UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
November 23, 1998
Date of Report (Date of earliest event reported)
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RJR NABISCO HOLDINGS CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-10215 13-3490602
(Jurisdiction (Commission File Number) (I.R.S. Employer
Incorporation or Identification No.)
Organization)
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RJR NABISCO, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-6388 56-0950247
(Jurisdiction (Commission File Number) (I.R.S. Employer
Incorporation or Identification No.)
Organization)
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1301 Avenue of the Americas
New York, New York 10019
(212) 258-5600
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
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ITEM 5. OTHER INFORMATION
Following several months of negotiations, on November 23, 1998, the
four largest U.S. tobacco companies including R.J. Reynolds Tobacco Company
("RJRT") and all of the state attorneys general whose states had not already
settled their cases against the industry announced that they had approved a
settlement agreement. The agreement was also approved by attorneys general
of Puerto Rico, Guam, the Virgin Islands, American Samoa and the Northern
Marianas. The agreement, which is subject to judicial approval in each
jurisdiction, will settle the litigation claims of all of these entities
against the tobacco companies. The tobacco companies' joint press releases
and the agreement are attached as Exhibits 1, 2, 3 and 4, respectively.
The agreement calls for the tobacco companies to pay the settling
states an initial payment of $2.4 billion (allocated among the companies on the
basis of relative market capitalization) and four subsequent additional annual
initial payments starting in 2000 (allocated among the companies on the basis
of relative market share) of up to approximately $2.47 billion, $2.5 billion,
$2.6 billion and $2.7 billion, respectively. It also requires perpetual annual
payments, increasing from $4.5 billion in April 2000 to $8 billion in 2004 and
further to $9.0 billion in 2018 and thereafter. Ten additional payments of
$861 million are due annually beginning in April 2008.
Except for the first initial payment, all payments made under the
agreement are allocated among the participating manufacturers based on their
relative market shares. In addition, most payments to be made under the
agreement after 1999 are subject to a number of adjustments, most frequently
adjustments based on inflation (the greater of 3% or the rise in the consumer
price index) and on changes in the volume of cigarettes sold each year.
Certain payments are also subject to adjustments to account for payments to
previously settling states and for the impact, if any, on the signatory
tobacco companies of competitive disadvantages vis-a-vis non-settling
manufacturers as a result of the settlement. Furthermore, certain payments
are subject to set-off against payments that cigarette companies might be
required to make to the federal government that are paid over to the settling
states for uses related to this agreement. Finally, if judicial approval is
not obtained in any state, there would be an adjustment deducting for the
share of a payment allocable to that state.
The tobacco companies have also agreed to (a) make a one-time payment
of $50 million on March 31, 1999 to establish a fund for enforcement of the
agreement and laws relating to tobacco products and (b) fund activities of
the National Association of Attorneys General relating to the agreement at
the cost of $150,000 per year for ten years.
In addition, the agreement calls for the creation of a national
foundation which would establish public education and other programs and
conduct or sponsor research to reduce youth smoking and to understand and
educate the public about diseases associated with tobacco-product use. The
tobacco companies would fund the establishment of the
foundation with 10 annual payments of $25 million commencing March 31, 1999,
further payments of $250 million on March 31, 1999 and $300 million annually
thereafter for four years and additional annual payments of $300 million
beginning in 2004 if, during the year preceding the year when payment is due,
participating manufacturers collectively accounted for at least 99.05% of the
cigarette market.
The manufacturers also agree to pay the litigation costs, including
government attorneys fees, of the attorneys general's offices relating to the
settled cases and, subject to certain quarterly and annual payment caps, the
costs and fees of outside counsel to the settling states. Outside counsel fees
are to be determined either by arbitration or in accordance with a negotiated
fee procedure. Awards determined by arbitration will be paid subject to an
aggregate annual cap for all these (and certain other) settled cases in each
year of $500 million. Fees set by the negotiated fee procedure would be
subject to an annual cap of $250 million, and will not exceed a total of
$1.25 billion.
The agreement also contains provisions restricting the marketing of
cigarettes. Among these are restrictions or prohibitions on the following:
use of cartoon characters; brand name sponsorships; brand name non-tobacco
products; outdoor and transit brand advertising; payments for product
placement; free sampling; and lobbying. The agreement would require the
dissolution of the Tobacco Institute, the Council for Tobacco Research and
the Counsel on Indoor Air Research and place restrictions on the
establishment of any replacement organizations.
The agreement, when judicially approved, will release RJRT (and
certain of its indemnitees), RJR Nabisco, Inc. ("RJRN") and RJR Nabisco
Holdings Corp. ("RJRN Holdings") from: (i) all claims of the settling states
(and their respective political subdivisions and other recipients of state
health-care funds) relating to past conduct arising out of the use, sale,
distribution, manufacture, development, advertising, marketing or health
effects of, the exposure to, or research, statements or warnings about,
tobacco products; and (ii) all monetary claims relating to future conduct
arising out of the use of, or exposure to, tobacco products which have been
manufactured in the ordinary course of business.
RJRT's share of the first payment of $2.4 billion is $163.2 million
which will be charged to expense in the fourth quarter of 1998 and will be paid
from general corporate funds. RJRT's share of all other industry payments will
be charged to expense in the periods when RJRT's share of such payments is fixed
and determinable and is expected to be funded through price increases. The
financial effects of the agreement on RJRT, RJRN and RJRN Holdings are
difficult to predict, but the agreement is likely to have a negative impact on
their respective operating results, cash flows and financial condition in the
fourth quarter of 1998 and may have a significant negative impact on operating
results, cash flows and financial condition in the future. The financial
effects depend, among other things, on the impact of increased cigarette
prices (needed to cover the cost of these payments), proposed marketing
restrictions, increased funding of anti-smoking educational programs, the
amount and kind of additional
requirements that may be imposed on the industry by state and national
legislation and regulation, and the effect on RJRT's payment obligations of
such variables as inflation, sales volumes, the level of operating profits
and RJRT's competitive position in the industry. The effect of the
settlement, if any, on existing claims, or the number and type of additional
lawsuits filed against RJRT in the future, is also difficult to predict at
this time.
RJRN expects to accrue between $650 million and $750 million in the
fourth quarter of 1998 as a result of the settlement. In addition, the
Company expects to accrue in excess of $2 billion during 1999 for
settlement-related expenses, although this amount may change as the effects
of volume, inflation and other adjustments described above become known.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Exhibits
(1) Press Release of R.J. Reynolds Tobacco Company, Philip Morris
Incorporated, Brown and Williamson Tobacco Corporation and
the Lorillard Tobacco Company dated November 16, 1998.
(2) Press Release of R.J. Reynolds Tobacco Company, Philip Morris
Incorporated, Brown and Williamson Tobacco Corporation and
the Lorillard Tobacco Company dated November 20, 1998.
(3) Press Release of R.J. Reynolds Tobacco Company, Philip Morris
Incorporated, Brown and Williamson Tobacco Corporation and
the Lorillard Tobacco Company dated November 23, 1998.
(4) Master Settlement Agreement.