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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
---------------------
NABISCO GROUP HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10215 13-3490602
(State or other jurisdiction (Commission file number) (I.R.S. Employer Identification No.)
of
incorporation or organization)
7 CAMPUS DRIVE
PARSIPPANY, NJ 07054-0311
(973) 682-5000
(Address, including zip code, and telephone number, including area
code, of the registrant's principal executive offices)
------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X , NO ___.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: APRIL 30, 2000:
326,442,347 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
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INDEX
PAGE
--------------
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three Months
Ended March 31, 2000 and 1999............................. 1
Consolidated Condensed Statements of Comprehensive
Income--Three Months Ended March 31, 2000 and 1999........ 2
Consolidated Condensed Statements of Cash Flows--Three
Months Ended March 31, 2000 and 1999...................... 3
Consolidated Condensed Balance Sheets--March 31, 2000 and
December 31, 1999......................................... 4
Notes to Consolidated Condensed Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 14
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures.......................................................................... 19
PART I
ITEM 1. FINANCIAL STATEMENTS
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
NET SALES................................................... $2,069 $1,855
------ ------
Costs and expenses:
Cost of products sold..................................... 1,147 1,027
Selling, advertising, administrative and general
expenses................................................ 696 641
Amortization of trademarks and goodwill................... 55 53
------ ------
OPERATING INCOME........................................ 171 134
Interest and debt expense................................... (72) (98)
Other income (expense), net................................. (2) (10)
------ ------
INCOME BEFORE INCOME TAXES.............................. 97 26
Provision for income taxes.................................. 38 9
------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST.............................................. 59 17
Less minority interest in income of Nabisco Holdings........ 12 7
------ ------
INCOME FROM CONTINUING OPERATIONS....................... 47 10
Discontinued operations:
Income from operations of discontinued businesses, net of
income taxes............................................ -- 66
------ ------
NET INCOME.............................................. $ 47 $ 76
====== ======
NET INCOME PER COMMON SHARE--BASIC:
Income from continuing operations......................... $ .14 $ .02
Income from discontinued operations....................... -- .20
------ ------
Net income.............................................. $ .14 $ .22
====== ======
NET INCOME PER COMMON SHARE--DILUTED:
Income from continuing operations......................... $ .14 $ .02
Income from discontinued operations....................... -- .20
------ ------
Net income.............................................. $ .14 $ .22
====== ======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK................ $.1225 $.5125
====== ======
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
1
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
THREE MONTHS
ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
NET INCOME.................................................. $ 47 $ 76
------ ------
Other comprehensive income (loss):
Cumulative translation adjustment......................... 3 (106)
Provision for income taxes................................ -- --
------ ------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX........ 3 (106)
------ ------
COMPREHENSIVE INCOME (LOSS)................................. $ 50 $ (30)
====== ======
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- --------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income................................................ $ 47 $ 76
Less (income) from discontinued operations................ -- (66)
------ -----
Income from continuing operations......................... 47 10
------ -----
Adjustments to reconcile to net cash flows from (used in)
continuing operating activities:
Depreciation of property, plant and equipment......... 67 67
Amortization of intangibles........................... 55 53
Deferred income tax provision......................... 28 16
Restructuring payments................................ (21) (18)
Accounts receivable, net.............................. 127 (8)
Inventories........................................... (74) (73)
Accounts payable and accrued liabilities, including
income taxes........................................ (299) (243)
Other, net............................................ 3 10
------ -----
Total adjustments................................... (114) (196)
------ -----
Net cash flows (used in) continuing operating
activities............................................ (67) (186)
Net cash flows from discontinued operations............. -- 150
------ -----
Net cash flows (used in) operating activities........... (67) (36)
------ -----
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures...................................... (40) (47)
Proceeds from sale of assets.............................. 2 2
Proceeds from exercise of Nabisco Holdings' common stock
options................................................. -- 2
------ -----
Net cash flows (used in) investing activities........... (38) (43)
------ -----
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt.............. 210 233
Repayments of long-term debt.............................. (153) (7)
Increase in notes payable................................. 33 5
Dividends paid on common and preferred stock.............. (50) (183)
Other, net................................................ -- 23
------ -----
Net cash flows from financing activities................ 40 71
------ -----
Effect of exchange rate changes on cash and cash
equivalents............................................... -- (6)
------ -----
Net change in cash and cash equivalents................. (65) (14)
Cash and cash equivalents at beginning of period............ 254 112
------ -----
Cash and cash equivalents at end of period.................. $ 189 $ 98
====== =====
Income taxes paid, net of refunds........................... $ 8 $ 11
Interest paid............................................... $ 79 $ 104
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 189 $ 254
Short-term investments.................................... 8 6
Accounts receivable, net of allowance for doubtful
accounts of $51 million and $52 million, respecively.... 555 681
Deferred income taxes..................................... 104 114
Inventories............................................... 964 898
Prepaid expenses and other current assets................. 81 79
------- -------
TOTAL CURRENT ASSETS.................................. 1,901 2,032
------- -------
Property, plant and equipment, net.......................... 3,058 3,089
Trademarks, net............................................. 3,414 3,443
Goodwill, net............................................... 3,151 3,159
Other assets and deferred charges........................... 266 238
------- -------
$11,790 $11,961
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 72 $ 39
Account payable........................................... 403 642
Accrued liabilities....................................... 983 1,056
Current maturities of long-term debt...................... 11 158
Income taxes accrued...................................... 116 107
------- -------
TOTAL CURRENT LIABILITIES............................. 1,585 2,002
------- -------
Long-term debt (less current maturities).................... 4,094 3,892
Minority interest in Nabisco Holdings....................... 765 763
Other noncurrent liabilities................................ 784 768
Deferred income taxes....................................... 1,293 1,277
Contingencies (Note 5)
Nabisco Group Holdings' obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely
junior subordinated debentures*........................... 98 98
Stockholders' equity:
Common stock (326,442,347 and 326,146,847 shares issued
and outstanding at March 31, 2000 and December 31, 1999,
respectively)........................................... 3 3
Paid-in capital........................................... 3,462 3,459
Retained earnings......................................... 132 125
Accumulated other comprehensive income (loss)............. (317) (320)
Treasury stock, at cost................................... (100) (100)
Unamortized restricted stock.............................. (9) (6)
------- -------
TOTAL STOCKHOLDERS' EQUITY.......................... 3,171 3,161
------- -------
$11,790 $11,961
======= =======
- ------------------------
* The sole asset of the subsidiary trust is the junior subordinated debentures
of Nabisco Group Holdings Corp. The remaining outstanding junior
subordinated debentures have an aggregate principal amount of approximately
$101 million, an annual interest rate of 9 1/2%, and mature in September,
2047. The preferred securities outstanding as of March 31, 2000 will be
mandatorily redeemed for $98 million upon redemption of the junior
subordinated debentures.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
NABISCO GROUP HOLDINGS CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS
GENERAL
The consolidated condensed financial statements include the accounts of
Nabisco Group Holdings Corp. ("NGH"), and its majority-owned subsidiaries,
including 80.6% of Nabisco Holdings Corp. ("Nabisco Holdings") and its
wholly-owned subsidiary, Nabisco, Inc. ("Nabisco").
For interim reporting purposes, certain costs and expenses are charged to
operations in proportion to the estimated total annual amount expected to be
incurred. The results for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ended
December 31, 2000.
In management's opinion, the accompanying unaudited consolidated condensed
financial statements (the "Consolidated Condensed Financial Statements") of NGH
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods presented.
The Consolidated Condensed Financial Statements should be read in conjunction
with the consolidated financial statements and footnotes in the Annual Report on
Form 10-K of NGH at December 31, 1999.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
During the second quarter of 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was required
to be adopted by January 1, 2000, with early adoption permitted. In June 1999,
the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133, which amended SFAS
No. 133 to delay its effective date one year. SFAS No. 133 requires that all
derivative instruments be recorded on the consolidated balance sheet at their
fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. NGH has not yet determined the impact, if any, that
adoption or subsequent application of SFAS No. 133 will have on its financial
position or results of operations.
ACQUISITION GOODWILL ADJUSTMENT
In November 1999, Nabisco acquired certain assets and liabilities of
Favorite Brands International, Inc. As of March 31, 2000 the purchase price
allocation has not been fully completed, pending the completion of the
acquisition integration plan. However, additional goodwill of $24 million was
recognized during the first quarter of 2000 from the settlement of the purchase
price for working capital amounts, resulting in total goodwill of $92 million.
1998 RESTRUCTURING CHARGES
In the second and fourth quarters of 1998, Nabisco recorded restructuring
charges of $406 million ($216 million after tax, net of minority interest) and
$124 million ($75 million after tax, net of minority interest), respectively,
and in 1999, recorded a net restructuring credit of $67 million ($39 million
after tax, net of minority interest) resulting in a total net charge for the
1998 restructuring programs of $463 million ($252 million after tax, net of
minority interest). These restructuring programs were undertaken to streamline
operations and improve profitability and will result in a workforce reduction of
approximately 6,900 employees of which 6,700 positions were eliminated as of
March 31, 2000.
5
NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED)
The June 1998 program was substantially completed in 1999 and the December
1998 program is expected to be substantially completed by mid-year 2000. The
restructuring programs when completed will require cash expenditures, net of
cash proceeds, of approximately $140 million.
The key elements of the restructuring programs include:
SEVERANCE CONTRACT ASSET OTHER EXIT
IN MILLIONS AND BENEFITS TERMINATIONS IMPAIRMENTS COSTS TOTAL
- ----------- ------------ ------------ ----------- ---------- --------
Sales force reorganizations.............. $ 37 $ 3 $ -- $-- $ 40
Distribution reorganizations............. 16 8 9 -- 33
Staff reductions......................... 83 -- 3 -- 86
Manufacturing cost reduction
initiatives............................. 22 -- 8 -- 30
Plant closures........................... 46 3 217 15 281
Product line rationalizations............ 4 4 20 32 60
---- --- ---- --- ----
Total 1998 restructuring reserves.... 208 18 257 47 530
1999 net restructuring credit............ (50) 1 (14) (4) (67)
---- --- ---- --- ----
158 19 243 43 463
---- --- ---- --- ----
Charges and Payments:
Cumulative through December 31, 1999..... (132) (14) (233) (35) (414)
Three months ended March 31, 2000........ (11) -- (4) (2) (17)
---- --- ---- --- ----
Total charges and payments, net of
cash proceeds...................... (143) (14) (237) (37) (431)
---- --- ---- --- ----
Reserve and valuation account balances as
of March 31, 2000....................... $ 15 $ 5 $ 6 $ 6 $ 32
==== === ==== === ====
The key elements of the restructuring programs, after the restructuring
credit of $67 million include:
SEVERANCE CONTRACT ASSET OTHER EXIT
IN MILLIONS AND BENEFITS TERMINATIONS IMPAIRMENTS COSTS TOTAL
- ----------- ------------ ------------ ----------- ---------- --------
Sales force reorganization............... $ 16 $ 3 $ -- $-- $ 19
Distribution reorganization.............. 11 4 7 -- 22
Staff reductions......................... 59 1 4 -- 64
Manufacturing cost reduction
initiatives............................. 19 -- 8 -- 27
Plant closures........................... 51 6 203 15 275
Product line rationalizations............ 2 5 21 28 56
---- --- ---- --- ----
Total restructuring charges.......... $158 $19 $243 $43 $463
==== === ==== === ====
Total charges and payments include cash expenditures, non-cash charges
primarily for asset impairments and committed severance and benefits to be paid.
The total cash payments, net of cash proceeds applied against the restructuring
reserves totaled $123 million, which is comprised of cumulative cash
expenditures of $145 million and cumulative cash proceeds of $22 million. For
the quarter ended March 31, 2000, cash payments, net of cash proceeds totaled
$20 million, which is comprised of $21 million of cash expenditures and
$1 million of cash proceeds which were applied against the restructuring
reserves. Cash payments for the three months ended March 31, 2000 exceeded
charges and payments, net of cash proceeds, for the three months ended
March 31, 2000 due to payments made to satisfy severance and benefit obligations
previously committed and charged against the reserves.
6
NOTE 2 -- INVENTORIES
The major classes of inventory are as follows:
MARCH 31, DECEMBER 31,
IN MILLIONS 2000 1999
- ----------- --------- ------------
Finished products........................................... $576 $551
Raw materials............................................... 244 199
Work in process............................................. 42 45
Other....................................................... 102 103
---- ----
$964 $898
==== ====
NOTE 3 -- NET INCOME PER SHARE
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2000 1999
------------------- -------------------
BASIC DILUTED BASIC DILUTED
-------- -------- -------- --------
Income from continuing operations applicable to common
stock:
Income from continuing operations....................... $ 47 $ 47 $ 10 $ 10
Preferred stock dividends............................... -- -- (4) (4)
-------- -------- -------- --------
$ 47 $ 47 $ 6 $ 6
======== ======== ======== ========
Weighted average number of common and common equivalent
shares outstanding (in thousands):
Common shares........................................... 325,762 325,762 324,053 324,053
Assumed exercise of NGH's stock options................. -- 49 -- 248
-------- -------- -------- --------
325,762 325,811 324,053 324,301
======== ======== ======== ========
Shares of ESOP convertible preferred stock of 12,543,347 were not included
in computing diluted earnings per share for 1999, because the effect would have
been antidilutive. Common shares also exclude 680,500 and 949,100 shares of
restricted stock as the vesting provisions had not been met at March 31, 2000
and 1999, respectively.
NOTE 4 -- SEGMENT REPORTING
NGH is a holding company whose majority-owned subsidiaries are engaged
principally in the manufacture, distribution and sale of cookies, crackers, and
other food products. NGH is organized and reports its results of operations in
three operating segments: Nabisco Biscuit Company, the Nabisco Foods Company and
the International Food Group which are segregated by both product and geographic
area.
NGH's management evaluates the performance and allocates resources based
upon operating company contribution ("OCC") before restructuring-related
expenses. OCC, for each reportable segment is operating income before
amortization of intangibles and restructuring charges and credits and exclusive
of, restructuring-related expenses.
THREE MONTHS ENDED
MARCH 31,
---------------------
IN MILLIONS 2000 1999
- ----------- -------- ----------
Net sales from external customers:
Nabisco Biscuit Company................................... $ 881 $ 867
Nabisco Foods Company..................................... 631 435
International Food Group.................................. 557 553
------- -------
Total................................................. $ 2,069 $ 1,855
======= =======
7
NOTE 4 -- SEGMENT REPORTING (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
---------------------
IN MILLIONS 2000 1999
- ----------- -------- ----------
Segment operating company contribution:
Nabisco Biscuit Company................................... $ 132 $ 121
Nabisco Foods Company..................................... 65 49
International Food Group.................................. 33 32
Other..................................................... (4) --
------- -------
Total segment operating company contribution................ 226 202
Restructuring-related expenses.............................. -- 15
Amortization of trademarks and goodwill..................... 55 53
------- -------
Consolidated operating income............................... 171 134
Interest and debt expense................................... 72 98
Other expense, net.......................................... 2 10
------- -------
Income before income taxes.................................. $ 97 $ 26
======= =======
NOTE 5 -- CONTINGENCIES
TOBACCO LITIGATION
As of April 26, 2000, NGH was a defendant in 43 lawsuits arising out of its
now severed relationship with the tobacco business conducted by its former
subsidiary, Reynolds Tobacco or its subsidiaries. These cases name NGH on a
variety of theories, not always specifically pled, that seek to impose liability
on NGH for injuries allegedly caused by the use, sale, distribution,
manufacture, development, advertising, marketing or health effects of, exposure
to, or research, statements or warnings regarding cigarettes.
Fifteen of the active suits were brought in state courts by claimants
seeking recovery of health care costs they incurred for large numbers of
beneficiaries whose illnesses are allegedly related to cigarettes. The
plaintiffs in these cases include groups of union health-benefit trust funds, a
Native American tribe and two foreign countries or political subdivisions. Four
of the cases are non-union class action suits, one in Pennsylvania federal
court, one in Indiana state court, one in New York federal court and one in
Missouri state court.
In addition, as of April 26, 2000, 21 anti-trust cases have been served on
NGH as well as a number of cigarette manufacturers and their present or former
parent companies in three federal courts and various state courts. NGH has been
named in an additional nine such cases, but has not been served. These cases,
all of which seek to be certified as class actions, allege violations of state
and/or federal anti-trust law and are brought by plaintiffs who claim to
represent direct purchasers, indirect purchasers and retail purchasers of
cigarettes.
NGH's defenses in all the cigarette cases in which it is named include the
merits defenses of Reynolds Tobacco plus separate arguments that NGH is a
holding company that does not engage in any of the activities for which
plaintiffs seek to impose liability. NGH also seeks to be dismissed from some of
these cases based on the fact that as a holding company that does not conduct
business in most states, NGH lacks the minimum contacts with most states that
would be necessary for the assertion of personal jurisdiction over it.
In the health-care cost-recovery cases of the kind noted above, defendants
also argue that the case should be dismissed because of the settled law that one
who pays an injured person's medical expenses is legally too remote to maintain
an action against the person allegedly responsible for the injury. Most courts
that have decided motions to dismiss based on this argument, including the
federal court of appeals for the Second, Third, Fifth, Seventh and Ninth
Circuits, have granted motions to dismiss on these "remoteness" grounds. Ten of
these union cases, all pending in New York State courts, have been
8
NOTE 5 -- CONTINGENCIES (CONTINUED)
consolidated and, on March 6, 2000, defendants' motion to dismiss these cases on
"remoteness" grounds was granted. Plaintiffs have filed notices of appeal in
these cases.
As of May 3, 2000, no case in which NGH is a named defendant was scheduled
for trial in 2000. One class action case, described below, in which Reynolds
Tobacco is a defendant is in the process of being tried in Florida, and an
individual case, ANDERSON V. PHILIP MORRIS INC. has just begun trial in New
York. It is likely that several more will be tried during the course of the
year.
NGH's litigation defense costs as well as any liabilities it might incur as
a result of the cases pending against it are to be paid by RJR and Reynolds
Tobacco under the indemnification provisions of an agreement between NGH, RJR
and Reynolds Tobacco. NGH's cost of defense, as well as any liabilities incurred
as a result of the cases brought by plaintiffs based on sales of cigarettes
outside the United States, are generally also subject to an indemnity from Japan
Tobacco Inc. as provided under the sale agreement among Japan Tobacco, Reynolds
Tobacco and RJR. If RJR and Reynolds Tobacco and Japan Tobacco cannot fulfill
their respective indemnity obligations, NGH could be required to make the
relevant payments itself.
In addition to the cases pending against NGH, there are several hundred
lawsuits relating to cigarettes in which Reynolds Tobacco, and sometimes RJR,
are named defendants. One Florida class action case, in which Reynolds Tobacco
is a defendant, ENGLE VS. R.J. REYNOLDS TOBACCO COMPANY, is being tried in
several phases. A jury found against Reynolds Tobacco and the other cigarette
company defendants in the first phase. The second phase, considering the claims
of class representatives, was completed on April 7, 2000 with an award of
$12.7 million to three class members. Beginning on May 15, 2000, the same jury
will hear the case for an award of punitive damages, which would be a lump sum
for the class as a whole. A decision on this award may be made during June or
July 2000. It is not possible to estimate the size of such an award if made, but
it could be in the billions of dollars. No payment of damages should be required
until the end of the trail and appellate process. If Reynolds Tobacco and RJR
are unable to satisfy their payment obligations for any adverse judgments
against them in some or all of these cases, it is possible that plaintiffs in
these cases would seek to recover the unsatisfied obligations from the assets of
NGH by bringing lawsuits on various theories.
Some of the claims against NGH seek recovery of hundreds of millions and
possibly billions of dollars. This is also true of the litigation pending
against Reynolds Tobacco and RJR. Litigation is subject to many uncertainties.
While management believes it has strong defenses in the litigation against NGH,
management is unable to predict the outcome of the litigation against NGH, or to
derive a meaningful estimate of the amount or range of any possible loss in any
quarterly or annual period or in the aggregate.
NOTE 6 -- SUBSEQUENT EVENT
On May 5, 2000, the European Commission gave clearance to Nabisco's
previously announced intention of joining a consortium of investors, Finalrealm
Limited ("Finalrealm"), that has acquired the equity of United Biscuits
(Holdings) plc ("UB"), a United Kingdom company, for cash of 265 pence per UB
share. Pursuant to the definitive agreements and subject to completion:
(i) Nabisco will contribute approximately $45 million in cash and its operations
in Spain, Portugal and the Middle East (in 1999, these operations had net sales
of approximately $290 million) to an associate of Finalrealm and in exchange
receive dual convertible discounted preferred securities; (ii) Finalrealm has
agreed to procure the sale to Nabisco of UB's operations in China, Hong Kong and
Taiwan (in 1999, these operations had net sales of approximately $66 million).
It is expected that Nabisco will have: (i) an economic interest of 26.5% in
the consortium which will be comprised of UB's businesses in the United Kingdom,
France, the Benelux countries and Nabisco's operations named above; and
(ii) ownership of UB's Asian businesses cited above.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of NGH's financial condition and
results of operations. The discussion and analysis of the results of operations
is divided into separate sections for sales, operating company contribution and
operating income. The sales section includes information as reported in the
historical financial statements, followed by management's discussion and
analysis of these results. The operating company contribution and operating
income sections include information as reported in the historical financial
statements, followed by special items that management believes impact the
comparability of historical results, results excluding special items and
management's discussion and analysis of results excluding special items. Results
excluding special items are presented on a basis consistent with how the
businesses are managed. Special items include restructuring-related expenses
that management believes affect the comparability of the results of operations.
The results of operations excluding special items should not be viewed as a
substitute for the historical results of operations but as a tool to better
understand the underlying trends in the business. The discussion and analysis of
NGH's financial condition and results of operations should be read in
conjunction with the historical financial information and the related notes
thereto included in the Consolidated Condensed Financial Statements.
NGH's business is conducted by Nabisco Holdings Corp.'s ("Nabisco Holdings")
wholly-owned subsidiary Nabisco Inc. ("Nabisco"). The food business is conducted
by the operating subsidiaries of Nabisco Holdings. Nabisco's businesses in the
United States are comprised of Nabisco Biscuit Company and the Nabisco Foods
Company. Nabisco's businesses outside the United States are conducted by Nabisco
Ltd and Nabisco International, Inc. ("Nabisco International" together with
Nabisco Ltd, the "International Food Group").
NET SALES
THREE MONTHS ENDED
MARCH 31,
------------------------------
IN MILLIONS 2000 1999 % CHANGE
- ----------- -------- -------- --------
REPORTED NET SALES:
Nabisco Biscuit Company................................... $ 881 $ 867 2%
Nabisco Foods Company..................................... 631 435 45%
International Food Group.................................. 557 553 1%
------ ------
Total..................................................... $2,069 $1,855 12%
====== ======
- Nabisco Biscuit Company's net sales increased 2% versus the prior year due
to continued momentum in volume growth from its core cookie and cracker
brands as well as the impact of several new products. Offsetting some of
these gains were several discontinued breakfast food and snack items.
- Nabisco Foods Company's net sales increased 45% to $631 million. Excluding
the impact on net sales resulting from the November 1999 acquisition of
the Favorite Brands' business, net sales grew 14%, over the prior year,
primarily due to volume gains from nuts, confections and pet snacks.
- International's net sales increased 1% versus the prior year to
$557 million. Excluding the impact of unfavorable foreign currency
translations, International's net sales increased 2%. This increase is
primarily due to volume gains in Argentina, principally due to the impact
of the Canale S.A. acquisition, the Andean region and Asia as well as
price increases in Brazil, partially offset by volume declines in Brazil,
Mexico and Spain.
10
OPERATING COMPANY CONTRIBUTION
THREE MONTHS ENDED
MARCH 31,
------------------------------
IN MILLIONS 2000 1999 % CHANGE
- ----------- -------- -------- --------
REPORTED OPERATING COMPANY CONTRIBUTION(1):
Nabisco Biscuit Company................................... $132 $108 22%
National Foods Company.................................... 65 48 35%
International Food Group.................................. 33 31 6%
Other..................................................... (4) -- --
---- ----
Total....................................................... 226 187 21%
---- ----
SPECIAL ITEMS:
Restructuring-related expenses:
Nabisco Biscuit Company................................. -- (13)
Nabisco Foods Company................................... -- (1)
International Food Group................................ -- (1)
---- ----
Total....................................................... -- (15)
---- ----
OPERATING COMPANY CONTRIBUTION EXCLUDING SPECIAL ITEMS:
Nabisco Biscuit Company................................... 132 121 9%
Nabisco Foods Company..................................... 65 49 33%
International Food Group.................................. 33 32 3%
Other..................................................... (4) -- --
---- ----
Total....................................................... $226 $202 12%
==== ====
- ------------------------
(1) Operating company contribution represents operating income before
amortization of trademarks and goodwill and restructuring charges (credits).
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING COMPANY CONTRIBUTION
EXCLUDING SPECIAL
ITEMS:
- Nabisco Biscuit Company's operating company contribution increased 9%
versus the prior year. The increase reflects the impact of ongoing
productivity programs on manufacturing costs and volume gains in its core
cookie and cracker brands. Increased marketing spending and lower
breakfast snack volumes partially offset these gains.
- Nabisco Foods Company's operating company contribution increased 33%
versus the prior year. The results were primarily due to strong volume
gains from nuts, confections and pet snacks partially offset by increased
marketing spending.
- International's operating company contribution increased 3% versus the
prior year. The increase was primarily due to volume increase in
Argentina, the Andean region and Asia. Also contributing to the increase
was the impact of productivity programs on lowering costs in Canada and
Argentina. Partially offsetting this increase were volume declines in
Brazil, Mexico and Spain in addition to increased marketing investments in
Canada, Asia and Brazil.
11
OPERATING INCOME
THREE MONTHS
ENDED MARCH 31,
------------------------------
IN MILLIONS 2000 1999 % CHANGE
- ----------- -------- -------- --------
REPORTED OPERATING INCOME................................... $171 $ 134 28%
---- -----
SPECIAL ITEMS:
Restructuring-related expenses.......................... -- (15)
---- -----
OPERATING INCOME EXCLUDING SPECIAL ITEMS.................... $171 $ 149 15%
==== =====
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING INCOME EXCLUDING
SPECIAL ITEMS:
- NGH's operating income was $171 million for the first quarter of 2000, an
increase of 15% from the first quarter 1999 level, primarily due to the
increase in operating company contribution discussed previously.
INTEREST AND DEBT EXPENSE
Consolidated interest and debt expense of $72 million for the first quarter
of 2000 decreased by $26 million or 27% from the same 1999 period primarily due
to the repurchase and redemption of trust preferred securities in May of 1999.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $2 million expense for the first three
months of 2000 compared to $10 million expense for the first three months of
1999. The first three months comparison primarily reflects foreign exchange
gains in 2000 compared to foreign exchange losses in 1999 and higher interest
income.
NET INCOME
Nabisco Group Holdings' net income of $47 million for the first quarter of
2000 compared with net income of $76 million for the first quarter of 1999. The
first quarter decrease primarily reflects the absence of income from operations
of discontinued businesses and an increased provision for income taxes partially
offset by higher operating income, lower interest and debt expense and lower
other income (expense), net.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income was $50 million for the first quarter of 2000 versus a
loss of $30 million in the first quarter of 1999. The $80 million change
reflects foreign currency translation gains in 2000 compared to foreign currency
translation losses in 1999 partially offset by lower net income.
RESTRUCTURING
Savings objectives set in Nabisco's 1998 restructuring programs are on
target despite lower than anticipated spending to date. The June 1998 program
was substantially completed in 1999 and the December 1998 program is expected to
be substantially completed by mid-year 2000. Pre-tax savings in 2000 are
expected to be approximately $140 million including cash savings of
$133 million and, after completion of the programs, are expected to be
approximately $145 million annually including cash savings of $135 million. In
1999, Nabisco recorded a net restructuring credit of $67 million. This net
credit reduced the restructuring charges to $463 million. As the remaining
projects from the December 1998 restructuring program are completed, Nabisco
will continue to analyze the actual spending and the estimated cost to complete
the programs. The results of that analysis will determine what further
adjustments, if any, will be necessary. Cumulative cash expenditures, net of
cash proceeds, to date have
12
totaled $123 million with $20 million expended in 2000. The cash component of
the restructuring charge for the programs will be approximately $140 million
including an estimated $37 million expenditure in 2000. For a further discussion
of the restructuring programs, see Note 1 to the Consolidated Financial
Statements.
DISCONTINUED OPERATIONS
Total income from discontinued operations was $66 million in the first
quarter of 1999. Discontinued operations represent the results from tobacco
businesses and RJR Nabisco, Inc.'s corporate headquarters' expenses prior to the
sale in 1999 of the international tobacco business and subsequent spin-off to
shareholders of the domestic tobacco business.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows used in continuing operating activities amounted to
$67 million for the first three months of 2000 compared to $186 million for the
first three months of 1999. The decrease in net cash flows used in continuing
operating activities primarily reflects the 2000 increase in income from
continuing operations and lower working capital requirements.
Cash flows used in investing activities for the first three months of 2000
decreased $5 million from the first three months of 1999 to $38 million,
primarily due to lower capital expenditures and partially offset by the absence
of proceeds from the exercise of Nabisco Holdings' common stock options.
Capital expenditures were $40 million in the first three months of 2000.
Management expects that capital expenditures for 2000 will be approximately
$250 million, which is sufficient to support the strategic and operating needs
of Nabisco Holdings' businesses. Management also expects that cash flow from
operations will be sufficient to support its planned capital expenditures in
2000.
Cash flows from financing activities were $40 million for the first three
months of 2000, a decrease of $31 million from the first three months of 1999,
principally due to the lower net proceeds from long-term debt partially offset
by lower dividends paid on common and preferred stock.
As of March 31, 2000, Nabisco's $1.5 billion revolving credit facility was
unutilized and available to support borrowings and the 364-day $1.1 billion
credit facility was unavailable as it supported outstanding commercial paper
borrowings.
The companies believe that they are currently in compliance with all
covenants and restrictions imposed by the terms of their indebtedness.
At March 31, 2000, NGH's total debt (notes payable and long-term debt,
including current maturities and mandatorily redeemable preferred securities)
and total capital (total debt and stockholders' equity) amounted to
approximately $4.3 billion and $7.4 billion, respectively, of which total debt
is higher by approximately $88 million and total capital is higher by
$98 million than at December 31, 1999, NGH's ratios of total debt to
stockholders' equity and total debt to total capital were 1.35 to 1 and .57 to
1, respectively.
NGH currently anticipates that it will pay a regular quarterly cash dividend
that is approximately equal to the amount of the regular Nabisco Holdings'
quarterly cash dividend that NGH expects to receive. However, the dividend
payable on each NGH common share will be less than the dividend payable on each
Nabisco Holdings' common share because the number of outstanding NGH common
shares exceeds the number of Nabisco Holdings' shares owned by NGH. Passing
through Nabisco Holdings' current annual dividend of $0.75 per share on NGH's
213,250,000 shares of Nabisco Holdings' stock would yield an annual dividend of
approximately $0.49 per share on the 326,442,347 shares of NGH stock outstanding
on March 31, 2000.
On April 3, 2000 the Board of NGH directed its management to explore all
alternatives to maximize shareholder value including the sale of NGH or the sale
of Nabisco Holdings.
13
SUBSEQUENT EVENT
On May 5, 2000, the European Commission gave clearance to Nabisco's
previously announced intention of joining a consortium of investors, Finalrealm
Limited ("Finalrealm"), that has acquired the equity of United Biscuits
(Holdings) plc ("UB"), a United Kingdom company, for cash of 265 pence per UB
share. Pursuant to the definitive agreements and subject to completion:
(i) Nabisco will contribute approximately $45 million in cash and its operations
in Spain, Portugal and the Middle East (in 1999, these operations had net sales
of approximately $290 million) to an associate of Finalrealm and in exchange
receive dual convertible discounted preferred securities; (ii) Finalrealm has
agreed to procure the sale to Nabisco of UB's operations in China, Hong Kong and
Taiwan (in 1999, these operations had net sales of approximately $66 million).
It is expected that Nabisco will have: (i) an economic interest of 26.5% in
the consortium which will be comprised of UB's businesses in the United Kingdom,
France, the Benelux countries and Nabisco's operations named above; and
(ii) ownership of UB's Asian businesses cited above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Nabisco is exposed to changes in interest rates primarily as a result of its
borrowing activities which include commercial paper, short-term borrowings and
long-term fixed rate debt used to maintain liquidity and fund its business
operations. Nabisco employs a variance/co-variance approach to its calculation
of Value at Risk ("VaR"), which is a statistical measure of potential loss in
terms of fair value, cash flows, or earnings of interest rate sensitive
financial instruments over a one year horizon using a 95% confidence interval
for changes in interest rates. The model assumes that financial returns are
normally distributed. For options and instruments with non-linear returns, the
model uses the delta/ gamma method to approximate the financial return.
The VaR, which is the potential loss in fair value associated with Nabisco's
exposure to changing interest rates, was $182 million after tax, net of minority
interest at March 31, 2000, an increase of $4 million from the December 31, 1999
amount. This exposure is primarily related to long-term debt with fixed interest
rates.
The VaR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by Nabisco, nor does it
consider the potential effect of favorable changes in market factors.
COMMODITY PRICE EXPOSURE
The VaR associated with Nabisco's derivative commodity instruments due to
reasonably possible near-term changes in commodity prices, based on historical
commodity price movements, would not result in a material effect on the future
earnings of Nabisco.
The VaR associated with Nabisco's net commodity exposure (anticipated future
purchases less derivatives, inventory and firm purchase commitments) would
result in a potential loss in earnings, before taxes and minority interest of
$40 million at March 31, 2000, an increase of $10 million from the December 31,
1999 amount.
The VaR associated with either Nabisco's derivative commodity instruments or
its net commodity exposure would not have a material effect on the fair values
or cash flows of Nabisco.
------------------------
14
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 5 to the Consolidated
Condensed Financial Statements contains forward-looking statements concerning,
among other things, the amount of savings from the restructuring program, the
level of future capital expenditures, the level of dividends and litigation.
These statements reflect management's current views with respect to future
events and financial performance. These forward-looking statements are based on
many assumptions and factors including competitive pricing for products,
commodity prices, success of new product innovations and acquisitions, economic
conditions in countries where Nabisco Group Holdings' subsidiaries do business,
the effects of currency fluctuations, the effects of government regulation and
the status of litigation. Any changes in such assumptions or factors could
produce significantly different results.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
NGH has been named as a defendant in a number of lawsuits (43 as of
April 26, 2000) as a result of its now severed relationship with the tobacco
business conducted by Reynolds Tobacco or its subsidiaries. For information
about this litigation see Note 5 to the Consolidated Condensed Financial
Statements.
Some of the claims against NGH in the tobacco-related litigation noted above
seek recovery of hundreds of millions and possibly billions of dollars. This is
also true of litigation pending against Reynolds Tobacco and RJR, former
subsidiaries of NGH. Litigation is subject to many uncertainties. While
management believes it has strong defenses in the litigation against NGH,
management is unable to predict the outcome of the litigation against NGH, or to
derive a meaningful estimate of the amount or range of any possible loss in any
quarterly or annual period or in the aggregate.
Nabisco Holdings and Nabisco, both subsidiaries of NGH, are defendants in
various lawsuits arising in the ordinary course of business. In the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on those companies' or on NGH's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The matters below were voted upon at the annual meeting of stockholders of
NGH held on May 9, 2000. Holders of Common Stock were entitled to vote upon the
proposals to elect directors, ratify the appointment of auditors and to vote on
one stockholder proposal. Holders present in person or by proxy at the meeting
were entitled to vote 300,340,458 shares of Common Stock.
(a) Election of Twelve Directors
NAME VOTES FOR VOTES WITHHELD
- ---- ----------- --------------
John T. Chain, Jr............................... 281,014,732 19,325,726
Julius L. Chambers.............................. 281,032,413 19,308,045
John L. Clendenin............................... 280,934,980 19,405,478
Steven F. Goldstone............................. 280,865,642 19,474,816
Ray J. Groves................................... 280,952,377 19,388,081
David B. Jenkins................................ 279,716,734 20,623,724
Nancy Karch..................................... 279,897,120 20,353,338
James M. Kilts.................................. 281,057,355 19,283,103
Fred H. Langhammer.............................. 281,065,202 19,275,256
H. Eugene Lockhart.............................. 279,640,098 20,700,360
Theodore E. Martin.............................. 281,028,259 19,312,199
Rozanne L. Ridgway.............................. 280,923,439 19,417,019
(b) Ratification of appointment of Deloitte & Touche LLP as independent
auditors.
For:................................................... 298,597,320
Against:............................................... 582,517
Abstain:............................................... 1,160,621
16
(c) Stockholder Proposal on Financial and Social Accountability in
Executive Compensation
For:................................................... 10,057,279
Against:............................................... 183,678,118
Abstain:............................................... 20,754,328
Non-Votes:............................................. 85,850,733
ITEM 5. OTHER INFORMATION
STOCKHOLDER RIGHTS PLAN
On March 13, 2000, the Board of Directors of NGH (the "Board") adopted a
stockholder rights plan. Under the plan, the Board declared a dividend of one
preferred stock purchase right (a "Right") for each share of NGH common stock
outstanding on March 20, 2000, and authorized the distribution of one Right for
each subsequently issued common share. Each Right entitles the holder to
purchase from NGH one one-hundredth of a share of a new series of preferred
stock at an initial purchase price of $30. The Board authorized the issuance of
4,400,000 preferred shares under this plan, none of which has been issued. The
Rights will become exercisable at a specified period of time after any person
becomes the beneficial owner of 10% or more of the common stock of NGH or
commences a tender or exchange offer which, if consummated, would result in any
person becoming the beneficial owner of 10% or more of the common stock. If any
person becomes the beneficial owner of 10% or more of the common stock, each
Right will entitle the holder, other than the acquiring person, to purchase, for
$30, a number of shares of NGH common stock having a market value of $60. For
persons who as of March 13, 2000 beneficially owned 10% or more of the common
stock, the plan "grandfathers" their current level of ownership, so long as they
do not purchase additional shares. Unless earlier redeemed, the Rights will
expire on March 13, 2002.
EXPLORATION OF ALTERNATIVES TO MAXIMIZE SHAREHOLDER VALUE
On April 3, 2000, the Board of NGH directed its management to explore all
alternatives to maximize shareholder value, including the sale of NGH or the
sale of Nabisco Holdings. In this connection, NGH engaged UBS Warburg LLC and
Morgan Stanley & Co. Incorporated as financial advisors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Nabisco Group Holdings Corp. 1990 Long Term Incentive Plan
(effective April 16, 1997 as amended and restated through
March 17, 2000) (incorporated by reference to Exhibit 10.1
to Quarterly Report on Form 10-Q of Nabisco Group Holdings
Corp. for the fiscal quarter ended March 31, 2000, filed
May 12, 2000 (the "March 2000 NGH Form 10-Q")).
10.2 Form of Non-Qualified Stock Option Agreement between Nabisco
Group Holdings Corp. and the optionee named therein (2000
grant) (incorporated by reference to Exhibit 10.2 to the
March 2000 NGH Form 10-Q).
10.3 Form of Restricted Stock Agreement between Nabisco Group
Holdings Corp. and the grantee named therein (incorporated
by reference to Exhibit 10.3 to the March 2000 NGH
Form 10-Q).
10.4 Amended and Restated Employment Agreement by and among
Nabisco Holdings Corp., Nabisco, Inc., Nabisco Group
Holdings Corp. and James M. Kilts (effective April 1, 2000)
(incorporated by reference to Exhibit 10.4 to the March 2000
NGH Form 10-Q).
17
10.5 Employment Agreement (dated October 1, 1997) by and among
Nabisco, Inc., Nabisco Holdings Corp., Nabisco Group
Holdings Corp. and James E. Healey (as amended and restated
effective March 17, 2000) (incorporated by reference to
Exhibit 10.5 to the March 2000 NGH Form 10-Q).
10.6 Employment Agreement (dated October 31, 1988) by and among
Nabisco, Inc., Nabisco Holdings Corp., Nabisco Group
Holdings Corp. and James A. Kirkman III (as amended and
restated effective March 17, 2000) (incorporated by
reference to Exhibit 10.6 to the March 2000 NGH Form 10-Q).
10.7 Employment Agreement (dated February 9, 1998) by and among
Nabisco, Inc., Nabisco Holdings Corp., Nabisco Group
Holdings Corp. and Richard H. Lenny (as amended and restated
effective March 17, 2000) (incorporated by reference to
Exhibit 10.7 to the March 2000 NGH Form 10-Q).
10.8 Employment Agreement (dated September 1, 1995) by and among
Nabisco, Inc., Nabisco Holdings Corp., Nabisco Group
Holdings Corp. and Douglas R. Conant (as amended and
restated effective March 17, 2000) (incorporated by
reference to Exhibit 10.8 to the March 2000 NGH Form 10-Q).
12.1 Nabisco Group Holdings Corp. Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends/Deficiency in the Coverage of Combined Fixed
Charges and Preferred Stock Dividends by Earnings Before
Fixed Charges for the three months ended March 31, 2000
(incorporated by reference to Exhibit 12.1 to the
March 2000 NGH Form 10-Q).
12.2 Nabisco Group Holdings Corp. Computation of Ratio of
Earnings to Fixed Charges/ Deficiency in the Coverage of
Fixed Charges By Earnings Before Fixed Charges for the three
months ended March 31, 2000 (incorporated by reference to
Exhibit 12.2 to the March 2000 NGH Form 10-Q).
27 Nabisco Group Holdings Corp. Financial Data Schedule for the
three months ended March 31, 2000 (incorporated by reference
to Exhibit 27 to the March 2000 NGH Form 10-Q).
(b) Reports on Form 8-K
Current report on Form 8-K dated March 14, 2000, regarding
NGH's adoption of a Stockholder Rights Plan.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NABISCO GROUP HOLDINGS CORP.
(Registrant)
/s/ JAMES E. HEALEY
---------------------------------------------
James E. Healey
Senior Vice President and Chief Financial Officer
Date: September 26, 2000 /s/ THOMAS J. PESCE
---------------------------------------------
Thomas J. Pesce
Senior Vice President and Controller
19