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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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, NEW JERSEY 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: OCTOBER 31, 2000:
326,452,420 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 and Nine
Months Ended September 30, 2000 and 1999.................. 1
Consolidated Condensed Statements of Comprehensive
Income--Three and
Nine Months Ended September 30, 2000 and 1999............. 2
Consolidated Condensed Statements of Cash Flows--Nine Months
Ended September 30, 2000 and 1999......................... 3
Consolidated Condensed Balance Sheets--September 30, 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................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 18
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Securities Holders....... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
Signatures.......................................................................... 21
PART I
ITEM 1. FINANCIAL STATEMENTS
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET SALES................................................ $2,253 $2,057 $6,580 $ 5,935
------ ------ ------ -------
Costs and expenses:
Cost of products sold.................................. 1,231 1,133 3,594 3,249
Selling, advertising, administrative and general
expenses............................................. 779 679 2,250 2,023
Amortization of trademarks and goodwill................ 55 54 165 161
Restructuring credit................................... -- (59) (27) (59)
------ ------ ------ -------
OPERATING INCOME..................................... 188 250 598 561
Interest and debt expense................................ (73) (66) (220) (254)
Other income (expense), net.............................. 4 (4) -- (14)
------ ------ ------ -------
INCOME BEFORE INCOME TAXES........................... 119 180 378 293
Provision for income taxes............................... 48 64 153 109
------ ------ ------ -------
INCOME BEFORE MINORITY INTEREST IN INCOME OF NABISCO
HOLDINGS........................................... 71 116 225 184
Less minority interest in income of Nabisco Holdings..... 15 22 46 42
------ ------ ------ -------
INCOME FROM CONTINUING OPERATIONS.................... 56 94 179 142
Discontinued operations:
Income from operations of discontinued businesses, net
of income taxes...................................... -- -- -- 24
Gain on discontinued businesses, net of income taxes... -- -- -- 2,970
------ ------ ------ -------
INCOME BEFORE EXTRAORDINARY ITEM..................... 56 94 179 3,136
Extraordinary item--loss on early extinguishment of debt,
net of income taxes.................................... -- (2) -- (281)
------ ------ ------ -------
NET INCOME........................................... $ 56 $ 92 $ 179 $ 2,855
====== ====== ====== =======
BASIC NET INCOME (LOSS) PER SHARE:
Income from continuing operations...................... $ .17 $ .29 $ .55 $ .43
Income from discontinued operations.................... -- -- -- 9.21
Extraordinary loss..................................... -- (.01) -- (.87)
------ ------ ------ -------
Net income........................................... $ .17 $ .28 $ .55 $ 8.77
====== ====== ====== =======
DILUTED NET INCOME (LOSS) PER SHARE:
Income from continuing operations...................... $ .17 $ .29 $ .55 $ .42
Income from discontinued operations.................... -- -- -- 9.21
Extraordinary loss..................................... -- (.01) -- (.87)
------ ------ ------ -------
Net income........................................... $ .17 $ .28 $ .55 $ 8.76
====== ====== ====== =======
DIVIDENDS DECLARED PER COMMON SHARE...................... $.1225 $.1225 $.3675 $1.1475
====== ====== ====== =======
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
1
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET INCOME................................................ $ 56 $ 92 $ 179 $2,855
------ ------ ------ ------
Other comprehensive income (loss):
Reclassification of cumulative translation losses
related to businesses sold included in net income..... -- -- 41 218
Minimum pension liability associated with the
distribution of R.J. Reynolds Tobacco Holdings, Inc.
stock................................................. -- -- -- 6
Cumulative translation adjustment....................... (3) (16) (24) (104)
(Provision) benefit for income taxes.................... -- -- -- --
------ ------ ------ ------
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX............. (3) (16) 17 120
------ ------ ------ ------
COMPREHENSIVE INCOME...................................... $ 53 $ 76 $ 196 $2,975
====== ====== ====== ======
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income................................................ $ 179 $ 2,855
Less income from discontinued operations.................. -- 2,994
----- -------
Income (loss) from continuing operations.................. 179 (139)
----- -------
Adjustments to reconcile to net cash flows from (used in)
continuing operating activities:
Depreciation of property, plant and equipment......... 201 198
Amortization of intangibles........................... 165 161
Deferred income tax provision......................... 37 28
Extraordinary loss on early extinguishment of debt.... -- 431
Restructuring credit.................................. (27) (59)
Restructuring payments................................ (46) (65)
Accounts receivable, net.............................. 44 (59)
Inventories........................................... (108) (184)
Accounts payable and accrued liabilities, including
income taxes........................................ (163) (340)
Other, net............................................ 69 27
----- -------
Total adjustments................................... 172 138
----- -------
Net cash flows from (used in) continuing operating
activities............................................ 351 (1)
Net cash flows from discontinued operations............. -- 2,284
----- -------
Net cash flows from operating activities................ 351 2,283
----- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures...................................... (132) (150)
Purchases of financial investments, net of maturities..... 4 (114)
Proceeds from sale of assets.............................. 31 27
Investment in Finalrealm transactions..................... (151) --
Acquisition of businesses................................. -- (107)
Repurchases of Nabisco Holdings' Class A common stock..... (13) (12)
Proceeds from exercise of Nabisco Holdings' Class A common
stock options........................................... 20 7
----- -------
Net cash flows (used in) investing activities........... (241) (349)
----- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt.............. 111 497
Repayments of long-term debt.............................. (222) (515)
Increase in notes payable................................. 133 183
Dividends paid on common and preferred stock.............. (149) (583)
Repurchase/redemption of trust preferred securities....... -- (1,265)
Repurchase of ESOP preferred stock........................ -- (202)
Other, net................................................ 9 63
----- -------
Net cash flows (used in) financing activities........... (118) (1,822)
----- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (3) (9)
----- -------
Net change in cash and cash equivalents................. (11) 103
Cash and cash equivalents at beginning of period............ 254 112
----- -------
Cash and cash equivalents at end of period.................. $ 243 $ 215
===== =======
Income taxes paid, net of refunds........................... $ 45 $ 85
Interest paid............................................... $ 218 $ 265
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
NABISCO GROUP HOLDINGS CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 243 $ 254
Short-term investments.................................... 9 6
Accounts receivable, net of allowance for doubtful
accounts of $39 million and $52 million, respectively... 560 681
Deferred income taxes..................................... 112 114
Inventories............................................... 951 898
Prepaid expenses and other current assets................. 73 79
------- -------
TOTAL CURRENT ASSETS.................................. 1,948 2,032
------- -------
Property, plant and equipment, net.......................... 2,943 3,089
Trademarks, net............................................. 3,343 3,443
Goodwill, net............................................... 3,045 3,159
Other assets and deferred charges........................... 548 238
------- -------
$11,827 $11,961
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 80 $ 39
Account payable........................................... 359 642
Accrued liabilities....................................... 1,087 1,056
Current maturities of long-term debt...................... 100 158
Income taxes accrued...................................... 166 107
------- -------
TOTAL CURRENT LIABILITIES............................. 1,792 2,002
------- -------
Long-term debt (less current maturities).................... 3,834 3,892
Minority interest in Nabisco Holdings....................... 790 763
Other noncurrent liabilities................................ 809 768
Deferred income taxes....................................... 1,253 1,277
Contingencies (Note 6)
Nabisco Group Holdings' obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
junior subordinated debentures*........................... 98 98
Stockholders' equity:
Common stock (326,438,760 and 326,146,847 shares issued
and outstanding at September 30, 2000 and December 31,
1999, respectively)..................................... 3 3
Paid-in capital........................................... 3,469 3,459
Retained earnings........................................... 184 125
Accumulated other comprehensive income (loss)............... (303) (320)
Treasury stock, at cost..................................... (100) (100)
Unamortized restricted stock................................ (2) (6)
------- -------
TOTAL STOCKHOLDERS' EQUITY.......................... 3,251 3,161
------- -------
$11,827 $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 September 30, 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 80.5% 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 and nine months ended September 30, 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, as amended, at December 31, 1999.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
BUSINESS DISPOSALS
In April 2000, Nabisco joined Finalrealm Limited ("Finalrealm"), a
consortium of investors, which acquired the equity of United Biscuits (Holdings)
plc ("UB"), a United Kingdom company. At that time, Nabisco invested
approximately $45 million in cash in DeluxeStar Limited ("DeluxeStar"), an
affiliate of Finalrealm. In July 2000, Nabisco sold its operations in Spain,
Portugal and the Middle East, which included $10 million in cash and cash
equivalents, to DeluxeStar and agreed to pay an additional $41 million in cash
to Finalrealm. In exchange for the total cash consideration and businesses sold,
Nabisco received mandatorily redeemable discounted preferred stock from
DeluxeStar and warrants from Bladeland Limited ("Bladeland"), the indirect
parent company of Finalrealm and Deluxestar. The discounted preferred stock and
warrants were fair valued at approximately $277 million based on a valuation
opinion received from an independent investment banker. The discounted preferred
stock accretes non-cash dividend income at an annual rate of 11.72% and is
mandatorily redeemable in 2049. The discounted preferred stock converts into
26.51% of the common equity of Bladeland upon the future exercise of the
warrants. The warrants are exercisable at maturity, which is in 25 years, upon
an initial public offering by Bladeland, or upon a change of control in
Bladeland, in which the ownership of the equity investors becomes less than 50%.
These securities are being accounted for on a cost basis.
The sale of operations resulted in the recognition of a pre-and-after tax
loss of approximately $18 million that was recorded in selling, advertising,
administrative and general expenses in the quarter ended June 30, 2000. In 1999,
these operations had annual net sales of approximately $290 million.
As a result of the transaction, Nabisco recorded $12 million of investor
financing fee income during the third quarter of 2000 in other income (expense),
net.
BUSINESS ACQUISITIONS
In July 2000, Nabisco acquired UB's operations in China, Hong Kong and
Taiwan for approximately $99 million as part of its agreement to join the
consortium of investors discussed above. In 1999, these operations had annual
net sales of approximately $66 million.
In November 1999, Nabisco acquired certain assets and liabilities of
Favorite Brands International, Inc., a company operating under Chapter 11 of
Title 11 of the U.S. Code. As of June 30, 2000, the
5
NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED)
purchase price allocation was completed and resulted in total goodwill of
$106 million, an increase of $38 million from December 31, 1999. The after-tax
net increase in goodwill consisted of:
(IN MILLIONS)
- -------------
Fair value adjustments to:
Property, plant and equipment............................. $16
Certain working capital items............................. 12
Severance accruals.......................................... 5
Contract exit cost accruals................................. 5
---
$38
===
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. 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 will adopt SFAS 133, as amended, on
January 1, 2001 but has not yet determined the impact that such adoption or
subsequent application will have on its financial position or results of
operations.
In December 1999, The Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. NGH is required to adopt SAB No. 101, as amended, in the fourth
quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when certain revenue is generally realized
and earned, and also requires the deferral of incremental direct selling costs.
NGH has determined that the impact of adoption or subsequent application of SAB
No. 101 will not have a material effect on its financial position or result of
operations.
During the second quarter of 2000, the Emerging Issues Task Force ("EITF")
issued EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF
No. 00-14 addresses the recognition, measurement and statement of income
classification of various sales incentives and will be effective for the fourth
quarter of 2000. NGH has determined that the impact of adoption will be a
reduction of approximately 1% to 2% on its net sales, with no impact on its net
income. Certain sales incentives, principally for consumer coupon redemption
expenses, currently included in selling, advertising, administrative and general
expenses will be reclassified as a reduction of net sales and, upon adoption,
prior period amounts will be restated for comparative purposes.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
replaced SFAS No. 125 Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. This statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. NGH will adopt SFAS No. 140 for
transactions occurring after March 31, 2000. NGH has not yet determined the
impact that such adoption or subsequent application will have on its financial
position or results of operations.
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. In
the second quarter of 2000, Nabisco recorded a net reduction of $27 million in
the previously recorded restructuring expense due to higher than anticipated
proceeds from assets sold and lower than anticipated spending primarily in
severance programs. This restructuring credit
6
NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED)
combined with the $67 million net restructuring credit recorded in 1999 resulted
in a total net charge for the 1998 restructuring programs of $436 million
($238 million after tax, net of minority interest). These restructuring programs
were undertaken to streamline operations and improve profitability and have
resulted in the elimination of approximately 6,900 employee positions.
The June 1998 program was completed in 1999 and the December 1998 program
was completed as of June 30, 2000.
The key elements of the restructuring programs were:
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 costs 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)
2000 net restructuring credit............ (4) (3) (21) 1 (27)
----- ---- ----- ---- -----
Total program reserves............... 154 16 222 44 436
----- ---- ----- ---- -----
Charges and Payments:
Cumulative through December 31, 1999..... (132) (14) (233) (35) (414)
Six months ended June 30, 2000........... (22) (2) 11 (9) (22)
----- ---- ----- ---- -----
Total charges and payments, net of
cash proceeds...................... (154) (16) (222) (44) (436)
----- ---- ----- ---- -----
Program reserves as of June 30, 2000..... $ -- $ -- $ -- $ -- $ --
===== ==== ===== ==== =====
The key elements of the restructuring programs, after the restructuring
credits of $94 million were:
SEVERANCE CONTRACT ASSET OTHER EXIT
IN MILLIONS AND BENEFITS TERMINATIONS IMPAIRMENTS COSTS TOTAL
- ----------- ------------ ------------ ----------- ---------- --------
Sales force reorganizations.............. $ 16 $ 3 $ -- $-- $ 19
Distribution reorganizations............. 10 4 (2) -- 12
Staff reductions......................... 56 1 3 -- 60
Manufacturing costs reduction
initiatives............................ 19 -- 8 -- 27
Plant closures........................... 51 3 192 15 261
Product line rationalizations............ 2 5 21 29 57
---- --- ---- --- ----
Total restructuring charges.......... $154 $16 $222 $44 $436
==== === ==== === ====
Total charges and payments include net 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 $122 million, which is comprised of cumulative cash
expenditures of $170 million and cumulative cash proceeds of $48 million. For
the nine months ended September 30, 2000, cash payments, net of cash proceeds
totaled $19 million, which is comprised of $46 million of cash expenditures and
$27 million of cash proceeds which were applied against the restructuring
reserves. Although projects have been completed, proceeds to be collected and
certain cash payments, primarily severance and benefits that are paid over time,
are being transacted after the program completion dates. This is expected to
result in a net cash inflow of approximately $7 million subsequent to
September 30, 2000.
7
NOTE 2 -- CHANGE OF CONTROL
PROPOSED TRANSACTIONS
On June 25, 2000, the board of directors of NGH approved two major
transactions: (1) the sale of NGH's 80.5% interest in Nabisco Holdings to Philip
Morris Companies, Inc. (the "Nabisco Sale") pursuant to a merger in which Philip
Morris will acquire all of the outstanding Nabisco Holdings common stock for
$55 per share (the "Nabisco Holdings merger"), and (2) the subsequent
acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. ("RJR") pursuant to a
merger in which RJR will acquire all of the outstanding NGH common stock for
$30 per share (the "NGH merger"). Completion of the Nabisco Holdings merger is
subject to customary closing conditions, including receipt of regulatory
approvals. Completion of the NGH merger is also subject to customary closing
conditions, including receipt of regulatory approvals and is conditioned on the
completion of the Nabisco Sale. There can be no assurance that such approvals
will be obtained. On October 27, 2000, the stockholders of NGH approved the
acquisition of Nabisco Holdings by Philip Morris and the subsequent acquisition
of NGH by RJR as discussed in Note 7--Subsequent Events. The transactions are
expected to close during the fourth quarter of 2000.
NGH STOCKHOLDER VOTE REQUIRED TO APPROVE THE NABISCO SALE AND THE NGH MERGER
The Nabisco Sale requires approval by holders of a majority of the
outstanding shares of NGH common stock because the Nabisco Holdings shares
constitute substantially all of the assets of NGH. The Nabisco Sale represents
approximately $11.728 billion in gross proceeds to NGH. NGH has entered into a
voting and indemnity agreement with Philip Morris with respect to the Nabisco
Sale which generally provides that, subject to receiving approval of the Nabisco
Sale from NGH stockholders, NGH will promptly vote in favor of the Nabisco
Holdings merger. The approval by NGH, as discussed above, is the only Nabisco
Holdings stockholder approval required to complete the Nabisco Holdings merger.
All costs and expenses incurred in connection with the Nabisco Holdings
merger agreement and related transactions will be paid by the Company incurring
such costs or expenses, except that Nabisco Holdings and NGH have agreed that
Nabisco Holdings will be responsible for fees and expenses of the financial,
legal and other advisors to Nabisco Holdings and NGH up to $50 million, and NGH
will be responsible for all such fees and expenses in excess of $50 million.
In connection with the Nabisco Holdings merger and the NGH merger, both NGH
and Nabisco Holdings incurred costs during the third quarter of 2000 for
financial, legal and other advisor fees. These costs amounted to $21 million at
Nabisco Holdings and an additional $2 million at NGH. In addition, in accordance
with the terms of the Nabisco Holdings merger agreement, and upon depletion of
its existing treasury stock inventory, Nabisco Holdings paid cash to satisfy the
excess of the market price of Nabisco Holdings stock at the time of exercise,
over the exercise price of Nabisco Holdings stock options. As a result, NGH
recognized compensation expense of $28 million during the third quarter and
first nine months of 2000. These costs have been classified as selling,
advertising, administrative and general expenses in the accompanying
Consolidated Condensed Statements of Income.
NOTE 3 -- INVENTORIES
The major classes of inventory are as follows:
SEPTEMBER 30, DECEMBER 31,
IN MILLIONS 2000 1999
- ----------- ------------- ------------
Finished products........................................... $605 $551
Raw materials............................................... 211 199
Work in process............................................. 32 45
Other....................................................... 103 103
---- ----
$951 $898
==== ====
8
NOTE 4 -- NET INCOME PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations applicable to
common stock:
Income from continuing
operations.................. $ 56 $ 56 $ 94 $ 94 $ 179 $ 179 $ 142 $ 142
Preferred stock dividends..... -- -- -- -- -- -- (8) (8)
------- ------- -------- -------- ------- ------- -------- --------
$ 56 $ 56 $ 94 $ 94 $ 179 $ 179 $ 134 $ 134
======= ======= ======== ======== ======= ======= ======== ========
Weighted average number of
common and common equivalent
shares outstanding (in
thousands):
Common shares................. 326,203 326,203 325,190 325,190 325,939 325,939 324,671 324,671
Assumed exercise of NGH's
stock options............... -- 5,235 -- 263 -- 2,405 -- 286
------- ------- -------- -------- ------- ------- -------- --------
326,203 331,438 325,190 325,453 325,939 328,344 324,671 324,957
======= ======= ======== ======== ======= ======= ======== ========
Common shares exclude 179,500 and 949,100 shares of restricted stock as the
vesting provisions had not been met at September 30, 2000 and 1999,
respectively.
NOTE 5 -- 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"). OCC for each reportable segment is
operating income before amortization of intangibles and exclusive of a
restructuring credit, loss on sale of businesses restructuring-related expenses
and costs associated with the Nabisco Holdings merger and the NGH merger. Such
costs include the cash buyout of exercised Nabisco Holdings stock options and
financial, legal and other advisor fees.
9
NOTE 5 -- SEGMENT REPORTING (CONTINUED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
IN MILLIONS 2000 1999 2000 1999
- ----------- -------- -------- -------- --------
Net sales from external customers:
Nabisco Biscuit Company................................... $ 962 $ 924 $2,779 $2,688
Nabisco Foods Company..................................... 748 545 2,112 1,527
International Food Group.................................. 543 588 1,689 1,720
------ ------ ------ ------
Total................................................. $2,253 $2,057 $6,580 $5,935
====== ====== ====== ======
Segment operating company contribution:
Nabisco Biscuit Company................................... $ 161 $ 136 $ 439 $ 386
Nabisco Foods Company..................................... 100 74 271 196
International Food Group.................................. 40 49 112 129
Other..................................................... (7) (2) (17) (2)
------ ------ ------ ------
Total segment operating company contribution................ 294 257 805 709
Cash buyout of exercised Nabisco Holdings stock options..... (28) -- (28) --
Financial, legal and other advisor fees..................... (23) -- (23) --
Loss on sale of businesses.................................. -- -- (18) --
Restructuring credit........................................ -- 59 27 59
Restructuring-related expenses.............................. -- (12) -- (46)
Amortization of trademarks and goodwill..................... (55) (54) (165) (161)
------ ------ ------ ------
Consolidated operating income............................... 188 250 598 561
Interest and debt expense................................... (73) (66) (220) (254)
Other income (expense), net................................. 4 (4) -- (14)
------ ------ ------ ------
Income before income taxes.................................. $ 119 $ 180 $ 378 $ 293
====== ====== ====== ======
NOTE 6 - CONTINGENCIES
TOBACCO LITIGATION
As of November 1, 2000, NGH was a defendant in 22 lawsuits arising out of
its now severed relationship with the tobacco business conducted by its former
subsidiary, R.J. Reynolds Tobacco Company ("Reynolds Tobacco") or its
subsidiaries. During the third quarter of 2000, NGH was not served with any new
tobacco related cases and was voluntarily dismissed from 19 such cases. Since
the close of the third quarter, NGH has been dropped from seven additional cases
but, on November 9, 2000, was served in one new case (brought by the European
Union). These tobacco related 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. None of these cases is scheduled
for trial in 2000 or the first quarter of 2001.
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.
Although NGH had been named, and in many cases served in a number of
anti-trust cases, also arising from the sale of tobacco products, as of
November 1, 2000, NGH (as well as other present or former parent companies) had
been voluntarily dismissed without prejudice from 18 anti-trust cases in which
it had previously been a defendant in various state courts. In 14 additional
such cases in which NGH had been named but not served, NGH has been dropped from
the cases but plaintiffs have reserved the right to reinstate their cases
against NGH in certain future circumstances. NGH and other
10
NOTE 6 - CONTINGENCIES (CONTINUED)
parent or former parent companies were voluntarily dismissed from all the
antitrust cases previously pending against them in federal courts. NGH has not
yet been dismissed or dropped from three state court anti-trust cases. These
cases, all of which seek to be certified as class actions, allege violations of
state 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, Ninth and
Eleventh Circuits, have granted motions to dismiss on these "remoteness"
grounds. Ten of these union cases, all pending in New York State courts, have
been consolidated and, on March 6, 2000, defendants' motion to dismiss these
cases on "remoteness" grounds was granted. Plaintiffs have filed notices of
appeal and have until January 2001 to perfect their appeals.
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. ("Japan Tobacco") 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 approximately 1,670
lawsuits relating to cigarettes in which Reynolds Tobacco, and sometimes RJR,
are defendants. Eleven hundred of these cases are contained in two complaints
filed in the last quarter by the same law firm in West Virginia. Reynolds is
also a defendant in approximately 3,100 additional individual lawsuits arising
from a Florida environmental tobacco smoke class action lawsuit that was settled
in 1997.
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. The
jury, on July 7, 1999, found against Reynolds Tobacco and the other cigarette
company defendants in the first phase which included issues of liability,
general causation and entitlement to punitive damages. 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 (although $5.831 million
of this award was attributable to a plaintiff against whom the jury found that
the statute of limitations had already run out).
The same jury subsequently heard the case for a lump sum award of punitive
damages and on July 14, 2000 awarded $145 billion against the defendants as a
group of which $36.3 billion was allotted to Reynolds Tobacco. The defendants,
including Reynolds Tobacco, on July 24, 2000 filed numerous post-verdict
motions, including motions for a new trial and to reduce the punitive damages
award. They also sought to remove the case to federal district court, but the
federal court, on November 3, 2000, remanded the case back to the state court on
the ground that removal was premature. Promptly upon remand, the state court
judge issued an order denying all of the defendants' post-trial motions and
purporting to enter a final judgment as to the second phase of the trial.
11
NOTE 6 - CONTINGENCIES (CONTINUED)
Defendants intend to appeal the remand decision to the 11th Circuit Court of
Appeals and have filed a notice of appeal of the state judge's order to the
Florida 3rd District Court of Appeal. To prevent plaintiffs from seeking to
recover the damages awarded during the second phase of trial while defendants
are pursuing their appeals, Reynolds Tobacco has posted two bonds: a civil
supersedeas bond of $100,000,000, the statutory limit, with respect to its
potential obligations under the punitive damages award, and a second bond in the
amount of the compensatory damages award plus interest. Under the trial plan,
the third phase will address all other class members' claims in individual
trials before separate juries.
A recently enacted Florida statute established the limits for the
supersedeas bond described above, but it is possible that plaintiffs will
challenge the validity of this legislative limitation, and, if successful,
require a bond in the full amount of the punitive damages award plus interest.
If Reynolds Tobacco and RJR are unable to satisfy their payment obligations for
any adverse judgments against them in ENGLE or any other of these cases pending
against them, 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 7 -- SUBSEQUENT EVENTS
On October 27, 2000 the stockholders of NGH approved the acquisition of
Nabisco Holdings by Philip Morris and the subsequent acquisition of NGH by RJR.
In November 2000, Nabisco signed definitive agreements for the sale of its
domestic breath mints, gum, dry mix dessert and baking powder businesses. These
transactions are conditioned on completion of the acquisition of Nabisco
Holdings by Philip Morris and are subject to customary closing conditions,
including receipt of regulatory approval. In 1999, these businesses had net
sales and operating income of approximately $314 million and $96 million,
respectively.
12
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 and 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 income and operating company
contribution section provides a reconciliation of operating income to operating
company contribution, which excludes amortization of trademarks and goodwill and
special items that management believes impact the comparability of historical
results. This is followed by management's discussion and analysis of operating
company contribution ("OCC") which is presented on a basis consistent with how
the businesses are managed. Special items include a restructuring credit, loss
on sale of businesses, restructuring-related expenses and costs associated with
the Nabisco Holdings merger and the NGH merger that management believes affect
the comparability of the results of operations. OCC 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
DOLLARS IN MILLIONS 2000 1999 % CHANGE 2000 1999 % CHANGE
- ------------------- -------- -------- -------- -------- -------- --------
Nabisco Biscuit Company........................ $ 962 $ 924 4 % $2,779 $2,688 3 %
Nabisco Foods Company.......................... 748 545 37 % 2,112 1,527 38 %
International Food Group....................... 543 588 (8)% 1,689 1,720 (2)%
------ ------ ------ ------
Total.......................................... $2,253 $2,057 10 % $6,580 $5,935 11 %
====== ====== ====== ======
- Nabisco Biscuit Company's net sales increased 4% in the third quarter and
3% in the first nine months versus the same periods last year. The
increase in both periods resulted from the continued momentum in volume
growth from its cookie and cracker brands of 3% and 4 % for the third
quarter and first nine months of 2000, respectively, versus the same
periods last year, and favorable pricing actions. These volume gains were
driven by new products, increased marketing investment and the increasing
efficiency and effectiveness of Biscuit's reorganized direct store
delivery sales force. Several discontinued breakfast food and snack
products partially offset the improvements in both periods.
- Nabisco Foods Company's net sales increased 37% in the third quarter and
38% in the first nine months versus the comparable periods last year.
Excluding the impact on net sales resulting from the November 1999
acquisition of the Favorite Brands' business, net sales grew 4% in the
third quarter and 8% in the first nine months, over the respective prior
year periods. Volume gains from confections, including the impact of
several new products, and condiments, coupled with favorable pricing
actions continued to drive growth in both periods. Volume gains in nuts
and pet snacks also contributed to the increase in net sales for the first
nine months versus the same period last year.
- International Food Group's net sales decreased 8% in the third quarter and
2% in the first nine months versus the same periods last year. Excluding
the net sales of Spain, Portugal and the Middle East, whose operations
were disposed of in July of 2000, International's net sales increased 4%
in both the third quarter and first nine months of 2000 over the
comparable 1999 periods. In the third quarter, the net sales increase,
after excluding the disposals in 2000, was due to the additional volume
contributed by the Canale acquisition and gains in Asia, primarily
pricing, and Canada, due to volume, offset by softness in pricing for the
Southern Cone Region of South America, principally Argentina and Uruguay.
Year to date gains were attributable to the addition of Canale, higher
volume in Venezuela offset in part by volume weakness in Mexico and both
price and volume weakness in the balance of the Southern Cone business.
13
OPERATING INCOME AND OPERATING COMPANY CONTRIBUTION
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
DOLLARS IN MILLIONS 2000 1999 % CHANGE 2000 1999 % CHANGE
- ------------------- -------- -------- -------- -------- -------- --------
OPERATING INCOME......................... $ 188 $ 250 (25)% $ 598 $ 561 7 %
------ ------ ------ ------
ITEMS EXCLUDED FROM OPERATING COMPANY
CONTRIBUTION:
Amortization of trademarks and
goodwill........................... 55 54 165 161
Special items:
Cash buyout of exercised Nabisco
Holdings stock options............. 28 -- 28 --
Financial, legal and other advisor
fees in connection with the Nabisco
Holdings and NGH mergers........... 23 -- 23 --
Restructuring credit................. -- (59) (27) (59)
Loss on sale of businesses........... -- -- 18 --
Restructuring-related expenses....... -- 12 -- 46
------ ------ ------ ------
106 7 207 148
------ ------ ------ ------
OPERATING COMPANY CONTRIBUTION BY
SEGMENT:
Nabisco Biscuit Company................ 161 136 18 % 439 386 14 %
Nabisco Foods Company.................. 100 74 35 % 271 196 38 %
International Food Group............... 40 49 (18)% 112 129 (13)%
Other.................................. (7) (2) -- (17) (2) --
------ ------ ------ ------
Total.................................. $ 294 $ 257 14 % $ 805 $ 709 14 %
====== ====== ====== ======
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING COMPANY
CONTRIBUTION:
- Nabisco Biscuit Company's operating company contribution increased 18% in
the third quarter and 14% in the first nine months versus the same prior
year periods. The third quarter results were primarily attributable to
gains in cookie and cracker volumes and favorable pricing actions offset
in part by higher marketing investment. Driving the first nine months'
improvement was strong cookie and cracker volumes, lower raw material
costs, and higher pricing. Partially offsetting this improvement were
increased marketing investments and lower breakfast snack volumes.
- Nabisco Foods Company's operating company contribution was $100 million in
the third quarter of 2000, an increase of $26 million over the third
quarter of 1999, and $271 million in the first nine months of 2000, an
increase of $75 million from the first nine months of 1999. The results in
both periods were primarily driven by strong volume gains coupled with
favorable pricing. Increased marketing investments partially offset the
first nine months' comparison.
- International Food Group's operating company contribution declined 18% in
the third quarter of 2000 and 13% in the first nine months of 2000 from
the comparable 1999 periods principally due to the disposal of its
operations in Spain, Portugal, and the Middle East in July of 2000.
Excluding the results of these businesses, the International Food Group's
operating company contribution was up 3% in the third quarter and 12% in
the first nine months versus the same periods last year. The third quarter
increase is primarily attributed to the sales gains noted above as costs
remained flat with the prior year period. Canada, Mexico, Asia, and
Venezuela reported higher OCC while Brazil and Southern Cone were weaker.
The first nine month
14
performance primarily reflects the sales gains noted, offset by higher
marketing investment and foreign exchange. Strengths in Canada, Venezuela
and the Asian businesses offset weaknesses in Brazil and Mexico.
INTEREST AND DEBT EXPENSE
Consolidated interest and debt expense of $73 million and $220 million for
the third quarter and first nine months of 2000 increased 11% and decreased 13%,
respectively, from the same 1999 periods. The third quarter increase is due to
higher average debt levels and higher average interest rates. The decrease in
the first nine months comparison is primarily due to the repurchase and
redemption of Trust Originated Preferred Securities in May 1999 offset in part
by increased interest expense due to higher average interest rates and higher
average debt levels.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $4 million income and less than $1 million
for the third quarter and first nine months of 2000 compared to $4 million
expense and $14 million expense in the same 1999 periods. The third quarter
comparison primarily reflects United Biscuits investor financing fee income of
$12 million and dividend income accreted on the discounted preferred stock of
$7 million. Partially offsetting these gains were increased foreign exchange
losses primarily due to the impact of currency movements on this investment. The
first nine months comparison also reflects lower foreign exchange losses not
related to the United Biscuits transaction, offset in part by increased
financing costs and lower interest income.
DISCONTINUED OPERATIONS
Total income from discontinued operations was nil and $3.0 billion in the
third quarter and first nine months of 1999, respectively. Discontinued
operations represent the results from tobacco businesses and RJR Nabisco, Inc.'s
corporate headquarters' expenses prior to the sale in the second quarter of 1999
of the international tobacco business and subsequent spin-off to shareholders of
the domestic tobacco business.
NET INCOME
Nabisco Group Holdings' net income of $56 million and $179 million for the
third quarter and first nine months of 2000 compared with net income of
$92 million and $2.9 billion for the same 1999 periods. The third quarter
decrease primarily reflects lower operating income and higher interest and debt
expense offset in part by a lower provision for income taxes and higher other
income. The nine month decrease principally reflects the absence in 2000 of
income from operations of discontinued businesses.
COMPREHENSIVE INCOME
Comprehensive income was $53 million income and $196 million income for the
third quarter and first nine months of 2000 versus income of $76 million and
$3.0 billion in the comparable 1999 periods. The third quarter decrease
primarily reflects lower net income partially offest by lower foreign currency
translation losses. The nine month decrease is primarily due to lower net income
and a decrease in the reclassification of cumulative translation losses related
to businesses sold partially offset by lower foreign currency translation
losses.
RESTRUCTURING
Savings objectives set in Nabisco's 1998 restructuring programs are on
target. As of September 30, 2000, the 1998 restructuring programs were complete.
Pre-tax savings in 2000 are expected to be
15
approximately $140 million including cash savings of $133 million and are
expected to be approximately $145 million annually including cash savings of
$135 million in 2001 and thereafter. In the second quarter of 2000, Nabisco
recorded a net restructuring credit of $27 million in addition to the
$67 million net restructuring credit recorded in 1999. These net credits reduced
the restructuring charges to $436 million. Cumulative cash expenditures, net of
cash proceeds, to date have totaled $122 million with $19 million expended in
the first nine months of 2000. Cumulative cash payments, net of cash proceeds is
comprised of $170 million in cash payments and cumulative cash proceeds of
$48 million. For the nine months ended September 30, 2000, cash payments, net of
cash proceeds is comprised of $46 million of cash expenditures and $27 million
of cash proceeds. Although projects have been completed, proceeds to be
collected and certain cash payments, primarily severance and benefits that are
paid over time, are being transacted after the program completion dates. This is
expected to result in a net cash inflow of approximately $7 million subsequent
to September 30, 2000. For a further discussion of the restructuring programs,
see Note 1 to the Consolidated Condensed Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from continuing operating activities for the first nine
months of 2000 increased $352 million from the first nine months of 1999 to
$351 million. The increase in net cash flows from continuing operating
activities primarily reflects income from continuing operations in 2000 compared
to a loss from continuing operations in 1999, lower working capital requirements
and lower restructuring credits and payments partially offset by the absence of
an extraordinary loss on the early extinguishment of debt in 2000.
Cash flows used in investing activities for the first nine months of 2000
decreased $108 million from the first nine months of 1999 to $241 million,
primarily due to maturities of financial investments in 2000 compared to net
purchases of financial investments in 1999, lower acquisition expenditures,
lower capital expenditures and increased proceeds from the exercise of Nabisco
Holdings' common stock options partially offset by the investment in Finalrealm
transactions.
Capital expenditures were $132 million in the first nine months of 2000.
Management expects that capital expenditures for 2000 will be approximately
$270 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 used in financing activities were $118 million for the first nine
months of 2000, a decrease of $1.7 billion from the first nine months of 1999.
The decrease was principally due to the absence of trust preferred securities
and ESOP preferred stock purchases and redemptions in 2000 and lower dividends
paid on common and preferred stock partially offset by a reduction in net
borrowings. The significant cash flows used in financing activities were sourced
from cash inflows resulting from the sale of the international tobacco business
in the third quarter of 1999.
As of September 30, 2000, Nabisco's $1.5 billion revolving credit facility
was unutilized and available to support borrowings. In addition, the 364-day
$1.1 billion credit facility was utilized to support outstanding commercial
paper borrowings of $1.01 billion, and accordingly, approximately $90 million
was available. Effective October 26, 2000, the 364 day facility was renewed,
amended and extended to January 25, 2001 to a $1.09 billion facility.
Nabisco's credit facilities limit the ability of Nabisco Holdings and its
subsidiaries 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.
16
The Nabisco Holdings merger agreement with Philip Morris Companies, Inc.
dated as of June 25, 2000 requires Nabisco Holdings to conduct its business in
the ordinary course consistent with past practice and limits the ability of
Nabisco Holdings and its subsidiaries to incur indebtedness, acquire, sell or
dispose of certain assets and securities, and take certain other actions.
Similarly, the NGH merger agreement with RJR dated as of June 25, 2000, requires
NGH to conduct its business in the ordinary course consistent with past practice
and limits the ability of NGH to incur indebtedness, acquire, sell or dispose of
certain assets and securities, and take certain other actions.
At September 30, 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 $4.1 billion and $7.4 billion, respectively, of which total debt
is lower by approximately $75 million and total capital is higher by
$15 million than at December 31, 1999. NGH's ratios of total debt to
stockholders' equity and total debt to total capital were 1.3 to 1 and .56 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. There are no restrictions
on the payment of Nabisco Holdings' customary quarterly dividend under the terms
of the terms of the Nabisco Holdings merger agreement with Philip Morris
Companies, Inc. 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
326,438,760 shares of NGH stock outstanding on September 30, 2000.
CHANGE OF CONTROL
PROPOSED TRANSACTIONS
On June 25, 2000, the board of directors of NGH approved two major
transactions: (1) the sale of NGH's 80.5% interest in Nabisco Holdings to Philip
Morris Companies, Inc. (the "Nabisco Sale") pursuant to a merger in which Philip
Morris will acquire all of the outstanding Nabisco Holdings common stock for
$55 per share (the "Nabisco Holdings merger"), and (2) the subsequent
acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. ("RJR") pursuant to a
merger in which RJR will acquire all of the outstanding NGH common stock for
$30 per NGH share (the "NGH merger"). Completion of the Nabisco Holdings merger
is subject to customary closing conditions, including receipt of regulatory
approvals. Completion of the NGH merger is also subject to customary closing
conditions, including receipt of regulatory approvals and is conditioned on the
completion of Nabisco Sale. There can be no assurance that such approvals will
be obtained. The transactions are expected to close during the fourth quarter of
2000.
NGH STOCKHOLDER VOTE REQUIRED TO APPROVE THE NABISCO SALE AND THE NGH MERGER
The Nabisco Sale required approval by holders of a majority of the
outstanding shares of NGH common stock because the Nabisco Holdings shares
constitute substantially all of the assets of NGH. The Nabisco Sale represents
approximately $11.728 billion in gross proceeds to NGH. NGH has entered into a
voting and indemnity agreement with Philip Morris with respect to the Nabisco
Sale which generally provides that, subject to receiving approval of the Nabisco
Sale from NGH stockholders, NGH will promptly vote in favor of the Nabisco
Holdings' merger. The approval by NGH was the only Nabisco Holdings' stockholder
approval required to complete the Nabisco Holdings' merger.
17
The NGH merger also required approval by holders of a majority of the
outstanding shares of NGH common stock.
SUBSEQUENT EVENTS
On October 27, 2000, the stockholders of NGH approved the acquisition of
Nabisco Holdings by Philip Morris and the subsequent acquisition of NGH by RJR.
In November 2000, Nabisco signed definitive agreements for the sale of its
domestic breath mints, gum, dry mix dessert and baking powder businesses. These
transactions are conditioned on completion of the acquisition of Nabisco
Holdings by Philip Morris and are subject to customary closing conditions,
including receipt of regulatory approvals. In 1999, these businesses had net
sales and operating income of approximately $314 million and $96 million,
respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Nabisco is exposed to market risk in the areas of foreign currency exchange
rates, interest rates and commodity prices. 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 market risk sensitive financial instruments over a one-year
horizon using a 95% confidence interval for changes in market rates and prices.
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 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.
INTEREST RATE EXPOSURE
The VaR, which is the potential loss in fair value of financial instruments
resulting from Nabisco's exposure to changing interest rates, was $155 million
after tax, net of minority interest at September 30, 2000, a decrease of
$23 million from the December 31, 1999 amount.
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
$19 million at September 30, 2000, a decrease of $11 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 value or
cash flows of Nabisco.
------------------------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 6 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, the completion of
the Nabisco Holdings and NGH mergers 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.
18
PART II
ITEM 1. LEGAL PROCEEDINGS
NGH is a defendant in a number of lawsuits (22 as of November 1, 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 6 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.
OTHER LITIGATION
During the week of June 26, 2000, two actions were filed in the Court of
Chancery for the State of Delaware and one action was filed in the Chancery
Division of the Superior Court of New Jersey, in each case by alleged common
stockholders of NGH on behalf of a purported class of similarly situated NGH
stockholders. The actions are styled ALFONSE MAYER, ET AL. V. NABISCO GROUP
HOLDINGS CORPORATION, ET AL., C.A. 18126, HARRIET RAND, ET AL. V. NABISCO GROUP
HOLDINGS CORPORATION, ET AL., C.A. 18129NC, AND MARK SCHNEIDER V. STEVEN F.
GOLDSTONE, ET AL., DOCKET NO. L-2028-00. The complaints in the actions name as
defendants NGH and the members of its Board of Directors, and allege that the
NGH directors breached their fiduciary duties to NGH stockholders by agreeing to
the NGH merger and by allegedly failing to obtain the highest value for NGH
stockholders in the NGH merger. The complaints sought injunctive relief and
monetary damages in an unspecified amount. None of these complaints challenges
the validity or fairness of the Nabisco Holdings' merger or seeks injunctive
relief or monetary damages in connection with the Nabisco Holdings' merger.
On October 3, 2000, the plaintiff in the New Jersey action filed an amended
complaint, along with a demand for a court order granting a preliminary
restraint to enjoin NGH from holding its October 27, 2000 stockholder meeting to
vote on approval of the NGH merger and to require NGH to file a revised proxy
statement. A hearing on this demand for a preliminary restraint was scheduled
for October 25, 2000.
On October 20, 2000, counsel for plaintiffs in the New Jersey and Delaware
actions and counsel for defendants signed a memorandum of understanding in which
the parties agreed in principle to settle the New Jersey and Delaware actions.
The settlement will provide NGH, its directors, and all affiliated parties, with
a full release and dismissal with prejudice. Among other things, the memorandum
of understanding provides that NGH will obtain a written agreement from R. J.
Reynolds Tobacco Holdings, Inc. ("RJR") to the effect that RJR will pay or cause
to be paid to NGH stockholders, in the circumstances described in
Section 2.02(b) of the NGH Merger Agreement (which relates to any transaction in
which NGH receives, as a stockholder or Nabisco Holdings Corp. ("NA"), more than
$55 per NA share), an amount equal to 100% of the difference between the Net
Proceeds (as defined in the NGH Merger Agreement) and $11.729 billion.
On October 20, 2000, the parties to the New Jersey action advised the court
that they had agreed to settle the case and that plaintiff's demand for a
preliminary restraint was withdrawn.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The matters below were voted upon at the special meeting of stockholders of
NGH held on October 27, 2000. Holders of Common Stock were entitled to vote upon
the proposals to sell NGH's 80.5% interest in Nabisco Holdings Corp. to Philip
Morris Companies, Inc., on the subsequent acquisition of NGH by R.J. Reynolds
Tobacco Holdings, Inc. for $30 per share and to grant discretionary authority to
vote in favor of an adjournment of the meeting, if necessary. Holders present in
person or by proxy at the meeting were entitled to vote 219,131,545 shares of
Common Stock.
(a) Sale of NGH's 80.5% interest in Nabisco Holdings Corp. to Philip Morris
Companies, Inc.
For......................................................... 216,324,824
Against..................................................... 1,691,531
Abstain..................................................... 1,115,190
Subsequent acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. for
(b) $30
per share
For......................................................... 216,040,471
Against..................................................... 1,822,877
Abstain..................................................... 1,268,197
Grant discretionary authority to vote in favor of an adjournment of the
(c) meeting,
if necessary
For......................................................... 162,166,246
Against..................................................... 49,710,706
Abstain..................................................... 7,254,593
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to the 364 Day Credit Facility dated as of
September 8, 2000, among Nabisco Holdings Corp., Nabisco,
Inc. and the lending institutions party thereto
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of Nabisco Holdings Corp. and Nabisco,
Inc. for the fiscal quarter ended September 30, 2000 (the
"September 2000 Nabisco Form 19-Q")).
10.2 Nabisco, Inc. Deferred Compensation Plan, as amended and
restated effective as of September 13, 2000 (incorporated by
reference to Exhibit 10.2 to the September 2000 Nabisco
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 nine months ended September 30, 2000.
*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 nine
months ended September 30, 2000.
*27 Nabisco Group Holdings Corp. Financial Data Schedule for the
nine months ended September 30, 2000.
- ------------------------
* Filed herewith
(b) Reports on Form 8-K
None.
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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
/s/ THOMAS J. PESCE
---------------------------------------------
Thomas J. Pesce
Senior Vice President and Controller
Date: November 14, 2000
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