJRN Plus loan for the life of the loans. 8 14. You shall maintain the terms and conditions of this Agreement in confidence. In addition, you will not disclose to any other employer or person any trade secrets or other proprietary or confidential information pertaining to the Company. In accordance with normal ethical and professional standards, you will refrain from taking actions or making statements, written or oral, which defame or denigrate the goodwill or reputation of the Company, its properties, products, directors, officers, executives and employees or which constitute willful conduct under circumstances where it is reasonable for you to anticipate or to expect that the natural consequences of such conduct by you will be to affect adversely the morale of other employees. 15. a) You agree that you will personally provide reasonable assistance and cooperation to the Company in activities related to the prosecution or defense of any pending or future lawsuits or claims involving the Company. b) You will promptly notify the Company if you receive any requests from anyone other than an employee or agent of the Company for information regarding the Company or if you become aware of any potential claim or proposed litigation against the Company. c) You will refrain from providing any information related to any claim or potential litigation against the Company to any non-Company representatives without either the Company's written permission or being required to provide information pursuant to legal process. d) If required by law to provide sworn testimony regarding any Company-related matter, you will consult with and have Company-designated legal counsel present for such testimony. e) The Company will be responsible for the costs of such designated counsel and you will bear no cost for same. f) You will confine your testimony to items about which you have knowledge rather than speculation, unless otherwise directed by legal process. g) You will cooperate with the Company's attorneys to assist their efforts, especially on matters you have been privy to, holding all privileged attorney-client matters in strictest confidence. Nothing in sentences c-g of the above paragraph is intended to apply to governmental or judicial investigations; provided, however, the Company will reimburse you for legal expenses if you are compelled to appear in a governmental or judicial investigation. 9 16. Except as otherwise stated herein, no benefits (other than those provided by a tax-qualified plan or trust) or promise hereunder shall be secured by any specific assets of the Company. The payments under this Agreement shall not be assigned by you or anticipated in any way and any such attempted assignment will be void. 17. You agree not to apply for unemployment insurance attributable to your period of compensation continuance. 18. IN CONSIDERATION OF THE COMPENSATION AND BENEFITS SET FORTH IN THIS AGREEMENT AND EXCEPT FOR THE COMPANY'S OBLIGATIONS TO HOLD YOU HARMLESS AND INDEMNIFY YOU UNDER PARAGRAPH 11 HEREIN, YOU VOLUNTARILY, KNOWINGLY AND WILLINGLY RELEASE AND FOREVER DISCHARGE THE COMPANY, ITS PARENTS, SUBSIDIARIES AND AFFILIATES, TOGETHER WITH THEIR RESPECTIVE OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS, AND EACH OF THEIR PREDECESSORS, SUCCESSORS AND ASSIGNS, FROM ANY AND ALL CHARGES, COMPLAINTS, CLAIMS, PROMISES, AGREEMENTS, CONTROVERSIES, CAUSES OF ACTION AND DEMANDS OF ANY NATURE WHATSOEVER WHICH AGAINST THEM YOU OR YOUR EXECUTORS, ADMINISTRATORS, SUCCESSORS OR ASSIGNS EVER HAD, NOW HAVE OR HEREAFTER CAN, SHALL OR MAY HAVE BY REASON OF ANY MATTER, CAUSE OR THING WHATSOEVER ARISING TO THE TIME YOU SIGN THIS AGREEMENT. YOU FURTHER AGREE THAT YOU WILL NOT SEEK OR BE ENTITLED TO ANY AWARD OF EQUITABLE OR MONETARY RELIEF IN ANY PROCEEDING OF ANY NATURE BROUGHT ON YOUR BEHALF ARISING OUT OF ANY OF THE MATTERS RELEASED BY THIS PARAGRAPH. THIS RELEASE INCLUDES, BUT IS NOT LIMITED TO, ANY RIGHTS OR CLAIMS RELATING IN ANY WAY TO YOUR EMPLOYMENT RELATIONSHIP WITH THE COMPANY, OR THE TERMINATION THEREOF, OR UNDER ANY STATUTE, INCLUDING THE AGE DISCRIMINATION IN EMPLOYMENT ACT, TITLE VII OF THE CIVIL RIGHTS ACT, THE AMERICANS WITH DISABILITIES ACT, THE NEW YORK STATE AND CITY HUMAN RIGHTS LAWS OR ANY OTHER FEDERAL, STATE OR LOCAL LAW. 10 19. By signing this Agreement, you represent that you have not commenced any proceeding against the Company in any forum (administrative or judicial) concerning your employment or the termination thereof. You further acknowledge that you were given sufficient notice under the Worker Adjustment and Retraining Notification Act (the "WARN Act") and that the termination of your employment does not give rise to any claim or right to notice, or pay or benefits in lieu of notice under the WARN Act. In the event any WARN Act issue does exist or arises in the future, you agree and acknowledge that the payments and benefits set forth in this Agreement shall be applied to any pay or benefits in lieu of notice required by the WARN Act, provided that any such offset shall not impair or affect the validity of any provision of this Agreement, including the release set forth in paragraph 18. 20. The Company advises you that you may wish to consult with an attorney of your choosing prior to signing this Agreement. You understand and agree that you have the right and have been given the opportunity to review this Agreement and, specifically, the release in paragraph 18, with an attorney of your choice should you so desire. You also understand and agree that the Company is under no obligation to offer you the additional compensation and benefits of the Protection Program and that you are under no obligation to consent to the release set forth in paragraph 18 and that you have entered into this Agreement freely, knowingly and voluntarily. 21. You will be reimbursed for travel, food, lodging or similar out-of- pocket expense incurred at the Company's request in discharging any of your obligations under this agreement. If the Company reasonably determines that you have materially violated any of your obligations under this Agreement, then the Company may, at its option, terminate the Compensation Continuance and any other benefits hereunder. The Company may demand the return of all Salary Continuation payments already made and you hereby agree to return such payments upon such demand. If after such demand you fail to return said payments, the Company has the right to commence judicial proceedings against you to recover said payments and any and all of its attorney's fees and costs. 11 22. This Agreement may not be amended except in writing signed by you and the Company and no amendments or modifications are contemplated at this time. This Agreement shall not be construed to provide any rights to anyone other than you and the Company. 23. If you have any questions about this Agreement, contact Gerald I. Angowitz. 24. You have at least twenty-one (21) days to consider the terms of this Agreement, although you may sign and return it sooner if you wish. This Agreement may be revoked by you for a period of seven (7) consecutive calendar days after you have signed and dated it, and after such seven (7) days, it becomes final. Please indicate your acceptance of the terms of this Agreement by signing this letter and the attached duplicate and returning one signed original to me. Sincerely, RJR NABISCO, INC. RJR NABISCO HOLDINGS CORP. -------------------------- Charles M. Harper, Chairman and Chief Executive Officer Understood and Agreed: - ---------------------- Eugene R. Croisant Date:_________________ 12 EX-10.32 9 EXHIBIT 10.32 CONSULTING AGREEMENT This CONSULTING AGREEMENT, made as of the 14th day of February, 1995, among RJR Nabisco Holdings Corp. ("RJR") and Nabisco Holdings Corp. ("Nabisco"), (collectively, the "Company"), and Eugene R. Croisant, an individual ("Consultant"). RECITALS -------- WHEREAS, Consultant has experience and insight into the business and various projects of the Company; and WHEREAS, the Company desires Consultant to perform consulting services in connection with the business of the Company, and Consultant is willing to provide such services. NOW, THEREFORE, in consideration of the promises contained in this Agreement, the Company and Consultant agree as follows: 1. Consulting Services ------------------- Consultant agrees to act as a consultant to the Company from time to time at the request of the Company in connection with matters concerning the worldwide business of the Company. Consultant will be notified of such requests as they are assigned by the Chairman of RJR, and/or Nabisco. Except as provided hereinafter, Consultant shall be available, on a mutually agreeable basis, to render services for 100 days each Contract Period (as defined hereinafter) during the term of this Agreement. If Consultant shall have other commitments, he shall, nevertheless, give first priority to the services requested by the Company. Requests for the services of Consultant is the sole discretion of the Chairman of RJR and/or Nabisco, and availability, in the sole discretion of the Company, may be either Consultant's actual presence at a designated site or availability by telecommunication. Consultant shall, during the term of this Agreement, keep his location, address and telephone number consistently updated with the Company so that he may be reached at any time. 2. Consulting Fees --------------- a) The consulting fees hereunder are (i) a paid retainer for 100 days availability during each Contract Period in the Term of Agreement and (ii) actual payment for any services rendered. All fees shall be paid by Nabisco. For purposes of fee calculation, a full "day" is any day during which services were actually performed or Consultant was available to perform services. b) As consideration, in part, for the services under Paragraph 1 Consultant will render and for Consultant's availability to provide such services for 100 days each Contract Period, RJR agrees to pay to Consultant a fee at the monthly rate of $13,333 ($160,000 per year) which shall be paid at the beginning of each month during each Contract Period. c) In addition, at the beginning of each Contract Period, if the Agreement has not been previously cancelled, Consultant shall receive a grant of 20,000 nonqualified stock options each from the RJR Long Term Incentive Plan and the Nabisco Long Term Incentive Plan, respectively. Each option grant shall have an exercise price equal to fair market value on the date of grant; shall be 100% vested on the day of grant, and shall be subject to the provisions of the respective RJR and Nabisco Long Term Incentive Plans and individual stock option agreements thereunder. d) It is intended that the combination of cash in 2(b) and stock options in 2(c) will deliver $400,000 in value as a consulting fee each Contract Period. Consultant, within 24 months after the end the last Contract Period, may request a cash adjustment from the Company should Consultant reasonably believe that the stock option component has not delivered $240,000 in value for the purposes of Section 2(a) above. Should the Company and Consultant not agree on an adjustment, the issue of an adjustment shall be referred for resolution to an arbitrator mutually acceptable to the Company and the Consultant. e) Consultant shall be paid $4,000 per day for each day services are performed in excess of 100 days during a Contract Period. 2 f) If the Agreement is terminated pursuant to 3(b), payment at a rate of $4,000 per day shall be made for the excess of actual days worked over the number of days attributable to the retainer paid pursuant to 2(b) and 2(c) for the Contract Period through the date of cancellation. g) Any election to defer cash consulting fees shall be made before a consulting fee becomes payable and shall be on a form prescribed by the Company. Any deferrals shall be by means of a cash credit, and the deferral shall be payable by Nabisco January 1 of the calendar following the calendar year in which the last consulting services are performed. The cash credit account shall be credited, as of the date that payment of the award would otherwise have been made, with the dollar amount of the portion of the award deferred by means of a cash credit. In addition, the Consultant's cash credit account shall be credited as of the last day of each calendar month with an interest equivalent in an amount determined by applying to the current balance in the account the interest rate for the immediately preceding month which, when annualized, shall be the average prime rate of Morgan Guaranty Trust Company of New York during such immediately preceding month. Interest shall be credited for the actual number of days in the month and shall be calculated based upon a 365-day year. 3. Term ---- (a) The Term of this Agreement shall be two consecutive 12 month periods ("Contract Periods") commencing March 4, 1995. (b) Either party may cancel this Agreement on 30 days written notice. 4. Billing and Reimbursement of Expenses ------------------------------------- (a) The Company will reimburse Consultant for authorized travel, living and other business expenses incurred by Consultant for services which Consultant performs at the Company's request. Consultant will make monthly billings to the Company for any travel, living and other business expenses reimbursable to Consultant hereunder. Travel by air shall be at the first class rate. 3 (b) In lieu of reimbursement for office and secretarial services, the Company will, as necessary from time to time, provide Consultant with the use of the Company office space and secretarial and support services at Nabisco. 5. Death Benefits -------------- In the event of the death of Consultant during a Contract Period, the Company will pay to Consultant's designated beneficiary the fees for the balance of the Contract Period and the Agreement shall be cancelled. In the absence of a designated beneficiary, any amounts payable shall be paid to Consultant's wife unless she predeceases Consultant, in which event such amounts shall be paid to Consultant's estate. 6. Independent Contractor ---------------------- Consultant is an independent contractor in all respects. Consultant shall not be entitled to any benefits afforded by the Company to its employees or employees of its affiliates by reason of the services performed under this Agreement. The Company shall not deduct from the consulting fees paid under this Agreement any taxes, payments for unemployment compensation, social security or other expense unless required by law. In connection with the performance of Consultant's services, the Company shall provide Consultant with the same liability and indemnification programs it affords to its' officers and directors. 7. Non-Disclosure and Non-Competition ---------------------------------- (a) During the term of this Agreement, Consultant will not, without the prior written consent of the Company, perform advisory or consulting services for, or become employed by, any person, firm or corporation that competes directly or indirectly with the Company or its affiliates. (b) Any information disclosed to Consultant by the Company or any of its affiliates shall be regarded as confidential. Such information will be used solely in connection with work performed by Consultant for the Company, 4 and Consultant shall not disclose such information to any third party unrelated to the Company at any time during the term of this Agreement or thereafter without the prior written approval of the Company. 8. Miscellaneous ------------- (a) This is an agreement for the personal services of Consultant. Consultant's rights and obligations hereunder may not be assigned by Consultant without prior written consent of the Company. (b) This Agreement constitutes the entire agreement of the parties, and any amendments hereto shall be in writing, signed by both parties hereto. (c) This Agreement shall be governed by the laws of the State of Delaware. (d) No benefit or promise hereunder shall be secured by any specific assets of the Company. Consultant shall have only the right of an unsecured general creditor in seeking satisfaction of such benefits or promises. No benefit or promise hereunder may be assigned or anticipated in any way. IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as of the date first written above. RJR Nabisco Holdings, Inc. Nabisco Holdings, Inc. By:___________________________ Chairman ______________________________ Eugene R. Croisant 5 EX-10.55 10 EXHIBIT 10.55 STOCK OPTION PLAN FOR DIRECTORS AND KEY EMPLOYEES OF RJR NABISCO HOLDINGS CORP. AND SUBSIDIARIES (As Amended and Restated Effective October 4, 1994) RJR Nabisco Holdings Corp., a Delaware corporation, hereby adopts this amendment and restatement of the Stock Option Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries. The purposes of this Plan are as follows: (1) To further the growth, development and financial success of Holdings by providing additional incentives to certain of its Directors and Key Employees who have been or will have or be given responsibility for the management or administration of Holdings' business affairs by assisting them to become owners of capital stock of Holdings and thus to benefit directly from its growth, development and financial success. (2) To enable Holdings to obtain and retain the services of, and business relationships with, the type of professional, technical and managerial Employees and Directors considered essential to the long range success of Holdings by providing and offering them an opportunity to become owners of capital stock of Holdings under Options. ARTICLE I DEFINITIONS ----------- Section 1.1 - General - ----------- ------- Whenever the following terms are used in this Plan they shall have the meaning specified below unless the context clearly indicates to the contrary. Section 1.2 - Affiliated Director - ----------- ------------------- "Affiliated Director" shall mean a Director who is an employee or officer of an entity which owns at least 25% of the outstanding Common Stock, or any affiliate thereof (other than Holdings or any Subsidiary). Section 1.3 - Board - ----------- ----- "Board" shall mean the Board of Directors of Holdings. Section 1.4 - Code - ----------- ---- "Code" shall mean the Internal Revenue Code of 1986, as amended. Section 1.5 - Committee - ----------- --------- "Committee" shall mean the Compensation Committee of the Board or any other committee appointed by the Board pursuant to Section 7.1. Section 1.6 - Common Stock - ----------- ------------ "Common Stock" shall mean the Common Stock, par value $0.01 per share, of Holdings. Section 1.7 - Director - ----------- -------- "Director" shall mean a member of the Board. Section 1.8 - Eligible Director - ----------- ----------------- "Eligible Director" shall mean a Director who (i) has never been an employee or officer of Holdings or any Subsidiary and (ii) has never been an employee or officer of any entity which owns at least 25% of the outstanding Common Stock, or any affiliate thereof. Section 1.9 - Employee - ----------- -------- "Employee" shall mean any employee (as defined in accordance with the regulations and revenue rulings then applicable under Section 3401(c) of the Code) of Holdings, or of any corporation which is then a Subsidiary, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan or any other person providing goods or services to Holdings or its subsidiaries, as the Committee may determine in its discretion. Section 1.10 - Holdings - ------------ -------- "Holdings" shall mean RJR Nabisco Holdings Corp., a Delaware Corporation. 2 Section 1.11 - Option - ------------ ------ "Option" shall mean an option granted under the Plan to purchase Common Stock. Options include only options which are not intended to be "incentive stock options" under Section 422 of the Code. Section 1.12 - Option Price - ------------ ------------ "Option Price" shall have the meaning given in Sections 4.2 and 5.2, as appropriate. Section 1.13 - Optionee - ------------ -------- "Optionee" shall mean an Employee or Director to whom an Option is granted under the Plan. Section 1.14 - Plan - ------------ ---- "Plan" shall mean the Stock Option Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries. Section 1.15 - Secretary - ------------ --------- "Secretary" shall mean the Secretary of Holdings. Section 1.16 - Subsidiary - ------------ ---------- "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with Holdings if each of the corporations, or if each group of commonly controlled corporations, other than the last corporation in an unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. ARTICLE II SHARES SUBJECT TO PLAN ---------------------- Section 2.1 - Shares Subject to Plan - ----------- ---------------------- The shares of stock subject to Options shall be shares of Common Stock. The aggregate number of shares of Common Stock which may be issued upon exercise of Options shall not exceed 30,000,000. 3 Section 2.2 - Unexercised Options - ----------- ------------------- If any Option expires or is canceled without having been fully exercised, the number of shares subject to such Option but as to which such Option was not exercised prior to its expiration or cancellation may again be optioned hereunder, subject to the limitations of Section 2.1. ARTICLE III GRANTING OF OPTIONS ------------------- Section 3.1 - Eligibility - ----------- ----------- Any Eligible Director, Affiliated Director, or key Employee of Holdings or of any Subsidiary shall be eligible to be granted Options as set forth in this Article III. Section 3.2 - Granting of Options to Directors - ----------- -------------------------------- (a) Each Eligible Director who is elected to serve on the Board on or after March 1, 1994 shall be granted an Option to purchase an aggregate of 30,000 shares of Common Stock. Such Option shall be granted only once to each Eligible Director as soon as practicable following the Director's initial election to serve on the Board and shall be subject to the terms and conditions set forth in Article IV. (b) In addition to Options granted pursuant to Section 3.2(a), each Eligible Director and each Affiliated Director shall receive an annual grant of an Option to purchase the number of shares of Common Stock determined pursuant to the following formula (rounded up to the next multiple of 100): 15,000 ----------- (A x .37) Where "A" equals the final closing price of Common Stock (as reported on the New York Stock Exchange consolidated tape) on the date of grant, and the factor ".37" is derived from the growth model projection for the value of Common Stock. Such Option shall be granted annually on the date of such Director's election or re-election to serve on the Board; provided, however, that the grant for 1994 shall be made on October 4, 1994. 4 All Options granted pursuant to this Section 3.2(b) shall be subject to the terms and conditions set forth in Article IV. Section 3.3 - Granting of Options to Employees - ----------- -------------------------------- The Committee shall from time to time, in its absolute discretion: (i) Determine which Employee are key Employees and select from among the key Employees (including those to whom Options have been previously granted under the Plan) such of them as in its opinion shall be granted Options; and (ii) Determine the number of shares to be subject to such Options granted to such selected key Employees; and (iii) Determine the terms and conditions of such Options, consistent with the Plan; and (iv) Establish such conditions as to the manner of exercise of such Options as it may deem necessary, including but not limited to requiring Optionees to enter into agreements regarding transferability and other restrictions with respect to shares issuable upon exercise of such Options. ARTICLE IV TERMS OF OPTIONS FOR DIRECTORS ------------------------------ Section 4.1 - Formula Plan - ----------- ------------ With respect to Options granted to Eligible Directors and Affiliated Directors, the Plan is intended to qualify as a nondiscretionary formula plan, within the meaning of Rule 16b-3 (and any other applicable rule) promulgated by the Securities and Exchange Commission under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as such rule or its equivalent or successor is then in effect ("Rule 16b- 3"). The terms of such Options shall be consistent with the terms of this Article IV. To the extent that any provision of the Plan is not consistent with the "formula plan" requirements of Rule 16b-3, then such provision shall not apply to Options granted to Eligible Directors or Affiliated Directors. The grant of such Options may be evidenced by a Stock Option Agreement, which shall be executed by the Optionee and an authorized officer of Holdings and which shall incorporate the terms and conditions of this Article IV. 5 Section 4.2 - Option Price - ----------- ------------ The exercise price of each share of Common Stock subject to an Option granted pursuant to Section 3.2 shall be the final closing price of Common Stock (as reported on the New York Stock Exchange consolidated tape) on the date of grant. Section 4.3 - Commencement of Exercisability - ----------- ------------------------------- Options granted pursuant to Section 3.2(a) shall not be exercisable prior to six months after the date of grant, and thereafter shall be exercisable in full, subject to applicable securities regulations. Options granted pursuant to Section 3.2(b) shall be exercisable in three installments. The first installment shall be exercisable on the first anniversary of the date of grant for 33% of the number of shares of Common Stock subject to the Option. Thereafter, on each subsequent anniversary of the date of grant, an installment shall become exercisable for 33% and 34%, respectively, of the number of shares subject to the Option until the Option has become fully exercisable. To the extent that any of the above installments is not exercised when it becomes exercisable, it shall not expire, but shall continue to be exercisable at any time thereafter until the Option shall terminate, expire or be surrendered. An exercise shall be for whole shares only. Section 4.4 - Expiration of Option - ----------- -------------------- The Option shall expire and may not be exercised to any extent after the expiration of ten years from the date the Option was granted. ARTICLE V TERMS OF OPTIONS FOR KEY EMPLOYEES ---------------------------------- Section 5.1 - Option Agreement - ----------- ---------------- Options granted to key Employees shall be evidenced by a written Stock Option Agreement, which shall be executed by the Optionee and an authorized officer of Holdings and which shall contain the terms and conditions of this Article V and such other terms and conditions as the Committee shall determine, consistent with the Plan. 6 Section 5.2 - Option Price - ----------- ------------ (a) The price per share of the Common Stock subject to each Option granted pursuant to this Article V shall be set by the Committee. The price per share may be less than the fair market value of such shares on the date such Option is granted; provided that in no event shall the price per share be less than fifty (50%) percent of the fair market value of such shares on the date such Option is granted. (b) For the purpose of Section 5.2(a), the fair market value of a share of Common Stock on the date the Option is granted shall be the fair market value established by the Committee acting in good faith. Section 5.3 - Commencement of Exercisability - ----------- ------------------------------ Subject to the provisions of Section 8.2, Options granted pursuant to this Article V shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Section 8.2, accelerate the time at which such Option or any portion thereof may be exercised. Section 5.4 - Expiration of Options - ----------- --------------------- (a) No Option may be exercised to any extent by anyone after, and every Option shall expire no later than, the expiration of ten (10) years and one (1) day from the date the Option was granted. (b) Subject to the provisions of Section 5.4(a), the Committee shall provide, in the terms of each individual Option, when such Option expires and becomes unexercisable. Section 5.5 - No Right to Continue in Employment - ----------- ---------------------------------- Nothing in this Plan or in any Stock Option Agreement hereunder (i) shall confer upon any Optionee who is an Employee any right to continue in the employ of Holdings or any of its Subsidiaries or (ii) shall interfere with or restrict in any way the rights of Holdings and its Subsidiaries, which are hereby expressly reserved, to terminate the employment of any Optionee at any time for any reason whatsoever, with or without good cause. 7 Section 5.6 - Merger, Consolidation, Exchange, Acquisition, Liquidation or Dissolution --------------------------------------- In its absolute discretion, and on such terms and conditions as it deems appropriate, coincident with or after the grant of any Option pursuant to this Article V, the Committee may provide that such Option cannot be exercised after the merger or consolidation of Holdings into another corporation, the exchange of all or substantially all of the assets of Holdings for the securities of another corporation, the acquisition by another person of 80% or more of Holdings' then outstanding shares of voting stock or the recapitalization, reclassification, liquidation or dissolution of Holdings, and if the Committee so provides, it may, in its absolute discretion and on such terms and conditions as it deems appropriate, also provide, either by the terms of such Option or by a resolution adopted prior to the occurrence of such merger, consolidation, exchange, acquisition, recapitalization, reclassification, liquidation or dissolution, that, for some period of time prior to such event, such Option shall be exercisable as to all shares subject thereto, notwithstanding anything to the contrary in Section 5.3 and/or in any installment provisions of such Option (but subject to the provisions of Section 5.4(a)) and that, upon the occurrence of such event, such Option shall terminate and be of no further force or effect; provided, however, that the Committee may also provide, in its absolute discretion, that even if the Option shall remain exercisable after any such event, from and after such event, any such Option shall be exercisable only for the kind and amount of securities and/or other property, or the cash equivalent thereof, receivable as a result of such event by the holder of a number of shares of stock for which such Option could have been exercised immediately prior to such event. ARTICLE VI EXERCISE OF OPTIONS ------------------- Section 6.1 - Persons Eligible to Exercise - ----------- ---------------------------- During the lifetime of the Optionee, only he or his guardian may exercise an Option granted to him, or any portion thereof. After the death of the Optionee, any exercisable portion of an Option may, prior to the time when such portion becomes unexercisable under Section 4.4, 5.4 or 5.6, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 8 Section 6.2 - Partial Exercise - ----------- ---------------- At any time and from time to time prior to the time when any exercisable Option or exercisable portion thereof expires or becomes unexercisable under Section 4.4, 5.4, or 5.6, such Option or portion thereof may be exercised in whole or in part; provided, however, that Holdings shall not be required to issue fractional shares. With respect to Options granted to key Employees, the Committee may, in the Stock Option Agreement, require any partial exercise to be with respect to a specified minimum number of shares. Section 6.3 - Manner of Exercise - ----------- ------------------ An exercisable Option, or any exercisable portion thereof, may be exercised solely by delivering to the Secretary or his office all of the following prior to the time when such Option or such portion becomes unexercisable: (a) Notice in writing signed by the Optionee or other person then entitled to exercise such Option or portion thereof, stating that such Option or portion thereof is exercised; (b) Full payment of the Option Price (in cash, by check or by a combination thereof) for the shares with respect to which such Option or portion thereof is thereby exercised, together with payment or arrangement for payment of any federal income or other tax required to be withheld by Holdings with respect to such shares; (c) Such representations and documents as the Committee reasonably deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended and any other federal, state or foreign securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance, including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) In the event that the Option or portion thereof shall be exercised pursuant to Section 6.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. 9 Section 6.4 - Rights as Stockholders - ----------- ---------------------- The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of Holdings in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by Holdings to such holders. Section 6.5 - Transfer Restrictions - ----------- --------------------- The Committee, in its absolute discretion, may impose such restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate, and any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. ARTICLE VII ADMINISTRATION -------------- Section 7.1 - Compensation Committee - ----------- ----------------------- The Plan shall be administered by the Compensation Committee of the Board. In its absolute discretion, the Board may appoint a different committee comprised of two or more Directors to administer all or a portion of the Plan. To the extent required to avoid liability under Section 16 of the Exchange Act, no person shall be eligible to serve on the Committee unless he is then a "disinterested person" within the meaning of Rule 16b-3. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee shall be filled by the Board. Section 7.2 - Duties and Powers of Committee - ----------- ------------------------------ It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the Options and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such interpretations and rules shall be consistent with the basic purpose of the Plan to grant Options, including Incentive Stock Options and, with respect to Options granted to Eligible Directors or Affiliated Directors, shall be consistent with the designation of this Plan as a nondiscretionary formula plan within the meaning of Rule 16b-3. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan. The Committee may act either by vote at a telephonic or other meeting or by a memorandum or other written instrument signed by a majority of the Committee. 10 Section 7.3 - Compensation; Professional Assistance; Good Faith Actions - ----------- --------------------------------------------------------- Members of the Committee shall not receive compensation for their services as members but all expenses and liabilities they incur in connection with the administration of the Plan shall be borne by Holdings. The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, Holdings and the Officers and Directors of Holdings shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, Holdings and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Options, and all members of the Committee shall be fully protected by Holdings with respect to any such action, determination or interpretation. ARTICLE VIII MISCELLANEOUS PROVISIONS ------------------------- Section 8.1 - Options Not Transferable - ----------- ------------------------ No Option or interest or right therein shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means, whether such disposition be voluntary or involuntary or by operation of law or by judgment, levy, attachment, garnishment or any other legal or equitable proceeding (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 8.1 shall prevent transfers by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing, the Committee, in its absolute discretion, may direct that a Stock Option Agreement provide that Options granted thereunder may be transferred to a "family member" of the Optionee or to a trust for the benefit of such family member. For purposes of the preceding sentence, "family member" with respect to an Optionee shall include the Optionee's parents, siblings, children or grandchildren. Section 8.2 - Amendment, Suspension or Termination of the Plan - ----------- ------------------------------------------------ (a) The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, without approval of Holdings' stockholders given within 12 months before or after the action by the Board or the Committee, no action of the Committee or the Board may, except as provided in Section 8.3, increase any limit imposed in Section 2.1 on the maximum number of shares which may be issued 11 upon exercise of Options, reduce the minimum option price requirements in Section 4.2 or 5.2(a) or extend the limit imposed in this Section 8.2 on the period during which Options may be granted. Except as expressly permitted by the terms of the Plan, neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of the Option, alter or impair any rights or obligations under any Option theretofore granted. No Option may be granted during any period of suspension nor after termination of the Plan, and in no event may any Option be granted under this Plan after the expiration of ten years from the date the Plan is adopted or the date the stockholders of Holdings approve this Plan, if earlier. (b) Notwithstanding anything in Section 8.2(a) to the contrary, in no event may the provisions of Section 3.2 or Article IV be amended more frequently than once in six months, except as necessary to comport with changes to the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. Section 8.3 - Adjustments in Outstanding Options - ----------- ---------------------------------- In the event that the outstanding shares of Common Stock subject to Options are, from time to time, changed into or exchanged for a different number or kind of shares of Holdings or other securities of Holdings by reason of a merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend, combination of shares, or otherwise, the Committee shall make an appropriate and equitable adjustment in the aggregate number of shares which may be issued pursuant to Section 2.1 hereof and the number and kind of shares or other consideration as to which all outstanding Options, or portions thereof then unexercised, shall be exercisable. Any such adjustment made by the Committee shall be final and binding upon all Optionees, Holdings and all other interested persons. Section 8.4 - Effect of Plan Upon Other Options and Compensation Plans - ----------- -------------------------------------------------------- Nothing in this Plan shall be construed to limit the right of Holdings or any of its Subsidiaries (a) to establish any other forms of incentives or compensation for employees of Holdings or any of its Subsidiaries or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. Section 8.5 - Titles - ----------- ------ Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. 12 Section 8.6 - Pronouns - ----------- -------- The masculine pronoun shall include the feminine and neuter and the singular shall include the plural, where the context so indicates. I hereby certify that this amendment and restatement of the Plan was duly adopted by the Board of Directors of RJR Nabisco Holdings Corp. on October 4, 1994. Executed as of this ____________ day of ____________ , 1994. ------------------------ Secretary Corporate Seal EX-11 11 EXHIBIT 11 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, 1994(A) 1993(A) 1992(A) ------------------------- -------------------------- ------------------------- PRIMARY FULLY DILUTED PRIMARY(B) FULLY DILUTED PRIMARY FULLY DILUTED --------- ------------- ---------- ------------- --------- ------------- Average number of common and common equivalent shares outstanding during the period (in thousands): Common stock issued and outstanding at beginning of period............................ 1,348,011 1,348,011 1,344,649 1,344,649 1,331,659 1,331,659 Less: shares related to unamortized value of restricted stock............................. -- -- -- -- (120) (120) --------- ------------- ---------- ------------- --------- ------------- 1,348,011 1,348,011 1,344,649 1,344,649 1,331,539 1,331,539 Average number of shares of common stock issued during the period............................ 3,347 3,347 3,541 3,541 11,835 11,836 Average number of shares related to value of restricted stock earned during the period....... 676 676 1,006 1,006 60 60 Average number of stock options outstanding during the period and shares issuable under performance shares granted..... 12,412 13,628 -- 6,217 20,115 20,167 Average number of shares issuable on conversion of redeemable convertible preferred stock....... -- -- -- 10,498 -- 11,203 Average number of shares issuable on conversion of senior converting debentures.......... -- -- -- 5,548 -- 20,203 ESOP convertible preferred stock............................. -- 15,468 -- 15,610 -- 15,625 Average number of Series C Depositary Shares issued during the period(C).................. 173,681 173,681 -- -- -- -- --------- ------------- ---------- ------------- --------- ------------- Average number of common and common equivalent shares outstanding during the period (in thousands)................. 1,538,127 1,554,811 1,349,196 1,387,069 1,363,549 1,410,633 --------- ------------- ---------- ------------- --------- ------------- --------- ------------- ---------- ------------- --------- ------------- Net income (loss) applicable to common stock: Income (loss) before extraordinary item............. $ 764 $ 764 $ (3 ) $ (3) $ 776 $ 776 Interest on senior converting debentures (net of income taxes)............................ -- -- -- 17 -- 51 Preferred stock dividends........ (131) (116) (68 ) (43) (31) -- Income tax benefit on ESOP convertible preferred stock dividends......................... -- (2) -- (1) -- (6) --------- ------------- ---------- ------------- --------- ------------- Income (loss) before extraordinary item applicable to common stock................... 633 646 (71 ) (30) 745 821 Extraordinary item--loss on early extinguishments of debt, net of income taxes...................... (245) (245) (142 ) (142) (477) (477) --------- ------------- ---------- ------------- --------- ------------- Net income (loss) applicable to common stock...................... $ 388 $ 401 $ (213 ) $ (172) $ 268 $ 344 --------- ------------- ---------- ------------- --------- ------------- --------- ------------- ---------- ------------- --------- ------------- Net income (loss) per common and common equivalent share: Income (loss) before extraordinary item............. $ 0.41 $ 0.42 $ (0.05 ) $ (0.02) $ 0.55 $ 0.58 Extraordinary item............... (0.16) (0.16) (0.10 ) (0.10) (0.35) (0.34) --------- ------------- ---------- ------------- --------- ------------- Net income (loss)................ $ 0.25 $ 0.26 $ (0.15 ) $ (0.12) $ 0.20 $ 0.24 --------- ------------- ---------- ------------- --------- ------------- --------- ------------- ---------- ------------- --------- -------------
- ------------ (A) The calculations of fully diluted earnings per share are antidilutive; therefore, primary earnings per share are used for financial statement purposes. The Board of Directors of Holdings approved a one-for-five reverse split of the Common Stock which will be submitted to Holdings' stockholders for approval at its Annual Meeting in April 1995. (B) The net loss per common and common equivalent share reported for the year ended December 31, 1993 would have increased by $.19 per share if the weighted average number of shares of Series A Depositary Shares outstanding during the period had been excluded from the earnings per share calculation. (C) Each Series C Depositary Share represents a one-tenth ownership interest in a share of Series C Preferred Stock of Holdings. EX-12 12 EXHIBIT 12 RJR NABISCO, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES/ DEFICIENCY IN THE COVERAGE OF FIXED CHARGES BY EARNINGS BEFORE FIXED CHARGES (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Earnings before fixed charges: Income (loss) from continuing operations.............. $ 762 $ (4) $ 783 $ 349 $ (283) Provision for income taxes............................ 614 116 693 301 152 ------ ------ ------ ------ ------ Income (loss) before income taxes..................... 1,376 112 1,476 650 (131) Interest and debt expense............................. 1,065 1,186 1,359 2,140 2,899 Interest portion of rental expense.................... 51 52 49 56 49 ------ ------ ------ ------ ------ Earnings before fixed charges(a)........................ $2,492 $1,350 $2,884 $2,846 $2,817 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges: Interest expense...................................... $1,046 $1,167 $1,340 $2,030 $2,724 Amortization of debt issuance costs................... 19 19 19 110 175 Interest portion of rental expense.................... 51 52 49 56 49 Capitalized interest.................................. 11 9 5 10 12 ------ ------ ------ ------ ------ Total fixed charges................................. $1,127 $1,247 $1,413 $2,206 $2,960 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Deficiency in the coverage of fixed charges by earnings before fixed charges.................................... $ -- $ -- $ -- $ -- $ (143) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges...................... 2.2 1.1 2.0 1.3 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
- ------------ (a) Includes non-cash amortization of trademarks and goodwill for each of the years in the five-year period ended December 31, 1994 of $629 million, $625 million, $616 million, $609 million and $608 million respectively. EX-21 13 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 Airco IHC, Inc. Mar 22, 1989 Delaware AO ISMA Nov 19, 1992 Russia AO Kabisco Jun 28, 1994 Kazakhstan A/O Nabisco Aug 16, 1994 Russia AO Vostanovlenniy Tabak - Yelets Oct 26, 1994 Russia Arjay Equipment Corporation Nov 08, 1968 Delaware Arjay Holdings, Inc. May 07, 1984 Delaware Associated Biscuits * Mar 29, 1898 England Batavia Inc. Jul 31, 1951 New Jersey Beech-Nut Life Savers (Panama) S.A. Jul 12, 1963 Panama Beijing Nabisco Food Company Limited (91%) ? 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 Cia. Arturo Field Y La Estrella Ltda., S.A. (94.64%) ? Peru 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 Compania Venezolana de Conservas C.A. Jul 25, 1969 Venezuela Consiber, S.A. Mar 31, 1979 Spain Covenco Holding C.A. Nov 26, 1991 Venezuela
* Inactive February 14, 1995 ** In Liquidation Page 1 *** Partnership SUB-CURR **** Nameholder
RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation ------------------------------------------------------------------------------------------------------------------ Dely, S.A. Dec 18, 1960 Guatemala Distribuidora Pan Americana, S.A. Oct 22, 1974 Panama Establecimiento Modelo Terrabusi S.A. (98.9%) ? Argentina Exhold Limited Oct 03, 1989 Liberia Expefo, Inc. Mar 09, 1965 Delaware Export "A" Inc. Mar 31, 1989 Canada F.& R. Peru, S.A. Jan 28, 1972 Peru 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 Freezer Queen Foods (Canada) Limited Nov 03, 1967 Ontario, Canada Fulmer Corporation Limited May 15, 1981 Bahamas Fulmer Two S.A. Jul 01, 1991 Panama Galletas Artiach, S.A. Jul 23, 1932 Spain Gelatinas Ecuatorianas S.A. (66.7%) Nov 21, 1978 Ecuador GEM: Global Event Management, Ltd. Jun 27, 1991 England Gemsbeek Holding B.V. Sep 02, 1963 Netherlands Global Events Management, Inc. Sep 05, 1991 Delaware Golden Sociedad Anonima Apr 01, 1966 Costa Rica Grapple Company Limited Sep 02, 1985 Bahamas Grupo Gamesa, S.A. de C.V. (1%) Jul 29, 1981 Mexico Hanover Servicing, Inc. Jan 12, 1990 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
* Inactive February 14, 1995 ** In Liquidation Page 2 *** Partnership SUB-CURR **** Nameholder
RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation ------------------------------------------------------------------------------------------------------------------ Industria de Colores y Sabores S.A. * Jun 21, 1967 Colombia Industria de Laticinios Gloria Ltda. * Jan 18, 1978 Brazil Industrias Alimenticias Maguary S.A. ? Brazil Iracema Industrias de Caju S.A. Aug 08, 1978 Brazil 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 Litografia A. Romero, S.A. (.001%) Feb 22, 1978 Canary Is. Loste-McVitie's Distribution Service, S.A. (50%) Oct 28, 1992 Spain Lowney Inc. Jan 01, 1983 Federal, Canada Mahachai Holding Co. Ltd. (49%) Jan 07, 1986 Thailand Marbu, S.A. Oct 26, 1967 Spain MEX Holdings, Ltd. Nov 27, 1991 Delaware Modi RJR Limited (50%) *** ? India Mont Pelrin Inc. May 05, 1954 New Jersey
* Inactive February 14, 1995 ** In Liquidation Page 3 *** Partnership SUB-CURR **** Nameholder
RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation ------------------------------------------------------------------------------------------------------------------ NABEC, S.A. Nov 17, 1982 Ecuador Nabisco * Dec 24, 1908 England Nabisco Argentina S.A. Mar 14, 1994 Argentina Nabisco B.V. ? 1994 Netherlands Nabisco Biscuit Manufacturing (Midwest), Inc.* Dec 21, 1988 New York Nabisco Biscuit Manufacturing (West), Inc.* Dec 21, 1988 New York Nabisco Brands Holdings Denmark Limited ? 1989 Liberia Nabisco Brands Ltd Jan 1, 1993 Federal, Canada Nabisco Brands Nominees Limited * Aug 22, 1983 England Nabisco Brands Trading Limited * Mar 25, 1987 Delaware Nabisco Brands (U.K.) Limited Apr 05, 1982 Delaware Nabisco Brazil, Inc. May 10, 1990 Delaware Nabisco Caribbean Export, Inc. Jun 13, 1984 Delaware Nabisco Cereals * Mar 15, 1956 England Nabisco/Cetus Food Biotechnology Research Partnership (80%) *** Mar 01, 1984 Delaware Nabisco China Limited ? 1995 China Nabisco Chongqing Food Co., Ltd. ? 1995 China Nabisco de Nicaragua, S.A. (60%) Dec 10, 1965 Nicaragua Nabisco de Puerto Rico, Inc. Sep 21, 1951 New York Nabisco England IHC, Inc. Mar 29, 1989 Delaware Nabisco Enterprises IHC, Inc. Mar 22, 1989 Delaware Nabisco Espana, S.L. Jul 15, 1993 Spain Nabisco Foods, Inc. Dec 30, 1991 New Jersey Nabisco Group Ltd. Apr 05, 1982 Nevada Nabisco Group Pensions Investments Ltd. Jun 07, 1962 England Nabisco Group Pensions Limited Sep 13, 1977 England Nabisco Holdings Corp. Apr 21, 1981 Delaware Nabisco Holdings IHC, Inc. Mar 22, 1989 Delaware Nabisco Hong Kong Limited Apr 12, 1994 Hong Kong Nabisco, Inc. Feb 03, 1898 New Jersey Nabisco, Inc. Foreign Sales Corporation Dec 17, 1991 US Virgin Is.
* Inactive February 14, 1995 ** In Liquidation Page 4 *** Partnership SUB-CURR **** Nameholder
RJR NABISCO HOLDINGS CORP. 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 (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 S.A. Mar 14, 1994 Argentina 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 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 (Thailand) Limited (50+%) ** Jan 07, 1986 Thailand Nabisco Trading A.G. Aug 02, 1960 Switzerland Nabisco Trading Limited* Feb 20, 1986 England Nabisco Venezuela, C.A. Nov 26, 1991 Venezuela National Biscuit Company **** Jan 17, 1971 Delaware New York Style Bagel Chip Company, Inc. Apr 13, 1992 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 Precis One Hundred Limited Feb 12, 1982 England Productos Confitados Salvavidas de Guatemala, S.A. Jul 03, 1974 Guatemala Productos Royal S.A.* Dec 27, 1977 Argentina Produtos Alimenticios Fleischmann e Royal Ltda. Nov 28, 1964 Brazil
* Inactive February 14, 1995 ** In Liquidation Page 5 *** Partnership SUB-CURR **** Nameholder
RJR NABISCO HOLDINGS CORP. 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%)*** ? 1994 Vietnam R. J. Reynolds Espana, S.L. (50%) ? Spain R. J. Reynolds Europe, Inc. Apr 24, 1992 Delaware R. J. Reynolds Finance S.A. Sep 17, 1982 Switzerland R. J. Reynolds, Inc. Oct 09, 1985 Delaware 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. (50%) Jul 20, 1980 Portugal 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. ? 1994 Slovakia 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. * ? 1994 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 (Hungary) Kft Jun 18, 1991 Hungary R. J. Reynolds Tobacco (Hungary) LLC Feb 27, 1991 Hungary
* Inactive February 14, 1995 ** In Liquidation Page 6 *** Partnership SUB-CURR **** Nameholder
RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation ------------------------------------------------------------------------------------------------------------------ R. J. Reynolds Tobacco International (Asia Pacific), Inc. Nov 27, 1978 Delaware 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 S.A. Nov 03, 1966 Switzerland R. J. Reynolds Tobacco - Kazakhstan 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 - Lviv JSC (70%) Oct 28, 1993 Ukraine R. J. Reynolds Tobacco (MAK) ? 1994 Macedonia R. J. Reynolds Tobacco (Poland) S.o.o. Jan 07, 1991 Poland R. J. Reynolds Tobacco (Romania) Ltd. ? 1994 Romania R. J. Reynolds Tobacco Rt Jul 28, 1992 Hungary R. J. Reynolds Tobacco Spol. s.r.o. Apr 12, 1991 Czech. 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, 1992 Turkey Reynolds Manufacturing (Bulgaria) Ltd. (67%) * ? 1994 Bulgaria Reynolds Manufacturing (Romania) SRL (97%) ? 1994 Romania Reynolds Technologies, Inc. Mar 01, 1994 Delaware Ritz Biscuit Company Limited **** Sep 28, 1989 England RJI Corporation Nov 06, 1970 Delaware RJR-Armavirtabak Oct 24, 1994 Russia RJR (Bulgaria) Ltd. * ? 1994 Bulgaria RJR Comercial Ltda. * Aug 18, 1977 Brazil 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 Mauritius Private Limited Sep 27, 1993 Mauritius RJR Merchandise Marketing Company Aug 22, 1994 Delaware RJR Nabisco & Company *** Mar 20, 1992 Cyprus RJR Nabisco China Limited Dec 28, 1979 Hong Kong RJR Nabisco (Cyprus) Limited Mar 29, 1990 Cyprus RJR-Nabisco Industries, Inc. Dec 13, 1985 Delaware RJR Nabisco Investments, Inc. Mar 22, 1989 Delaware RJR Nabisco (Kiev) JSC Apr 09, 1993 Ukraine RJR Nabisco (Philippines) Inc. Apr 22, 1992 Philippines RJR Nabisco Processing, Inc. Nov 21, 1994 Delaware RJR Nabisco Securities Ltd. Sep 28, 1987 Federal, Canada RJR Nabisco Washington, Inc. Dec 13, 1985 Delaware
* Inactive February 14, 1995 ** In Liquidation Page 7 *** Partnership SUB-CURR **** Nameholder
RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation ------------------------------------------------------------------------------------------------------------------ RJR-Petro (82%) *** May 07, 1992 Russia 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 Russia Dec 05, 1991 Russia RJR Trade Promotion Co. Feb 18, 1993 Delaware RJRN Policy Institute, Inc. Dec 13, 1985 Delaware Royal Brands Portugal Comercio e Industria Limitada Dec 23, 1916 Portugal Royal Brands, S.A. (98.92%) May 20, 1952 Spain Royal Food Products, S.A. Jul 02, 1976 Tunisia Royal Holding C.A. Nov 26, 1991 Venezuela Royal Productos Alimenticios, C.A. Jul 26, 1971 Venezuela Salem Holidays Sdn. Bhd. Sep 18, 1993 Malaysia Salem Power Station Sdn. Bhd. * ? 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 Sociedade Brasileira Beneficiadora de Cha' Ltda. (60%) Feb 24, 1958 Brazil 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 Tevalca Holding C.A. Nov 26, 1991 Venezuela Transnational Services, Inc. Jan 06, 1988 Delaware 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 February 14, 1995 ** In Liquidation Page 8 *** Partnership SUB-CURR **** Nameholder
EX-23 14 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. ("Holdings") on Form S-8, Registration Statement No. 33-57571 of Holdings on Form S-3, and Registration Statement No. 33-55767 on Form S-4 of Holdings of our report dated January 30, 1995, (February 21, 1995 as to Notes 11 and 17), appearing in this Annual Report on form 10-K of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the year ended December 31, 1994. DELOITTE & TOUCHE LLP New York, New York February 22, 1995 EX-24 15 Exhibit 24 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 Jo-Ann Ford, Joan E. Gmora and Francis C. Marinelli, 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, 1994, 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 day of , 19 . ----- ---------- -- /s/ Charles M. Harper Chairman of the Board and Chief -------------------------- Executive Officer, Director Charles M. Harper /s/ Stephen R. Wilson Executive Vice President and -------------------------- Chief Financial Officer Stephen R. Wilson /s/ Robert S. Roath Senior Vice President and Controller -------------------------- Robert S. Roath Page 2 -------------------------- Director John T. Chain, Jr. /s/ Julius L. Chambers Director -------------------------- Julius L. Chambers /s/ John L. Clendenin Director -------------------------- John L. Clendenin /s/ James H. Greene, Jr. Director -------------------------- James H. Greene, Jr. /s/ H. John Greeniaus Director -------------------------- H. John Greeniaus -------------------------- Director James W. Johnston /s/ Vernon E. Jordan, Jr. Director -------------------------- Vernon E. Jordan, Jr. /s/ Henry R. Kravis Director -------------------------- Henry R. Kravis /s/ John G. Medlin, Jr. Director -------------------------- John G. Medlin, Jr. /s/ Paul E. Raether Director -------------------------- Paul E. Raether /s/ Lawrence R. Ricciardi Director -------------------------- Lawrence R. Ricciardi /s/ Rozanne L. Ridgway Director -------------------------- Rozanne L. Ridgway -------------------------- Director Clifton S. Robbins -------------------------- Director George R. Roberts /s/ Scott M. Stuart Director -------------------------- Scott M. Stuart -------------------------- Director Michael T. Tokarz -----END PRIVACY-ENHANCED MESSAGE-----