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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
---------------------
RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10215 13-3490602
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-6388 56-0950247
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6013
(212) 258-5600
(Address, including zip code, and telephone number, including area code,
of the principal executive offices of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc.)
------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_, NO ___.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS'
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: JULY 31, 1998:
RJR NABISCO HOLDINGS CORP.: 324,812,528 SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE
RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER
SHARE
------------------------
RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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INDEX
PAGE
---------
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three Months Ended June 30, 1998 and 1997......... 1
Consolidated Condensed Statements of Income--Six Months Ended June 30, 1998 and 1997........... 2
Consolidated Condensed Statements of Cash Flows--Six Months Ended June 30, 1998 and 1997....... 3
Consolidated Condensed Balance Sheets--June 30, 1998 and December 31, 1997..................... 4
Notes to Consolidated Condensed Financial Statements........................................... 5-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 12-19
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 20-21
Item 4. Submission of Matters to a Vote of Security Holders............................................ 22
Item 6. Exhibits and Reports on Form 8-K............................................................... 23-24
Signatures................................................................................................ 25
PART I
ITEM 1. FINANCIAL STATEMENTS
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
---------------------- ----------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- ----------- --------- -----------
NET SALES*.......................................................... $ 4,292 $ 4,292 $ 4,286 $ 4,286
--------- ----------- --------- -----------
Costs and expenses:
Cost of products sold*............................................ 1,886 1,886 1,954 1,954
Selling, advertising, administrative and general expenses......... 1,624 1,624 1,456 1,455
Tobacco settlement expense (note 4)............................... 145 145 -- --
Amortization of trademarks and goodwill........................... 158 158 160 160
Restructuring expense (note 1).................................... 406 406 -- --
--------- ----------- --------- -----------
OPERATING INCOME................................................ 73 73 716 717
Interest and debt expense........................................... (228) (204) (231) (206)
Other income (expense), net......................................... (35) (35) (47) (47)
--------- ----------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES............................... (190) (166) 438 464
Provision (benefit) for income taxes................................ (21) (13) 175 184
--------- ----------- --------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME (LOSS) OF
NABISCO HOLDINGS.............................................. (169) (153) 263 280
Less minority interest in income (loss) of Nabisco Holdings......... (39) (39) 20 20
--------- ----------- --------- -----------
NET INCOME (LOSS)............................................... $ (130) $ (114) $ 243 $ 260
--------- ----------- --------- -----------
--------- ----------- --------- -----------
BASIC NET INCOME (LOSS) PER SHARE................................... $ (0.44) $ 0.72
DILUTED NET INCOME (LOSS) PER SHARE................................. $ (0.44) $ 0.71
DIVIDENDS PER SHARE:
Dividends per share of Series C preferred stock................... -- $ 0.7510
Dividends per share of common stock............................... $ 0.5125 $ 0.5125
- ------------------------
* Excludes excise taxes of $843 million and $879 million for the three months
ended June 30, 1998 and 1997, respectively.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------------- ----------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- ----------- ---------
NET SALES*............................................................... $ 8,239 $ 8,239 $ 8,065 $ 8,065
--------- --------- ----------- ---------
Costs and expenses:
Cost of products sold*................................................. 3,710 3,710 3,674 3,674
Selling, advertising, administrative and general expenses.............. 3,015 3,016 2,704 2,704
Tobacco settlement expense (note 4).................................... 457 457 -- --
Amortization of trademarks and goodwill................................ 316 316 318 318
Restructuring expense (note 1)......................................... 406 406 -- --
--------- --------- ----------- ---------
OPERATING INCOME................................................... 335 334 1,369 1,369
Interest and debt expense................................................ (449) (401) (463) (415)
Other income (expense), net.............................................. (63) (63) (76) (76)
--------- --------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.................................. (177) (130) 830 878
Provision for income taxes............................................... 1 20 341 360
--------- --------- ----------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME (LOSS) OF NABISCO
HOLDINGS......................................................... (178) (150) 489 518
Less minority interest in income (loss) of Nabisco Holdings.............. (28) (28) 33 33
--------- --------- ----------- ---------
NET INCOME (LOSS).................................................. $ (150) $ (122) $ 456 $ 485
--------- --------- ----------- ---------
--------- --------- ----------- ---------
BASIC NET INCOME (LOSS) PER SHARE........................................ $ (0.53) $ 1.34
DILUTED NET INCOME (LOSS) PER SHARE...................................... $ (0.53) $ 1.33
DIVIDENDS PER SHARE:
Dividends per share of Series C preferred stock.......................... -- $ 2.254
Dividends per share of common stock...................................... $ 1.025 $ 1.025
- ------------------------
* Excludes excise taxes of $1.671 billion and $1.731 billion for the six
months ended June 30, 1998 and 1997, respectively.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------------- ----------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- ----------- ---------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)...................................................... $ (150) $ (122) $ 456 $ 485
--------- --------- ----- ---------
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization...................................... 570 570 579 579
Deferred income tax benefit........................................ (205) (205) (1) (1)
Changes in working capital items, net.............................. (610) (507) (608) (452)
Tobacco settlement expense, net of cash payments................... 377 377 -- --
Restructuring and restructuring related expense, net of cash
payments......................................................... 292 292 (146) (146)
Other, net......................................................... (20) (21) (7) (14)
--------- --------- ----- ---------
Total adjustments................................................ 404 506 (183) (34)
--------- --------- ----- ---------
Net cash flows from operating activities............................. 254 384 273 451
--------- --------- ----- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures................................................... (296) (296) (308) (308)
Acquisition of businesses.............................................. (9) (9) -- --
Disposition of businesses and certain assets........................... 10 10 100 100
Repurchases of Nabisco Holdings' Class A common stock.................. (38) (38) -- --
Proceeds from exercise of Nabisco Holdings' Class A common stock
options.............................................................. 22 22 -- --
--------- --------- ----- ---------
Net cash flows used in investing activities.......................... (311) (311) (208) (208)
--------- --------- ----- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings of long-term debt....................................... 1,012 1,012 68 68
(Decrease) increase in short-term borrowings........................... (794) (794) 239 239
Dividends paid on common and preferred stock........................... (373) (18) (383) (16)
Other, net-including intercompany transfers and payments............... 55 (430) 20 (524)
--------- --------- ----- ---------
Net cash flows used in financing activities.......................... (100) (230) (56) (233)
--------- --------- ----- ---------
Effect of exchange rate changes on cash and cash equivalents............. (5) (5) (10) (10)
--------- --------- ----- ---------
Net change in cash and cash equivalents.............................. (162) (162) (1) --
Cash and cash equivalents at beginning of period......................... 348 348 252 251
--------- --------- ----- ---------
Cash and cash equivalents at end of period............................... $ 186 $ 186 $ 251 $ 251
--------- --------- ----- ---------
--------- --------- ----- ---------
Income taxes paid, net of refunds........................................ $ 295 $ 295 $ 330 $ 330
Interest paid............................................................ $ 394 $ 346 $ 441 $ 393
Tobacco settlement payments.............................................. $ 80 $ 80 $ -- $ --
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
JUNE 30, 1998 DECEMBER 31, 1997
-------------------- --------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 186 $ 186 $ 348 $ 348
Accounts and notes receivable, net.................................. 1,158 1,155 1,122 1,118
Inventories......................................................... 2,630 2,630 2,617 2,617
Prepaid expenses and excise taxes................................... 712 712 538 538
--------- --------- --------- ---------
TOTAL CURRENT ASSETS............................................ 4,686 4,683 4,625 4,621
--------- --------- --------- ---------
Property, plant and equipment, net.................................... 5,718 5,718 5,939 5,939
Trademarks, net....................................................... 7,651 7,651 7,759 7,759
Goodwill, net......................................................... 11,710 11,710 11,885 11,885
Other assets and deferred charges..................................... 480 466 470 453
--------- --------- --------- ---------
$ 30,245 $ 30,228 $ 30,678 $ 30,657
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................... $ 499 $ 499 $ 361 $ 361
Accounts payable and accrued liabilities............................ 3,528 3,350 3,483 3,305
Current maturities of long-term debt................................ 222 222 33 33
Income taxes accrued................................................ 212 289 268 243
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES....................................... 4,461 4,360 4,145 3,942
--------- --------- --------- ---------
Long-term debt (less current maturities).............................. 9,322 9,322 9,456 9,456
Minority interest in Nabisco Holdings................................. 761 761 812 812
Other noncurrent liabilities.......................................... 2,272 1,560 2,157 1,908
Deferred income taxes................................................. 3,364 3,300 3,524 3,460
Contingencies (note 4)
RJRN Holdings' obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated
debentures*......................................................... 953 -- 953 --
Stockholders' equity:
Other preferred stock............................................... 512 -- 520 --
Common stock (328,199,828 shares issued at June 30)................. 3 -- 3 --
Paid-in capital..................................................... 9,199 11,347 9,668 11,470
Retained earnings................................................... -- -- -- --
Accumulated other comprehensive income.............................. (422) (422) (391) (391)
Treasury stock, at cost............................................. (100) -- (100) --
Other stockholders' equity.......................................... (80) -- (69) --
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY.................................... 9,112 10,925 9,631 11,079
--------- --------- --------- ---------
$ 30,245 $ 30,228 $ 30,678 $ 30,657
--------- --------- --------- ---------
--------- --------- --------- ---------
- ------------------------
* The sole asset of the subsidiary trust is the junior subordinated debentures
of RJRN Holdings. Upon redemption of the junior subordinated debentures,
which have a final maturity of December 31, 2044, the preferred securities
will be mandatorily redeemed. The outstanding junior subordinated debentures
have an aggregate principal amount of approximately $978 million and an
annual interest rate of 10%.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
NOTE 1 -- INTERIM REPORTING
For interim reporting purposes, certain costs and expenses are charged to
operations in proportion to the estimated total annual amount expected to be
incurred.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
In management's opinion, the accompanying unaudited consolidated condensed
financial statements (the "Consolidated Condensed Financial Statements") of RJR
Nabisco Holdings Corp. ("RJRN Holdings") and RJR Nabisco, Inc. ("RJRN" and
together with RJRN Holdings, the "Registrants") contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods presented. The Consolidated Condensed
Financial Statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K of
RJRN Holdings and RJRN for the year ended December 31, 1997.
On January 1, 1998, RJRN Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which established
standards for reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in stockholders' equity during a
period from transactions from nonowner sources and primarily includes net income
(loss) and foreign currency translation adjustments. Total comprehensive income
for the three months ended June 30, 1998 and 1997 was $(161) million and $220
million, respectively, for RJRN Holdings and $(145) million and $237 million,
respectively, for RJRN. Total comprehensive income for the six months ended June
30, 1998 and 1997 was $(181) million and $391 million, respectively, for RJRN
Holdings and $(153) million and $420 million, respectively, for RJRN.
RESTRUCTURING CHARGES
In the second quarter of 1998, Nabisco recorded a restructuring charge of
$406 million ($216 million after-tax, net of minority interest) related to a
program announced on June 8, 1998. The restructuring program, which was
undertaken to streamline operations and improve profitability, commenced during
the second quarter of 1998 and will be substantially completed during 1999. The
$406 million restructuring expense will require cash expenditures of
approximately $164 million. In addition to the restructuring charge, the program
will require additional cash expenditures of approximately $118 million, of
which $6 million ($3 million after-tax, net of minority interest) was incurred
in the second quarter of 1998. These additional expenses are principally for
implementation and integration of the program and include costs for relocation
of employees and equipment and for training. After completion of the
restructuring program, pre-tax savings in the year 2000 and thereafter are
expected to be approximately $100 million annually.
The major components of the $406 million restructuring charge are $162
million for domestic and international severance and related benefits associated
with workforce reductions totaling approximately 4,300 employees, $186 million
for estimated losses from disposals of property related to domestic and
international plant closures, $43 million for estimated losses from disposals of
equipment and packaging materials related to non-strategic product line
rationalizations, and $15 million for estimated costs to terminate distribution
related contracts.
As of June 30, 1998, $7 million of the food restructuring accruals were
utilized as follows: $5 million for severance and related benefits and $2
million for product line rationalizations.
In the fourth quarter of 1997, RJRN Holdings recorded a pre-tax
restructuring expense of $301 million ($235 million after-tax) to reorganize its
worldwide tobacco operations. As of June 30, 1998, $118 million of the tobacco
restructuring accruals were utilized as follows: $56 million for employee
severance and related benefits, $35 million for rationalization of manufacturing
operations, $6 million for disposal of non-strategic investments, and $21
million for contract terminations and other costs.
5
NOTE 2 -- INVENTORIES
The major classes of inventory are as follows:
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
Finished products................................................... $ 796 $ 816
Leaf tobacco........................................................ 1,180 1,184
Raw materials....................................................... 238 226
Other............................................................... 416 391
----------- ------
$ 2,630 $ 2,617
----------- ------
----------- ------
NOTE 3 -- EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ------------------------------------------
1998 1997 1998 1997
-------------------- -------------------- -------------------- --------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common
stock :
Net income (loss)..................... $ (130) $ (130) $ 243 $ 243 $ (150) $ (150) $ 456 $ 456
Preferred stock dividends............. (11) (11) (11) (11) (22) (22) (22) (22)
Adjustment for the dilutive effect of
Nabisco Holdings' stock options..... -- -- -- (1) -- -- -- (1)
--------- --------- --------- --------- --------- --------- --------- ---------
$ (141) $ (141) $ 232 $ 231 $ (172) $ (172) $ 434 $ 433
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
(in thousands):
Common shares......................... 323,858 323,858 323,861 323,861 323,828 323,828 323,821 323,821
Assumed exercise of RJRN Holdings'
stock options....................... -- -- -- 1,135 -- -- -- 1,416
--------- --------- --------- --------- --------- --------- --------- ---------
323,858 323,858 323,861 324,996 323,828 323,828 323,821 325,237
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Shares of ESOP convertible preferred stock of 13,214,133 and 14,199,704 were
not included in computing diluted earnings per share for 1998 and 1997,
respectively, because the effect would have been antidilutive. Common shares
also exclude approximately 965,000 shares of restricted stock as the vesting
provisions have not been met.
NOTE 4--CONTINGENCIES
TOBACCO LITIGATION
OVERVIEW. Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including, with increasing frequency, RJRN and RJRN Holdings) or indemnitees,
including actions claiming that lung cancer and other diseases as well as
addiction have resulted from the use of or exposure to RJRT's tobacco products.
During the second quarter of 1998, 67 new actions were served against RJRT
and/or its affiliates or indemnitees (as against 111 in the second quarter of
1997) and 41 such actions were dismissed or otherwise resolved in favor of RJRT
and/or its affiliates or indemnitees without trial. There have been noteworthy
increases in the number of these cases pending. On June 30, 1998, there were 575
active cases pending, as compared with 345 on June 30, 1997, and 193 on June 30,
1996. As of August 7, 1998, 586 active cases were pending against RJRT and/or
its affiliates or indemnitees, 580 in the United States, two each in Canada and
in Puerto Rico, and one in each of the Marshall Islands and Nigeria.
The United States cases are in 47 states and the District of Columbia, and
are distributed as follows: 160 in Florida, 109 in New York, 38 in California,
25 in Louisiana, 22 in Pennsylvania, 17 in Texas, 15 in Tennessee, 14 in each of
Ohio and Alabama, 11 in each of Illinois and West Virginia, ten in each of the
6
NOTE 4--CONTINGENCIES (CONTINUED)
District of Columbia and Nevada, nine in each of Mississippi and New Jersey,
seven in each of Georgia and Massachusetts, six in each of Arkansas, Indiana and
Minnesota, five in each of Iowa, Maryland, and Michigan, four in each of
Arizona, Missouri and Utah, three in each of Colorado, Hawaii, Kansas, Kentucky,
New Mexico, Oklahoma, Rhode Island, South Carolina, South Dakota, Washington and
Wisconsin, two in each of Connecticut, New Hampshire, North Dakota and Oregon,
and one each in Alaska, Idaho, Maine, Montana, North Carolina and Vermont. Of
the 580 active cases in the United States, 457 are in state court and 123 are in
federal court. Most of these cases were brought by individual plaintiffs, but a
significant number, discussed below, seek recovery on behalf of states, union
pension funds, or other large classes of claimants.
THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring
and common law public nuisance. Punitive damages, often in amounts ranging into
the hundreds of millions or even billions of dollars, are specifically pleaded
in a number of cases in addition to compensatory and other damages. Twelve of
the 580 active cases in the United States involve alleged non-smokers claiming
injuries purportedly resulting from exposure to environmental tobacco smoke.
Fifty-seven cases purport to be class actions on behalf of thousands of
individuals. Purported classes include individuals claiming to be addicted to
cigarettes, individuals and their estates claiming illness and death from
cigarette smoking, purchasers of cigarettes claiming to have been defrauded and
seeking to recover their costs, and Blue Cross/Blue Shield subscribers seeking
reimbursement for premiums paid. One hundred twenty-four of the active cases
seek, INTER ALIA, recovery of the cost of Medicaid payments or other
health-related costs paid for treatment of individuals suffering from diseases
or conditions allegedly related to tobacco use. Eight, brought by entities
administering asbestos liability, seek contribution for the costs of settlements
and judgments.
DEFENSES. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act of some or all such claims arising after 1969; the lack of any defect in the
product; assumption of the risk; contributory or comparative fault; lack of
proximate cause; and statutes of limitations or repose; and, in the attorney
general cases (discussed below), additional statutory, equitable, constitutional
and other defenses. RJRN and RJRN Holdings have asserted additional defenses,
including jurisdictional defenses, in many of these cases in which they are
named.
Juries have found for plaintiffs in four smoking and health cases in which
RJRT was not a defendant, but in one such case, no damages were awarded and the
judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another
such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on
appeal and the case was subsequently dismissed. In the third such case, on
August 9, 1996, a Florida jury awarded damages of $750,000 to an individual
plaintiff. That case, CARTER V. BROWN & WILLIAMSON, was overturned on appeal on
June 22, 1998. In another Florida case brought by the same attorney, WIDDICK VS.
BROWN & WILLIAMSON, a state court jury awarded the plaintiff approximately $1
million in compensatory and punitive damages on June 10, 1998. The defendant
will appeal that verdict. In two cases in 1997, brought by the same attorney who
represented plaintiffs in the CARTER AND WIDDICK cases, Florida state court
juries found no RJRT liability. On March 19, 1998, an Indiana state court jury
found for RJRT, RJRN Holdings and other defendants in an individual case, DUNN
V. RJR NABISCO HOLDINGS CORP., in which plaintiffs sought damages for the
alleged harm caused to a non-smoker by environmental tobacco smoke. In addition,
during 1997 and early 1998, RJRT and other tobacco industry defendants settled
six lawsuits. See "Certain Settlements" below.
CERTAIN CLASS ACTION SUITS. In May 1996, in an early class action case,
CASTANO V. AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals
overturned the certification of a purported nationwide class
7
NOTE 4--CONTINGENCIES (CONTINUED)
of persons whose claims related to alleged addiction to tobacco. Since this
ruling by the Fifth Circuit, most purported class action suits have sought
certification of statewide rather than nationwide classes.
Putative class action suits based on claims similar to those asserted in
CASTANO have been brought in state and, in a few instances, federal courts in
Alabama, Arkansas, California, the District of Columbia (D.C. court), Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, New Mexico, Nevada, New Jersey, New York, Ohio, Oklahoma,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, West
Virginia and Wisconsin. A putative class action filed in Tennessee seeks
reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout
the United States. Other types of class action suits have also been filed in
additional jurisdictions and there are also putative class action suits pending
in Canada, Puerto Rico and Nigeria. Most of these suits assert claims on behalf
of classes of individuals who claim to be addicted, injured, or at greater risk
of injury by the use of tobacco or exposure to environmental tobacco smoke, or
are the legal survivors of such persons.
Jury selection has begun in a class action suit pending in Florida, ENGLE V.
R.J. REYNOLDS TOBACCO COMPANY, in which a class consisting of Florida residents
or their survivors who claim to have diseases or medical conditions caused by
their alleged "addiction" to cigarettes has been certified. Jury selection is
expected to take several weeks and the entire trial is likely to require several
months to complete.
Class certifications, initially granted in two cases pending in New York
state courts, HOSKINS V. R.J. REYNOLDS TOBACCO COMPANY and GEIGER V. AMERICAN
TOBACCO COMPANY, have been reversed on appeal. In the HOSKINS decision, rendered
on July 16, 1998, the appeals court also dismissed the complaint entirely. In
GEIGER, where class certification had originally been conditional, a July 6,
1998 decision returned the case to the trial court for limited class discovery
and some form of hearing on class certification.
THE ATTORNEY GENERAL AND RELATED CASES. Forty-three states, through their
attorneys general and/or other state agencies, have sued RJRT and other U.S.
cigarette manufacturers as well as, in some instances, their parent companies,
in actions to recover the costs of medical expenses incurred by the state or its
agencies in the treatment of diseases allegedly caused by cigarette smoking.
Some of these cases also seek injunctive relief and treble damages for state
and/or federal antitrust law and RICO violations. Certain of the actions also
seek statutory penalties and other forms of relief under state consumer
protection and antitrust statutes. On August 7, 1998, there were 39 such cases
pending in the following states or territories: Alaska, Arizona, Arkansas,
California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana,
Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland, Massachusetts,
Michigan, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New
York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South
Carolina, South Dakota, Utah, Vermont, Washington, West Virginia and Wisconsin.
Tobacco company defendants have settled attorney general cases in the states of
Mississippi, Florida, Texas and Minnesota. See "Certain Settlements" below.
On July 24, 1998, an Indiana state court judge dismissed all claims by that
state's attorney general for Medicaid recovery. The judge ruled that the state's
exclusive remedy for recovering such costs is by subrogation on a case-by-case
basis as to each Medicaid recipient. The state may appeal this decision.
In addition to the 39 pending actions brought by the various attorneys
general, 84 pending actions advancing similar theories have been brought by
private attorneys and/or local officials purportedly on behalf of the citizens
of certain states, counties and/or cities, union health and welfare funds, a
university and five native American tribes. Sixty-three of these cases have been
brought by health and welfare trusts funds and similar entities, and are pending
in the following states: Arizona, California, Connecticut, Florida, Hawaii,
Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan,
Minnesota, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Rhode
Island, Texas, Washington, and West Virginia.
8
NOTE 4--CONTINGENCIES (CONTINUED)
On July 13, 1998, a federal district court in Maryland dismissed one such
union case, SEAFARERS WELFARE PLAN V. PHILIP MORRIS, stating that "Plaintiffs'
entire complaint suffers from the fundamental flaw that the funds themselves, as
opposed to their participants or the pertinent employers, have not suffered any
cognizable damages." The court also indicated that, even if the funds have
suffered injury, each of the plaintiffs' claims are subject to dismissal
because, among other reasons, the plaintiffs' alleged injuries are too remotely
caused by the defendants to satisfy the requirements of proximate cause,
plaintiffs' lack "antitrust standing," and plaintiffs failed to state a claim
for unjust enrichment. A similar holding by an Oregon federal court on August 5,
1998, dismissed another union case, OREGON LABORERS-EMPLOYERS HEALTH AND WELFARE
TRUST V. PHILIP MORRIS.
PROPOSED RESOLUTION.
Since early 1997, RJRT and other tobacco companies have been seeking a
collective resolution of the litigation and regulatory issues concerning
tobacco. An initial agreement with attorneys general and certain plaintiffs'
lawyers (the "June 20th Agreement"), signed in 1997, required the enactment of
federal legislation, which has not occurred. RJRN had expected that
implementation of the June 20th Agreement would increase the costs and reduce
the consumption of RJRT's tobacco products in the United States. In particular,
the substantial price increases necessary to fund payments of the magnitude
contemplated by the June 20th Agreement were projected to have the effect of
reducing domestic industry cigarette volumes by up to 45% over 10 years
depending on the assumptions used. Such volume reduction would likely have had a
significant negative effect on the business of RJRT and the stated financial
position of RJRN Holdings, RJRN and RJRT.
Congress is currently considering various alternatives. Legislation or other
resolutions that impose greater financial burdens and/or afford less litigation
relief than the June 20th Agreement could have more severe effects on RJRN
Holdings, RJRN and RJRT than those discussed above.
There can be no assurance that Congress will not enact legislation that
could have material adverse effects on the cigarette industry. The financial
effects of any such legislation would depend, among other things, on (i) the
amount, timing and tax treatment of the payments actually required of RJRT by
the legislation; (ii) the means used to finance these payments; (iii) whether or
not litigation protection affording financial predictability is provided; (iv)
the impact of increased cigarette prices, advertising restrictions and other
aspects of the legislation on domestic cigarette consumption; (v) the effect of
the legislation on the consumption of tobacco products and on the regulatory and
litigation environment outside the United States; (vi) the effect, if any, on
public attitudes toward smoking and the tobacco industry; and (vii) the impact
on RJRT's competitive position in the tobacco industry.
Tobacco companies are continuing to explore other alternatives to the June
20th Agreement, including discussions on settling one or more pending attorney
general suits. No assurances can be given that such discussions will result in
any alternative agreement or agreements or that such an agreement or agreements
will resolve the full range of litigation and regulatory issues facing the
tobacco companies.
In evaluating any proposal to resolve tobacco issues, RJRN and RJRT will
continue to weigh carefully the potential benefits, principally greater
regulatory and litigation certainty and predictability in annual aggregate
contingency risk, against the resulting monetary, regulatory and other costs.
For a further discussion of the effects of federal legislation, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Tobacco -- Governmental Activity."
CERTAIN SETTLEMENTS.
Six cases have been settled, including four attorney general cases, since
June 1997: the attorney general cases in Mississippi, Florida, Texas and
Minnesota, a class action in Florida and an unfair trade practices case in
California. These settlements have been described in prior SEC filings on Forms
10-Q and
9
NOTE 4--CONTINGENCIES (CONTINUED)
8-K. (See RJRN's Report on Form 10-Q for the Quarterly Period ended March 31,
1998, filed May 15, 1998 (the "1998 First Quarter 10-Q"); RJRN's Report on Form
8-K dated January 16, 1998; RJRN's Report on Form 8-K dated August 25, 1997; and
RJRN's Report on Form 10-Q for the Quarterly Period ended June 30, 1997, filed
August 8, 1997.)
As described in the prior filings, the Mississippi, Florida and Texas
settlement agreements provided that, if the defendants entered into subsequent
settlement agreements with any other state or states, these three states would,
under certain circumstances, be entitled to terms at least as favorable to them
as those contained in any such future settlement. In July 1998, in light of
their May settlement with the State of Minnesota, tobacco company defendants,
including RJRT, entered into supplementary agreements with the states of
Mississippi and Texas to make "most favored nation" adjustments to the original
settlement agreements with those states.
The supplemental agreements with Mississippi and Texas provide for
additional "initial payments" by the industry to be paid according to an annual
schedule over five years, commencing in January 1999. The first payment to
Mississippi, due in January 1999, is set at $41,738,000; payments for the years
2000 through 2002 are set at $145,173,000 per year; and the final payment in
2003 is set at $72,743,000. A similar formula was adopted in the Texas
agreement. The first supplemental payment due to Texas in January 1999 is set at
$156,530,000; payments for the years 2000 through 2002 are set at $605,090,000
per year and the final payment in 2003 is set at $303,200,000.
All of these industry obligations are to be apportioned among the settling
defendants on the basis of their market share. Except for the 1999 initial
payments, they are to be adjusted upward by the greater of 3% or the cost of
living index and up or down by volume of cigarettes sold in each year. In
addition, these agreements modify the "most favored nation" terms applicable to
these states so that they apply only to certain non-economic terms of any future
settlement agreements with separately settling states or other non-federal
governmental entities.
In separate fee payment agreements, also part of the most favored nation
adjustments, RJRT and the other settling defendants agreed to pay advances
towards the fees of private counsel for Mississippi and Texas. As previously
agreed, these fees are to be awarded by arbitration panels that will be
appointed and begin deliberations in the fall of 1998. Pursuant to the fee
payment agreements, advances on these awards, to be credited against future
payments beginning in 1999, were paid for Mississippi's private counsel in the
amount of $100,000,000. The same amount was advanced for Texas' private counsel,
$50,000,000 pursuant to the initial settlement agreement and $50,000,000
pursuant to the fee payment agreement.
The fee payment agreements establish an annual cap of $500,000,000 for
payments of all attorneys' fees awarded by arbitration panels pursuant to past
and future smoking and health litigation settlements (other than settlements of
cases brought by a single plaintiff). The fee cap was $250,000,000 with respect
to 1997. The agreements create a mechanism for allocating these payments among
eligible counsel on a quarterly basis. Although the first payments of
arbitration awards are to become due on December 15, 1998, Reynolds obligations
are to be deferred to January 1999 to the extent of $62,000,000 in the aggregate
for both states.
Negotiations to amend the settlement agreement with the State of Florida are
ongoing and if an agreement is achieved, will likely give rise to increases in
the "initial payments" due to that state, and create an obligation to make
advance payments against future attorneys' fee awards for that state's private
counsel.
RJRN Holdings accrued $312 million in the first quarter of 1998 for its
share of all fixed and determinable portions of its obligations related to the
Minnesota settlements and other settlement related costs. In the second quarter
of 1998, RJRN Holdings accrued $145 million related to the additional "initial
payments" expected to be made under the supplementary agreements and advances
toward the fees of
10
NOTE 4--CONTINGENCIES (CONTINUED)
private counsel discussed above. Total estimated cash payments in 1998 for all
attorney general agreements and related fee payment agreements will be
approximately $600 million, $80 million of which has been paid as of June 30,
1998.
RECENT AND SCHEDULED TRIALS. As of August 7, 1998, there were six cases
scheduled for trial in 1998 against RJRT alleging injuries relating to tobacco.
The next attorney general case scheduled for trial is the State of Washington's,
which has been scheduled for September 14, 1998. ENGLE V. R.J. REYNOLDS TOBACCO
COMPANY, a class-action case in Florida state court, began on July 6, 1998.
Cases against other tobacco company defendants are also scheduled for trial in
1998 and thereafter. Although trial schedules are subject to change and many
cases are dismissed before trial, it is likely that there will be an increased
number of tobacco cases, involving claims for possibly billions of dollars,
against RJRT and RJRN coming to trial over the next year as compared to prior
years when trials in these cases were infrequent.
RJRT is aware of certain grand jury investigations being conducted in New
York and Washington, D.C. which relate to the cigarette business. For a further
discussion of these investigations see the 1998 First Quarter 10-Q.
Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory, and
other developments relating to the tobacco industry and cigarette smoking that
have received wide media attention, including the various litigation settlements
and the release and wide availability of various industry documents referred to
above. These developments may negatively affect the outcomes of tobacco-related
legal actions and encourage the commencement of additional similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits may be filed against RJRT, RJRN
and RJRN Holdings, a significant increase in litigation and/or in adverse
outcomes for tobacco defendants could have an adverse effect on any one or all
of these entities. RJRT, RJRN and RJRN Holdings each believes that it has a
number of valid defenses to any such actions and intends to defend such actions
vigorously.
RJRN Holdings and RJRN believe that, notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
NOTE 5--SUBSEQUENT EVENTS
In July 1998, Nabisco sold its College Inn brand of canned broths and signed
agreements, which are subject to certain conditions, to sell its U.S. and
Canadian tablespreads and U.S. egg substitute businesses and the Del Monte brand
canned vegetable business in Venezuela. In 1997, net sales from these businesses
totaled approximately $550 million. Subject to completion, these transactions
will be recorded in the third quarter of 1998 and are expected to result in a
net after-tax gain.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJRN Holdings. The results of operations
discussion and analysis is broken into three sections. The first section
includes reported information for net sales and operating company contribution
as included in the historical consolidated condensed financial statements. The
second section illustrates operating company contribution on a basis consistent
with how management manages the ongoing businesses. It excludes one-time items
that management believes affect the comparability of the results of operations.
This section should not be viewed as a substitute for the historical results of
operations but as a tool to better understand underlying trends in the business.
The last section includes management's discussion and analysis of the ongoing
results. The following discussion and analysis of RJRN Holdings' financial
condition and results of operations should be read in conjunction with the
historical financial information included in the Consolidated Condensed
Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- -----------------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
--------- --------- ------------- --------- --------- -------------
(DOLLARS IN MILLIONS)
NET SALES:
RJRT............................................ $ 1,398 $ 1,216 15% $ 2,574 $ 2,292 12%
Reynolds International.......................... 763 879 (13) 1,572 1,677 (6)
--------- --------- --------- ---------
Total Tobacco............................... 2,161 2,095 3 4,146 3,969 4
--------- --------- --------- ---------
Nabisco Biscuit................................. 864 907 (5) 1,714 1,708 --
U.S. Foods Group................................ 637 647 (2) 1,167 1,174 (1)
--------- --------- --------- ---------
Domestic Food Group............................. 1,501 1,554 (3) 2,881 2,882 --
International Food Group........................ 630 637 (1) 1,212 1,214 --
--------- --------- --------- ---------
Total Food.................................. 2,131 2,191 (3) 4,093 4,096 --
--------- --------- --------- ---------
$ 4,292 $ 4,286 -- $ 8,239 $ 8,065 2
--------- --------- --------- ---------
--------- --------- --------- ---------
OPERATING COMPANY CONTRIBUTION:(1)
RJRT(2)......................................... $ 265 $ 395 (33) $ 293 $ 775 (62)
Reynolds International.......................... 140 179 (22) 313 374 (16)
--------- --------- --------- ---------
Total Tobacco............................... 405 574 (29) 606 1,149 (47)
--------- --------- --------- ---------
Nabisco Biscuit(3).............................. 125 183 (32) 268 317 (15)
U.S. Foods Group(3)............................. 81 93 (13) 144 158 (9)
--------- --------- --------- ---------
Domestic Food Group............................. 206 276 (25) 412 475 (13)
International Food Group........................ 47 44 7 79 98 (19)
--------- --------- --------- ---------
Total Food.................................. 253 320 (21) 491 573 (14)
--------- --------- --------- ---------
Headquarters.................................... (21) (18) (17) (40) (35) (14)
--------- --------- --------- ---------
$ 637 $ 876 (27) $ 1,057 $ 1,687 (37)
--------- --------- --------- ---------
--------- --------- --------- ---------
- ------------------------
(1) Operating company contribution represents operating income before
amortization of trademarks and goodwill and restructuring expense.
Restructuring expense of $406 million related to the food business was
recorded in the second quarter of 1998 ($268 million at Biscuit, $90 million
at U.S. Foods Group and $48 million at International).
(2) 1998 includes $145 million of additional tobacco settlement charges incurred
relating to certain prior state settlement agreements for the three months
ended June 30, 1998 and $457 million related to the settlement agreement
reached with the Minnesota state attorney general ($312 million) and the
12
additional tobacco settlement charges incurred relating to certain prior
state settlement agreements ($145 million) for the six months ended June 30,
1998.
(3) Both 1998 periods include $6 million of charges related to the
implementation of the restructuring of the food business ($4 million at
Biscuit and $2 million at U.S. Foods Group).
The following table represents operating company contribution comparisons
based upon ongoing results. It excludes all one-time items which management
believes affect the comparability of the results of operations. These items are
discussed in footnotes (1) through (3) above.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- -----------------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
--------- --------- ------------- --------- --------- -------------
(DOLLARS IN MILLIONS)
OPERATING COMPANY CONTRIBUTION:
RJRT.............................................. $ 410 $ 395 4% $ 750 $ 775 (3)%
Reynolds International............................ 140 179 (22) 313 374 (16)
--------- --------- --------- ---------
Total Tobacco................................. 550 574 (4) 1,063 1,149 (7)
--------- --------- --------- ---------
Nabisco Biscuit................................... 129 183 (30) 272 317 (14)
U.S. Foods Group.................................. 83 93 (11) 146 158 (8)
--------- --------- --------- ---------
Domestic Food Group............................... 212 276 (23) 418 475 (12)
International Food Group.......................... 47 44 7 79 98 (19)
--------- --------- --------- ---------
Total Food.................................... 259 320 (19) 497 573 (13)
--------- --------- --------- ---------
Headquarters...................................... (21) (18) (17) (40) (35) (14)
--------- --------- --------- ---------
$ 788 $ 876 (10) $ 1,520 $ 1,687 (10)
--------- --------- --------- ---------
--------- --------- --------- ---------
UNLESS OTHERWISE NOTED, DISCUSSIONS OF THE RESULTS OF OPERATIONS ARE BASED ON
ONGOING RESULTS.
TOBACCO
The tobacco line of business is conducted by RJRT and R.J. Reynolds
International ("Reynolds International").
RJRT's net sales for the second quarter were $1.4 billion, $182 million
higher than the comparable period in 1997 and $2.57 billion for the first six
months of 1998, an increase of $282 million over 1997. The increase for both
periods is primarily attributable to higher pricing ($217 million for the second
quarter and $367 million for the first six months of 1998), partially offset by
lower volume ($39 million for the second quarter and $63 million for the first
six months of 1998). The pricing increase is before competitive discounting. See
the operating company contribution discussion below. Volume for both periods
decreased 3%, which was in line with total industry results.
RJRT's overall retail share of market for the second quarter of 1998
decreased to 25.32% from 25.44% in the prior year comparable period. For the
second quarter of 1998, RJRT's full-price share of market declined to 16.42%
from 16.70%, while its savings share of market increased to 8.90% from 8.75%.
Retail share of market for RJRT for the first six months of 1998 decreased to
25.38% compared to 25.45% in 1997. Full price share of market declined to 16.45%
for the first six months of 1998 versus 16.61% in 1997, while savings increased
to 8.94% in 1998 from 8.84% in 1997. Industry wide the full-price category for
the three and six months ended June 30, 1998 increased to 73% of total shipments
compared to 72% for the comparable periods in 1997. RJRT's full-price shipments
for the three and six months ended June 30, 1998 as a percentage of its total
shipments decreased to 62% from 63% in 1997.
RJRT experienced growth in Winston, its largest full-price brand for both
the second quarter and first six months of 1998. Winston's volume rose 3% in
both periods compared to the prior periods, resulting from the new national "No
Bull" marketing campaign featuring a 100-percent-tobacco blend with no
additives. While Camel's volume declined 7% and 4% for the second quarter and
the first six months of
13
1998, respectively, compared to prior periods its retail share of market
increased 2% and 3% for the second quarter and the first six months of 1998,
respectively. Salem's volume declined 7% and 8% for the second quarter and first
six months of 1998, respectively compared to the 1997 comparable periods. RJRT
is currently testing a new advertising and promotional campaign in select
markets to reverse Salem's declining trend. Doral, the industry's leading
savings brand, experienced an 8% volume increase in both periods over the prior
year.
RJRT's operating company contribution increased 4% to $410 million for the
second quarter of 1998 and decreased 3% to $750 million for the first six months
of 1998. The increase in the second quarter is due primarily to increased
pricing ($217 million), partially offset by lower volume ($32 million), ongoing
settlement costs ($38 million) and competitive discounting (marketing) ($128
million). The decrease in the first six months of 1998 is due to a decrease in
volume ($51 million), competitive discounting (marketing) ($195 million),
ongoing settlement costs ($75 million) and an increase in other costs (legal,
product costs and merchandising costs), partially offset by increased pricing
($367 million).
RJRT announced a $3.00 per thousand cigarette price increase effective
August 5, 1998. This follows two other price increases of $2.50 per thousand
cigarettes announced in the second quarter of this year. Similar price increases
were announced by other cigarette manufacturers.
Reynolds International's net sales were $763 million for the second quarter
of 1998, a decrease of 13% over the comparable 1997 quarter. Excluding the
impact of unfavorable foreign currency translation, net sales would have
decreased 8% versus 1997. Overall volume of 46.6 billion units was down 8%
versus 1997, primarily due to overall weakness in Special Markets and
deteriorating economic conditions in the CIS and Baltics region.
Reynolds International's net sales decreased 6% to $1.57 billion for the
first six months of 1998 over the 1997 comparable period, primarily due to the
economic slowdown in Asia and the negative impact of foreign currency
translation. Excluding the impact of unfavorable foreign currency translation,
net sales would have remained flat compared to 1997. Overall volume of 95.6
billion units increased by 4% from 1997 primarily as a result of volume gains of
14% in the CIS and Baltics and the East and Central Europe regions (low margin
markets), more than offsetting softness in Western European and Asian markets
(high margin markets).
Operating company contribution was $140 million for the second quarter of
1998, a decrease of 22% over the second quarter of 1997, and $313 million for
the first six months of 1998, a 16% decrease over the comparable 1997 period.
The decrease in the second quarter was driven primarily by the lower volume and
the impact of unfavorable foreign currency translation. For the first six months
of 1998, the decrease was driven primarily by unfavorable foreign currency
translation and lower sales in high margin markets. Excluding the impact of
unfavorable foreign currency translation, operating company contribution for the
second quarter and first six months of 1998 would have decreased approximately
12% and 5%, respectively compared to the comparable 1997 periods.
GOVERNMENTAL ACTIVITY
In August 1996, the U.S. Food and Drug Administration (the "FDA") asserted
jurisdiction over cigarettes and certain other tobacco products by declaring
such products to be medical devices and adopting regulations, first proposed in
1995, on the advertising, promotion and sale of cigarettes. Regulations
establishing 18 as the national minimum age for the sale of cigarettes and
requiring age identification from purchasers who appear to be under age 26
became effective in February 1997. Implementation of the remaining regulations,
which prohibit or impose stringent limits on a broad range of sales and
marketing practices, was stayed by the U.S. District Court for the Middle
District of North Carolina (COYNE BEAHM V. UNITED STATES FOOD & DRUG
ADMINISTRATION) pending appeal of its ruling that, among other things, certain
of the FDA restrictions on tobacco advertising were beyond the FDA's authority.
A second oral argument on appeal, required because of the death of one of the
jurors on the
14
original appeals court panel, occurred June 9, 1998. RJRT is unable to predict
the ultimate outcome of this litigation seeking to find the FDA's regulations to
be unlawful. If the full regulations do go into effect, they could be expected
to have an adverse effect on cigarette sales and RJRT.
On May 28, 1997, the Federal Trade Commission (the "FTC") issued an
unfairness complaint against RJRT, seeking to prohibit the use of Joe Camel
advertising, to require RJRT to undertake certain potentially costly public
education activities and to monitor sales and share of sales of each of RJRT's
brands to smokers under the age of 18. An administrative hearing is scheduled
for November 2, 1998. On June 17, 1997, RJRT filed suit against the FTC in the
Federal District Court for the Middle District of North Carolina, challenging
the FTC's action as procedurally improper. The FTC moved to dismiss the action.
On July 17, 1998 the court granted the FTC's motion, citing lack of subject
matter jurisdiction.
In December 1992, the U.S. Environmental Protection Agency (the "EPA")
issued a report entitled, "Respiratory Health Effects of Passive Smoking: Lung
Cancer and Other Disorders," which classified environmental tobacco smoke as a
Group A (known human) carcinogen. On June 22, 1993, RJRT and others filed suit
in the U.S. District Court for the Middle District of North Carolina (FLUE-CURED
STABILIZATION CORP. V. U.S. ENVIRONMENTAL PROTECTION AGENCY) to challenge the
validity of the EPA report. On July 17, 1998, the court's ruling on the
plaintiffs' motion for summary judgment found that the EPA's classification of
environmental tobacco smoke was invalid, and vacated those portions of the EPA
report dealing with lung cancer.
In July 1996, Massachusetts enacted legislation requiring manufacturers of
tobacco products sold in Massachusetts to report yearly, beginning December 15,
1997, the ingredients of each brand sold. The statute also requires the
reporting of nicotine yield ratings in accordance with procedures established by
the State. The legislation contemplates public disclosure of all ingredients in
descending order, a trade-secret disclosure that RJRT believes could damage the
competitive position of its brands. RJRT, together with other cigarette
manufacturers, filed suit in the U.S. District Court for the District of
Massachusetts seeking to have the statute declared null and void and to restrain
Massachusetts officials from enforcing it. A similar suit was filed by
manufacturers of smokeless tobacco products. The court granted a preliminary
injunction that enjoined Massachusetts officials from enforcing the law relating
to ingredient reporting. Massachusetts appealed that decision. Both the
manufacturers and Massachusetts are now seeking summary judgment from the
district court. Oral argument on the motions for summary judgment took place
during May 1998. Oral argument of Massachusetts' appeal of the preliminary
injunction decision occurred on July 28, 1998.
In 1997, Texas enacted legislation very similar to the Massachusetts law,
except that the Texas statute authorizes confidentiality of trade secrets and
its annual reporting requirements begin in 1998. Together with other cigarette
manufacturers, RJRT has provided comments on the regulations. Final regulations
were issued and RJRT's initial disclosure is due on December 1, 1998.
As of July, 1998, the United States Congress was considering a number of
bills that would impose new and severe regulations on the manufacturing,
marketing and advertising of tobacco products and/or impose materially increased
financial obligations on the tobacco industry. Although, by its execution of the
June 20th Agreement, RJRT supported the enactment of legislation that would have
imposed severe regulatory and financial burdens on the industry, it did so in
anticipation that the legislation would also provide certain relief from
litigation risk. Other bills being considered could impose greater burdens on
the industry than those provided in the June 20th Agreement coupled with little
or no litigation risk reduction. RJRT cannot predict what legislation, if any,
will be enacted as a result of the current congressional activity, but it is
possible that such legislation will not be advantageous to RJRT and could impact
the dividend and share repurchase policies of RJRN Holdings and have a material
adverse effect on RJRT's business and financial condition and that of its parent
companies.
It is not possible to determine what additional federal, state, local or
foreign legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on RJRT,
15
Reynolds International or the cigarette industry generally, but such legislation
or regulations could have a material effect on RJRT, Reynolds International or
the cigarette industry generally.
For a description of certain litigation affecting RJRT and its affiliates,
including the effects on results of operations of certain attorney general
agreements, see note 4 to the Consolidated Condensed Financial Statements.
FOOD
The food line of business is conducted through the operating subsidiaries of
Nabisco Holdings Corp. ("Nabisco Holdings"). Nabisco Holdings' businesses in the
United States are comprised of the Nabisco Biscuit and the U.S. Foods Group
(collectively, the "Domestic Food Group"). The U.S. Foods Group includes the
Sales & Integrated Logistics Group, the Specialty Products, LifeSavers,
Planters, Tablespreads and Food Service organizations. Nabisco Holdings'
businesses outside the United States are conducted by Nabisco Ltd and Nabisco
International, Inc. (collectively, the "International Food Group").
The Domestic Food Group's net sales declined 3% for the second quarter and
were flat for the first six months of 1998, while the International Food Group's
net sales declined 1% in the second quarter and were slightly lower for the
first six months of 1998. Within the Domestic Food Group, Nabisco Biscuit's net
sales declined 5% in the second quarter and were slightly higher in the first
six months versus the prior year. Nabisco Biscuit's decrease for the second
quarter was primarily due to volume declines in the SnackWell's line and
breakfast snacks. The small increase in net sales for the first six months of
1998 reflects price increases, volume increases in core cookie and cracker
brands, largely offset by lower volumes in SnackWell's and breakfast snacks. Net
sales for the first six months of 1998 were favorably impacted by more selling
days. Without these extra days, net sales would have declined 3% due to lower
volumes. The U.S. Foods Group's net sales decreased 2% in the second quarter and
1% for the first six months of 1998 primarily due to the 1997 disposal of
certain regional brands and the disposal of Plush Pippin pies in 1998. Excluding
the impact of these disposals, net sales would have risen 1% in the second
quarter and 2% in the first six months of 1998. In addition, higher sales for
nuts and the inclusion of Cornnuts snacks, acquired in December 1997, were
offset by lower sales volume for confections and other products. The
International Food Group's net sales decrease in the second quarter and first
six months resulted from unfavorable foreign exchange rates, particularly in
Spain and Canada, and declines in Argentina due to competitive activity, in
Spain due to trade consolidations, in Canada due to sluggish biscuit sales, and
in Asia due to the impact of the regional economic downturn, partially offset by
improvements in Venezuela and Mexico.
The Domestic Food Group's operating company contribution was $212 million in
the second quarter of 1998 versus $276 million in the second quarter of 1997, a
decrease of 23%. For the first six months of 1998, the Domestic Food Group
generated operating company contribution of $418 million versus $475 million in
the first six months of 1997, a decrease of 12%. The International Food Group's
operating company contribution increased $3 million or 7% for the second quarter
and decreased $19 million or 19% for the first six months of 1998.
Within the Domestic Food Group, the operating company contribution for
Nabisco Biscuit decreased $54 million, or 30%, for the second quarter of 1998
and decreased $45 million, or 14%, for the first six months of 1998. These
declines resulted largely from the impact of lower sales in the second quarter
and higher selling related expenses in both periods. The U.S. Foods Group's
operating company contribution decreased $10 million for the second quarter of
1998 and $12 million for the first six months of 1998, primarily due to the
impact of the 1997 disposal of certain regional brands. The International Food
Group's decline in operating company contribution for the first six months of
1998 was principally due to the net sales decline discussed above, coupled with
higher marketing expense in Canada, which more than offset improvements in
Venezuela and Mexico.
16
In June 1998, Nabisco announced that marketing initiatives in Nabisco
Biscuit would be increased by 30% in the second half of 1998 over year ago
levels. These initiatives and the restructuring program discussed below will
have a significant impact on anticipated earnings in 1998.
RESTRUCTURING CHARGE
In the second quarter of 1998, Nabisco recorded a restructuring charge of
$406 million ($216 million after-tax, net of minority interest) related to a
program announced on June 8, 1998. The restructuring program, which was
undertaken to streamline operations and improve profitability, commenced during
the second quarter of 1998 and will be substantially completed during 1999. The
restructuring charge for the Domestic Food Group amounted to $358 million and
consisted of $268 million for Nabisco Biscuit, $30 million for LifeSavers, $15
million for Specialty Products and the remaining $45 million for corporate
headquarters operations, the Sales & Integrated Logistics Group and other
business units. The restructuring expense for the International Food Group
amounted to $48 million and consisted of $37 million for Latin American
operations, including $15 million for Brazil, $15 million for Argentina, and $7
million for Canada.
The $406 million restructuring charge will require cash expenditures of
approximately $164 million. In addition to the restructuring expense, the
program will require additional expenditures of approximately $118 million, of
which $6 million ($3 million after-tax, net of minority interest) was recorded
in the second quarter of 1998. These additional expenses are principally for
implementation and integration of the program and include costs for relocation
of employees and equipment and for training. Key components of the restructuring
program include the disposal of plant and distribution assets in the United
States and Latin America, including facilities in Argentina and Brazil; the
reconfiguring of sales organizations to improve their effectiveness and drive
revenue growth; the downsizing of departmental organizations and operating
company structures; and the discontinuance of certain non-strategic product
lines. After completion of the restructuring program, pre-tax savings in the
year 2000 and thereafter are expected to be approximately $100 million annually.
See note 1 to the Consolidated Condensed Financial Statements for information
regarding the major components of the restructuring program.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
On January 1, 1998, RJRN Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. See note 1 to the
Consolidated Condensed Financial Statements for further discussion.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from operating activities were $254 million in the first six
months of 1998 compared to $273 million for the first six months of 1997. The
decrease primarily reflects the tobacco settlement payments in 1998 and the
timing of accounts payable disbursements, partially offset by a reduction in
inventory resulting from overall better inventory management, a reduction in
accounts receivable due to an overall decrease in both tobacco and food net
sales, a reduction in interest payments due to debt refinancings at Nabisco and
lower income tax payments due to lower earnings.
Net cash flows used in investing activities for 1998 were $311 million, an
increase of $103 million from the 1997 level of $208 million. The increase
reflects a lower level of proceeds in 1998 versus 1997 resulting from the sale
and closure of certain international tobacco facilities in 1997 and the
repurchases of Nabisco Holdings' Class A common stock, net of stock option
exercises in 1998.
Net cash flows used in financing activities was $100 million for the first
six months of 1998, compared to $56 million in 1997. The increase was primarily
due to an overall reduction in debt levels, partially offset by 1998 proceeds
from the sale of call options on Nabisco debt.
17
Free cash flow, another measure used by management to evaluate liquidity and
financial condition, represents cash available for the repayment of debt and
certain other corporate purposes such as common stock dividends, stock
repurchases and acquisitions. It is essentially net cash flow from operating
activities and investing activities per the Consolidated Statements of Cash
Flows, adjusted for acquisitions and divestitures of businesses, less preferred
stock dividends. Free cash flow resulted in an inflow of $54 million and an
outflow of $67 million for the first six months of 1998 and 1997, respectively.
The increase in free cash flow primarily reflects the reduction in inventory,
the lower accounts receivable levels, and the reduction in interest and income
tax payments discussed above, partially offset by the decline in operating
company contribution, the timing of accounts payable disbursements and the
tobacco settlement payments in 1998.
Total estimated payments in 1998 for all attorney general agreements and
related amendments and fee payment agreements, including an agreement with Blue
Cross and Blue Shield of Minnesota, will be approximately $600 million, $80
million of which has been paid as of June 30, 1998. Payments will be funded
primarily by cash flows from operating and financing activities. For further
discussion of the potential impact of the proposed resolution of national,
regulatory and litigation issues and various litigation settlements, including
the effects of certain attorney general agreements, see note 4 to the
Consolidated Condensed Financial Statements.
Management of RJRN Holdings and its subsidiaries is continuing to review
various strategic transactions, including but not limited to, acquisitions,
divestitures, mergers and joint ventures. Management is also exploring ways to
increase efficiency and productivity and to reduce the cost structures of its
respective businesses, actions that, if implemented, could affect future
results.
Capital expenditures were $296 million for the first six months of 1998.
Management expects the current level of capital expenditures planned for 1998 to
be in the range of approximately $600 million to $650 million (approximately 56%
Food and 44% Tobacco), which will be funded primarily by cash flows from
operating and financing activities. Management expects its capital expenditures
program will continue at a level sufficient to support the strategic and
operating needs of RJRN Holdings' operating subsidiaries.
RJRN maintains a three-year revolving credit facility, of which no
borrowings were outstanding at June 30, 1998, and a 364-day credit facility
primarily to support commercial paper issuances, of which the entire facility
was substantially available at June 30, 1998. In June 1998, the maturity of the
revolving credit facility was extended to June 2001 and the 364-day credit
facility was renewed to May 31, 1999. The commitment under the 364-day facility
was reduced to $212 million. The commitments under the revolving credit facility
decline to approximately $2.1 billion in year 1, to $2.0 billion in year 2 and
to $1.7 billion in the final year. During 1998, RJRN Holdings and RJRN also
amended certain terms of these credit agreements to accomodate the settlement of
certain litigation.
In July 1998, Nabisco sold its College Inn brand of canned broths and signed
agreements, which are subject to certain conditions, to sell its U.S. and
Canadian tablespreads and U.S. egg substitute businesses and the Del Monte brand
canned vegetable business in Venezuela. In 1997, net sales from these businesses
totaled approximately $550 million. Subject to completion, these transactions
will be recorded in the third quarter of 1998 and are expected to result in a
net after-tax gain.
YEAR 2000
RJRN Holdings and RJRN have been actively working to assure that they and
their operating subsidiaries are prepared for the computer issues associated
with year 2000 compliance. Comprehensive reviews of all systems and
applications, including key suppliers and vendors, are being conducted,
implementation plans to resolve any issues are being formulated and certain
corrective actions have commenced.
18
RJRN Holdings and RJRN expect their year 2000 compliance programs, which
began in 1996, to be completed in all material respects by the end of 1999. The
total cost of achieving year 2000 compliance is currently estimated to be
approximately $90 million. All modification costs are expensed as incurred.
Through June 30, 1998, approximately $30 million has been expensed.
------------------------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements particularly with respect to the level of restructuring-related
expenses and the amount of savings related to the food restructuring program,
capital expenditures, the impact of proposed national legislation and various
litigation settlements, including certain attorney general agreements related to
the tobacco business and the impact of the year 2000 issue on computer systems
and applications which reflect management's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including, but not limited to, the effect on
financial performance and future events of competitive pricing for products,
success of new product innovations and acquisitions, local economic conditions
and the effects of currency fluctuations in countries in which RJRN Holdings and
its subsidiaries do business, the effects of domestic and foreign government
regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in
the case of the tobacco business, litigation and related legislative and
regulatory developments. Due to such uncertainties and risks, readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date hereof.
19
PART II
ITEM 1. LEGAL PROCEEDINGS
TOBACCO-RELATED LITIGATION
OVERVIEW. Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including, with increasing frequency, RJRN and RJRN Holdings) or indemnitees,
including actions claiming that lung cancer and other diseases as well as
addiction have resulted from the use of or exposure to RJRT's tobacco products.
During the second quarter of 1998, 67 new actions were served against RJRT
and/or its affiliates or indemnitees (as against 111 in the second quarter of
1997) and 41 such actions were dismissed or otherwise resolved in favor of RJRT
and/or its affiliates or indemnitees without trial. There have been noteworthy
increases in the number of these cases pending. On June 30, 1998, there were 575
active cases pending, as compared with 345 on June 30, 1997 and 193 on June 30,
1996. As of August 7, 1998, 586 active cases were pending against RJRT and/or
its affiliates or indemnitees, 580 in the United States, two each in Canada and
in Puerto Rico, and one in each of the Marshall Islands and Nigeria.
The United States cases are in 47 states and the District of Columbia, and
are distributed as follows: 160 in Florida, 109 in New York, 38 in California,
25 in Louisiana, 22 in Pennsylvania, 17 in Texas, 15 in Tennessee, 14 in each of
Ohio and Alabama, 11 in each of Illinois and West Virginia, ten in each of the
District of Columbia and Nevada, nine in each of Mississippi and New Jersey,
seven in each of Georgia and Massachusetts, six in each of Arkansas, Indiana and
Minnesota, five in each of Iowa, Maryland, and Michigan, four in each of
Arizona, Missouri and Utah, three in each of Colorado, Hawaii, Kansas, Kentucky,
New Mexico, Oklahoma, Rhode Island, South Carolina, South Dakota, Washington and
Wisconsin, two in each of Connecticut, New Hampshire, North Dakota and Oregon,
and one each in Alaska, Idaho, Maine, Montana, North Carolina and Vermont. Of
the 580 active cases in the United States, 457 are in state court and 123 are in
federal court. Most of these cases were brought by individual plaintiffs, but a
significant number, discussed below, seek recovery on behalf of states, union
pension funds, or other large classes of claimants.
For information about other litigation and legal proceedings, see note 4 to
the consolidated condensed financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Governmental
Activity."
------------------------
Litigation is subject to many uncertainties and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory, and
other developments relating to the tobacco industry and cigarette smoking that
have received wide media attention, the various litigation settlements and the
release and wide availability of various industry documents referred to above.
These developments may negatively affect the outcomes of tobacco-related legal
actions and encourage the commencement of additional similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT, RJRN and
RJRN Holdings, a significant increase in litigation and/or in adverse outcomes
for tobacco defendants could have an adverse effect on any one or all of these
entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of
valid defenses to any such actions and intend to defend such actions vigorously.
RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or
20
RJRN in particular quarterly or annual periods or the financial condition of
RJRN Holdings and RJRN could be materially affected by the ultimate outcome of
certain pending litigation matters (including litigation costs). Management is
unable to predict the outcome of the litigation or to derive a meaningful
estimate of the amount or range of any possible loss in any particular quarterly
or annual period or in the aggregate.
------------------------
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The matters indicated below were voted upon at the annual meeting of
stockholders of RJRN Holdings held on May 13, 1998. Holders of Common Stock and
ESOP Convertible Preferred Stock were entitled to vote upon the proposals to
elect directors, ratify the appointment of auditors and to vote on three
stockholder proposals. Holders present in person or by proxy at the meeting were
entitled to vote 283,840,461 shares of Common Stock and 13,453,248 shares of
ESOP Convertible Preferred Stock.
(a) Election of Nine Directors.
NAME VOTES FOR VOTES WITHHELD
- ----------------------------------------------------------------- ------------- --------------
John T. Chain, Jr. 280,853,958 2,986,503
Julius L. Chambers 280,826,590 3,013,871
John L. Clendenin 280,781,765 3,058,696
Steven F. Goldstone 280,712,178 3,128,283
Ray J. Groves 280,814,494 3,025,967
L. Dennis Kozlowski 280,818,149 3,022,312
H. Eugene Lockhart 279,704,974 4,135,487
Theodore E. Martin 280,646,480 3,193,981
Rozanne L. Ridgway 280,712,672 3,127,789
(b) Ratification of Appointment of Deloitte & Touche LLP as Independent
Auditors.
For: 282,826,960
Against: 609,516
Abstain: 403,985
(c) Stockholder Proposal on U.S. Youth Smoking Programs in Developing Countries.
For: 11,703,222
Against: 215,623,691
Abstain: 9,244,891
(d) Stockholder Proposal on Smuggling.
For: 8,243,534
Against: 219,444,766
Abstain: 8,883,509
(e) Stockholder Proposal on Workforce Reductions and Stock Options.
For: 11,721,779
Against: 222,699,211
Abstain: 2,150,820
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Agreement of Resignation, Appointment and Acceptance, dated as of July 27, 1998, by
and among RJR Nabisco, Inc., Citibank, N.A. and The Bank of New York in connection
with the Amended and Restated Indenture, dated as of July 24, 1995, between RJR
Nabisco, Inc. and Citibank, N.A.
10.1 Eighth Amendment to the 364 Day Credit Agreement between RJR Nabisco Holdings Corp.,
RJR Nabisco, Inc. and the lending institutions named therein, dated as of April 3,
1998.
10.2 Sixth Amendment to the 3 Year Credit Agreement and Ninth Amendment to the 364 Day
Credit Agreement between RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and the lending
institutions named therein, dated as of June 8, 1998.
10.3 First Amendment to the 5 Year Credit Agreement and Second Amendment to the 364 Day
Credit Agreement between Nabisco Holdings Corp., Nabisco, Inc. and the lending
institutions named therein, dated as of May 19, 1998.
10.4 Form of Deferred Stock Unit Agreement, dated May 13, 1998, between various unnamed
grantees and RJR Nabisco Holdings Corp. in connection with the Equity Incentive Award
Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries.
10.5 Form of Stock Option Agreement, dated May 13, 1998, between various unnamed optionees
and RJR Nabisco Holdings Corp. in connection with the Equity Incentive Award Plan for
Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries.
10.6 Retention Trust Agreement, dated May 13, 1998 by and between RJR Nabisco, Inc. and
Wachovia Bank, N.A.
12.1 RJR Nabisco Holdings Corp. Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends/Deficiency in the Coverage of Combined Fixed Charges and
Preferred Stock Dividends by Earnings before Fixed Charges for the six months ended
June 30, 1998.
12.2 RJR Nabisco Holdings Corp. Computation of Ratio of Earnings to Fixed
Charges/Deficiency in the Coverage of Combined Fixed Charges by Earnings before Fixed
Charges for the six months ended June 30, 1998.
12.3 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges/Deficiency in the
Coverage of Combined Fixed Charges by Earnings before Fixed Charges for the six months
ended June 30, 1998.
27.1 RJR Nabisco Holdings Corp. Financial Data Schedule for the six months ended June 30,
1998.
27.2 RJR Nabisco, Inc. Financial Data Schedule for the six months ended June 30, 1998.
99.1 Mississippi Fee Payment Agreement, dated as of July 2, 1998, by and among Philip
Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco
Corporation and (collectively, the "Mississippi Defendants"), the State of Mississippi
("Mississippi") and Mississippi's private counsel named therein (the "Mississippi
Counsel") in connection with Moore v. The American Tobacco Company, et al.,
Mississippi Litigation No. 94-1429 (the "Mississippi Action").
99.2 Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order, dated
July 2, 1998, by and among the Mississippi Defendants, Mississippi and the Mississippi
Counsel in connection with the Mississippi Action.
23
99.3 Texas Fee Payment Agreement, dated as of July 24, 1998, by and among Philip Morris
Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation,
Lorillard Tobacco Company and United States Tobacco Company (collectively, the "Texas
Defendants"), the State of Texas ("Texas") and Texas' private counsel named therein
(the "Texas Counsel") in connection with Texas v. The American Tobacco Company, et
al., Texas Litigation No. 5-96CV-91 (the "Texas Action").
99.4 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree,
dated July 24, 1998, by and among the Texas Defendants, Texas and the Texas private
counsel in connection with the Texas Action.
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
(Registrants)
Date: August 14, 1998 /s/ DAVID B. RICKARD
------------------------------------------------
David B. Rickard
Senior Vice President and Chief Financial
Officer
/s/ RICHARD G. RUSSELL
------------------------------------------------
Richard G. Russell
Senior Vice President and Controller
25