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SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [x]
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Check the appropriate box:
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14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[X] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
RJR Nabisco Holdings Corp.
(Name of Registrant as Specified In Its Charter)
RJR Nabisco Holdings Corp.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
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14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
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[ ] Check box if any part of the fee is offset as provided by Exchange
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INSTITUTIONAL
SHAREHOLDER
SERVICES(SM)
- ------------------------------------------------------------------------------
Proxy Contest: RJR NABISCO HOLDINGS
CORP.
RN (NYSE)
Annual Meeting: April 17, 1996
Record Date: February 29, 1996
Security ID: 74960K108 (CUSIP) 74960K10 (CUSIP) 74960K207 (CUSIP) 74960K405
(CUSIP) 2719144 (SEDOL) 2733940 (SEDOL)
MEETING AGENDA
Item Code RJR Proposals (WHITE card) Mgt. Rec. ISS Rec.
_____________________________________________________________________________
1 M0201 Elect Directors For FOR
2 M0101 Ratify Auditors For FOR
Shareholder Proposals
3 S0812 Prepare Report/Promote EEOC-Related
Activities Against NONE
4 S0810 Discourage Underage Smoking Proposal Against AGAINST
5 S0810 Infants and Tobacco Proposal Against AGAINST
6 S0704 Prepare Tobacco-Related Report Against AGAINST
7 S0732 Spin Off Tobacco-Related Business Against FOR
8 S0501 Restrict Executive Compensation Plan Against AGAINST
Awards
9 S0223 Require Director Fees to be Paid in Against AGAINST
Stock
10 S0509 Eliminate Outside Directors'
Retirement Against FOR
Benefits
11 S0318 Eliminate or Restrict Severance
Agreements (Change-in-Control) Against FOR
Item Code Brooke Group Proposals (BLUE card) Dis. Rec. ISS REC.
_____________________________________________________________________________
1 M0225 Elect Directors (Opposition Slate) For WITHHOLD
2 M0101 Ratify Auditors For FOR
Shareholder Proposals
3 S0812 Prepare Report/Promote EEOC-Related None NONE
Activities
4 S0810 Discourage Underage Smoking Proposal None AGAINST
5 S0810 Infants and Tobacco Proposal None AGAINST
6 S0704 Prepare Tobacco-Related Report None AGAINST
7 S0732 Spin Off Tobacco-Related Business For FOR
8 S0501 Restrict Executive Compensation Plan None AGAINST
Awards
9 S0223 Require Director Fees to be Paid in None AGAINST
Stock
10 S0509 Eliminate Outside Directors'
Retirement For FOR
Benefits
11 S0318 Eliminate or Restrict Severance
Agreements None FOR
(Change-in-Control)
* To follow ISS's recommendation, mark the WHITE card only. Discard the BLUE
card provided by Brooke Group.
FINANCIAL SUMMARY
_____________________________________________________________________________
INCOME STATEMENT SUMMARY ($ in millions except per share data)
_____________________________________________________________________________
1993 1994 1995 ACG(*)
____ ____ ____ ______
Net Sales $15,104.00 $15,366.00 $16,008.00 2.9%
Net Income -145.00 -519.00 611.00 NMF
EPS (Primary) -0.79 1.27 1.53 NMF
Dividends per share 0.00 0.00 1.50 NMF
Calendar year-end stock price $31.88 $27.50 $33.62(**)
Dividends paid since: 1995
___________________________
(*) Annual Compound Growth
(**) Current Price
Fiscal Year Ended: December 31
Source: Company Annual Report
______________________________________________________________________________
PERFORMANCE SUMMARY
______________________________________________________________________________
1-Year 3-Year 5-Year
______ ______ ______
Total shareholder returns, company 15.9% -9.6% 2.5%
Total shareholder returns, index 34.1% 14.0% 14.8%
Total shareholder returns, peer group 40.4% 7.5% 12.3%
________________________________
Sources: Company Proxy Statement
BUSINESS: Operations in consumer packaged goods, food and tobacco industries
ACCOUNTANTS: Deloitte & Touche LLP
CORPORATE GOVERNANCE PROFILE
_____________________________________________________________________________
GOVERNANCE PROVISIONS
_____________________________________________________________________________
Blank check preferred stock (Charter)
Board can amend bylaws without shareholder approval (Charter)
D&O indemnification provisions for acts made in good faith (Bylaw)
D&O liability protection for acts made in good faith (Charter)
Elimination of shareholders' right to call a special meeting (Bylaw)
Restrictions on shareholders' right to act by written consent (Bylaw)
Unequal voting rights
_____________________________________________________________________________
GOVERNANCE MILESTONES
_____________________________________________________________________________
Established Corporate Governance Committee (1996)
_____________________________________________________________________________
SEVERANCE AGREEMENTS
_____________________________________________________________________________
Golden parachute executive severance agreements triggered by termination of
employment following a change in control
Change-in-control provisions in executive stock option or other compensation
plans
_____________________________________________________________________________
STATE STATUTES: Delaware
_____________________________________________________________________________
Labor contract provision
Three-year freezeout provision
DIRECTOR PROFILES
Terms Director No
Name Classification Ends Since Stock
____ ______________ _____ _________ _____
RJR NOMINEES
John T. Chain, Jr. Outsider 1997 1994
Julius L. Chambers Outsider 1997 1994
John L. Clendenin Outsider 1997 1994
Steven F. Goldstone Insider 1997 1995
H. John Greeniaus Insider 1997 1992
Ray J. Groves Outsider 1997 1995
Charles M. Harper Insider 1997 1993
James W. Johnston Insider 1997 1992
John G. Medlin, Jr. Outsider 1997 1989
Rozanne L. Ridgway Outsider 1997 1989
BROOKE GROUP NOMINEES
Arnold I. Burns
Rouben V. Chakalian
Robert L. Frome
Dale M. Hanson
Richard J. Lampon
Bennett S. LeBow
Barry W. Ridings
William H. Starbuck
Peter Strauss
Frederick W. Zuckerman
Classified board: No CEO as chairman: No
Current nominees: 10 (each slate) Retired CEO on board: Yes
COMPOSITION OF COMMITTEES
Audit Status Compensation Status Nominating Status
_____ ______ ____________ ______ __________ ______
Julius L. Chambers O John T. Chain, Jr. O Julius L. Chambers O
Rozanne L. Ridgeway O John L. Clendenin O John G. Medlin, Jr. O
John G. Medlin, Jr. O Rozanne L. Ridgeway O
Committee Name Assigned by Company:
Audit: Audit Committee
Compensation: Compensation Commitee
Nominating: Corporate Governance and Nominating Committee
OWNERSHIP INFORMATION
Votes
for Authorized Shares
Beneficial Ownership Type of Shares Shares Shares Outstanding
_____________________ ______________ ______ __________ ___________
Officers & 0.46% Common stock 1.00 440,000,000 272,982,782
Directors
Institutions 70.71% Series C conversion
preferred stock 0.20 150,000,000 26,675,000
Wachovia Bank 1.07% ESOP convertible
of North preferred stock 0.20 150,000,000 15,003,379
Carolina, N.A.
_______________
Sources: Proxy Statement, CDA Investment Technologies
Note: The company has three types of voting stock: common stock, Series C
conversion preferred stock, and ESOP convertible preferred stock. Each share
of common stock entitles its holder to one vote. Each share of Series C
conversion preferred stock and ESOP convertible preferred stock entitles its
holder to one-fifth of a vote. Wachovia Bank of North Carolina, N.A.
beneficially owns 100 percent of the company's ESOP convertible preferred
stock. Bennett LeBow and Carl Icahn together own approximately 6.6 percent of
the outstanding common stock.
To follow the ISS vote recommendations, please mark the WHITE proxy card as
instructed below and discard any BLUE proxy cards you may have been sent by
Brooke Group.
Item 1: Elect Directors
Mr. LeBow's Brook Group has nominated a ten-member slate to replace the
current board of RJR. The LeBow slate has a three-prong platform:
o Effect an immediate spin-off of Nabisco
o Increase the company's 1996 annual tobacco dividend from $1.50 to $2.00
per share and maintain a payout ratio of 60 percent of net cash flow
o Revitalize the tobacco company under Ronald Fulford, former executive
chairman of Imperial Tobacco, a subsidiary of Hanson PLC.
In addition, as a result of the terms of the recent Liggett Group Inc. tobacco
litigation settlement of the Castano class action lawsuit and the settlement
of a number of state attorneys' general suits against the industry to recover
expenses of treating Medicaid patients, Mr. LeBow would offer RJR shareholders
a first opportunity to consider a merger between Liggett and RJR that
purportedly would extend the settlement to RJR and free the company from all
current and future addiction-based liability claims.
The Brooke Group slate comprises ten nominees, five of whom (Bennett LeBow,
Rouben Chakalian, Richard Lampen, Arnold Burns, and Barry Ridings) are
employees or directors of Brooke Group or some affiliated organization.
Mr. Chakalian has been president and CEO of Liggett since June 1994.
Liggett is the manufacturer of Chesterfields and Eve cigarettes. Also
providing the slate with tobacco industry experience is Peter Strauss, who
was for three years (through December 1994) senior vice president, trade
marketing (domestic) and international operations for the American Tobacco
Co., which was merged into Brown & Williamson, a subsidiary of B.A.T.
Industries, in 1994.
In addition to Mr. Strauss, the outside directors include shareholder advocate
and former California Public Employees' Retirement System (CalPERS) CEO Dale
Hanson, attorney Robert Frome, investment banker Barry Ridings, business
professor William Starbuck, and Frederick Zuckerman, a former senior executive
of IBM, RJR Nabisco, and Chrysler.
Cognizant that RJR and some shareholders are suspicious of Mr. LeBow's
motives, Brooke Group's nominees have pledged that if they have not declared a
spin-off of the remaining Nabisco shares held by the company within six months
of their election, they will call a special meeting for the election of new
directors. Brooke Group has also stated that it will not participate in the
management of RJR Nabisco.
In addition, Brooke Group's slate has also pledged to adhere to a number of
corporate governance policies, including the following:
o Any corporate transaction between RJR Tobacco and its subsidiaries and
Brooke Group or its affiliates valued at more than $2 million (i.e., a
Liggett/RJR merger) would require approval by a special committee of
independent directors and RJR shareholders.
o No adoption of a staggered board or a poison pill.
o Adoption of confidential voting for future stockholder votes.
o Termination of the RJR Nabisco Directors Retirement Plan for directors
elected at the upcoming annual meeting or any meeting thereafter.
Background
Brooke Group waged a successful campaign that convinced shareholders owning a
majority of the company's outstanding shares to vote for a nonbinding proposal
expressing the desire of shareholders for an immediate spin-off of Nabisco.
While the victory may have seemed marginal, as measured by the 50.4 percent
majority, the dissidents apparently gained the support of some 21 of RJR's 25
largest shareholders. Shareholders also successfully restored their right to
call a special meeting, which had been eliminated by the board in 1995 in
response to Brooke Group's dissident activities.
In its campaign, Brooke Group noted the weak performance of RJR stock in both
absolute and comparative terms and suggested that a spin-off would unlock the
unrealized value of Nabisco. The dissidents dismissed management's claim that
a spin-off should wait for an improved tobacco litigation environment in order
to avoid legal assaults by antitobacco litigants that would tie up Nabisco for
years and possibly restrict the company's ability to pay higher dividends or
buy back more shares. Brooke Group argued that a spin-off of Nabisco could
not be blocked by the courts because it would be a valid business transaction,
as opposed to an attempt to shield assets from potential creditors -- in this
case, the tobacco litigants -- and that, in any event, in order to block a
spin-off, the plaintiffs would have to prove, among other things, that their
claims against the tobacco industry are likely to succeed on the merits --
something that tobacco litigants have failed to do in more than four decades
of lawsuits against the industry.
RJR claims that its commitment to bond holders (to not spin-off Nabisco prior
to 1996 if it would lead to a downgrade of the company's senior debt)
precluded an immediate spin-off, but Brooke Group argued that this is without
merit. While the company's board had adopted such a policy (see the RJR 1995
annual meeting proxy statement), the dissidents noted that the policy has
never been included in indentures, which are the legally binding contracts
that set forth the terms of conditions of the debt.
The dissidents also insinuated that despite the company's public statements to
the contrary, the directors were secretly opposed to a spin-off. Brooke Group
reasoned that the directors fear that a spin-off of Nabisco exposes them to
personal liability for having declared an illegal dividend. Under Delaware
law, such an action does not fall under the "business judgment rule," which
generally protects directors for errors in judgment in the commercial arena.
RJR vigorously denied that the director liability issue played a role in the
board's spin-off deliberations.
Following the announcement of the unofficial results of the spin-off proposal
in late February, RJR reiterated its view that an immediate spin-off was
impractical and that the board would not follow the recommendation of
shareholders. Initially, the company indicated that it would increase its
dividend, but only by a modest amount. RJR stated that its first priority
would be "to defend its businesses." However, on March 5, the company
announced a dividend increase, a share buyback program, and the formation of a
committee that would focus on corporate governance issues. More specifically,
the company raised its annual dividend to $1.85 per share, a 23 percent
increase. The company also announced its intention to buy back ten million
shares (about 3.6 percent of shares outstanding) over the next several years,
with an initial plan of purchasing approximately $100 million, or 2.94 million
shares, over the next year.
RJR also announced that it has established a new committee on corporate
governance which comprises outside directors only. The committee will be
responsible for reviewing executive compensation, identifying potential new
outside directors, and developing corporate governance policies.
On March 12, Brooke Group announced that Liggett, its cigarette manufacturing
subsidiary, had reached the first-ever settlement of a tobacco liability
lawsuit with the plaintiffs in the Castano class action suit, which purports
to represent some 50 million individuals alleging to have become addicted to
cigarettes. Brooke Group later reached settlements with several state
attorneys general (Florida, Massachusetts, West Virginia, Louisiana,
Mississippi) of lawsuits to recover alleged smoking-related Medicaid expenses
incurred by the individual states. The state of Minnesota rejected the
settlement. The state of Texas has since filed a similar suit against the
tobacco companies in federal court.
The key terms of the Castano settlement, according to Brooke, include the
following:
o Release of Brooke and Liggett from all current and future addiction-based
claims, including those represented in the Castano class.
o The Castano class would receive up to five percent of Liggett's pretax
income each year, up to a maximum of $50 million for the next 25 years. The
funds are to be used for smoking cessation programs.
o Liggett agreed to phase in the Food and Drug Administration's proposed
interim regulations regarding the marketing of cigarettes to minors.
o Brooke Group and Liggett can walk away from the settlement if the remaining
defendants prevail in the litigation.
o The plaintiffs agreed not to sue to enjoin (i.e., block) a spin-off of
Nabisco Holdings if Brooke Group wins control of the RJR board. Furthermore,
the terms of the settlement (including the formula for determining the
required payment to plaintiffs) would extend to cover any company with a
cigarette market share of less than 30 percent (i.e., any tobacco company
except Philip Morris) that merges with Liggett.
Five states settled on roughly similar terms, including the application of the
settlement to any business combination including Liggett and another tobacco
company (except Philip Morris). The terms of the settlement include the
following:
o The states currently participating in the agreement and any states which
join the agreement in the future will be paid $5 million ($1 million each)
over a ten-year period plus a maximum of 7.5 percent of Liggett's pretax
income. The original states split the first 2.5 percent. Late-joining states
split a pool consisting of the remaining five percent of Liggett's pretax
income.
o If Liggett succeeds in merging with another tobacco company, the five
states receive another $160 million. Additional states joining the settlement
would be paid from a supplemental fund of $25 million, which would be
supplemented by additional minimum payments of $50 million annually.
o Brooke Group and liggett can walk away form the deal if not enough other
states join in.
o If Liggett is not merged with another tobacco company within three years,
Liggett must pay the states an additional $5 million plus 7.5 percent of its
pretax income for the next 25 years.
Therefore, if RJR and Liggett were merged, RJR, based on current earnings,
would end up paying out nearly $2 billion over 25 years, or $120 million a
year, in return for being released from the Castano class action and state
attorneys general claims filed to date.
The settlement does not protect Liggett or its potential partners from
future lawsuits filed by individuals (including those who choose to
participate in the settlement), lawsuits by a class or individuals not
based on claims of addiction, or pending or future lawsuits alleging
damages from second-hand smoke. However, according to Brooke Group, the
settlement does allow for reductions of Liggett's payout if the company is
successfully sued by individuals and releases Liggett from the settlement
if the remaining tobacco defendants prevail on the merits in the addiction-
based lawsuits. Note that Liggett may also withdraw from the settlement if
the Castano class is decertified or if notice costs exceed $1 million.
The Whistle-Blowers
Shortly after the settlements were announced, the FDA made public that
affidavit of a former Philip Morris scientist alleging that the company has
always known that nicotine is an addictive drug and that the company
manipulated the levels of the substance in its cigarettes in order to motivate
smokers to continue using its products.
The impact of the news of the settlements and the disclosure of the
scientist's affidavit had a sharply negative short-term effect on the value of
RJR and other tobacco stocks. RJR fell from nearly $35 per share to as low as
$29.50 per share (a 16 percent decline) in the week following their Liggett
settlements, while Philip Morris tumbled from a record high of $104 per share
to $86 per share. The price decline stemmed in part from the perception that
the settlement would attract more potential plaintiffs who could still sue
tobacco companies on nonaddiction-based claims. In addition, while still
failing to achieve a comprehensive settlement of all pending and future
litigation issues, RJR would end up paying about $120 million (based on 1995
operation profits) annually for the next quarter century (Philip Morris would
pay approximately $400 million annually if it settled with the Castano class
and the state attorneys general on roughly the same basis).
Meetings with LeBow and RJR
ISS met with RJR representatives, including CEO Steven Goldstone, Rozanne
Ridgway, an outside director and chairperson of the Corporate Governance
Committee, and James Johnston, CEO of RJR Reynolds Tobacco. Iss also met
with Mr. LeBow, his legal and financial advisers, as well as Dale Hanson,
one of the Brooke Group nominees. Following is a summary by issue of our
discussions.
Guaranteed Spin-Off?
LeBow
Mr. LeBow told ISS at a meeting prior to the February consent solicitation
that the tobacco plaintiffs were unlikely to succeed in blocking a spin-off of
Nabisco Holdings after four decades of unsuccessful litigation against the
industry because they would be hard-pressed to show that 1) plaintiffs would
have a strong likelihood of succeeding on the merits, and 2) a spin-off
transaction would render RJR insolvent for the purposes of satisfying a
judgment against it. At our meeting in late March, Mr. LeBow said his Liggett
settlement removes RJR's central objection to a spin-off -- the injunctive
risk. He scoffed at claims that his settlement does not secure a spin-off
because of the existence of hundreds of plaintiffs outside of Castano and the
states that signed the settlement agreement. None of the individual
plaintiffs or states can block a spin-off because their claims against RJR
alone are not large enough to meet the insolvency test necessary to obtain an
injunction. Moreover, Mr. LeBow asserts that once a spin-off has occurred, it
cannot be undone.
The LeBow camp is more certain than before that RJR will never spin-off
Nabisco. That is because rating agencies apparently indicated to Mr. LeBow
that they consider it unlikely that creditors will be able to "pierce the
corporate veil" to reach Nabisco's assets, and therefore the company's debt
will be downgraded whenever a spin-off occurs. Because management has
formally pledged not to spin off Nabisco if it would lead to a downgrade, Mr.
LeBow believes RJR will always claim that a spin-off violates its pledge.
RJR
Mr. Goldstone reiterated RJR's belief that now is not the time for a spin-off,
but that the board is committed to a spin-off as soon as it can practically be
accomplished given legal and financial considerations. In response to a LeBow
criticism that the board will never agree to a spin-off because the major
ratings agency will not allow it to happen without a downgrade of its credit,
Mr. Goldstone responded that the board's policy on a spin-off is not tied
forever to the actions of the rating agencies, i.e., the policy essentially
commits RJR to no spin-off before 1998 if it would lead to a downgrade. After
1998, the company is free to do what it wants. His concern now is to
establish the sustainability of the dividend as part of a plan to return more
cash to shareholders. Mr. Goldstone asserted, "We don't see the spin-off
value as Ben [LeBow] does, otherwise we would take the risk. He added that
the impact of a negative injunction finding would further depress tobacco
stocks.
Mr. Goldstone reiterated that there is danger of an opinion in an injunction
proceeding that the company attempted an intentional fraudulent conveyance
that could have a negative long-term impact on the underlying litigation.
Such an opinion could be introduced into evidence at trial and heard by jurors
(which would have a prejudicial impact even if the evidence was thrown out).
Counsel to RJR also warned, "We don't choose our courts" and that many of
these cases could come up in court systems that are less sophisticated in
their understanding of financial issues. Furthermore, there is a danger of a
precedential finding by a judge that plaintiffs have a likelihood of
succeeding on the merits (one of the legal standards for obtaining an
injunction). RJR believes that Mr. LeBow and his attorneys are wrong to
believe that judges in pro-plaintiff jurisdictions will not find a way to
enjoin a spin-off, even though the company's defenses appear to be valid on
their face. RJR counsel added that some of these jurisdictions do not permit
for an interlocutory appeal of lower court decisions. As a result, RJR also
does not believe that the Liggett settlement guarantees a risk-free spin-off.
Benefits/Risks of Liggett Settlement
LeBow
Mr. LeBow also stated that election of his slate gives RJR "a first crack" at
a merger with Liggett that would avail RJR of the protections of the
settlement. However, he stresses that at a minimum, even if such a merger
does not occur, shareholders will still receive the benefits of a spin-off of
Nabisco. In this scenario, shareholders also get an initial dividend payment
of $2.00 per share on the tobacco company plus the $0.35 pass-through dividend
from Nabisco. But Mr. LeBow now believes that as a result of recent
developments, including his own reevaluation of the Wigand (Brown &
Williamson) testimony, the ongoing grand jury investigations regarding allege
perjury in the tobacco executives testimony to Congress regarding the
addictiveness of nicotine, as well as the recent public statements of the
Philip Morris scientists, the tobacco litigation environment has worsened and
the danger of a massive judgment has increased. What makes the situation
worse now, according to Mr. LeBow, is evidence that the tobacco industry
executives lied about the addictiveness of their product, thus permitting
plaintiff's to argue fraud.
Using the slogan "Remember Texaco" (referring to the instance where Texaco
lost a $12 billion tortious interference case on questionable grounds, but was
forced into bankruptcy court because it could not afford the required bond to
sustain an appeal), Mr. LeBow argued that RJR cannot afford to suffer a
massive judgment because it may not be able to secure the necessary bond to
appeal the verdict.
Moreover, Mr. LeBow now believes that the tobacco industry gains nothing from
the anticipated decertification of the Castano class action suit. That is
because plaintiffs have made it clear that if they are unsuccessful in
maintaining class action status they will attempt to file a class-action suit
in some pro-plaintiff jurisdiction, possibly in a state where the only appeal
after state supreme court is to the U.S. Supreme Court, which Mr. LeBow's
attorneys believe will not rule against a state court's ability to certify a
nationwide class. The Liggett settlement purportedly protects Liggett (and
its prospective merger partner) from all future addiction-based claims,
including those made by a reformed version of the Castano class in a new
jurisdiction.
LeBow representatives believe that RJR and other commentators are misleading
shareholders regarding the impact of the suit on future litigation. Mr. Lebow
reasons that once the addiction-based cases are dispensed with, the remaining
cases, and likely any future cases, are those that can be defended based on
the issue of free choice, i.e., smokers were informed that smoking is
unhealthy through cigarette pack warnings. These types of cases have ruled
against smokers held strong antitobacco company sentiments. Therefore, argues
the LeBow group, for little more than a penny a pack, RJR could conceivably
escape addiction-based claims, which it believes is the greatest danger to the
tobacco industry.
Mr. LeBow believes the settlement is a "no lose" proposition for Liggett and
possibly RJR. If the tobacco defendants prevail, then Liggett/RJR is freed
form further settlement payments. If there is a catastrophic judgment, the
settling parties also win because they are out of the litigation. Mr. LeBow
noted that the settlement provides for reductions in the potential payments,
if there are judgments against the company by individual plaintiffs.
RJR
RJR counsel says the Liggett "settlement" is just a "temporal appeasement"
and settles very little, if anything at all. They asserted that "pieces of
litigation have been purchased by a company which has no cash flow." RJR
views the Liggett settlement as a financing vehicle for a cadre of
plaintiffs counsel that is investing money where the returns are highest
and that the suit encourages them to file even more suits under a variety
of claims. Counsel claimed that the settlement does not address the
federal grand juries, the claims of the state attorneys general who do not
settle or who may soon file suits, the FDA proposed regulations, and does
not protect against future "whistle blowers". According to counsel, the
settlement only pertains to claims of addiction, but does not protect
tobacco companies against the real danger of personal injury claims,
including those supported by claims of addiction. RJR noted that addiction
arguments have never succeeded before in individual cases, and therefore it
does not make sense to settle them now.
RJR gave examples of how the settlement is encouraging state attorneys general
and plaintiffs counsel alike. RJR believes that the Mississippi attorney
general was under pressure from the state capitol to "get out" of the case,
but that Mr. LeBow's settlement legitimized his involvement. Minnesota failed
to join what if referred to as a "sham settlement." RJR also pointed to the
recently filed Morales case in Texas, in which plaintiffs enumerated a large
number of previously untested legal claims against the industry. The Texas
complaint asserts that the Liggett settlement is a sham and merely admits the
industry's culpability.
Mr. Goldstone said that rather than settle in the Castano case, the industry's
priority should be to defeat the plaintiffs class action status so as to make
it uneconomic for entrepreneurial plaintiffs' counsel to sue tobacco companies
under a variety of claims. While plaintiffs can attempt to refile for class
action status elsewhere so as to make it uneconomic for entrepreneurial
plaintiffs' counsel to sue tobacco companies under a variety of claims. While
plaintiffs can attempt to refile for class action status elsewhere, the first
victory provides a legal precedent that is useful in future cases. A victory
in Castano also likely spells the end for the Engle case (a statewise class
action tobacco case in Florida). Victories against the class actions are
valuable for RJR and other tobacco companies because plaintiffs' counsel
realize there is far less potential profit in pursuing individual
addiction-based claims.
Finally, Mr. Goldstone distinguished the tobacco litigation from asbestos and
breast implant class action litigation, which ultimately settled. The
difference, according to Mr. Goldstone, is that tobacco is an ongoing business
that is not planning on coming to an end. Therefore, if cigarette companies
begin settling product liability cases now, they increase the likelihood that
they will go bankrupt.
Court Approval of the Settlement
LeBow
Mr. LeBow's attorneys disagree with critics who assert that the settlement
will not be approved by the court. According to Mr. LeBow, these critics
mistakenly draw a parallel between the Liggett settlement and a rejected
settlement which provided General Motors Corp. truck customers who bought
defective vehicles with vouchers for discounts on new trucks. In that case,
the class settlement was rejected in part because it provided no damages to
the GM customers. However, Brooke Group argues that the settlement of the
Castano and state attorneys a general claims provides benefits in the form of
payment for the treatment of addicted smokers and also a societal benefit of
ending cigarette advertisements aimed at minors. LeBow believes that it is
foolish to assert that a tobacco industry settlement must be predicated on
monetary payments to individuals. For example, Mr. LeBow estimates that Philip
Morris could pay little more than $140 annually to each U.S. smoker. He
further believes that opt outs will be relatively low, consistent with opt out
percentages in other class action settlements, and should also be limited by
the fact that the settlement was concluded with the support of the syndicate
of law firm currently representing the tobacco plaintiffs.
RJR
RJR reiterated its belief that the settlement will not be approved by the
court because it yields only a meager payment to the plaintiffs. However,
beyond the defects it sees in the settlement, RJR firmly believes that Mr.
LeBow will exercise one of numerous escape clauses to void the settlement long
before a court rules on it. That is because the settlement can be voided at
Mr. LeBow's discretion if Castano is decertified, or if in Mr. LeBow's
perception, there ar too many opt out, or if notice to the class costs more
than $1 million (which is virtually certain).
Tobacco Company Operations
LeBow
Brooks Group believes RJR's tobacco operations can be improved by Ron Fulford,
who is credited with several business turnarounds, including a revitalization
of Imperial Tobacco, a subsidiary of U.K.-based Hanson Plc. Mr. Fulford's
model for turnarounds is based on improving operating income-to-sales as a
ratio of employed capital to sales through lowering unit costs. Mr. Fulford
said he has found that he can produce quality cigarettes without using the
most expensive blends of tobacco. He prefers a flatter management structure
and, at Imperial, eliminated brand managers from the marketing fold.
According to Mr. Fulford, the turnaround strategy used at Imperial Tobacco can
be applied to RJ Reynolds, although he acknowledges that to some extent RJ
Reynolds' operations are similar to Imperial and expects that his program will
result in more modest gains than in his past efforts. He expects that he can
produce a five percent gain in sales over three years. Mr. LeBow added that
there are about $150 million in synergies from a Liggett and RJR merger, much
of it coming from closing Liggett factories and manufacturing its brands in
RJR facilities.
RJR
RJR executives acknowledged that Mr. Fulford has done a commendable job at
Imperial Tobacco, but they suggested that his talents and experience are not
relevant or needed at RJR. As a result of its KKR leveraged buyout legacy,
RJR's tobacco operations have become extremely efficient. The company's costs
have been flat for seven years, and further cost reduction programs are in
place. RJR points out that on a cigarette per employee basis, RJR is twice as
productive as Imperial. The executives also warned that Mr. Fulford's
low-price strategy will not work in the United States. They believe this fact
was amply demonstrated by "Marlboro Friday", a strategy that successfully
refocused U.S. tobacco companies' emphasis on its more profitable premium
brands. RJR plans to focus on the market share of its premium brands rather
than its lower margin savings brands and is planning several new offerings in
this segment. The tobacco executives noted that Camel was the fastest-growing
brand in the United States last year.
This company also noted that Imperial's competitive environment in the United
Kingdom is in stark contrast to the U.S. market, where there is a dominant
competitor like Philip Morris. RJR believes that Gallaher, Imperial's main
competitor in Britain, has intentionally conceded market share in the low
price range, allowing Imperial to increase its overall market share.
The tobacco executives assert that acquiring Liggett does little for RJR
because of the weakness of its brands. The company has little to offer other
than its private label business, which has only six accounts. They believe
that Liggett is on the edge of the abyss and is no longer salvageable. RJR
pointed out that Liggett recently reported that its operating losses tripled
last year and that Liggett has shut down four factories in recent years. Mr.
Goldstone said that LeBow has had eight competent CEOs at Liggett, but
suggested that all of them were stifled by Mr. LeBow's financial dealings.
Corporate Governance Programs
LeBow
Dale Hanson discussed a series of corporate governance pledges that the LeBow
slate will implement. However, he emphasizes that his main concern is RJR's
poor performance in terms of long-term total return to shareholders. Mr.
Hanson said that he did not know of the Liggett settlement until it was
announced, and Mr. LeBow confirmed that only a small circle of attorneys and
advisors knew of the settlement efforts before it was made public. Mr.
Hanson's opinion after learning of the settlement was that it was a brilliant
deal that gains a significant advantage without giving up much. He made clear
that he is not running on the slate to provide "window dressing".
RJR
Ambassador Ridgway chairs the company's new corporate governance committee
and will oversee a review of the company's governance and compensation
policies. She asserted that RJR is not just learning about corporate
governance - she stressed that even during the KKR era, directors insisted
on strict audits and sound governance policies. She believes that the
company's governance will evolve as RJR's situation as a widely held
company normalizes. We asked Amb. Ridgway, who has served on the board
since 1989, whether she had ever considered not voting for a spin-off out
of fear of personal liability. She responded that she does not recall the
issue ever being discussed at any meeting of RJR directors and cannot
understand how this came to be an issue. She commented, "If I can't make a
business decision like that, I'll get off the board."
The LeBow Record
LeBow
Mr. LeBow believes criticisms of his performance as an executive have been
misleading. While he acknowledges he is no stranger to bankruptcy court, Mr.
LeBow points out that his business has involved acquiring and reorganizing
troubled or bankrupt companies. He termed his reorganization of New Valley
Corp. as one of the most successful reorganizations in history and an example
that set the standard for payment of post-petition interest. Mr. LeBow
reiterated that Brooke Group's total return to shareholders greatly exceeds
RJR's returns.
RJR
Goldstone bristles at Mr. LeBow's comparison of RJR's and Brooke Group's
return to shareholders. He estimates that if one examines the cost basis of
the original shareholders of the companies acquired by Mr. LeBow, the compound
annual return of his investments is less than three percent on an annual
compound basis. He said that Mr. LeBow inappropriately includes increases in
value of the companies he no longer owns in his computations. He argued that
Liggett traded at $12 per share when formed, dropped to $5 before the RJR
takeover effort, and rose to $9 per share on RJR takeover speculation and the
Liggett settlement. Meanwhile, he asserted that Mr. LeBow's recent actions
reduced RJR's market value by 16 percent.
Analysis and Conclusion
In our analysis of the spin-off resolution contest in February, we stated
that Mr. LeBow's arguments in favor of a spin-off of Nabisco were
compelling, that there was a reasonable change of its success based on
known standards of law, and that we saw little downside risk in attempting
the transaction. We indicated at that time that our endorsement of the
spin-off proposal in no way constituted an endorsement of the LeBow slate
in the election of directors at the upcoming annual meeting. Our analysis
stressed our belief that supporting LeBow's spin-off "message" did not
place the "messenger" on step closer to a low cost takeover of RJR. Any
decision to place the board under Mr. LeBow's control would be in the
hands of RJR shareholders. We now believe that fiduciaries should reject
the LeBow slate. Liggett's proposed settlement of the Castano class and
several of the state attorneys general cases makes it clear to us that Mr.
LeBow's primary motive is to merge Liggett and RJR at a cost to be
determined at some later date after his slate takes control. We further
believe the settlement presents a substantial risk to RJR shareholders.
Evaluation of a Liggett/RJR Merger
We see no value in a Liggett/RJR merger to RJR shareholders, either
operationally or legally. As a business, Liggett has little to offer RJR but
a few struggling brands that command less than two percent of the cigarette
market and a limited private label business. We note that on April 2, Brooke
Group announced that its preliminary 1995 net loss from continuing operations
grew from $18 million to $45 million. Details of the operating results were
not available, and Brooke Group requested a delay in the filing of its 10-K
annual report. We suspect that the tobacco operations are probably showing
continued weakness. Any synergistic benefits from such a combination, such as
manufacturing Liggett's marginal brands through RJR factories, would appear to
accrue only to Brooke Group shareholders.
Why Settle Now?
Mr. LeBow has attempted to infuse value into Liggett by negotiating a clever,
but limited, settlement with some of the tobacco plaintiffs. On its face, the
settlement offers a risk-free spin-off to RJR, but only if Mr. LeBow's slate
succeeds in taking control of the board. In addition, the settlement releases
RJR from the Castano class action case and purportedly from all future
addiction-based claims if it merges with Liggett. These settlement terms are
virtually meaningless to the tobacco plaintiff when applied only to Liggett,
which will pay a small percentage of its meager operating earnings to the
participating states and the Castano class. The obvious intent is to entice
RJR shareholders into supporting the LeBow slate and, for the plaintiffs, to
funnel approximately $120 million in annual RJR earnings to the plaintiffs.
The settlement is filled with options that guarantee Mr. LeBow the right to
back out of the settlement at any time he chooses.
Frankly, we believe that Mr. LeBow's case was more compelling when his
publicly stated agenda focused only on a spin-off of the food unit and not a
settlement of the tobacco lawsuits and a possible Liggett-RJR merger. Given
his earlier stated belief that RJR's board appeared exceedingly timid about
the injunctive risk of a spin-off in light of the industry's stainless "take
no prisoners" litigation record, and with the prospects for the Castano class
decertification by the end of the summer appearing reasonably good, why did
Mr. LeBow feel the need to horse-trade RJR's future earnings for further
guarantees of a spin-off? We believe that while he expected some shareholders
to support his cause, he knew the could not win control of the board without
a dramatic move. He also needed a reason to get shareholders to drop their
guard with respect to their concerns over his attempt to merge Liggett with
RJR by making the prospect appear more palatable through the illusion of
freedom from tobacco litigation.
However, Mr. LeBow publicly argues that even within the short period between
the February consent solicitation and the present, the litigation has worsened
largely as a result of the Philip Morris "whistleblower" scientists who made
purportedly new revelations about the tobacco companies's manipulation of
nicotine levels. Their statements, and those of Jeffrey Wigand, a former
Brown & Williamson research director, have fueled grand jury investigations of
whether tobacco executives lied to Congress in their recent testimony at
hearings regarding the addictiveness of their product and the manipulation of
nicotine levels. But despite the almost daily overblown media coverage of
these developments, experts and industry analysts apparently find little new
in these statements, and we think this is probably apparent to Mr. LeBow, a
nine-year veteran of the tobacco industry.
Consider this excerpt from "A Peace Plan for the Cigarette Wars," by Richard
Kluger, appearing in the New York Times Magazine, April 7, 1996 (Kluger is the
author of "Ashes to Ashes: America's Hundred-Year Cigarette War, the Public
Health and the Unabashed Triumph of Philip Morris" to be published this month
by Alfred A. Knopf):
"None of the freshly unearthed industry documents or thus-far-disclosed
testimony by whistle-blowers has revealed any dark industry "secrets" on
the causal connection between smoking and disease that were not already
known among independent public-health investigators.... As early as
1942, the Lancet, a leading British medical journal, reported that
'smoking tobacco is essentially a means of administering nicotine' --
information that seems to have astonished Jeffrey Wigand when he became
Brown & Williamson's research director in 1989."
and further:
"Nor is it much of a secret that the industry controls the components of
cigarettes. That has long been common knowledge among those
professionally acquainted with the smoking issue and has been conveyed
to the public by countless books, periodicals and Government reports."
It appears none of the industry defenses that Mr. LeBow was confident would
prevail in favor of a contested spin-off two months ago have changed
substantially as a result of these statements. Therefore, we can only
conclude that the "settlement" was simply a bold stroke by Mr. LeBow to win
the contest and not the result of a change in the legal landscape. If RJR
legitimizes the settlement by merging with Liggett, it is likely to encourage
plaintiff counsels, who will see the agreement as evidence of the industry's
culpability and will likely file new class action claims on a variety of legal
theories.
Since the settlement, Texas has filed a suit in federal court on 14 counts,
including two new legal theories not seen before in other previous cases:
racketeering and violation of federal antitrust laws. Minnesota has rejected
the Liggett settlement, referring to it as a "sham" designed to aid the
takeover of RJR. In addition to continued litigation against RJR on all
fronts, these states and other plaintiffs (including plaintiffs opting out of
the settlement) are just as free to oppose a spin-off of Nabisco as before the
settlement. These plaintiffs are no more or less likely to succeed now than
they were before (recall that Mr. LeBow previously argued that even the
Castano claim was not sufficiently large enough to enjoin a spin-off based on
a claim of insolvency). Therefore, we are not sufficiently certain that the
settlement guarantees a "risk-free" spinoff.
Furthermore, if new class action litigation on a variety of legal theories is
not precluded, then the settlement also seems hardly worth the purported
penny-a-pack payment. We are convinced by RJR's argument that it is better to
defeat than settle the current class actions. To do otherwise increases RJR's
risks by encouraging more plaintiffs counsels to file new class actions,
however defensible the new claims may be, in hopes of extracting further
settlements. In short, we think the "settlement" settles little and therefore
casts doubt on the value of voting for a Brooke Group takeover or an
RJR-Liggett merger.
Corporate Governance Aspects
We believe that even if there were some perceived value to RJR availing itself
of the settlement, the LeBow program has serious governance flaws. First, we
note that the ten-member slate includes five Brooke Group insiders and
affiliates. At the very least, we believe that to adequately protect
shareholder interests, Mr. LeBow's board should have a majority of truly
independent outsiders. While Mr. LeBow would recuse himself from merger
considerations involving Liggett and leave assessment of a deal to a committee
of outsiders who, armed by investment bankers and lawyers, would ostensibly
represent shareholder interests, we believe this is small comfort for
shareholders, who will be well aware that this evaluation is being performed
by directors who have been paid by Mr. LeBow and who will receive an array of
directors benefits only because he selected them for his slate.
In the off chance that the current RJR board reaches the conclusion that the
Liggett settlement is beneficial to RJR shareholders, it should be the current
board, and not the "outside directors" of a board selected by Mr. LeBow, the
chairman and CEO of Liggett's parent company, that should negotiate on an
arm's-length basis the terms and structure under which the two companies
should be merged.
While it is true that shareholders could persistently vote against any
RJR-Liggett merger deals proposed by a LeBow board if they are considered
unattractive from a financial and/or legal perspective, we remind shareholders
that this is not how boards of directors are designed to work. In assessing
such transactions, directors are charged with the important responsibility of
evaluating all available information and presenting shareholders with the
alternative that best maximizes their long-term value. Therefore, the mere
fact that a proposed transaction manages the required majority vote for
passage does not necessarily mean that directors have fulfilled their
fiduciary duty. In fact, established case law holds that directors may not
rely solely on a favorable shareholder vote alone to ratify their actions (see
Smith v. Van Gorkum). Therefore, we are not convinced that the pledge of a
vote on all transactions with Brooke Group affiliates ensures the best result
for RJR shareholders.
We are also suspect of the pledge of the LeBow board to call a special meeting
in six months to elect new directors for RJR if a spinoff is not declared,
particularly in light of recent sworn statements by the LeBow slate members
that cast doubt on whether they are committed to an immediate spin-off. If
the special meeting must be called, who will nominate the new directors, other
than a nominating committee of the LeBow board? Who will they nominate? It
would be hard to escape the conclusion that any subsequent board would be
tagged as "Son of LeBow" and the new RJR board might not be bound to the same
pledges by Mr. LeBow to place all transactions with Brooke Group to a
shareholder vote. While Brooke Group assures us that the directors are
committed to a spin-off and that a special meeting will not be required, the
issue is nonetheless a considerable loose end in the LeBow program.
Despite our disagreement with the current RJR board on the feasibility of
an immediate spin-off of Nabisco, we accept that the board is committed to
achieving a spin-off and that it has taken the February spin-off vote to
heart. Having had the chance to directly speak with an outside director of
the board about the issue, we are now even less inclined than before to
believe Brooke Group's assertion that a spin-off has been opposed by the
board due to the placing of a fear of personal liability over the best
interests of shareholders. This assessment is also based on the fact that
Brooke Group has been unable to unearth such evidence in its recent
litigation.
Who Will Run the Company?
As a final matter, we think shareholders are best served by the continued
direction of new management. While we recognize that the company's financial
performance and returns have been substandard since it became public following
the KKR era, we understand that the company's performance has been hampered by
the effort to reduce its once massive debt levels. We note that the company's
aggressive debt reduction is coming to a close and the board has committed to
returning cash to shareholders, as evidenced by its recent 23 percent dividend
increase and stock repurchase plan. From an operational standpoint, the
company improved sales of its Camel and Doral brands and appears to have
reversed its previously slipping cigarette market share. The company enjoyed
double-digit gains in international food sales and a total revenue gain of
eight percent in 1995.
On the other hand, while Mr. LeBow has generated returns for Brooke Group,
these returns reflect the company's financial dealings rather than its
underlying operating performance. Liggett initially traded at $12 per share
following its acquisition from Grand Metropolitan Plc. The company now trades
in the $9 to $10 range, but boasts in its 1994 annual report that its initial
shareholders have received $20 per share in cash and stock dividends. A
substantial portion of this amount (about 80 percent) is attributable to the
SkyBox spin-off to Marvel Entertainment, which has gained most of its value
for shareholders after Brooke Group no longer controlled the company. Such
dealings do not reflect a substantive capability to continue improvement of
operating performances at one of the world's leading consumer products
companies and is another critical reason to support the current board.
In summary, based on our concerns about the risk of the Liggett settlement,
the inadvisability of a merger with Liggett, flaws in the LeBow slate's
governance protections, and the lack of a positive operating record at Brooke
Group companies, we believe shareholders will fare better with the current
management, which has stabilized the company's operations and is beginning to
use its cash flow to reward investors.
We recommend a vote FOR the RJR directors.
Item 2: Ratify Auditors
The board recommends that Deloitte & Touche LLP be approved as the company's
independent accounting firm for the coming year. Note that the auditors'
report contained in the annual report is unqualified, meaning that in the
opinion of the auditor, the company's financial statements are fairly
presented in accordance with generally accepted accounting principles.
We recommend a vote FOR the auditors.
Shareholder Proposals
Item 3: Prepare Report/Promote EEOC-Related Activities
This shareholder proposal requests that the company publish a report that
includes (i) a copy of the consolidated EEO-1 report for 1993, 1994, and 1995;
(ii) information on the number of discrimination complaints and lawsuits and
related costs; (iii) results of any federal audit, corporate management
review, and letter of compliance conducted to protect the company's government
contracts and to preclude legal penalties; (iv) a report on the race,
ethnicity, and gender of top management; and (v) a description of any policies
or programs to promote minority- and female-owned businesses.
This sponsor notes that a substandard equal employment opportunity record
leaves a company open to expensive legal action, poor employee morale, and
potential loss of business. The proponent believes it is in the company's and
shareholders' best interest to have information of this kind available to the
public.
Management contends that the company is strongly committed to a policy of
equal opportunity and employment, as demonstrated through its policies and
programs. The company has implemented diversity awareness training and
programs to recruit, develop, and advance women, minorities, and people with
disabilities. Moreover, as federal contractors, the company's subsidiaries
already prepare a similar report called for by the proponent. Management
believes that the company's current efforts clearly prove its ongoing
commitment to the equal employment of and recruitment of women and minorities
and that further reporting would serve no useful purpose.
There are reasonable arguments on both sides of this complex issue. As there
is no evidence clearly demonstrating how this proposal will impact long-term
shareholder value, the decision is one best left to individual shareholders.
We make no vote recommendation on this proposal.
Item 4: Discourage Underage Smoking Proposal
Item 4 is a shareholder proposal requesting that the company contribute three
percent of profits realized from sales to minorities to a third party to run a
national antismoking campaign aimed at discouraging underage smoking. The
sponsor also proposes that the campaign be evaluated in three years to
determine its efficacy.
Management asserts that the company strongly discourages underage smoking.
This company policy is exemplified by RJR's various programs that supplement
private and governmental nonsmoking efforts in more than 800 cities and towns
throughout the United States. The "Right Decisions, Right Now" program
targets children between the ages of 12 and 15 years through local schools and
public service announcements. RJR also implemented the "Support the Law"
program for retailers that promotes compliance to minimum age laws.
Management contends that because these programs adequately address the problem
of underage smoking, additional funding for this initiative is unnecessary.
RJR has demonstrated a commitment to combat underage smoking through
comprehensive programs that increase awareness among both consumers and
suppliers. As such, ISS does not believe that the proponent's request that
RJR engage a third party in addition to its current efforts would provide any
meaningful benefit to the public or the company. Moreover, the significant
resource allocation proposed may place the company at a competitive
disadvantage to its peers.
We recommend a vote AGAINST Item 4.
Item 5: Infants and Tobacco Proposal
This shareholder proposal requests that the company develop and implement a
program to prevent fetal and neonatal harm from tobacco smoke. The proponent
also recommends that the company evaluate the effectiveness of the program and
inform shareholders of its findings by Jan. 1, 1999.
Management notes that a warning indicating the dangers of smoking by pregnant
women already appears on both cigarette packages and advertisements in
rotation with three other government-prescribed warnings. Management contends
that the company is in full compliance with federal regulations with respect
to disclosure of health risks associated with smoking. Moreover, the company
believes that the proliferation of information by health organizations and
government agencies has sufficiently conveyed the potential risks of smoking
during pregnancy.
While we acknowledge the importance of the social issue raised by the
proponent, we cannot assess the economic impact of the creation of the
proposed program to discourage smoking during pregnancy. We believe that the
issue raised by the proponent is one of public policy and should be raised in
a public forum. Moreover, we note that RJR meets all current health-warning
requirements, and we are reluctant to recommend support for a proposal that
requires RJR to allocate its resources to a program that is not required of
other cigarette manufacturers.
We recommend a vote AGAINST Item 5.
Item 6: Prepare Tobacco-Related Report
Item 6 is a shareholder proposal requesting that the company develop a
nicotine rating system, identify levels at which tobacco is no longer
addictive, and market such products as a panacea to tobacco addiction. The
proponent argues that technology to rate nicotine levels and to reduce
nicotine content in tobacco products is already available and should be used
to help smokers quit.
In its argument against the proposed rating system, RJR states that the
company already lists the tar and nicotine yield of each cigarette brand on
its advertisements. The company uses a standardized test developed by the
Federal Trade Commission. With respect to the proponent's assertion that a
nonaddictive cigarette can be produced, RJR contends that no empirical
evidence exists proving that specified levels of nicotine causes addiction.
In addition, Philip Morris briefly manufactured a denicotinized cigarette,
with nicotine yields higher than the cigarette proposed by the sponsor,
that was deemed unacceptable by consumers. Numerous smoking cessation
products regulated by the Federal Drug Administration as drugs or medical
devices are currently available to consumers. RJR does not purport to be
in this line of business, nor does it want to commence such operations.
RJR has manufactured and marketed cigarettes for smoking pleasure and
enjoyment since 1913, and management believes that the company should
continue to operate toward this objective.
Because RJR complies with all regulations relating to the listing of tar and
nicotine yields of its cigarette brands, ISS believes that the development of
a rating system is unwarranted. Moreover, a rating system used solely by RJR
is of questionable value to consumers and may place the company at competitive
disadvantage to its peers. Lastly, ISS considers the proponent's request to
enter the smoking cessation business counterproductive to RJR's current
operations.
We recommend a vote AGAINST Item 6.
Item 7: Spin Off Tobacco-Related Business
Two shareholders have submitted a proposal to spin off the company's
nontobacco business by Jan. 1, 1997. As stated by the board in its response,
the proposal is essentially the same as the spin-off resolution proposed by
Brooke Group in a consent solicitation conducted earlier this year. In that
solicitation, a majority of shares outstanding were voted in favor of a
resolution calling for an immediate spin-off, which was sufficient to adopt
the resolution. In our Feb. 6 analysis of the consent solicitation, we stated
our arguments in favor of the proposed spin-off and recommended a vote for the
resolution. Our recommendation at this time remains the same. We believe
that a vote for this proposal reinforces the message to the board that
shareholders support a spin-off of Nabisco Holdings at the earliest date
possible. Please see our Feb. 6 analysis for our arguments in favor of the
spinoff resolution.
We recommend a vote FOR Item 7.
Item 8: Restrict Executive Compensation Plan Awards
This shareholder proposal, submitted by Matthew Trachtenberg, requests that
the company cease payouts of bonuses, stock options, performance accelerated
awards or options, or deferred compensation to the top five executive officers
until the stock price reaches $50 per share. The proponent believes that the
company's poor performance, relative to itself and its peers, should not be
rewarded with compensation above the annual base salary.
The Compensation Committee bases executive compensation on two primary
components. First, compensation packages must enable the company to attract
and retain the most qualified individuals. Second, a significant portion of
executive compensation must be linked to quantifiable measures of company
performance. Management does not believe that the simplistic formula provided
by the sponsor would meet either of these criteria. Moreover, compensation
should be linked to the individual responsibilities of each executive. In the
report on executive compensation, the Compensation Committee notes that Mr.
Goldstone, RJR's CEO, has been granted 200,000 stock performance units that
vest contingent upon his continued employment through December 1998 and upon
the achievement of a 30-day average stock price of $43.75 per share for any
period ending on or prior to Dec. 31, 1998. Note that RJR's stock price
traded in the mid $20s at the time of Mr. Goldstone's appointment as CEO.
In our opinion, the manner in which the company currently determines executive
compensation is much more effective and comprehensive than simply correlating
executive pay to stock price. Furthermore, as demonstrated by the significant
loss of market value following the Liggett settlement, in some instances
changes in stock price occur for reasons that are not under the company's
control. In addition, ISS believes that placing arbitrary goals based on
stock price may deprive shareholders of the benefits of long-term strategies
that are not always reflected in a company's market value.
We recommend a vote AGAINST Item 8.
Item 9: Require Director Fees to be Paid in Stock
Charles Miller has submitted this shareholder proposal requesting that
nonemployee directors receive at least 50 percent of their total compensation
in the form of stock that may not be sold within three years of grant. The
proponent argues that stock ownership by outside directors provides the
greatest motivation for improving company performance.
Management claims that the issue of nonemployee director stock ownership is
moot because it considers directors' stock ownership of more than 40,000
shares in aggregate sufficient to align their interests with those of
shareholders. In addition, management notes that stock options are an
important part of director compensation. Each nonemployee director currently
receives an option to purchase 6,000 shares upon initial election to the board
and an annual formula grant. Under the formula grant in 1995, each
nonemployee director received an option for 1,400 shares. Directors also
receive an annual retainer fee of $60,000 in cash.
ISS does not consider nonemployee directors' current stock ownership as
significant as management asserts. Nonemployee directors and executive
officers as a group account for only 0.18 percent of the company's outstanding
common shares. On the other hand, given the size of RJR and the number of
shares outstanding, it would be difficult for the board to own a significant
percentage of total shares without each individual board member investing an
extraordinary amount of his or her personal wealth.
The present annual option grant represents approximately 45 percent of the
total compensation to nonemployee directors which essentially meets the
requirements of this proposal. While ISS recognizes that increases in stock
ownership by nonemployee directors has proven to be an effective method to
improve company performance, we believe that RJR's current compensation
package for nonemployee directors adequately reflects this growing trend.
We recommend a vote AGAINST Item 9.
Item 10: Eliminate Outside Directors' Retirement Benefits
This shareholder proposal, submitted by William Steiner, requests that the
company cease the grant of pension benefits to new nonemployee directors and
that current nonemployee directors voluntarily relinquish their pension plans.
The proponent believes that pension plans are inappropriate for nonemployee
directors given the kind of service they provide, which is more in line with
consulting. In addition, the sponsor argues that pension plans may compromise
nonemployee directors' objectivity.
Management, on the other hand, asserts that RJR's pension plan is necessary to
attract and retain the most qualified directors, particularly because
approximately 70 percent of its peers offer such benefits to their directors.
RJR's pension plan provides each nonemployee director with a monthly allowance
equal to a monthly director fee payable at the time service is terminated.
Service of the board for ten or more years entitles the director to 180
monthly payments. Directors who have served on the board for between five and
ten years will receive a number of monthly payments equal to 180 multiplied by
a fraction whose numerator is the number of years of service and whose
denominator is ten. Directors with five or less years of service will receive
48 monthly payments.
While it may be true that many companies have adopted retirement programs
for nonemployee directors, ISS does not consider this a beneficial trend.
Many corporations are currently revising how directors are paid for their
services, seeking to avoid pay structures that compensate directors as
though they were employees and create conflicts of interest by their high
value. Companies eliminating pension plans for nonemployee directors
include Anheuser-Bush Cos., Bell Atlantic Corp., Digital Equipment Corp.
and Rockwell International Corp. Note that all of RJR's outside directors
hold or have held prominent positions in their respective companies or
organizations and are undoubtedly covered by substantial compensation and
retirement plans at their primary place of business. Thus, we question the
marginal benefit of RJR's pension plans both to the directors and to the
company. ISS believes that such compensation is excessive and would prefer
to see the plan withdrawn.
We recommend a vote FOR Item 10.
Item 11: Eliminate or Restrict Severance Agreements (Change-in-Control)
Kenneth Steiner proposes that the company make no further arrangements that
would provide any director or officer with compensation contingent upon a
change in control unless approved by shareholders. Under the employment
agreements of certain RJR executive officers, employees would receive
compensation and benefits for three years following termination from
employment upon a change in control.
Golden parachutes do not necessarily conflict with shareholder interests. On
the contrary, parachutes can actually serve to maximize share value by
reducing key officers' concerns about losing their job or suffering financial
hardship after a change in control. Without a severance package for top
executives, it would be harder to attract and retain competent management,
especially in an environment of hostile takeovers and proxy contests for
control.
Typically, an executive covered by a golden parachute is at or near the head
of his company and the height of his career, is often within ten years of
retirement, and has invested several years in the company, shouldering
substantial responsibility for its direction. This is what shareholders
demand and deserve from their agents. Were that executive's position to be
threatened by a change in control, his chances of obtaining a position with
similar challenges, financial support and responsibilities soon after
termination are limited.
Not all parachutes are necessary, however. Executives' parachutes should
strictly preclude them from receiving any special compensation if they are
involved in a management buyout, which carries no risk of job loss. Nor
should parachute payments be excessive (more than three times salary according
to the current IRS standard). We also object to parachute payments for
nonemployee directors, who do not depend on director fees for their livelihood
and therefore have only nominal financial risk in a change of control.
While RJR's golden parachutes are not excessive by industry standards, ISS
believes that shareholders should be permitted to vote upon severance
packages.
We recommend a vote FOR Item 11.
USA TODAY, THURSDAY, MARCH 14, 1996
STREET TALK
LeBow tactic vs. RJR may backfire
By: Daniel Kadlec
NEW YORK - Now we know how far Bennett LeBow will go to get his way
with RJR Nabisco as far as he has to.
LeBow is CEO of Brooke Group, which has controlling interest in the
nation's No. 5 tobacco company, Liggett Group. He has teamed with investor
Carl Icahn to buy a 5.8 % stake in RJR. The two are trying to force RJR to
immediately spin off the Nabisco food division, claiming it will unlock hidden
value. RJR has resisted, saying the tobacco litigation climate is not right
for spinoff.
Wednesday, LeBow moved boldly to disarm RJR's main argument against a
spinoff. The argument, essentially, is that tobacco plaintiffs would sue to
prevent the spinoff, alleging it would put most of the company's assets out of
reach should the plaintiffs prevail in court. Nabisco accounts for about
two-thirds of the company's market value. But LeBow, in a groundbreaking
settlement, announced he has won assurances that plaintiffs will not try to
stop the spinoff.
All LeBow had to do was break ranks with the tobacco industry by
agreeing to the first-ever payment to a tobacco litigant (Cover Story, ID;
1A). His deal sent tobacco stocks tumbling (Industry Spotlight, right) -
except for Brooke, which rose 1 1/2 to $9 7/8. The deal is seen as a possible
chink in the armor of tobacco companies, one that may pave the way for future
costly settlements.
For that reason, LeBow's deal angered a number of people. In a
statement, RJR called it "irresponsible and reckless." Institutions that own
tobacco stocks were misled. Whatever the deal may be worth to Brooke or RJR,
it is more than offset by the negative impact on industry king Philip Morris.
Big investors who own any tobacco stocks tend to own them all. They can't be
happy that LeBow's deal poses problems for other tobacco stocks.
Ironically, to get his way with RJR, LeBow will need the support of
institutions. They collectively own 69 % of RJR and took the biggest hit in
Philip Morris' stock Wednesday, when the company lost $3.6 billion of market
value.
LeBow recently won 51 % of the vote in a straw poil to decide if RJR
shareholders want an immediate spinoff of the food division. He has proposed a
slate of directors up for election at the company's April 17 annual meeting.
Many suspect that LeBow really wants RJR to buy Liggett. His settlement terms
would extend to RJR should the companies merge. But a merger is not necessary.
Even without it, plaintiffs agree not to oppose the spinoff of Nabisco foods -
so long as LeBow wins the board seats he is after.
THE WALL STREET JOURNAL WEDNESDAY, MARCH 13, 1996
===========================================================================
BREAKING AWAY
Liggett Group Offers First-Ever Settlement Of Cigarette Lawsuits
-----------------------
States' Health-Cost Claims and Smoker Class Action
Are Included in the Deal
-----------------------
LeBow Gambit in RJR Fight
By Wall Street Journal Staff Reporters
Alix M. Freedman, Suein L. Hwang, Steve Lipin
and Milo Geyelin in New York
-----------------------
Despite four decades of controversy and a deluge of litigation, the
tobacco industry has never paid a penny to settle a smoking related lawsuit.
That is apparently about to change.
In a stunning break with the rest of the $45 billion tobacco
industry, Liggett Group, the smallest of the nation's five major tobacco
companies, has offered to settle the biggest and most visible liability cases
now hanging over them all. The proposed settlement - which was nearing
completion late yesterday - is likely to infuriate the other cigarette makers,
which have built their litigation and regulatory strategy on a united front
against all attacks.
If the deal goes through, Liggett's audacious gambit would remove it
from four of the five suits brought by states seeking to compel tobacco
companies to pay for the states costs of smoking related illnesses. It also
would remove Liggett as a defendant in the Castano case, the giant
class-action lawsuit in which a consortium of about 60 law firms is suing on
behalf of every U.S. smoker who claims to be addicted. And it would
effectively bar Castano class members - and hence all current U.S. smokers -
from future suits against Liggett relating to their alleged addictions.
In addition, in a striking concession insisted upon by the attorneys
general, Liggett would phase in voluntary compliance with certain measures
proposed by the Food and Drug Administration in an effort to curtail underage
smoking. Though Liggett isn't conceding the FDA's right to regulate tobacco,
it is agreeing to adopt some of the FDA's proposed limits on advertising and
marketing to keep it from attracting minors. In contracts, the rest of the
industry is waging a fierce battle against the FDA's proposed rules.
Although glitches are still possible negotiations have proceeded very
far and as of yesterday, Liggett and the plaintiffs' lawyers appeared very
close to final agreement on the Castano deal. Meanwhile, Liggett and the
states are close to signing an agreement in principle in their pact.
The proposed settlements - in which Liggett neither admits nor denies
liability for tobacco-related illnesses - are complex, but their main elements
are these:
Liggett would pay the four states - Florida, Massachusetts,
Mississippi and West Virginia - $4 million over 10 years, Depending on how
many other states participated. Liggett would also part with between 2% and
7% of its pretax income over 24 years.
To settle the Castano class action, Liggett would pay another 5% of
its pretax income for the next 25 years. The money wouldn't go to individual
plaintiffs but to programs to help people quit smoking. Court approval is
required.
If Liggett merged with RJR Nabisco Holdings Corp.'s Reynolds Tobacco
unit or another U.S. tobacco company, that company could settle its legal
liability under the same terms. (In a key exception, the settlement wouldn't
apply to a combination between Liggett and industry leader Philip Morris Cos.)
"For the past ten years, on this litigation front, Liggett has been
pretty much following everybody. If Philip Morris said jump, we jumped,"
Bennett LeBow, the majority shareholder in Liggett parent Brooke Group Ltd.,
said in an interview in New York yesterday. "Why should we keep spending $10
million a year on legal fees (for Liggett) if there is a way to settle it?"
For smokers, the settlement would represent a historic watershed, for
both its symbolic and its financial value. For the first time, a cigarette
company would be taking financial - though not legal - responsibility for
tobacco-related diseases that independent scientists may claim the lives of
425,000 smokers in the U.S. each year. States would have new funds, however
limited, to begin to help defray Medicaid costs allegedly linked to illnesses
from smoking. And quit-smoking programs would get a lift from the financing
funneling in from the Castano settlement.
On its face, the budding alliance between Mr. LeBow and a team of
attorneys led by Mississippi Attorney General Mike Moore and plaintiffs'
lawyer Richard Scruggs seems an unlikely one. But Liggett's elaborate
settlement appears to offer big benefits - at only modest risk - to the key
players on both sides.
Through a proxy fight, Mr. LeBow is seeking to gain control of RJR
and split it into two parts - its food and tobacco units. He says such a
split would bolster the stock price by separating the Nabisco food unit from
the drag of tobacco-tainted stock. In this effort, he is allied with
financier Carl Icahn.
For Mr. LeBow, the proposed settlement of tobacco litigation is part
of his strategy for gaining control of the nation's second-largest cigarette
maker. Under the deal, if Mr. LeBow won control of RJR, the tobacco
plaintiffs would be bound not to fight any RJR effort to spin off the food
unit. The company has feared that plaintiffs would try to block the spinoff.
Further, Mr. LeBow hopes to make an RJR merger with struggling
Liggett more attractive by offering the terms of his settlement - which he
considers not very onerous - to the merged company.
Even if Mr. LeBow is rebuffed by RJR's shareholders, Liggett itself
is giving up relatively little by agreeing to the proposed deal: With
about a 2.3% U.S. market share, the company's pretax earnings for 1995 are
estimated to have been $11 million. Thus, even the maximum 12% annual
payment under the deal would cost Liggett well under $2 million a year at
current earning levels.
In addition, Liggett has written itself an escape clause: If Philip
Morris or another tobacco firm defeated the same plaintiffs when the cases got
to court, Liggett could walk away from its deal. It also could drop out of
the Castano deal if too many smokers decided not to participate in the
settlement. And it could halt the states' settlement if enough additional
states filed suits of their own and refused to join the deal.
"We've brought an insurance policy against a potential [liability]
catastrophe for Liggett," Mr. LeBow says, "and we got for the shareholders of
RJR a risk-free spinoff. We don't see the downside."
Plaintiffs' lawyers see the planned Liggett settlement as a foot in a
door that has been closed to them until now. Once tobacco-company
shareholders and potential jurors in cigarette lawsuits see that one company
has settled, pressure will mount for other companies to join in, the lawyers
claim.
"This settlement, if we are able to conclude it, will result in the
most remarkable transformation in public health this century," Mr. Scruggs
says, adding that if shareholders of other companies "use this as a way out
short of total war, then they will hopefully press management to adopt similar
provisions."
In particular, pressure could mount on major cigarette makers if Wall
Street were to react favorably to Mr. LeBow's idea. Analysts believe that
cigarette shares trade at a big discount owing to jitters over tobacco
litigation and regulation.
Mr. LeBow brushes off suggestions that his plan would sell the
industry down the river. "Are Philip Morris and RJR and B.A.T. and Lorillard
going to step up to the plate and guarantee us that we'll never lose?" he
asks. "Let them step up and give us an absolute guarantee that we're never
going to lose any of this litigation and we wouldn't have needed any
settlement." In the meantime, Mr. LeBow says, this is the best way for him to
look after Brooke shareholders.
The proposed Liggett deal was the brainchild of Marc Kasowitz, a New
York lawyer who does work for Mr. LeBow. He first encountered Don Barrett,
one of the lawyers now representing Mississippi in its tobacco litigation,
while the two were on opposing sides in a class action involving a certain
plastic used in plumbing. Late last year, Mr. Kasowitz, with Mr. LeBow's
blessing, put out a feeler to Mr. Barrett, and informal talks between the two
continued through January. Thereafter, the two sides held a series of secret
meetings in Houston, Miami and New York.
But as late as a week ago, Mr. Scruggs acknowledges, the sides were
"very far apart." Indeed, last Saturday, the talks almost came unglued over a
demand by the attorneys general that Liggett embrace the FDA's blueprint
regarding marketing to minors.
"The rule the FDA has proposed is so vital that we told them we're
not interested in talking money unless they were willing to talk about that,"
Mr. Scruggs recalls.
Ultimately, Liggett embraced a few pieces of the FDA plan, including
a ban on providing free samples where minors are present and the phasing out
of certain kinds of ads in magazines that have a large youth readership.
Though dramatic, the planned Liggett settlement raises a host of
questions that even the principals on both sides confess they can't fully
answer, at least for now.
-- Would Liggett's settlement weaken the defenses of the rest of
industry, which remains on the hook in the Castano and state lawsuits?
-- Would RJR shareholders react negatively to a Liggett merger
because the settlement's cost -- about $120 million a year over 25 years
for RJR's domestic tobacco business, by Liggett's reckoning -- might seem
too high?
-- Did plaintiffs' attorneys get enough for their clients? Florida
Attorney General Bob Butterworth, while agreeing in principle to the
settlement, says, "It doesn't recoup enough money for the states' needs."
Future companies that settle may end up paying more, he adds.
-- Would this agreement do anything to put a lid on future tobacco
litigation? Though members of the Castano class couldn't sue again as a
class, many future lawsuits by individual smokers or their families wouldn't
be barred. And suits by people exposed to other people's smoking are
unaffected. A closely watched secondhand-smoke case, brought by the family of
a barber who dies of lung cancer, is set to go to trial in late spring in
Laurel, Miss.
The future of tobacco litigation is especially important to all
parties. In t he past, most suits against cigarette makers alleged personal
injury or death caused by smoking. But juries repeatedly rejected such
claims, deeming smokers responsible for their own decisions to take up the
practice. In the only product-liability verdict to go against the industry,
the Cippolone case in New Jersey, the jury award of $400,000 was tossed out on
appeal in 1992.
Now, for the first time, tobacco companies are facing well-organized
and well-funded legal challenges in numerous states. Topping the list is the
Castano case, the federal class action pending in New Orleans. In keeping
with the new wave of lawsuits, the Castano suite focuses not on individual
injury by on possible misrepresentations by tobacco companies about the
alleged addictiveness of nicotine.
By settling its piece of the Castano case, Liggett would be limiting
its exposure in what is potentially the most ominous litigation facing the
tobacco industry. Mr. Kasowitz, the Liggett lawyer, says: "Look at it this
way. Liggett through the settlement of the Castano class action, in effect,
is taking addiction [allegations] out of tobacco litigation."
Last night, the plaintiffs' steering committee representing 60 law
firms was expected to meet in Mr. Kasowitzs' New York office to sign a
definitive agreement to settle this case. If this was accomplished, the
parties would still have to get approval from U.S. District Judge Helen Ginger
Berrigan. Liggett would then spend up to $1 million to notify the class
members and give them the opportunity to opt out. Those who chose not to
participate in the settlement would still have the right to sue individually
on the theory that tobacco companies lied about addictiveness.
Liggett might fare even better in settling its part of four of the
five current state suits. (The fifth, Minnesota, late yesterday was on the
fence about whether to participate.) No matter how many states ended up
joining, Liggett's total payout would be capped at 7% of pretax profits.
Under the deal, states that have currently agreed to settle would split 2% of
Liggett's pretax profits; all others that joined later would have to share
from a pool of 5%, split according the number of Medicaid patients in a given
state.
Even so, the agreement can't guarantee the end of all tobacco
litigation -- and it doesn't pretend to. when one legal theory has been
exhausted by plaintiffs' lawyers, they have typically found a new one, and
that pattern is not expected to change. Nonetheless, Liggett lawyers are
optimistic about the future. Michael Hirschfeld, another Liggett lawyer, says
that much of the plaintiffs' bar's creativity has come in response to the
unyielding position of the tobacco industry. "I would hope that the dynamic
shifts, at least for Liggett, from nonstop confrontation . . . to responsible
coexistence," he says. "If you effect that kind of sea change, it's not clear
people will have the same incentive to pursue Liggett in the manner as they
had in the past."
This isn't the first time that scrappy Liggett has jolted the tobacco
industry's copy rapport. In the mid 1980s, the company shocked the industry,
which always marched in lockstep on cigarette pricing, by marketing cut-rate
cigarettes. In 1989, as intense cigarette price wars raged, Liggett sued
Brown & Williamson Tobacco Corp., alleging predatory pricing. Liggett's
victory was later reversed on appeal.
For his part, Mr. LeBow, who acquired a majority interest in Liggett
in 1986 through a leveraged buyout, also has a reputation for controversy. He
has faced shareholder accusations of self-dealing, and some of the companies
he has controlled have filed for bankruptcy-law protection. Analysts say
lingering doubt about Mr. LeBow and Mr. Icahn, the former raider who is his
partner in the Nabisco battle, explains why investors appear wary of replacing
the board of RJR with Brooke's slate in the coming proxy fight.
But with his proposed settlement, Mr. LeBow is gambling that he will
sharply increase his odds of success in the proxy battle. For months, even as
RJR has insisted that legal concerns precluded any immediate spinoff of the
food unit, Mr. LeBow has taken the opposite viewpoint with equal vigor. Late
last month, shareholders in a nonbinding vote signaled their unhappiness with
management by handing Mr. LeBow a startling 51% show of support for an
immediate spinoff. Armed with a settlement, Mr. LeBow is hoping to convert
that protest vote into an endorsement of his slate next month.
The financier has devised a mechanism to give RJR investors an
ostensibly safe shot at the spinoff many apparently crave. If RJR's
shareholders elect Mr. LeBow's board slate, the plaintiffs involved in the
settlement have pledged not to run to court to block an immediate food spinoff.
This scheme is sure to trigger a fresh round of accusations from RJR,
which has repeatedly accused Mr. LeBow of fanning hopes of a spinoff so he can
seize control of RJR. It would enable him, in effect, to unload Liggett by
merging it into RJR's tobacco operations. But Mr. LeBow denies he is trying to
foist Liggett on RJR shareholders, explaining that if his slate of directors
wins in April, he will recuse himself from deliberations about a Liggett
combination. And shareholders of RJR would have to approve any Liggett
purchase through a vote.
Even so, Mr. LeBow readily acknowledges that he now has built in a
potentially powerful incentive for a prospective buyer. "Does it make Liggett
valuable? Yes!" Mr. LeBow says. And he makes it plain that, while he is
giving RJR shareholders "a first option," he will look for other partners with
whom to merge. "If RJR shareholders don't like it, maybe Lorillard
shareholders or maybe B.A.T. or UST shareholders will like it," he said.
Lorillard is a unite of Loews Corp.
It is difficult to predict what effect Mr. LeBow's bombshell will
have on tobacco stocks as a whole. On the other hand, the prospect of a rift
in the tight-knit industry over legal strategy could send stock tumbling. On
the other hand, investors may espouse the contrary view: that the Liggett
settlement offers the prospect of some light at the end of the litigation
tunnel. RJR's shares could conceivably benefit from the possibility of a
spinoff with minimal legal risk.
Messrs. LeBow and Icahn are betting on it: On Monday, they disclosed
that they recently snapped up an additional three million shares of RJR's
stock, raising their stake to 5.8% from 4.8%.
-- Proposed Terms of Liggett Deal
-- Liggett Group agrees to settle the so-called Castano case, a
class-action suit against cigarette makers on behalf of smokers nationwide,
paying 5% of pretax income (to a maximum of $50 million a year) for 25 years.
Money goes toward smoking-cessation programs. Settlement is subject to
federal-court approval.
-- Liggett settles suits by attorneys general of Florida,
Massachusetts, Mississippi and West Virginia seeking payment for states'
smoking-related health-care costs. Settlement payment is $1 million per state
- -- as well as 2% to 7% of pretax income for 24 years, depending on whether
additional states join the settlement.
-- Liggett will phase in compliance with certain proposed FDA rules
regarding smoking by children and teens, including a prohibition on using
cartoon characters in ads and limits on marketing to minors.
-- The settlements apply in the event of a business combination
between Liggett or its parent Brooke Group and another cigarette maker, except
Philip Morris. The Castano class would get 5% of the pretax income of the
merged entity's domestic tobacco business (up to $50 million a year) for 25
years. The four states would share $100 million initially plus legal fees,
and additional states joining the settlement would get a total of another $25
million. The states also would share 2% to 7% of pretax income for 24 years,
depending on whether additional states join the settlement, but not less than
$20 million to $25 million a year. The states would also share $3 million to
fund research on children's smoking issues.
-- The attorneys general and the Castano class won't seek to enjoin a
spinoff of Nabisco if Brooke's nominees are elected to the RJR Nabisco board.
-- Liggett has the right to terminate the settlements if the other
tobacco makers in the suits end up winning the litigation on the merits.
Liggett can terminate the Castano settlement if the smokers' certification as
a class is reversed on appeal or if too many class members choose not to
participate in the settlement. It can terminate the attorneys-general
settlement if not enough other sates join.
VOTE THE WHITE CARD
CONFIDENTIAL
RJR NABISCO HOLDINGS CORP.
Annual Meeting of Stockholders
INSTRUCTION CARD
The undersigned participant in the RJR Nabisco Capital Investment Plan (CIP)
hereby instructs the Trustee to vote as indicated below at the 1996 Annual
Meeting of Stockholders of RJR Nabisco Holdings Corp. and at any adjournments
or postponements thereof all shares of stock allocated to the undersigned's
account.
For unmarked proposals, The Trustee will vote FOR proposals 1 and 2 and
AGAINST proposals 3 through 11.
X Please mark your votes as in this example.
Please MARK this Instruction Card, fill in the date and sign on the
reverse side and return promptly in the accompanying envelope. No
postage is necessary if mailed in the United States. The Card must be
received by April 12, 1996.
Election of Directors, Nominees:
J. T. Chain, Jr.; J. L. Chambers; J. L. Clendenin; S. F. Goldstone; H. J.
Greeniaus; R. J. Groves; C. M. Harper; J. W. Johnston; J. G. Medlin, Jr.; and
R. L. Ridgway.
1. Election of Directors
For, except withhold from the following nominee(s):
X FOR WITHHELD
2. Ratify the appointment of Deloitte & Touche LLP as independent
Auditors
X FOR AGAINST ABSTAIN
(Continued on the reverse side)
3.Stockholder proposal on equal
employment opportunity reporting
FOR X AGAINST ABSTAIN
4. Stockholder proposal on underage smoking
FOR X AGAINST ABSTAIN
5. Stockholder proposal on infants and
tobacco
FOR X AGAINST ABSTAIN
6. Stockholder proposal on rating and
curbing nicoine
FOR X AGAINST ABSTAIN
CIP MATCH 680.0000SHRS
7. Stockholder proposal to separate non-tobacco business from tobacco
businesses by January, 1, 1997
FOR X AGAINST ABSTAIN
8. Stockholder proposal on executive
officer compensation
FOR X AGAINST ABSTAIN
9. Stockholder proposal to use stock to
compensate directors
FOR X AGAINST ABSTAIN
10. Stockholder proposal on non-employee
director pensions
FOR X AGAINST ABSTAIN
11.Stockholder proposal on golden parachutes
FOR X AGAINST ABSTAIN
Please sign exactly as name
572090215 Date 3/20/98
------------------------------
Signature /s/JOHN DOE
-----------------------------------
YOZZ04000SY7771150099072531B
John Doe
3/20/98
401 N. Main Street
Winston-Salem,NC 27102
WHITE CARD
Why Vote to Support RJR Management?
o The RJR Nabisco board has studied options for spinning off the foods and
tobacco companies for a number of years now. They, too, think the
companies should be split--WHEN THE TIME IS RIGHT. Now is not that time.
o The RJRN Board has overseen the recovery of RJR's balance sheet from a
debt-driven to an investment-quality position. They know this company's
strengths and assets better than outside raiders. You will recall that
once the announcement came out about LeBow and Icahn's attempts to take
over our company, the firms that rate bonds and other investments
immediately put RJR Nabisco on a "watch" status for possible downgrading
of our bonds to "junk" status. That sends a message regarding what they
think will happen to RJR's bonds if an unwise split of the companies is
forced through by LeBow and Icahn.
o The Board has just approved a 23 percent increase in your dividend. They
also gave the company permission to buy back its own stock. This shows
faith in the stock as a good investment, and reduces "dilution" of our
stock in the marketplace. Other investment-grade companies conduct stock
repurchase programs all the time, and often this increases the value of
the shares outstanding.
o Our management is committed to MANAGING this company for long-term growth.
o LeBow has already made agreements with plaintiffs' lawyers to settle
claims against Liggett, and has said he would bind RJR under those same
agreements if he gains control of our company. The estimated cost to RJR
of living up to these agreements could be $2 billion or more over the
next 25 years. LeBow has msaid he would "kill" Joe Camel, and prohibit
RJR from using premium items like caps or T-shirts, or advertising on
billboards. The other tobacco companies would not have to work under
these constraints, according to the agreement. How can we effectively
compete if there is one set of rules for RJR and another for Philip
Morris, Lorillard and Brown and Williamson?
o Ronald Fulford, the former Imperial Tobacco executive LeBow has hired to
run the tobacco company if he gets control, closed Imperial factories,
and reduced staffing from over 11,000 to 2,900. While RJR has had
layoffs too, they have been driven by our business, not by a "slash and
burn" mentality.
o Our management has risen to this company's defense when the chips were
down. Jim Johnston and Andy Schindler appeared before a hostile
Congress, and walked with us in Washington to fight the FET. They want
ALL shareholders to profit from their investment in this company, not
just TWO shareholders.
VOTE THE WHITE CARD.
IF YOU DON'T VOTE, YOUR SHARES WILL NOT AUTOMATICALLY BE VOTED THE
WAY MANAGEMENT WANTS--YOU MUST SEND IN THE WHITE CARD OR YOU WILL
BE HELPING LEBOW AND ICAHN!
WHO IS BENNETT LEBOW?
FACTS
* A Fortune magazine survey in 1993 named Brooke Group the least-admired
company among 404 companies included in the survey. (The Dallas Morning News,
June 8, 1995)
American Brands Chairman William J. Alley told The Wall Street Journal, "We
wouldn't take Liggett if they gave it to us." (Business-North Carolina,
February, 1989)
According to Brooke's own performance graph the company's shares have
performed worse than the S&P 500, S&P Tobacco and S&P Midcap 400 for the
period 1988 to 1992. (Triangle Business Journal, December 6, 1993)
South Floridians may know Bennett S. LeBow best for his ill-fated attempt to
install a 310-foot statue of Christopher Columbus at the southern tip of Miami
Beach in 1992. (South Florida Business Journal, October 29, 1993)
"Despite his reputation as a cold-hearted numbers man, people who have worked
with LeBow say he is actually quite amiable. But he can erupt. When he was
taking over Western Union a year ago, several big shareholders thought he was
getting too sweet a deal and tried to halt it. Red-faced shouting matches
ensued. and the deal went through on his terms.' He definitely doesn't like
to be beaten,' says a shareholder, 'Especially by nobodies like us.' (Business
Week, December 12, 1988)
"If you really want to anger him, suggest that he is simply a front man for
Drexel. He is partners with the firm in three investments, including his
Brooke Partners, which is helping finance the Prime deal. Since he owns 85% of
Brooke, while Drexel has 15%, he argues that he alone has control. Says LeBow:
"There is no way they can tell me what to do.'" (Business Week, December 12,
1988)
Lebow doesn't smoke: "It was strictly business" he says of his purchase of
Liggett. (Forbes, October 24, 1988)
HIS LAVISH LIFESTYLE IS FINANCED BY LOANS AND CREDIT LINES FROM BROOKE GROUP
Mr. LeBow is not a favorite of public shareholders, who have accused him of
emptying companies he controls of their cash and assets. Brooke has poured
millions of dollars into the LeBow family coffers through its purchase of
assets controlled by Mr. LeBow. And it has financed his high-flying life style
with loans and unsecured credit lines amounting to millions of dollars (The
New York Times, August 30, 1995)
Lebow chartered a plane to fly 150 guests to a $3 million bash in London in
spring 1989 for launching of his yacht Stefaren, named for his daughters
Stefanie and Karen and modeled after Queen Victoria's private yacht. Guests
stayed at Claridge's hotel and were met at the port by a marching band in full
regalia. Souvenirs included gold coins with a likeness of Mr. LeBow donning a
Lord Nelson hat. (The Dallas Morning News, June 8, 1995)
"LeBow ... has been criticized for his lavish lifestyle that has included a
yacht, jets, several pricey homes and elaborate entertaining. LeBow has
started "tightening his belt," according to David Pearson, president of
Miami-based Pearson Associates, Brooke's public relations firm. LeBow sold his
yacht, two jets and two of his homes last year. He still owns homes here and
Saddle River, N.J. and continues to jet around the world on company business."
(South Florida Business Journal, October 29, 1993)
In 1991, Brooke loaned LeBow more than $5 million and bought $1.4 million of
LeBow's preferred stock. LeBow repaid some of the loans by assigning two
notes, which later failed, to Brooke. The company also bought a plane from
LeBow for $7.3 million, paid LeBow $2 million for an option to buy a second
plane from a company LeBow controlled and rented planes from two companies
LeBow owned for $441,000 in 1991 and $594,000 in 1992. (South Florida Business
Journal, October 29, 1993)
Brooke made additional loans to LeBow in 1992 totaling $6.5 million, including
a $1.75 million line of credit in May; $1.7 million in unsecured loans between
May and August, and an unsecured $1.4 million line of credit in September.
LeBow has repaid $2.8 million. . (South Florida Business Journal, October 29,
1993)
In February 1992, Brooke paid LeBow $9.6 million for 80 percent of Brooke
Management, a management company LeBow owned. Brooke Management charged
its only clients, Brooke and its affiliated companies, $10.2 million in
1991 and $10.4 million in 1992 for "advisory, consulting and other
services." In August, Brooke bought the remaining 20 percent for $2.4
million. Brooke also bought $3 million of LeBow's common stock, but
suspended its 14 cents per share cash dividend payments on common shares.
LeBow got another $1.475 million credit line in January. (South Florida
Business Journal, October 29, 1993)
In February [1993], shareholders sued the Brooke Group, LeBow and other
directors, alleging transactions between the company and management as unfair
to the company. In particular, the suit objected to the loans to LeBow and
claimed the company overpaid for Brooke Management. LeBow says he is entitled
to the loans because he waived $120 million in dividends by not participating
in the spin-off. He said only $5 million of the $17 million in outstanding
loans belongs to public shareholders since they only own 30 percent of the
company. As for the lawsuit, LeBow says he will "sit down with the
shareholders after the first of the year and try to work something out."
(South Florida Business Journal, October 29, 1993)
Many analysts and investors have criticized LeBow for the way he has run
Brooke, claiming he tapped the company's coffers to support his lavish
lifestyle and other businesses when the company was reporting huge losses.
Brooke owns the Liggett cigarette company, which provides most of the revenue
and cash, New Valley Corp. and Russian real estate and tobacco operations.
(South Florida Business Journal, February 10, 1995)
WHILE LEBOW CRITICIZES RJR BOARD MEMBERS' PENSIONS, THEY DON'T BEGIN TO
COMPARE WITH HIS SALARY AND PENSION DEALS
The company ... pays LeBow a generous salary. LeBow's employment contract
guarantees him $950,000 per year, plus a minimum bonus of $475,000, plus a 10
percent bonus. (South Florida Business Journal, October 29, 1993)
Bennett LeBow, the savvy LBO financier who controls several companies that
have track records of becoming financially strapped, took another hefty check
from Brooke Group coffers last year. According to proxy statements filed this
week, LeBow made $1.4 million in salary and bonuses despite Brooke Group's
less-than-stellar financial results this year. (Triangle Business Journal,
December 2, 1994)
According to the latest filings. LeBow has strengthened his golden parachute
by locking in various clauses entitling him to make millions of dollars long
after his departure from Brooke. (Triangle Business Journal, December 2, 1994)
In 1994, LeBow repaid more than $16 million in personal loans from Brooke and
its subsidiaries, according to the company's 1994 proxy statement. And in
connection with the settlement of a shareholder suit. LeBow agreed to limit
his compensation and obtain board approval for certain transactions. (South
Florida Business Journal, February 10, 1995)
NOT THE TURNAROUND ARTIST HE CLAIMS TO BE...
"[In 1995]. . . the first time since 1992, Brooke Group Ltd. shareholders are
getting regular cash dividends, and the Miami-based holding company is
spinning off its 65 percent stake in MAI Systems Corp., its computer
subsidiary. The biggest beneficiary may be Brooke chairman Benett S. LeBow,
who owns about 60 percent of Brooke's stock and will get more than $800,000 in
cash dividends." (South Florida Business Journal, February 10, 1995)
[Brooke] had $400 million in long-term debt and a $485.4 million deficit in
shareholders' equity at Sept. 30. Operating cash flow for the nine months was
a negative $36 million and working capital was a negative $77.5 million.
(South Florida Business Journal, February 10, 1995)
"Brooke Group is falling into some cash and will probably pay a dividend as
long as its primary shareholder [Lebow] needs cash," said Tony Russ, an
analyst at Shelby Cullom Davis & Co. in New York who describes himself as a
chagrined shareholder. "Let the buyer beware." (South Florida Business
Journal, February 10, 1995)
"I am literally sick and tired of people trying to find fault in what I do,"
LeBow said. "The truth is, I always tried to acquire troubled companies and
turn them around." The jury is still out on whether LeBow has been
successful, especially when it's considered that three of the four companies
Brooke controls are incurring losses. Two of them are currently under
bankruptcy protection. And more than 300 have been laid off from his companies
in the past couple of years. (Triangle Business Journal, October 25, 1993)
LUCKLESS RAIDER Bennett LeBow's major forays:
PRIME COMPUTER In 1989, LeBow launched a hostile bid for the minicomputer
maker through his MAI Systems Corp./Basic Four. Prime found a white knight.
MAI filed and emerged from bankruptcy protection in 1993. (Business Week,
November 13, 1995)
In 1990, Mr. LeBow merged another company under his control, Brooke Partners
L.P., into Brooke Group, owner of the profitable Liggett Group Inc. tobacco
company. The merger saddled the Brooke Group with $300 million of junk-bond
debt, incurred in connection with Brooke Partners' acquisition activities (The
Dallas Morning News, June 8, 1995)
After years of operating losses and mounting deficits in shareholders' equity,
Brooke Group was close to bankruptcy in 1993, according to filings with the
Securities and Exchange Commission (SEC). In those SEC filings, Brooke
reported a net capital deficiency of $504 million, said it had "substantial
doubt about meeting its liquidity needs and its ability to continue as a going
concern." Critics say LeBow ran the company into the ground through a
combination of business decisions and exploiting company assets for his
personal benefit . LeBow says that his transactions with the company were
authorized and proper and that the company's financial condition is improving.
"At the end of the day, everyone will say, LeBow, you are a genius,"' he
said. "Or a bum. One of the two." (South Florida Business Journal, October 29,
1993)
INSIDER OPINIONS
Thomas A. Carter, an analyst with USAA growth fund, which owns 3.9 million RJR
shares. Carter says he wouldn't support Icahn and LeBow in their bid to force
a breakup or higher valuation. His argument: Cash is better invested in the
company's growing international business than in a higher dividend. And the
food company isn't at its strongest right now. "It might be better to wait,"
Carter says. (Business Week, November 13, 1995)
"Acquiring RJR would provide a safety net for his failing Liggett cigarette
business," said Roy D. Burry, a tobacco industry analyst at Oppenheimer &
Company. (The New York Times, August 30, 1995)
"Brooke has a history of shuffling assets around and taking money out of the
company...Usually LeBow. Richard Ressler (LeBow's No.2 executive), and their
buddies are the only winners," said a New York money manager, who declined to
be identified. South Florida Business Journal, October 29, 1993
Joel Tillinhast of Fidelity Investments, a Liggett shareholder: "[S]ince
[Lebow] took [Liggett] public, the stock has been a dog." (Wall Street
Journal, Aug. 16, 1989)
"The history isn't that Ben LeBow loses money,' says an investor who has
followed his career. 'Ben LeBow has always made money.' But his shareholders,
as a group, haven't." (Wall Street Journal, Aug. 16, 1989).
LETTER TO RETIRED RJR EMPLOYEES
March 20, 1996
Dear Retiree:
Over the next few weeks, the shareholders of RJR Nabisco will vote in a proxy
battle that will have a tremendous impact on the future of our company.
Bennett LeBow, head of the Brooke Group, with the backing of corporate raider
Carl Icahn, is asking our shareholders to replace our current board of
directors with his hand-picked group of directors so that he can take control
of our company. For the long-term best interests of our company, our
employees, retirees and our shareholders, this cannot be allowed to happen.
LeBow is not a tobacco man, even though the Brooke Group owns Liggett. His
irresponsible actions last week in agreeing to settle with plaintiffs'
attorneys in the Castano class-action suit and with some state attorneys
general in their suits to recover Medicaid payments, clearly illustrates that
fact. Not only did LeBow agree to a punitive settlement, he also agreed to
cooperate with the plaintiffs' attorneys in their cases against the other
members of the tobacco industry.
LeBow's track record with Liggett has been one of head-count reduction,
slashing benefits and competing only in the lowest price category of the
marketplace. Ronald Fulford, the person he has proposed to run our domestic
and international tobacco business, had a similar record as head of Imperial
Tobacco in the United Kingdom.
In short, a vote for LeBow and his slate of directors is not a vote to return
our tobacco company to the days when we were a stand-alone tobacco company
under local management. It is a vote to place Reynolds Tobacco on the same
path outlined in the Wall Street Journal clipping I have enclosed which
accurately outlines the fate of other firms managed by LeBow.
The management of RJR Nabisco is committed to enhancing the value of our
shareholders' investments through a spin-off of our foods business when the
time is right, through attractive stock dividends and by implementing the
plans we now have to make Reynolds Tobacco a stronger competitor in the
domestic marketplace while continuing to build our rapidly growing
international tobacco business. We have seen no evidence of such a prudent
approach from LeBow.
If you are a shareholder in our company, I hope you will weigh your decision
carefully and cast your proxy vote on behalf of our current board of
directors. If you are not currently a shareholder, but have friends and
associates who are, I hope you will urge them to reach the same decision.
Sincerely,
James W. Johnston
Chairman
Enclosures
Date: March 21, 1996
Subject: Message for Voice Mail on Friday, March 22, April 2 and April 8
and for E-mail on April 1 and April 4
If you have not yet mailed in your WHITE proxy card, please sign, date and
mail it in today. If you have already sent in your WHITE card and get a second
one in the mail, please sign, date and return the second one also. We ask you
NOT to sign or return any "BLUE" CARDS. If you need help completing your WHITE
card, visit one of the Help Centers set up in locations across the company.
Remember, EVERY VOTE COUNTS!
Voice Mail Message
A message from administrator:
As you know, Bennett LeBow of Brooke Group has proposed an alternate slate of
directors to gain control of our company. You will receive two sets of proxy
statements, one for RJR Nabisco and one from Brooke Group.
Your vote is critical to the outcome. Proposals will be decided by a majority
of the shares voted. We need the support of every employee shareholder.
We ask you to sign and return the WHITE proxy card to support the company's
board and management.
We ask you not to sign or return the Blue card which you will receive from the
Brooke Group.
The company will be setting up help stations for anyone who needs help with
the proxy.
NO
LEBOW
JUST SAY NO TO LEBOW.
DESTROY THE "BLUE CARD."
GRAPHICS:
CIRCLE WITH A LINE THROUGH - TEXT - NO LEBOW
Check Stuffer Message
EVERY VOTE COUNTS! VOTE THE WHITE CARD! If you own shares in RJR Nabisco-- as
a participant in company-sponsored Capital Investment or Savings Plans or as
an individual shareholder with shares in a brokerage account--your vote in
this year's annual meeting is more important than ever!
o We ask you to sign, date and return the WHITE proxy card indicating your
support of the company's board and management and voting on the other
proposals in the manner recommended by your board of directors. (The card is
printed in black ink and labeled "White Card.")
o We ask you NOT to sign or return the card labeled "BLUE Card" from Brooke
Group. (The card is printed in blue ink.)
EVERY VOTE COUNTS! VOTE THE WHITE CARD! If you own shares in RJR Nabisco-- as
a participant in company-sponsored Capital Investment or Savings Plans or as
an individual shareholder with shares in a brokerage account--your vote in
this year's annual meeting is more important than ever!
o We ask you to sign, date and return the WHITE proxy card indicating your
support of the company's board and management and voting on the other
proposals in the manner recommended by your board of directors. (The card is
printed in black ink and labeled "White Card.")
o We ask you NOT to sign or return the card labeled "BLUE Card" from Brooke
Group. (The card is printed in blue ink.)
EVERY VOTE COUNTS! VOTE THE WHITE CARD! If you own shares in RJR Nabisco-- as
a participant in company-sponsored Capital Investment or Savings Plans or as
an individual shareholder with shares in a brokerage account--your vote in
this year's annual meeting is more important than ever!
o We ask you to sign, date and return the WHITE proxy card indicating your
support of the company's board and management and voting on the other
proposals in the manner recommended by your board of directors. (The card is
printed in black ink and labeled "White Card.")
o We ask you NOT to sign or return the card labeled "BLUE Card" from Brooke
Group. (The card is printed in blue ink.)
NO LEBOW
GRAPHICS:
CIRCLE WITH LINE THROUGH - TEXT - NO LEBOW
Weekly News Item
RJR Nabisco's annual meeting of shareholders will be held this year on April
17 in Winston-Salem, North Carolina.
As you know, a group led by Bennett LeBow of Brooke Group, backed by Carl
Icahn, has proposed an alternate slate of directors for election at this
year's annual meeting in a bid to gain control of our company. You will
therefore receive two sets of annual meeting proxy statements and voting
cards, one from RJR Nabisco and one from Brooke Group.
Your participation in the annual meeting vote is important, in fact, critical
to the outcome. Proposals at our annual meeting are decided by a majority of
the shares voted, not a majority of the shares outstanding, so every vote
counts! We hope every employee shareholder will support the company by voting
for your current board and voting on the other proposals in the manner
recommended by your board of directors.
We ask you to sign, date and return the WHITE proxy card indicating your
support of the company's board and management.
We ask you NOT to sign or return the BLUE card which you will receive from
Brooke Group.
If you have any questions or need assistance in completing the enclosed WHITE
card, please call our solicitors: MacKenzie Partners, Inc., toll free, at
1-800-322-2885 or D.F. King & Co., Inc., toll free, at 1-800-290-6430.
Every vote counts, so please send in your white card and support RJR Nabisco.
EVERY VOTE COUNTS!
VOTE THE WHITE CARD!
SUPPORT RJR NABISCO!
Letter to Employees and Poster
March 8, 1996
Dear Colleague:
RJR Nabisco's annual meeting of shareholders will be held this year on April
17 in Winston-Salem, North Carolina.
As you know, a group led by Bennett LeBow of Brooke Group, backed by Carl
Icahn, has proposed an alternate slate of directors for election at this
year's annual meeting in a bid to gain control of our company. You will
therefore receive two sets of annual meeting proxy statements and voting
cards, one from RJR Nabisco and one from Brooke Group.
Your participation in the annual meeting vote is important, in fact, critical
to the outcome. Proposals at our annual meeting are decided by a majority of
the shares voted, not a majority of the shares outstanding, so every vote
counts! We hope every employee shareholder will support the company by voting
for your current board and voting on the other proposals in the manner
recommended by your board of directors.
We ask you to sign, date and return the WHITE proxy card indicating your
support of the company's board and management.
We ask you NOT to sign or return the BLUE card which you will receive from
Brooke Group.
If you have any questions or need assistance in completing the enclosed WHITE
card, please call our solicitors: MacKenzie Partners, Inc., toll free, at
1-800-322-2885 or D.F. King & Co., Inc., toll free, at 1-800-290-6430.
Every vote counts, so please send in your white card and support RJR Nabisco.
Sincerely,
Charles A. Blixt
Senior Vice President and General Counsel
EVERY VOTE COUNTS!
VOTE THE WHITE CARD!
SUPPORT RJR NABISCO!
POST: 03-08-96 Remove: 03-14-96
Video Script
Just Say No To LeBow Script
Opening
(Close-up on poster, pan back bring speaker into view)
Hello, my name is Frank Lester, I'm with public relations here at RJR.
(preference would be cut to another angle - left - bringing the RJR logo into
view with speaker)
A lot of you are understandably confused by all of the mailings you've
received on the proxy vote.
I would like to help clarify the procedure for voting in support of management
and the future of RJR Tobacco.
First, let me say how important it is for you to vote. This is NOT like the
other RJR Nabisco shareholder votes we have held in the past. A. non-vote is
NOT a vote for management. You MUST vote in order to have your voice heard.
Second, you've all heard a lot about Bennett LeBow and Carl Icahn. They're
corporate raiders whose only goal, we believe, is to line their own pockets
with your hard-earned money. Whatever problems we have, we do not need outside
people - who, in our opinion, know nothing about our business - running this
company into the ground, and, rest assured - evidence suggests they will - if
you let them.
If you support the future of RJR Tobacco, vote with management.
Destroy the blue card or any other materials from the Brooke Group - If you
have already voted the blue card, you CAN change your vote by voting the WHITE
card. Just Say No To LeBow. Please vote the WHITE card.
Instructions- clarification
(Pause- new angle)
I am sure that you've already received information and calls about the proxy
vote. You may receive up to four mailings. In all cases, vote the WHITE card
and DESTROY the one that says BLUE Card.
(Close up of language WHITE CARD)
It's important to remember that if you've already voted and you think you've
made a mistake, you CAN vote again. Votes are counted according to the LATEST
post date.
So if you're unsure, vote another WHITE card. If you don't have another WHITE
card call 1-800-322-2885 (up on screen) OR go by one of the help centers
located throughout the company and you'll get another WHITE card - and help in
filling it out..
Now, the easiest way to vote in support of management is to simply sign, date
and return the WHITE card.
(show signature block on WHITE cared)
If you want to fill the WHITE card out - this is what a properly completed
WHITE card looks like.
(cut to whole white card)
To vote in SUPPORT of management and FOR the future of RJR Tobacco - Put an X
in the FOR boxes on 1-2 (focus on 1-2) and an X in the AGAINST boxes on 3-11
(focus on 3-11).
Then sign, date and return your card.
That's FOR in 1-2 and AGAINST in 3-11. Sign, date and return.
Remember - If you support the future of RJR - Vote only the WHITE card -
destroy the blue.
Closing
(Close-up of speaker)
Your vote and support is essential to the future of RJR Tobacco. Remember, if
you have ANY doubts on how you voted. You can vote any time before April 17.
The LAST vote sent in is the one that counts. If you aren't sure how you voted
or you have any questions, call 1-800-322-2885 or go to one of the help
centers located throughout the company.
A vote on the WHITE card is a vote for the future. JUST SAY NO TO LEBOW - Vote
the WHITE card today.
Thank you very much.