-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A3Q9qlFLz1oNubL6l22LXXByBRIfOdDQqNTeZkWEtfPnAA7/hzZVsSgeh8P8xudy bjG5rTv1Fdeg9OI3GlSbxQ== 0001047469-98-012013.txt : 19980330 0001047469-98-012013.hdr.sgml : 19980330 ACCESSION NUMBER: 0001047469-98-012013 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RJR NABISCO HOLDINGS CORP CENTRAL INDEX KEY: 0000847903 STANDARD INDUSTRIAL CLASSIFICATION: COOKIES & CRACKERS [2052] IRS NUMBER: 133490602 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10215 FILM NUMBER: 98575929 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 STREET 2: C/O RJR NABISCO HOLDINGS CORP CITY: NEW YORK STATE: NY ZIP: 10019-6013 FORMER COMPANY: FORMER CONFORMED NAME: RJR HOLDINGS CORP DATE OF NAME CHANGE: 19891116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RJR NABISCO INC CENTRAL INDEX KEY: 0000083612 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 560950247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06388 FILM NUMBER: 98575930 BUSINESS ADDRESS: STREET 1: 1301 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2122585600 MAIL ADDRESS: STREET 1: 1301 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: REYNOLDS R J INDUSTRIES INC DATE OF NAME CHANGE: 19860501 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 ------------------- RJR NABISCO HOLDINGS CORP. (Exact name of registrant as specified in its charter) DELAWARE 1-10215 13-3490602 (State or other (Commission file (I.R.S. Employer jurisdiction of number) Identification No.) incorporation or organization)
RJR NABISCO, INC. (Exact name of registrant as specified in its charter) DELAWARE 1-6388 56-0950247 (State or other (Commission file (I.R.S. Employer jurisdiction of number) Identification No.) incorporation or organization)
1301 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (212) 258-5600 (Address, including zip code, and telephone number, including area code, of the principal executive offices of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc.) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED - ------------------------------------------------------- ------------ RJR NABISCO HOLDINGS CORP. Common Stock, par value $.01 per share New York Series B Depositary Shares New York RJR NABISCO, INC. 8.30% Senior Notes due April 15, 1999 New York 8% Notes due January 15, 2000 New York 8% Notes due 2001 New York 8 5/8% Notes due 2002 New York 7 5/8% Notes due September 15, 2003 New York 8 1/4% Notes due 2004 New York 8.75% Senior Notes due April 15, 2004 New York 8 3/4% Notes due 2005 New York 8 1/2% Notes due 2007 New York 8 3/4% Notes due 2007 New York 9 1/4% Debentures due 2013 New York NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED - ------------------------------------------------------- ------------ SUBSIDIARIES OF THE REGISTRANTS RJR NABISCO HOLDINGS CAPITAL TRUST I 10% Trust Originated Preferred Securities 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 FEBRUARY 28, 1998 WAS APPROXIMATELY $11.2 BILLION. CERTAIN DIRECTORS OF RJR NABISCO HOLDINGS CORP. ARE CONSIDERED AFFILIATES FOR PURPOSES OF THIS CALCULATION BUT SHOULD NOT NECESSARILY BE DEEMED AFFILIATES FOR ANY OTHER PURPOSE. NONE OF THE VOTING STOCK OF RJR NABISCO, INC. IS HELD BY ANY NON-AFFILIATE. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS' CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: FEBRUARY 28, 1998: RJR NABISCO HOLDINGS CORP.: 324,752,330 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 MARCH 30, 1998 ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX
PAGE ----- PART I Item 1. Business........................................................................................ 1 (a) General Development of Business......................................................... 1 (b) Financial Information about Industry Segments........................................... 2 (c) Narrative Description of Business....................................................... 2 Tobacco............................................................................... 2 Food.................................................................................. 13 Other Matters......................................................................... 17 (d) Financial Information about Foreign and Domestic Operations and Export Sales...................................................................... 17 Item 2. Properties...................................................................................... 17 Item 3. Legal Proceedings............................................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders............................................. 18 Executive Officers of the Registrants........................................................... 19 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters........................... 21 Item 6. Selected Financial Data......................................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 23 Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................................... 36 Item 8. Financial Statements and Supplementary Data..................................................... 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................... 36 PART III Item 10. Directors and Executive Officers of the Registrants............................................. 37 Item 11. Executive Compensation.......................................................................... 37 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 37 Item 13. Certain Relationships and Related Transactions.................................................. 37 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 38
PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS The operating subsidiaries of RJR Nabisco Holdings Corp. ("RJRN Holdings") and its wholly-owned subsidiary, RJR Nabisco, Inc. ("RJRN") (collectively the "Registrants"), comprise one of the largest tobacco and food companies in the world. In the United States, the tobacco business is conducted by R. J. Reynolds Tobacco Company ("RJRT"), a wholly-owned subsidiary of RJRN and the second largest manufacturer of cigarettes, and the packaged food business is conducted under Nabisco Holdings Corp. ("Nabisco Holdings") by its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"), the largest manufacturer and marketer of cookies and crackers. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco Holdings, which represents approximately 80.7% of the economic interest in Nabisco Holdings and approximately 97.7% of the total voting power of Nabisco Holdings' outstanding common stock. Outside the United States, tobacco operations are conducted by R.J. Reynolds International ("Reynolds International"), and food operations are conducted by Nabisco International, Inc. ("Nabisco International") and Nabisco Ltd (formerly Nabisco Brands Ltd). RJRT's and Reynolds International's tobacco products are sold around the world under a variety of brand names. Nabisco's food products are sold in the United States, Canada, Latin America, certain European countries and certain other international markets. No customer of RJRN's subsidiaries in the aggregate accounted for 10% or more of RJRN's consolidated 1997 revenues. 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 RJRN Holdings and RJRN as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 (the "Consolidated Financial Statements"). RJRN Holdings was organized as a Delaware corporation in 1988 at the direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), a Delaware limited partnership, to effect the acquisition of RJRN, which was completed on April 28, 1989. As a result of this acquisition, RJRN became an indirect, wholly-owned subsidiary of RJRN Holdings. After a series of holding company mergers completed on December 17, 1992, RJRN became a direct, wholly-owned subsidiary of RJRN Holdings. The business of RJRN Holdings is conducted through RJRN. KKR no longer holds an interest in RJRN Holdings. RJRN was incorporated as a holding company in 1970 holding the stock of RJRT and other companies that have since been sold. It acquired Nabisco Holdings Corp. (formerly Nabisco Brands, Inc.) in 1985. In recent years subsidiaries of RJRN Holdings and RJRN have completed a number of acquisitions and have divested certain businesses. In 1997 these acquisitions included the stock of Cornnuts, Inc., a manufacturer of crispy corn kernel snacks. In 1996, these acquisitions included the Mayco and Capri biscuit businesses and the Vizzolini pasta business in Argentina, the Pilar biscuit business in Brazil and the Fontanda biscuit business in Spain as well as the biscuit, confectionery and snack food assets of a Taiwan-based manufacturer and a 50% interest plus management control of Azerbaijan Tobacco Company. RJRN will continue to assess its businesses to evaluate their consistency with strategic objectives. Although RJRN may acquire and/or divest additional businesses in the future, no other decisions have been made with respect to any such acquisitions or divestitures. RJRN Holdings' and RJRN's credit agreements, each dated as of April 28, 1995, as amended, prohibit the sale of all or any substantial portion of certain assets of RJRN Holdings or its subsidiaries. 1 (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS During 1997, 1996 and 1995, RJRN's industry segments were tobacco and food. For information relating to industry segments for the years ended December 31, 1997, 1996 and 1995, see note 15 to the Consolidated Financial Statements. (C) NARRATIVE DESCRIPTION OF BUSINESS TOBACCO The tobacco line of business is conducted by RJRT and Reynolds International, which manufacture, distribute and sell cigarettes. Cigarettes are manufactured in the United States by RJRT and in over 40 foreign countries and territories by Reynolds International and subsidiaries, joint ventures or licensees of RJRT and are sold throughout the United States and in more than 170 markets around the world. In 1997, approximately 59% of total tobacco segment net sales (after deducting excise taxes) and approximately 66% of total tobacco segment operating income on a reported basis (before amortization of trademarks and goodwill and restructuring expenses) 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 DORAL, WINSTON, CAMEL, SALEM, and VANTAGE. RJRT's other cigarette brands, including MONARCH, MORE, NOW, CENTURY, STERLING and MAGNA, 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 1997 of 25.4%, a decrease of approximately one-half a share point from 1996. During 1997, RJRT and the largest domestic cigarette manufacturer, Philip Morris Incorporated, together sold, on a shipment basis, approximately 73% of all cigarettes sold in the United States. In May 1996, RJRT began test marketing in Chattanooga, Tennessee, ECLIPSE, a cigarette that primarily heats rather than burns tobacco and thereby substantially reduces second-hand smoke. Test markets were expanded in 1997 to include Lincoln, Nebraska and Atlanta, Georgia. ECLIPSE is also available to adult smokers by mail in 20 states. RJRT continues to assess the test results. A primary long-term objective of RJRT is to increase earnings and cash flow through selective marketing investments in its key brands and continual improvements in its cost structure and operating efficiency. Marketing programs for full-price brands are designed to build brand awareness and add value to the brands by building brand loyalty among current adult smokers and attracting adult smokers of competing brands. In 1997, these efforts focused on accelerating share of market gains of the CAMEL brand family and reestablishing growth of the WINSTON brand through a complete marketplace repositioning program. In the first half of the year, new CAMEL Menthol line extensions were introduced nationally and distribution of the RED KAMEL styles was expanded to pack-oriented retail outlets throughout the country. During the second half, the company began the national introduction of WINSTON's new "No Bull" marketing campaign which is designed to establish WINSTON as a brand with a "straight-up" attitude leveraged by a unique product distinction: a 100-percent-tobacco blend with no additives. 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 "Business--Tobacco--Competition" in this Item 1. RJRT's domestic manufacturing facilities, consisting principally of factories and leaf storage facilities, are located in or near Winston-Salem, North Carolina and are owned by RJRT. Cigarette production is conducted at the Tobaccoville cigarette manufacturing plant (approximately two million square feet) and the Whitaker Park cigarette manufacturing complex (approximately one and one-half million square feet). 2 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 17% of RJRT's sales, no RJRT customers accounted for more than 10% of RJRT's sales for 1997. 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 uses print media, billboards, point-of-sale displays and other methods of advertising. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States. INTERNATIONAL TOBACCO OPERATIONS Reynolds International operates in over 170 markets around the world. Although overall foreign cigarette sales (excluding China, in which production data indicates an approximate 2% per annum growth rate) have increased at a rate of only 1% per annum in recent years, Reynolds International believes that the American-blend segment, in which Reynolds International primarily competes, is growing significantly faster. Although Reynolds International is the second largest of two international cigarette producers that have significant positions in the American-blend segment, its share of sales in this segment is approximately one-fourth of the share of Philip Morris International Inc., the largest American-blend producer. Reynolds International has strong brand presence in Western Europe and is well established in its other key markets in the Middle East/Africa, Asia, the CIS and Baltics region and Canada. Reynolds International is aggressively pursuing development opportunities throughout the world. Reynolds International markets nearly 100 brands of which WINSTON, CAMEL and SALEM, all American-blend cigarettes, are its international leaders. WINSTON, Reynolds International's largest selling international brand, has a significant presence in Puerto Rico and has particular strength in the Western Europe and Middle East/Africa regions. CAMEL is sold in approximately 140 markets worldwide and is Reynolds International's second largest selling international brand. SALEM is the world's largest selling menthol cigarette and is particularly strong in Far East markets. Reynolds International also markets a number of local brands in various foreign markets. None of Reynolds International's customers accounted for more than 10% of its sales in 1997. Approximately 18% of Reynolds International's 1997 volume was U.S.-made product, with the remainder manufactured outside the U.S. Reynolds International brands are manufactured in owned or joint-venture facilities in 22 locations outside the United States, and through licensing agreements in about 20 other countries. Reynolds International owned or joint-venture manufacturing locations include Azerbaijan, Canada, the Canary Islands, China, the Czech Republic, Finland, Germany, Hong Kong, Hungary, Indonesia, Kazakhstan, Malaysia, Poland, Portugal, Romania, Russia, Switzerland, Tanzania, Turkey, Ukraine and Vietnam. Certain of Reynolds International's foreign operations are subject to local regulations that set import quotas, restrict financing flexibility, affect repatriation of earnings or assets and/or limit advertising. In recent years, certain trade barriers for cigarettes, particularly in Asia and Eastern Europe, have been liberalized. This may provide opportunities for all international cigarette manufacturers, including Reynolds International, to expand operations in such markets; however, there can be no assurance that the liberalizing trends will be maintained or extended or that Reynolds International will be successful in pursuing such opportunities. RAW MATERIALS In its domestic production of cigarettes, RJRT primarily uses domestic burley and flue cured leaf tobaccos purchased at domestic auction. RJRT also purchases oriental tobaccos, grown primarily in Turkey 3 and Greece, and certain other non-domestic tobaccos. Reynolds International uses a variety of tobacco leaf from both United States and international sources. RJRT and Reynolds International believe there is a sufficient supply of tobacco in the worldwide tobacco market to satisfy their current production requirements. Reynolds International is actively involved in tobacco cultivation activities with fully owned agronomy operations in Vietnam and Turkey and a joint venture in China. Tobacco leaf is an agricultural commodity subject in the United States to government production controls and price supports that can affect market prices substantially. The tobacco leaf price support program is subject to Congressional review and may be changed at any time. In December 1994, Congress enacted the Uruguay Round Agreements Act to replace a domestic content requirement with a tariff rate quota system that keys tariffs to import volumes. The tariff rate quotas have been established by the United States with overseas tobacco producers and became effective on September 13, 1995. COMPETITION Generally, the markets in which RJRT and Reynolds International conduct their businesses are highly competitive, with a number of large participants. Competition is conducted on the basis of brand recognition, brand loyalty, quality and price. For most of RJRT's and Reynolds International's brands, substantial advertising and promotional expenditures are required to maintain or improve a brand's market position or to introduce a new brand. Anti-smoking groups have undertaken activities designed to inhibit cigarette sales, the form and content of cigarette advertising and the testing and introduction of new cigarette products. Because television and radio advertising for cigarettes is prohibited in the United States and brand loyalty has tended to be higher in the cigarette industry than in other consumer product industries, established cigarette brands in the United States have a competitive advantage. RJRT has repositioned or introduced brands designed to appeal to adult smokers of the largest selling cigarette brand in the United States, but there can be no assurance that such efforts will be successful. In addition, increased selling prices and taxes on cigarettes have resulted in additional price sensitivity of cigarettes at the consumer level and in a proliferation of discounted brands in the savings segment of the market. Generally, sales of cigarettes in the savings segment are not as profitable as those in other segments. LEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY The tobacco business is subject to a wide range of laws and regulations regarding the advertising, sale, taxation and use of tobacco products imposed by local, state, federal and foreign governments. In addition, at present, the U.S. Congress is considering several bills that could change the regulatory framework within which that business is conducted and make it significantly more restrictive. Any such legislation is likely to also result in material new costs and reduced sales for the cigarette industry but could also limit some of the litigation risks to which it is now subject. For a discussion of the regulatory and legislative environment applicable to the cigarette business see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tobacco--Governmental Activity" and note 10 to the consolidated financial statements. LITIGATION AFFECTING THE CIGARETTE INDUSTRY OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJRN and RJRN Holdings) or indemnitees, including those claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During 1997, 492 new actions were served against RJRT and/or its affiliates or indemnitees and 212 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. There have been noteworthy increases in the number of these cases pending. On December 31, 1997, there were 516 active 4 cases pending, as compared with 234 on December 31, 1996, 132 on December 31, 1995 and 54 on December 31, 1994. As of March 3, 1998, 540 active cases were pending against RJRT and/or its affiliates or indemnitees, 534 in the United States, two in Puerto Rico, one in the Marshall Islands, two in Canada and one in Nigeria. The United States cases are in 46 states and are distributed as follows: 198 in Florida, 101 in New York, 21 in Louisiana, 17 in each of Texas and Pennsylvania, 14 in California, 12 in each of Alabama and Ohio, 11 in Tennessee, nine in each of the District of Columbia, Illinois and Mississippi, seven in each of Indiana, New Jersey and West Virginia, six in Georgia, five in each of Maryland and Massachusetts, four in each of Kansas, Michigan, Minnesota and South Dakota, three in each of Arizona, Arkansas, Colorado, Hawaii, Iowa, Missouri, Nevada, Oklahoma and Rhode Island, two in each of Connecticut, Montana, New Hampshire, New Mexico, Oregon, South Carolina, Utah, Washington and Wisconsin, and one each in Alaska, Idaho, Kentucky, Maine, North Carolina and Vermont. Of the 534 active cases in the United States, 426 are in state court and 108 are in federal court. Most of these cases were brought by individual plaintiffs, but an increasing number, discussed below, seek recovery on behalf of states or large classes of claimants. THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a variety of legal theories, including, among others, strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. Eight of the 534 active cases in the United States involve alleged non-smokers claiming injuries purportedly resulting from exposure to environmental tobacco smoke. Forty-seven cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, and Blue Cross/Blue Shield subscribers seeking reimbursement for premiums paid. One hundred two of the active cases seek, INTER ALIA, recovery of the cost of Medicaid payments or other health-related costs paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco use. Four, brought by entities administering asbestos liability, seek contribution for settlement costs. DEFENSES. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act of some or all such claims arising after 1969; the lack of any defect in the product; assumption of the risk; contributory or comparative fault; lack of proximate cause; and statutes of limitations or repose; and, in the attorney general cases (discussed below), additional statutory, equitable, constitutional and other defenses. RJRN and RJRN Holdings have asserted additional defenses, including jurisdictional defenses, in many of these cases in which they are named. Juries have found for plaintiffs in three smoking and health cases in which RJRT was not a defendant, but in one such case, no damages were awarded and the judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on appeal and the case was subsequently dismissed. In the third such case, on August 9, 1996, a Florida jury awarded damages of $750,000 to an individual plaintiff. The defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking to reverse the judgment on appeal. On May 5, 1997, in an individual case filed against RJRT, brought by the same attorney who represented plaintiffs in the CARTER case, a Florida state court jury found no RJRT liability. On October 31, 1997, in still another case (KARBIWNYK V. R.J. REYNOLDS TOBACCO COMPANY) brought by the same attorney, another state court jury found no RJRT liability. On March 19, 1998, an Indiana state court found for RJRT, RJRN Holdings and other defendants in an individual case, DUNN V. RJR NABISCO HOLDINGS CORP., in which plaintiffs sought damages for the alleged harm caused to a non-smoker by environmental tobacco smoke. In addition, during 1997 and early 1998, RJRT and other tobacco industry defendants have settled five lawsuits. See "Interim Agreements" below. 5 CERTAIN CLASS ACTION SUITS. In May 1996, in an early class action case, CASTANO V. AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals overturned the certification of a purported nationwide class of persons whose claims related to alleged addiction to tobacco. The Court ordered the case remanded to the district court for decertification of the class on the grounds that a class consisting of all "addicted" smokers failed to meet the standards and requirements of Federal Rule 23 governing class actions. The class has been decertified and the parties have agreed to move for dismissal of the remaining individual case with a right to replead after November 15, 1998. Since this ruling by the Fifth Circuit, most purported class action suits have sought certification of statewide rather than nationwide classes. Putative class action suits based on claims similar to those asserted in CASTANO have been brought in state and, in a few instances, federal courts in Alabama, Arkansas, California, the District of Columbia (D.C. court), Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, New Mexico, Nevada, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, West Virginia and Wisconsin. A putative class action filed in Tennessee seeks reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout the United States. Suits are also expected to be filed in additional jurisdictions and there are also putative class action suits pending in Canada, Puerto Rico and Nigeria. Each such suit asserts claims on behalf of residents of a particular jurisdiction who claim to be addicted, injured, or at greater risk of injury by the use of tobacco, or are the legal survivors of such persons. In the class action suit pending in Florida, ENGLE V. R.J. REYNOLDS TOBACCO COMPANY, a class consisting of Florida residents or their survivors who claim to have diseases or medical conditions caused by their "addiction" to cigarettes has been certified. The case was scheduled for trial in February 1998 but was removed from the court calendar and has not yet been rescheduled. A class was certified in another purported class action suit pending in Louisiana state court, SCOTT V. AMERICAN TOBACCO COMPANY, on April 11, 1997. Defendants are seeking reconsideration of the certification. Class certification was granted in two cases pending in New York state courts, HOSKINS V. R.J. REYNOLDS TOBACCO COMPANY and GEIGER V. AMERICAN TOBACCO COMPANY (in which certification was conditional). The parties have briefed and argued appeals brought by defendants in both cases. On January 28, 1998, class certification was granted by a Maryland state court in RICHARDSON V. PHILIP MORRIS. Class certification was denied, however, on August 18, 1997, by a District of Columbia court in the case of REED V. PHILIP MORRIS. In October 1997, class certification was also denied in ARCH V. AMERICAN TOBACCO COMPANY (renamed BARNES V. AMERICAN TOBACCO COMPANY), which was pending in the United States District Court for the Eastern District of Pennsylvania. That court had initially certified a medical monitoring class based on the plaintiffs' amended complaint (having refused to certify a class based on the initial complaint), but on October 17, 1997, the judge reversed the certification and also dismissed the claims of each of the class representatives. Plaintiffs are appealing this ruling and briefing is scheduled to continue through April 23, 1998. In addition, in another purported class action brought in federal court in Puerto Rico, RUIZ V. AMERICAN TOBACCO COMPANY, the court on March 17, 1998, denied plaintiffs motion for class certification. Another class action suit, BROIN V. PHILIP MORRIS, was settled by an agreement dated October 9, 1997 and approved by the Florida state court on February 3, 1998. See "Interim Agreements" below. THE ATTORNEY GENERAL AND RELATED CASES. In June 1994, the Mississippi attorney general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, against various industry members including RJRT. This case was brought on behalf of the state to recover state funds paid for healthcare 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 sought an injunction against "promoting" or "aiding and abetting" the sale of cigarettes to minors. Both actual and punitive damages were sought in unspecified amounts. The case was scheduled for trial on July 7, 1997, but on July 2, 1997, the parties arrived at an agreement in principle settling the claims relating to the subject matter of the litigation. A comprehensive settlement agreement, based on the agreement in principle, was signed on October 17, 1997. See "Interim Agreements" below. Following the filing of the MOORE case, other states, through their attorneys general and/or other state agencies, sued RJRT and other U.S. cigarette manufacturers as well as, in some instances, their parent 6 companies, in actions to recover the costs of medical expenses incurred by the state or its agencies in the treatment of diseases allegedly caused by cigarette smoking. Some of these cases also seek injunctive relief and treble damages for state and/or federal antitrust law and RICO violations. Certain of the actions also seek statutory penalties and other forms of relief under state consumer protection and antitrust statutes. On March 3, 1998, there were 39 such cases pending in the following states, commonwealths, or territories: Alaska, Arizona, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia and Wisconsin. In addition to the Mississippi case mentioned above, tobacco company defendants have settled two additional attorney general cases; one in the State of Florida (except for certain equitable claims) and another in the State of Texas. See "Interim Agreements" below. One of the attorney general cases is currently on trial in Minnesota. The trial, which began in January 1998, is expected to take approximately four months. Plaintiffs in this case are seeking compensatory damages of $1.7 billion and, in addition, seek disgorgement of profits, restitution, treble damages under the State's antitrust statute, punitive damages, funding of smoking cessation and public education programs, civil penalties of $25,000 for each separate violation of various consumer protection statutes, civil penalties of $50,000 for each separate violation of Minnesota's antitrust statute, attorneys' fees and costs, various forms of non-monetary relief and such other relief as the court deems just and equitable. During pre-trial discovery and in the course of trial to date, the court in this case made a number of rulings adverse to the defendants. These rulings, among other things, limit the defenses available to the defendants and require production by the defendants of thousands of documents for which privilege had been asserted. The tobacco companies are defending this case vigorously, but the court's rulings could have an adverse effect on their ability to present their defense effectively. In addition to the 39 pending actions brought by the various attorneys general, 63 pending actions advancing similar theories have been brought by private attorneys and/or local officials purportedly on behalf of the citizens of certain states, counties and/or cities, union health and welfare funds, a university and four native American tribes. One such union case, NORTHWEST LABORERS V. PHILIP MORRIS, pending in the State of Washington, was certified as a class action on December 24, 1997. A taxpayer case pending in Ohio was dismissed for lack of standing on February 12, 1998 (COYNE V. AMERICAN TOBACCO). Although RJRT and most other cigarette manufacturers have agreed to the Memorandum described below, the uncertainty of its enactment into law requires that they continue to defend these attorney general and related cases vigorously and, except as described below (see "Interim Agreements") they continue to do so (as do RJRN and RJRN Holdings in the cases where they are named defendants). In addition, the tobacco company defendants filed for declaratory judgment in several of the states in which attorney general cases were threatened. PROPOSED RESOLUTION. Following several months of negotiations with state attorneys general, representatives of the public health community and plaintiffs' lawyers, on June 20, 1997, a Memorandum of Understanding and Resolution (the "Memorandum") that sets forth concepts for federal legislation and a contractual protocol to resolve a variety of litigation and regulatory issues concerning tobacco was entered into. The Memorandum requires the tobacco companies to make an initial $10 billion payment and subsequent annual multi-billion dollar payments expected to aggregate to approximately $368.5 billion over 25 years. Discussions with other manufacturers who were participants in the negotiations which led to the Memorandum are still in progress, but RJRT believes that its share of the initial payment will be in the range of $600 to $700 million and that subsequent payments will be allocated within the industry based on market share. The proposed legislation would also, among other things, reduce retail access for tobacco products, eliminate cigarette vending machines and tobacco product sampling, confer authority on the FDA to regulate the manufacture of tobacco products (with express limitations on authority relating to nicotine) and create publicly funded smoking cessation and education programs. The proposed legislation would grant limited litigation protection to the tobacco industry, including a bar on class action suits, suits 7 based on addiction and demands for punitive damages for past actions. It would also cap industry payments in permitted individual lawsuits to an aggregate of $5 billion per year. The proposal also provides a "look-back" provision which would penalize manufacturers if youth smoking is not reduced by stated amounts in certain years after enactment, culminating in a 60% reduction after 10 years. There can be no assurance that legislation required to implement the Memorandum will be enacted or that it will be enacted without modification that is materially adverse to the tobacco industry, particularly in light of the complex legal and factual issues involved and the need to reconcile the views of many competing interests. A number of bills have been introduced into Congress incorporating terms that vary in significant ways from those agreed to in the Memorandum. It is not certain that proposed legislation, if any, that emerges from this process will be advantageous to RJRT. If enacted, the legislation could face challenges on the grounds, among others, that the federal government lacks the authority to regulate the tobacco industry or limit its liability in the manner contemplated by the Memorandum. Regardless of the legislative outcome, the negotiation and signing of the Memorandum could adversely affect other federal, state and local regulation of the tobacco industry, alter the climate for pending litigation against RJRN, RJRT and other tobacco industry defendants and their corporate parents and affect the number of new smoking and health claims filed against the industry. The financial effects of this legislation and the related contractual protocol are difficult to predict. They depend, among other things, on (i) the amount, timing and tax treatment of the payments actually required of RJRT by the legislation; (ii) the means used to finance these payments; (iii) the impact of increased cigarette prices and other aspects of the legislation and the contractual protocol on domestic cigarette consumption; (iv) the effect of the legislation and the contractual protocol on the consumption of tobacco products and on the regulatory and litigation environment outside the United States; (v) the effect, if any, on public attitudes toward smoking and the tobacco industry; and (vi) the impact on RJRT's competitive position in the tobacco industry. Despite these uncertainties, RJRN believes that implementation of the Memorandum would increase the costs and reduce the consumption of RJRT's tobacco products in the United States. In particular, the substantial price increases necessary to fund payments of the magnitude contemplated by the Memorandum could reduce domestic industry cigarette volumes by up to 45% over 10 years depending on the assumptions used, which assumptions, by their nature, are speculative. Such volume reduction would likely have a significant negative effect on the business of RJRT and the stated financial position of RJRN Holdings, RJRN and RJRT. Any significant negative effect on the financial position of any of these entities could ultimately impact the share repurchase and dividend policies of RJRN Holdings. On the other hand, the proposals contemplated by the Memorandum offer a measure of relief from certain litigation that could otherwise materially affect the results of operations or cash flows of RJRN in particular quarterly or annual periods or its financial condition. In evaluating any proposed legislation to resolve tobacco issues, RJRN and RJRT will continue to weigh carefully the potential benefits, principally greater regulatory and litigation certainty and predictability in annual aggregate contingency risk, against the resulting monetary, regulatory and other costs. INTERIM AGREEMENTS Because the Memorandum, unless and until it is enacted into law, will not resolve any pending litigation scheduled for trial in advance of such enactment, the parties in each case must decide, on a case-by-case basis, whether to proceed to trial or seek some other resolution. Thus far, five cases have been settled, including three attorney general cases. THE ATTORNEY GENERAL AGREEMENTS. In furtherance of the proposed resolution under the Memorandum, tobacco companies have settled attorney general cases in Mississippi, Florida and Texas as they came to trial. Each settling state has agreed to a percentage share of the $10 billion initial and scheduled annual payments agreed to in the Memorandum; 1.7% for Mississippi, 5.5% for Florida and 7.25% for Texas and will also be entitled to attorneys' costs as well as private counsel fees as set by a panel of arbitrators subject to a $500 million aggregate annual cap for payment of such fees for all settlements of similiar litigation. 8 Each agreement also provides that if the U.S. Congress enacts federal legislation in keeping with the Memorandum, the terms of that legislation would generally supersede the terms of the state agreement. Defendants would receive credit for their payments under the state agreements against the obligations arising under the federal legislation. If, instead, the defendants enter into a number of separate settlement agreements with other individual states, these three settling states would be entitled to payment adjustments to assure at least as favorable a settlement as any other separately settling state. The first attorney general case scheduled for trial after adoption of the Memorandum was MOORE V. AMERICAN TOBACCO COMPANY. In that case, a settlement was agreed to on July 2, 1997, and a full settlement agreement was executed on October 17, 1997. The agreement calls for the defendants to make an aggregate up-front payment of $170 million to the State of Mississippi. It also provides for continuing payments commencing December 31, 1998, and annually thereafter, based, in 1998, on Mississippi's 1.7% share of $4 billion (the anticipated first annual industry payment under the Memorandum) and escalating in several annual steps to 1.7% of $8 billion in year eight and thereafter, adjusted upward by no less than 3% per year and further adjusted upward or downward to reflect increases or decreases in volume of domestic tobacco product sales. Mississippi also became entitled to $61.8 million for an anti-smoking pilot program by operation of the "most favored nation" provision of its agreement as a result of Florida's subsequent settlement containing pilot program provisions. The second attorney general case to come to trial, STATE OF FLORIDA V. AMERICAN TOBACCO COMPANY, was in the jury selection phase in Florida state court when, on August 25, 1997, the parties announced that they had entered into a settlement agreement. The agreement called for the tobacco company participants to make an aggregate up-front payment of $550 million. It also provides for annual payments beginning in September 1998 of 5.5% of $4 billion and increasing in several annual steps to 5.5% of $8 billion by 2003 and thereafter (subject to various adjustments) all consistent with the national annual payment schedule. The tobacco companies also agreed to fund a $200 million pilot program to discourage youth smoking. The agreement, like the other state settlements, also requires the tobacco companies to discontinue all billboard advertisements as well as all advertisements that appear on vehicles and in certain public areas, within several months. Related to the Florida settlement, on November 18, 1997, a law firm that had represented the State filed a suit against RJRT and others alleging tortious interference with the plaintiff's contingency fee contract with the State as well as conspiracy to induce the State to circumvent and negate plaintiff's rights to recover under that contract. The case is now in discovery. Finally, the Texas case, STATE OF TEXAS V. AMERICAN TOBACCO COMPANY, was settled by an agreement dated January 16, 1998 providing for a pilot program payment of $264 million and an aggregate up-front payment of $725 million. Texas will be entitled to a 1998 annual payment of $290 million (7.25% of $4 billion) paid in two installments ($89 million on November 1, 1998 and $201 million on December 31, 1998) and increasing in several annual steps to $580 million (7.25% of $8 billion) by 2003 and thereafter (subject to adjustments). RJRT's shares of the initial payment and pilot program will total approximately $114 million, paid or to be paid over the course of 1998 in payments of approximately $32 million by February 1, 1998; $12 million by July 1, 1998; $23 million by October 1, 1998; and $47 million by November 1, 1998. The companies have also agreed to pay a $50 million advance on fees of the State of Texas's private counsel prior to the arbitration decision awarding such fees provided that the State of Texas makes an equivalent advance. RJRT's share of the advance will be approximately $12 million. The payment of this amount, originally scheduled for late February, has been suspended by stipulation of the parties until March 24, 1998 as a result of a dispute raised by would-be interveners about the scope of the settlement. Neither the Mississippi nor Florida settlement agreement provides for payment of any advance on private counsel fees. Therefore, under the most favored nation provisions of their settlement agreements, provided that those states make equivalent advances, the tobacco companies may be required to make advances to private counsel in those states. Each tobacco company's share of advances of this type, for all settling states, would be based on market share. 9 If federal legislation in keeping with the Memorandum is enacted, the parties expect that Mississippi, Florida and Texas, because of their contribution to securing resolution of these matters, may apply to a panel of arbitrators for additional compensation. The settling defendants have agreed not to oppose applications of $75 million for Mississippi, $250 million for Florida and $329.5 million for Texas (as well as, any increase over these amounts necessary to offset the difference, if any, between the amounts to be paid to these states during 1998 under the agreements and the amounts allocated to those states for that period under the federal legislation). Payment of these amounts would be made over a number of years and would be subject to an aggregate annual cap of $100 million for all settling states. Each individual state agreement provides that the related settlement is not an admission or concession or evidence of any liability or wrongdoing on the part of any party and was entered into by the settling defendants solely to avoid the further expense and uncertainty of litigation. RJRT has made certain payments under these attorney general agreements. Its portion of the upfront payments, based on market capitalization, was $12.4 million for Mississippi and $37.4 million for Florida. Texas payments, both for the initial amount and pilot program to discourage youth smoking are to be made at several points in 1998 as described above. RJRT's portion of the pilot program payments, based on market share, was $15.3 million for Mississippi and $49 million for Florida. Additional payments, based on market share, were made with respect to the costs and expenses of counsel in all three states which totalled approximately $21 million. THE BROIN SETTLEMENT. The plaintiffs' attorneys in a class action case, BROIN V. PHILIP MORRIS, entered into a settlement agreement with participating tobacco company defendants on October 9, 1997. This case had been brought in Florida state court on behalf of all flight attendants of U.S. airlines alleged to be suffering from diseases or ailments caused by second-hand smoke in airplane cabins. This agreement requires the participating tobacco companies to pay $300 million in three annual installments, allocated among the companies by market share, to fund research on the early detection and cure of diseases associated with tobacco smoke. It also calls for those companies to pay a total of $49 million for plaintiffs' counsel's fees and expenses. The agreement bars class members from bringing aggregate claims or obtaining punitive or exemplary damages and also bars individual claims to the extent that they are based on fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO, suppression, concealment or any other alleged intentional or willful conduct. The defendants agree that in any individual case brought by a class member, they will bear the burden of proof regarding general causation that ordinarily would be born by the plaintiffs. Trial court approval of the BROIN settlement was granted on February 3, 1998, but this approval has been noticed for appeal. No payments with respect to either the research fund or attorney's fees will be due until final resolution of all appeals. RJRT's portion will be approximately $86 million. RJRT has already paid its market share of $3 million due to the BROIN attorneys in respect of costs and expenses. This amount is subject to recovery if the settlement is successfully challenged. THE MANGINI SETTLEMENT. On September 5, 1997, a settlement agreement was executed on behalf of the parties to MANGINI V. R.J. REYNOLDS TOBACCO COMPANY, a case that had been scheduled for trial in San Francisco Superior Court for December 1997. This case sought injunctive and other relief against RJRT and an advertising agency with respect to the use of Joe Camel advertising as an unfair business practice allegedly targeting minors. The agreement requires the defendants to acknowledge that the lawsuit along with public controversy surrounding Joe Camel, was a "substantial factor" in the phase-out of Joe Camel advertising. It also requires prompt removal of Joe Camel billboards and cessation of the use of Joe Camel in advertisements and promotional items in California. The defendants agreed to authorize release to the public of non-privileged and non-work product documents referring to persons under the age of 18 and/or the Joe Camel advertising campaign that were produced during discovery in the case. Pursuant to the agreement, RJRT has paid $10 million to the City and County of San Francisco to cover attorneys' fees ($1 million) and for distribution to the various state jurisdictions participating in the case for anti-youth smoking advertisements ($9 million). 10 The MANGINI settlement provides that plaintiffs' counsel will be paid in accordance with the counsel fee arrangements ultimately arrived at for the national legislative settlement. If there is no such arrangement, or the arrangement does not allow plaintiffs' counsel to participate, fees will be determined by an arbitration panel. Finally, the agreement preserves certain claims brought by various California public entities, including claims that the Joe Camel campaign violated certain sections of the California Business and Professions Code. RJRT has participated and may continue to participate in discussions with plaintiffs in certain healthcare cost-recovery and class actions scheduled to be tried in the coming months in order to postpone or settle those actions in light of the pending legislative initiative. There can be no assurance that any such postponement or settlement can be achieved, or, if achieved, as to the terms ultimately agreed to. In the absence of postponement or settlement, these actions would be tried as scheduled and any final judgment reached prior to enactment of the contemplated legislation might not be affected by the passage of that legislation. RECENT AND SCHEDULED TRIALS. As of March 3, 1998, there were 14 cases scheduled for trial in 1998 against RJRT alleging injuries relating to tobacco. Two trials are currently in process, the attorney general case in Minnesota discussed above and an individual environmental tobacco smoke case in Indiana state court (DUNN V. RJR NABISCO HOLDINGS). The next attorney general case scheduled for trial is Washington's which has been scheduled for September 1998. The State of Florida's remaining equitable claims are also scheduled for trial in September 1998. The State of Arizona's case is scheduled for October and that of Oklahoma for November. Cases against other tobacco company defendants are also scheduled for trial in 1998 and thereafter. Although trial schedules are subject to change and many cases are dismissed before trial, it is likely that there will be an increased number of tobacco cases, involving claims for possibly billions of dollars, against RJRT and RJRN coming to trial over the next year as compared to prior years when trials in these cases were infrequent. OTHER DEVELOPMENTS. On May 28, 1997, a suit was filed against RJRT in the U.S. District Court for the Northern District of Georgia, Atlanta Division, FARR V. R.J. REYNOLDS TOBACCO COMPANY, alleging claims under Title VII and the Equal Pay Act on behalf of female RJRT employees and applicants for employment in the "southeast sales region," seeking equitable relief, back pay and lost benefits, as well as punitive damages, based on allegations that plaintiffs had been denied employment, desirable job assignments, training, promotion and equal pay. No motion seeking class certification has yet been filed by plaintiffs. RJRT has filed an answer in the case and intends to defend it vigorously. On September 15, 1997, a suit, RAYMARK INDUSTRIES V. BROWN & WILLIAMSON, was filed against RJRT and RJRN and various other tobacco industry entities for contribution/damages related to asbestos litigation. The suit was filed in the United States District Court for the Northern District of Georgia. Raymark alleged that it expended $400 million on the defense and payment of asbestos personal injury claims in trial, verdict, appeal and settlement. Raymark alleged that cigarette smoke inhaled by the asbestos claimants caused the cancers complained of in the litigation in which it has been involved. Raymark seeks to recover contribution and/or indemnity from the defendants for the share of payments made by Raymark that were allegedly caused by tortious and otherwise actionable conduct of defendants. Raymark's claims included counts for: negligence, strict liability, fraud and misrepresentation, conspiracy and damages. Three other cases making similar allegations were filed in December 1997, one in California and two in New York. RJRT and the other tobacco industry defendants in this action dispute the claims advanced in these cases and intend to defend all such actions vigorously. A purported class was granted conditional class certification in a case, MOSELY V. PHILIP MORRIS COMPANIES, brought in Alabama state court against RJRT, RJRN and others, alleging violations of Alabama antitrust law. The complaint in this case alleges that cigarette companies and others have conspired to raise prices. The class consists of all Alabama residents who purchased certain defendants' cigarettes for smoking purposes since March 1997. The plaintiffs seek statutory damages as well as actual damages of up to $500 per class member. The defendants have removed the case to federal court. On 11 October 31, 1997, the federal court vacated the conditional class certification pending a hearing on class certification in federal court and on February 6, 1998, the federal court denied plaintiff's motion to remand the case to state court. RJRT understands that a grand jury investigation is being conducted in the Eastern District of New York examining possible violations of criminal law in connection with activities relating to the Council for Tobacco Research -- USA, Inc., of which RJRT is a sponsor. RJRT has responded, and will continue to respond, to document subpoenas issued by this grand jury. In addition, subpoenas dated May 24, 1996, November 8, 1996, December 5, 1996 and January 21, 1998 were served on RJRT by a grand jury sitting in the District of Columbia. RJRT has responded or is in the process of responding to those subpoenas. RJRN and RJRT are unable to predict the outcome of these investigations. RJRT, R.J. Reynolds International ("Reynolds International") and Northern Brands International, another subsidiary of RJRN, each received document subpoenas dated July 24, 1997, from a federal grand jury sitting in the Northern District of New York. RJRT understands that the grand jury is investigating possible smuggling activities. RJRT, Reynolds International and Northern Brands International are responding to these subpoenas but are unable to predict the outcome of the grand jury's investigation. For a further discussion of litigation affecting the tobacco business see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tobacco--Governmental Activity." Litigation is subject to many uncertainties and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJRT or its affiliates (including RJRN Holdings and RJRN) or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and could encourage an increase in the number of such claims. There have been a number of political, legislative, regulatory, and other developments relating to the tobacco industry and cigarette smoking that have received wide media attention, including the Memorandum referred to above. These developments may negatively affect the outcomes of tobacco-related legal actions and encourage the commencement of additional similar litigation. Although it is impossible to predict the outcome of such events on pending litigation and the rate at which new lawsuits are filed against RJRT, RJRN and RJRN Holdings, a significant increase in litigation and/or in adverse outcomes for tobacco defendants could have an adverse effect on any one or all of these entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of valid defenses to any such actions and intend to defend such actions vigorously. RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses available to them and RJRT in litigation matters, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). Management is unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. For more detailed information about the class action and attorneys general suits pending against RJRT and its affiliates and indemnitees, see exhibit 99 to this Form 10-K, a copy of which will be provided free of charge to persons requesting it in writing and addressed to Worldwide Communications, RJR 12 Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019 or by phone to 800-RJR-NAB3. ------------------------ FOOD The food line of business is conducted by operating subsidiaries of Nabisco Holdings. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco Holdings, which represents approximately 80.7% of the economic interest in Nabisco Holdings and approximately 97.7% of the total voting power of Nabisco Holdings' outstanding common stock. Nabisco's businesses in the United States are comprised of Nabisco Biscuit and the U.S. Foods Group (collectively, the "Domestic Food Group"). The U.S. Foods Group is comprised of the Sales & Integrated Logistics Group and Specialty Products, LifeSavers, Planters, Tablespreads and Food Service. Nabisco's businesses outside the United States are conducted by Nabisco Ltd and Nabisco International, Inc. ("Nabisco International" and together with Nabisco Ltd, 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 1997. DOMESTIC FOOD GROUP OPERATIONS NABISCO BISCUIT. Nabisco Biscuit is the largest manufacturer and marketer in the United States cookie and cracker industry with eight of the ten top selling brands, each of which had annual net sales of over $150 million in 1997. Overall, in 1997, Nabisco Biscuit had a 40% share of the domestic cookie category and a 54% share of the domestic cracker category (in the aggregate more than two times the share of its closest competitor) compared with 41% and 56% respectively in 1996. Leading Nabisco Biscuit cookie brands include OREO, CHIPS AHOY!, SNACKWELL's and NEWTONS. Leading Nabisco Biscuit cracker brands include RITZ, PREMIUM, NABISCO HONEY MAID GRAHAMS, TRISCUIT, AIR CRISPS and WHEAT THINS. OREO and CHIPS AHOY! are the two largest selling cookies in the United States. OREO, the leading sandwich cookie, is Nabisco Biscuit's largest selling cookie brand. Line extensions such as OREO DOUBLE STUF, FUDGE COVERED OREO and Reduced Fat OREO continue to increase the brand's appeal to targeted consumer groups. CHIPS AHOY! is the leader in the chocolate chip cookie segment with line extensions such as CHUNKY CHIPS AHOY! and CHEWY CHIPS AHOY! broadening its appeal and adding incremental sales. NEWTONS, the oldest Nabisco Biscuit cookie brand, is the fourth leading cookie brand in the United States. In recent years, fat free and reduced calorie varieties of NEWTONS, as well as NEWTONS COBBLERS, have been introduced. Nabisco Biscuit's cracker business is led by RITZ, the largest selling cracker in the United States, as well as RITZ BITS, RITZ BITS SANDWICHES, and REDUCED FAT RITZ successful product line extensions which, together with RITZ, accounted for 12.8% of cracker sales in the United States in 1997 compared with 13.9% in 1996. PREMIUM, the oldest Nabisco cracker brand and the leader in the saltine cracker segment, is joined by NABISCO HONEY MAID GRAHAMS, TRISCUIT, AIR CRISPS and WHEAT THINS to comprise, along with RITZ, six of the eight largest selling cracker brands in the United States. AIR CRISPS, launched nationally in 1996, consists of a line of light, crispy baked snacks in Ritz, Cheese Nips, Wheat Thins, Pretzel and Potato varieties and has achieved sales approaching $150 million in 1997. Nabisco Biscuit's other cookie and cracker brands, which include NILLA, NUTTER BUTTER, STELLA D'ORO, BETTER CHEDDARS, CHEESE NIPS and BARNUM'S ANIMAL CRACKERS, 13 compete in consumer niche segments. Many are the first or second largest selling brands in their respective segments. In 1994, Nabisco entered the breakfast snack aisle with the launch of SNACKWELL'S cereal bars and granola bars and the repositioning of TOASTETTES toaster pastries. The line was expanded in 1996 and 1997 with new cereal bar varieties. Nabisco introduced SNACKWELL'S fat free toaster pastries in 1996. Nabisco Biscuit's products are manufactured in 14 Nabisco owned bakeries and in 17 facilities with which Nabisco has production agreements. These facilities are located throughout the United States. Nabisco Biscuit also operates a flour mill in Toledo, Ohio which supplies over 85% of its flour needs. Nabisco Biscuit's products are sold to major grocery and other large retail chains through Nabisco Biscuit's direct store delivery system. The system is supported by a distribution network utilizing 11 major distribution warehouses and 111 shipping branches where shipments are consolidated for delivery to approximately 87,000 separate delivery points. U.S. FOODS GROUP The U.S. Foods Group represents Nabisco's non-biscuit food operations in the U.S. and is comprised of the following business units: SALES & INTEGRATED LOGISTICS GROUP. The Sales & Integrated Logistics Group handles sales and distribution for Specialty Products, LifeSavers, Planters, and the Tablespreads companies and distribution for Food Service. It sells to retail grocery chains and warehouse clubs through independent brokers and a direct sales force, and to drug stores, mass merchandisers and other non-grocery retail outlets through a direct sales force. The products are distributed from twenty distribution centers located throughout the United States. SPECIALTY PRODUCTS. Specialty Products manufactures and markets a broad range of food products, with sauces and condiments, pet snacks, hot cereals, healthy packaged egg products, dry mix desserts, and gelatins representing the largest categories. Many of Specialty Products' products are first or second in their product categories. Well-known brand names include A.1. steak sauces, GREY POUPON mustards, MILK-BONE pet snacks, CREAM OF WHEAT hot cereals, EGGBEATERS healthy packaged egg product, ROYAL desserts and KNOX gelatines. Specialty Products' primary entries in the steak sauce and mustard segments are A.1. and A.1. SWEET & TANGY steak sauces, the leading line of steak sauces, and GREY POUPON mustards, which include the leading Dijon mustard. Specialty Products is the second largest manufacturer of pet snacks in the United States with MILK-BONE dog biscuits and dog snacks. MILK-BONE products include MILK-BONE ORIGINAL BISCUITS, FLAVOR SNACKS, SUPER PREMIUM BISCUITS, DOG TREATS and DOGGIE BAG TREATS. Specialty Products is a leading manufacturer of hot cereals and participates in the cook-on-stove and mix-in-bowl segments of the category. CREAM OF WHEAT, the leading wheat-based hot cereal, and CREAM OF RICE participate in the cook-on-stove segment. INSTANT CREAM OF WHEAT participates in the mix-in-bowl segment and includes new varieties such as BANANA NUT BREAD. Quaker Oats Company is the most significant participant in the hot cereal category. Specialty Products manufactures products in five plants and sources products from a number of contract manufacturers. LIFESAVERS. LifeSavers manufactures and markets non-chocolate candy and gum primarily for sale in the United States. LifeSavers' well-known brands include LIFE SAVERS candy, BREATH SAVERS sugar free mints, CARE*FREE sugarless gum, ICE BREAKERS gum, BUBBLE YUM bubble gum, GUMMI 14 SAVERS fruit chewy candy, NOW & LATER fruit chewy taffy and FRUIT STRIPE gum. LIFE SAVERS is the largest selling non-chocolate candy brand in the United States, with a 1997 share of 5.2%, compared to 5.4% in 1996, of the non-chocolate candy category. BREATH SAVERS is the largest selling sugar free breath mint in the United States and BUBBLE YUM is the largest selling bubble gum in the United States. In 1997, LifeSavers introduced SNACKWELL'S chocolate candy, its first entry into the sugared, reduced-fat chocolate candy segment. LifeSavers manufactures its products in four owned plants and utilizes two primary contract manufacturers. PLANTERS. Planters produces and markets nuts and salty snacks largely for sale in the United States, primarily under the PLANTERS trademark. Planters, the only nut brand sold nationally, is the clear leader in the packaged nut category. Planters' products are seasonally strongest in the fourth quarter. Planters manufactures its products in four plants. In December 1997, the CORNNUTS line of crispy corn kernel snacks was acquired and added to Planters. FOOD SERVICE. Food Service utilizes a direct national sales force to sell a variety of specially packaged food products of the Domestic Food Group including cookies, crackers, confections, hot cereals, sauces and condiments to the food service and vending machine industry. TABLESPREADS. Tablespreads manufactures and markets various margarines and spreads, and is the second largest margarine producer in the United States, participating in all segments of the margarine category, with the BLUE BONNET, FLEISCHMANN'S and MOVE OVER BUTTER brands. Tablespreads strengthened its position in the margarine category in 1995 with the October purchase of the Kraft Foods, Inc. margarine business which includes the PARKAY, TOUCH OF BUTTER and CHIFFON brands. Tablespreads currently manufactures in two facilities and also sources products from two contract manufacturers. INTERNATIONAL FOOD GROUP OPERATIONS NABISCO LTD. Nabisco Ltd conducts Nabisco's Canadian operations through its Biscuit Division, Grocery Division and Food Service Division. Excluding private label brands, the Biscuit Division produced all of the top ten cookies and nine of the top ten crackers in Canada in 1997. Nabisco Ltd's cookie and cracker brands in Canada include OREO, CHIPS AHOY!, SNACKWELL'S, FUDGEE-O, PEEK FREANS, DAD'S, DAVID, PREMIUM PLUS, RITZ, AIR CRISPS, TRISCUIT and STONED WHEAT THINS. These products are manufactured in five bakeries in Canada and are sold through a direct store delivery system, utilizing 10 sales offices and distribution centers and a combination of company trucks and common carriers. Nabisco Ltd also markets a variety of single-serve cookies, crackers and salty snacks under such brand names as MINI OREO, RITZ BITS SANDWICHES and CRISPERS. Nabisco Ltd's Grocery Division produces and markets canned fruits and vegetables, fruit juices and drinks, pet snacks, pasta and other Italian food products. The Grocery Division is the leading canned fruit producer in Canada and is the second largest canned vegetable producer in Canada. Canned fruits and vegetables, fruit juices and drinks are marketed under the DEL MONTE trademark, pursuant to a license from the Del Monte Corporation, and under the AYLMER trademark. The Grocery Division also markets MILK-BONE pet snacks and MAGIC baking powder, each a leading brand in Canada. Nabisco Ltd's Grocery Division operated seven manufacturing facilities in 1997, five were devoted to canned products, principally fruits and vegetables, one produced pet snacks and one produced pasta. The Grocery Division's products are sold directly to retail chains and are distributed through four regional warehouses. In 1995, Nabisco Ltd acquired the PRIMO brand for dry pasta, canned tomatoes and other Italian food products. Nabisco Ltd's Food Service Division sells a variety of specially packaged food products including cookies, crackers, canned fruits, vegetables, pasta and condiments to non-grocery outlets. The Food 15 Service Division has its own sales and marketing organization and sources product from Nabisco Ltd's other divisions. NABISCO INTERNATIONAL. Nabisco International is a leading producer of biscuits, powdered dessert and drink mixes, baking powder, pasta, juices, milk products and other grocery items, as well as industrial yeast and bakery ingredients. Nabisco International also exports a variety of Domestic Food Group products to markets in Europe, the Middle East, Latin America, Africa and Asia from the United States. Nabisco International operates one of the largest multinational packaged food businesses in Latin America, with operations in 17 countries. Nabisco International manufactures and markets biscuits and crackers under the NABISCO, TERRABUSI, ARTIACH, MARBU and LUCKY brands, yeast and bakery ingredients under the FLEISCHMANN'S brand, desserts, drink mixes and baking powder under the ROYAL brand, processed milk products under the GLORIA brand, juice under the MAGUARY brand, and canned fruits and vegetables under the DEL MONTE brand pursuant to a license from the Del Monte Corporation. Nabisco International's largest market is Brazil, where it operates 21 facilities. In biscuits, Nabisco International is the market leader in Spain, Argentina, Venezuela, Puerto Rico, Nicaragua, Uruguay and Taiwan, and it holds strong number two positions in Peru, Ecuador, other Central American markets and the three major markets in China. Nabisco International is the market leader in powdered desserts in Spain and most of Latin America, in the yeast category in Brazil and certain other Latin American countries, in baking powder throughout South America, and in canned vegetables in Venezuela. In Asia, Nabisco International continues to expand its Chinese biscuit business through joint ventures in Beijing and a wholly-owned subsidiary in Suzhou. The Beijing bakery was trebled in size and a greenfield plant in Suzhou started up in 1996. In Indonesia, a greenfield plant, 70% owned by Nabisco and 30% owned by its partner and distributor, started up in 1996. Biscuit leadership in Taiwan was gained in 1996 through the acquisition of the assets of Lucky Enterprises Corporation Limited, the leading biscuit company in Taiwan. Nabisco International's grocery products are sold to retail outlets through its own local country sales forces and independent wholesalers and distributors. Industrial yeast and bakery products are sold to the bakery trade through Nabisco International's own local country sales 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 normally purchased through supplier contracts, while the commodities market is utilized to hedge prices for a large portion of anticipated future requirements. Prices of agricultural commodities tend to fluctuate due to various seasonal, climatic and economic factors which generally also affect Nabisco's competitors. Management believes that all of the raw materials for Nabisco 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 16 locations. Nabisco does not believe that such licensing arrangements have a material effect on the conduct of its domestic or international business. OTHER MATTERS ENVIRONMENTAL MATTERS The U.S. Government and various state and local governments have enacted or adopted laws and regulations concerning protection of the environment. The regulations promulgated by the EPA and other governmental agencies under various statutes have resulted in, and will likely continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities. In April 1995, RJRN Holdings was named a potentially responsible party (a "PRP") with certain third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to a superfund site at which a former subsidiary of RJRN had operations. Certain subsidiaries of the Registrants have also been named as PRPs with third parties or may have indemnification obligations with respect to a number of additional sites. Liability under CERCLA is joint and several. RJRN Holdings' subsidiaries have been engaged in a continuing program to assure compliance with U.S., state and local laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and to estimate the cost of resolving these CERCLA matters, RJRN Holdings and RJRN do not expect such expenditures or other costs to have a material adverse effect on the business or financial condition of the Registrants and their subsidiaries taken as a whole. EMPLOYEES At December 31, 1997, RJRN Holdings together with its subsidiaries had approximately 80,400 employees of which approximately 2,400 were part-time employees. None of RJRT's operations is unionized. Most of the unionized workers at Nabisco's operations are represented under a national contract with the Bakery, Confectionery and Tobacco Workers International Union, which was ratified in August 1996 and which will expire in August 2001. Other unions represent the employees of a number of Nabisco's operations and several of Reynolds International's operations are unionized. RJRN believes that its subsidiaries' relations with these employees and with their unions are good. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES For information about foreign and domestic operations and export sales for the years 1995 through 1997, see "Geographic Data" in note 15 to the Consolidated Financial Statements. ITEM 2. PROPERTIES For information pertaining to the RJRN Holdings' and RJRN's assets by lines of business and geographic areas as of December 31, 1997 and 1996, see note 15 to the Consolidated Financial Statements. For information on properties, see Item 1. ITEM 3. LEGAL PROCEEDINGS In the fourth quarter of 1995, purported RJRN Holdings stockholders for themselves and derivatively for RJRN Holdings and Nabisco Holdings filed three putative class and derivative actions in the Court of Chancery of the State of Delaware in and for New Castle County against members of RJRN Holdings Board of Directors. The actions were consolidated in December 1995. The plaintiffs allege, among other things, that the individual defendants breached their fiduciary duty and wasted corporate assets by undertaking an exchange offer and related consent solicitations completed by RJRN and Nabisco in 17 June 1995 and by amending, in August 1995, RJRN Holdings By-Law provisions concerning the calling of shareholder meetings and procedures for shareholder action by written consent. The plaintiffs allege that management took these and other actions to wrongfully obstruct a spin-off of Nabisco Holdings, to enrich the defendants at the expense of RJRN Holdings, its shareholders and Nabisco Holdings and to entrench the defendants in the management and control of RJRN Holdings. By agreement of the parties, the defendants' time to respond to the complaint in these consolidated actions has been extended, most recently, to May 22, 1998. RJRN Holdings believes that these allegations are without merit and, if necessary, will defend these actions vigorously. For information about other litigation and legal proceedings, see "Business--Tobacco--Litigation Affecting the Cigarette Industry" and "Other Matters--Environmental Matters" in Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Governmental Activity" in Item 7. ------------------------ Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJRT or its affiliates or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and increase the number of such claims. Although it is impossible to predict the outcome of such events or their effect on RJRT, a significant increase in litigation activities could have an adverse effect on RJRT. RJRT believes that it has a number of valid defenses to any such actions, including but not limited to those defenses based on preemption under the CIPOLLONE decision, and RJRT intends to defend vigorously all such actions. RJRN Holdings and RJRN believe that, not withstanding the quality of defenses available to them and RJRT in litigation matters, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). Management is unable to predict the outcome of litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 EXECUTIVE OFFICERS OF THE REGISTRANTS EXECUTIVE OFFICERS OF RJRN HOLDINGS The executive officers of RJRN Holdings are Steven F. Goldstone (Chairman of the Board, Chief Executive Officer and President), Gerald I. Angowitz (Senior Vice President, Human Resources and Administration), John J. Delucca (Senior Vice President and Treasurer), H. Colin McBride (Senior Vice President, Associate General Counsel and Secretary), David B. Rickard (Senior Vice President and Chief Financial Officer), William L. Rosoff (Senior Vice President and General Counsel), and Richard G. Russell (Senior Vice President and Controller). The following table sets forth certain information regarding such officers.
BUSINESS EXPERIENCE DURING THE PAST NAME AGE FIVE YEARS AND OTHER INFORMATION - --------------------------- --------- ---------------------------------------------------------------------------- Steven F. Goldstone 52 Chairman since May 1996; Chief Executive Officer since December 1995; President since October 1995; prior thereto, General Counsel, March 1995 to December 1995; previously Senior Partner with law firm of Davis, Polk & Wardwell until October 1995 and for more than five years prior thereto. Gerald I. Angowitz 48 Senior Vice President of Human Resources and Administration since March 1995; prior thereto, Vice President of Human Resources, January 1994 to March 1995; Vice President of Employee Benefits, January 1992 to December 1993. John J. Delucca 54 Senior Vice President and Treasurer since October 1993; Treasurer of Nabisco Holdings, October 1994 to February 1995; previously, Managing Director and Chief Financial Officer, Hascoe Associates, 1991 to 1993. H. Colin McBride 52 Senior Vice President, Associate General Counsel and Secretary since February 1998; prior thereto, Vice President, Assistant General Counsel and Secretary, December 1995 to February 1998; Vice President and Assistant General Counsel for more than five years prior thereto. David B. Rickard 51 Senior Vice President and Chief Financial Officer since March 1997; previously Executive Vice President, International Distillers and Vintners, 1996 to 1997; Finance Director, International Distillers and Vintners, 1995 to 1996; Group Controller, Grand Metropolitan PLC, 1994 to 1995; Senior Vice President and Chief Financial Officer, The Pillsbury Company, 1991 to 1994. William L. Rosoff 51 Senior Vice President and General Counsel since January 1998; previously Partner with law firm of Davis Polk & Wardwell for more than five years prior thereto. Richard G. Russell 52 Senior Vice President and Controller since May 1995; previously Partner at the accounting firm of Deloitte & Touche LLP for more than five years prior thereto.
19 EXECUTIVE OFFICERS OF RJRN HOLDINGS OR ITS SUBSIDIARIES NOT LISTED ABOVE Set forth below are the names, ages, positions and offices held and a brief account of the business experience during the past five years of certain executive officers of RJRN Holdings or its subsidiaries, other than those listed above.
BUSINESS EXPERIENCE DURING THE PAST NAME AGE FIVE YEARS AND OTHER INFORMATION - --------------------------- --------- ---------------------------------------------------------------------------- James M. Kilts 50 President and Chief Executive Officer of Nabisco Holdings and of Nabisco since January 1998; previously Executive Vice President--Worldwide Food of Philip Morris Companies, 1994 to March 1997; President of Kraft USA, 1989 to 1994. Pierre de Labouchere 44 Chief Executive Officer and President of Reynolds International since December 1995; prior thereto, President of Eastern Europe, Middle East and Africa Region, Reynolds International, 1994 to December 1995; Regional Vice President--European and Special Markets, Reynolds International, 1991 to 1994. Andrew J. Schindler 53 President and Chief Executive Officer of RJRT since July 1995; prior thereto, President and Chief Operating Officer--U.S.A., RJRT, May 1994 to June 1995; Executive Vice President-- Operations, RJRT, 1991 to 1994. Jeffrey A. Kuchar 43 Senior Vice President and General Auditor since January 1998; prior thereto, Vice President and General Auditor, 1993 to 1997; Director of Finance and Business Development, Specialty Products Company, Nabisco, 1993; Director of Financial Planning, Specialty Products Company, Nabisco, 1992 to 1993. Lionel L. Nowell III 43 Senior Vice President of Strategy and Business Development since January 1998; previously Vice President--Finance, Pillsbury North America, November 1996 to January 1998; Vice President-- Finance, Pillsbury Bakeries & Foodservice, February 1996 to November 1996; Vice President and Chief Financial Officer, Haagen-Dazs, November 1994 to February 1996; Vice President and Controller, The Pillsbury Company, May 1993 to November 1994; Vice President--Food and International Retailing Audit of The Pillsbury Company, September 1992 to May 1993. J. Thomas Pearson 56 Senior Vice President, Taxation since 1988. Huntley R. Whitacre 55 Senior Vice President of Investor Relations since August 1995; prior thereto, Vice President of Investor Relations for more than five years. Jason H. Wright 37 Senior Vice President of Worldwide Communications since February 1994; prior thereto, Vice President of Worldwide Communications, 1993 to 1994; Vice President of Financial Communications, 1990 to 1993.
20 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of RJRN Holdings, par value $.01 per share (the "Common Stock"), is listed and traded on the New York Stock Exchange (the "NYSE"). Since completion of the acquisition there has been no public trading market for the common stock of RJRN. As of February 28, 1998, there were approximately 55,000 record holders of the Common Stock. All of the common stock of RJRN is owned by RJRN Holdings. The Common Stock closing price on the NYSE for February 27, 1998 was $34 9/16. 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 -------- -------- 1997: First Quarter..................................................... $38 7/8 $30 5/8 Second Quarter.................................................... 36 1/2 27 Third Quarter..................................................... 36 1/8 29 9/16 Fourth Quarter.................................................... 37 15/16 29 7/8 HIGH LOW -------- -------- 1996: First Quarter..................................................... $35 1/4 $29 Second Quarter.................................................... 34 1/2 29 Third Quarter..................................................... 32 3/8 25 1/8 Fourth Quarter.................................................... 34 5/8 25 3/4
- ------------------------ The Board of Directors of RJRN Holdings declared an initial quarterly cash dividend of $.375 per share payable on April 1, 1995. During 1995, RJRN Holdings continued to pay such a quarterly cash dividend on the Common Stock, adjusted to take into account a one-for-five reverse split of the Common Stock. Cash dividends paid by RJRN to RJRN Holdings are included in the Consolidated Statements of Cash Flows in the Consolidated Financial Statements. On March 5, 1996, RJRN Holdings announced a 23% increase in its annual common dividend rate from $1.50 to $1.85 per share of Common Stock and adopted as an objective the repurchase of approximately 10 million shares of Common Stock over the next several years based on the achievement of performance targets. RJRN Holdings repurchased approximately $100 million of Common Stock in 1996. On February 28, 1997, the Board of Directors authorized an 11% increase in the annual common dividend to $2.05 per share and authorized the repurchase of up to $200 million of Common Stock in 1997. No such repurchases were made in 1997. Commencing with the July 1 payment, the quarterly dividend paid by Nabisco was increased to $.175 per share or $.70 per share on an annual basis, from its previous level of $.62 cents per share. As a result, the Nabisco Holdings dividends payable to RJRN increased from approximately $132 million annually to $141 million annually. The operations of RJRN Holdings and RJRN are conducted through RJRN's subsidiaries and, therefore, RJRN Holdings and RJRN are dependent on the earnings and cash flow of RJRN's subsidiaries to satisfy their respective obligations and other cash needs. Certain Nabisco credit facilities limit the amount of dividends, distributions and advances by Nabisco Holdings and its subsidiaries to RJRN Holdings and its non-Nabisco subsidiaries. Moreover, RJRN's credit agreements and certain policies adopted by the Board of Directors of RJRN Holdings limit the payment by RJRN Holdings of dividends on the Common Stock in excess of certain specific amounts. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Financial Condition" and notes 6 and 9 to the Consolidated Financial Statements. RJRN Holdings does not believe that the provisions of its credit agreements or its adopted policies concerning distributions to stockholders will limit its ability to pay its anticipated quarterly dividends. 21 ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993 - --------------------------------------------------------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS Net sales.............................................. $ 17,057 $ 17,063 $ 16,008 $ 15,366 $ 15,104 Income (loss) before extraordinary item................ 402 611 627 764 (3) PER SHARE DATA Basic income (loss) per share before extraordinary item................................................. $ 1.11 $ 1.75 $ 1.59 $ 2.07 $ (0.26) Diluted income (loss) per share before extraordinary item................................................. $ 1.09 $ 1.74 $ 1.58 $ 2.06 $ (0.26) Average number of common and common equivalent shares outstanding (in thousands): Basic................................................ 323,787 324,917 325,476 305,142 269,839 Diluted.............................................. 325,318 325,947 326,235 306,756 269,839 Dividends per share of common stock.................... $ 2.05 $ 1.85 $ 1.50 -- -- Dividends per share of Series A convertible preferred stock................................................ -- -- -- $ 2.92 $ 3.34 Dividends per share of Series C convertible preferred stock................................................ $ 2.25 $ 6.01 $ 6.01 $ 3.94 -- CASH FLOW DATA Dividends paid on common and preferred stock........... $ 755 $ 716 $ 598 $ 395 $ 241 Capital expenditures................................... 763 741 744 670 615 BALANCE SHEET DATA (AT END OF PERIODS) Total assets........................................... $ 30,678 $ 31,289 $ 31,518 $ 31,408 $ 31,295 Long-term debt......................................... 9,456 9,256 9,429 8,883 12,005 Mandatorily redeemable preferred securities............ 953 954 954 -- -- Stockholders' equity................................... 9,631 10,148 10,329 10,908 9,070 OTHER DATA Number of employees Tobacco.............................................. 26,400 25,400 22,800 21,200 21,500 Food................................................. 54,000 54,300 53,200 49,400 45,000
- ------------------------ See the consolidated financial statements regarding (i) the restructuring of the worldwide tobacco operations during 1997 and 1995; (ii) the tobacco settlement agreements reached by RJRT with the Florida, Mississippi and Texas state attorneys general and in certain class action cases during 1997; (iii) the conversion during 1997 of Series C depositary shares issued during 1994; (iv) the restructuring of the food operations during 1996 and (v) the exchange of preferred securities by RJRN Holdings and a subsidiary and certain debt exchanges between RJRN and Nabisco during 1995. During 1994, the Series A depositary shares issued during 1991 converted into 42,000,000 shares of common stock and a pre-tax charge of $65 million was recorded in connection with the realignment of corporate headquarters. During 1993, a pre-tax restructuring charge of $730 million ($467 million after-tax) was recorded in connection with a program to streamline both the tobacco and food operations and to improve profitability. Net sales and costs of products sold exclude excise taxes of $3.599 billion, $3.852 billion, $3.832 billion, $3.578 billion and $3.757 billion for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. See Notes to Consolidated Financial Statements. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of the consolidated financial condition and results of operations of RJRN Holdings. The results of operations discussion and analysis is broken into four sections. The first section includes reported information for net sales, operating company contribution and restructuring expenses as included in the historical consolidated financial statements. The second section highlights items that management believes impact the comparability of the historical financial information, including the restructuring expenses in section one. The third section illustrates operating company contribution on a basis consistent with how management manages the ongoing businesses. It excludes one-time items that management believes affect the comparability of the results of operations. This section should not be viewed as a substitute for the historical results of operations but as a tool to better understand underlying trends in the business. The last section includes management's discussion and analysis of the ongoing results. The discussion and analysis should be read in connection with the consolidated financial statements and the related notes thereto of RJRN Holdings as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997. RESULTS OF OPERATIONS
% CHANGE FROM PRIOR YEAR ------------------------ YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS) 1997 1996 1995 1997 1996 - ---------------------------------------------------------------- --------- --------- --------- ----------- ----------- Net sales: R.J. Reynolds Tobacco......................................... $ 4,895 $ 4,551 $ 4,480 8% 2% Reynolds International........................................ 3,428 3,623 3,234 (5)% 12% --------- --------- --------- Total Tobacco................................................. 8,323 8,174 7,714 2% 6% --------- --------- --------- Nabisco Biscuit............................................... 3,545 3,677 3,569 (4)% 3% U.S. Foods Group.............................................. 2,604 2,638 2,451 (1)% 8% --------- --------- --------- Domestic Food Group........................................... 6,149 6,315 6,020 (3)% 5% International Food Group...................................... 2,585 2,574 2,274 --% 13% --------- --------- --------- Total Nabisco................................................. 8,734 8,889 8,294 (2)% 7% --------- --------- --------- $ 17,057 $ 17,063 $ 16,008 --% 7% --------- --------- --------- --------- --------- --------- Operating company contribution (1)(2): R.J. Reynolds Tobacco......................................... $ 1,151 $ 1,450 $ 1,420 (21)% 2% Reynolds International........................................ 581 803 643 (28)% 25% --------- --------- --------- Total Tobacco................................................. 1,732 2,253 2,063 (23)% 9% --------- --------- --------- Nabisco Biscuit............................................... 691 542 535 27% 1% U.S. Foods Group.............................................. 386 346 355 12% (3)% --------- --------- --------- Domestic Food Group........................................... 1,077 888 890 21% --% International Food Group...................................... 231 242 239 (5)% 1% --------- --------- --------- Total Nabisco................................................. 1,308 1,130 1,129 16% --% --------- --------- --------- Headquarters.................................................. (70) (67) (64) (4)% (5)% --------- --------- --------- $ 2,970 $ 3,316 $ 3,128 (10)% 6% --------- --------- --------- --------- --------- ---------
Restructuring expenses, which are not included in operating company contribution, are allocated by business as follows:
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS) 1997 1996 1995 - ------------------------------------------------------------------------------------ --------- --------- --------- R.J. Reynolds Tobacco............................................................... $ 80 $ -- $ 100 Reynolds International.............................................................. 221 -- 54 --------- --------- --------- Total Tobacco....................................................................... 301 -- 154 --------- --------- --------- Nabisco Biscuit..................................................................... -- 238 -- U.S. Foods Group.................................................................... -- 115 -- --------- --------- --------- Domestic Food Group................................................................. -- 353 -- International Food Group............................................................ -- 75 -- --------- --------- --------- Total Nabisco....................................................................... -- 428 -- --------- --------- --------- $ 301 $ 428 $ 154 --------- --------- --------- --------- --------- ---------
- ------------------------------ (1) Includes restructuring-related and domestic tobacco settlement costs of $448 million for 1997, restructuring-related costs of $97 million for 1996 and restructuring-related costs of $49 million for 1995. Restructuring-related costs are allocated to the business units as follows: Reynolds International--$89 million for the year ended December 31, 1997 and $49 million for the year ended December 31, 1995; Nabisco Biscuit--$58 million, U.S. Foods Group--$33 million and the International Food Group--$6 million for the year ended December 31, 1996. (2) Operating company contribution represents operating income before amortization of trademarks and goodwill and restructuring expenses. 23 The following table summarizes items impacting comparability, which are described in notes 2, 9 and 10 to the consolidated financial statements. We believe these items are unusual and therefore are not included when evaluating the ongoing performance of our businesses.
1996 1995 1997 -------------------------- -------------------------- YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS, -------------------------- PER DILUTED PER DILUTED EXCEPT PER SHARE AMOUNTS) PRE-TAX PRE-TAX SHARE PRE-TAX SHARE - ---------------------------------------------- ----------- ----------- ------------- ----------- ------------- PER DILUTED SHARE ------------- Operating company contribution: Tobacco settlement expense at R.J. Reynolds Tobacco..................... $ 359 $ .67 $ -- $ -- $ -- $ -- Restructuring-related costs................. 89 .24 97 .14 49 .10 ----- ----- ----- ----- ----------- ----- 448 .91 97 .14 49 .10 ----- ----- ----- ----- ----------- ----- Restructuring expense......................... 301 .72 428 .74 154 .32 Other financial expense....................... -- -- -- -- 103 .21 Early extinguishment of debt, net tax......... -- .06 -- -- -- .05 ----- ----- ----- ----- ----------- ----- Total....................................... $ 749 $ 1.69 $ 525 $ .88 $ 306 $ .68 ----- ----- ----- ----- ----------- ----- ----- ----- ----- ----- ----------- -----
The following table represents operating company contribution based upon ongoing results.
% CHANGE FROM PRIOR YEAR ------------------------ YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS) 1997 1996 1995 1997 1996 - ----------------------------------------------------------- --------- --------- --------- ----------- ----------- R.J. Reynolds Tobacco...................................... $ 1,510 $ 1,450 $ 1,420 4% 2% Reynolds International..................................... 670 803 692 (17)% 16% --------- --------- --------- Total Tobacco.............................................. 2,180 2,253 2,112 (3)% 7% --------- --------- --------- Nabisco Biscuit............................................ 691 600 535 15% 12% U.S. Foods Group........................................... 386 379 355 2% 7% --------- --------- --------- Domestic Food Group........................................ 1,077 979 890 10% 10% International Food Group................................... 231 248 239 (7)% 4% --------- --------- --------- Total Nabisco.............................................. 1,308 1,227 1,129 7% 9% --------- --------- --------- Headquarters............................................... (70) (67) (64) (4)% (5)% --------- --------- --------- $ 3,418 $ 3,413 $ 3,177 --% 7% --------- --------- --------- --------- --------- ---------
In addition to the above recorded items, another factor impacting comparability was the decision by Reynolds International to reduce quarter-end sales incentives in order to eliminate excess trade inventories that reduced revenues and earnings. See the international tobacco and net income per share discussion and analysis for the estimated impact. 24 The percentage contributions of each industry segment to net sales and operating company contribution during the last three years on an ongoing basis were as follows:
1997 1996 1995 ----- ----- ----- Net sales: Total Tobacco.............................................................. 49% 48% 48% Total Food................................................................. 51 52 52 --- --- --- 100% 100% 100% --- --- --- --- --- ---
Operating company contribution(1): Total Tobacco...................................................... 63% 65% 65% Total Food......................................................... 37 35 35 --- --- --- 100% 100% 100% --- --- --- --- --- ---
- -------------------------- (1) Contributions by industry segments were computed without effects of Headquarters' expenses. UNLESS OTHERWISE NOTED, OPERATING COMPANY CONTRIBUTION COMPARISONS WITHIN THE FOLLOWING DISCUSSIONS ARE BASED ON ONGOING RESULTS. TOBACCO The tobacco business is conducted by R.J. Reynolds Tobacco ("RJRT") and Reynolds International. 1997 VS. 1996. RJRT's net sales increased 8% over 1996 to $4.9 billion. The increase is primarily due to pricing of $409 million, partially offset by a 2% volume decline of $81 million. The company believes that its shipments and those of the entire domestic tobacco industry were influenced by wholesale trading activity in anticipation of further price increases. The industry volume declined 1% but it is estimated that volume would have declined by approximately 2%, excluding the impact of the additional buying activity. RJRT's retail share of market declined slightly to 25.41% from 25.90%. RJRT's full-price share of market decreased slightly to 16.65% from 16.81%. The company's savings share of market also decreased slightly to 8.76% from 9.09%. Industrywide, the full-price category continues the upward momentum of recent years growing to 73% of total shipments from 72% in 1996 and 70% in 1995. RJRT's full-price shipments as a percentage of its total shipments has remained steady at 63% for 1997, 1996 and 1995. The company has made progress on several initiatives designed to strengthen its full-price business, as demonstrated by its stable full-price share of market in the latter half of 1997. Camel shipments grew 5% as it continues to be one of the fastest-growing full-price brands in the United States. During the year, Camel successfully introduced a new advertising campaign "What You're Looking For" to replace "Joe Camel." The newest additions to the Camel family, Camel Menthol, Red Kamel and Kamel Menthe, continued to show positive results. In addition, Winston, another of the company's flagship brands, grew 9% in volume in the second half of 1997 compared to the same period of the prior year and sustained share after the company introduced its national "No Bull" marketing campaign. "No Bull" repositions the brand as a "straight-up" attitude leveraging its image and unique product point-of-difference; a 100-percent-tobacco blend with no additives for true tobacco taste. In November, the company began the test marketing of a new positioning strategy for the Salem brand. It also continues to monitor and test Eclipse, a cigarette featuring reduced smoke that leaves practically no ashes, stains or lingering odor. In the savings category, Doral, the industry's leading savings brand, grew volume by 5% and its share of the savings segment was up 8%. Operating company contribution grew 4% over 1996 to $1.5 billion primarily due to favorable pricing and mix, partially offset by higher marketing and litigation expenses and the overall volume decline. On January 23, 1998, RJRT announced an average price increase of approximately 2% across all its cigarette brands, which may have an impact on future volume. 25 Reynolds International's volume increased 1% over 1996 despite a decision to reduce quarter-end sales incentives in order to eliminate excess trade inventories. Excluding the estimated impact of eliminating excess trade inventories, volume would have increased by approximately 4%. Unfavorable volume mix (approximately $183 million) and currency translation (approximately $190 million) more than offset higher pricing (approximately $167 million), resulting in a decrease in net sales of 5% to $3.4 billion. Excluding the estimated impact of reducing excess trade inventories and the unfavorable currency translation, net sales would have increased 4% to $3.8 billion. By region, volume declines in Western Europe of 15% and export shipments of 11% were more than offset by volume increases in the CIS and Baltics of 13% and Central Europe of 43%. In Western Europe, short-term pricing pressures in France and Spain, a general shift from the full-flavor segments throughout Western Europe and the decision to reduce excess trade inventories caused the 15% volume decline. Reynolds International's new lights entries (Camel Lights and Camel Medium) are fueling growth in the low tar and nicotine category. Camel Lights grew 5% in Western Europe while Camel Medium grew 17%. Difficult operating conditions affected the volume performance in the European and Middle East export markets. Regional heritage brands such as Peter I in Russia are fueling the growth in the CIS and Baltics region. Peter I is the largest-selling filter cigarette in Russia, where capacity is currently being expanded to meet the growing demand. In addition, other heritage brands have been introduced throughout the region and are also performing well. The volume increase in Central Europe was driven by Winston and Monte Carlo. In Asia, volume declined approximately 3% primarily driven by the trade inventory reduction. Salem Pianissimo, a low smoke, low smell cigarette, continues to outperform competition in Japan. Reynolds International's operating company contribution declined 17%, primarily due to unfavorable volume mix, higher product costs and unfavorable foreign currency translation, partly offset by higher pricing. Excluding the estimated impact of the decision to reduce excess trade inventories and foreign currency translation, Reynolds International's operating company contribution would have increased by approximately 5%. 1996 VS. 1995. RJRT's net sales in 1996 increased 2% over 1995 to $4.6 billion primarily due to pricing ($164 million), partially offset by an overall volume decline of 4% ($127 million). RJRT's full-price volume decreased 3% for the full year. Given extra business days in 1996 versus 1995, total industry shipments were up slightly versus 1995 while consumption was essentially flat. The dynamics of the market continued to shift toward full-price brands in 1996 which comprised 72% of the total industry volume in 1996 versus 28% for savings brands. This compares to a 70% to 30% split in 1995 and a 67% to 33% split in 1994. RJRT's full-price volume as a percentage of total volume was 63% in 1996 and 1995, and 60% in 1994. RJRT's full-price share of market decreased 0.4 share points to 16.81% with 1996 shipments of 75 billion units. Camel performed exceedingly well, generating a 5% growth in shipments and a 0.3 share point gain for the full year versus 1995. However, Winston and Salem volume declined 8% and 3%, respectively. The Winston brand family declined 8% primarily due to the decision to reduce support of Winston Select. RJRT's savings brands shipments declined 4% to 44.1 billion units in 1996 due to planned sales reductions of lower priority brands. Offsetting the decline on these brands was continued growth of the industry's largest savings brand, Doral. Doral experienced a 4% volume increase over 1995, and a 2.2 share of segment gain despite an industry savings category decline of two percentage points from 30% to 28%. RJRT's overall volume performance reflects the decision to focus on growth among its key full-price and savings brands. To stabilize full-price market share, RJRT tested several initiatives. Building on the Camel momentum, RJRT introduced Camel Menthol during the third quarter of 1996 and began a national launch in the first quarter of 1997. Red Kamel and Kamel Menthe were also test marketed in several cities. RJRT conducted a Florida test market of Winston that emphasized the "No Bull" positioning of Winston and a no-additives blend. Eclipse, a cigarette featuring 80% reduced second-hand smoke that leaves practically 26 no ashes, stain or lingering odor, was also tested in 1996. RJRT is also continuing to test Moonlight Tobacco Company brands that feature innovative packaging and product concepts. Test markets were New York City, Seattle/Portland, Chicago, Cleveland, and North Carolina. RJRT's operating company contribution was $1.45 billion, $30 million higher than 1995 primarily due to favorable pricing and lower manufacturing costs, partially offset by lower volume and higher marketing and merchandising spending. Reynolds International delivered 10% volume growth in 1996. The growth was essentially across all regions and can be attributed to Reynolds International's overall focus on the right brands in the right markets. Revenues increased 12% over 1995 to $3.6 billion, primarily due to the 10% volume increase ($255 million), pricing ($200 million) and acquisitions ($58 million), partially offset by the impact of unfavorable foreign currency translation ($150 million). The 10% volume gain was driven by Reynolds International's three flagship brands: Camel, Winston and Salem. The three combined to account for 8% of the 10% increase. Individually, Camel, fueled by the introduction of new Camel Lights, grew 2%. Winston, Reynolds International's largest brand, grew 12% and Salem, aided by the introduction of Salem Pianissimo, grew 10%. Regionally, the major contributions to volume growth were in the CIS and Baltics, Central Europe, Africa, Japan, and to a lesser extent, Western Europe. In Western Europe, volume was up 2% over 1995 driven by the rollout of Camel Lights, which helped abate the decline in the full-flavor segment. Camel Lights became available throughout Western Europe. In the CIS and Baltics, core brands--Camel, Winston, Salem, Magna, North Star and Peter I--grew volume by more than 60%, with each brand recording double-digit volume growth. Total market share grew two share points to almost 15%. In Central Europe, volume grew 55%, mainly in Turkey and Romania. Reynolds International became the number one international cigarette company in Romania, having almost doubled its market share to 15%. In Turkey, market share also almost doubled. In Asia, fueled by the successful introduction of Salem Pianissimo and Premier Pianissimo, Reynolds International became the fastest-growing cigarette company in Japan. Salem Pianissimo is a menthol brand featuring less smoke and less smell and Premier is the non-menthol version. In Africa, volume almost doubled, driven by the successful integration of the Tanzanian business acquired in 1995. Reynolds International's operating company contribution increased 16% or $111 million to $803 million reflecting the volume growth and pricing, partially offset by higher marketing spending, product costs and unfavorable foreign currency translation. GOVERNMENTAL ACTIVITY If the legislation contemplated by the Memorandum discussed in note 10 of the consolidated financial statements ("Note 10") is enacted, RJRT and other cigarette manufacturers would be subject to certain actions taken (or to be taken) by certain governmental regulatory agencies that could be expected to have an adverse effect on cigarette sales. As described in Note 10, RJRT would be prepared to support the enactment of such legislation as part of a comprehensive resolution of a variety of tobacco issues. Nonetheless, in the absence of such legislation, regulatory conditions such as the following remain of significant importance to RJRT. The advertising, sale and use of cigarettes have been under attack by government and health officials in the United States and in other countries for many years, principally due to health concerns about cigarette smoking and environmental tobacco smoke. 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 27 increases in recent years and substantial increases in state and federal excise taxes on cigarettes, these developments have had and will likely continue to have an adverse effect on cigarette sales. Cigarettes are subject to substantial excise taxes in the United States and to similar taxes in many foreign markets. The federal excise tax per pack of 20 cigarettes is currently 24 cents. On August 5, 1997, President Clinton signed H.R. 2015 into law, which will increase the per pack federal cigarette excise tax by 10 cents in fiscal year 2000, and an additional 5 cents in fiscal year 2002. In addition, all states and the District of Columbia impose excise taxes at levels ranging from a low of 2.5 cents in Virginia to a high of $1.00 per pack in Alaska. In 1997, the cigarette tax in ten states was increased by amounts ranging from 2.5 cents to 71 cents per pack. In August 1996, the U.S. Food and Drug Administration (the "FDA") asserted jurisdiction over cigarettes and certain other tobacco products by declaring such products to be medical devices and adopting regulations, first proposed in 1995, on the advertising, promotion and sale of cigarettes. The regulations include a phased-in schedule of effectiveness over a two-year period. The first phase began on February 28, 1997, when regulations establishing 18 as the national minimum age for the sale of cigarettes and requiring age identification from purchasers who appear to be under age 26 became effective. Among other things, the remaining regulations would prohibit or impose stringent limits on a broad range of sales and marketing practices, including bans on sampling, sponsorship by brand name, and distribution of non-tobacco items carrying brand names. The FDA's rules also limit advertising in print and on billboards to black and white text and impose new labeling language. RJRT, together with the four other major domestic cigarette manufacturers and an advertising agency, filed suit in the U.S. District Court for the Middle District of North Carolina (COYNE BEAHM V. UNITED STATES FOOD & DRUG ADMINISTRATION) challenging the regulations. Similar suits were filed in the same court by manufacturers of smokeless tobacco products, by operators of retail stores and by advertising interests. On April 26, 1997, the court ruled on a motion for summary judgment, that based on the facts alleged by the FDA, that agency was not barred from asserting jurisdiction over tobacco but lacked authority to issue certain of the regulations bearing on marketing and advertising. The court immediately certified its decision for appeal to the Fourth Circuit Court of Appeals and stayed the effectiveness of that portion of the regulations which had not yet been implemented pending appeal or further court action. Oral argument on the appeal has been heard, but no decision has been handed down to date. RJRT is unable to predict the ultimate outcome of this litigation seeking to find the FDA's regulations to be unlawful. If the full regulations do go into effect, they could be expected to have an adverse effect on cigarette sales and RJRT. On May 28, 1997, the Federal Trade Commission (the "FTC") issued an unfairness complaint against RJRT, seeking to stop the use of Joe Camel advertising, to require RJRT to undertake certain public education activities and to monitor sales and share of sales of each of RJRT's brands to smokers under the age of 18. On June 17, 1997, RJRT filed suit against the FTC in the Federal District Court for the Middle District of North Carolina, challenging the FTC's action as procedurally improper. The FTC has moved to dismiss the action. In March 1994, the U.S. Occupational Safety and Health Administration ("OSHA") announced proposed regulations that would restrict smoking in the workplace to designated smoking rooms that are separately exhausted to the outside. Although RJRT cannot predict the form or timing of any regulations that may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT expects that many employers who have not already done so would prohibit smoking in the workplace rather than make expenditures necessary to establish designated smoking areas to accommodate smokers. RJRT submitted comments on the proposed regulations during the comment period which closed in February 1996. Because many employers currently do not permit smoking in the workplace, RJRT cannot predict the effect of any regulations that may be adopted, but incremental restrictions on smokers could have an adverse effect on cigarette sales and RJRT. 28 Legislation imposing various restrictions on public smoking has also been enacted in 48 states and many local jurisdictions, and many employers have initiated programs restricting or eliminating smoking in the workplace. Seventeen states have enacted legislation designating a portion of increased cigarette excise taxes to fund either anti-smoking programs, health care programs or cancer research. Federal law prohibits smoking on all domestic airline flights of six hours duration or less and the U.S. Interstate Commerce Commission has banned smoking on buses transporting passengers inter-state. Certain common carriers have imposed additional restrictions on passenger smoking. In July 1996, Massachusetts enacted legislation requiring manufacturers of tobacco products sold in Massachusetts to report yearly, beginning December 15, 1997, the ingredients of each brand sold. The statute also requires the reporting of nicotine yield ratings in accordance with procedures established by the State. The legislation contemplates public disclosure of all ingredients in descending order, a trade-secret disclosure that RJRT believes could damage the competitive position of its brands. RJRT, together with other cigarette manufacturers, filed suit in the U.S. District Court for the District of Massachusetts seeking to have the statute declared null and void and to restrain Massachusetts officials from enforcing it. A similar suit was filed by manufacturers of smokeless tobacco products. The court granted a preliminary injunction that enjoined Massachusetts officials from enforcing the law relating to ingredient reporting. Both the manufacturers and the State are now seeking summary judgment from the district court. Oral argument is scheduled for April 1998. In 1997, Texas enacted legislation very similar to the Massachusetts law, except that the Texas statute authorizes confidentiality of trade secrets and its annual reporting requirements begin in 1998. RJRT believes that regulations proposed by Texas, however, are inadequate to prevent inadvertent disclosure of its trade secrets. Together with other cigarette manufacturers, RJRT has provided comments on the regulations. Final regulations are expected from Texas by mid-year. RJRT is unable to predict whether final regulations will provide adequate security for its trade secrets. The California state legislature adopted two bills removing obstacles to product liability actions against tobacco product manufacturers. One bill removed barriers to public entities bringing such suits based on defectiveness of the product, fraud or misconduct. The second removed tobacco products from the list of inherently unsafe widely-used consumer products for which manufacturers received immunity from product liability actions. These legislative actions could result in an increase in the cases brought against RJRT. In 1997, Minnesota enacted legislation that would require manufacturers of tobacco products to report certain constituents of tobacco smoke for each brand sold. Minnesota has not implemented the statute. RJRT is unable to predict whether or when this statute will be enforced. 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 1997, the Canadian Parliament passed legislation permitting their Health Department to adopt new regulations that may substantially limit cigarette advertising and sponsorships. The regulations are expected to be promulgated by the end of 1998. Also in 1997, the EU Council of Health Ministers approved a directive banning all tobacco advertising (except at retail point-of-sale) and sponsorships. The EU Parliament may approve the directive this year, and member countries will have three years to enact conforming legislation. 29 In 1990, RJRT and other U.S. cigarette manufacturers, through The Tobacco Institute, announced a tobacco industry initiative to assist retailers in enforcing minimum age laws on the sale of cigarettes, to support the enactment of state laws requiring the adult supervision of cigarette vending machines in places frequented by minors, to seek the uniform establishment of 18 as the minimum age for the purchase of cigarettes in all states, to distribute informational materials to assist parents in combatting peer pressure on their children to smoke, and to limit voluntarily certain cigarette advertising and promotional practices. In 1995, wholesalers, retailers and the tobacco industry including RJRT formed the Coalition for Responsible Tobacco Retailing and launched a new program ("We Card") focused on stopping underage access to cigarettes. In 1992, the Alcohol, Drug Abuse and Mental Health Act was signed into law. This act requires states to adopt a minimum age of 18 for purchases of tobacco products and to establish a system to monitor, report and reduce the illegal sale of tobacco products to minors in order to continue receiving federal funding for mental health and drug abuse programs. In January 1996, regulations implementing this legislation were announced by the Department of Health and Human Services. In 1964, the Report of the Advisory Committee to the Surgeon General of the U.S. Public Health Service concluded that cigarette smoking was a health hazard of sufficient importance to warrant appropriate remedial action. Since 1966, federal law has required a warning statement on cigarette packaging. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States. Cigarette advertising in other media in the United States is required to include information with respect to the "tar" and nicotine yield content of cigarettes, as well as a warning statement. During the past three decades, various laws affecting the cigarette industry have been enacted. In 1984, Congress enacted the Comprehensive Smoking Education Act (the "Smoking Education Act"). Among other things, the Smoking Education Act: (i) establishes an interagency committee on smoking and health that is charged with carrying out a program to inform the public of any dangers to human health presented by cigarette smoking; (ii) requires a series of four health warnings to be printed on cigarette packages and advertising on a rotating basis; (iii) increases type size and area of the warning required in cigarette advertisements; and (iv) requires that cigarette manufacturers provide annually, on a confidential 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. Since the initial report in 1964, the Secretary of Health, Education and Welfare (now the Secretary of Health and Human Services) and the Surgeon General have issued a number of other reports which purport to find the nicotine in cigarettes addictive and to link cigarette smoking and exposure to cigarette smoke with certain health hazards, including various types of cancer, coronary heart disease and chronic obstructive lung disease. These reports have recommended various governmental measures to reduce the incidence of smoking. It is not possible to determine what additional federal, state, local or foreign legislation or regulations relating to smoking or cigarettes will be enacted or to predict any resulting effect thereof on RJRT, Reynolds International or the cigarette industry generally, but such legislation or regulations could have an adverse effect on RJRT, Reynolds International or the cigarette industry generally. For a description of certain litigation affecting RJRT and its affiliates (including RJRN Holdings and RJRN) and indemnitees, see note 10 to the consolidated financial statements. FOOD The food business is conducted by Nabisco through its Domestic Food Group and International Food Group. The Domestic Food Group is comprised of Nabisco Biscuit and the U.S. Foods Group. The U.S. 30 Foods Group includes the Sales & Integrated Logistics Group, Specialty Products, LifeSavers, Planters, Tablespreads and Food Service organizations. The International Food Group is comprised of Nabisco Ltd and Nabisco International, Inc. 1997 VS. 1996. The Domestic Food Group reported net sales of $6.1 billion, a decrease of 3% from the 1996 level of $6.3 billion, with Nabisco Biscuit lower by 4% and the U.S. Foods Group lower by 1% compared with last year. Nabisco Biscuit's net sales decline was primarily due to volume declines in SnackWell's and breakfast snacks, which more than offset volume increases in other core cookie and cracker brands. The U.S. Foods Group's net sales decrease was primarily due to lower sales volume for tablespreads, condiments and certain other products and the impact from the sale of certain domestic regional brands in the second quarter of 1997, partially offset by higher volume for nuts and certain confectionery products. The International Food Group reported net sales of $2.6 billion in 1997, slightly higher compared to 1996. The increase reflects improved results in Asia and Mexico, partially offset by volume declines in Brazil, resulting from aggressive competitive activity in the biscuit and milk categories, and in Argentina, due to competitive pricing pressures. Nabisco's operating company contribution grew 7% to $1.3 billion in 1997. Nabisco Biscuit, the largest division of Nabisco, grew operating company contribution 15% to $691 million, primarily due to restructuring-driven margin improvements and ongoing productivity initiatives. The U.S. Foods Group's operating company contribution grew only 2% primarily due to reduced sales of higher margin products which more than offset the benefits of restructuring efficiencies. The International Food Group's operating company contribution declined 7% for 1997 primarily as a result of lower volume in Brazil and lower earnings in Argentina due to competitive pressures, partially offset by the improved results in Mexico and Asia and productivity-driven earnings improvements in Canada. Notwithstanding the improved earnings, Nabisco's results reflected a decline in market share in a number of core brands, less market acceptance of certain new products and in-store performance difficulties experienced in Nabisco Biscuit's direct delivery system. Nabisco's results also reflected economic and competitive problems in certain international markets and underperformance at certain units. Nabisco Holdings is undertaking a number of initiatives designed to improve performance, including improvements in marketing, changes in training, compensation and recruiting of personnel at Nabisco Biscuit's delivery system, continued emphasis on increased productivity, reevaluation of how new products are identified and developed, accelerated international marketing of core United States brands, and consideration of disposing of underperforming units that do not fit into Nabisco Holdings' long-term plans. Implementation of the changes will take time and Nabisco Holdings is unable to predict the effect of the initiatives on performance in 1998. 1996 VS. 1995. Nabisco Holdings reported net sales of $8.9 billion in 1996, an increase of 7% from the 1995 level of $8.3 billion, with the Domestic Food Group up 5% and the International Food Group up 13%. Within the Domestic Food Group, Nabisco Biscuit's net sales increased 3% versus the prior year, primarily attributable to volume increases in the Oreo, Ritz, Air Crisps and Chips Ahoy! brands, partially offset by lower volume for SnackWell's and Fig Newtons. The U.S. Foods Group's net sales increased 8%, primarily due to higher volumes for Planters nuts and the net impact of the October 1995 Parkay acquisition, offset by the impact of the 1995 product line disposals. Planters nuts volume increase resulted from gains in the warehouse club and mass merchandising channels and a more stable competitive environment in the nut market. The International Food Group's net sales increase for 1996 was primarily driven by 1995 business acquisitions, principally Primo in Canada and Royal Beech-Nut in South Africa, and 1996 business acquisitions in Latin America. Nabisco Holdings' operating company contribution of $1.2 billion in 1996 was 9% higher than last year's level, with the Domestic Food Group up 10% and the International Food Group up 4%. The 1995 period includes a net gain of $11 million from the sale of the Ortega Mexican food ($18 million gain in the U.S. Foods Group) and New York Style Bagel Chip ($7 million loss in the International Food Group) businesses. The increase in operating company contribution for the Domestic Food Group was primarily a result of the profit impact from higher net sales and lower advertising expenses, partially offset by higher 31 trade promotion expenses and higher fixed manufacturing and distribution expenses. The increase in the International Food Group's operating company contribution was primarily due to the profit impact from business acquisitions. RESTRUCTURING EXPENSE Restructuring charges of $301 million and $154 million were incurred during 1997 and 1995, respectively, to streamline operations and improve the profitability of the tobacco operations. Restructuring charges of $428 million were incurred in 1996 to streamline operations and improve the profitability of the food operations. The programs included workforce reductions and product line and facility rationalizations and are discussed further in note 2 to the consolidated financial statements. Approximately $180 million of the 1997 restructuring charge, $240 million of the 1996 restructuring charge and substantially all of the 1995 restructuring charge is cash-related. The 1997 restructuring is expected to generate annual savings of approximately $155 million in the year 2000 and thereafter. The 1996 restructuring is expected to generate approximately $175 million in annual savings beginning in 1998. OTHER INCOME (EXPENSE), NET Consolidated other income (expense), net for 1995 includes a pre-tax charge of approximately $103 million ($67 million after-tax) for fees and expenses incurred in connection with an exchange of debt between RJRN and Nabisco. INCOME TAXES The effective income tax rate on an ongoing basis for 1997, 1996 and 1995 was 42.4%, 43.7% and 43.4%, respectively. The lower effective income tax rate for 1997 primarily reflects lower taxes on foreign earnings. NET INCOME PER SHARE (DILUTED)
1997 1996 1995 --------- --------- --------- Reported.......................................... $ 1.03 $ 1.74 $ 1.53 Ongoing........................................... $ 2.72 $ 2.62 $ 2.21
Net income per share was calculated pursuant to the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share, which was adopted in the fourth quarter of 1997. All prior year amounts have been restated. The diluted net income per share amounts are essentially the same as the fully diluted net income per share amounts as computed under Accounting Principles Board Opinion No. 15, Earnings per Share. Excluding the estimated impact of reducing excess trade inventories, ongoing diluted net income per share would have been approximately $2.95, a 13% increase over 1996. 32 LIQUIDITY AND FINANCIAL CONDITION DECEMBER 31, 1997 Net cash flows from operating activities for 1997 increased by $74 million to $1.57 billion. The increase in net cash flows from operating activities primarily reflects reduced working capital requirements resulting from the decision to reduce excess trade inventories in 1997 and special leaf inventory programs in 1996, partially offset by tobacco litigation settlement payments and higher restructuring and related payments in 1997. Net cash flows used in investing activities for 1997 were $686 million, a decrease of $91 million from the 1996 level of $777 million. The decrease reflects a reduction in acquisitions of businesses from the prior year, partially offset by an increase in capital expenditures and a repurchase of Nabisco Holdings' Class A common stock during 1997. Net cash flows used in financing activities increased to $751 million in 1997 from $689 million in 1996. The increase was primarily due to an increase in dividends paid and higher debt repayments during 1997, partially offset by the repurchase of RJRN Holdings' common stock in 1996. Free cash flow, another measure used by management to evaluate liquidity and financial condition, represents cash available for the repayment of debt and certain other corporate purposes such as common stock dividends, stock repurchases and acquisitions. It is essentially net cash flow from operating activities and investing activities per the Consolidated Statements of Cash Flows, adjusted for acquisitions and divestitures of businesses, less preferred stock dividends. Free cash flow resulted in inflows of $869 million and $748 million for 1997 and 1996, respectively. The increase in free cash flow from 1996 to 1997 primarily reflects the increase in net cash flows from operating activities and lower preferred stock dividend payments as a result of the Series C preferred stock conversion, partially offset by a lower level of proceeds from the disposition of certain assets compared to the prior year. In May 1997, 26,675,000 shares of Series C preferred stock mandatorily converted into 53,350,000 shares of common stock. In July 1997, RJRN repaid commercial paper borrowings with proceeds from the issuance of $150 million 8 1/4% notes due 2004 and $200 million 8 1/2% notes due 2007. In August 1997, Nabisco issued $200 million of notes due 2009. In December 1997, Nabisco refinanced $432 million of 8.3% notes due 1999 and $541 million of 8% notes due 2000 with short-term borrowings. These short-term borrowings were refinanced in January 1998 with 6.0%-6 3/8% long-term notes due 2011-2035. Fixed rate debt comprised approximately 77% of total consolidated debt at December 31, 1997. For a discussion of the potential impact on the financial condition of RJRN Holdings and RJRN of the proposed resolution of national regulatory and litigation issues and various litigation settlements, see note 10 to the consolidated financial statements. RJRN maintains a three-year $2.75 billion revolving credit facility, of which no borrowings were outstanding at December 31, 1997, and a 364-day $568 million credit facility primarily to support commercial paper issuances, of which the entire facility was available at December 31, 1997. In June 1997, the maturity of the revolving credit facility was extended to June 2000 and the 364-day credit facility was renewed to June 1998. The commitments under the revolving credit facility decline to approximately $2.2 billion in the final year. The revolving credit facility also provides for the issuance of up to $800 million of letters of credit, of which $362 million was issued at December 31, 1997. Availability under the revolving credit facility is reduced by the amount of any borrowings outstanding and letters of credit issued under the facility and by the amount of outstanding commercial paper in excess of $568 million. During 1997, RJRN Holdings and RJRN also amended certain terms of these credit agreements to accommodate the adoption of a policy of increased cash returns to shareholders, a restructuring charge and related adjustments to streamline the operations of the domestic and international tobacco businesses, and the settlement of certain litigation. 33 Nabisco maintains a five-year $1.5 billion revolving credit facility, of which no borrowings were outstanding at December 31, 1997, and a 364-day $1.381 billion credit facility primarily to support commercial paper issuances, all of which was completely utilized at December 31, 1997. At the end of the 364-day period, any borrowings outstanding under the 364-day credit facility are convertible into a three-year term loan at Nabisco's option. In October 1997, the maturity under the revolving credit facility was extended to October 2002 and the 364-day credit facility was renewed to October 1998. The commitments under the revolving credit facility decline to approximately $1.46 billion in the final year. The revolving credit facility also provides for the issuance of up to $300 million of letters of credit, of which none was issued at December 31, 1997. Availability under the revolving credit facility is reduced by the amount of any borrowings outstanding and letters of credit issued under the facility and by the amount of outstanding commercial paper in excess of $1.381 billion. At December 31, 1997, $890 million was available under the revolving credit facility. Distributions and the payment of dividends by RJRN Holdings are subject to certain restrictions under certain financing agreements and debt instruments of RJRN Holdings and RJRN and their subsidiaries. The financing agreements generally restrict cumulative common and preferred dividends and distributions, limit the ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell or dispose of certain assets and certain subsidiaries' stock, issue certain equity securities and engage in certain mergers or consolidations. RJRN Holdings and RJRN believe that they are currently in compliance with all covenants and restrictions imposed by the terms of their indebtedness. Nabisco's credit agreements, among other things, generally restrict common and preferred dividends and distributions, limit loans and advances by Nabisco Holdings and its subsidiaries to RJRN, limit the ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, acquire, sell or dispose of certain assets and securities and engage in certain mergers or consolidations. Nabisco Holdings and Nabisco believe that they are currently in compliance with all covenants and restrictions imposed by the terms of their indebtedness. Management of RJRN Holdings and its subsidiaries is continuing to review various strategic transactions, including but not limited to, acquisitions, divestitures, mergers and joint ventures. Management is also exploring ways to increase efficiency and productivity, and to reduce the cost structures of its respective businesses. No assurance may be given that any such transactions will be announced or completed. See note 9 to the consolidated financial statements for management's policy regarding distributions of capital stock of its subsidiaries. Capital expenditures were $763 million, $741 million and $744 million for 1997, 1996 and 1995, respectively. The increased level of capital expenditures in 1997 was primarily due to increased capital investments for Reynolds International (notably in Russia). The current level of expenditures planned for 1998 is expected to be in the range of approximately $650 million to $700 million (approximately 52% Food and 48% 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 RJRN Holdings' operating subsidiaries. RJRN Holdings' subsidiaries have operations in many countries which utilize many different functional currencies. Significant foreign currency net investments are located in Canada, Spain, Argentina, Puerto Rico, Germany, Brazil, Mexico, Malaysia, Venezuela and Hong Kong. RJRN Holdings' subsidiaries also have significant exposure to foreign exchange transactions in currencies other than their functional currencies. Exposures primarily include the U.S. dollar, German mark, French franc, British pound, Italian lira, Japanese yen, Swiss franc, Hong Kong dollar, Singapore dollar, Finnish markka, Canadian dollar, Spanish peseta, Dutch guilder, Brazilian real, Malaysian ringgitt, Indonesian rupiah, Russian rouble, Romanian leu, and Turkish lira. Whenever possible, RJRN Holdings' policy is to net exposures and utilize natural offsets to minimize the effects of foreign currency transactions on cash flows; otherwise, consideration is given to foreign currency arrangements to protect RJRN Holdings and its subsidiaries from risk that the eventual dollar cash flows resulting from transactions with international parties will be adversely 34 affected by changes in exchange rates. In addition, consideration is given to foreign currency arrangements to hedge foreign currency exposures on existing assets and liabilities, including certain international debt. At December 31, 1997, there was $1.982 billion of accumulated and undistributed income of foreign subsidiaries. No applicable U.S. federal deferred income taxes have been provided because management intends to reinvest these earnings abroad indefinitely to fund international acquisitions, new products and other opportunities in foreign markets. YEAR 2000 The year 2000 issue stems from computer applications that were written using two digits rather than four digits to define the applicable year. The issue is whether computer systems will properly interpret date-sensitive information when the year changes to 2000. RJRN Holdings recognizes the issues associated with the year 2000 problem and the need to ensure that its operations will not be adversely impacted by year 2000 software failures. Comprehensive reviews of all systems and applications, including key suppliers and vendors, are being conducted, implementation plans to resolve any issues are being formulated and certain corrective actions have commenced. RJRN Holdings expects its year 2000 compliance programs, which began in 1996, to be completed in all material respects by the end of 1999. The total cost of achieving year 2000 compliance is estimated to be approximately $90 million. All modification costs are expensed as incurred. Through December 31, 1997, approximately $19 million had been expensed. The remainder will be incurred in 1998 and 1999. LITIGATION For a description of certain litigation affecting RJRT and its affiliates (including RJRN Holdings and RJRN) and indemnitees, see note 10 to the consolidated financial statements. ENVIRONMENTAL MATTERS The U.S. Government and various state and local governments have enacted or adopted laws and regulations concerning protection of the environment. The regulations promulgated by the Environmental Protection Agency and other governmental agencies under various statutes have resulted in, and will likely continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities. In April 1995, RJRN Holdings was named a potentially responsible party (a "PRP") with certain third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to a superfund site at which a former subsidiary of RJRN had operations. RJRN has also been named in an insurance coverage suit brought by another company named as a PRP at this site. In this lawsuit, DEL MONTE FRESH PRODUCE V. FIREMEN'S FUND INSURANCE, filed August 13, 1997 in the First Circuit Court of the State of Hawaii, the plaintiff seeks declaratory judgment that it is entitled to insurance coverage for the site or, in the alternative, that RJRN is obligated to indemnify Del Monte under the terms of the agreement by which RJRN sold that company in 1989. Certain subsidiaries of RJRN Holdings and RJRN have also been named as PRPs with third parties or may have indemnification obligations with respect to a number of additional sites. Liability under CERCLA is joint and several. RJRN Holdings' and RJRN's subsidiaries have been engaged in a continuing program to assure compliance with U.S., state and local laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and to estimate the cost of resolving these CERCLA matters, RJRN Holdings and RJRN do not expect such expenditures or other costs to have a material adverse effect on the business or financial condition of RJRN Holdings and RJRN and their subsidiaries taken as a whole. 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of RJRN Holdings due to adverse changes in financial and commodity market prices and rates. RJRN Holdings is exposed to market risk in the areas of foreign currency exchange rates, interest rates and commodity prices. These exposures are directly related to its international operations, its use of agricultural commodities in its food operations and its normal investing and funding activities. RJRN Holdings has established various policies and procedures to manage its exposure to market risks, including the use of financial and commodity derivatives, which are highly correlated to underlying exposures. See note 11 to the consolidated financial statements for further information regarding the use of financial derivatives. RJRN Holdings estimates its market risk due to changes in foreign currency rates, interest rates and commodity prices utilizing a financial model called Value at Risk ("VaR"). VaR is a statistical measure of the potential loss in terms of fair value, cash flows or earnings of market-risk sensitive instruments over a one-year horizon using a 95% confidence interval for changes in market rates and prices. FOREIGN EXCHANGE AND INTEREST RATE EXPOSURES Upon reviewing its derivatives and other foreign currency and interest rate instruments, based on historical foreign currency rate movements and the fair value of market-rate sensitive instruments at year-end, RJRN Holdings does not believe that near term changes in foreign currency or interest rates will have a material impact on its future earnings, fair values or cash flows. COMMODITY PRICE EXPOSURE Based on either Nabisco Holdings' derivative commodity instruments or its net commodity exposure (derivatives plus physical contracts less anticipated future consumption), a near-term change in commodity prices, based on historical commodity price movements, would not have a material impact on future earnings, fair values or cash flows of RJRN Holdings. ------------------------ The foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements, particularly with respect to capital expenditures, the year 2000 problem, market risk in the areas of foreign currency exchange rates, interest rates and commodity prices, restructuring savings and the impact of proposed national legislation and various litigation settlements, which reflect management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, the effect on financial performance and future events of competitive pricing for products, success of new product innovations and acquisitions, local economic conditions and the effects of currency fluctuations in countries in which RJRN Holdings and its subsidiaries do business, the effects of domestic and foreign government regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in the case of the tobacco business, litigation and related legislative and regulatory developments. For additional information concerning factors affecting future events and policies and RJRN Holdings' performance, see Part I, Items 1 through 3 and Part II, Item 5 of this report. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the Index to Financial Statements and Financial Statement Schedules on page 41 for the required information. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS Item 10 is hereby incorporated by reference to RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to March 30, 1998. Reference is also made regarding the executive officers of the Registrants to "Executive Officers of the Registrants" following Item 4 of Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION Item 11 is hereby incorporated by reference to RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to March 30, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 12 is hereby incorporated by reference to RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to March 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 13 is hereby incorporated by reference to RJRN Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to March 30, 1998. 37 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 SINCE THE THIRD QUARTER 1997 Form 8-K dated January 16, 1998, reporting on the settlement of a healthcare cost recovery suit in the State of Texas and filing as exhibits the related settlement agreement and press release. (C) EXHIBITS See Exhibit Index. (D) FINANCIAL STATEMENT SCHEDULES. See Index to Financial Statements and Financial Statement Schedules.
38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on March 27, 1998. RJR NABISCO HOLDINGS CORP. BY: /S/ STEVEN F. GOLDSTONE ----------------------------------------------- (Steven F. Goldstone) Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1998.
SIGNATURE TITLE - -------------------------------------------------- -------------------------------------------------- /s/ STEVEN F. GOLDSTONE Chairman and Chief Executive Officer (principal --------------------------------------- executive officer) (Steven F. Goldstone) /s/ DAVID B. RICKARD Senior Vice President and Chief Financial Officer --------------------------------------- (principal financial officer) (David B. Rickard) /s/ RICHARD G. RUSSELL Senior Vice President and Controller (principal --------------------------------------- accounting officer) (Richard G. Russell) * Director --------------------------------------- (John T. Chain, Jr.) * Director --------------------------------------- (Julius L. Chambers) * Director --------------------------------------- (John L. Clendenin) * Director --------------------------------------- (L. Dennis Kozlowski) * Director --------------------------------------- (Ray J. Groves) * Director --------------------------------------- (H. Eugene Lockhart) * Director --------------------------------------- (Theodore E. Martin) * Director --------------------------------------- (John G. Medlin, Jr.) * Director --------------------------------------- (Rozanne L. Ridgway)
*By: /s/ WILLIAM L. ROSOFF ---------------------------------------------- William L. Rosoff Attorney-in-Fact
39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on March 27, 1998. RJR NABISCO, INC. BY: /S/ STEVEN F. GOLDSTONE ----------------------------------------------- (Steven F. Goldstone) Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1998.
SIGNATURE TITLE - -------------------------------------------------- -------------------------------------------------- /s/ STEVEN F. GOLDSTONE Chairman and Chief Executive Officer (principal --------------------------------------- executive officer) (Steven F. Goldstone) /s/ DAVID B. RICKARD Senior Vice President and Chief Financial Officer --------------------------------------- (principal financial officer) (David B. Rickard) /s/ RICHARD G. RUSSELL Senior Vice President and Controller (principal --------------------------------------- accounting officer) (Richard G. Russell) * Director --------------------------------------- (John T. Chain, Jr.) * Director --------------------------------------- (Julius L. Chambers) * Director --------------------------------------- (John L. Clendenin) * Director --------------------------------------- (Ray J. Groves) * Director --------------------------------------- (L. Dennis Kozlowski) * Director --------------------------------------- (H. Eugene Lockhart) * Director --------------------------------------- (Theodore E. Martin) * Director --------------------------------------- (John G. Medlin, Jr.) * Director --------------------------------------- (Rozanne L. Ridgway)
*By: /s/ WILLIAM L. ROSOFF ---------------------------------------------- William L. Rosoff Attorney-in-Fact
40 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE --------- FINANCIAL STATEMENTS Report of Deloitte & Touche LLP, Independent Auditors................................................... F-1 Report of Management's Responsibility for Financial Statements.......................................... F-1 Consolidated Statements of Income--Years Ended December 31, 1997, 1996 and 1995......................... F-2 Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996 and 1995......................................................................................... F-3 Consolidated Balance Sheets--December 31, 1997 and 1996................................................. F-4 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1997, 1996 and 1995........... F-6 Notes to Consolidated Financial Statements.............................................................. F-7
FINANCIAL STATEMENT SCHEDULES For the years ended December 31, 1997, 1996 and 1995: Schedule I --Condensed Financial Information of Registrants................... S-1
41 REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS RJR Nabisco Holdings Corp. RJR Nabisco, Inc.: We have audited the accompanying consolidated balance sheets of RJR Nabisco Holdings Corp. ("RJRN Holdings") and RJR Nabisco, Inc. ("RJRN") as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules of RJRN Holdings and RJRN as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 as listed in the accompanying index to the financial statements. These financial statements and financial statement schedules are the responsibility of the Companies management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of RJRN Holdings and RJRN at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 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. /S/ DELOITTE & TOUCHE LLP New York, New York January 26, 1998, (March 3, 1998 as to note 10) REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements presented in this report have been prepared by management in accordance with generally accepted accounting principles using, where appropriate, management's best estimates and judgment. Management maintains a system of internal controls to provide reasonable assurance that the Company's assets are safeguarded and transactions are executed as authorized and properly recorded. The system includes established policies and procedures, a program of internal audits, management reviews and careful selection and training of qualified personnel. The audit committee is comprised solely of outside directors. It meets periodically with management, the internal auditors, and the independent auditors, Deloitte & Touche LLP, to discuss and address internal accounting control, auditing and financial reporting matters. Both independent and internal auditors have unrestricted access to the audit committee. /S/ STEVEN F. GOLDSTONE - ---------------------------- Chairman and Chief Executive Officer /S/ DAVID B. RICKARD - ---------------------------- Senior Vice President and Chief Financial Officer F-1 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31 1997 1996 1995 - ----------------------------------------------- -------------------------- -------------------------- -------------------------- RJRN RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN HOLDINGS RJRN ------------ ------------ ------------ ------------ ------------ ------------ NET SALES*..................................... $ 17,057 $ 17,057 $ 17,063 $ 17,063 $ 16,008 $ 16,008 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Cost of products sold*....................... 7,847 7,847 7,973 7,973 7,468 7,468 Selling, advertising, administrative and general expenses........................... 5,881 5,888 5,774 5,779 5,412 5,412 Tobacco settlement expense (note 10)......... 359 359 -- -- -- -- Amortization of trademarks and goodwill...... 634 634 636 636 636 636 Restructuring expense........................ 301 301 428 428 154 154 ------------ ------------ ------------ ------------ ------------ ------------ OPERATING INCOME......................... 2,035 2,028 2,252 2,247 2,338 2,338 Interest and debt expense...................... (912) (817) (927) (832) (899) (872) Other income (expense), net.................... (107) (107) (126) (127) (173) (175) ------------ ------------ ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES............... 1,016 1,104 1,199 1,288 1,266 1,291 Provision for income taxes..................... 530 566 585 619 580 594 ------------ ------------ ------------ ------------ ------------ ------------ INCOME BEFORE MINORITY INTEREST IN INCOME OF NABISCO HOLDINGS.................... 486 538 614 669 686 697 Less minority interest in income of Nabisco Holdings..................................... 84 84 3 3 59 59 ------------ ------------ ------------ ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM................................... 402 454 611 666 627 638 Extraordinary item--loss on early extin- guishments of debt, net of income taxes and minority interest............................ (21) (21) -- -- (16) (16) ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME............................... $ 381 $ 433 $ 611 $ 666 $ 611 $ 622 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ BASIC NET INCOME PER SHARE: Income before extraordinary item............. $ 1.11 $ 1.75 $ 1.59 Net income................................... $ 1.05 $ 1.75 $ 1.54 DILUTED NET INCOME PER SHARE: Income before extraordinary item............. $ 1.09 $ 1.74 $ 1.58 Net income................................... $ 1.03 $ 1.74 $ 1.53 DIVIDENDS PER SHARE: Common stock................................. $ 2.05 $ 1.85 $ 1.50 Series C preferred stock..................... $ 2.25 $ 6.01 $ 6.01
- ------------------------ * Excludes excise taxes as follows: 1997--$3.599 billion, 1996--$3.852 billion and 1995--$3.832 billion. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-2 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31 1997 1996 1995 - -------------------------------------------------------------- ---------------------- ---------------------- ----------- RJRN RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN HOLDINGS ----------- --------- ----------- --------- ----------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income.................................................. $ 381 $ 433 $ 611 $ 666 $ 611 ----------- --------- ----------- --------- ----------- Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization............................. 1,138 1,138 1,174 1,174 1,171 Deferred income tax benefit............................... (183) (184) (120) (114) (172) Extraordinary item........................................ 43 43 -- -- 29 Tobacco settlement expense, net of cash payments.......... 226 226 -- -- -- Restructuring and restructuring-related expenses, net of cash payments........................................... 168 168 257 257 (53) Other changes that provided (used) cash: Accounts and notes receivable......................... 208 216 (77) (66) (351) Inventories........................................... (40) (40) (135) (135) 159 Accounts payable and accrued liabilities, including income taxes........................................ (270) (278) (310) (283) 145 Other, net............................................ (102) (100) 95 87 126 ----------- --------- ----------- --------- ----------- Total adjustments..................................... 1,188 1,189 884 920 1,054 ----------- --------- ----------- --------- ----------- Net cash flows from operating activities.................. 1,569 1,622 1,495 1,586 1,665 ----------- --------- ----------- --------- ----------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Capital expenditures........................................ (763) (763) (741) (741) (744) Acquisitions of businesses.................................. (46) (46) (189) (189) (429) Divestitures of businesses and certain assets............... 145 145 153 153 237 Net proceeds from issuance (repurchases) of Nabisco Hold- ings' common stock........................................ (22) (22) -- -- 1,201 ----------- --------- ----------- --------- ----------- Net cash flows from (used in) investing activities........ (686) (686) (777) (777) 265 ----------- --------- ----------- --------- ----------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................... 787 787 34 34 2,324 Repayments of long-term debt................................ (1,181) (1,181) (216) (216) (1,285) Increase (decrease) in short-term borrowings................ 358 358 249 249 (2,500) Repurchase of common stock.................................. -- -- (100) -- -- Dividends paid on common and preferred stock................ (755) (34) (716) (30) (598) Financing and advisory fees paid............................ -- -- -- -- (114) Other, net, including intercompany transfers and payments... 40 (733) 60 (816) 50 ----------- --------- ----------- --------- ----------- Net cash flows used in financing activities............... (751) (803) (689) (779) (2,123) ----------- --------- ----------- --------- ----------- Effect of exchange rate changes on cash and cash equivalents.. (36) (36) (11) (11) 4 ----------- --------- ----------- --------- ----------- Net change in cash and cash equivalents................... 96 97 18 19 (189) Cash and cash equivalents at beginning of period.............. 252 251 234 232 423 ----------- --------- ----------- --------- ----------- Cash and cash equivalents at end of period.................... $ 348 $ 348 $ 252 $ 251 $ 234 ----------- --------- ----------- --------- ----------- ----------- --------- ----------- --------- ----------- Income taxes paid, net of refunds............................. $ 652 $ 690 $ 693 $ 727 $ 583 Interest paid................................................. $ 895 $ 800 $ 913 $ 794 $ 788 YEARS ENDED DECEMBER 31 - -------------------------------------------------------------- RJRN --------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income.................................................. $ 622 --------- Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization............................. 1,171 Deferred income tax benefit............................... (173) Extraordinary item........................................ 29 Tobacco settlement expense, net of cash payments.......... -- Restructuring and restructuring-related expenses, net of cash payments........................................... (53) Other changes that provided (used) cash: Accounts and notes receivable......................... (344) Inventories........................................... 159 Accounts payable and accrued liabilities, including income taxes........................................ 125 Other, net............................................ 163 --------- Total adjustments..................................... 1,077 --------- Net cash flows from operating activities.................. 1,699 --------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Capital expenditures........................................ (744) Acquisitions of businesses.................................. (429) Divestitures of businesses and certain assets............... 237 Net proceeds from issuance (repurchases) of Nabisco Hold- ings' common stock........................................ 1,201 --------- Net cash flows from (used in) investing activities........ 265 --------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................... 2,324 Repayments of long-term debt................................ (1,285) Increase (decrease) in short-term borrowings................ (2,500) Repurchase of common stock.................................. -- Dividends paid on common and preferred stock................ (15) Financing and advisory fees paid............................ (114) Other, net, including intercompany transfers and payments... (555) --------- Net cash flows used in financing activities............... (2,145) --------- Effect of exchange rate changes on cash and cash equivalents.. 4 --------- Net change in cash and cash equivalents................... (177) Cash and cash equivalents at beginning of period.............. 409 --------- Cash and cash equivalents at end of period.................... $ 232 --------- --------- Income taxes paid, net of refunds............................. $ 583 Interest paid................................................. $ 784
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31 1997 1996 - ---------------------------------------------------------------------- ---------------------- ---------------------- RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN ----------- --------- ----------- --------- ASSETS Current assets: Cash and cash equivalents........................................... $ 348 $ 348 $ 252 $ 251 Accounts and notes receivable, net.................................. 1,122 1,118 1,418 1,413 Inventories: Finished products................................................. 816 816 830 830 Leaf tobacco...................................................... 1,184 1,184 1,161 1,161 Raw materials..................................................... 226 226 234 234 Other............................................................. 391 391 411 411 ----------- --------- ----------- --------- Total inventories................................................. 2,617 2,617 2,636 2,636 ----------- --------- ----------- --------- Prepaid expenses and excise taxes................................... 538 538 445 445 ----------- --------- ----------- --------- TOTAL CURRENT ASSETS............................................ 4,625 4,621 4,751 4,745 ----------- --------- ----------- --------- Property, plant and equipment--at cost: Land and land improvements........................................ 324 324 323 323 Buildings and leasehold improvements.............................. 2,002 2,002 1,974 1,974 Machinery and equipment........................................... 6,299 6,299 5,936 5,936 Construction-in-process........................................... 554 554 604 604 ----------- --------- ----------- --------- Total property, plant and equipment............................... 9,179 9,179 8,837 8,837 Less accumulated depreciation......................................... 3,240 3,240 3,002 3,002 ----------- --------- ----------- --------- Property, plant and equipment, net................................ 5,939 5,939 5,835 5,835 ----------- --------- ----------- --------- Trademarks, net of accumulated amortization (1997-$2,226, 1996--$1,996)....................................................... 7,759 7,759 8,030 8,030 Goodwill, net of accumulated amortization (1997-$3,277, 1996--$2,901)....................................................... 11,885 11,885 12,268 12,268 Other assets and deferred charges..................................... 470 453 405 382 ----------- --------- ----------- --------- $ 30,678 $ 30,657 $ 31,289 $ 31,260 ----------- --------- ----------- --------- ----------- --------- ----------- ---------
F-4 CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN MILLIONS)
DECEMBER 31 1997 1996 - ---------------------------------------------------------------------- ---------------------- ---------------------- RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN ----------- --------- ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings............................................... $ 361 $ 361 $ 609 $ 609 Accounts payable.................................................... 733 733 691 690 Accrued liabilities................................................. 2,750 2,572 2,684 2,527 Current maturities of long-term debt................................ 33 33 63 63 Income taxes accrued................................................ 268 243 259 235 ----------- --------- ----------- --------- TOTAL CURRENT LIABILITIES....................................... 4,145 3,942 4,306 4,124 ----------- --------- ----------- --------- Long-term debt (less current maturities).............................. 9,456 9,456 9,256 9,256 Other noncurrent liabilities.......................................... 2,969 2,720 3,020 2,669 Deferred income taxes................................................. 3,524 3,460 3,605 3,542 Commitments and contingencies (note 10) RJRN Holdings' obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures*......................................................... 953 -- 954 -- Stockholders' equity: Series C convertible preferred stock (26,675,000 shares issued and outstanding in 1996).............................................. -- -- 3 -- Other preferred stock............................................... 520 -- 534 -- Common stock (1997-327,158,090 shares issued, 1996-- 273,574,308 shares issued).................................................... 3 -- 3 -- Paid-in capital..................................................... 9,668 11,470 10,038 11,890 Retained earnings................................................... -- -- -- -- Cumulative translation adjustments.................................. (391) (391) (221) (221) Treasury stock, at cost............................................. (100) -- (100) -- Other stockholders' equity.......................................... (69) -- (109) -- ----------- --------- ----------- --------- TOTAL STOCKHOLDERS' EQUITY...................................... 9,631 11,079 10,148 11,669 ----------- --------- ----------- --------- $ 30,678 $ 30,657 $ 31,289 $ 31,260 ----------- --------- ----------- --------- ----------- --------- ----------- ---------
- ------------------------------ * The sole asset of the subsidiary trust is the junior subordinated debentures of RJRN Holdings. Upon redemption of the junior subordinated debentures, which have a final maturity of December 31, 2044, the preferred securities will be mandatorily redeemed. The outstanding junior subordinated debentures have an aggregate principal amount of approximately $978 million and an annual interest rate of 10%. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN MILLIONS)
CUMULATIVE CAPITAL PAID-IN RETAINED TRANSLATION TREASURY STOCK* CAPITAL EARNINGS ADJUSTMENTS STOCK ----------- --------- ----------- ----------------- ----------- Balance at January 1, 1995......................... $ 1,501 $ 10,157 $ (364) $ (164) $ -- Net income....................................... 611 Foreign currency translation, net of tax......... (12) Retirement of 324,453 shares of ESOP preferred stock.......................................... (5) Exchange of preferred securities of a subsidiary for 37,956 shares of Series B preferred stock.......................................... (949) (5) Issuance of 543,787 shares of common stock....... 13 Repurchase and cancellation of 67,222 shares of common stock................................... (2) Gain on sale of Nabisco Holdings' common stock... 401 Dividends........................................ (432) (247) ESOP note payments received...................... Other............................................ (22) ----------- --------- ----- ----- ----- Balance at December 31, 1995....................... 547 10,110 -- (176) -- Net income....................................... 611 Foreign currency translation, net of tax......... (45) Retirement of 431,757 shares of ESOP preferred stock.......................................... (7) Issuance of 775,366 shares of common stock....... 18 Repurchase of 3,377,300 shares of common stock... (100) Cancellation of 9,000 shares of common stock..... Dividends........................................ (97) (611) ESOP note payments received...................... Other............................................ 7 ----------- --------- ----- ----- ----- Balance at December 31, 1996....................... 540 10,038 -- (221) (100) Net income....................................... 381 Foreign currency translation, net of tax......... (170) Retirement of 843,970 shares of ESOP preferred stock.......................................... (14) Conversion of 26,675,000 shares of Series C preferred stock into 53,350,000 shares of common stock................................ (3) 3 Issuance of 405,532 shares of common stock....... 10 Cancellation of 171,750 shares of common stock... (5) Dividends........................................ (361) (381) ESOP note payments received...................... Other............................................ (17) ----------- --------- ----- ----- ----- Balance at December 31, 1997....................... $ 523 $ 9,668 $ -- $ (391) $ (100) ----------- --------- ----- ----- ----- ----------- --------- ----- ----- ----- OTHER TOTAL ----------- --------- Balance at January 1, 1995......................... $ (222) $ 10,908 Net income....................................... 611 Foreign currency translation, net of tax......... (12) Retirement of 324,453 shares of ESOP preferred stock.......................................... (5) Exchange of preferred securities of a subsidiary for 37,956 shares of Series B preferred stock.......................................... (954) Issuance of 543,787 shares of common stock....... 13 Repurchase and cancellation of 67,222 shares of common stock................................... (2) Gain on sale of Nabisco Holdings' common stock... 401 Dividends........................................ (679) ESOP note payments received...................... 27 27 Other............................................ 43 21 ----- --------- Balance at December 31, 1995....................... (152) 10,329 Net income....................................... 611 Foreign currency translation, net of tax......... (45) Retirement of 431,757 shares of ESOP preferred stock.......................................... (7) Issuance of 775,366 shares of common stock....... 18 Repurchase of 3,377,300 shares of common stock... (100) Cancellation of 9,000 shares of common stock..... -- Dividends........................................ (708) ESOP note payments received...................... 34 34 Other............................................ 9 16 ----- --------- Balance at December 31, 1996....................... (109) 10,148 Net income....................................... 381 Foreign currency translation, net of tax......... (170) Retirement of 843,970 shares of ESOP preferred stock.......................................... (14) Conversion of 26,675,000 shares of Series C preferred stock into 53,350,000 shares of common stock................................ -- Issuance of 405,532 shares of common stock....... 10 Cancellation of 171,750 shares of common stock... (5) Dividends........................................ (742) ESOP note payments received...................... 36 36 Other............................................ 4 (13) ----- --------- Balance at December 31, 1997....................... $ (69) $ 9,631 ----- --------- ----- ---------
- ------------------------ * Includes $3 million of common stock for each reporting period presented. The number of shares of common stock, par value $.01, authorized at December 31, 1997 was 440,000,000. Common shares outstanding: 1997-323,780,790 and 1996 - 270,197,008. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of RJR Nabisco Holdings Corp. ("RJRN Holdings"), its wholly-owned subsidiary RJR Nabisco, Inc. ("RJRN") and their majority-owned subsidiaries, including 80.7% of Nabisco Holdings Corp. ("Nabisco Holdings") and its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"). The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior years' amounts have been reclassified to conform to the 1997 presentation. Unless otherwise noted, all dollar amounts presented are in millions except per share amounts. CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments that are readily convertible to known amounts of cash and that have original maturities of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. The cost of U.S. tobacco inventories is determined principally under the LIFO method. The cost of remaining inventories is determined principally under the FIFO, specific lot and weighted average methods. In accordance with recognized industry practice, stocks of tobacco, which must be cured for more than one year, are classified as current assets. DEPRECIATION AND AMORTIZATION AND VALUATION OF INTANGIBLES Property, plant and equipment are depreciated by the straight-line method over the estimated useful lives of the assets. Goodwill and trademarks are amortized using the straight-line method, principally over 40 years. Management periodically evaluates the recoverability of goodwill and trademarks. The carrying value of goodwill and trademarks would be reduced if it is probable that management's best estimate of future operating income before amortization of goodwill and trademarks from related operations, on an undiscounted basis, will be less than the carrying value over the remaining amortization period. OTHER INCOME (EXPENSE), NET Interest income, certain gains and losses on foreign currency transactions, financing-related fees and other items of a financial nature are included in "Other income (expense), net". INCOME TAXES Income taxes are calculated for RJRN on a separate return basis. ADVERTISING AND RESEARCH AND DEVELOPMENT Advertising and research and development costs are expensed as incurred. F-7 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTEREST RATE ARRANGEMENTS For interest rate swaps, the differential to be paid or received is accrued and recognized in interest expense and may change as market interest rates change. For purchased interest rate caps, the premium paid is amortized to interest expense over the term of the cap and any amounts receivable are accrued as a reduction of interest expense. If an arrangement is terminated prior to maturity, the gain or loss is recognized over the remaining original life of the arrangement if the item hedged remains outstanding, or immediately, if the item hedged does not remain outstanding. If the arrangement is not terminated prior to maturity, but the underlying hedged item is no longer outstanding, the interest rate arrangement is marked to market and any unrealized gain or loss is recognized immediately. FOREIGN CURRENCY ARRANGEMENTS Forward foreign exchange contracts are carried at fair value on the consolidated balance sheets. The corresponding gains or losses on those contracts entered into to hedge firm commitments are deferred on the consolidated balance sheets as well and included in the basis of the underlying hedged transaction when settled. To the extent that the underlying hedged foreign currency transaction does not occur, the gains and losses deferred would be recognized in earnings immediately. Gains or losses on those contracts entered into to hedge foreign currency exposure of existing assets and liabilities are generally recognized in income currently, along with the related translation gains or losses recognized from the remeasurement of the assets or liabilities hedged. Translation gains or losses resulting from foreign-denominated borrowings that are accounted for as hedges of certain foreign currency net investments result in charges or credits to the cumulative translation adjustments account in stockholders' equity. COMMODITY CONTRACTS Changes in the market value of commodity contracts are recorded as an addition to, or reduction from, the raw material inventory cost. Market value changes are recorded in cost of products sold when the related finished products are sold. Due to wide fluctuations in the market prices for various agricultural commodities, futures contracts are frequently entered into to hedge the price risk associated with anticipated purchases. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"), which establishes standards for the way that public business enterprises report information about operating segments. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. RJRN Holdings is currently reviewing its operating segment disclosures and will adopt SFAS No. 131 in the fourth quarter of 1998. NOTE 2--RESTRUCTURING RJRN Holdings recorded a pre-tax restructuring expense of $301 million ($235 million after-tax) in the fourth quarter of 1997 to reorganize its worldwide tobacco operations. The 1997 restructuring program was undertaken to enhance its competitive position and improve its long-term earnings growth prospects. F-8 NOTE 2--RESTRUCTURING (CONTINUED) The components of the $301 million charge are as follows:
INTERNATIONAL DOMESTIC TOTAL --------------- ------------- --------- Employee severance and related benefits.......................................... $ 142 $ 30 $ 172 Rationalization of manufacturing operations...................................... 42 30 72 Disposal of non-strategic investments............................................ 33 -- 33 Contract termination and other costs............................................. 4 20 24 ----- --- --------- $ 221 $ 80 $ 301 ----- --- --------- ----- --- ---------
For international tobacco, the employee severance and related benefits pertains to workforce reductions of 2,600 employees at various manufacturing facilities, headquarters and regional support centers; the rationalization of manufacturing operations is primarily in Germany, Switzerland, Finland and Asia; and the disposal of non-strategic investments is primarily in Central Europe and Russia. For domestic tobacco, the employee severance and related benefits pertains to workforce reductions of 192 full-time positions and 217 seasonal positions at a manufacturing facility and staff related areas; the rationalization of manufacturing operations relates to the closing of a leaf processing facility; and the contract termination relates to a supply agreement. Of the $301 million charge, cash outlays will aggregate approximately $180 million. The program is expected to be completed in late 1999 and yield approximately $155 million in annual savings beginning in the year 2000. In addition to the above restructuring charge, approximately $89 million was recognized in operating expenses for international tobacco for implementation and integration expenses, principally training and relocation of employees and equipment. Nabisco Holdings recorded a pre-tax restructuring expense of $428 million ($241 million after-tax, net of minority interest) in the second quarter of 1996, $240 million of which was a cash expense. The 1996 restructuring program, which was undertaken to streamline operations and improve profitability, was substantially completed during 1997. In addition to the restructuring expense, approximately $97 million was recognized during 1996 for implementation and integration expenses, principally for training and relocation of employees and equipment. The major components of the $428 million restructuring expense were domestic sales force reorganizations and other domestic and international workforce reductions totaling 6,000 employees, product line rationalizations, non-strategic product line writedowns, contract terminations, plant closures and facility reorganizations. The restructuring expense consisted of approximately $353 million for the domestic food business and approximately $75 million for the international food business, primarily for Brazil, Canada and Iberia. RJRN Holdings recorded a pre-tax restructuring expense of $154 million ($104 million after-tax) in the fourth quarter of 1995 to reorganize its worldwide tobacco operations. The 1995 restructuring program, which was primarily undertaken in order to streamline operations and improve profitability, was substantially completed during 1996. A significant portion of the 1995 restructuring program was a cash expense. In addition to the $154 million restructuring expense, approximately $49 million was recorded in the fourth quarter of 1995 for the consolidation and relocation of the international tobacco operations' headquarters facilities and certain of its sales offices. The major components of the $154 million restructuring expense were workforce reductions totaling 1,260 employees, the rationalization and closing of facilities relating to the international tobacco operations and equipment and lease abandonments at the domestic tobacco operations. F-9 NOTE 3--EARNINGS PER SHARE Earnings per share has been computed and presented pursuant to the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share, which was adopted in the fourth quarter of 1997. The components of the calculation for income before extraordinary items are as follows:
YEARS ENDED DECEMBER 31 ---------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- ---------------------- BASIC DILUTED BASIC DILUTED BASIC DILUTED ---------- ---------- ---------- ---------- ---------- ---------- Income applicable to common stock before extraordinary item: Income before extraordinary item...... $ 402 $ 402 $ 611 $ 611 $ 627 $ 627 Preferred stock dividends............. (44) (44) (43) (43) (110) (110) Adjustment for the dilutive effect of Nabisco Holdings' stock options..... -- (3) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- $ 358 $ 355 $ 568 $ 568 $ 517 $ 517 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding (in thousands): Common shares outstanding............. 323,787 323,787 324,917 324,917 325,476 325,476 Assumed exercise of RJRN Holdings' stock options....................... -- 1,531 -- 1,030 -- 759 ---------- ---------- ---------- ---------- ---------- ---------- 323,787 325,318 324,917 325,947 325,476 326,235 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Shares of ESOP convertible preferred stock of 13,714,950, 14,558,920 and 14,990,677 were not included in computing diluted earnings per share for 1997, 1996 and 1995, respectively, because the effect would have been antidilutive. NOTE 4--ACCOUNTS RECEIVABLE Nabisco maintains an arrangement to sell for cash substantially all of its domestic trade accounts receivable to a financial institution. In addition, similar arrangements have been established for the sale of trade accounts receivable by certain foreign tobacco and food subsidiaries. NOTE 5--INVENTORIES At December 31, 1997 and 1996, approximately $592 million and $694 million, respectively, of domestic tobacco inventories was valued under the LIFO method. The current cost of LIFO inventories at December 31, 1997 and 1996 was greater than the amount at which these inventories were carried on the consolidated balance sheets by $151 million and $166 million, respectively. For the years ended December 31, 1997, 1996 and 1995, net income was increased by approximately $14 million, $35 million and $29 million, respectively, as a result of LIFO inventory liquidations. The LIFO liquidations resulted from programs to reduce domestic leaf durations consistent with forecasts of future operating requirements. F-10 NOTE 6--SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS
1997 1996 -------------------------- -------------------------- AVERAGE AVERAGE AMOUNT YEAR-END AMOUNT YEAR-END OUTSTANDING INTEREST RATE OUTSTANDING INTEREST RATE ----------- ------------- ----------- ------------- Nabisco Holdings: Domestic commercial paper (see note 9)............ $ 1,991 6.2% $ 1,175 5.8% International commercial paper.................... 26 4.1% 45 3.2% Notes payable to banks............................ 154 8.2% 206 14.8% Other (see note 9)................................ 50 5.8% -- -- ----------- ----------- 2,221 1,426 Amount reclassified as long-term debt (see note 9).............................................. (2,041) (1,175) ----------- ----------- Total Nabisco Holdings.......................... 180 251 ----------- ----------- RJRN: Domestic commercial paper (see note 9)............ -- -- 297 6.2% Notes payable to banks............................ 181 6.4% 358 6.4% ----------- ----------- 181 655 Amount reclassified as long-term debt (see note 9).............................................. -- (297) ----------- ----------- Total RJRN...................................... 181 358 ----------- ----------- Total short-term borrowings.................................... $ 361 $ 609 ----------- ----------- ----------- -----------
RJRN maintains a three-year $2.75 billion revolving credit facility and a 364-day $568 million credit facility primarily to support commercial paper issuances. The commitments under the revolving credit facility decline to approximately $2.2 billion in the final year. Borrowings under the revolving credit facility bear interest at rates which vary with the prime rate or LIBOR. Borrowings under the 364-day credit facility bear interest at rates which vary with LIBOR. Nabisco maintains a five-year $1.5 billion revolving credit facility and a 364-day $1.381 billion credit facility primarily to support commercial paper issuances. At the end of the 364-day period, any borrowings outstanding under the 364-day credit facility are convertible into a three-year term loan at Nabisco's option. The commitments under the revolving credit facility decline to approximately $1.46 billion in the final year. Borrowings under the revolving credit facility bear interest at rates which vary with the prime rate or LIBOR. Borrowings outstanding under the 364-day credit facility bear interest at rates which vary with LIBOR. Based on RJRN's and Nabisco's intention and ability to continue to refinance for more than one year the amount of their respective domestic commercial paper and revolving credit agreement borrowings and certain other borrowings through their separate long-term revolving credit facilities, such borrowings were reclassified as long-term debt. Distributions and the payment of dividends by RJRN Holdings are subject to certain restrictions under certain financing agreements and debt instruments of RJRN Holdings and RJRN and their subsidiaries. The financing agreements generally restrict cumulative common and preferred dividends and distributions, limit the ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell or dispose of certain assets and certain subsidiaries' stock, issue certain equity securities and engage in certain mergers or consolidations. F-11 NOTE 6--SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS (CONTINUED) Nabisco's credit agreements, among other things, generally restrict common and preferred dividends and distributions, limit loans and advances by Nabisco Holdings and its subsidiaries to RJRN, limit the ability to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, acquire, sell or dispose of certain assets and securities and engage in certain mergers or consolidations. NOTE 7--ACCRUED LIABILITIES
1997 1996 ------------- ------------- Payroll and employee benefits................................ $ 595 $ 552 Marketing and advertising.................................... 424 461 Excise taxes................................................. 205 255 Restructuring................................................ 368 210 Dividends.................................................... 186 164 Tobacco settlement........................................... 177 -- Accrued interest............................................. 163 202 Other........................................................ 632 840 ------ ------ $ 2,750 $ 2,684 ------ ------ ------ ------
NOTE 8--INCOME TAXES The provision for income taxes consisted of the following:
YEARS ENDED DECEMBER 31 1997 1996 1995 - ---------------------------------------------------------------------- --------------- --------------- --------------- Current: Federal............................................................. $ 482 $ 471 $ 525 Foreign and other................................................... 231 234 227 ----- ----- ----- 713 705 752 ----- ----- ----- Deferred: Federal............................................................. (139) (147) (190) Foreign and other................................................... (44) 27 18 ----- ----- ----- (183) (120) (172) ----- ----- ----- Provision for income taxes............................................ $ 530 $ 585 $ 580 ----- ----- ----- ----- ----- -----
F-12 NOTE 8--INCOME TAXES (CONTINUED) The components of the deferred income tax liability disclosed on the consolidated balance sheets included the following:
1997 1996 --------- --------- Deferred tax assets: Pension and other postretirement liabilities....................................... $ (418) $ (403) Restructuring and other accrued liabilities........................................ (247) (242) --------- --------- Total deferred tax assets before valuation allowance......................... (665) (645) Valuation allowance................................................................ 79 86 --------- --------- Net deferred tax assets...................................................... (586) (559) --------- --------- Deferred tax liabilities: Property and equipment............................................................. 921 963 Trademarks......................................................................... 2,624 2,755 Other.............................................................................. 565 446 --------- --------- Total deferred tax liabilities............................................... 4,110 4,164 --------- --------- Net deferred income taxes.................................................... $ 3,524 $ 3,605 --------- --------- --------- ---------
Pre-tax income for domestic and foreign operations consisted of the following:
1997 1996 1995 ------------- ------------- ------------- Domestic (includes U.S. exports)...................................... $ 651 $ 554 $ 782 Foreign............................................................... 365 645 484 ------ ------ ------ Pre-tax income........................................................ $ 1,016 $ 1,199 $ 1,266 ------ ------ ------ ------ ------ ------
The differences between the provision for income taxes and income taxes computed at statutory U.S. federal income tax rates are explained as follows:
1997 1996 1995 --------------- --------------- --------------- Income taxes computed at statutory U.S. federal income tax rates....................................................... $ 356 $ 420 $ 443 State and local income taxes, net of federal tax benefits..... 44 55 52 Goodwill amortization......................................... 126 132 125 Taxes on foreign operations at rates different than statutory U.S. federal rate........................................... 14 (9) (4) Exempt foreign sales corporation earnings..................... (5) (7) (15) Other items, net.............................................. (5) (6) (21) ----- ----- ----- Provision for income taxes.................................... $ 530 $ 585 $ 580 ----- ----- ----- ----- ----- ----- Effective tax rate............................................ 52.2% 48.8% 45.8% ----- ----- ----- ----- ----- -----
At December 31, 1997, there was $1.982 billion of accumulated and undistributed income of foreign subsidiaries. These earnings are intended by management to be reinvested abroad indefinitely. Accordingly, no applicable U.S. federal deferred income taxes have been provided nor is a determination of the amount of unrecognized U.S. federal deferred income taxes practicable. F-13 NOTE 9--LONG-TERM DEBT
1997 1996 --------- --------- Nabisco Holdings: Short-term borrowings, reclassified.......................................................... $ 2,041 $ 1,175 6.7-8.3% notes, due 1998 through 2015........................................................ 1,946 2,938 Other indebtedness........................................................................... 368 124 Current maturities of long-term debt......................................................... (21) (24) --------- --------- Total Nabisco Holdings long-term debt.................................................... 4,334 4,213 --------- --------- RJRN: Short-term borrowings, reclassified.......................................................... -- 297 6.80-9.25% notes, due 1999 through 2013...................................................... 4,443 4,122 5.375-10% foreign currency debt, due 2000 to 2001............................................ 469 501 Other indebtedness........................................................................... 222 162 Current maturities of long-term debt......................................................... (12) (39) --------- --------- Total RJRN long-term debt................................................................ 5,122 5,043 --------- --------- Total long-term debt..................................................................... $ 9,456 $ 9,256 --------- --------- --------- ---------
- ------------------------ The payment of long-term debt through December 31, 2002 is as follows: 1999--$237; 2000--$765; 2001-- $2,024 and 2002--$1,972. In July 1997, RJRN issued $150 million 8 1/4% notes due 2004 and $200 million 8 1/2% notes due 2007. Interest on the notes is payable semi-annually on January 1 and July 1 of each year, beginning January 1, 1998. The net proceeds from the issuance of the notes were used to repay commercial paper borrowings. In August 1997, Nabisco issued $200 million notes due 2009. These notes contain both a put and a call option exercisable at the end of two years. The interest rate for the first two years varies with LIBOR (5.85% at December 31, 1997). Thereafter, the notes, if extended, will bear interest at 6.2% plus Nabisco's future credit spread on ten-year treasury notes. In December 1997, Nabisco redeemed $432 million of its $538 million outstanding 8.3% notes due 1999 and $541 million of its $688 million outstanding 8% notes due 2000. An extraordinary loss of approximately $43 million ($21 million after-tax, net of minority interest, or $.06 per basic and diluted common share of RJRN Holdings) was recorded related to this transaction. The redemption of these notes was financed with short-term borrowings, which in turn were refinanced in January 1998 with long-term notes as follows: $400 million 6.0% notes due 2011, puttable/callable in 2001; $300 million 6 1/8% notes due 2033, puttable/callable in 2003; and $300 million 6 3/8% notes due 2035, puttable/callable in 2005. The interest rates on the 6.0%, 6 1/8% and 6 3/8% notes, if not put or called, will be reset at 5.75%, 6.07% and 6.07%, respectively, plus, in each case, Nabisco's future credit spread on treasury notes of comparable maturities. During 1995, RJRN and Nabisco completed a debt exchange which resulted in a pre-tax charge of approximately $103 million for fees and expenses incurred. An extraordinary loss of approximately $29 million ($16 million after-tax, net of minority interest or $.05 per basic and diluted common share of RJRN Holdings) was recorded in 1995 in connection with the refinancing of certain long-term debt. The junior subordinated debentures issued by the subsidiary trust of RJRN Holdings may be redeemed at RJRN Holdings' election at $25 per debenture on or after August 19, 1998 and are due in December 2044. Cash distributions on the preferred securities, which were issued by the subsidiary in F-14 NOTE 9--LONG-TERM DEBT (CONTINUED) exchange for an equal amount of RJRN Holdings Series B preferred stock, are cumulative at an annual rate of 10% of the liquidation amount of $25 per security and are payable quarterly in arrears. At December 31, 1997, approximately $5.0 billion of total debt (notes payable and long-term debt, including current maturities) was owed by RJRN and approximately $4.9 billion was owed by its subsidiaries. The estimated fair value of RJRN Holdings' consolidated long-term debt as of December 31, 1997 and 1996 was approximately $9.8 billion and $9.4 billion, respectively, based on available market quotes, discounted cash flows and book values, as appropriate. RJRN Holdings manages overall interest rate exposure by adjusting the mix of floating rate debt and fixed rate debt for both RJRN and Nabisco. As part of managing such interest rate exposures, RJRN and Nabisco may enter into various interest rate arrangements from time to time. See note 11 to the consolidated financial statements for further information regarding interest rate arrangements. RJRN Holdings adopted a policy setting forth its intention not to make a distribution to shareholders prior to December 31, 1998 of shares of capital stock of a subsidiary if that distribution would cause the ratings of the senior indebtedness of RJRN to be reduced from investment grade to non-investment grade or if, after giving effect to such distribution, any publicly held senior indebtedness of the distributed company would not be rated investment grade. The board of directors of RJRN Holdings is committed to effecting a spin-off of Nabisco Holdings at the appropriate time. There is no assurance that any such distribution will take place. Additional policies provide that an amount equal to the net cash proceeds from any issuance and sale of equity by RJRN Holdings or from any sale outside the ordinary course of business of material assets owned or used by subsidiaries in the tobacco business, in each case before December 31, 1998, will be used either to repay, purchase or redeem consolidated indebtedness or to acquire properties, assets or businesses to be used in existing or new lines of business and that an amount equal to the net cash proceeds of any secondary sale of shares of Nabisco Holdings before December 31, 1998 will be used to repay, purchase or redeem consolidated debt. No assurance can be given that RJRN Holdings will issue or sell any equity or sell any material assets outside the ordinary course of business. NOTE 10--COMMITMENTS AND CONTINGENCIES TOBACCO LITIGATION OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJRN and RJRN Holdings) or indemnitees, including those claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During 1997, 492 new actions were served against RJRT and/or its affiliates or indemnitees and 212 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. There have been noteworthy increases in the number of these cases pending. On December 31, 1997, there were 516 active cases pending, as compared with 234 on December 31, 1996, 132 on December 31, 1995 and only 54 on December 31, 1994. As of March 3, 1998, 540 active cases were pending against RJRT and/or its affiliates or indemnitees, 534 in the United States, two in Puerto Rico, one in the Marshall Islands, two in Canada and one in Nigeria. The United States cases are in 46 states and are distributed as follows: 198 in Florida, 101 in New York, 21 in Louisiana, 17 in each of Texas and Pennsylvania, 14 in California, 12 in each of Alabama and Ohio, 11 in Tennessee, nine in each of the District of Columbia, Illinois and Mississippi, seven in each of Indiana, New Jersey and West Virginia, six in Georgia, five in each of Maryland and Massachusetts, four in each of Kansas, Michigan, Minnesota and South Dakota, three in each of Arizona, Arkansas, Colorado, Hawaii, Iowa, Missouri, Nevada, Oklahoma and Rhode Island, two in each of Connecticut, Montana, New Hampshire, New Mexico, Oregon, South Carolina, Utah, Washington and Wisconsin, and one each in F-15 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) Alaska, Idaho, Kentucky, Maine, North Carolina and Vermont. Of the 534 active cases in the United States, 426 are in state court and 108 are in federal court. Most of these cases were brought by individual plaintiffs, but an increasing number, discussed below, seek recovery on behalf of states or large classes of claimants. THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a variety of legal theories, including, among others, strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. Eight of the 534 active cases in the United States involve alleged non-smokers claiming injuries purportedly resulting from exposure to environmental tobacco smoke. Forty-seven cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, and Blue Cross/Blue Shield subscribers seeking reimbursement for premiums paid. One hundred two of the active cases seek, INTER ALIA, recovery of the cost of Medicaid payments or other health-related costs paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco use. Four, brought by entities administering asbestos liability, seek contribution for settlement costs. DEFENSES. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act of some or all such claims arising after 1969; the lack of any defect in the product; assumption of the risk; contributory or comparative fault; lack of proximate cause; and statutes of limitations or repose; and, in the attorney general cases (discussed below), additional statutory, equitable, constitutional and other defenses. RJRN and RJRN Holdings have asserted additional defenses, including jurisdictional defenses, in many of these cases in which they are named. Juries have found for plaintiffs in three smoking and health cases in which RJRT was not a defendant, but in one such case, no damages were awarded and the judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on appeal and the case was subsequently dismissed. In the third such case, on August 9, 1996, a Florida jury awarded damages of $750,000 to an individual plaintiff. The defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking to reverse the judgment on appeal. On May 5, 1997, in an individual case filed against RJRT, brought by the same attorney who represented plaintiffs in the CARTER case, a Florida state court jury found no RJRT liability. On October 31, 1997, in still another case (KARBIWNYK V. R.J. REYNOLDS TOBACCO COMPANY) brought by the same attorney, another state court jury found no RJRT liability. In addition, during 1997 and early 1998, RJRT and other tobacco industry defendants have settled five lawsuits. See "Interim Agreements" below. CERTAIN CLASS ACTION SUITS. In May 1996, there was an important ruling in one of the purported class action cases, CASTANO V. THE AMERICAN TOBACCO COMPANY, originally filed in March 1994 in the United States District Court for the Eastern District of Louisiana against tobacco industry defendants, including RJRT and RJRN. Plaintiffs sought to obtain certification of a class action on behalf of all United States residents who allegedly are or claim to be addicted, or are the legal survivors of persons who allegedly were addicted, to tobacco products manufactured by defendants. The complaint alleged that cigarette manufacturers manipulated the levels of nicotine in their tobacco products to induce addiction in smokers. Plaintiffs' motion for certification of the class was granted in part on February 17, 1995 but, on May 23, 1996, the Fifth Circuit Court of Appeals overturned the certification and ordered the case remanded to the district court for decertification of the class on the grounds that a class consisting of all "addicted" smokers failed to meet the standards and requirements of Federal Rule 23 governing class actions. The class has been decertified and the parties have agreed to move for dismissal of the remaining individual case with a F-16 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) right to replead after November 15, 1998. Another purported class action, filed shortly after CASTANO, remains stayed in federal district court in Louisiana. Putative class action suits based on similar claims have been brought in state and, in a few instances, federal courts in Alabama, Arkansas, California, the District of Columbia (D.C. court), Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, New Mexico, Nevada, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, West Virginia and Wisconsin. A putative class action filed in Tennessee seeks reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout the United States. Suits are also expected to be filed in additional jurisdictions and there are also putative class action suits pending in Canada, Puerto Rico and Nigeria. Each such suit asserts claims on behalf of residents of a particular jurisdiction who claim to be addicted, injured, or at greater risk of injury by the use of tobacco, or are the legal survivors of such persons. In the class action suit pending in Florida, ENGLE V. R.J. REYNOLDS TOBACCO COMPANY, a class consisting of Florida residents or their survivors who claim to have diseases or medical conditions caused by their "addiction" to cigarettes has been certified. The case was scheduled for trial in February 1998 but was removed from the court calendar and has not yet been rescheduled. A class was certified in another purported class action suit, SCOTT V. AMERICAN TOBACCO COMPANY, on April 11, 1997. Defendants are seeking reconsideration of the certification. Class certification was granted in two cases pending in New York, HOSKINS V. R.J. REYNOLDS TOBACCO COMPANY and GEIGER V. AMERICAN TOBACCO COMPANY (in which certification was conditional). The parties have briefed and argued appeals brought by defendants in both cases. On January 28, 1998, class certification was granted by a Maryland state court in RICHARDSON V. PHILIP MORRIS. Class certification was denied, however, on August 18, 1997, by a District of Columbia court in the case of REED V. PHILIP MORRIS. In October 1997, class certification was also denied in ARCH V. AMERICAN TOBACCO COMPANY (renamed BARNES V. AMERICAN TOBACCO COMPANY), which was pending in the United States District Court for the Eastern District of Pennsylvania. That court had initially certified a medical monitoring class based on the plaintiffs' amended complaint (having refused to certify a class based on the initial complaint), but on October 17, 1997, the judge reversed the certification and also dismissed the claims of each of the class representatives. Plaintiffs are appealing this ruling and briefing is scheduled to continue through April 23, 1998. Another class action suit, BROIN V. PHILIP MORRIS, was settled by an agreement dated October 9, 1997 and approved by the Florida state court on February 3, 1998. See "Interim Agreements" below. THE ATTORNEYS GENERAL AND RELATED CASES. In June 1994, the Mississippi attorney general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, against various industry members including RJRT. This case was brought on behalf of the state to recover state funds paid for healthcare 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 sought an injunction against "promoting" or "aiding and abetting" the sale of cigarettes to minors. Both actual and punitive damages were sought in unspecified amounts. The case was scheduled for trial on July 7, 1997, but on July 2, 1997, the parties arrived at an agreement in principle settling the claims relating to the subject matter of the litigation. A comprehensive settlement agreement, based on the agreement in principle, was signed on October 17, 1997. See "Interim Agreements" below. Following the filing of the MOORE case, other states, through their attorneys general and/or other state agencies, sued RJRT and other U.S. cigarette manufacturers as well as, in some instances, their parent companies, in actions to recover the costs of medical expenses incurred by the state or its agencies in the treatment of diseases allegedly caused by cigarette smoking. Some of these cases also seek injunctive relief and treble damages for state and/or federal antitrust law and RICO violations. Certain of the actions also seek statutory penalties and other forms of relief under state consumer protection and antitrust statutes. On March 3, 1998, there were 39 such cases pending in the following states, commonwealths, or territories: F-17 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) Alaska, Arizona, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia and Wisconsin. In addition to the Mississippi case mentioned above, tobacco company defendants have settled two additional attorney general cases; one in the State of Florida (except for certain equitable claims) and another in the State of Texas. See "Interim Agreements" below. One of the attorney general cases is currently on trial in Minnesota. The trial, which began in January 1998, is expected to take approximately four months. Plaintiffs in this case are seeking compensatory damages of $1.7 billion and, in addition, seek disgorgement of profits, restitution, treble damages under the State's antitrust statute, punitive damages, funding of smoking cessation and public education programs, civil penalties of $25,000 for each separate violation of various consumer protection statutes, civil penalties of $50,000 for each separate violation of Minnesota's antitrust statute, attorneys' fees and costs, various forms of non-monetary relief and such other relief as the court deems just and equitable. During pre-trial discovery and in the course of trial to date, the court in this case made a number of rulings adverse to the defendants. These rulings, among other things, limit the defenses available to the defendants and require production by the defendants of thousands of documents for which privilege had been asserted. The tobacco companies are defending this case vigorously, but the court's rulings could have an adverse effect on their ability to present their defense effectively. In addition to the 39 pending actions brought by the various attorneys general, 63 pending actions advancing similar theories have been brought by private attorneys and/or local officials purportedly on behalf of the citizens of certain states, counties and/or cities, union health and welfare funds, a university and four native American tribes. One such union case, NORTHWEST LABORERS V. PHILIP MORRIS, pending in the State of Washington, was certified as a class action on December 24, 1997. A taxpayer case pending in Ohio was dismissed for lack of standing on February 12, 1998 (COYNE V. AMERICAN TOBACCO). Although RJRT and most other cigarette manufacturers have agreed to the Memorandum described below, the uncertainty of its enactment into law requires that they continue to defend these attorney general and related cases vigorously as they come to trial and, except as described below (see "Interim Agreements") they continue to do so (as do RJRN and RJRN Holdings in the cases where they are named defendants). In addition, the tobacco company defendants filed for declaratory judgment in several of the states in which attorney general cases were threatened. PROPOSED RESOLUTION. Following several months of negotiations with state attorneys general, representatives of the public health community and plaintiffs' lawyers, on June 20, 1997, a Memorandum of Understanding and Resolution (the "Memorandum") that sets forth concepts for federal legislation and a contractual protocol to resolve a variety of litigation and regulatory issues concerning tobacco was entered into. The Memorandum requires the tobacco companies to make an initial $10 billion payment and subsequent annual multi-billion dollar payments expected to aggregate to approximately $368.5 billion over 25 years. Discussions with other manufacturers who were participants in the negotiations which led to the Memorandum are still in progress, but RJRT believes that its share of the initial payment will be in the range of $600 to $700 million and that subsequent payments will be allocated within the industry based on market share. The proposed legislation would also, among other things, reduce retail access for tobacco products, eliminate cigarette vending machines and tobacco product sampling, confer authority on the FDA to regulate the manufacture of tobacco products (with express limitations on authority relating to nicotine) and create publicly funded smoking cessation and education programs. The proposed legislation would grant limited litigation protection to the tobacco industry, including a bar on class action suits, suits based on addiction and demands for punitive damages for past actions. It would also cap industry payments in permitted individual lawsuits to an aggregate of $5 billion per year. The proposal also provides F-18 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) a "look-back" provision which would penalize manufacturers if youth smoking is not reduced by stated amounts in certain years after enactment, culminating in a 60% reduction after 10 years. There can be no assurance that legislation required to implement the Memorandum will be enacted or that it will be enacted without modification that is materially adverse to the tobacco industry, particularly in light of the complex legal and factual issues involved and the need to reconcile the views of many competing interests. A number of bills have been introduced into Congress incorporating terms that vary in significant ways from those agreed to in the Memorandum. It is not certain that proposed legislation, if any, that emerges from this process will be advantageous to RJRT. If enacted, the legislation could face challenges on the grounds, among others, that the federal government lacks the authority to regulate the tobacco industry or limit its liability in the manner contemplated by the Memorandum. Regardless of the legislative outcome, the negotiation and signing of the Memorandum could adversely affect other federal, state and local regulation of the tobacco industry, alter the climate for pending litigation against RJRN, RJRT and other tobacco industry defendants and their corporate parents and affect the number of new smoking and health claims filed against the industry. The financial effects of this legislation and the related contractual protocol are difficult to predict. They depend, among other things, on (i) the amount, timing and tax treatment of the payments actually required of RJRT by the legislation; (ii) the means used to finance these payments; (iii) the impact of increased cigarette prices and other aspects of the legislation and the contractual protocol on domestic cigarette consumption; (iv) the effect of the legislation and the contractual protocol on the consumption of tobacco products and on the regulatory and litigation environment outside the United States; (v) the effect, if any, on public attitudes toward smoking and the tobacco industry; and (vi) the impact on RJRT's competitive position in the tobacco industry. Despite these uncertainties, RJRN believes that implementation of the Memorandum would increase the costs and reduce the consumption of RJRT's tobacco products in the United States. In particular, the substantial price increases necessary to fund payments of the magnitude contemplated by the Memorandum could reduce domestic industry cigarette volumes by up to 45% over 10 years depending on the assumptions used, which assumptions, by their nature, are speculative. Such volume reduction would likely have a significant negative effect on the business of RJRT and the stated financial position of RJRN Holdings, RJRN and RJRT. Any significant negative effect on the financial position of any of these entities could ultimately impact the share repurchase and dividend policies of RJRN Holdings. On the other hand, the proposals contemplated by the Memorandum offer a measure of relief from certain litigation that could otherwise materially affect the results of operations or cash flows of RJRN in particular quarterly or annual periods or its financial condition. In evaluating any proposed legislation to resolve tobacco issues, RJRN and RJRT will continue to weigh carefully the potential benefits, principally greater regulatory and litigation certainty and predictability in annual aggregate contingency risk, against the resulting monetary, regulatory and other costs. INTERIM AGREEMENTS Because the Memorandum, unless and until it is enacted into law, will not resolve any pending litigation scheduled for trial in advance of such enactment, the parties in each case must decide, on a case-by-case basis, whether to proceed to trial or seek some other resolution. Thus far, five cases have been settled, including three attorney general cases. THE ATTORNEY GENERAL AGREEMENTS. In furtherance of the proposed resolution under the Memorandum, tobacco companies have settled attorney general cases in Mississippi, Florida and Texas as they came to trial. Each settling state has agreed to a percentage share of the $10 billion initial and scheduled annual payments agreed to in the Memorandum; 1.7% for Mississippi, 5.5% for Florida and 7.25% for Texas and will also be entitled to attorneys' costs as well as private counsel fees as set by a panel of arbitrators subject to a $500 million aggregate annual cap for payment of such fees for all settlements of similiar litigation. F-19 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) Each agreement also provides that if the U.S. Congress enacts federal legislation in keeping with the Memorandum, the terms of that legislation would generally supersede the terms of the state agreement. Defendants would receive credit for their payments under the state agreements against the obligations arising under the federal legislation. If, instead, the defendants enter into a number of separate settlement agreements with other individual states, these three settling states would be entitled to payment adjustments to assure at least as favorable a settlement as any other separately settling state. The first attorney general case scheduled for trial after adoption of the Memorandum was MOORE V. AMERICAN TOBACCO COMPANY. In that case, a settlement was agreed to on July 2, 1997, and a full settlement agreement was executed on October 17, 1997. The agreement calls for the defendants to make an aggregate up-front payment of $170 million to the State of Mississippi. It also provides for continuing payments commencing December 31, 1998, and annually thereafter, based, in 1998, on Mississippi's 1.7% share of $4 billion (the anticipated first annual industry payment under the Memorandum) and escalating in several annual steps to 1.7% of $8 billion in year eight and thereafter, adjusted upward by no less than 3% per year and further adjusted upward or downward to reflect increases or decreases in volume of domestic tobacco product sales. Mississippi also became entitled to $61.8 million for an anti-smoking pilot program by operation of the "most favored nation" provision of its agreement as a result of Florida's subsequent settlement containing pilot program provisions. The second attorney general case to come to trial, STATE OF FLORIDA V. AMERICAN TOBACCO COMPANY, was in the jury selection phase in Florida state court when, on August 25, 1997, the parties announced that they had entered into a settlement agreement. The agreement called for the tobacco company participants to make an aggregate up-front payment of $550 million. It also provides for annual payments beginning in September 1998 of 5.5% of $4 billion and increasing in several annual steps to 5.5% of $8 billion by 2003 and thereafter (subject to various adjustments) all consistent with the national annual payment schedule. The tobacco companies also agreed to fund a $200 million pilot program to discourage youth smoking. The agreement, like the other state settlements, also requires the tobacco companies to discontinue all billboard advertisements as well as all advertisements that appear on vehicles and in certain public areas, within several months. Related to the Florida settlement, on November 18, 1997, a law firm that had represented the State filed a suit against RJRT and others alleging tortious interference with the plaintiff's contingency fee contract with the State as well as conspiracy to induce the State to circumvent and negate plaintiff's rights to recover under that contract. The case is now in discovery. Finally, the Texas case, STATE OF TEXAS V. AMERICAN TOBACCO COMPANY, was settled by an agreement dated January 16, 1998 providing for a pilot program payment of $264 million and an aggregate up-front payment of $725 million. Texas will be entitled to a 1998 annual payment of $290 million (7.25% of $4 billion) paid in two installments ($89 million on November 1, 1998 and $201 million on December 31, 1998) and increasing in several annual steps to $580 million (7.25% of $8 billion) by 2003 and thereafter (subject to adjustments). RJRT's shares of the initial payment and pilot program will total approximately $114 million, paid or to be paid over the course of 1998 in payments of approximately $32 million by February 1, 1998; $12 million by July 1, 1998; $23 million by October 1, 1998; and $47 million by November 1, 1998. The companies have also agreed to pay a $50 million advance on fees of the State of Texas's private counsel prior to the arbitration decision awarding such fees provided that the State of Texas makes an equivalent advance. RJRT's share of the advance will be approximately $12 million. The payment of this amount, originally scheduled for late February, has been suspended by stipulation of the parties until March 24, 1998 as a result of a dispute raised by would-be interveners about the scope of the settlement. Neither the Mississippi nor Florida settlement agreement provides for payment of any advance on private counsel fees. Therefore, under the most favored nation provisions of their settlement agreements, provided that those states make equivalent advances, the tobacco companies may be required to make F-20 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) advances to private counsel in those states. Each tobacco company's share of advances of this type, for all settling states, would be based on market share. If federal legislation in keeping with the Memorandum is enacted, the parties expect that Mississippi, Florida and Texas, because of their contribution to securing resolution of these matters, may apply to a panel of arbitrators for additional compensation. The settling defendants have agreed not to oppose applications of $75 million for Mississippi, $250 million for Florida and $329.5 million for Texas (as well as, any increase over these amounts necessary to offset the difference, if any, between the amounts to be paid to these states during 1998 under the agreements and the amounts allocated to those states for that period under the federal legislation). Payment of these amounts would be made over a number of years and would be subject to an aggregate annual cap of $100 million for all settling states. Each individual state agreement provides that the related settlement is not an admission or concession or evidence of any liability or wrongdoing on the part of any party and was entered into by the settling defendants solely to avoid the further expense and uncertainty of litigation. RJRT has made certain payments under these attorney general agreements. Its portion of the upfront payments, based on market capitalization, was $12.4 million for Mississippi and $37.4 million for Florida. Texas payments, both for the initial amount and pilot program to discourage youth smoking are to be made at several points in 1998 as described above. RJRT's portion of the pilot program payments, based on market share, was $15.3 million for Mississippi and $49 million for Florida. Additional payments, based on market share, were made with respect to the costs and expenses of counsel in all three states which totalled approximately $21 million. THE BROIN SETTLEMENT. The plaintiffs' attorneys in a class action case, BROIN V. PHILIP MORRIS, entered into a settlement agreement with participating tobacco company defendants on October 9, 1997. This case had been brought in Florida state court on behalf of all flight attendants of U.S. airlines alleged to be suffering from diseases or ailments caused by second-hand smoke in airplane cabins. This agreement requires the participating tobacco companies to pay $300 million in three annual installments, allocated among the companies by market share, to fund research on the early detection and cure of diseases associated with tobacco smoke. It also calls for those companies to pay a total of $49 million for plaintiffs' counsel's fees and expenses. The agreement bars class members from bringing aggregate claims or obtaining punitive or exemplary damages and also bars individual claims to the extent that they are based on fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO, suppression, concealment or any other alleged intentional or willful conduct. The defendants agree that in any individual case brought by a class member, they will bear the burden of proof regarding general causation that ordinarily would be born by the plaintiffs. Trial court approval of the BROIN settlement was granted on February 3, 1998, but this approval has been noticed for appeal. No payments with respect to either the research fund or attorney's fees will be due until final resolution of all appeals. RJRT's portion will be approximately $86 million. RJRT has already paid its market share of $3 million due to the BROIN attorneys in respect of costs and expenses. This amount is subject to recovery if the settlement is successfully challenged. THE MANGINI SETTLEMENT. On September 5, 1997, a settlement agreement was executed on behalf of the parties to MANGINI V. R.J. REYNOLDS TOBACCO COMPANY, a case that had been scheduled for trial in San Francisco Superior Court for December 1997. This case sought injunctive and other relief against RJRT and an advertising agency with respect to the use of Joe Camel advertising as an unfair business practice allegedly targeting minors. The agreement requires the defendants to acknowledge that the lawsuit along with public controversy surrounding Joe Camel, was a "substantial factor" in the phase-out of Joe Camel advertising. It also requires prompt removal of Joe Camel billboards and cessation of the use of Joe Camel in advertisements and promotional items in California. The defendants agreed to authorize release to the public of non-privileged and non-work product documents referring to persons under the age of 18 and/or the Joe Camel advertising campaign that were produced during discovery in the case. Pursuant to the F-21 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) agreement, RJRT has paid $10 million to the City and County of San Francisco to cover attorneys' fees ($1 million) and for distribution to the various state jurisdictions participating in the case for anti-youth smoking advertisements ($9 million). The MANGINI settlement provides that plaintiffs' counsel will be paid in accordance with the counsel fee arrangements ultimately arrived at for the national legislative settlement. If there is no such arrangement, or the arrangement does not allow plaintiffs' counsel to participate, fees will be determined by an arbitration panel. Finally, the agreement preserves certain claims brought by various California public entities, including claims that the Joe Camel campaign violated certain sections of the California Business and Professions Code. RJRT has participated and may continue to participate in discussions with plaintiffs in certain healthcare cost-recovery and class actions scheduled to be tried in the coming months in order to postpone or settle those actions in light of the pending legislative initiative. There can be no assurance that any such postponement or settlement can be achieved, or, if achieved, as to the terms ultimately agreed to. In the absence of postponement or settlement, these actions would be tried as scheduled and any final judgment reached prior to enactment of the contemplated legislation might not be affected by the passage of that legislation. RECENT AND SCHEDULED TRIALS. As of March 3, 1998, there were 14 cases scheduled for trial in 1998 against RJRT alleging injuries relating to tobacco. Two trials are currently in process, the attorney general case in Minnesota discussed above and an individual environmental tobacco smoke case in Indiana state court (DUNN V. RJR NABISCO HOLDINGS). The next attorney general case scheduled for trial is Washington's which has been scheduled for September 1998. The State of Florida's remaining equitable claims are also scheduled for trial in September 1998. The State of Arizona's case is scheduled for October and that of Oklahoma for November. Cases against other tobacco company defendants are also scheduled for trial in 1998 and thereafter. Although trial schedules are subject to change and many cases are dismissed before trial, it is likely that there will be an increased number of tobacco cases, involving claims for possibly billions of dollars, against RJRT and RJRN coming to trial over the next year as compared to prior years when trials in these cases were infrequent. OTHER DEVELOPMENTS. On May 28, 1997, a suit was filed against RJRT in the U.S. District Court for the Northern District of Georgia, Atlanta Division, FARR V. R.J. REYNOLDS TOBACCO COMPANY, alleging claims under Title VII and the Equal Pay Act on behalf of female RJRT employees and applicants for employment in the "southeast sales region," seeking equitable relief, back pay and lost benefits, as well as punitive damages, based on allegations that plaintiffs had been denied employment, desirable job assignments, training, promotion and equal pay. No motion seeking class certification has yet been filed by plaintiffs. RJRT has filed an answer in the case and intends to defend it vigorously. On September 15, 1997, a suit, RAYMARK INDUSTRIES V. BROWN & WILLIAMSON, was filed against RJRT and RJRN and various other tobacco industry entities for contribution/damages related to asbestos litigation. The suit was filed in the United States District Court for the Northern District of Georgia. Raymark alleged that it expended $400 million on the defense and payment of asbestos personal injury claims in trial, verdict, appeal and settlement. Raymark alleged that cigarette smoke inhaled by the asbestos claimants caused the cancers complained of in the litigation in which it has been involved. Raymark seeks to recover contribution and/or indemnity from the defendants for the share of payments made by Raymark that were allegedly caused by tortious and otherwise actionable conduct of defendants. Raymark's claims included counts for: negligence, strict liability, fraud and misrepresentation, conspiracy and damages. Three other cases making similar allegations were filed in December 1997, one in California and two in New York. RJRT and the other tobacco industry defendants in this action dispute the claims advanced in these cases and intend to defend all such actions vigorously. A purported class was granted conditional class certification in a case, MOSELY V. PHILIP MORRIS COMPANIES, brought in Alabama state court against RJRT, RJRN and others, alleging violations of F-22 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) Alabama antitrust law. The complaint in this case alleges that cigarette companies and others have conspired to raise prices. The class consists of all Alabama residents who purchased certain defendants' cigarettes for smoking purposes since March 1997. The plaintiffs seek statutory damages as well as actual damages of up to $500 per class member. The defendants have removed the case to federal court. On October 31, 1997, the federal court vacated the conditional class certification pending a hearing on class certification in federal court and on February 6, 1998, the federal court denied plaintiff's motion to remand the case to state court. RJRT understands that a grand jury investigation is being conducted in the Eastern District of New York examining possible violations of criminal law in connection with activities relating to the Council for Tobacco Research -- USA, Inc., of which RJRT is a sponsor. RJRT has responded, and will continue to respond, to document subpoenas issued by this grand jury. In addition, subpoenas dated May 24, 1996, November 8, 1996, December 5, 1996 and January 21, 1998 were served on RJRT by a grand jury sitting in the District of Columbia. RJRT has responded or is in the process of responding to those subpoenas. RJRN and RJRT are unable to predict the outcome of these investigations. RJRT, R.J. Reynolds International ("Reynolds International") and Northern Brands International, another subsidiary of RJRN, each received document subpoenas dated July 24, 1997, from a federal grand jury sitting in the Northern District of New York. RJRT understands that the grand jury is investigating possible smuggling activities. RJRT, Reynolds International and Northern Brands International are responding to these subpoenas but are unable to predict the outcome of the grand jury's investigation. For a further discussion of litigation affecting the tobacco business see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tobacco--Governmental Activity." Litigation is subject to many uncertainties and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJRT or its affiliates (including RJRN Holdings and RJRN) or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and could encourage an increase in the number of such claims. There have been a number of political, legislative, regulatory, and other developments relating to the tobacco industry and cigarette smoking that have received wide media attention, including the Memorandum referred to above. These developments may negatively affect the outcomes of tobacco-related legal actions and encourage the commencement of additional similar litigation. Although it is impossible to predict the outcome of such events on pending litigation and the rate at which new lawsuits are filed against RJRT, RJRN and RJRN Holdings, a significant increase in litigation and/or in adverse outcomes for tobacco defendants could have an adverse effect on any one or all of these entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of valid defenses to any such actions and intend to defend such actions vigorously. RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses available to them and RJRT in litigation matters, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). Management is unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. ENVIRONMENTAL MATTERS The U.S. Government and various state and local governments have enacted or adopted laws and regulations concerning protection of the environment. The regulations promulgated by the Environmental Protection Agency and other governmental agencies under various statutes have resulted in, and will likely continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities. F-23 NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) In April 1995, RJRN Holdings was named a potentially responsible party (a "PRP") with certain third parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to a superfund site at which a former subsidiary of RJRN had operations. RJRN has also been named in an insurance coverage suit brought by another company named as a PRP at this site. In this lawsuit, DEL MONTE FRESH PRODUCE V. FIREMEN'S FUND INSURANCE, filed August 13, 1997 in the First Circuit Court of the State of Hawaii, the plaintiff seeks declaratory judgment that it is entitled to insurance coverage for the site or, in the alternative, that RJRN is obligated to indemnify Del Monte under the terms of the agreement by which RJRN sold that company in 1989. Certain subsidiaries of RJRN Holdings and RJRN have also been named as PRPs with third parties or may have indemnification obligations with respect to a number of additional sites. Liability under CERCLA is joint and several. RJRN Holdings' and RJRN's subsidiaries have been engaged in a continuing program to assure compliance with U.S., state and local laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and to estimate the cost of resolving these CERCLA matters, RJRN Holdings and RJRN do not expect such expenditures or other costs to have a material adverse effect on the business or financial condition of RJRN Holdings and RJRN and their subsidiaries taken as a whole. COMMITMENTS At December 31, 1997, commitments totalled approximately $900 million, principally for minimum operating leases, the purchase of leaf tobacco inventories and other contractual arrangements. NOTE 11--FINANCIAL INSTRUMENTS INTEREST RATE ARRANGEMENTS At December 31, 1997, Nabisco had: (i) $1.074 billion of interest rate caps with expiration dates within six months, (ii) $500 million of forward starting interest rate caps commencing within six months and with expiration dates six months thereafter, and (iii) $300 million of fixed to floating interest rate swaps expiring the beginning of 1999. These financial interest rate arrangements were entered into to reduce the potential impact of increases in interest rates on floating rate debt and swap a portion of its fixed rate debt to floating rate debt. In addition, in connection with certain puttable/callable fixed rate debt issued by Nabisco during January 1998, $600 million of U.S. Treasury locks expiring February 1998 and $900 million of written call options were entered into during 1997. The written call options were subsequently settled upon the issuance of the puttable/callable fixed rate debt. The U.S. Treasury locks and written call options were entered into to lock into the call premium and initial interest rates prior to issuance of such debt. The carrying amounts and estimated fair values of interest rate arrangements entered into as of December 31, 1997 and 1996 were as follows:
1997 1996 -------------------------------- -------------------------------- ASSETS/(LIABILITIES) ASSETS/(LIABILITIES) -------------------------------- -------------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE ----------------- ------------- ----------------- ------------- Interest rate swaps: Variable rate pay swaps................................. $ -- $ (1) $ (1) $ (2) Fixed rate pay swaps.................................... $ -- $ -- $ (6) $ (10) Interest rate caps........................................ $ 1 $ -- $ 2 $ 1 U.S. Treasury locks....................................... $ -- $ (3) $ -- $ -- Written call options...................................... $ -- $ (13) $ -- $ --
F-24 FOREIGN CURRENCY ARRANGEMENTS RJRN Holdings' subsidiaries have significant exposure to foreign exchange transactions in currencies other than their functional currencies. Exposures primarily include the U.S. dollar, German mark, French franc, British pound, Italian lira, Japanese yen, Swiss franc, Hong Kong dollar, Singapore dollar, Finnish markka, Canadian dollar, Spanish peseta, Dutch guilder, Brazilian real, Malaysian ringgit, Indonesian rupiah, Russian rouble, Romanian leu, and Turkish lira. Whenever possible, RJRN Holdings' policy is to net exposures and utilize natural offsets to minimize the effects of foreign currency transactions on cash flows; otherwise, consideration is given to foreign currency arrangements to protect RJRN Holdings and its subsidiaries from risk that the eventual dollar cash flows resulting from transactions with international parties will be adversely affected by changes in exchange rates. In addition, consideration is given to foreign currency arrangements to hedge foreign currency exposures on existing assets and liabilities, including certain international debt. At December 31, 1997 and 1996, RJRN Holdings and its subsidiaries had approximately $472 million and $608 million, respectively, of outstanding foreign exchange contracts with banks in which foreign currencies (primarily the Swiss franc, Spanish peseta, British pound, Canadian dollar and the German mark) were purchased, and approximately $267 million and $245 million, respectively, of outstanding foreign exchange contracts in which foreign currencies (primarily the Japanese yen, Spanish peseta, Brazilian real and Indonesian rupiah) were sold. The weighted average maturity of the arrangements outstanding at December 31, 1997 approximated two months. At December 31, 1997 and 1996, the carrying values and estimated fair values of foreign currency arrangements entered into were as follows:
1997 ------------------------- 1996 -------------------------------- ASSETS/(LIABILITIES) ------------------------- ASSETS/(LIABILITIES) FAIR -------------------------------- CARRYING VALUE VALUE CARRYING VALUE FAIR VALUE -------------- --------- ----------------- ------------- Forward foreign exchange contracts to purchase foreign currencies............................................... $3 $1 $ (7) $ (7) Forward foreign exchange contracts to sell foreign currencies............................................... $14 $15 $ 12 $ 13
MARKET AND CREDIT RISK The above interest rate and foreign currency arrangements entered into involve, to varying degrees, elements of market risk as a result of potential changes in future interest and foreign currency exchange rates. To the extent that the financial instruments entered into remain outstanding as effective hedges of existing interest rate and foreign currency exposure, the impact of such potential changes in future interest and foreign currency exchange rates on the financial instruments entered into would offset the related impact on the items being hedged. Also, RJRN Holdings and its subsidiaries may be exposed to credit losses in the event of non-performance by the counterparties to these financial instruments. However, RJRN Holdings and its subsidiaries continually monitor their positions and the credit ratings of their counterparties and therefore, do not anticipate any non-performance. There are no significant concentrations of credit risk with any individual counterparties or groups of counterparties as a result of any financial instruments entered into including those financial instruments discussed above. NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL The outstanding capital stock of RJRN Holdings at December 31, 1997 consisted of common stock, Series B preferred stock (stated value of $25,000 per share) and ESOP convertible preferred stock (stated value of $16 per share). All classes of preferred stock of RJRN Holdings (150,000,000 shares authorized at December 31, 1997) rank senior to common stock as to dividends and liquidation preferences. In addition, Series B depositary shares were issued in connection with the issuance of the Series B preferred stock. F-25 NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL (CONTINUED) Each Series B depositary share (12,043,940 outstanding at December 31, 1997 and 1996) represents a .001 ownership interest in a share of Series B preferred stock. Each share of Series B preferred stock (12,044 shares issued and outstanding at December 31, 1997 and 1996) bears cumulative cash dividends of $2,312.50 or $2.3125 per Series B depositary share per annum, payable quarterly in arrears. RJRN Holdings may redeem Series B preferred stock on or after August 19, 1998, resulting in the redemption of the Series B depositary shares at $25 per Series B depositary share plus accrued and unpaid dividends. In May 1997, 26,675,000 shares of Series C preferred stock mandatorily converted into 53,350,000 shares of common stock. RJRN Holdings and its subsidiaries sponsor a defined contribution plan in which matching contributions to eligible employees are made in the form of ESOP preferred stock. Every five shares of ESOP preferred stock (13,714,950 and 14,558,920 shares issued and outstanding at December 31, 1997 and 1996, respectively) is generally convertible into one share of common stock of RJRN Holdings, and bears cumulative dividends at 7.8125% of stated value per annum at least until April 10, 1999, payable semi-annually in arrears. The ESOP preferred stock is redeemable at the option of RJRN Holdings on or after April 10, 1999 at an initial redemption price of $16.25 per share. The redemption price declines thereafter to $16 per share on April 10, 2001, plus accrued and unpaid dividends. RJRN Holdings matches $.50 for every pre-tax dollar contributed by each eligible employee, up to a maximum of 6% of the employee's pay. The shares of ESOP preferred stock are allocated to employees at either a floor value of $16 per share or the fair market value of one-fifth of a share of common stock, whichever is higher. Unallocated shares totalled 4,182,985 and 6,423,948 at December 31, 1997 and 1996, respectively. During 1997, 1996 and 1995, approximately $32 million, $28 million and $23 million, respectively, was contributed to the ESOP by RJRN Holdings and approximately $18 million, $18 million and $19 million, respectively, of ESOP dividends were used to service the ESOP's debt to RJRN Holdings that was incurred in connection with the initial formation of the ESOP. NOTE 13--STOCK PLANS RJRN Holdings' 1989 stock plan provides for grants of options to purchase common stock of RJRN Holdings to non-employee directors, directors and key employees. A maximum of 6,000,000 shares may be issued under this plan. The options granted under the plan generally vest over three years, are separately exercisable for primarily ten years from the date of grant and are exercisable at a price that is generally the fair market value of the stock at the grant date. RJRN Holdings' 1990 long-term incentive plan ("LTIP") provides for grants of incentive stock options, other stock options, stock appreciation rights, restricted stock, purchase stock, dividend equivalent rights, performance units, performance shares and other stock-based grants to key employees. A maximum of 33,000,000 shares of common stock of RJRN Holdings may be issued under the LTIP. The options granted under the plan generally vest over three years, are exercisable for 10-15 years from date of grant, and are exercisable at a price that is generally the fair market value of the stock at the grant date. As of December 31, 1997, purchase stock, stock options other than incentive stock options, restricted stock and other stock-based grants have been granted under the LTIP. In 1995, employees of RJRN Holdings and its non-Nabisco subsidiaries surrendered 8,378,449 options in exchange for a new grant of options under the LTIP. These options are fully vested but are not exercisable for three years thereafter. Nabisco Holdings' 1994 long-term incentive plan is similar to the LTIP except that stock-based awards are denominated in shares of Class A common stock of Nabisco Holdings. In 1995, employees of Nabisco Holdings with outstanding stock options granted under RJRN Holdings' stock plans exchanged 4,968,214 of these options for options in the Nabisco Holdings' stock plan. Also in 1995, employees of RJRN F-26 NOTE 13--STOCK PLANS (CONTINUED) Holdings with outstanding stock options under RJRN Holdings' stock plans exchanged 264,989 of these options for options under the Nabisco Holdings' stock plan. The Nabisco Holdings' stock options granted (5,971,858) in exchange for the cancellation of RJRN Holdings' stock options are fully vested; however, such Nabisco Holdings' stock options may not be exercised for three years thereafter. The changes in stock options under RJRN Holdings' stock plans are as follows:
1997 1996 1995 -------------------------- --------------------------- ----------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------------- ----------- -------------- ----------- ------------- -------------- Balance at beginning of year......................... 17,783,323 $ 29.54 14,855,935 $ 28.40 16,166,323 $ 22.60-57.80 Options granted............... 589,600 32.37 3,792,447 34.57 12,837,460 26.88-32.25 Options exercised............. (396,363) 25.81 (595,112) 25.68 (168,097) 22.82-29.69 Options cancelled............. (598,519) 34.68 (269,947) 31.41 (13,979,751) 22.82-54.69 ------------- -------------- ------------- Balance at end of year........ 17,378,041 29.54 17,783,323 29.54 14,855,935 22.60-57.80 ------------- -------------- ------------- ------------- -------------- ------------- Exercisable at end of year.... 5,683,937 31.09 4,618,935 30.46 3,437,549 ------------- -------------- ------------- ------------- -------------- -------------
The changes in stock options under Nabisco Holdings' stock plan are as follows:
1997 1996 ------------------------- ------------------------- WEIGHTED- WEIGHTED- 1995 AVERAGE AVERAGE ------------------------------ EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------------ ----------- ------------ ----------- ------------ ---------------- Balance at beginning of year..................... 11,727,881 $ 28.57 8,909,663 $ 26.77 -- -- Options granted............... 2,758,500 37.22 3,114,200 33.83 9,043,263 $ 24.50 - 29.38 Options cancelled............. (326,854) 33.13 (295,982) 29.73 (133,600) 27.38 - 29.00 ------------ ------------ ------------ Balance at end of year........ 14,159,527 30.15 11,727,881 28.57 8,909,663 24.50 - 29.38 ------------ ------------ ------------ ------------ ------------ ------------
Additional information at December 31, 1997 with respect to options under RJRN Holdings' and Nabisco Holdings' stock plans are as follows:
RJRN NABISCO HOLDINGS HOLDINGS --------------- ---------------- Option price range at end of year............................................ $22.82-52.50 $24.50-46.31 Shares of common stock available for future grant........................... 15,851,816 14,370,820 Weighted average remaining contractual life of outstanding options at end of year...................................................................... 10.7 years 10.8 years
RJRN Holdings and its subsidiaries recognize and measure compensation costs related to employee stock plans utilizing the intrinsic value based method. Had compensation expense been determined based F-27 NOTE 13--STOCK PLANS (CONTINUED) upon the fair value of awards granted during 1997, 1996 and 1995, RJRN Holdings' net income and earnings per share would have been as follows:
1997 1996 1995 ------------------------- -------------------------- -------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------- ---------- ------------- ----------- ------------- ----------- Net income............................. $ 381 $ 354 $ 611 $ 591 $ 611 $ 542 Basic earnings per share............... $1.05 $0.96 $1.75 $1.69 $1.54 $1.33 Diluted earnings per share............. $1.03 $0.94 $1.74 $1.68 $1.53 $1.32 Weighted average grant date fair value of RJRN Holdings' options granted during the year....................... -- $6.79 -- $7.06 -- $5.11 Weighted average grant date fair value of Nabisco Holdings' options granted during the year....................... -- $12.55 -- $ 11.00 -- $ 11.41
For options granted, fair value was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
1997 1996 1995 ------------------------ ------------------------ ------------------------ RJRN NABISCO RJRN NABISCO RJRN NABISCO HOLDINGS HOLDINGS HOLDINGS HOLDINGS HOLDINGS HOLDINGS ----------- ----------- ----------- ----------- ----------- ----------- Dividend yield.................................... 5.8% 1.7% 5.3% 1.9% 5.5% 1.9% Expected volatility............................... 31% 23% 29% 24% 29% 27% Risk-free interest rate........................... 6.4% 6.6% 6.2% 6.4% 5.3% 6.8% Expected option lives (years)..................... 5 7 5 7 5 11
NOTE 14--RETIREMENT BENEFITS RJRN and its subsidiaries sponsor a number of non-contributory defined benefit pension plans covering most U.S. and certain foreign employees. Plans covering regular full-time employees in the tobacco operations as well as the majority of salaried employees in the corporate groups and food operations provide pension benefits that are based on credits, determined by age, earned throughout an employee's service and final average compensation before retirement. Plan benefits are offered as lump sum or annuity options. Plans covering hourly as well as certain salaried employees in the corporate groups and food operations provide pension benefits that are based on the employee's length of service and final average compensation before retirement. RJRN's policy is to fund the cost of current service benefits and past service cost over periods not exceeding 30 years to the extent that such costs are currently tax deductible. Additionally, RJRN and its subsidiaries participate in several (i) multi-employer plans, which provide benefits to certain union employees, and (ii) defined contribution plans, which provide benefits to certain employees in foreign countries. Employees in foreign countries who are not U.S. citizens are covered by various post-employment benefit arrangements, some of which are considered to be defined benefit plans for accounting purposes. F-28 NOTE 14--RETIREMENT BENEFITS (CONTINUED) A summary of the components of pension expense is as follows:
YEARS ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------- ------------- ------------- ------------- Defined benefit pension plans: Service cost--benefits earned during the period.......................... $ 86 $ 96 $ 69 Interest cost on projected benefit obligation............................ 291 281 265 Less actual return on plan assets........................................ (493) (445) (555) Net amortization and deferral............................................ 186 159 308 ----- ----- ----- Total................................................................ 70 91 87 Multi-employer and other defined contribution plans........................ 39 42 39 ----- ----- ----- Total pension expense................................................ $ 109 $ 133 $ 126 ----- ----- ----- ----- ----- -----
The principal plans used the following actuarial assumptions for accounting purposes:
U.S. PLANS FOREIGN PLANS -------------------- -------------------------------- DECEMBER 31 1997 1996 1997 1996 - ------------------------------------------------------------ --------- --------- --------------- --------------- Weighted average discount rate.............................. 7% 7.5% 3.5%-8% 4%-9% Rate of increase in compensation levels..................... 5% 5% 3%-5% 3%-5% Expected long-term rate of return on assets................. 9.5% 9.5% 4.5%-8.25% 4.75%-8.5%
The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at December 31, 1997 and 1996 for U.S. defined benefit pension plans:
U.S. PLANS ---------------------------------------------------------------------- 1997 1996 ---------------------------------- ---------------------------------- PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS EXCEEDED BENEFITS ASSETS BENEFITS ASSETS --------------- ----------------- --------------- ----------------- Actuarial present value of: Vested benefits................................. $ 300 $ 3,107 $ 3,032 $ 120 Non-vested benefits............................. 25 119 32 3 ------ ------ ------ ------ Accumulated benefit obligation.................. 325 3,226 3,064 123 Effect of future salary increases............... 34 322 301 14 ------ ------ ------ ------ Projected benefit obligation.................... 359 3,548 3,365 137 Plan assets at fair market value.................. 368 3,066 3,172 17 ------ ------ ------ ------ Plan assets in excess of (less than) projected benefit obligation.............................. 9 (482) (193) (120) Unrecognized net (gain) loss...................... (13) 177 (65) 41 Unrecognized prior service cost................... 4 (8) (5) (6) Adjustment required to recognize minimum pension liability....................................... -- (40) -- (21) ------ ------ ------ ------ Net pension assets (liabilities) recognized in the consolidated balance sheets..................... $ -- $ (353) $ (263) $ (106) ------ ------ ------ ------ ------ ------ ------ ------
F-29 NOTE 14--RETIREMENT BENEFITS (CONTINUED) The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at December 31, 1997 and 1996 for foreign defined benefit pension plans:
FOREIGN PLANS ------------------------------------------------------------------------ 1997 1996 ---------------------------------- ------------------------------------ PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEEDED ACCUMULATED ASSETS EXCEEDED ACCUMULATED ACCUMULATED BENEFITS EXCEEDED ACCUMULATED BENEFITS EXCEEDED BENEFITS ASSETS BENEFITS ASSETS --------------- ----------------- ----------------- ----------------- Actuarial present value of: Vested benefits................................. $ 242 $ 175 $ 283 $ 105 Non-vested benefits............................. 3 28 2 29 ------ ------ ----- ------ Accumulated benefit obligation.................. 245 203 285 134 Effect of future salary increases............... 24 27 27 38 ------ ------ ----- ------ Projected benefit obligation.................... 269 230 312 172 Plan assets at fair market value.................. 293 60 331 3 ------ ------ ----- ------ Plan assets in excess of (less than) projected benefit obligation.............................. 24 (170) 19 (169) Unrecognized net (gain) loss...................... (8) 12 (21) 11 Unrecognized prior service cost................... 12 -- 10 -- Transition amount................................. (5) 9 (6) 11 Adjustment required to recognize minimum pension liability....................................... -- (6) -- (2) ------ ------ ----- ------ Net pension assets (liabilities) recognized in the consolidated balance sheets..................... $ 23 $ (155) $ 2 $ (149) ------ ------ ----- ------ ------ ------ ----- ------
At December 31, 1997, approximately 92% of the plans' assets were invested in listed stocks and bonds and other highly liquid investments. The balance consisted of various income-producing investments. In addition to providing pension benefits, RJRN provides certain healthcare and life insurance benefits for retired employees and their dependents. Substantially all of its regular full-time employees, including certain employees in foreign countries, may become eligible for those benefits if they reach retirement age while working for RJRN and its subsidiaries. Net postretirement health and life insurance benefit costs consisted of the following:
YEARS ENDED DECEMBER 31 1997 1996 1995 - ---------------------------------------------------------------------- ----------------- ----------------- ----------------- Service cost--benefits earned during the period....................... $ 14 $ 16 $ 18 Interest cost on accumulated postretirement benefit obligation........ 68 64 62 --- --- --- Net postretirement healthcare and life insurance costs.............. $ 82 $ 80 $ 80 --- --- --- --- --- ---
F-30 NOTE 14--RETIREMENT BENEFITS (CONTINUED) Postretirement health and life insurance benefit plans currently are not funded. The status of the plans at December 31, 1997 and 1996 was as follows:
1997 1996 --------- --------- Actuarial present value of accumulated postretirement benefit obligation: Retirees..................................................................................... $ 768 $ 697 Fully eligible active plan participants...................................................... 130 131 Other active plan participants............................................................... 289 265 Unrecognized actuarial amounts................................................................. (174) (95) --------- --------- Accrued postretirement healthcare and life insurance costs..................................... $ 1,013 $ 998 --------- --------- --------- ---------
The assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation was 6.5% in 1997 and 6.0% in 1998 gradually declining to 5% by the year 2000 and remaining at that level thereafter. A one percentage point increase in the assumed healthcare cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 and the aggregate of the service and interest cost components of the net postretirement benefit cost for the year then ended by approximately $82 million and $6 million, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 7.5% as of December 31, 1997 and 1996, respectively. NOTE 15--SEGMENT INFORMATION INDUSTRY SEGMENT DATA RJRN Holdings is a holding company whose subsidiaries are engaged principally in the manufacture, distribution and sale of tobacco products, cookies, crackers, and other food products. Cigarettes are manufactured in the United States by RJRT and in approximately 40 foreign countries and territories by Reynolds International and subsidiaries or licensees of RJRT and are sold throughout the United States and in approximately 170 markets around the world including Europe, the Middle East, Africa, Asia, the CIS and Baltics, and Canada. RJRN's 80.7%-owned subsidiary, Nabisco Holdings, manufactures and markets cookies, crackers, non-chocolate candy and gum products, nuts and snacks, various margarines and spreads, and other specialty products under several brand names in the United States, Canada, Europe, Asia, and Latin America. F-31 NOTE 15--SEGMENT INFORMATION (CONTINUED)
YEARS ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------- --------- --------- --------- Net sales: Tobacco........................................................................ $ 8,323 $ 8,174 $ 7,714 Food........................................................................... 8,734 8,889 8,294 --------- --------- --------- Consolidated net sales....................................................... $ 17,057 $ 17,063 $ 16,008 --------- --------- --------- --------- --------- --------- Operating income: Tobacco........................................................................ $ 1,023 $ 1,845 $ 1,500 Food........................................................................... 1,082 474 902 Headquarters................................................................... (70) (67) (64) --------- --------- --------- Consolidated operating income................................................ $ 2,035 $ 2,252 $ 2,338 --------- --------- --------- --------- --------- --------- Capital expenditures: Tobacco........................................................................ $ 371 $ 304 $ 231 Food........................................................................... 392 437 513 --------- --------- --------- Consolidated capital expenditures............................................ $ 763 $ 741 $ 744 --------- --------- --------- --------- --------- --------- Depreciation expense: Tobacco........................................................................ $ 184 $ 217 $ 236 Food........................................................................... 277 270 244 Headquarters................................................................... 2 2 2 --------- --------- --------- Consolidated depreciation expense............................................ $ 463 $ 489 $ 482 --------- --------- --------- --------- --------- ---------
DECEMBER 31 1997 1996 - -------------------------------------------------------------------------------------- --------- --------- Assets: Tobacco............................................................................. $ 18,297 $ 18,952 Food................................................................................ 12,100 12,235 Headquarters(1)..................................................................... 281 102 --------- --------- Consolidated assets............................................................... $ 30,678 $ 31,289 --------- --------- --------- ---------
- ------------------------ (1) Cash and cash equivalents for the domestic tobacco operations are included in Headquarters' assets. F-32 NOTE 15--SEGMENT INFORMATION (CONTINUED) GEOGRAPHIC DATA
YEARS ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------- --------- --------- --------- Net sales: United States (including U.S. export sales).................................... $ 11,492 $ 11,513 $ 11,295 Europe......................................................................... 3,022 2,897 2,184 Other geographic areas......................................................... 3,675 3,631 3,261 Less transfers between geographic areas(1)..................................... (1,132) (978) (732) --------- --------- --------- Consolidated net sales....................................................... $ 17,057 $ 17,063 $ 16,008 --------- --------- --------- --------- --------- --------- Operating income: United States.................................................................. $ 1,696 $ 1,606 $ 1,749 Europe......................................................................... 76 300 299 Other geographic areas......................................................... 333 413 354 Headquarters................................................................... (70) (67) (64) --------- --------- --------- Consolidated operating income................................................ $ 2,035 $ 2,252 $ 2,338 --------- --------- --------- --------- --------- ---------
DECEMBER 31 1997 1996 - ----------------------------------------------------------------------------------------- --------- --------- Assets: United States.......................................................................... $ 24,399 $ 24,860 Europe................................................................................. 2,416 2,843 Other geographic areas................................................................. 3,582 3,484 Headquarters(2)........................................................................ 281 102 --------- --------- Consolidated assets.................................................................. $ 30,678 $ 31,289 --------- --------- --------- ---------
- ------------------------ (1) Transfers between geographic areas are generally made at fair market value. (2) Cash and cash equivalents for the domestic tobacco operations are included in Headquarters' assets. NOTE 16--ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31 1997 1996 1995 - ------------------------------------------------------------------------------------------ --------- --------- --------- Advertising expense..................................................................... $ 603 $ 544 $ 496 Research and development expense........................................................ 178 191 229 Rent expense............................................................................ 182 167 163
F-33 NOTE 17--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH --------- --------- --------- --------- 1997(1)(2) Net sales................................................................ $ 3,779 $ 4,286 $ 4,409 $ 4,583 Operating income......................................................... 653 716 484 182 Income (loss) before extraordinary item.................................. 213 243 122 (176) Net income (loss)........................................................ 213 243 122 (197) Per share data:(3) Basic income (loss) per share before extraordinary item................ $ .62 $ .72 $ .34 $ (.58) Diluted income (loss) per share before extraordinary item.............. .62 .71 .34 (.58) Common stock dividends declared........................................ .5125 .5125 .5125 .5125 Market price of common stock --high............................................................... $ 38 7/8 $ 36 1/2 $ 36 1/8 $37 15/16 --low................................................................ 30 5/8 27 29 9/16 29 14/16 --close.............................................................. 32 1/4 33 34 3/8 37 1/2
FIRST SECOND THIRD FOURTH --------- --------- --------- --------- 1996(4) Net sales................................................................. $ 3,886 $ 4,203 $ 4,349 $ 4,625 Operating income.......................................................... 640 237 683 692 Income (loss) before extraordinary item................................... 198 (27) 225 215 Net income (loss)......................................................... 198 (27) 225 215 Per share data:(3) Basic income (loss) per share before extraordinary item................. $ .58 $ (.11) $ .66 $ .63 Diluted income (loss) per share before extraordinary item............... .57 (.11) .66 .63 Common stock dividends declared......................................... .4625 .4625 .4625 .4625 Market price of common stock --high................................................................ $ 35 1/4 $ 34 1/2 $ 32 3/8 $ 34 5/8 --low................................................................. 29 29 25 1/8 25 3/4 --close............................................................... 30 1/4 31 3/4 26 1/8 34
- ------------------------ (1) The third quarter of 1997 includes $219 million ($133 million after-tax) related to the settlement agreements reached by RJRT with the Florida and Mississippi state attorneys general and in certain class action cases. (2) The fourth quarter of 1997 includes $301 million ($235 million after-tax) of restructuring expense and approximately $89 million ($78 million after-tax) of restructuring-related expenses at the tobacco operations and $140 million ($85 million after-tax) related to the settlement agreement reached by RJRT with the Texas state attorney general. (3) 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. (4) The second quarter of 1996 includes $428 million ($241 million after-tax, net of minority interest) of restructuring expense at the food operations. The second, third and fourth quarters of 1996 include $10 million, $17 million and $70 million, respectively, of restructuring-related expenses at the food operations. ---------------------------- F-34 SCHEDULE I RJR NABISCO HOLDINGS CORP. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31 1997 1996 1995 - -------------------------------------------------------------------- ------------- ------------- ------------- Interest and debt expense........................................... $ (98) $ (98) $ (29) Other income (expense), net......................................... 7 6 2 ------------- ------------- ------------- Loss before income taxes...................................... (91) (92) (27) Benefit for income taxes............................................ (36) (34) (15) ------------- ------------- ------------- Loss before equity in income from subsidiaries................ (55) (58) (12) Equity in income from subsidiaries, net of income taxes............. 457 669 639 ------------- ------------- ------------- Income before extraordinary item.............................. 402 611 627 Extraordinary item--loss on early extinguishments of debt of subsidiary, net of income taxes................................... (21) -- (16) ------------- ------------- ------------- Net income.................................................... $ 381 $ 611 $ 611 ------------- ------------- ------------- ------------- ------------- -------------
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)
YEARS ENDED DECEMBER 31 1997 1996 1995 - -------------------------------------------------------------------- ------------- ------------- ------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income........................................................ $ 381 $ 611 $ 611 ------------- ------------- ------------- Adjustments to reconcile net income to net cash flows from operating activities: Deferred income tax provision (benefit)......................... 1 (6) 1 Extraordinary item.............................................. 43 -- 29 Equity in income from subsidiaries, net of income taxes........................................... (457) (669) (639) Dividends received from subsidiary.............................. 834 1,108 267 Other, net...................................................... 16 (2) (36) ------------- ------------- ------------- Total adjustments........................................... 437 431 (378) ------------- ------------- ------------- Net cash flows from operating activities........................ 818 1,042 233 ------------- ------------- ------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Repurchase of common stock........................................ -- (100) -- Dividends paid on common and preferred stock...................... (721) (686) (583) Other, net--including intercompany transfers and payments......... (98) (257) 338 ------------- ------------- ------------- Net cash flows used in financing activities..................... (819) (1,043) (245) ------------- ------------- ------------- Net change in cash and cash equivalents......................... (1) (1) (12) Cash and cash equivalents at beginning of period.................... 1 2 14 ------------- ------------- ------------- Cash and cash equivalents at end of period.......................... $ -- $ 1 $ 2 ------------- ------------- ------------- ------------- ------------- -------------
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 1997 1996 - ----------------------------------------------------------------------------------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ -- $ 1 Accounts and notes receivable, net............................................... 4 5 ------------- ------------- TOTAL CURRENT ASSETS....................................................... 4 6 ------------- ------------- Investment in subsidiaries......................................................... 11,115 11,702 Other assets....................................................................... 17 23 ------------- ------------- $ 11,136 $ 11,731 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities......................................... $ 178 $ 158 Income taxes accrued............................................................. 33 24 ------------- ------------- TOTAL CURRENT LIABILITIES.................................................. 211 182 ------------- ------------- Intercompany payable, net.......................................................... 229 355 Other noncurrent liabilities....................................................... 18 -- Deferred income taxes.............................................................. 64 63 Junior subordinated debentures..................................................... 983 983 Commitments and contingencies (note D) Stockholders' equity: Series C convertible preferred stock............................................. -- 3 Other preferred stock............................................................ 520 534 Common stock--(1997--327,158,090 shares issued, 1996--273,574,308 shares issued)........................................................................ 3 3 Paid-in capital.................................................................. 9,668 10,038 Retained earnings................................................................ -- -- Cumulative translation adjustments............................................... (391) (221) Treasury stock, at cost.......................................................... (100) (100) Other stockholders' equity....................................................... (69) (109) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY................................................. 9,631 10,148 ------------- ------------- $ 11,136 $ 11,731 ------------- ------------- ------------- -------------
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--BASIS OF PRESENTATION Certain prior years' amounts have been reclassified to conform to the 1997 presentation. NOTE B--SUPPLEMENTAL CASH FLOWS INFORMATION For information regarding certain non-cash financing activities, see note 9 to the consolidated financial statements. NOTE C--JUNIOR SUBORDINATED DEBENTURES See note 9 to the consolidated financial statements for information regarding the issuance of the junior subordinated debentures. RJRN Holdings' obligations under the junior subordinated debentures are unsecured and subordinate to all senior indebtedness of RJRN Holdings, but junior to all future stock issuances and stock guarantees. As of December 31, 1997, RJRN Holdings had no senior indebtedness other than its guarantee of RJRN's obligations under RJRN's credit agreements. RJRN Holdings guarantees all distributions made by its subsidiary trust, subordinate to any distributions to any senior debenture holders and junior subordinated debenture holders. Interest on the junior subordinated debentures is payable quarterly in arrears. The junior subordinated debentures may be redeemed by RJRN Holdings on or after August 19, 1998 and mature in December, 2044. Covenants applicable to the junior subordinated debentures limit RJRN Holdings' ability to enter into certain capital stock transactions, among other things, if RJRN Holdings is in default of any payments or guarantees with respect to the junior subordinated debentures. NOTE D--COMMITMENTS AND CONTINGENCIES RJRN Holdings has guaranteed the indebtedness of RJRN under RJRN's credit facilities. For disclosure of additional contingent liabilities, see note 10 to the consolidated financial statements. S-4 SCHEDULE I RJR NABISCO, INC. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31 1997 1996 1995 - ---------------------------------------------------------------------------------- --------- --------- --------- Administrative expenses........................................................... $ (5) $ (5) $ -- Interest and debt expense......................................................... (433) (454) (614) Other income (expense), net....................................................... 942 956 923 --------- --------- --------- Income before income taxes.................................................. 504 497 309 Provision for income taxes........................................................ 173 169 80 --------- --------- --------- Income before equity in income from subsidiaries.................................. 331 328 229 Equity in income from subsidiaries, net of income taxes........................... 123 338 409 --------- --------- --------- Income before extraordinary item............................................ 454 666 638 Extraordinary item-loss on early extinguishments of debt of a subsidiary, net of income taxes and minority interest.............................................. (21) -- (16) --------- --------- --------- Net income........................................................................ $ 433 $ 666 $ 622 --------- --------- --------- --------- --------- ---------
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 DECEMBER 31 1997 1996 1995 - ------------------------------------------------------------------------------------ --------- --------- --------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income........................................................................ $ 433 $ 666 $ 622 --------- --------- --------- Adjustments to reconcile net income to net cash flows from (used in) operating activities: Deferred income tax provision (benefit)......................................... 7 (8) (146) Extraordinary item.............................................................. 43 -- 29 Equity in income from subsidiaries, net of income taxes........................................................... (123) (338) (409) Dividends received from subsidiary.............................................. 141 125 58 Other, net...................................................................... 1 20 (288) --------- --------- --------- Total adjustments........................................................... 69 (201) (756) --------- --------- --------- Net cash flows from (used in) operating activities.............................. 502 465 (134) --------- --------- --------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Capital expenditures.............................................................. -- (1) -- --------- --------- --------- Net cash flows from (used in) investing activities.............................. -- (1) -- --------- --------- --------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.......................................... 345 -- 666 Repayments of long-term debt...................................................... (28) (118) (800) Increase (decrease) in short-term borrowings...................................... (295) 53 (2,390) Financing and advisory fees paid.................................................. -- -- (29) Dividends paid to parent.......................................................... (834) (1,108) (267) Other, net--including intercompany transfers and payments......................... 437 717 2,919 --------- --------- --------- Net cash flows from (used in) financing activities.............................. (375) (456) 99 --------- --------- --------- Net change in cash and cash equivalents......................................... 127 8 (35) Cash and cash equivalents at beginning of period.................................... 13 5 40 --------- --------- --------- Cash and cash equivalents at end of period.......................................... $ 140 $ 13 $ 5 --------- --------- --------- --------- --------- ---------
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 1997 1996 - -------------------------------------------------------------------------------------------- --------- --------- ASSETS Current assets: Cash and cash equivalents................................................................. $ 140 $ 13 Accounts and notes receivable............................................................. 40 63 Prepaid expenses.......................................................................... 6 1 --------- --------- TOTAL CURRENT ASSETS................................................................ 186 77 --------- --------- Intercompany receivable, net................................................................ 10,802 11,248 Investment in subsidiaries.................................................................. 5,815 6,067 Property, plant and equipment, net.......................................................... 5 6 Other assets................................................................................ 56 72 --------- --------- $ 16,864 $ 17,470 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued liabilities.................................................. $ 171 $ 184 Current maturities of long-term debt...................................................... -- 24 Income taxes accrued...................................................................... 42 43 --------- --------- TOTAL CURRENT LIABILITIES........................................................... 213 251 --------- --------- Long-term debt (less current maturities).................................................... 4,944 4,928 Other noncurrent liabilities................................................................ 54 71 Deferred income taxes....................................................................... 574 551 Commitments and contingencies (note C) Stockholder's equity: Paid-in capital........................................................................... 11,470 11,890 Retained earnings......................................................................... -- -- Cumulative translation adjustments........................................................ (391) (221) --------- --------- TOTAL STOCKHOLDER'S EQUITY.......................................................... 11,079 11,669 --------- --------- $ 16,864 $ 17,470 --------- --------- --------- ---------
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--BASIS OF PRESENTATION Certain prior years' amounts have been reclassified to conform to the 1997 presentation. NOTE B--SUPPLEMENTAL CASH FLOWS INFORMATION For information regarding certain non-cash financing activities, see note 9 to the consolidated financial statements. NOTE C--COMMITMENTS AND CONTINGENCIES RJR Nabisco, Inc. has guaranteed most of the indebtedness of its international tobacco subsidiary. For disclosure of contingent liabilities, see note 10 to the consolidated financial statements. ------------------------ S-8 EXHIBIT INDEX
EXHIBIT NO. - ----------- 3.1 (a) Composite of the Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp. as amended to and including April 12, 1995 (incorporated by reference to Exhibit 3.1(a) of the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended March 31, 1995, filed May 19, 1995 (the "First Quarter 1995 Form 10-Q")). 3.1 (b) Certificate of Retirement of certain shares of Series B Cumulative Preferred Stock, filed October 11, 1995 (incorporated by reference to Exhibit 3.1(m) of the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No.'s I-10215 and I-6388, filed on February 22, 1996 (the "1995 Form 10-K")). *3.2 By-Laws of RJR Nabisco Holdings Corp. as Amended Effective December 15, 1997. 3.3 A composite of the Certificate of Incorporation of RJR Nabisco, Inc., as amended to May 13, 1994 (incorporated by reference to Exhibit 3.3(d) of the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No.'s I- 10215 and I-6388 filed on February 23, 1995 (the "1994 Form 10-K")). *3.4 By-Laws of RJR Nabisco, Inc. as Amended Effective December 15, 1997. 4.1 Amended and Restated Indenture, dated as of July 24, 1995, between RJR Nabisco, Inc. and Citibank, N.A., dated as of July 24, 1995 (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended June 30, 1995 (the "Second Quarter 1995 10-Q")). 4.2 Indenture (the "TOPrS Indenture"), dated as of September 21, 1995, between RJR Nabisco Holdings Corp. and the Bank of New York (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of RJR Nabisco Holdings Corp. and RJR Nabisco Holdings Capital Trust I, Registration Nos. 33-60415 and 33-60415-01, filed June 20, 1995 (the "TOPrS Registration Statement")). 4.3 Form of First Supplemental Indenture to the TOPrS Indenture (incorporated by reference to Exhibit 4.2 to the TOPrS Registration Statement). 4.4 Form of Amended and Restated Declaration of Trust of RJR Nabisco Holdings Capital Trust I (incorporated by reference to Exhibit 4.5 to the TOPrS Registration Statement). 4.5 Form of Preferred Security of RJR Nabisco Holdings Capital Trust I (included in Exhibit 4.4 above). 4.6 Form of Junior Subordinated Debenture (included in Exhibit 4.2 above). 4.7 Form of Guarantee Agreement with respect to Preferred Securities between RJR Nabisco Holdings Corp. and the Bank of New York as the Guarantee Trustee (incorporated by reference to Exhibit 4.8 to the TOPrS Registration Statement). 4.8 Indenture, dated as of June 5, 1995, between Nabisco, Inc. and Citibank, N.A., (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 of Nabisco, Inc., Registration No. 33-90224, filed March 29, 1995). 4.9 The Registrants agree to furnish copies of any instrument defining the rights of holders of long-term debt of the Registrants and their consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrants and their consolidated subsidiaries to the Commission upon request.
EXHIBIT NO. - ----------- 10.1 Credit Agreement (the "Three Year Credit Agreement"), dated as of April 28, 1995, among RJR Nabisco, Inc., as Borrower, RJR Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase Manhattan Bank, N.A., Chemical Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents, and various lending institutions (incorporated by reference to Exhibit 10.1 to the Second Quarter 1995 Form 10-Q). 10.2 Credit Agreement (the "364 Day Credit Agreement"), dated as of April 28, 1995, among RJR Nabisco, Inc., as Borrower, RJR Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase Manhattan Bank, N.A., Chemical Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents, and various lending institutions (incorporated by reference to Exhibit 10.2 to the Second Quarter 1995 Form 10-Q). 10.3 Agreement and Waiver to the Three Year Credit Agreement and the 364 Day Credit Agreement (collectively, the "RJRN Credit Agreements"), dated as of July 27, 1995 (incorporated by reference to Exhibit 10.5 to the Second Quarter 1995 Form 10-Q). 10.4 First Amendment, dated as of September 12, 1995, to the RJRN Credit Agreements (incorporated by reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 filed October 31, 1995 (the "Third Quarter 1995 Form 10-Q")). 10.5 Second Amendment, dated as of June 3, 1996, to the 364 Day Credit Agreement (incorporated by reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 filed July 31, 1996 (the "Second Quarter 1996 Form 10-Q")). 10.6 Second Amendment to the Three Year Credit Agreement and Third Amendment to the 364 Day Credit Agreement, dated as of January 31, 1997 (incorporated by reference to Exhibit 10.6 to the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed March 14, 1997 (the "1996 Form 10-K")). 10.7 Fourth Amendment to the 364 Day Credit Agreement, dated as of April 4, 1997 (incorporated by reference to Exhibit 10.6 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997, filed August 8, 1997 (the "Second Quarter 1997 Form 10-Q")). 10.8 Third Amendment to the Three Year Credit Agreement and Fifth Amendment to the 364 Day Credit Agreement, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, filed November 5, 1997 (the "Third Quarter 1997 Form 10-Q")). *10.9 Fourth Amendment to the Three Year Credit Agreement and Sixth Amendment to the 364 Day Credit Agreement, dated as of December 5, 1997. *10.10 Fifth Amendment to the Three Year Credit Agreement and Seventh Amendment to the 364 Day Credit Agreement, dated as of February 13, 1998. 10.11 Credit Agreement (the "Five Year Nabisco Credit Agreement"), dated as of October 31, 1996, among Nabisco, Inc., as Borrower, Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents, and various lending institutions (incorporated by reference to Exhibit 10.7 to the 1996 Form 10-K). 10.12 Credit Agreement (the "364 Day Nabisco Credit Agreement"), dated as of October 31, 1996, among Nabisco, Inc., as Borrower, Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase Manhattan Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents, and various lending institutions (incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K). *10.13 First Amendment to the 364 Day Nabisco Credit Agreement, dated as of September 18, 1997. 10.14 RJR Nabisco, Inc. Annual Incentive Award Plan, as amended and restated effective January 1, 1997 (incorporated by reference to Exhibit 10.2 of the Third Quarter 1997 Form 10-Q).
EXHIBIT NO. - ----------- 10.15 RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan as amended and restated effective April 16, 1997 (incorporated by reference to Exhibit 10.1 of the Second Quarter 1997 Form 10-Q). 10.16 Form of Deferred Stock Unit Agreement between RJR Nabisco Holdings Corp. and the Director named therein dated as of April 16, 1997 (incorporated by reference to Exhibit 10.2 of the Second Quarter 1997 Form 10-Q). 10.17 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the Director named therein dated as of April 16, 1997 (incorporated by reference to Exhibit 10.3 of the Second Quarter 1997 Form 10-Q). 10.18 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1997 grant -- 1 year period) dated as of February 28, 1997 (incorporated by reference to Exhibit 10.4 of the Second Quarter 1997 Form 10-Q). 10.19 Form of Restricted Stock Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein dated as of June 16, 1997 (incorporated by reference to Exhibit 10.5 of the Second Quarter 1997 Form 10-Q). 10.20 Non-Qualified Stock Option Agreement dated January 10, 1997 between RJR Nabisco Holdings Corp. and Steven F. Goldstone (incorporated by reference to Exhibit 10.1 of the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997, filed May 13, 1997 (the "First Quarter 1997 Form 10-Q")) 10.21 Form of Performance Appreciation Right Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (incorporated by reference to Exhibit 10.2 of the First Quarter 1997 Form 10-Q). 10.22 Restricted Stock Unit Agreement dated March 24, 1997 between RJR Nabisco Holdings Corp. and David B. Rickard (incorporated by reference to Exhibit 10.3 of the First Quarter 1997 Form 10-Q). 10.23 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996; three-year period) (incorporated by reference to Exhibit 10.2 of the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996, filed on May 1, 1996 (the "First Quarter 1996 Form 10-Q")). 10.24 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996 grant-regular) incorporated by reference to Exhibit 10.3 of the First Quarter 1996 Form 10-Q. 10.25 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein(1996 grant-insider) (incorporated by reference to Exhibit 10.4 of the First Quarter 1996 Form 10-Q). 10.26 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996 grant-executive)(incorporated by reference to Exhibit 10.5 of the First Quarter 1996 Form 10-Q). 10.27 Amendment to Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1996 grant-insider) (incorporated by reference to Exhibit 10.5 to the Second Quarter 1996 Form 10-Q). 10.28 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")).
EXHIBIT NO. - ----------- 10.29 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 Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989 (the "1988 Form 10-K")). 10.30 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). 10.31(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). 10.31(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). 10.32 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). 10.33 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). 10.34 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). 10.35(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). 10.35(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). 10.35(c) Amendment to Supplemental Executive Retirement Plan, dated April 10, 1993 (incorporated by reference to the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No.'s I- 10215 and I-6388 filed on February 24, 1994 (the "1993 Form 10-K")). 10.36 Amended and Restated Employment Agreement (dated June 1, 1996) by and between R.J. Reynolds International B.V. and Pierre deLabouchere (incorporated by reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the Third Quarter ended September 30, 1996, filed November 1, 1996 (the "Third Quarter 1996 Form 10-Q")). 10.37 Engagement Agreement (dated March 3, 1995) between RJR Nabisco Holdings Corp. and Steven F. Goldstone (incorporated by reference to Exhibit 10.38 of the 1995 Form 10-K). 10.38 Amended and Restated Employment Agreement (dated December 5,1995) by and among RJR Nabisco Holdings Corp., and RJR Nabisco, Inc. and Steven F. Goldstone (incorporated by reference to Exhibit 10.40 of the 1995 Form 10-K). 10.39 Contingent Performance Share Agreement (dated December 5, 1995) between RJR Nabisco Holdings Corp. and Steven F. Goldstone (incorporated by reference to Exhibit 10.42 of the 1995 Form 10-K). 10.40 Secured Promissory Note (dated December 5, 1995) of Steven F. Goldstone in favor of RJR Nabisco Holdings Corp. (incorporated by reference to Exhibit 10.43 of the 1995 Form 10-K). 10.41 Secured Promissory Note (dated May 15, 1996) of Steven F. Goldstone in favor of Nabisco Holdings Corp. (incorporated by reference to Exhibit 10.6 to the Third Quarter 1996 Form 10-Q). 10.42 Amendment dated December 5, 1995 to Employment Agreement between RJR Nabisco Holdings Corp. and Andrew J. Schindler (incorporated by reference to Exhibit 10.44 of the Registrants' 1995 Form 10-K).
EXHIBIT NO. - ----------- 10.43 Participation Agreement RJR Nabisco, Inc. Supplemental Executive Retirement Plan for Andrew J. Schindler dated December 28, 1995 (incorporated by reference to Exhibit 10.45 of the Registrants' 1995 Form 10-K). 10.44 Amended and Restated Deferred Compensation Plan for RJR Directors (dated as of September 1, 1996) (incorporated by reference to Exhibit 10.2 of the Third Quarter 1996 Form 10-Q). 10.45 Amended and Restated Equity Incentive Award Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries (dated as of September 1, 1996) (incorporated by reference to Exhibit 10.3 to the Third Quarter 1996 Form 10-Q). 10.46 Performance Unit Program under RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the First Quarter 1994 Form 10-Q). 10.47 Amendment to Non-Qualified Stock Option Agreements dated prior to October 11, 1995 (incorporated by reference to Exhibit 10.75 of the 1995 Form 10-K). 10.48 Form of Non-Qualified Stock Option Agreement dated April 27, 1995 between RJR Nabisco Holdings Corp. and the grantee named therein (Reissued options) (incorporated by reference to Exhibit 10.77 of the 1995 Form 10-K). 10.49 Form of Non-Qualified Stock Option Agreement dated April 27, 1995 between RJR Nabisco Holdings Corp. and the grantee named therein (Premium options) (incorporated by reference to Exhibit 10.78 of the 1995 Form 10-K). 10.50 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (incorporated by reference to Exhibit 10.79 of the 1995 Form 10-K). 10.51 Form of Deferred Stock Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein dated as of May 31, 1996 (incorporated by reference to Exhibit 10.5 to the Third Quarter 1996 Form 10-Q). 10.52 Amendment dated July 10, 1995 to Executive Equity Program Agreement under the 1990 Long Term Incentive Plan between RJR Nabisco Holdings Corp. and the grantee named therein (incorporated by reference to Exhibit 10.82 of the 1995 Form 10-K). 10.53 Form of Employment Agreement dated October 11, 1995 (incorporated by reference to Exhibit 10.83 of the 1995 Form 10-K). 10.54 Form of Employment Agreement dated November 1, 1995 (incorporated by reference to Exhibit 10.84 of the 1995 Form 10-K). 10.55 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp., and Director named therein (Election version) (incorporated by reference to Exhibit 10.86 of the 1995 Form 10-K). 10.56 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp., and Director named therein (Annual version) (incorporated by reference to Exhibit 10.87 of the 1995 Form 10-K). 10.57 Settlement Agreement dated August 25, 1997, between the State of Florida and settling defendants in THE STATE OF FLORIDA V. AMERICAN TOBACCO COMPANY (incorporated by reference to Exhibit 2 to the Registrants' Current Report on Form 8-K dated August 25, 1997). 10.58 Settlement Agreement dated January 16, 1998, between the State of Texas and settling defendants in THE STATE OF TEXAS V. AMERICAN TOBACCO COMPANY (incorporated by reference to Exhibit 2 to the Registrants' Current Report on Form 8-K dated January 16, 1998). *12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges for each of the periods within the five year period ended December 31, 1997.
EXHIBIT NO. - ----------- *21. Subsidiaries of the Registrants. *23. Consent of Independent Auditors. *24. Powers of Attorney. *27.1 Financial Data Schedule of RJR Nabisco Holdings Corp. *27.2 Financial Data Schedule of RJR Nabisco, Inc. *99. Expanded Litigation Disclosure.
- ------------------------ * Filed herewith. EX-3.2 2 BY-LAWS OF RJR HOLDINGS ADMT (12/15/97) RJR NABISCO HOLDINGS CORP. BY-LAWS As Amended Effective December 15, 1997 ARTICLE I MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Place of Meetings. Meetings of stockholders of the Corporation shall be held at such place either within or without the State of Delaware as the Board of Directors may determine. Section 2. Annual and Special Meetings. Annual meetings of stockholders shall be held, at a date, time and place fixed by the Board of Directors and stated in the notice of meeting, to elect a Board of Directors and to transact such other business as may properly come before the meeting. Special meetings of stockholders may be called by the Chairman for any purpose and shall be called by the Chairman or the Secretary if directed by the Board of Directors or requested in writing by holders of not less than 25% of the common stock of the Corporation. Each such stockholder request shall state the purpose of the proposed meeting. Section 3. Notice. Except as otherwise provided by law or by the Certificate of Incorporation, written notice shall be given to each stockholder entitled to vote at least 10 and not more than 60 days before each meeting of stockholders, such notice to include the time, date and place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Section 4. Quorum. At any meeting of stockholders, the holders of record, present in person or by proxy, of a majority of the Corporation's stock issued and outstanding and entitled to vote shall constitute a quorum for the transaction of business, except as otherwise provided by law or by the Certificate of Incorporation. In the absence of a quorum, any officer entitled to preside at or to act as secretary of the meeting shall have power to adjourn the meeting from time to time until a quorum is present. Section 5. Conduct of Meeting and Order of Business. The Chairman or, at the Chairman's request, the Chief Executive Officer, shall act as chairman at all meetings of stockholders. The Secretary of the Corporation or, in his or her absence, an Assistant Secretary shall act as secretary at all meetings of stockholders. The chairman of the meeting shall have the right and authority to determine and maintain the rules, regulations and procedures for the proper conduct of the meeting, including but not limited to restricting entry to the meeting after it has commenced, maintaining order and the safety of those in attendance, opening and closing the polls for voting, dismissing business not properly submitted, and limiting time allowed for discussion of the business of the meeting. Business to be conducted at annual meetings of stockholders shall be limited to that properly submitted to the meeting either by or at the direction of the Board of Directors or by any stockholder of the Corporation who shall be entitled to vote at such meeting and who complies with the notice requirements set forth in Section 6 of this Article I. If the chairman of the meeting shall determine that any business was not properly submitted in accordance with the terms of Section 6 of this Article I, he or she shall declare to the meeting that such business was not properly submitted and would not be transacted at that meeting. Section 6. Advance Notice of Stockholder Proposals. In order to properly submit any business to an annual meeting of stockholders, a stockholder must give timely notice in writing to the Secretary of the Corporation. To be considered timely, a stockholder's notice must be delivered either in person or by United States certified mail, postage prepaid, and received at the principal executive offices of the Corporation (a) not less than 120 days nor more than 150 days before the first anniversary date of the Corporation's proxy statement in connection with the last annual meeting of stockholders or (b) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than a reasonable time, as determined by the Board of Directors, prior to the date of the applicable annual meeting. Nomination of persons for election to the Board of Directors may be made by the Board of Directors or any committee designated by the Board of Directors or by any stockholder entitled to vote for the election of directors at the applicable meeting of stockholders. However, nominations other than those made by the Board of Directors or its designated committee must comply with the procedures set forth in this Section 6, and no person shall be eligible for election as a director unless nominated in accordance with the terms of this Section 6. 2 A stockholder may nominate a person or persons for election to the Board of Directors by giving written notice to the Secretary of the Corporation in accordance with the procedures set forth above. In addition to the timeliness requirements set forth above for notice to the Corporation by a stockholder of business to be submitted at an annual meeting of stockholders, with respect to any special meeting of stockholders called for the election of directors, written notice must be delivered in the manner specified above and not later than the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. The Secretary of the Corporation shall deliver any stockholder proposals and nominations received in a timely manner for review by the Board of Directors or a committee designated by the Board of Directors. A stockholder's notice to submit business to an annual meeting of stockholders shall set forth (i) the name and address of the stockholder, (ii) the class and number of shares of stock beneficially owned by such stockholder, (iii) the name in which such shares are registered on the stock transfer books of the Corporation, (iv) a representation that the stockholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) any material interest of the stockholder in the business to be submitted and (vi) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting. In addition, the stockholder making such proposal shall promptly provide any other information reasonably requested by the Corporation. In addition to the information required above to be given by a stockholder who intends to submit business to a meeting of stockholders, if the business to be submitted is the nomination of a person or persons for election to the Board of Directors then such stockholder's notice must also set forth, as to each person whom the stockholder proposes to nominate for election as a director, (a) the name, age, business address and, if known, residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of stock of the Corporation which are beneficially owned by such person, (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, (e) the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected and (f) a description of all arrangements or understandings between such stockholder and each nominee and any other person 3 or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder. Any person nominated for election as director by the Board of Directors or any committee designated by the Board of Directors shall, upon the request of the Board of Directors or such committee, furnish to the Secretary of the Corporation all such information pertaining to such person that is required to be set forth in a stockholder's notice of nomination. Notwithstanding the foregoing provisions of this Section 6, a stockholder who seeks to have any proposal included in the Corporation's proxy statement shall comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended. Section 7. Voting. Except as otherwise provided by law or by the Certificate of Incorporation, all matters submitted to a meeting of stockholders shall be decided by vote of the holders of record, present in person or by proxy, of a majority of the Corporation's stock issued and outstanding and entitled to vote. A proxy shall be executed in writing by the stockholder or by his or her duly authorized attorney-in-fact and shall be delivered to the secretary of the meeting at or prior to the time designated by the chairman of the meeting. No stockholder may designate more than four persons to act on his or her behalf at a meeting of stockholders. Section 8. Inspectors of Election. Prior to any meeting of stockholders, the Board of Directors shall appoint one or more inspectors to act at the meeting and make a written report thereof in accordance with the Delaware General Corporation Law. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. 4 ARTICLE II DIRECTORS ------------ Section 1. Number, Election and Removal of Directors. The number of Directors that shall constitute the Board of Directors shall be not less than one nor more than seventeen. The first Board of Directors shall consist of three Directors. Thereafter, within the limits specified above, the number of Directors shall be determined by the Board of Directors or by the stockholders. The Directors shall be elected by the stockholders at their annual meeting and shall serve until the next annual meeting of stockholders and until their successors are elected and shall qualify. Vacancies and newly created directorships resulting from any increase in the number of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or by the sole remaining Director or by the stockholders, and any Director so chosen shall serve until the next annual meeting of stockholders and until his or her successor shall be elected and shall qualify. A Director may be removed with or without cause by the stockholders. Section 2. Meetings. Regular meetings of the Board of Directors shall be held at such times and places as may from time to time be fixed by the Board of Directors or as may be specified in a notice of meeting. Special meetings of the Board of Directors may be held at any time upon the call of the Chairman or the Chief Executive Officer and shall be called by the Chairman, the Chief Executive Officer or the Secretary if directed by the Board of Directors. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of stockholders. Notice need not be given of regular or special meetings of the Board of Directors. Section 3. Quorum. One-third of the total number of Directors shall constitute a quorum for the transaction of business. If a quorum is not present at any meeting of the Board of Directors, the Directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until such a quorum is present. Except as otherwise provided by law, the Certificate of Incorporation of the Corporation, these By-Laws or any contract or agreement to which the Corporation is a party, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. Section 4. Executive Committee. The Board of Directors, by resolution adopted by a majority of the entire Board, may appoint from among its members an Executive Committee consisting of the Chief Executive Officer, if 5 such officer is a member of the Board of Directors, or the Chairman, if the Chief Executive Officer is not a member of the Board of Directors, and at least two other Directors. Meetings of the Executive Committee shall be held without notice at such dates, times and places as shall be determined by the Executive Committee. The Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation that are permitted by law to be exercised by a committee of the Board of Directors, including the power to declare dividends, to authorize the issuance of stock and to adopt a certificate of ownership and merger of parent corporation and subsidiary or subsidiaries; provided, however, that the Executive Committee shall not have the power or authority of the Board of Directors in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation with respect to the Corporation, recommending to the stockholders the sale, lease or exchange of all or substantially all the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, amending the By-Laws of the Corporation or adopting a certificate of ownership and merger of the Corporation (other than a certificate of ownership and merger of parent corporation and subsidiary or subsidiaries). The majority of the members of the Executive Committee shall constitute a quorum. Minutes shall be kept of the proceedings of the Executive Committee, which shall be reported at meetings of the Board of Directors. The Executive Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors of the Corporation, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series. Section 5. Other Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the Board of Directors, designate one or more other committees to have and exercise such power and authority as the Board of Directors shall specify. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another Director to act at the meeting in place of any such absent or disqualified member. 6 ARTICLE III OFFICERS ---------- Section 1. Description and Terms. The officers of the Corporation shall be the Chairman, the Chief Executive Officer, a President, a Secretary, a Treasurer and such other additional officers with such titles as the Board of Directors shall determine, all of whom shall be chosen by and serve at the pleasure of the Board of Directors; provided that the Chief Executive Officer may appoint Senior Vice Presidents, Vice Presidents or Assistant Officers at his or her discretion. Subject to such limitations as may be imposed by the Board of Directors, the Chief Executive Officer shall have full executive power and authority with respect to the Corporation. The President, if separate from the Chief Executive Officer, shall have such powers and authority as the Chief Executive Officer may determine. If the Chief Executive Officer is absent or incapacitated, the Executive Committee shall determine the person who shall have all the power and authority of the Chief Executive Officer. Other officers shall have the usual powers and shall perform all the usual duties incident to their respective offices. All officers shall be subject to the supervision and direction of the Board of Directors. The authority, duties or responsibilities of any officer of the Corporation may be suspended by the Chief Executive Officer with or without cause. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. Subject to such limitations as the Board of Directors may provide, each officer may further delegate to any other officer or any employee or agent of the Corporation such portions of his or her authority as the officer shall deem appropriate, subject to such limitation as the officer shall specify, and may revoke such authority at any time. Section 2. Stockholder Consents and Proxies. The Chairman, the Chief Executive Officer, each Vice Chairman, the President, the Secretary and the Treasurer, or any one of them, shall have the power and authority on behalf of the Corporation to execute any stockholders' consents or proxies and to attend and act and vote in person or by proxy at any meetings of stockholders of any corporation in which the Corporation may own stock, and at any such meetings shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock which as the owner thereof the Corporation might have possessed and executed if present. The Board of Directors by resolution from time to time may confer like powers upon any other officer. 7 ARTICLE IV INDEMNIFICATION ----------------- To the fullest extent permitted by the Delaware General Corporation Law, the Corporation shall indemnify any current or former Director or officer of the Corporation and may, at the discretion of the Board of Directors, indemnify any current or former employee or agent of the Corporation against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with any threatened, pending or completed action, suit or proceeding brought by or in the right of the Corporation or otherwise, to which he or she was or is a party or is threatened to be made a party by reason of his or her current or former position with the Corporation or by reason of the fact that he or she is or was serving, at the request of the Corporation, as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The right to indemnification conferred in this Article shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such action, suit or proceeding in advance of its final disposition unless such action, suit or proceeding was initiated by the person seeking advances of expenses or was brought by or in the right of the Corporation with the approval of the Board of Directors or the Chief Executive Officer; provided however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by a Director or officer of the Corporation in advance of the final disposition of such action, suit or proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Director or officer, to repay all amounts so advanced if it should be determined ultimately that such Director or officer is not entitled to be indemnified under this Article or otherwise. 8 ARTICLE V GENERAL PROVISIONS -------------------- Section 1. Notices. Whenever any statute, the Certificate of Incorporation or these By-Laws require notice to be given to any Director or stockholder, such notice is to be given in writing by mail, addressed to such Director or stockholder at his or her address as it appears on the records of the Corporation, with postage thereon prepaid. Such notice shall be deemed to have been given when it is deposited in the United States mail. Notice to Directors may also be given by telegram or facsimile transmission or be delivered personally or by telephone. Section 2. Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors. Section 3. Certificates of Stock. Certificates representing shares of the Corporation shall be signed by the Chairman or the Chief Executive Officer and by the Secretary or an Assistant Secretary. Any and all signatures on such certificates, including signatures of officers, transfer agents and registrars, may be facsimile. 9 EX-3.4 3 BY-LAWS OF RJR INC. RJR NABISCO, INC. BY-LAWS As Amended Effective December 15, 1997 ARTICLE I MEETINGS OF STOCKHOLDERS ------------------------- Section 1. Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place either within or without the State of Delaware as the Board of Directors may determine. Section 2. Annual and Special Meetings. Annual meetings of stockholders shall be held, at a date, time and place fixed by the Board of Directors and stated in the notice of meeting, to elect a Board of Directors and to transact such other business as may properly come before the meeting. Special meetings of the stockholders may be called by the Chairman or the Chief Executive Officer for any purpose and shall be called by the Chairman, the Chief Executive Officer or the Secretary if directed by the Board of Directors or requested in writing by the holders of not less than 25% of the common stock of the Corporation. Each such stockholder request shall state the purpose of the proposed meeting. Section 3. Notice. Except as otherwise provided by law or by the Certificate of Incorporation, at least 10 and not more than 60 days before each meeting of stockholders, written notice of the time, date and place of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder. Section 4. Quorum. At any meeting of stockholders, the holders of record, present in person or by proxy, of a majority of the Corporation's issued and outstanding common stock shall constitute a quorum for the transaction of business, except as otherwise provided by law or by the Certificate of Incorporation. In the absence of a quorum, any officer entitled to preside at or to act as secretary of the meeting shall have power to adjourn the meeting from time to time until a quorum is present. Section 5. Voting. Except as otherwise provided by law or by the Certificate of Incorporation, all matters submitted to a meeting of stockholders shall be decided by vote of the holders of record, present in person or by proxy, of a majority of the Corporation's issued and outstanding common stock. The date and time of the opening and closing of the polls for each matter upon which stockholders will vote shall be announced at the meeting. Section 6. Inspectors of Election. Prior to any meeting of the stockholders, the Board of Directors shall appoint one or more inspectors to act at the meeting and make a written report thereof in accordance with the Delaware General Corporation Law. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. ARTICLE II DIRECTORS ----------- Section 1. Number, Election and Removal of Directors. The number of Directors that shall constitute the Board of Directors shall be not less than one nor more than seventeen. The first Board of Directors shall consist of three Directors. Thereafter, within the limits specified above, the number of Directors shall be determined by the Board of Directors or by the stockholders. The Directors shall be elected by the stockholders at their annual meeting and shall serve until the next annual meeting of the stockholders and until their successors are elected and shall qualify. Vacancies and newly created directorships resulting from any increase in the number of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or by the sole remaining Director or by the stockholders, and any Director so chosen shall serve until the next annual meeting of the stockholders and until his or her successor shall be elected and shall qualify. A Director may be removed with or without cause by the stockholders. Section 2. Meetings. Regular meetings of the Board of Directors shall be held at such times and places as may from time to time be fixed by the Board of Directors or as may be specified in a notice of meeting. Special meetings of the Board of Directors may be held at any time upon the call of the Chairman or the Chief Executive Officer and shall be called by the Chairman, the Chief Executive Officer or the Secretary if directed by the Board of Directors. A meeting of the Board of Directors may be held without notice immediately after 2 the annual meeting of the stockholders. Notice need not be given of regular or special meetings of the Board of Directors. Section 3. Quorum. One-third of the total number of Directors shall constitute a quorum for the transaction of business. If a quorum is not present at any meeting of the Board of Directors, the Directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until such a quorum is present. Except as otherwise provided by law, the Certificate of Incorporation of the Corporation, these By-Laws or any contract or agreement to which the Corporation is a party, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. Section 4. Executive Committee. The Board of Directors, by resolution adopted by a majority of the entire Board, may appoint from among its members an Executive Committee consisting of the Chief Executive Officer, if such officer is a member of the Board of Directors, or the Chairman, if the Chief Executive Officer is not a member of the Board of Directors, and at least two other Directors. Meetings of the Executive Committee shall be held without notice at such dates, times and places as shall be determined by the Executive Committee. The Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation that are permitted by law to be exercised by a committee of the Board of Directors, including the power to declare dividends, to authorize the issuance of stock and to adopt a certificate of ownership and merger of parent corporation and subsidiary or subsidiaries; provided, however, that the Executive Committee shall not have the power or authority of the Board of Directors in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation with respect to the Corporation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, amending the By-Laws of the Corporation or adopting a certificate of ownership and merger of the Corporation (other than a certificate of ownership and merger of parent corporation and subsidiary or subsidiaries). The majority of the members of the Executive Committee shall constitute a quorum. Minutes shall be kept of the proceedings of the Executive Committee, which shall be reported at meetings of the Board of Directors. The Executive Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors of the Corporation, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other 3 class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorized the increase or decrease of the shares of any series. Section 5. Other Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the Board of Directors, designate one or more other committees to have and exercise such power and authority as the Board of Directors shall specify. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another Director to act at the meeting in place of any such absent or disqualified member. ARTICLE III OFFICERS ---------- Section 1. Description and Terms. The officers of the Corporation shall be the Chairman, the Chief Executive Officer, a President, a Secretary, a Treasurer and such other additional officers with such titles as the Board of Directors shall determine, all of whom shall be chosen by and serve at the pleasure of the Board of Directors; provided that the Chief Executive Officer may appoint Senior Vice Presidents, Vice Presidents or Assistant Officers at his or her discretion. The Chairman shall be an employee of the Corporation. Subject to such limitations as may be imposed by the Board of Directors, the Chief Executive Officer shall have full executive power and authority with respect to the Corporation. The President, if separate from the Chief Executive Officer, shall have such powers and authority as the Chief Executive Officer may determine. If the Chief Executive Officer is absent or incapacitated, the Executive Committee shall determine the person who shall have all the power and authority of the Chief Executive Officer. Other officers shall have the usual powers and shall perform all the usual duties incident to their respective offices. All officers shall be subject to the supervision and direction of the Board of Directors. The authority, duties or responsibilities of any officer of the Corporation may be suspended by the Chief Executive Officer with or without cause. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. Subject to such limitations as the Board of Directors may provide, each officer may further delegate to any other officer or any employee or agent of the Corporation such portions of his or her authority as the officer shall deem appropriate, subject to such limitation as the officer shall specify, and may revoke such authority at any time. 4 Section 2. Stockholder Consents and Proxies. The Chairman, the Chief Executive Officer, each Vice Chairman, the President, the Secretary and the Treasurer, or any one of them, shall have the power and authority on behalf of the Corporation to execute any stockholders' consents or proxies and to attend and act and vote in person or by proxy at any meetings of the stockholders of any corporation in which the Corporation may own stock, and at any such meetings shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock which as the owner thereof the Corporation might have possessed and executed if present. The Board of Directors, by resolutions from time to time, may confer like powers upon any other officer. ARTICLE IV INDEMNIFICATION ----------------- To the fullest extent permitted by the Delaware General Corporation Law, the Corporation shall indemnify any current or former Director or officer of the Corporation and may, at the discretion of the Board of Directors, indemnify any current or former employee or agent of the Corporation against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with any threatened, pending or completed action, suit or proceeding brought by or in the right of the Corporation or otherwise, to which he or she was or is a party or is threatened to be made a party by reason of his or her current or former position with the Corporation or by reason of the fact that he or she is or was serving, at the request of the Corporation, as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The right to indemnification conferred in this Article shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such action, suit or proceeding in advance of its final disposition unless such action, suit or proceeding was initiated by the person seeking advances of expenses or was brought by or in the right of the Corporation with the approval of the Board of Directors or the Chief Executive Officer; provided however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by a Director or officer of the Corporation in advance of the final disposition of such action, suit or proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Director or officer, to repay all amounts so advanced if it should be determined ultimately that such Director or officer is not entitled to be indemnified under this Article or otherwise. 5 ARTICLE V GENERAL PROVISIONS -------------------- Section 1. Notices. Whenever any statute, the Certificate of Incorporation or these By-Laws require notice to be given to any Director or stockholder, such notices may be given in writing by mail, addressed to such Director or stockholder at his or her address as it appears on the records of the Corporation, with postage thereon prepaid. Such notice shall be deemed to have been given when it is deposited in the United States mail. Notice to Directors may also be given by telegram or facsimile transmission or be delivered personally or by telephone. Section 2. Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors. 6 EX-10.9 4 4TH ADMT TO 3 YEAR CREDIT (12/5/97) FOURTH AMENDMENT TO THE 3 YEAR CREDIT AGREEMENT ------------------------------------------------ SIXTH AMENDMENT TO THE 364 DAY CREDIT AGREEMENT ------------------------------------------------ FOURTH AMENDMENT, dated as of December 5, 1997, among RJR NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), RJR NABISCO, INC., a Delaware corporation (the "Borrower"), and the lending institutions party to the 3 Year Credit Agreement referred to below and SIXTH AMENDMENT, dated as of December 5, 1997, among Holdings, the Borrower and the lending institutions party to the 364 Day Credit Agreement referred to below (collectively, the "Amendment"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the respective Credit Agreements (as defined below). W I T N E S S E T H : WHEREAS, Holdings, the Borrower and various lending institutions (the "3 Year Banks") are parties to a Credit Agreement, dated as of April 28, 1995, with respect to initial Commitments aggregating $2,750,000,000 on such date (as in effect on the date hereof, the "3 Year Credit Agreement"); WHEREAS, Holdings, the Borrower and various lending institutions (the "364 Day Banks" and, together with the 3 Year Banks, the "Banks") are parties to a Credit Agreement, dated as of April 28, 1995, with respect to initial Commitments aggregating $750,000,000 on such date (as in effect on the date hereof, the "364 Day Credit Agreement" and, together with the 3 Year Credit Agreement, the "Credit Agreements"); WHEREAS, Holdings, the Borrower and the 3 Year Banks wish to enter into the agreements with respect to the 3 Year Credit Agreement as herein provided; and WHEREAS, Holdings, the Borrower and the 364 Day Banks wish to enter into the agreements with respect to the 364 Day Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: I. Amendment to the 3 Year Credit Agreement. 1. Section 8.07 of the 3 Year Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof:
"Period Amount -------- ------- Initial Borrowing Date $7,500,000,000 to and including December 31, 1995 January 1, 1996 $7,600,000,000 to and including December 31, 1996 January 1, 1997 $7,500,000,000 to and including December 30, 1997 December 31, 1997 $7,000,000,000". and thereafter
2. Section 8.08 of the 3 Year Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof:
"Period Ratio -------- ------ Initial Borrowing Date 1.60:1 to and including December 31, 1995 January 1, 1996 1.50:1 to and including December 31, 1997 January 1, 1998 1.40:1 to and including December 31, 1998 Thereafter 1.50:1".
3. Section 8.09 of the 3 Year Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: 2
"Period Ratio -------- ------ Initial Borrowing Date 2.60:1 to and including December 31, 1995 January 1, 1996 2.55:1 to and including December 31, 1996 January 1, 1997 2.40:1 to and including December 31, 1997 January 1, 1998 2.50:1 to and including June 30, 1998 July 1, 1998 2.40:1 to and including December 31, 1998 Thereafter 2.25:1".
4. Section 8.10 of the 3 Year Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof:
"Period Ratio -------- ------ Initial Borrowing Date 3.50:1 to and including December 31, 1996 January 1, 1997 3.75:1 to and including December 31, 1997 January 1, 1998 3.50:1 to and including December 31, 1998 Thereafter 3.75:1".
3 5. The definition of "Adjusted Operating Income" appearing in Section 10 of the 3 Year Credit Agreement is hereby amended by (x) deleting the word "and" appearing at the end of clause (iv) of the proviso contained therein and inserting a comma in lieu thereof and (y) inserting the following new clauses (vi) and (vii) at the end of said definition: ", (vi) Adjusted Operating Income shall be adjusted by adding thereto the amount of all expenses accrued by Holdings and its Subsidiaries during any Test Period pursuant to (x) the settlement agreement, dated as of October 9, 1997, among R.J. Reynolds Tobacco Company, certain other tobacco companies and the plaintiffs' attorneys in Broin v. Philip Morris and (y) the settlement agreement, dated as of September 5, 1997, among R.J. Reynolds Tobacco Company and the other parties to Mangini v. R.J. Reynolds Tobacco Company, to the extent (and only to the extent) (I) the aggregate amount of all payments made by Holdings and its Subsidiaries pursuant to the aforementioned agreements (and for which an adjustment to Adjusted Operating Income is made) does not exceed $96,000,000 and (II) the amount of such payments are deducted in any determination of Adjusted Operating Income and (vii) for all purposes, for any period which includes the fourth quarter of Holdings' 1997 fiscal year, there shall be excluded in determining Adjusted Operating Income any pre-tax restructuring expense and related expenses and adjustments (including deloading) recorded or accrued in the fourth quarter of Holdings' 1997 fiscal year which serve to reduce operating income of Holdings and/or its Subsidiaries in such fiscal quarter, to the extent (and only to the extent) the aggregate amount attributable pursuant to this clause (vii) does not exceed $449,000,000". 6. Section 12.07(a) of the 3 Year Credit Agreement is hereby amended by inserting the following sentence at the end of said Section: "Notwithstanding the foregoing, for purposes of the computations determining compliance with Section 8, all expenses and other charges arising from any tobacco litigation settlement and occurring in any fiscal quarter of Holdings ended after December 31, 1997 which are required by GAAP to be retroactively applied to a previous fiscal quarter of Holdings shall instead be accrued in the fiscal quarter in which such expenses and charges occur." II. Amendment to the 364 Day Credit Agreement. 1. Section 8.07 of the 364 Day Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: 4
"Period Amount -------- ------- Initial Borrowing Date $7,500,000,000 to and including December 31, 1995 January 1, 1996 $7,600,000,000 to and including December 31, 1996 January 1, 1997 $7,500,000,000 to and including December 30, 1997 December 31, 1997 $7,000,000,000". and thereafter
2. Section 8.08 of the 364 Day Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof:
"Period Ratio -------- ------ Initial Borrowing Date 1.60:1 to and including December 31, 1995 January 1, 1996 1.50:1 to and including December 31, 1997 January 1, 1998 1.40:1 to and including December 31, 1998 Thereafter 1.50:1".
3. Section 8.09 of the 364 Day Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof: 5
"Period Ratio -------- ------ Initial Borrowing Date 2.60:1 to and including December 31, 1995 January 1, 1996 2.55:1 to and including December 31, 1996 January 1, 1997 2.40:1 to and including December 31, 1997 January 1, 1998 2.50:1 to and including June 30, 1998 July 1, 1998 2.40:1 to and including December 31, 1998 Thereafter 2.25:1".
4. Section 8.10 of the 364 Day Credit Ageement is hereby amended by deleting the table appearing therein in its entirety and by inserting the following new table in lieu thereof:
"Period Ratio -------- ------ Initial Borrowing Date 3.50:1 to and including December 31, 1996 January 1, 1997 3.75:1 to and including December 31, 1997 January 1, 1998 3.50:1 to and including December 31, 1998 Thereafter 3.75:1".
6 5. The definition of "Adjusted Operating Income" appearing in Section 10 of the 364 Day Credit Agreement is hereby amended by (x) deleting the word "and" appearing at the end of clause (iv) of the proviso contained therein and inserting a comma in lieu thereof and (y) inserting the following new clauses (vi) and (vii) at the end of said definition: ", (vi) Adjusted Operating Income shall be adjusted by adding thereto the amount of all expenses accrued by Holdings and its Subsidiaries during any Test Period pursuant to (x) the settlement agreement, dated as of October 9, 1997, among R.J. Reynolds Tobacco Company, certain other tobacco companies and the plaintiffs' attorneys in Broin v. Philip Morris and (y) the settlement agreement, dated as of September 5, 1997, among R.J. Reynolds Tobacco Company and the other parties to Mangini v. R.J. Reynolds Tobacco Company, to the extent (and only to the extent) (I) the aggregate amount of all payments made by Holdings and its Subsidiaries pursuant to the aforementioned agreements (and for which an adjustment to Adjusted Operating Income is made) does not exceed $96,000,000 and (II) the amount of such payments are deducted in any determination of Adjusted Operating Income and (vii) for all purposes, for any period which includes the fourth quarter of Holdings' 1997 fiscal year, there shall be excluded in determining Adjusted Operating Income any pre-tax restructuring expense and related expenses and adjustments (including deloading) recorded or accrued in the fourth quarter of Holdings' 1997 fiscal year which serve to reduce operating income of Holdings and/or its Subsidiaries in such fiscal quarter, to the extent (and only to the extent) the aggregate amount attributable pursuant to this clause (vii) does not exceed $449,000,000". 6. Section 12.07(a) of the 364 Day Credit Agreement is hereby amended by inserting the following sentence at the end of said Section: "Notwithstanding the foregoing, for purposes of the computations determining compliance with Section 8, all expenses and other charges arising from any tobacco litigation settlement and occurring in any fiscal quarter of Holdings ended after December 31, 1997 which are required by GAAP to be retroactively applied to a previous fiscal quarter of Holdings shall instead be accrued in the fiscal quarter in which such expenses and charges occur." III. Miscellaneous Provisions 1. In order to induce the Banks to enter into this Amendment, each Credit Party hereby (i) makes each of the representations, warranties and agreements contained in Section 6 of each Credit Agreement and (ii) represents and warrants that there exists no Default or Event of Default, in each case on the date hereof and on Amendment Effective Date, after giving effect to this Amendment. 7 2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of either Credit Agreement or any other Credit Document (as defined in each Credit Agreement). 3. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with Holdings and the Payments Administrator. 4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 5. This Amendment shall become effective as of the date first written above on the date (the "Amendment Effective Date") when (i) each of the Credit Parties, (ii) 3 Year Banks constituting Required Banks under the 3 Year Credit Agreement and (iii) 364 Day Banks constituting Required Banks under the 364 Day Credit Agreement, shall have signed a copy hereof (whether the same or different copies) and shall have delivered (including by way of facsimile transmission) the same to White & Case, 1155 Avenue of the Americas, New York, New York 10036, Attention: Jacquiline Lawrence, Esq. (Facsimile No.: (212) 354-8113). After transmitting its executed signature page to White & Case as provided above, each of the Banks shall deliver executed hard copies of this Amendment to White & Case, Attention: Jacqueline Lawrence at the address provided above. * * * 8 EX-10.10 5 FIFTH AMENDMENT TO 3 YEAR CREDIT (2/13/97) FIFTH AMENDMENT TO THE 3 YEAR CREDIT AGREEMENT ---------------------------------------------- SEVENTH AMENDMENT TO THE 364 DAY CREDIT AGREEMENT -------------------------------------------------- FIFTH AMENDMENT, dated as of February 13, 1998, among RJR NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), RJR NABISCO, INC., a Delaware corporation (the "Borrower"), and the lending institutions party to the 3 Year Credit Agreement referred to below and SEVENTH AMENDMENT, dated as of February 13, 1998, among Holdings, the Borrower and the lending institutions party to the 364 Day Credit Agreement referred to below (collectively, the "Amendment"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the respective Credit Agreements (as defined below). W I T N E S S E T H : WHEREAS, Holdings, the Borrower and various lending institutions (the "3 Year Banks") are parties to a Credit Agreement, dated as of April 28, 1995, with respect to initial Commitments aggregating $2,750,000,000 on such date (as in effect on the date hereof, the "3 Year Credit Agreement"); WHEREAS, Holdings, the Borrower and various lending institutions (the "364 Day Banks" and, together with the 3 Year Banks, the "Banks") are parties to a Credit Agreement, dated as of April 28, 1995, with respect to initial Commitments aggregating $750,000,000 on such date (as in effect on the date hereof, the "364 Day Credit Agreement" and, together with the 3 Year Credit Agreement, the "Credit Agreements"); WHEREAS, Holdings, the Borrower and the 3 Year Banks wish to enter into the agreements with respect to the 3 Year Credit Agreement as herein provided; and WHEREAS, Holdings, the Borrower and the 364 Day Banks wish to enter into the agreements with respect to the 364 Day Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: I. Amendment to the 3 Year Credit Agreement. 1. The definition of "Adjusted Operating Income" appearing in Section 10 of the 3 Year Credit Agreement is hereby amended by (x) deleting the word "and" appearing at the end of clause (vi) of the proviso contained therein and inserting a comma in lieu thereof and (y) inserting the following new clause (viii) at the end of said definition: "and (viii) Adjusted Operating Income shall be adjusted by adding thereto the amount of all expenses accrued by Holdings and its Subsidiaries during any Test Period pursuant to the Comprehensive Settlement Agreement and Release, among R.J. Reynolds Tobacco Company, certain other tobacco companies and the State of Texas, to the extent (and only to the extent) (I) the aggregate amount of all payments made by Holdings and its Subsidiaries pursuant to the aforementioned agreement (and for which an adjustment to Adjusted Operating Income is made) does not exceed $140,000,000 and (II) the amount of such payments are deducted in any determination of Adjusted Operating Income." II. Amendment to the 364 Day Credit Agreement. 1. The definition of "Adjusted Operating Income" appearing in Section 10 of the 364 Day Credit Agreement is hereby amended by (x) deleting the word "and" appearing at the end of clause (vi) of the proviso contained therein and inserting a comma in lieu thereof and (y) inserting the following new clause (viii) at the end of said definition: "and (viii) Adjusted Operating Income shall be adjusted by adding thereto the amount of all expenses accrued by Holdings and its Subsidiaries during any Test Period pursuant to the Comprehensive Settlement Agreement and Release, among R.J. Reynolds Tobacco Company, certain other tobacco companies and the State of Texas, to the extent (and only to the extent) (I) the aggregate amount of all payments made by Holdings and its Subsidiaries pursuant to the aforementioned agreement (and for which an adjustment to Adjusted Operating Income is made) does not exceed $140,000,000 and (II) the amount of such payments are deducted in any determination of Adjusted Operating Income." III. Miscellaneous Provisions 1. In order to induce the Banks to enter into this Amendment, each Credit Party hereby (i) makes each of the representations, warranties and agreements contained in Section 6 of each Credit Agreement and (ii) represents and warrants that there exists no Default or Event of Default, in each case on the date hereof and on the Amendment Effective Date, both before and after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of either Credit Agreement or any other Credit Document (as defined in each Credit Agreement). 3. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same 2 instrument. A complete set of counterparts shall be lodged with Holdings and the Payments Administrator. 4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 5. This Amendment shall become effective as of the date first written above on the date (the "Amendment Effective Date") when (i) each of the Credit Parties, (ii) 3 Year Banks constituting Required Banks under the 3 Year Credit Agreement and (iii) 364 Day Banks constituting Required Banks under the 364 Day Credit Agreement, shall have signed a copy hereof (whether the same or different copies) and shall have delivered (including by way of facsimile transmission) the same to White & Case, 1155 Avenue of the Americas, New York, New York 10036, Attention: Jacquiline Lawrence, Esq. (Facsimile No.: (212) 354-8113). After transmitting its executed signature page to White & Case as provided above, each of the Banks shall deliver executed hard copies of this Amendment to White & Case, Attention: Jacqueline Lawrence at the address provided above. * * * 3 EX-10.13 6 FIRST AMENDMENT TO 364 DAY CREDIT AGMT (9/18/97) FIRST AMENDMENT TO THE 364 CREDIT AGREEMENT -------------------------------------------- FIRST AMENDMENT (this "Amendment"), dated as September 18, 1997, among NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), NABISCO INC., a New Jersey corporation (the "Borrower") and the lending institutions party to the Credit Agreement referred to below (the "Banks"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H: -------------------- WHEREAS, Holdings , the Borrower and the Banks are parties to a Credit Agreement, dated as of October 31, 1996 (as amended, modified and supplemented to the date hereof, the "Credit Agreement"); and WHEREAS, the parties to the Credit Agreement wish to amend the Credit Agreement as herein provided; NOW THEREFORE, it is agreed: I. Amendment to Credit Agreement. On and after the First Amendment Effective (as defined below): 1. The definition of "Commitment Expiry Date" appearing in Section 10 of the Credit Agreement shall be amended to read in its entirely as follows: "Commitment Expiry Date" shall mean the date which is 364 days after the First Amendment Effective Date. 2. Section 10 of the Credit Agreement is hereby amended by adding the following definitions in appropriate alphabetical order. "First Amendment" shall mean the First Amendment to this Agreement, dated as of September 18, 1997. "First Amendment Effective Date" shall have the meaning provided in the First Amendment. II. Conditions Precedent to First Amendment Effective Date. 1. This Amendment shall become effective on October 30, 1997 (the "First Amendment Effective Date"), so long as each of the following conditions shall have been met to the satisfaction of the Senior Managing Agents on or prior to the First Amendment Effective Date: (a) Execution of Amendment. On or prior to the First Amendment Effective Date, Holdings, the Borrower and each of the Banks shall have signed a copy hereof (whether the same or different copies) and shall have delivered (including by way of facsimile transmission) the same to the Payments Administrator at the Payments Administrator's Office. (b) No Default: Representations and Warranties. On the First Amendment Effective Date, both before and after giving effect to this Amendment, (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained in the Credit Agreement and in the other Credit Documents shall be true and correct in all materials respects. III. General Provisions 1. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 2. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with Holdings and the Payments Administrator. 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. * * * EX-12.1 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 RJR NABISCO, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Earnings before fixed charges: Income before income taxes............................................. $ 1,104 $ 1,288 $ 1,291 $ 1,376 $ 112 Less minority interest in pre-tax income of Nabisco Holdings........... 142 22 105 -- -- --------- --------- --------- --------- --------- Adjusted income before income taxes.................................... 962 1,266 1,186 1,376 112 Interest and debt expense.............................................. 817 832 872 1,065 1,186 Interest portion of rental expense..................................... 61 56 54 51 52 --------- --------- --------- --------- --------- Earnings before fixed charges............................................ $ 1,840 $ 2,154 $ 2,112 $ 2,492 $ 1,350 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Fixed charges: Interest and debt expense.............................................. $ 817 $ 832 $ 872 $ 1,065 $ 1,186 Interest portion of rental expense..................................... 61 56 54 51 52 Capitalized interest................................................... 6 15 12 11 9 --------- --------- --------- --------- --------- Total fixed charges.................................................. $ 884 $ 903 $ 938 $ 1,127 $ 1,247 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to fixed charges....................................... 2.1 2.4 2.3 2.2 1.1 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
EX-21 8 SUBSIDIARIES OF THE REGISTRANT Exhibit 21
RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation - ------------------------------------------------------------------------------------------------------------------------------- RJR Nabisco Holdings Corp. Oct 25, 1988 Delaware RJR Nabisco, Inc. Mar 04, 1970 Delaware ABCO Sp. z o.o Sept 24,1991 Poland Airco IHC, Inc. Mar 22, 1989 Delaware AO ISMA (60%) ** Nov 09, 1992 Russia AO3T Kabisco (90%) *** Jul 05, 1994 Kazakhstan A/O Nabisco * Aug 16, 1994 Russia AO Vostanovlenniy Tabak (48.46%) *** Oct 26, 1994 Russia Arjay Equipment Corporation Nov 08, 1968 Delaware Arjay Holdings, Inc. May 07, 1984 Delaware Arrimo Fomento Comercial Ltda. * Oct 27, 1987 Brazil Avare (I.C.P.A. Cerqeirense Ltda) May 11, 1971 Brazil Beech-Nut Life Savers (Panama) S.A. Jul 12, 1963 Panama Beijing Nabisco Food Company Ltd. (91.9%) Mar 16, 1995 China Bisco Services B.V. Dec 22, 1988 Netherlands Bisco Services SA Mar 01, 1998 Netherlands Camel Racing Inc. - Courses Camel 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 Comercial Benut, S.A. de C.V. ** Mar 16, 1977 Mexico Companhia Produtos Pilar June 23,1934 Brazil Compania Venezolana de Conservas C.A. (COVENCO) Jul 25, 1969 Venezuela Consiber, S.A. Mar 31, 1979 Spain Covenco Holding C.A. Nov 26, 1991 Venezuela Dely, S.A. Dec 18, 1960 Guatemala Distribuidora Pan Americana, S.A. Oct 22, 1974 Panama Establecimiento Modelo Terrabusi S.A. (99.2%) Dec 20, 1929 Argentina Exhold Limited * Oct 03, 1989 Liberia Export "A" Inc. Mar 31, 1989 Canada Fleischmann Argentina S.A. * Dec 13, 1990 Argentina Fleischmann Corporation, The Nov 02, 1929 Delaware Fleischmann International, Inc. Nov 20, 1944 Delaware Fleischmann Peruana Inc. Sep 01, 1939 Delaware Fleischmann Uruguaya S.A. Mar 09, 1961 Uruguay * Inactive Page 1 ** In Liquidation SUB-Curr *** Partnership/Joint Venture/Trust **** Nameholder Revised 3/13/98 RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation - ------------------------------------------------------------------------------------------------------------------------------- Freezer Queen Foods (Canada) Limited Nov 03, 1967 Ontario, Canada Fulmer Corporation Limited May 15, 1981 Bahamas Galletas Artiach, S.A. Jul 23, 1932 Spain Galletas Fontaneda, S.A. ? Spain Gelatinas Ecuatorianas S.A. (66.7%) Nov 21, 1978 Ecuador GEM: Global Event Management, Ltd. Jun 27, 1991 England Global Events Management, Inc. Sep 05, 1991 Delaware GMB, Inc. May 09, 1996 N. Carolina Grupo Gamesa, S.A. de C.V. (1%) Jul 29, 1981 Mexico Hanover Servicing, Inc. Apr 13, 1992 Delaware Haus Neuerburg GmbH * Feb 25, 1977 Germany Hervin Company, The May 28, 1965 Oregon Hervin Holdings, Inc. Mar 29, 1988 Delaware Industria de Colores y Sabores S.A. * Jun 21, 1967 Colombia Industria de Laticinios Gloria Ltda. * Jan 18, 1978 Brazil Industrias Alimenticias Maguary Ltda. May 07, 1953 Brazil Iracema Industrias de Caju Ltda Aug 08, 1978 Brazil Joshua Partners & Co. Mar 08, 1996 Cyprus Jupiter Produtos Alimenticios Ltda. Mar 02, 1962 Brazil Knox Company, The Dec 30, 1991 New Jersey Landers Centro Americana Fabricantes de Molinos Marca "Corona", S.A. de C.V. (95%) ** Jan 09, 1979 Honduras Landers y Cia, S.A. Oct 01, 1951 Colombia Leite Gloria do Nordeste S.A. May 16, 1968 Brazil Life Savers Manufacturing, Inc. Apr 21, 1976 Delaware Lowney Inc. Jan 01, 1983 Federal, Canada Luis Vizzolini e Hijos S.A.I.C. Jun 12, 1961 Argentina Marbu, S.A. Oct 26, 1967 Spain Merola Finance B.V. * May 09, 1995 Netherlands MEX Holdings, Ltd. Nov 27, 1991 Delaware MM Druck-und Verpackungstechnik Verwaltungsgesellschaft mbH Aug 27 1990 Germany Modi RJR Limited (50%) *** Sep 24, 1993 India NABEC, S.A. Nov 17, 1982 Ecuador * Inactive Page 2 ** In Liquidation SUB-Curr *** Partnership/Joint Venture/Trust **** Nameholder Revised 3/13/98 RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation - ------------------------------------------------------------------------------------------------------------------------------- Nabisco Arabia Co. Ltd. *** (75%) Jan 29, 1996 Saudi Arabia Nabisco Argentina S.A. Mar 14, 1994 Argentina Nabisco Biscuit Manufacturing (Midwest), Inc. Dec 21, 1988 Delaware Nabisco Biscuit Manufacturing (West), Inc. Dec 21, 1988 Delaware Nabisco Brands Company Aug 01, 1995 Delaware Nabisco Brands Holdings Denmark Limited Apr 17, 1989 Liberia Nabisco Brands Nominees Limited * Aug 22, 1983 England Nabisco Brazil, Inc. May 10, 1990 Delaware Nabisco Caribbean Export, Inc. Jun 13, 1984 Delaware Nabisco/Cetus Food Biotechnology Research Partnership (80%) *** Mar 01, 1984 Delaware Nabisco (China) Limited Aug 29, 1995 China Nabisco Chongqing Food Company Ltd. * Mar 01, 1995 China Nabisco de Nicaragua, S.A. (60%) Dec 10, 1965 Nicaragua Nabisco Direct, Inc. Aug 23, 1995 Delaware Nabisco Dominicana, S.A. Dec 11, 1995 Dom. Repub. Nabisco England IHC, Inc. Mar 29, 1989 Delaware Nabisco Enterprises IHC, Inc. Mar 22, 1989 Delaware Nabisco Europe, Middle East and Africa Trading, S.A. Oct 28, 1992 Spain Nabisco Food (Suzhou) Co. Ltd. Mar 16, 1995 China Nabisco Group Ltd. Jun 02, 1995 Delaware Nabisco Holdings I B.V. May 03, 1996 Netherlands Nabisco Holdings II B.V. May 28, 1996 Netherlands Nabisco Holdings Corp. (80.7%) Apr 21, 1981 Delaware Nabisco Holdings IHC, Inc. Mar 22, 1989 Delaware Nabisco Hong Kong Limited Apr 12, 1994 Hong Kong Nabisco Iberia Lda. Dec 23, 1916 Portugal Nabisco Iberia, S.L. (98.06%) Jul 15, 1993 Spain Nabisco, Inc. Feb 03, 1898 New Jersey Nabisco, Inc. Foreign Sales Corporation Dec 17, 1991 US Virgin Is. * Inactive Page 3 ** In Liquidation SUB-Curr *** Partnership/Joint Venture/Trust **** Nameholder Revised 3/13/98 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 L.L.C. (49%) ? Dubai, U.A.E. Nabisco International Market Development Group, Inc. Mar 22, 1989 Delaware Nabisco International, S.A. Nov 26, 1953 Panama Nabisco Investments, Inc. Mar 22, 1989 Delaware Nabisco Korea Ltd. Feb 10, 1998 Korea Nabisco Ltd-Nabisco Ltee Jan 01, 1993 Federal, Canada Nabisco Music Publishers, Inc. Mar 24, 1986 Delaware Nabisco Music Ventures, Inc. Mar 24, 1986 Delaware Nabisco (New Zealand) Limited **** Mar 30, 1990 New Zealand Nabisco Pension Trust Limited Aug 31, 1956 England Nabisco Peru S.A. Jan 28, 1972 Peru Nabisco Philippines Inc. Oct 14, 1997 Philippines Nabisco Royal Argentina Inc. Sep 29, 1934 Delaware Nabisco Royal Chile Limitada Mar 22, 1978 Chile Nabisco Royal de Honduras, S.A. Jul 22, 1982 Honduras Nabisco Royal del Ecuador, S.A. Sep 16, 1977 Ecuador Nabisco Royal, Inc. Sep 21, 1951 New York Nabisco Royal Panama, S.A. Mar 07, 1979 Panama Nabisco S.A. de C.V. (99%) Jun 15, 1992 Mexico Nabisco S.L. * Jan 18, 1989 Spain Nabisco South Africa (Proprietary) Limited (49%) Jan 02, 1945 South Africa Nabisco Taiwan Corporation May 27, 1996 Taiwan Nabisco Technology Company Dec 13, 1996 Delaware Nabisco Thailand Limited Oct 01, 1997 Thailand Nabisco Trading AG Aug 02, 1960 Switzerland Nabisco Tunisia S.A. Jul 02, 1976 Tunisia Nabisco Venezuela, C.A. Nov 26, 1991 Venezuela National Biscuit Company **** Jan 17, 1971 Delaware Northern Brands International, Inc. Dec 10, 1992 Delaware Outdoor Traders International S.r.L. ** Jan 17, 1991 Italy Planters & Biscuits Co. Jan 01, 1997 Russia Posto Apolo Ltda. Dec 05, 1984 Brazil Productos Alimenticios Royal S.A. Jan 01, 1966 Costa Rica Productos Confitados Salvavidas de Guatemala, S.A. Jul 03, 1974 Guatemala Productos Mayco S.A.I.C.I.F. May 11, 1962 Argentina Productos Royal S.A. * Dec 27, 1977 Argentina Produtos Alimenticios Fleischmann e Royal Ltda. Nov 28, 1964 Brazil PT Nabisco Foods (70%) ? Indonesia * Inactive Page 4 ** In Liquidation SUB-Curr *** Partnership/Joint Venture/Trust **** Nameholder Revised 3/13/98 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 (Consults) Limited Feb 20, 1996 Cyprus R. J. Reynolds (Cyprus) Limited Feb 20, 1990 Cyprus R. J. Reynolds-Da Nang Tobacco Company Limited (70%) *** Jan 24, 1995 Vietnam R. J. Reynolds Espana, S.L. (50%) Dec 16, 1992 Spain R. J. Reynolds Europe, Inc. Apr 24, 1992 Delaware R. J. Reynolds Finance S.A. Sep 17, 1982 Switzerland R. J. Reynolds Finland OY Apr 27, 1994 Finland R. J. Reynolds Iberia S.L. Nov 27, 1996 Spain R. J. Reynolds, Inc. Oct 09, 1985 Delaware R. J. Reynolds International B.V. Oct 30, 1995 Netherlands R. J. Reynolds Italia S.r.L. Feb 09, 1989 Italy R. J. Reynolds (Korea) Ltd. ** Mar 09, 1989 Korea R. J. Reynolds/M.C. Tobacco Company, Limited (70%) Jul 01, 1982 Japan R. J. Reynolds Overseas Finance Co. N.V. Oct 21, 1977 Neth. Antilles R. J. Reynolds (Portugal) Empresa Comercial de Tabacos, Ltda. Jul 20, 1980 Portugal R. J. Reynolds Processing (Romania) S.r.L. Dec 28, 1995 Romania R. J. Reynolds (PVT) Limited Dec 28, 1994 Pakistan R. J. Reynolds Reklam Ve Pazarlama A.S. Mar 22, 1990 Turkey R. J. Reynolds Scandinavia A.B. Apr 12, 1969 Sweden R. J. Reynolds (Sea) Sdn. Bhd. Aug 29, 1992 Malaysia R. J. Reynolds (Slovakia) Spol. s.r.o. Sep 20, 1993 Slovak Republic R. J. Reynolds (Thailand) Inc. Aug 06, 1992 Delaware R. J. Reynolds Tobacco A.G. Dagmersellen Mar 03, 1966 Switzerland R. J. Reynolds Tobacco B.V. Sep 24, 1973 Netherlands R. J. Reynolds Tobacco Company Apr 04, 1899 New Jersey R. J. Reynolds Tobacco Company Aug 08, 1969 Delaware R. J. Reynolds Tobacco Company (Hong Kong) Limited Apr 07, 1970 Hong Kong R. J. Reynolds Tobacco Company, S.A.E. Apr 27, 1971 Spain R. J. Reynolds Tobacco Company Sdn. Bhd. Oct 10, 1973 Malaysia R. J. Reynolds Tobacco Company (Taiwan), Inc. Apr 14, 1988 Delaware R. J. Reynolds Tobacco (Croatia) Ltd. * Dec 21, 1992 Croatia R. J. Reynolds Tobacco Foreign Sales Corporation Dec 19, 1984 US Virgin Is. R. J. Reynolds Tobacco France S.A. Aug 21, 1976 France R. J. Reynolds Tobacco GmbH Nov 30, 1957 Germany R. J. Reynolds Tobacco Hellas A.E.B.E. Sep 24, 1981 Greece R. J. Reynolds Tobacco International (Asia Pacific), Inc. Nov 27, 1978 Delaware R. J. Reynolds Tobacco International B.V. Sep 02, 1963 Netherlands R. J. Reynolds Tobacco International (Hong Kong) Limited Jul 28, 1987 Hong Kong R. J. Reynolds Tobacco International, Inc. Jan 12, 1976 Delaware R. J. Reynolds Tobacco International (Korea), Inc. Jan 17, 1991 Delaware R. J. Reynolds Tobacco International (Mexico), Inc. Jun 24, 1981 Delaware R. J. Reynolds Tobacco International OY ** Jun 14, 1995 Finland R. J. Reynolds Tobacco International S.A. Nov 03, 1966 Switzerland * Inactive Page 5 ** In Liquidation SUB-Curr *** Partnership/Joint Venture/Trust **** Nameholder Revised 3/13/98 RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation - ------------------------------------------------------------------------------------------------------------------------------- R. J. Reynolds Tobacco-Kazakhstan (80%) *** Jun 30, 1994 Kazakhstan R. J. Reynolds Tobacco (Kiev) JSC Apr 09, 1993 Ukraine R. J. Reynolds Tobacco-Kremenchuk (70%) *** Jun 10, 1993 Ukraine R. J. Reynolds Tobacco Limited * Jun 18, 1975 New Zealand R. J. Reynolds Tobacco Luxembourg Feb 07, 1997 Luxembourg R. J. Reynolds Tobacco Ltd May 16, 1995 Slovenia R. J. Reynolds Tobacco-Lviv JSC (70%) *** Oct 28, 1993 Ukraine R. J. Reynolds Tobacco (MAK) * Jul 25, 1994 Macedonia R. J. Reynolds Tobacco (Philippines), Inc. Apr 22, 1992 Philippines R. J. Reynolds Tobacco (Poland) Sp. zo.o. Jan 07, 1991 Poland R. J. Reynolds Tobacco (Romania) Ltd. Jul 06, 1993 Romania R. J. Reynolds Tobacco Spol. s.r.o. Apr 12, 1991 Czech Republic R. J. Reynolds Tobacco (UK) Limited Nov 18, 1980 England R. J. Reynolds Trading Company Sdn. Bhd. Nov 06, 1987 Malaysia R. J. Reynolds Tunisia Mar 17, 1997 Tunisia R. J. Reynolds Tutun Sanayi A.S. Jan 21, 1993 Turkey Reynolds Manufacturing (Bulgaria) Ltd. (67%) * Dec 29, 1993 Bulgaria Reynolds Manufacturing (Romania) S.r.L. (99%) Jul 12, 1993 Romania Reynolds Technologies, Inc. Mar 01, 1994 Delaware REYTAB Tutun Sanayi ve Ticaret AS Jun 10, 1986 Turkey Ritz Biscuit Company Limited **** Sep 28, 1989 England RJR-Armavirtabak (91.25%) *** Oct 24, 1994 Russia RJR (Bulgaria) Ltd. * Oct 27, 1993 Bulgaria RJR Central Asia * Mar 10, 1995 Kazakhstan RJR Comercial Ltda. ** Aug 18, 1977 Brazil RJR 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-Macdonald Investments Inc. June 21,1996 Federal Canada RJR Marketing and Sales JSC Feb 16, 1995 Russia RJR Mauritius Private Limited Sep 27, 1993 Mauritius RJR Merchandise Marketing Company Aug 22, 1994 Delaware RJR Nabisco & Company *** Mar 20, 1992 Cyprus RJR Nabisco China Limited Dec 28, 1979 Hong Kong RJR Nabisco (Cyprus) Limited Mar 29, 1990 Cyprus RJR Nabisco Holdings Capital Trust I (3%) *** Jun 20, 1995 Delaware RJR-Nabisco Industries, Inc. Dec 13, 1985 Delaware RJR Nabisco Securities Ltd.-Titres RJR Nabisco Ltee Sep 28, 1987 Federal, Canada * Inactive Page 6 ** In Liquidation SUB-Curr *** Partnership/Joint Venture/Trust **** Nameholder Revised 3/13/98 RJR NABISCO HOLDINGS CORP. Date of Place of Name of Subsidiary Incorporation Incorporation - ------------------------------------------------------------------------------------------------------------------------------- RJR-Petro (92%) *** May 07, 1992 Russia RJR Realty Relocation Services, Inc. Nov 01, 1994 N. Carolina RJR Sales Co. Feb 18, 1993 Delaware RJR Technical Company May 16, 1991 Delaware RJR Tobacco Company, Inc. Dec 30, 1982 N. Carolina RJR Tobacco Consolidated IHC, Inc. Mar 22, 1989 Delaware RJR Tobacco Eurasia, Inc. May 26, 1994 Delaware RJR Tobacco Holdings II, B.V. Apr 17, 1985 Netherlands RJR Tobacco Holdings IHC, Inc. Mar 22, 1989 Delaware R.J.R. Tobacco International Holding B.V. Nov 22, 1996 Netherlands RJR Tobacco Russia Dec 05, 1991 Russia RJR Trade Promotion Company Feb 18, 1993 Delaware Royal Beech-Nut (Namibia) (Pty) Ltd. Aug 08, 1989 South Africa Royal Holding C.A. Nov 26, 1991 Venezuela Royal Productos Alimenticios, C.A. Jul 26, 1971 Venezuela S.A. Marketers & Brokers (Pty) Ltd. Feb 12, 1987 South Africa Salem Holidays Sdn. Bhd. Oct 03, 1994 Malaysia Salem Power Station Sdn. Bhd. Sep 18, 1993 Malaysia Salem Servicing, Inc. Jan 12, 1990 Delaware Salvavidas S. de R.L. de C.V. ** Mar 30, 1967 Mexico S. F. Imports, Inc. May 26, 1994 Delaware Smoker's Connection, The Feb 18, 1993 Delaware Smooth Events, Inc. Jan 26, 1996 Canada Sports Marketing Enterprises, Inc. **** Apr 14, 1988 N. Carolina STAR Cooperation GmbH * Jan 29, 1960 Germany Stella D'oro Biscuit Co., Inc. Jan 02, 1948 New York Tabandor S.A. (33%) Feb 28, 1995 Andorra Tanzania Cigarette Company (51%) *** Jan 28, 1995 Tanzania Targacept, Inc. Mar 07, 1997 Delaware Tevalca Holding C.A. Nov 26, 1991 Venezuela Transapolo-Transportes Rodoviarios Apolo Ltda. Oct 24, 1984 Brazil Transnational Services, Inc. Jan 06, 1988 Delaware 20th Century Denmark Limited Mar 06, 1990 Liberia Vantage Arts Inc. - Arts Vantage 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 TOTAL: 260
* Inactive Page 7 ** In Liquidation SUB-Curr *** Partnership/Joint Venture/Trust **** Nameholder Revised 3/13/98 EX-23 9 CONSENT (DELOITTE & TOUCHE) EXHIBIT 23 CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 33-39791, 33-39725, 33-40400, 33-40395, 33-40396, 33-66084, 33-54397, 33-54399, 33-54393 and 33-40702 of RJR Nabisco Holdings Corp. on Form S-8 and Registration Statement Nos. 33-60803 and 333-39995 of RJR Nabisco, Inc. on Form S-3 of our report dated January 26, 1998 (March 3, 1998 as to note 10) appearing in this Annual Report on Form 10-K of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the year ended December 31, 1997. /s/ DELOITTE & TOUCHE LLP New York, New York March 23, 1998 EX-24 10 POWERS OF ATTORNEY POWER OF ATTORNEY ------------------ KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of each of RJR NABISCO HOLDINGS CORP. and RJR NABISCO, INC., each a Delaware corporation (the "Companies"), do hereby make, constitute and appoint William L. Rosoff, H. Colin McBride, Sara L. Silbiger and David F. Sternlieb, 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, 1997, 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 20th day of March, 1998. /s/Steven F. Goldstone - ------------------------ Chairman of the Board, President, Steven F. Goldstone Chief Executive Officer and Director /s/ David B. Rickard - ------------------------ Senior Vice President and Chief David B. Rickard Financial Officer /s/ Richard G. Russell - ------------------------ Senior Vice President and Controller Richard G. Russell Page 2 /s/John T. Chain, Jr. - ---------------------- Director John T. Chain, Jr. /s/Julius L. Chambers - ----------------------- Director Julius L. Chambers /s/John L. Clendenin - ---------------------- Director John L. Clendenin /s/Ray J. Groves - -------------------- Director Ray J. Groves - ------------------------ Director L. Dennis Kozlowski - ----------------------- Director H. Eugene Lockhart /s/Theodore E. Martin - ---------------------- Director Theodore E. Martin /s/John G. Medlin, Jr. - ----------------------- Director John G. Medlin, Jr. /s/Rozanne L. Ridgway - ---------------------- Director Rozanne L. Ridgway EX-27.1 11 FDS OF RJR NABISCO HOLDINGS CORP.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN HOLDINGS' CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000847903 RJR NABISCO HOLDINGS CORP. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 348 0 1,122 0 2,617 4,625 9,179 (3,240) 30,678 4,145 9,456 953 520 3 9,108 30,678 17,057 17,057 8,206 8,206 935 0 912 1,016 530 402 0 (21) 0 381 1.05 1.03
EX-27.2 12 FDS OF RJR NABISCO, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 0000083612 RJR NABISCO, INC. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 348 0 1,118 0 2,617 4,621 9,179 (3,240) 30,657 3,942 9,456 0 0 0 11,079 30,657 17,057 17,057 8,206 8,206 935 0 817 1,104 566 454 0 (21) 0 433 0.00 0.00
EX-99 13 EXPANDED LITIGATION DISCLOSURE EXHIBIT 99 EXPANDED LITIGATION DISCLOSURE TOBACCO-RELATED LITIGATION OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R. J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJRN and RJRN Holdings) or indemnitees, including legal actions claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During 1997, 492 new actions were filed or served against RJRT and/or its affiliates or indemnitees and 212 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. There have been noteworthy increases in the number of these cases pending. On December 31, 1997 there were 516 cases pending as compared to 234 on December 31, 1996, 132 on December 31, 1995 and only 54 on December 31, 1994. As of March 3, 1997, 540 active cases were pending against RJRT and/or its affiliates or indemnitees, 534 in the United States, two in Canada, two in Puerto Rico, and one in each of the Marshall Islands and Nigeria. The United States cases are in 46 states and are distributed as follows: 198 in Florida, 101 in New York, 21 in Louisiana, 17 in each of Texas and Pennsylvania, 14 in California, 12 in each of Alabama and Ohio, 11 in Tennessee, nine in each of the District of Columbia, Illinois and Mississippi, seven in each of Indiana, New Jersey and West Virginia, six in Georgia, five in each of Maryland and Massachusetts, four in each of Kansas, Michigan, Minnesota and South Dakota, three in each of Arizona, Arkansas, Colorado, Hawaii, Iowa, Missouri, Nevada, Oklahoma, and Rhode Island, two in each of Connecticut, Montana, New Hampshire, New Mexico, Oregon, South Carolina, Utah, Washington, and Wisconsin, and one each in Alaska, Idaho, Kentucky, Maine, North Carolina, and Vermont. Of the 534 active cases in the United States, 426 are in state court and 108 in federal court. Most of these cases are brought by individual plaintiffs, but an increasing number, discussed below, seek recovery on behalf of states or large classes of claimants. THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a variety of legal theories, including, among others, strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer Influenced and Corrupt Organizations Act ("RICO"), indemnity, medical monitoring and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. Eight of the 534 active cases in the United States involve alleged non-smokers claiming injuries purportedly resulting from exposure to environmental tobacco smoke. Forty-seven cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking and Blue Cross Blue Shield subscribers claiming reimbursement for premiums paid. One hundred two of the active cases seek, among other things, recovery of the cost of Medicaid payments or other health-related costs paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco use. Four, brought by entities administering asbestos liability, seek contribution for liabilities incurred relating to asbestos exposure. DEFENSES. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act ("the Cigarette Act") of some or all claims arising after 1969; the lack of any defect in the product; assumption of the risk; comparative fault; lack of proximate cause; statutes of limitations or repose; and, in the attorneys general cases (discussed below), various constitutional defenses. RJRN has asserted additional defenses, including jurisdictional defenses, in many of the cases in which it is named. In June, 1992, the United States Supreme Court in CIPOLLONE V. LIGGETT GROUP, held that claims that tobacco companies failed adequately to warn of the risks of smoking after 1969 and claims that their advertising and promotional practices undermined the effect of warnings after that date were preempted by the Cigarette Act. The Supreme Court also held that claims of breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. VERDICTS. Juries have found for plaintiffs in three smoking and health cases in which RJRT was not a defendant, but in one such case, no damages were awarded and the judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, but the award was overturned on appeal and the case was subsequently dismissed. In the third such case, on August 9, 1996, a Florida jury awarded damages of $750,000 to an individual plaintiff. The defendants in that case, CARTER V. BROWN & WILLIAMSON, are seeking to reverse the judgment on appeal. On May 5, 1997, in an individual case filed against RJRT, brought by the same attorney who represented plaintiffs in the CARTER case, a Florida state court jury found no RJRT liability. On October 31, 1997, in still another case (KARBIWNYK V. R.J. REYNOLDS TOBACCO COMPANY) brought by the same attorney, another state court jury found no RJRT liability. On March 19, 1998, an Indiana state court jury also found for RJRT, RJRN Holdings and other defendants in an individual case, DUNN V. RJR NABISCO HOLDINGS CORP., in which plaintiffs had sought damages for the alleged harm caused to a non-smoker by environmental tobacco smoke ("ETS"). In addition, during 1997 and early 1998, RJRT and other tobacco industry defendants have settled five lawsuits. These settlements are described in the Registrants' Form 10-K for the fiscal year ended December 31, 1997 (the Page 2 "1997 Form 10-K") to which this exhibit 99 relates. See, Item 1, "Business -- Tobacco -- Litigation Affecting the Cigarette Industry - Interim Agreements." CLASS ACTIONS A smoking and health class action against United States cigarette manufacturers including RJRT, in which a class was certified consisting of "all non-smoking flight attendants who are or have been employed by airlines based in the United States" and who are allegedly suffering from exposure to ETS aboard aircraft, BROIN, ET AL. V. PHILIP MORRIS, INC., ET AL., Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida, Case No. 91- 49738-CA-20, was settled in October, 1997. The settlement's principal terms are described in the 1997 Form 10-K. See Item 1, "Business -- Tobacco Litigation Affecting the Cigarette Industry -- Interim Agreements." In another smoking and health class action against United States cigarette manufacturers including RJRT, pending in Florida state court since May 1994, a class has been certified consisting of all Florida citizens and residents and their survivors who have suffered injury "caused by their addiction to cigarettes that contain nicotine." ENGLE, ET AL., V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida, Case No. 94-08273-CA-20. Various challenges to the class certification have been denied on appeal. That case is scheduled to go to trial sometime in 1998. In March 1994, a smoking and health class action was filed in Alabama state court against three United States cigarette manufacturers including RJRT and was subsequently removed to federal court. LACEY, ET AL., V. LORILLARD TOBACCO COMPANY, INC., ET AL., United States District Court, Northern District of Alabama, Jasper Division, Civil Action No. 94-4-B-0901-J. Plaintiffs, claiming to represent all smokers who had smoked or were smoking cigarettes sold by defendants in the State of Alabama, sought compensatory and punitive damages not to exceed $48,500 per each class member as well as injunctive relief arising from defendants' alleged failure to disclose additives used in their cigarettes. On January 31, 1997, the judge granted defendants' motion for summary judgment based on preemption by the Cigarette Act. Plaintiffs did not appeal, and the case has been closed. In March 1994, a smoking and health class action was filed in federal district court in Louisiana against United States cigarette manufacturers, including RJRT, and others, including RJRN, seeking certification of a purported class consisting of all United States residents who allege that they are addicted, or are the legal survivors of persons who were addicted, to tobacco products. CASTANO, ET AL., V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., United States District Court, Eastern District of Louisiana, Case No. 94-1044. Plaintiffs alleged that the cigarette manufacturers concealed and/or misrepresented information regarding the addictive nature of nicotine and manipulated Page 3 the levels of nicotine in their tobacco products to make such products addictive. In February 1995, the trial court certified the class and in May 1996, the Fifth Circuit Court of Appeals reversed the trial court's class certification and remanded the case with instructions that the class allegations be dismissed. The class has been decertified. Summary judgment motions against the two remaining named plaintiffs in this case were denied on February 21, 1997. The parties have agreed to move for dismissal of the remaining individual case with a right to replead after November 15, 1998. In September 1994, a smoking and health class action was filed in federal district court in Louisiana against United States cigarette manufacturers, including RJRT, and others, including RJRN, seeking certification of a purported class of all residents or domiciliaries of the United States who used and became addicted to tobacco products. GRANIER V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court, Eastern District of Louisiana, Case No. 94-3096. In November 1994, on the plaintiffs' motion, a motion to consolidate the case with CASTANO was stayed pending the decision on the issue of class certification in CASTANO. The case remains inactive. Following the announcement of the Fifth Circuit's class decertification decision in CASTANO, lawyers for the plaintiffs announced that they would file "state-wide" class actions in state courts. Subsequently, class actions based on claims similar to those in CASTANO (a "nicotine-dependence class action") and, in some cases, claims of physical injury (a "physical injury class action") and medical monitoring were filed in a number of states, as described below. Immediately prior to the Fifth Circuit's decision in the CASTANO case, a purported nicotine-dependence class action was filed in Indiana state court against United States cigarette manufacturers, including RJRT, and others, including RJRN Holdings. In June 1996, defendants removed the case to federal court. Plaintiffs' motion to remand the case to state court was granted. NORTON, ET AL. V. RJR NABISCO HOLDINGS CORPORATION, ET AL., Superior Court, Madison County, Indiana, Case No.48D01-9605-CP-0271. In May 1996, a purported physical injury and nicotine-dependence class action was filed in Maryland state court against United States cigarette manufacturers, including RJRT, and others, including RJRN. The case was removed by defendants to federal court and was subsequently remanded to state court. RICHARDSON, ET AL. V. PHILIP MORRIS, INC., ET AL., Circuit Court for Baltimore City, No. 96145050. On January 28, 1998, the Circuit Court for Baltimore City granted plaintiffs' motion for class certification. In May 1996, a purported nicotine-dependence/medical monitoring class action was filed in Louisiana state court against four United States cigarette manufacturers, including RJRT, and others, including RJRN. SCOTT, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., Civil District Court for the Parish of Orleans, State of Louisiana, Page 4 Docket No. 96-8461. On April 16, 1997, the Civil District Court of Orleans Parish granted plaintiffs' motion for class certification on behalf of Louisiana residents who require medical monitoring. In the class certification ruling, the court also granted the exception of no cause of action on behalf of the wholesaler defendants and dismissed them from the action. The remaining defendants removed the case to federal court on April 16, 1997. On December 2, 1997, plaintiffs' motion to remand the case to the Civil District Court of Orleans Parish was granted. In June 1996, a purported nicotine-dependence class action was filed in New York state court against RJRT, RJRN, The Tobacco Institute and The Council for Tobacco Research. HOSKINS, ET AL., V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., Supreme Court of the State of New York, County of New York, Case No. 96110951. In December 1996, defendants filed motions to dismiss the complaint and to deny class certification. On October 28, 1997, the trial court denied defendants' motions to dismiss and granted plaintiffs' motion for class certification. The class is defined as: "All residents of the State of New York who, on or after June 19, 1980 have smoked cigarettes manufactured by the manufacturing defendants, and who bought those cigarettes in New York." Defendants' appeal of the class certification is pending. In June 1996, a purported physical injury and nicotine-dependence class action was filed in the Superior Court of the District of Columbia against United States cigarette manufacturers, including RJRT, and others, including RJRN. RJRN has been voluntarily dismissed from this case. REED V. PHILIP MORRIS INCORPORATED, ET AL., Superior Court of the District of Columbia, Case No. CA-05070-96. Plaintiffs' motion for class certification was denied on August 18, 1997. Plaintiffs' motion for leave to file an amended complaint is pending. In August 1996, a purported nicotine-dependence class action was filed in Pennsylvania state court against United States cigarette manufacturers, including RJRT, and others, including RJRN, and was subsequently removed to federal court. BARNES/ARCH, ET AL., V. AMERICAN TOBACCO COMPANY, INC., ET AL., United States District Court for the Eastern District of Pennsylvania, Case No. 96-5903-CN. Plaintiff filed a renewed motion for class certification on June 17, 1997. Defendants filed opposition. On August 22, 1997, Judge Clarence Newcomer granted plaintiff's motion for class certification for medical monitoring. The class definition was: "All current residents of Pennsylvania who are cigarette smokers as of December 1, 1996 and who began smoking before age 19 while they were residents of Pennsylvania." Defendants filed a Motion for Summary Judgment on August 25, 1997 based on plaintiff's claims for medical monitoring. On October 17, 1997 Judge Newcomer granted defendants' motion for summary judgment against each of the six class representatives (five on statute of limitations grounds and one on a medical monitoring issue). Judge Newcomer also decertified the class, finding that plaintiffs' claims of nicotine dependence and theories of negligence and strict liability raised too many individual issues for class certification. Page 5 Plaintiffs filed a Notice of Appeal to the United States Court of Appeal for the Third Circuit on 10/17/97. The first named plaintiff, Arch, has been dismissed from the case and the second named plaintiff (Barnes) has taken his place. The appeal is pending. In August 1996, a purported nicotine-dependence class action was filed in Alabama state court, on behalf of Alabama and North Carolina residents, against four United States cigarette manufacturers, including RJRT, and others. In September 1996, the case was removed by defendants to federal court. LYONS, ET AL., V. THE AMERICAN TOBACCO CO., INC., ET AL., United States District Court for the Southern District of Alabama, Southern Division, Civil Action No. 96-0881-BH-S. Plaintiffs' motion to remand the case to state court was denied. In August 1996, a purported nicotine-dependence class action was filed in Ohio state court against United States cigarette manufacturers, including RJRT, and others, including RJRN, on behalf of Ohio residents and was subsequently removed to federal court in September, 1996. CHAMBERLAIN, ET AL., V. THE AMERICAN TOBACCO CO., ET AL., United States District Court, Northern District of Ohio, Case No. 1:96CV2005. Plaintiffs' motion to remand the case to state court was denied. The case is stayed until May 19, 1998. In September 1996, a purported class action was filed in Tennessee state court against four United States cigarette manufacturers, including RJRT, and others, on behalf of all individuals and entities in the United States who have paid premiums to a Blue Cross or Blue Shield organization for medical insurance. The complaint alleges that defendants' actions have resulted in increased medical insurance premiums for all class members and seeks recovery under various consumer protection statutes as well as under theories of breach of special duty and unjust enrichment. This case was removed by defendants to federal court. Plaintiffs' motion to remand the case to state court was granted. PERRY, ET AL., V. PHILIP MORRIS, INC., ET AL., Circuit Court, Coffee County, Tennessee, Case No. 27,960. In September 1996, a purported nicotine-dependence class action was filed in Minnesota state court against four United States cigarette manufacturers, including RJRT, and others, including RJRN. The case was removed by defendants to federal court in September 1996. THOMPSON/MASEPOHL, ET AL. V. THE AMERICAN TOBACCO CO., INC., ET AL., United States District Court, District of Minnesota, Third Division, Case No. CV3-96-888. Plaintiffs' motion to remand the case to state court was denied. In October 1996, a purported nicotine-dependence class action was filed in New Mexico state court against four United States cigarette manufacturers, including RJRT, and others, including RJRN. RJRN has been dismissed from this case. CONNOR, ET AL., V. THE AMERICAN TOBACCO CO., ET AL., Second Judicial District Court, County of Bernalillo, State of New Mexico, Case No. CV-96-9422. Page 6 In October 1996, a purported nicotine-dependence class action was filed in federal court in Puerto Rico against four United States cigarette manufacturers, including RJRT, and others. RUIZ, ET AL., V. THE AMERICAN TOBACCO CO., ET AL., United States District Court for the District of Puerto Rico, Civil Action No. 96-2300. Plaintiffs' motion for class certification was denied on March 17, 1998. In November 1996, a purported nicotine-dependence class action was filed in federal court in Arkansas against United States cigarette manufacturers, including RJRT, and others, including RJRN. HANSEN/MCGINTY, ET AL., V. THE AMERICAN TOBACCO CO., ET AL., United States District Court for the Eastern District of Arkansas, Western Division, Case No. LRC 96-881. In January 1995, a purported class action was filed in the Ontario Court of Justice, Toronto, Canada against RJR-MacDonald, Inc. and two other Canadian cigarette manufacturers. LETOURNEAU V. ROTHMANS ET AL., Ontario Court of Justice, Toronto, Canada, Court File No. 95-CU-82186 (now captioned CAPUTO V. IMPERIAL TOBACCO LIMITED, ET AL.). The lawsuit seeks damages in the amount of $1,000,000 (Canadian) per class member and punitive and exemplary damages and an order requiring the funding of rehabilitation centers. Plaintiffs seek certification of a class of persons consisting of all current and former cigarette smokers in Ontario, their families and the estates of deceased smokers. Plaintiffs have filed class certification materials, most recently in January, 1997, but no motion has yet been made for class certification. In March, 1996, PRO SE prisoners filed a purported class action against United States cigarette manufacturers including RJRT, and others, seeking class certification on behalf of prisoners in two Mississippi prisons based on alleged exposure to ETS. LYLE, ET AL., V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., United States District Court for the Northern District of Mississippi, Civil Action No. 3:96-CV-268WS. In October 1996, the court issued an order dismissing the action. Plaintiff has filed a motion for relief from said dismissal. In September 1996, a purported physical injury class action was filed in Florida state court against United States cigarette manufacturers, including RJRT, and others. WALTERS, ET AL., V. BROWN & WILLIAMSON TOBACCO CORP., ET AL., Circuit Court, Fourth Judicial District, Duval County, Florida. RJRT was not served within the 120 days that Florida law provides to effect service.. In January 1997, a purported nicotine-dependence class action was filed in West Virginia state court against United States cigarette manufacturers, including RJRT, and others, including RJRN. Despite the fact that RJRT and RJRN had not been served, they joined with other defendants in removing the case to federal court in February 1997. MCCUNE V. THE AMERICAN TOBACCO COMPANY, ET AL., Circuit Court, Kanawha County, Page 7 West Virginia, Case No. 2:97-0204. Plaintiffs' motion to remand the case was granted on January 30, 1998. In February 1997, a purported nicotine-dependence class action was filed in Hawaii state court against United States cigarette manufacturers, including RJRT, and others, including RJRN. PETERSON V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court for the District of Hawaii. Defendants removed this case in March, 1997. Plaintiffs' motion to remand is pending. In February 1997, a purported nicotine-dependence class action was filed in Kansas state court against United States cigarette manufacturers, including RJRT, and others, including RJRN. EMIG V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court, District of Kansas, Case No. 97-1121. This case was removed to federal court in March, 1997. Plaintiffs' motion for class certification is pending. In February 1997, a purported medical monitoring class action was filed in state court in Michigan against United States cigarette manufacturers, including RJRT, and others. BAKER V. AMERICAN TOBACCO, ET AL., Circuit Court, Wayne County, Michigan, Case No. 97-703444. In March 1997, a purported physical injury class action was filed in state court in West Virginia against United States cigarette manufacturers, including RJRT, and others. Defendants removed this case to federal court in April, 1997. WOODS V. PHILIP MORRIS INC., ET AL. United States District Court for the Southern District of West Virginia. Plaintiff filed a First Amended Complaint on September 26 1997, dropping plaintiff Ima Jean Ingle. Plaintiffs' motion to remand based on an amended complaint is pending. In March 1997, a purported nicotine dependence class action was filed in state court in Nevada against United States cigarette manufacturers, including RJRT, and others. SELCER, ET AL., V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., United States District Court, District of Nevada, Case No. CVS-97-00334 PMP. In April 1997, a purported physical injury class action was filed in Wisconsin state court against United States cigarette manufacturers, including RJRT, and others. Defendants removed the case to federal court in May 1997. Plaintiffs' motion to remand the case to the Circuit Court for Rock County was granted August 27, 1997. INSOLIA V. PHILIP MORRIS INC., ET AL.,. Circuit Court, Rock County, Wisconsin. Case No. 97-CV-230J. In April 1997, a nicotine dependence class action was filed in state court in New Jersey against United States cigarette manufacturers, including RJRT, and others, including RJRN. COSENTINO, ET AL., V. PHILIP MORRIS INC., ET AL., Superior Court, Middlesex County, New Jersey, Case No. L-5135-97. Page 8 In May 1997, a purported physical injury class action was filed in the federal court in Texas against United States cigarette manufacturers, including RJRT, and others. COLE V. THE TOBACCO INSTITUTE, ET AL., United States District Court for the Eastern District of Texas, Case No. 1:97-CV-0256. In May 1997, a purported physical injury class action was filed in the state court in New York against United States cigarette manufacturers, including RJRT, and others including RJRN. GEIGER, ET AL., V. AMERICAN TOBACCO, ET AL., Supreme Court, Queens County, New York, Case No. 010687. In July, 1997, the court certified an interim class of all New York smokers with lung and/or throat cancer and their survivors. Defendants' appeal of that decision is pending. In May 1997, a purported nicotine-dependence class action was filed in state court in Tennessee against United States cigarette manufacturers, including RJRT, and others, including RJRN. Defendants removed this case to the federal court in June, 1997. ANDERSON, ET AL., V. AMERICAN TOBACCO, ET AL., United States District Court, Eastern District of Tennessee. Plaintiffs' motion to remand was denied. In May 1997, a purported nicotine-dependence class action was filed in state court in New Jersey against United States cigarette manufacturers, including RJRT, and others, including RJRN. ENRIGHT V. AMERICAN TOBACCO, ET AL. Superior Court, Camden County, New Jersey, Case No. 699. On October 14, 1997, the case was transferred to the Middlesex County Superior Court. In May 1997, a purported physical injury class action was filed in state court in Georgia against United States cigarette manufacturers, including RJRT, and others, including RJRN. LYONS V. BROWN & WILLIAMSON, ET AL., Superior Court, Fulton County, Georgia, Case No E59346. In May 1997, a purported nicotine dependence class action was filed in state court in New Jersey against United States cigarette manufacturers, including RJRT, and others, including RJRN. TEPPER, ET AL., V. PHILIP MORRIS INCORPORATED, ET AL., Superior Court, Bergen County, New Jersey, Case No. L-4983-97-E. On October 14, 1997, the case was transferred to Middlesex County Superior Court. In May 1997, a purported physical injury class action was filed in federal court in Illinois against United States cigarette manufacturers, including RJRT, and others, including RJRN. CLAY, ET AL., V. AMERICAN TOBACCO, ET AL., Case No. 97-4167-JPG. In May 1997, a purported physical injury and nicotine dependence class action was filed in federal court in Georgia against United States cigarette manufacturers, including RJRT, and others. MCCAULEY V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET Page 9 AL., United States District Court for the Northern District of Georgia, Case No. 1:97-cv-1744. In June 1997, a purported physical injury class action was filed in the Tribal Court of the Lower Brule Sioux Tribe against United States cigarette manufacturers, including RJRT, and others. LANGDEAU V. AMERICAN TOBACCO, ET AL., Tribal Court of the Lower Brule Sioux Tribe, Case No. 97-5-0056. In June 1997, a purported physical injury/nicotine dependence class action was filed in state court in New Jersey against United States cigarette manufacturers, including RJRT, and others, including RJRN. LIPPINCOTT V. AMERICAN TOBACCO, ET AL., Superior Court, Camden County, New Jersey, Case No. L-4702-97. On October 14, 1997 the case was transferred to Middlesex County Superior Court. In June 1997, a purported physical injury class action was filed in state court in Iowa against United States cigarette manufacturers, including RJRT, and others, including RJRN. BRAMMER, ET AL., V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., District Court, Polk County, Iowa, Case No. 73061. The case is stayed through April 30, 1998. In June 1997, a purported physical injury class action was filed in federal court in Oklahoma against United States cigarette manufacturers, including RJRT, and others. WALLS, ET AL., V. AMERICAN TOBACCO, ET AL., United States District Court for the Northern District of Oklahoma, Case No. 97-CV-218-H. In July 1997, a purported physical injury class action was filed in state court in Louisiana against United States cigarette manufacturers, including RJRT, and others, including RJRN. KNOWLES, ET AL., V. AMERICAN TOBACCO, ET AL., District Court, Parish of Orleans, Louisiana, Case No. 97-11517. In July 1997, a purported physical injury class action was filed in state court in Illinois against United States cigarette manufacturers, including RJRT, and others, including RJRN. Defendants removed the case to federal court in December, 1997. DALEY, ET AL., V. AMERICAN BRANDS, INC., ET AL., United States District Court, Northern District of Illinois, Case No. 97L07963. In August 1997, a purported physical injury class action including those who desire to participate in smoking cessation programs was filed in state court in California against United States cigarette manufacturers, including RJRT, and others, including RJRN. BROWN, ET AL., V. AMERICAN TOBACCO, ET AL., Superior Court, County of San Diego, California, Case No. 711400. In September 1997, a purported physical injury/nicotine-dependence class action was filed in federal court in Texas against United States cigarette manufacturers, Page 10 including RJRT, and others. BUSH V. PHILIP MORRIS, INC., ET AL., United States District Court for the Eastern District of Texas, Case No. 597CV180. The case is stayed until May 11, 1998. In October 1997, a purported physical injury class action was filed in federal court in Tennessee against United States cigarette manufacturers, including RJRT, and others. NEWBORN, ET AL., V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., United States District Court for the Western District of Tennessee, Case No. 97-2938. In October 1997, a purported ETS class action on behalf of casino workers was filed in federal court in Nevada against United States cigarette manufacturers, including RJRT, and others, including RJRN. BADILLO, ET AL., V. AMERICAN TOBACCO, ET AL., United States District Court, District of Nevada, Case No. CV-N-97-00573-DWH. In November 1997, a purported physical injury class action was filed in federal court in South Carolina against United States cigarette manufacturers, including RJRT, and others, including RJRN. AKSAMIT, ET AL., V. BROWN & WILLIAMSON TOBACCO, ET AL., United States District Court, District of South Carolina, Case No. 6-97-3636-21. In December 1997, a purported physical injury, ETS class action was filed in state court in Louisiana. Defendants removed this case to the United States District Court for the Eastern District of Louisiana on December 12, 1997. YOUNG V. AMERICAN TOBACCO COMPANY ET AL., Circuit Court, New Orleans, Louisiana. The case was remanded to state court on February 2, 1998. In December 1997, a purported physical injury class action was filed in federal court in Texas against United States cigarette manufacturers, including RJRT, and others. MASON, ET AL., V. AMERICAN TOBACCO, ET AL., United States District Court for the Northern District of Texas, Case No. 7-97CV-293-X. In February 1998, a purported physical injury class action was filed in state court in Utah against United States cigarette manufacturers,. including RJRT and others, including RJRN. HERRERA V. AMERICAN TOBACCO, ET AL., District Court, Utah County, Utah, Case No. 9804-3567. In April 1997, a purported class action was filed in state court in Mississippi against United States cigarette manufacturers, including RJRT and others, including RJRN. WHITE, HL V. PHILIP MORRIS, INC., ET AL., Chancery Court, Jefferson County, Mississippi, Case No. 97-0053. HEALTH CARE COST RECOVERY LITIGATION Page 11 In certain of the pending proceedings, state and local government entities and others seek reimbursement for Medicaid and/or other health care expenditures allegedly caused by tobacco products. The claims asserted in these health care cost recovery actions vary. Generally, plaintiffs assert the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. The plaintiffs in these various health care cost recovery actions also assert one or more of the following additional claims: the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal or state RICO statutes. Each plaintiff seeks reimbursement of Medicaid and/or other health care costs. Other relief sought by some but not all plaintiffs includes punitive damages, treble damages for alleged antitrust law violations, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, disclosure of nicotine yields and payment of attorney and expert witness fees. Defenses raised by defendants include failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot recover because they participated in, and benefited from, the sale of cigarettes), lack of antitrust injury, federal preemption, lack of proximate cause and statute of limitations. In addition, defendants argue that they should be entitled to "set-off" any alleged damages to the extent a state benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that all of these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer or a state) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring an action on behalf of each individual health care recipient and should be subject to all defenses available against the allegedly injured party. In several states certain cigarette companies, including RJRT have filed related declaratory judgment actions which challenge the ability of the plaintiffs to use contingency fee counsel to prosecute these actions and/or the procedural capacity of the state attorney general to bring the health care cost recovery action absent the approval of the relevant executive officer charged with responsibility for certain of the health care programs at issue. Page 12 The following is a summary of certain developments in each of the health care cost recovery suits pending against RJRT and, in some cases, RJRN, and the related declaratory judgment actions filed by certain of the cigarette manufacturers. FLORIDA. In February 1995, the State of Florida filed a health care cost recovery action under a special statute in Florida state court. STATE OF FLORIDA, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida, Case No. CL 95 1466 AO. In September 1996, the trial court dismissed all of the state's claims except for its negligence and strict liability counts arising from Medicaid payments made after July 1, 1994, and its count for injunctive relief. The case was entering the trial phase when, during jury selection, the parties announced that they had entered into a settlement agreement. (For a description of the terms of the settlement see the 1997 Form 10-K, Item 1, "Business-Tobacco-Litigation Affecting the Cigarette Industry -- Interim Agreements.") MISSISSIPPI. In May 1994, the Attorney General of Mississippi filed a health care cost recovery action in Mississippi state court. MOORE V. THE AMERICAN TOBACCO COMPANY, ET AL., Chancery Court of Jackson County, Mississippi, Case No. 94-1429. A trial in this case began in June 1997, but on July 2, 1997, a settlement was agreed to based on a Memorandum of Understanding and subject to a number of conditions. (For a description of the terms of the settlement see the 1997 Form 10-K, Item 1, "Business-Tobacco-Litigation Affecting the Cigarette Industry- Interim Agreements.") MINNESOTA. In August 1994, the Attorney General of Minnesota and Blue Cross and Blue Shield of Minnesota filed a health care cost recovery action in Minnesota state court. MINNESOTA, ET AL. V. PHILIP MORRIS, INCORPORATED, ET AL., Minnesota District Court, Second Judicial District, County of Ramsey, Case No. C1-94-8565. In July 1996, the Minnesota Supreme Court ruled that Blue Cross did not have standing to pursue its tort claims against defendants, but that it could proceed against defendants for claims brought under antitrust and consumer protection statutes. The Supreme Court also held that Blue Cross could pursue directly its equitable claims, but only for injunctive (not monetary) relief. The trial began in January 1998 and is continuing. During pre-trial discovery and during the course of the trial to date, the court in this case made a number of rulings adverse to the defendants. These rulings, among other things, limit the defenses available to the defendants and require production by the defendants of thousands of documents for which privilege had been asserted. The tobacco companies are defending this case vigorously, but the court's rulings could have an adverse effect on their ability to present their defenses effectively. WEST VIRGINIA. In September 1994, the Attorney General of West Virginia filed a health care cost recovery action in West Virginia state court. MCGRAW V. THE AMERICAN TOBACCO COMPANY, ET AL., Circuit Court of Kanawha County, West Virginia, Case No. 94-1707. In October 1995, the court dismissed eight of ten counts of the complaint and Page 13 granted defendants' motion to prohibit prosecution of this case pursuant to a contingent fee agreement with private counsel. In June 1996, the Attorney General filed a second amended complaint that added the Public Employees' Insurance Agency as a plaintiff. In November 1996, the Attorney General filed a third amended complaint that added the West Virginia Department of Health and Human Resources as a plaintiff, and three law firms as defendants, and asserted additional counts under theories of indemnity, negligent misrepresentation, negligence, and strict product liability. In December 1996, the court heard oral argument on defendants' motion to dismiss common law and equitable claims contained in plaintiffs' third amended complaint. In a letter ruling issued February 13, 1997, the court ruled that neither of the West Virginia agencies had implied or express statutory authority to maintain the challenged causes of action. Motions to dismiss the remaining counts of the third amended complaint are pending. TEXAS. In March 1996, the Texas Attorney General filed a health care cost recovery action in federal court in Texas. STATE OF TEXAS V. AMERICAN TOBACCO COMPANY, ET AL., United States District Court, Eastern District of Texas, Civil No. 5-96CV91. Trial in this action is set for September 1997 and defendants have filed a number of motions to dismiss it. Defendants and others had previously filed an action in Texas state court in November 1995, seeking a declaration that the Texas Attorney General cannot pursue a health care cost recovery action. PHILIP MORRIS, INC., ET AL. V. DAN MORALES, ATTORNEY GENERAL FOR THE STATE OF TEXAS, ET AL., District Court of Travis County, Texas, No. 94-14807. A trial in this case had begun when, on January 16, 1998, the parties entered into a settlement agreement. (For a description of the terms of the settlement see the 1997 Form 10-K, Item 1, "Business-Tobacco-Litigation Affecting the Cigarette Industry- Interim Agreements.") MASSACHUSETTS. In December 1995, the Massachusetts Attorney General filed a health care cost recovery action in Massachusetts state court. COMMONWEALTH OF MASSACHUSETTS V. PHILIP MORRIS, INC., ET AL., Superior Court, Middlesex County, Civil Action No. 95-7378. Defendants have moved to dismiss the complaint. Defendants had previously filed an action in Massachusetts federal court in November 1995, seeking to enjoin the Attorney General from prosecuting a health care cost recovery action. PHILIP MORRIS INCORPORATED, ET AL. V. SCOTT HARSHBARGER, United States District Court, District of Massachusetts, Case No. 95-12574-GAO. In November 1996, the federal district court denied the Attorney General's motion to dismiss the complaint and stayed the injunction action. Trial is scheduled to begin in the Commonwealth case on February 1, 1999. MARYLAND. In May 1996, the State of Maryland filed a health care cost recovery action in Maryland state court. STATE OF MARYLAND V. PHILIP MORRIS INC., ET AL., Circuit Court for Baltimore County, Maryland, Case No. 96-122017/CL211017. Defendants' motion to dismiss the state's complaint was argued on January 28, 1997. The trial is scheduled for January 1999. Defendants and others had previously filed a separate action in Maryland state court seeking to enjoin the Maryland Attorney General from Page 14 prosecuting a health care cost recovery action pursuant to a contingent fee arrangement with special counsel. PHILIP MORRIS, ET AL., V. PARRIS N. GLENDENING, GOVERNOR OF THE STATE OF MARYLAND, ET AL., Circuit Court for Talbot County, Maryland, Case No. CG 2829. In August 1996, the court granted the attorney general's motion for summary judgment and dismissed the injunction action. An appeal of this decision is pending. LOUISIANA. In March 1996, the Attorney General of Louisiana filed a health care cost recovery action in Louisiana state court. IEYOUB, ET AL., V. THE AMERICAN TOBACCO COMPANY, ET AL., 14th Judicial District Court, Parish of Calcasieu, Louisiana, Case No. 96-1209. In January 1997, the court denied defendants' motion to dismiss which argued that the Attorney General lacked the authority to bring this action. Defendants are seeking a supervisory writ of review of this decision. On March 14, 1997 and again on April 3, 1997, the State filed a Supplemental and Amending Petition naming over 150 insurance companies as defendants pursuant to Louisiana Direct Action Statute, La.R.S.22:655. The State alleged that it was a third-party beneficiary of the tobacco manufacturer defendants' insurance policies, including certain policies sold to R. J. Reynolds, and that those policies provide coverage for the damages claimed by the State of Louisiana. In June, 1997, A.C.E. Insurance Company, Ltd. filed a notice of removal of the matter to federal court. A.C.E. based its removal on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. section 205. Also in June 1997, ICAROM, plc, another insurer-defendant, filed a separate notice of removal based on the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. section 1330 (a). Plaintiff filed two motions to remand, one addressed to the removal by A.C.E. and the other addressed to the removal by ICAROM. On September 11, 1997, the federal district court denied plaintiff's motion to remand. An appeal of the denial of the motion to remand is now pending and a stay of the proceeding, pending appeal, is in effect. SAN FRANCISCO. In June 1996, the City and County of San Francisco filed a health care cost recovery action in California federal court and has since been joined by ten other California counties. CITY AND COUNTY OF SAN FRANCISCO, ET AL., V. PHILIP MORRIS, INC. ET AL., United States District Court, Northern District of California, Civil No. C 96-2090. The current plaintiffs in this matter are various counties of the State of California seeking, among other things, the recovery of smoking-related costs incurred by county governments. In January 1997, the court denied defendants' motion to disqualify plaintiffs' contingency-fee counsel. In February 1997, the court dismissed all of the plaintiffs' claims. Two clams (implied warranty and conspiracy) were dismissed with prejudice. Plaintiffs were granted leave to file an amended complaint with respect to their remaining claims. On March 3, 1998, the Court granted defendants' motion to dismiss only the intentional breach of special duty cause of action. Answers are due on March 31, 1998. No discovery has taken place. In September 1996, plaintiffs in the federal court action, joined by several medical associations, filed an action in California state court seeking, among other things, injunctive relief and disgorgement of profits for alleged violations of California's consumer protection statutes. PEOPLE OF THE STATE OF CALIFORNIA, ET AL., V. PHILIP MORRIS, INC., ET AL., San Francisco Superior Court, County of San Francisco, Case No. 980864. In Page 15 January 1997, the court granted in part defendants' motion to dismiss by requiring plaintiffs to replead certain causes of action and denied the motion on other grounds. WASHINGTON. In June 1996, the Attorney General of the State of Washington filed a health care cost recovery action in Washington state court. STATE OF WASHINGTON V. AMERICAN TOBACCO CO., INC., ET AL., Superior Court of Washington, King County, No. 96-2-15056-8. In November 1996, the court dismissed claims based on special duty, unjust enrichment and restitution to the state, but did not dismiss claims brought under Washington's antitrust laws. The State of Washington recently moved to amend its complaint with the stated intention of correcting deficiencies found by the court to exist in the special duty and unjust enrichment claims and to add a claim for restitution under Washington's consumer protection statute. Trial is scheduled for September 1998. CONNECTICUT. In July 1996, the State of Connecticut filed a health care cost recovery action in Connecticut state court. STATE OF CONNECTICUT V. PHILIP MORRIS INC., ET AL., Superior Court, Judicial District of Litchfield, Case No. CV-96-01534405. Defendants had previously filed an action in federal district court in June 1996, seeking to enjoin the Connecticut Attorney General from bringing the health care cost recovery action. PHILIP MORRIS INC., ET AL. V. RICHARD BLUMENTHAL, United States District Court, District of Connecticut, Case No. 396CV01221 (PCD). This injunction action was dismissed in December 1996 and, in January 1997, plaintiffs appealed the dismissal. UTAH. In September 1996, the Utah Attorney General filed a health care cost recovery action in federal court in Utah. STATE OF UTAH V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., United States District Court, District of Utah, Case No. 2:96CV 0829W. Defendants had previously filed an action in Utah state court in July 1996, challenging the right of the Attorney General to bring such an action and to prosecute the case pursuant to a contingent fee arrangement with special counsel. PHILIP MORRIS INCORPORATED, ET AL. V. JANET C. GRAHAM, ATTORNEY GENERAL OF THE STATE OF UTAH, ET AL., Third Judicial District Court of Salt Lake County, Utah, Case No. 960904948CV. The parties have agreed that the state court action will be stayed while the federal action is proceeding, except for the challenge to the Attorney General's contingent fee arrangement with special counsel. In December 1996, a motion for partial summary judgment challenging the contingent fee arrangement was argued before the state court. In February 1997, the court denied the cigarette manufacturers' motion and granted the state's motion to dismiss three counts of the declaratory judgment action. Page 16 LOS ANGELES. In August 1996, the County of Los Angeles filed a health care cost recovery action in California state court. COUNTY OF LOS ANGELES V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., Superior Court of California, San Diego County, No. 707651. On February 14, 1996, defendants demurred to four of the five causes of action asserted by plaintiffs. The court granted defendants' demurrer and plaintiffs have now filed a Fifth Amended Complaint on January 22, 1998. ALABAMA. In August 1996, a health care cost recovery action was filed in Alabama state court as a putative class action on behalf of taxpayers of the State of Alabama. Following local rules, the state court entered an order conditionally certifying the class. This action was subsequently removed by defendants to federal court. CROZIER, ET AL., V. THE AMERICAN TOBACCO COMPANY, ET AL., Circuit Court, Montgomery County, Alabama, Case No. CV-96-1508. Plaintiffs' motion to remand to state court was granted on March 25, 1997. Defendants filed a motion to dismiss based on plaintiffs' lack of standing to bring this lawsuit on April 14, 1997. On September 29, 1997, Judge Charles Price granted in part defendants' motion to dismiss, dismissing plaintiffs' claims asserted on behalf of the State of Alabama. Judge Price denied that motion to dismiss as it relates to plaintiffs' individual claims and those claims asserted on behalf of children in the State of Alabama. KANSAS. In August 1996, the Attorney General of Kansas filed a health care cost recovery action in Kansas state court. STATE OF KANSAS, EX REL. CARLA J. STOVALL, ATTORNEY GENERAL, V. R.J. REYNOLDS TOBACCO CO., ET AL., District Court of Shawnee County, Kansas, Case No. 96-CV-919. Defendants filed a motion to dismiss this case. On October 15, 1997 the trial court ordered the release of approximately 2,500 Liggett documents to plaintiff, holding that the joint defense privilege does not apply. Defendants noticed an appeal on December 12, 1997 to the Kansas Court of Appeal. MICHIGAN. In August 1996, the Attorney General of Michigan filed a health care cost recovery action in Michigan state court. FRANK J. KELLEY, ATTORNEY GENERAL, EX REL. STATE OF MICHIGAN V. PHILIP MORRIS, INC., ET AL., Circuit Court for the 30th Judicial Circuit, Ingham County, Michigan, Case No. 96-84281-CZ. In October 1996, defendants moved to dismiss certain counts of the complaint and to strike claims for compensatory and punitive damages. In January 1997, plaintiff filed a motion to summarily dispose of defendants' affirmative defenses and defendants' claims that assignment and/or subrogation are the state's exclusive remedies for obtaining reimbursement of monies spent providing healthcare for Michigan citizens with smoking related diseases. On May 27 1997, the court issued oral rulings granting the motion for summary disposition filed by the plaintiff as to subrogation and directed defendants to file amended affirmative defenses. The Court granted with prejudice the motion to dismiss filed by defendants as to plaintiffs' anti-trust claims, claims of breach of special duty and injunctive relief, Page 17 dismissed plaintiff's punitive damages claim and denied the motion to disqualify plaintiffs' contingency fee counsel. Plaintiff has leave to amend. OKLAHOMA. In August 1996, the Attorney General of Oklahoma filed a health care cost recovery action in Oklahoma state court. STATE OF OKLAHOMA ET AL. R.J. REYNOLDS TOBACCO CO., ET AL., District Court for Cleveland County, Oklahoma, Case No. CJ-96-1499-L. Trial is scheduled for November 11, 1998. Discovery is ongoing. ARIZONA. In August 1996, the Attorney General of Arizona filed a health care cost recovery action in Arizona state court. STATE OF ARIZONA, ET AL., V. AMERICAN TOBACCO CO., INC. ET AL., Superior Court, Maricopa County, Arizona, No. CV 96-14769. The Governor of Arizona has instructed the Attorney General to dismiss the case. Subsequently, the Attorney General filed an amended complaint that abandons claims for Medicaid payments, but seeks recovery of other health care costs as well as other damages and forms of relief. On July 14, 1997, the court dismissed count 5 (RICO) of plaintiff's complaint. Both sides filed motions for reconsideration of the rulings concerning RICO and antitrust claims. The motions to reconsider are to be heard simultaneously with opposition to the amended complaint. Discovery is to be completed by July 31, 1998. Trial is scheduled for October 7, 1998. HAWAII. In January 1997, the Attorney General of Hawaii filed a health care recovery action in Hawaii state court. STATE OF HAWAII, ET AL., V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., Circuit Court of the First Circuit, No. 97-0441-01. In February 1997, the state filed its first amended complaint. Motions to dismiss have been filed and are to be heard on April 30, 1998. Discovery is ongoing. OHIO. In September 1996, two Ohio local officials filed a health care cost recovery action in Ohio state court, purportedly on behalf of the State of Ohio and all Ohio taxpayers. Defendants removed the case to federal court in Ohio and have filed a motion to dismiss challenging the standing of plaintiffs to bring this action. STATE EX REL. COYNE, JR., ET AL., V. THE AMERICAN TOBACCO CO., ET AL., United States District Court, Northern District of Ohio, Case No. 96-2247. Plaintiffs' motion to remand this action to state court is pending. Defendants filed a Motion to Dismiss based on failure to state a claim upon which relief can be granted on October8, 1997. Trial in this case is scheduled for May 4, 2000. In May 1997, the Attorney General of the State of Ohio filed a health care cost recovery action in Ohio state court. STATE OF OHIO EX REL. BETTY D. MONTGOMERY V. PHILIP MORRIS, ET AL., Case No. 97-CVH-05-5114. Discovery cut-off has been scheduled for December 16, 1999. This case is currently scheduled for trial for May 4, 2000. Motions to dismiss have been filed. Briefing on these motions was completed on March 17,1998. Oral argument has not been scheduled. Page 18 NEW JERSEY. In September 1996, the New Jersey Attorney General filed a health care cost recovery action in New Jersey state court. THE STATE OF NEW JERSEY V. R.J. REYNOLDS TOBACCO COMPANY, ET AL. Chancery Court, Middlesex County, Case No. C-254-96. In August 1996, defendants filed a separate suit challenging the right of the Attorney General to bring such an action and to prosecute the case pursuant to a contingent fee arrangement with special counsel. PHILIP MORRIS, INC., ET AL., V. PETER VERNIERO, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, ET AL., Superior Court of New Jersey, Chancery Division, Mercer County, Case No. MER-C-000114-96. Defendants' motion to dismiss the complaint and plaintiffs' motion for summary judgment are pending. Plaintiff filed an Amended Complaint on December 3, 1997 adding two new counts under the state's RICO and antitrust statutes. Defendants responded to the amended complaint on January 23, 1998 by filing a motion to strike Counts Five (unjust enrichment/restitution) and Six (indemnity) of plaintiff's amended complaint and limiting to subrogation plaintiff's common law right to seek reimbursement of Medicaid expenses. NEW YORK CITY. In October 1996, the City of New York and the New York City Health and Hospitals Corporation filed a health care cost recovery action in New York state court. CITY OF NEW YORK, ET AL., V. THE TOBACCO INSTITUTE, ET AL., Supreme Court of the State of New York, County of New York, Case No. 406225/96. In January 1997, plaintiffs filed an amended complaint. In February 1997, the case was removed to the United States District Court for the Southern District of New York, Case No. 97CIV0904(LMM). Plaintiff filed a motion for remand which was granted . ILLINOIS. In November 1996, the Attorney General of Illinois filed a health care cost recovery action in Illinois state court. PEOPLE OF THE STATE OF ILLINOIS V. PHILIP MORRIS, INC., ET AL., Circuit Court of Cook County, Illinois, Case No. 96 L 13146. On November 14, 1997 the court dismissed some of plaintiff's claims, but denied the motion as to plaintiff's negligence, civil conspiracy, and anti-trust claims. Defendants have filed a motion for reconsideration, or in the alternative asking the court to certify the order for interlocutory appeal to the Illinois Court of Appeals. This case has been consolidated with the COUNTY OF COOK case pending in the same court, for discovery and pre-trial purposes. IOWA. In November 1996, the State of Iowa filed a health care cost recovery action in Iowa state court. STATE OF IOWA, EX REL. THOMAS J. MILLER, IN HIS CAPACITY AS ATTORNEY GENERAL OF THE STATE OF IOWA, V. R.J. REYNOLDS TOBACCO CO., ET AL., District Court for Polk County, Iowa, Case No. CL71048. Defendants filed motions to dismiss. On June 13, 1997, plaintiff filed a First Amended Petition adding Count X (Iowa Ongoing Criminal Conduct), Count XI (Prima Facie Tort), and Count XII (Common Law Indemnity). On August 26, 1997, the court granted defendants' motion to dismiss four counts of the petition, but denied it with respect to five others. Plaintiffs have appealed Page 19 this ruling and briefing has been completed. Oral argument was heard on March 19, 1998. ALASKA. In January 1997, Reynolds and three other cigarette manufacturers filed suit against the Alaska Attorney General in federal district court seeking declaratory and injunctive relief to prohibit a threatened health care cost recovery action by Alaska on grounds that it would violate federal law. PHILIP MORRIS, INC., ET AL., V. BRUCE BOTELHO, United States District Court, Alaska, No. A 97-003 Civil (JWS). ERIE COUNTY. In January 1997, the County of Erie filed a health care cost recovery action in New York state court. COUNTY OF ERIE V. THE TOBACCO INSTITUTE, INC., ET AL., Supreme Court of the State of New York, County of Erie, Case No. I1997/359. NEW YORK. In January 1997, the Attorney General of New York filed a health care cost recovery action in New York state court. STATE OF NEW YORK, ET AL., V. PHILIP MORRIS, INC., ET AL., Supreme Court of the State of New York, County of New York, Case No. 400306/97. In February 1997, the case was removed to federal court, but it was remanded to state court on January 5, 1998. Defendants filed motions to dismiss on March 18, 1998. WISCONSIN. In February 1997, the Attorney General of Wisconsin filed a health care cost recovery action in Wisconsin state court. STATE OF WISCONSIN V. PHILIP MORRIS, INC., ET AL., Circuit Court (Dane County), Case No. 97CV0328. INDIANA. In February 1997, the Attorney General of Indiana filed a health care cost recovery action in Indiana state court. STATE OF INDIANA V. PHILIP MORRIS, INC., ET AL., Marion County Superior Court, Case No. 49D079702 CT0236. In April, 1997 the County of Cook filed a health care cost recovery action in Illinois state court. COUNTY OF COOK V. PHILIP MORRIS, Circuit Court, Cook County, Illinois, Case No. 97L01550. BECKOM Plaintiffs are residents of Tennessee who seek reimbursement of the funds expended by the state's taxpayers in providing health care for citizens. Plaintiffs are represented by J. D. Lee, the Tennessee attorney who has filed several cases against cigarette manufacturers since 1984. BECKOM V. AMERICAN TOBACCO, ET AL., United States District Court, Knoxville, Tennessee. ARKANSAS On December 12, 1997, RJRT was served with a reimbursement suit filed by the Attorney General for the State of Arkansas. ARKANSAS V. AMERICAN TOBACCO, ET AL., Chancery Court, Little Rock, Arkansas. Page 20 PENNSYLVANIA In April, 1997 the Attorney General of Pennsylvania filed a health care cost recovery action in state court. PENNSYLVANIA V PHILIP MORRIS, INC., ET AL. Court of Common Pleas, Philadelphia County. SOUTH CAROLINA In May, 1997, the Attorney General of South Carolina filed a health care cost recovery action in state court. SOUTH CAROLINA V. BROWN & WILLIAMSON, ET AL., Case No. 97-CP-401686. MONTANA In May, 1997, the Attorney General of Montana filed a health care cost recovery action in state court. MONTANA V. PHILIP MORRIS, INC., ET AL., Montana First Judicial Court, Lewis and Clark County, Montana, Case No. 9700306. MISSOURI In May, 1997, the Attorney General of Missouri filed a health care cost recovery action in state court. MISSOURI V. AMERICAN TOBACCO COMPANY, ET AL., Circuit Court, City of St. Louis, Missouri, Case No. 972-1465. COLORADO In June 1997, the Attorney General of Colorado filed a health care cost recovery action in state court. COLORADO V. R. J. REYNOLDS TOBACCO CO., ET AL., District Court, City and County of Denver, Colorado, Case No 97-CV-3432. NEW MEXICO In May 1997, the Attorney General of New Mexico filed a health care cost recovery action in state court. NEW MEXICO V. AMERICAN TOBACCO, ET AL., District Court, County of Santa Fe, New Mexico, Case No. SF97-1235. VERMONT In May 1997, the Attorney General of Vermont filed a health care cost recovery action in state court. VERMONT V. PHILIP MORRIS INC., ET AL., Chittenden Superior Court, Case No. 744-97. IDAHO In June 1997, the Attorney General of Idaho filed a health care cost recovery action in state court. IDAHO V. PHILIP MORRIS, INC., ET AL. District Court, County of Ada, Idaho, Case No. CV-970239D. NEW HAMPSHIRE In June 1997, the Attorney General of New Hampshire filed a health care cost recovery action in state court. NEW HAMPSHIRE V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., Superior Court, Merrimack County, New Hampshire, Case No. 97-E-0165. OREGON In June 1997, the Attorney General of Oregon filed a health care cost recovery action in state court. OREGON V. AMERICAN TOBACCO, ET AL., Circuit Court, Multnomah County, Oregon, Case NO. 9706-04457. Page 21 NEVADA In August 1997, , the Attorney General of Nevada filed a health care cost recovery action in state court. NEVADA V. PHILIP MORRIS, INC., ET AL., District Court, Wash County, Nevada, Case No.CV-97-03279. GEORGIA In September 1997, , the Attorney General of Georgia filed a health care cost recovery action in state court. GEORGIA V. PHILIP MORRIS, INC., ET AL., Superior Court, Fulton County, Georgia, Case No. E61692. MAINE In September 1997, the Attorney General of Maine filed a health care cost recovery action in state court. MAINE V. PHILIP MORRIS, INC., ET AL., Superior Court, Kennebec County, Maine, Case No. 97-134. RHODE ISLAND In October 1997, the Attorney General of Rhode Island filed a health care cost recovery action in state court. RHODE ISLAND V. BROWN & WILLIAMSON TOBACCO, ET AL., Superior Court, Providence, Rhode Island, Case No. 97-3058. SOUTH DAKOTA In February 1998, the Attorney General of South Dakota filed a health care costs recovery action in state court. SOUTH DAKOTA V. PHILIP MORRIS, INC., ET AL., Circuit Court, County of Hughes, South Dakota, Case No. 98-65. PUERTO RICO In June 1997, Pedro Rosello, as Governor of the Commonwealth of Puerto Rico, filed a health care cost recovery action in federal court. ROSELLO V. BROWN & WILLIAMSON TOBACCO, ET AL., United States District Court for the District of Puerto Rico, Case NO. 97-1910. In four cases, one or more asbestos companies seek reimbursement for a portion of the expenses, including settlements and judgments, they allege they have paid as a consequence of tobacco-related diseases. In those cases, they take the position that though asbestos claimants may have asbestos-related disease, those diseases are also associated with or caused by cigarettes. The four asbestos cases are as follows: FALISE, ET AL., V. AMERICAN TOBACCO, ET AL., United States District Court for the Eastern District of New York. Case No. CV 97 7640; KEENE CREDITORS TRUST V. BROWN & WILLIAMSON TOBACCO, ET AL., Supreme Court, County of New York, New York, Case No. 606479/97; RAYMARK INDUSTRIES, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., Circuit Court, Duval County, Florida, Case No. 97-0525; and FIBREBOARD CORPORATION, ET AL., V. AMERICAN TOBACCO, ET AL., Superior Court, County of Alameda, California, Case No 791919-8 In addition to the actions brought by the various state attorneys general, lawsuits based on similar theories have been brought by union health and welfare funds (44 such cases are currently pending), a university and four American tribes seeking to recover expenses paid on behalf of their members for smoking-related illnesses. Page 22 UNIONS THE NORTHWEST LABORERS-EMPLOYERS HEALTH & SECURITY TRUST FUND, ET AL., V. PHILIP MORRIS INC., ET AL., United States District Court for the Western District of Washington, Case No. C97-849-WD. On December 24, 1997 United States District Court Judge William Dwyer granted plaintiffs' motion for class certification as to "all existing jointly administered and collectively bargained-for health and welfare trusts in (the State of) Washington, and/or the trustees of such entities, that have provided or paid for health care and/or addiction treatment costs or services for employees or other beneficiaries." Judge Dwyer held that plaintiffs' class certification motion met the various requirements of Federal Rule of Civil Procedure 23(a) and (b)(3). IRON WORKERS UNION INSURANCE FUND, ET AL., V. PHILIP MORRIS, INC., ET AL, United States District Court for the Northern District of Ohio, Case No. 1:97 CV 144 STATIONARY ENGINEERS LOCAL 39 HEALTH & WELFARE TRUST FUND, ET AL., V. PHILIP MORRIS, INC., et al., United States District Court for the Northern District of California, Case No. C-97-1519-MMC KENTUCKY LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND, ET AL., V. PHILIP MORRIS, INC., ET AL, United States District Court for the Western District of Kentucky, Case No. 3:97CV-394-H MASSACHUSETTS LABORERS HEALTH AND WELFARE FUND, ET AL, V. PHILIP MORRIS, INC., ET AL., United States District Court, District Court of Massachusetts, Case No. 97-11552-GAO ARK-LA-MISS LABORERS WELFARE FUND, ET AL., United States District Court for the Eastern District of Louisiana, Case No. 97-1944 c/w 97-2570 HAWAII HEALTH & WELFARE FUND FOR OPERATING ENGINEERS V. PHILIP MORRIS, INC., ET AL., United States District Court, District of Hawaii, Case No. 97-00833 This case is currently stayed. CONNECTICUT PIPE TRADES HEALTH FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., United States District Court for the District of Connecticut, Case No. 397CV01305 UNITED FED OF TEACHERS WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., United States District Court for the Southern District of New York, Case No.97CIV4676 LABORERS LOCAL 17 HEALTH & BENEFIT FUND, ET AL., V. PHILIP MORRIS, INC., United States District Court for the Southern District of New York, Case Number 97CIV4550 WEST VIRGINIA LABORERS PENSION FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of West Virginia, Case No. 3:97-0708 Page 23 OREGON LABORERS-EMPLOYERS HEALTH & WELFARE TRUST FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., United States District Court for the District of Oregon, Case No. 9706-04707 Plaintiffs filed a motion for class certification. LABORERS' AND OPERATING ENGINEERS' UTILITY AGREEMENT HEALTH & WELFARE TRUST FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the District of Arizona, Case No. 97-1406-PHXSMM This case is currently stayed. SEAFARERS WELFARE PLAN, ET AL., V. PHILIP MORRIS, INC., ET AL. United States District Court for the District of Maryland, Case No. MJG-97-2127 TEAMSTERS NO. 142 HEALTH AND WELFARE TRUST FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., United States District Court for the Northern District of Indiana, Case No. 3:97CV00667RM EASTERN STATES HEALTH & WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No.97CV7346 WEST VIRGINIA-OHIO VALLEY AREA I.B.E.W. WELFARE FUND V. AMERICAN TOBACCO COMPANY, ET AL., United States District Court for the Southern District of West Virginia Case No: 97-C-2135 CONSTRUCTION LABORERS OF GREATER ST. LOUIS WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., United States District Court For the Eastern District of Missouri, Case No. 4:97CV02030ERW STEAMFITTERS LOCAL UNION 420 WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., United States District Court for the Eastern District of Pennsylvania, Case No. 97-CV-5344 NEW JERSEY CARPENTERS HEALTH FUND, ET AL., V. PHILIP MORRIS, INC., United States District Court for the District of New Jersey, Case No. 97-1728 S. E. FLORIDA LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS, INC., United States District Court for the Southern District of Florida, Case No. 97-8715-civRyskamp RHODE ISLAND LABORERS' HEALTH & WELFARE FUND V. AMERICAN TOBACCO COMPANY, United States District Court for the District of Rhode Island, Case No. 97-500L CENTRAL STATES JOINT BOARD HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS, INC., United States District Court for the Northern District of Illinois, Case No. 97C8114 Page 24 TEXAS CARPENTERS HEALTH BENEFIT FUND, ET AL., V. PHILIP MORRIS, INC., United States District Court for the Eastern District of Texas, Case No. 97-CV-0625 CENTRAL LABORERS WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., United States District Court for Southern District of Illinois, Case No. 97-568-WDS BAC LOCAL 32 INSURANCE TRUST FUND, ET AL., V. PHILIP MORRIS INC., ET AL., United States District Court for the District of Michigan, Case No. 97-75675 INTERNATIONAL BROTHERHOOD OF TEAMSTERS LOCAL 734 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Northern District of Illinois, Case No. 97C8113 IBEW LOCAL 363 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97CIV9396 IBEW LOCAL 25 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97-9395 LOCAL 138, 138A, AND 138B INTERNATIONAL UNION OF OPERATING ENGINEERS WELFARE FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97-9402 LOCAL 840, INTERNATIONAL BROTHERHOOD OF TEAMSTERS HEALTH & INSURANCE FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97CIV9398 PUERTO RICAN ILGWU HEALTH & WELFARE FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97CV9396 LONG ISLAND REGIONAL COUNCIL OF CARPENTERS WELFARE FUND V. PHILIP MORRIS, INC., ET AL., Supreme Court of New York for the County of New York, Case No. 97/122258 UNITED FOOD & COMMERCIAL WORKERS UNION V. PHILIP MORRIS, INC., ET AL., United States District Court for the Northern District of Alabama, Case No. CV-97-1340 LOCAL 1199 V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97CV9401 LOCAL 1199 HOME CARE INDUSTRY BENEFIT FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97-9401 Page 25 ASBESTOS WORKERS LOCAL 53 HEALTH AND WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., United States District Court for the Eastern District of Louisiana, Case No. 97-1944c/w97-2570 SCREEN ACTORS GUILD-PRODUCERS HEALTH & WELFARE FUND PLAN, ET AL. V. PHILIP MORRIS, INC., ET AL., Superior Court of California, County of Los Angeles, Case No. BS181603 DAY CARE COUNCIL - LOCAL D.C. 1707 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the Southern District of New York, Case No. 97/606240 OPERATING ENGINEERS LOCAL 12 HEALTH & WELFARE FUND V. AMERICAN TOBACCO COMPANY, ET AL., United States District Court for the Northern District of California, Case No. BC177968 STEAMFITTERS LOCAL UNION 614 HEALTH & WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., Circuit Court of Tennessee at Memphis, Case No. 92260-2 ARKANSAS CARPENTERS HEALTH & WELFARE FUND V. PHILIP MORRIS, INC., ET AL., United States District Court for the District of Arkansas, Case No. LR-C-97-0754 CARPENTERS & JOINERS WELFARE FUND, ET AL V. PHILIP MORRIS, INC., ET AL., United States District Court for the District of Minnesota, Case No. 98-515JMR/FLN NEW MEXICO AND WEST TEXAS MULTI-CRAFT HEALTH & WELFARE FUND, ET AL., V. PHILIP MORRIS, INC., ET AL., United States District Court for the District of New Mexico, Case No. CV-97-0009118 UNIVERSITIES UNIVERSITY OF SOUTH ALABAMA V. THE AMERICAN TOBACCO COMPANY, ET AL., United States District Court for the District of Alabama, Case No. 97-0552-BH-S. INDIAN TRIBES MUSCOGEE CREEK NATION V. THE AMERICAN TOBACCO COMPANY, ET AL., Muscogee Creek Tribal Court, Case No. CV 97-27. CROW CREEK SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., Tribal Court of the Crow Creek Sioux, Case No. CV 97-09-082. THE CROW TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., Crow Tribal Court, Case No. 97-181. Page 26 LOWER BRULE SIOUX NATION V. THE AMERICAN TOBACCO COMPANY, Lower Brule Sioux Tribal Court, Case No. 97-5-0057. Other state and local government entities have announced that they are considering filing similar health care cost recovery actions. Page 27 -----END PRIVACY-ENHANCED MESSAGE-----