AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
---------------------
NABISCO GROUP HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10215 13-3490602
(State or other jurisdiction (Commission file number) (I.R.S. Employer
of Identification
incorporation or organization) No.)
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 registrant's principal executive offices)
------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X , NO ___.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: JULY 31, 1999:
326,137,507 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
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INDEX
PAGE
---------
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three and Six Months Ended June 30, 1999 and
1998......................................................................................... 1
Consolidated Condensed Statements of Cash Flows--Six Months Ended June 30, 1999 and 1998....... 2
Consolidated Condensed Balance Sheets--June 30, 1999 and December 31, 1998..................... 3
Notes to Consolidated Condensed Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 16
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................................................... 19
Signatures................................................................................................ 20
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
NET SALES....................................................... $ 2,023 $ 2,131 $ 3,878 $ 4,093
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold......................................... 1,089 1,187 2,116 2,312
Selling, advertising, administrative and general expenses..... 703 691 1,344 1,289
Amortization of trademarks and goodwill....................... 54 57 107 113
Restructuring charge.......................................... -- 406 -- 406
--------- --------- --------- ---------
OPERATING INCOME (LOSS)..................................... 177 (210) 311 (27)
Interest and debt expense....................................... (90) (102) (188) (206)
Other income (expense), net..................................... -- (3) (10) (12)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES........................... 87 (315) 113 (245)
Provision (benefit) for income taxes............................ 36 (99) 45 (72)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME (LOSS) OF
NABISCO HOLDINGS.......................................... 51 (216) 68 (173)
Less minority interest in income (loss) of Nabisco Holdings..... 13 (39) 20 (28)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... 38 (177) 48 (145)
Discontinued operations:
Income (loss) from operations of discontinued businesses, net
of income taxes............................................. (42) 47 24 (5)
Gain on discontinued businesses, net of income taxes (note
2).......................................................... 2,970 -- 2,970 --
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 2,966 (130) 3,042 (150)
Extraordinary item--loss on early extinguishment of debt, net of
income taxes (note 2)......................................... (279) -- (279) --
--------- --------- --------- ---------
NET INCOME (LOSS)........................................... $ 2,687 $ (130) $ 2,763 $ (150)
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations...................... $ .10 $ (.58) $ .12 $ (.52)
Income (loss) from discontinued operations.................... 9.01 .14 9.21 (.01)
Extraordinary loss............................................ (.86) -- (.86) --
--------- --------- --------- ---------
Net income (loss)........................................... $ 8.25 $ (.44) $ 8.47 $ (.53)
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations...................... $ .10 $ (.58) $ .12 $ (.52)
Income (loss) from discontinued operations.................... 9.01 .14 9.21 (.01)
Extraordinary loss............................................ (.86) -- (.86) --
--------- --------- --------- ---------
Net income (loss)........................................... $ 8.25 $ (.44) $ 8.47 $ (.53)
--------- --------- --------- ---------
--------- --------- --------- ---------
DIVIDENDS PER SHARE OF COMMON STOCK............................. $ .5125 $ .5125 $ 1.025 $ 1.025
--------- --------- --------- ---------
--------- --------- --------- ---------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------- ---------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 2,763 $ (150)
Less income (loss) from discontinued operations................................ 2,994 (5)
------- -----
Subtotal....................................................................... (231) (145)
------- -----
Adjustments to reconcile to net cash flows from continuing operating
activities:
Depreciation and amortization.............................................. 239 250
Deferred income tax provision (benefit).................................... 21 (112)
Extraordinary loss on early extinguishment of debt......................... 428 --
Changes in working capital items, net...................................... (422) (269)
Restructuring charge, net of cash payments................................. (41) 401
Other, net................................................................. 24 (39)
------- -----
Total adjustments........................................................ 249 231
------- -----
Net cash flows from continuing operating activities.......................... 18 86
Net cash flows from discontinued operations.................................. 2,284 298
------- -----
Net cash flows from operating activities..................................... 2,302 384
------- -----
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures........................................................... (99) (168)
Acquisition of business........................................................ -- (9)
Investment in commercial paper................................................. (114) --
Proceeds on the sale of assets................................................. 14 5
Repurchases of Nabisco Holdings' Class A common stock.......................... (12) (38)
Proceeds from exercise of Nabisco Holdings' Class A common stock options....... 7 22
------- -----
Net cash flows used in investing activities.................................. (204) (188)
------- -----
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings (repayments) of long-term debt.................................. (115) 1,090
Repurchase/redemption of trust preferred securities............................ (1,265) --
Increase (decrease) in short-term borrowings................................... 181 (993)
Dividends paid on common and preferred stock................................... (583) (373)
Repurchase of ESOP preferred stock............................................. (202) --
Other, net..................................................................... 63 56
------- -----
Net cash flows used in financing activities.................................. (1,921) (220)
------- -----
Effect of exchange rate changes on cash and cash equivalents..................... (6) (5)
------- -----
Net change in cash and cash equivalents...................................... 171 (29)
Cash and cash equivalents at beginning of period................................. 112 127
------- -----
Cash and cash equivalents at end of period....................................... $ 283 $ 98
------- -----
------- -----
Income taxes paid, net of refunds................................................ $ 223 $ 73
Interest paid.................................................................... $ 191 $ 179
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
JUNE 30, 1999 DECEMBER 31, 1998
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 283 $ 112
Accounts and notes receivable, net.......................................... 511 522
Inventories................................................................. 819 753
Prepaid expenses............................................................ 70 70
Income tax asset............................................................ 123 --
Deferred income taxes....................................................... 163 101
Net assets of discontinued businesses (note 2).............................. -- 6,696
------- -------
TOTAL CURRENT ASSETS.................................................... 1,969 8,254
------- -------
Property, plant and equipment, net............................................ 2,841 2,947
Trademarks, net............................................................... 3,315 3,368
Goodwill, net................................................................. 3,093 3,182
Other assets and deferred charges............................................. 208 94
------- -------
$ 11,426 $ 17,845
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................................................... $ 52 $ 68
Accounts payable and accrued liabilities.................................... 1,425 1,638
Current maturities of long-term debt........................................ 160 118
Income taxes accrued........................................................ 104 121
------- -------
TOTAL CURRENT LIABILITIES............................................... 1,741 1,945
------- -------
Long-term debt (less current maturities)...................................... 3,644 3,619
Minority interest in Nabisco Holdings......................................... 733 752
Other noncurrent liabilities.................................................. 745 962
Deferred income taxes......................................................... 1,292 1,226
Contingencies (note 8)
Nabisco Group Holdings' obligated mandatorily redeemable preferred securities
of subsidiary trusts holding solely junior subordinated debentures*......... 98 1,327
Stockholders' equity:
ESOP preferred stock........................................................ -- 205
Common stock (1999--329,485,180 shares issued, 1998--328,385,148 shares
issued)................................................................... 3 3
Paid-in capital............................................................. 3,608 9,004
Retained earnings (accumulated deficit)..................................... -- (577)
Accumulated other comprehensive income (loss)............................... (324) (460)
Treasury stock, at cost..................................................... (100) (100)
Other stockholders' equity.................................................. (14) (61)
------- -------
TOTAL STOCKHOLDERS' EQUITY............................................ 3,173 8,014
------- -------
$ 11,426 $ 17,845
------- -------
------- -------
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* The sole asset of the subsidiary trust is the junior subordinated debentures
of Nabisco Group Holdings Corp. The remaining outstanding junior
subordinated debentures have an aggregate principal amount of approximately
$101 million, an annual interest rate of 9 1/2%, and mature in September,
2047. The preferred securities will be mandatorily redeemed upon redemption
of the junior subordinated debentures. See note 2 for discussion regarding
the partial tender and redemption of these securities.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- INTERIM REPORTING
GENERAL
The consolidated condensed financial statements include the accounts of
Nabisco Group Holdings Corp. ("NGH"--formerly named RJR Nabisco Holdings Corp.),
and its majority-owned subsidiaries, including 80.5% of Nabisco Holdings Corp.
("Nabisco Holdings") and its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco").
In management's opinion, the accompanying unaudited consolidated condensed
financial statements (the "Consolidated Condensed Financial Statements") of NGH
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods presented.
For interim reporting purposes, certain costs and expenses are charged to
operations in proportion to the estimated total annual amount expected to be
incurred. The results for the three and six month periods ended June 30, 1999
are not necessarily indicative of the results to be expected for the year ended
December 31, 1999.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
The account balances and activities of R.J. Reynolds Tobacco Holdings, Inc.
("RJR"--formerly named RJR Nabisco, Inc.), which included R.J. Reynolds
International ("Reynolds International"), R.J. Reynolds Tobacco Company
("Reynolds Tobacco") and corporate headquarters, are segregated and reported as
discontinued operations in the accompanying consolidated condensed financial
statements. See note 2 for further discussion. The Consolidated Condensed
Financial Statements should be read in conjunction with the restated
consolidated financial statements and footnotes of NGH at December 31, 1998 and
1997 and for each of the three years ended December 31, 1998 filed on Form 8-K
on June 3, 1999.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
On January 1, 1999, NGH adopted SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 established standards on accounting for
start-up and organization costs and, in general, requires such costs to be
expensed as incurred. The adoption of SOP No. 98-5 did not have a material
effect on NGH's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
During the second quarter of 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was required
to be adopted by January 1, 2000, with early adoption permitted. In June 1999,
the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133, which amended SFAS
No. 133 to delay its effective date one year. SFAS No. 133 requires that all
derivative instruments be recorded on the consolidated balance sheet at their
fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. NGH has not yet determined the impact, if any, that
adoption or subsequent application of SFAS No. 133 will have on its financial
position or results of operations.
4
NOTE 1 -- INTERIM REPORTING (CONTINUED)
COMPREHENSIVE INCOME
Total comprehensive income was $2.72 billion and $(161) million for the
three months ended June 30, 1999 and 1998, respectively, and $2.69 billion and
$(181) million for the six months ended June 30, 1999 and 1998, respectively.
Total comprehensive income includes net income (loss), foreign currency
translation adjustments and minimum pension liability adjustments.
NOTE 2 -- THE REORGANIZATION
On March 9, 1999, RJR and Reynolds Tobacco entered into a definitive
agreement to sell the international tobacco business for approximately $8
billion, including the assumption of approximately $200 million of net debt, to
Japan Tobacco Inc. ("Japan Tobacco"). The sale was substantially completed on
May 12, 1999 and resulted in a net gain of approximately $2.97 billion, after
income taxes of approximately $1.9 billion, subject to post-closing adjustments.
Under the terms of the agreement, Japan Tobacco acquired substantially all of
the business, including intellectual property rights of Reynolds International,
including the international rights to the CAMEL, WINSTON and SALEM brand names.
Proceeds from the sale were used to reduce debt and for general corporate
purposes. The repurchase of approximately $4 billion of debt securities by RJR
resulted in an extraordinary loss of approximately $384 million ($250 million
after-tax) during the period.
Also on March 9, 1999, NGH announced that its board of directors had
approved a plan to separate the domestic tobacco business conducted by Reynolds
Tobacco, from the food business conducted by Nabisco's operating subsidiaries.
Under the plan, the separation was accomplished by the transfer on May 18, 1999
of RJR's 80.5% interest in Nabisco, together with approximately $1.6 billion in
proceeds from the international tobacco sale, to NGH through a merger
transaction, followed by a spin-off on June 14, 1999 to NGH stockholders of
shares in RJR. The merger transaction and subsequent spin-off are intended to be
tax-free. An additional $200 million of proceeds from the international tobacco
sale was transferred by RJR to NGH prior to the spin-off in satisfaction of
certain liabilities assumed by NGH.
Upon completion of the spin-off, NGH was legally renamed Nabisco Group
Holdings Corp. and continues to exist as a holding company, owning 80.5% of
Nabisco. The re-named Nabisco Group Holdings Corp. (symbol: NGH) and Nabisco
(symbol: NA) each will continue to trade as separate companies on The New York
Stock Exchange. Shares of RJR (symbol: RJR), as the owner of 100% of Reynolds
Tobacco, are also trading separately under the changed name of R.J. Reynolds
Tobacco Holdings, Inc.
NGH, RJR and Reynolds Tobacco have entered into several agreements governing
the relationships among the parties after the distribution of RJR's shares to
NGH stockholders, including the provision of intercompany services by Nabisco to
NGH, certain tax matters, indemnification rights and obligations and other
matters among the parties as disclosed in the Form 8-K filed by NGH on June 15,
1999.
On April 13, 1999, NGH offered to purchase any and all of its 9 1/2% trust
preferred securities and sought consents from the holders of those securities to
waive certain covenants that might have prevented some of the transactions
described above. The consent offer expired on May 17, 1999 and resulted in the
tender of approximately $276 million of the total $374 million trust preferred
securities. The total cost to tender the preferred securities, including accrued
interest, premium fees and consent fees was approximately $314 million. NGH
invested approximately $114 million of the proceeds received from RJR from the
international tobacco sale in highly rated short-term commercial paper to
service future principal and interest payments through 2003 on the trust
securities not tendered. Such amount is included in other assets and deferred
charges as of June 30, 1999.
On May 18, 1999, NGH called for redemption all of its $949 million 10% trust
preferred securities outstanding. NGH completed the redemption of the full
amount of the securities on June 18, 1999.
5
NOTE 2 -- THE REORGANIZATION (CONTINUED)
The purchase and redemption of the 9 1/2% and 10% trust preferred securities
resulted in an extraordinary loss of approximately $44 million ($29 million
after-tax) during the period.
On or about May 18, 1999, NGH called for redemption of all of its
outstanding ESOP convertible preferred stock at $16.25 per share, plus accrued
dividends. A total of 12,412,767 shares were redeemed at a cost of approximately
$202 million. NGH completed this transaction on June 10, 1999. The 406,200
remaining shares were repurchased at $16.00 per share.
In connection with the reorganization transactions, the assets and
liabilities of the Retirement Plan for Employees of RJR Nabisco, Inc. (the "old
plan") were split into two plans. One plan covers employees and former employees
of Nabisco Holdings, Nabisco and NGH ("the Nabisco Plan") and the other plan
covers employees and former employees of RJR.
The split of the assets and liabilities of the old plan was in accordance
with a May 1999 agreement between the Pension Benefit Guaranty Corporation
("PBGC") and RJR Nabisco Holdings Corp. Based on this agreement and as required
by Section 414(1) of the Internal Revenue Code, the assets of the old plan were
allocated in proportion to the benefit obligations of each of the respective
plans. The use of this methodology resulted in a lower actual transfer of assets
to the Nabisco Plan of approximately $70 million and the assumption of higher
actual benefit obligations of approximately $30 million than the allocated
amounts used in the December 31, 1998 consolidated financial statements. The
impact of this change, an increase in the unfunded pension liability of $100
million, will be recognized in net periodic benefit costs over future periods.
As a result, net periodic benefit cost for full year 1999 is expected to
increase by approximately $7 million. The PBGC agreement did not require Nabisco
to make additional contributions to the Nabisco Plan.
Summarized operating results of the discontinued businesses are as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales.................................................................. $ 1,844 $ 2,161 $ 4,210 $ 4,146
Provision for income taxes................................................. 62 78 123 73
Assets and liabilities of the discontinued businesses are as follows:
DECEMBER 31,
1998
------------
Current assets.................................................................. $ 2,987
Property, plant and equipment, net.............................................. 2,351
Trademarks and goodwill, net.................................................... 12,165
Other assets and deferred charges............................................... 341
Current liabilities............................................................. (2,859)
Long-term debt (less current maturities)........................................ (5,036)
Deferred income taxes........................................................... (1,936)
Other noncurrent liabilities.................................................... (1,317)
------------
Net assets of discontinued businesses......................................... $ 6,696
------------
------------
----------------------------
6
NOTE 3 -- EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ------------------------------------------
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
applicable to common stock:
Income (loss) from continuing
operations.......................... $ 38 $ 38 $ (177) $ (177) $ 48 $ 48 $ (145) $ (145)
Preferred stock dividends............. (4) (4) (11) (11) (8) (8) (22) (22)
--------- --------- --------- --------- --------- --------- --------- ---------
$ 34 $ 34 $ (188) $ (188) $ 40 $ 40 $ (167) $ (167)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
(in thousands):
Common shares......................... 324,769 324,769 323,858 323,858 324,411 324,411 323,828 323,828
Assumed exercise of NGH's stock
options............................. -- 347 -- -- -- 298 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
324,769 325,116 323,858 323,858 324,411 324,709 323,828 323,828
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Shares of ESOP convertible preferred stock of 13,214,133 were not included
in computing diluted earnings per share for 1998, because the effect would have
been antidilutive. Common shares also exclude 949,100 and 965,000 shares of
restricted stock as the vesting provisions had not been met at June 30, 1999 and
1998, respectively.
In connection with the spin-off, options held by employees to purchase RJR
Nabisco Holdings Corp. common stock (17,065,066 options) were equitably adjusted
into options covering NGH shares (18,354,932 options) and options covering RJR
shares (5,456,114 options) in a manner intended to preserve the aggregate
benefits under the options.
NOTE 4 -- STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the six months ended June 30, 1999 was
as follows:
RETAINED ACCUMULATED
EARNINGS OTHER
CAPITAL PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY
IN MILLIONS STOCK* CAPITAL DEFICIT) INCOME (LOSS) STOCK OTHER TOTAL
- ------------------------------------ ----------- ----------- ------------- ----------------- ----------- --------- ---------
Balance at December 31, 1998........ $ 208 $ 9,004 $ (577) $ (460) $ (100) $ (61) $ 8,014
Net income.......................... 2,763 2,763
Exercise of stock options........... 28 28
Retirement and redemption of ESOP
preferred stock (205) (2) (207)
Cash dividends declared............. (341) (341)
Foreign currency translation
adjustments....................... (87) (87)
ESOP note payments received......... 34 34
Recognition of Reynolds
International cumulative
translation adjustments upon
sale.............................. 218 218
Distribution of RJR stock........... (7,268) 6 7 (7,255)
Reclassify retained earnings debit
balance........................... (5,423) 5,423 --
Other............................... 1 (1) 6 6
----- ----------- ------------- ----- ----- --------- ---------
Balance at June 30, 1999............ $ 3 $ 3,608 $ -- $ (324) $ (100) $ (14) $ 3,173
----- ----------- ------------- ----- ----- --------- ---------
----- ----------- ------------- ----- ----- --------- ---------
* Includes $3 million of common stock for each reporting period presented.
NOTE 5 -- 1998 RESTRUCTURING CHARGES
In the second and fourth quarters of 1998, Nabisco recorded restructuring
charges of $406 million ($216 million after tax, net of minority interest) and
$124 million ($75 million after tax, net of minority
7
NOTE 5 -- 1998 RESTRUCTURING CHARGES (CONTINUED)
interest), respectively. These restructuring programs were undertaken to
streamline operations and improve profitability and will result in a workforce
reduction of approximately 6,500 employees of which 4,575 positions were
eliminated as of June 30, 1999. The restructuring programs will require net cash
expenditures of approximately $205 million. In addition, the programs will
require additional restructuring-related expenses of approximately $134 million.
$90 million ($43 million after tax, net of minority interest) was incurred since
the programs' inception, of which $19 million ($9 million after tax, net of
minority interest) and $34 million ($17 million after tax, net of minority
interest), respectively, were incurred in the three months and six months ended
June 30, 1999. These additional expenses are principally for implementation and
integration of the programs and include costs for relocation of employees and
equipment and training.
The key elements of the $530 million restructuring programs include:
SEVERANCE CONTRACT ASSETS TO BE OTHER EXIT
IN MILLIONS AND BENEFITS TERMINATIONS DISPOSED OF COSTS TOTAL
- ---------------------------------------------------- ------------- --------------- --------------- ------------- ---------
Sales force reorganizations......................... $ 37 $ 3 $ -- $ -- $ 40
Distribution reorganizations........................ 16 8 9 33
Staff reductions.................................... 83 3 86
Manufacturing cost reduction initiatives............ 22 8 30
Plant closures...................................... 46 3 217 15 281
Product line rationalizations....................... 4 4 20 32 60
----- --- ----- --- ---------
Total restructuring reserves.................... 208 18 257 47 530
----- --- ----- --- ---------
Charges and Payments:
Year ended December 31, 1998........................ 34 3 12 12 61
Six months ended June 30, 1999...................... 32 3 58 14 107
----- --- ----- --- ---------
Total charges and payments, net of cash
proceeds...................................... 66 6 70 26 168
----- --- ----- --- ---------
Reserve balances as of June 30, 1999................ $ 142 $ 12 $ 187 $ 21 $ 362
----- --- ----- --- ---------
----- --- ----- --- ---------
The charges and payments, net of cash proceeds applied against the
restructuring reserves included cash expenditures of $78 million and cash
proceeds of $6 million. $39 million of cash expenditures and $6 million of cash
proceeds were applied against the restructuring reserves in the first six months
of 1999.
As of June 30, 1999, production had ceased in 8 facilities of which 3 were
sold.
NOTE 6 -- INVENTORIES
The major classes of inventory are as follows:
JUNE 30, DECEMBER 31,
1999 1998
----------- ---------------
Finished products.................................................... $ 487 $ 457
Raw materials........................................................ 195 164
Other................................................................ 137 132
----- -----
$ 819 $ 753
----- -----
----- -----
8
NOTE 7 -- SEGMENT REPORTING
NGH is a holding company whose subsidiaries are engaged principally in the
manufacture, distribution and sale of cookies, crackers, and other food
products. NGH is organized and reports its results of operations in three
operating segments: Nabisco Biscuit, the U.S. Foods Group and the International
Food Group which are segregated by both product and geographic location.
NGH's management evaluates the performance of its operating segments based
upon ongoing Operating Company Contribution ("OCC"). OCC for each reportable
segment is operating income before amortization of trademarks and goodwill,
restructuring expenses and other items deemed unusual by management.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
IN MILLIONS 1999 1998 1999 1998
- ------------------------------------------------------------- ----------- ------------- ----------- -------------
Net sales from external customers:
Biscuit.................................................... $ 897 $ 864 $ 1,764 $ 1,714
U.S. Foods Group........................................... 547 514 982 921
International Food Group................................... 579 625 1,132 1,205
----------- ------------- ----------- -------------
Total ongoing.......................................... 2,023 2,003 3,878 3,840
----------- ------------- ----------- -------------
U.S. Foods Group........................................... -- 123 -- 246
International Food Group................................... -- 5 -- 7
----------- ------------- ----------- -------------
Total divested......................................... -- 128 -- 253
----------- ------------- ----------- -------------
Total................................................ $ 2,023 $ 2,131 $ 3,878 $ 4,093
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Operating company contribution before restructuring-related
expenses:
Biscuit.................................................... $ 129 $ 129 $ 250 $ 272
U.S. Foods Group........................................... 73 67 122 111
International Food Group................................... 48 47 80 79
----------- ------------- ----------- -------------
Total ongoing.......................................... 250 243 452 462
----------- ------------- ----------- -------------
U.S. Foods Group and other................................. -- 16 -- 36
----------- ------------- ----------- -------------
Total divested......................................... -- 16 -- 36
----------- ------------- ----------- -------------
Segment operating company contribution before restructuring-
related expenses........................................... 250 259 452 498
Restructuring-related expenses............................... (19) (6) (34) (6)
Amortization of trademarks and goodwill...................... (54) (57) (107) (113)
Restructuring charge......................................... -- (406) -- (406)
----------- ------------- ----------- -------------
Consolidated operating income (loss)......................... 177 (210) 311 (27)
Interest and debt expense.................................... (90) (102) (188) (206)
Other income (expense), net.................................. -- (3) (10) (12)
----------- ------------- ----------- -------------
Income (loss) before income taxes............................ $ 87 $ (315) $ 113 $ (245)
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
9
NOTE 8 -- CONTINGENCIES
TOBACCO LITIGATION
As of August 10, 1999, NGH was a defendant in 20 lawsuits arising out of the
tobacco business conducted by Reynolds Tobacco or its subsidiaries. In two
additional cases, NGH has been voluntarily dismissed subject to plaintiffs'
discretion to restore NGH to the case within a limited period of time. These 20
cases name NGH on a variety of theories, not always specifically pled, that seek
to impose liability on NGH for injuries allegedly caused by the use, sale,
distribution, manufacture, development, advertising, marketing or health effects
of, exposure to, or research, statements or warnings regarding cigarettes.
Most of these 20 active suits were brought in state courts by union
health-benefit trust funds -- and, in two instances, Native American tribes --
seeking to recover the health-care costs they claim to have incurred for their
members whose illnesses are allegedly related to cigarettes. One health-care
cost recovery suit is being brought in a Texas state court by a foreign state
government (RIO DE JANIERO VS. PHILIP MORRIS COMPANIES). Three of the cases are
non-union class action suits, one in Indiana state court, one in Missouri state
court and one pending in Lagos, Nigeria. NGH's defenses in all the cigarette
cases in which it is named include the merits defenses of Reynolds Tobacco plus
separate arguments that NGH is a holding company that does not engage in any of
the activities for which plaintiffs seek to impose liability. NGH also seeks to
be dismissed from some of these cases based on the fact that it has no presence
in the state in which a particular case is pending and therefore should not be
subject to the jurisdiction of the applicable court.
In the union health-care cost-recovery cases of the kind noted above,
defendants also argue that the case should be dismissed because of the settled
law that one who pays an injured person's medical expenses is legally too remote
to maintain an action against the person allegedly responsible for the injury.
Most courts that have decided motions to dismiss based on this argument,
including the federal courts of appeals for the Second, Third and Ninth
Circuits, have granted the motions to dismiss on these "remoteness" grounds. In
another case, in which NGH was named and which proceeded to trial before a jury,
NGH as well as RJR were dismissed from the case on a directed verdict after
plaintiffs had presented their case.
As of August 10, 1999, no case in which NGH is a named defendant was
scheduled for trial in 1999. One case in which Reynolds Tobacco is a defendant
ENGLE V. R.J. REYNOLDS TOBACCO COMPANY, is being tried in three phases. A jury
found against Reynolds Tobacco and the other cigarette company defendants in the
first phase. In the second phase, scheduled to begin in September 1999, the jury
is likely to consider the award of punitive damages for an entire class of
Florida smokers. It is not possible to predict the size of such an award if
made, but it could be in the billions of dollars. No payment of damages would be
required until the end of the trial and appellate process. In addition, three
other cases in which Reynolds Tobacco is a defendant are scheduled for trial
during 1999.
NGH's litigation defense costs as well as any liabilities it might incur as
a result of the cases pending against it are to be paid by RJR and Reynolds
Tobacco under the indemnification provisions of an agreement between NGH, RJR
and Reynolds Tobacco. NGH's costs of defense, as well as any liabilities
incurred as a result of the case pending in Nigeria and the RIO DE JANIERO case,
are also subject to an indemnity from Japan Tobacco Inc. as provided under the
sale agreement among Japan Tobacco, Reynolds Tobacco and RJR. If RJR and
Reynolds Tobacco and Japan Tobacco cannot fulfill their respective indemnity
obligations, NGH could be required to make the relevant payments itself.
In addition to the cases pending against NGH, there are several hundred
lawsuits relating to cigarettes in which Reynolds Tobacco, and sometimes RJR,
are named defendants. If Reynolds Tobacco and RJR are unable to satisfy their
payment obligations for any adverse judgments against them in some or all of
these cases, it is possible that plaintiffs in these cases would seek to recover
the unsatisfied obligations from the assets of NGH by bringing lawsuits on
various theories.
NGH has been served with a document subpoena dated July 7, 1999 by a grand
jury convened by the Eastern District of North Carolina. NGH has responded to
the subpoena. NGH understands that the grand jury is investigating foreign sales
practices relative to a former distributor for the sold international tobacco
businesses.
10
Some of the claims against NGH seek recovery of hundreds of millions and
possibly billions of dollars. This is also true of the litigation pending
against Reynolds Tobacco and RJR. Litigation is subject to many uncertainties.
Management is unable to predict the outcome of the litigation against NGH, or to
derive a meaningful estimate of the amount or range of any possible loss in any
quarterly or annual period or in the aggregate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of Nabisco Group Holdings'
financial condition and results of operations. The discussion and analysis for
sales, operating company contribution and operating income includes information
as reported in the historical financial statements, followed by items that
management believes impact the comparability of historical results, ongoing
results and management's discussion and analysis of ongoing results. Ongoing
results are presented on a basis consistent with how the ongoing businesses are
managed. They exclude sales, operating company contribution and operating income
from divested and discontinued businesses and restructuring-related expenses
that management believes affect the comparability of the results of operations.
The ongoing results of operations should not be viewed as a substitute for the
historical results of operations but as a tool to better understand the
underlying trends in the business. The discussion and analysis of Nabisco Group
Holdings' financial condition and results of operations should be read in
conjunction with the historical financial information and the related notes
thereto included in the Consolidated Condensed Financial Statements.
Nabisco Group Holdings owns an 80.5% majority interest in Nabisco Holdings.
The food business is conducted by the operating subsidiaries of Nabisco
Holdings. Nabisco's businesses in the United States are comprised of Biscuit and
the U.S. Foods Group. Nabisco's businesses outside the United States are
conducted by Nabisco Ltd and Nabisco International, Inc. ("Nabisco
International" together with Nabisco Ltd, the "International Food Group").
NET SALES
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- -----------------------------------
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998 % CHANGE
- --------------------------------------------------- --------- --------- ------------- --------- --------- -------------
REPORTED NET SALES:
Biscuit.......................................... $ 897 $ 864 4% $ 1,764 $ 1,714 3%
U.S. Foods Group................................. 547 637 (14%) 982 1,167 (16%)
International Food Group......................... 579 630 (8%) 1,132 1,212 (7%)
--------- --------- --------- ---------
Total............................................ $ 2,023 $ 2,131 (5%) $ 3,878 $ 4,093 (5%)
--------- --------- --------- ---------
NET SALES FROM DIVESTED BUSINESSES:
U.S. Foods Group................................. -- 123 -- 246
International Food Group......................... -- 5 -- 7
--------- --------- --------- ---------
Total............................................ -- 128 -- 253
--------- --------- --------- ---------
NET SALES FROM ONGOING BUSINESSES:
Biscuit.......................................... $ 897 $ 864 4% $ 1,764 $ 1,714 3%
U.S. Foods Group................................. 547 514 6% 982 921 7%
International Food Group......................... 579 625 (7%) 1,132 1,205 (6%)
--------- --------- --------- ---------
Total............................................ $ 2,023 $ 2,003 1% $ 3,878 $ 3,840 1%
--------- --------- --------- ---------
--------- --------- --------- ---------
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON NET SALES FROM ONGOING
BUSINESSES:
- Biscuit's net sales increased 4% in the second quarter and 3% in the first
six months versus the prior year. The increase in the second quarter
reflects price increases and volume gains in core cookies and crackers
partially offset by lower volumes in breakfast snacks. The sales
performance for the
11
first six months reflects price increases and volume increases in core
cookie and cracker brands, partially offset by lower volume in SnackWell's
and breakfast snacks.
- U.S. Foods Group's net sales increased 6% in the second quarter and 7% in
the first six months versus the prior year. The increase in the second
quarter was paced by strong volume gains from Planters nuts and
condiments. The key contributors to the sales performance for the first
six months reflects increased sales volume of Planters nuts, Life Savers
candy, condiments, pet snacks and hot cereals.
- International's net sales decreased 7% in the second quarter and 6% in the
first six months versus the prior year. The decrease in the second quarter
was primarily driven by unfavorable foreign currency translation in
Brazil, Spain and Canada. Excluding the impact of foreign currency
translation, sales increased 1%, reflecting solid volume gains in Canada,
Asia, the Caribbean and several Latin American countries. The factors
influencing decreased sales for the first six months were unfavorable
foreign currency translation in Brazil and Canada along with volume
declines in Brazil, Argentina, and the Andean region. Price increases in
Brazil and solid volume gains in Canada, Mexico and the Caribbean helped
minimize the impact on sales.
OPERATING COMPANY CONTRIBUTION
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- --------------------
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998
- ----------------------------------------------------------- --------- --------- ------------- --------- ---------
REPORTED OPERATING COMPANY CONTRIBUTION(1):
Biscuit.................................................... $ 114 $ 125 (9%) $ 222 $ 268
U.S. Foods Group........................................... 71 81 (12%) 119 144
International Food Group................................... 46 47 (2%) 77 79
Other...................................................... -- -- -- 1
--------- --------- --------- ---------
Total...................................................... $ 231 $ 253 (9%) $ 418 $ 492
--------- --------- --------- ---------
ITEMS EXCLUDED FROM ONGOING OPERATING COMPANY CONTRIBUTION:
Biscuit:
Restructuring-related expenses......................... (15) (4) (28) (4)
U.S. Foods Group:
Restructuring-related expenses......................... (2) (2) (3) (2)
Results from divested businesses....................... -- 16 -- 35
International Food Group:
Restructuring-related expenses......................... (2) -- (3) --
Results from divested businesses....................... -- -- -- --
Other...................................................... -- -- -- 1
--------- --------- --------- ---------
Total...................................................... (19) 10 (34) 30
--------- --------- --------- ---------
OPERATING COMPANY CONTRIBUTION FROM ONGOING BUSINESSES:
Biscuit.................................................... $ 129 $ 129 -- $ 250 $ 272
U.S. Foods Group........................................... 73 67 9% 122 111
International Food Group................................... 48 47 2% 80 79
--------- --------- --------- ---------
Total...................................................... $ 250 $ 243 3% $ 452 $ 462
--------- --------- --------- ---------
--------- --------- --------- ---------
(IN MILLIONS) % CHANGE
- ----------------------------------------------------------- -------------
REPORTED OPERATING COMPANY CONTRIBUTION(1):
Biscuit.................................................... (17%)
U.S. Foods Group........................................... (17%)
International Food Group................................... (3%)
Other......................................................
Total...................................................... (15%)
ITEMS EXCLUDED FROM ONGOING OPERATING COMPANY CONTRIBUTION:
Biscuit:
Restructuring-related expenses.........................
U.S. Foods Group:
Restructuring-related expenses.........................
Results from divested businesses.......................
International Food Group:
Restructuring-related expenses.........................
Results from divested businesses.......................
Other......................................................
Total......................................................
OPERATING COMPANY CONTRIBUTION FROM ONGOING BUSINESSES:
Biscuit.................................................... (8%)
U.S. Foods Group........................................... 10%
International Food Group................................... 1%
Total...................................................... (2%)
- ------------------------
(1) Operating company contribution represents operating income before
amortization of trademarks and goodwill and restructuring charges.
12
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING COMPANY CONTRIBUTION
FROM ONGOING BUSINESSES:
Biscuit's operating company contribution was flat in the second quarter and
decreased 8% in the first six months versus the prior year. Both the quarter and
year to date periods were impacted by increased advertising, consumer promotion
spending and increased selling costs associated with the implementation of the
redesigned direct store delivery sales force. Price increases and lower
manufacturing overhead costs resulting from restructuring programs, along with
volume gains in the second quarter for both cookies and crackers partially
offset these higher costs.
U.S. Foods Group's operating company contribution increased 9% in the second
quarter and 10% in the first six months versus the prior year. The second
quarter improvements were primarily due to increased earnings for condiments,
pet snacks and hot cereals. The first six months' improvement was primarily due
to gains in condiments, pet snacks and hot cereals. Both periods were impacted
by increased expenses associated with marketing programs partially offset by the
impact of restructuring programs on fixed overhead costs.
International's operating company contributions increased 2% in the second
quarter and 1% in the first six months of 1999 versus the prior year. The second
quarter increase was primarily due to increased earnings in Asia due to price
increases and volume gains, and lower overhead costs in Brazil and Argentina
partially offset by lower earnings in the Andean region principally due to
volume declines. The first six months' increase was primarily due to increased
earnings in Brazil, principally as a result of higher prices and lower fixed
overhead costs which more than offset unfavorable foreign currency translation,
and Asia due to price increases and volume gains offset by lower earnings in the
Andean region due to volume declines.
OPERATING INCOME
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------- ---------------------------------
(IN MILLIONS) 1999 1998 % CHANGE 1999 1998 % CHANGE
- --------------------------------------------------------- --------- --------- --------------- --------- --------- -----------
REPORTED OPERATING INCOME (LOSS)......................... $ 177 $ (210) $ 311 $ (27)
--------- --------- --------- ---------
OPERATING INCOME (LOSS) EXCLUDED FROM ONGOING BUSINESS:
Restructuring charge................................. -- (406) -- (406)
Restructuring-related expenses....................... (19) (6) (34) (6)
Results from divested businesses and other........... -- 14 -- 31
--------- --------- --------- ---------
Total (19) (398) (34) (381)
--------- --------- --------- ---------
OPERATING INCOME FROM ONGOING BUSINESS................... $ 196 $ 188 4% $ 345 $ 354 (3%)
--------- --------- --------- ---------
--------- --------- --------- ---------
THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING INCOME FROM ONGOING
BUSINESSES:
- NGH's operating income was $196 million and $345 million for the second
quarter and the first six months of 1999, an increase of 4% and a decrease
of 3%, respectively, from the same 1998 periods. The increase in the
second quarter was a result of higher operating company contribution
discussed previously. The decrease in the first six months reflects lower
operating company contribution discussed previously.
INTEREST AND DEBT EXPENSE
Consolidated interest and debt expense of $90 million and $188 million for
the second quarter and first six months of 1999 both decreased 12% and 9%,
respectively from the same 1998 periods primarily due to the paydown of
long-term debt with the net proceeds from businesses sold in the third quarter
of
13
1998 and with funds generated from operating cash flows and the repurchase and
redemption of trust preferred securities in May of 1999.
OTHER INCOME (EXPENSE), NET
Other income (expense), net amounted was zero and $10 million expense for
the second quarter and first six months of 1999, a decrease of $3 million and $2
million, respectively, principally due to higher interest income, partially
offset by higher foreign exchange losses.
NET INCOME (LOSS)
Nabisco Group Holdings' net income of $2.69 billion and $2.76 billion for
the second quarter and the first six months of 1999 compares to a net loss of
$130 million and $150 million for the same 1998 periods. Both 1999 periods
reflect the net gain on the sale of the international tobacco business,
increased operating income and lower interest and debt expense.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income of $2.72 billion and $2.69 billion for the second
quarter and first six months of 1999 compares to a comprehensive loss of $161
million and $181 million for the same 1998 periods. The second quarter reflects
higher net income and the favorable impact of foreign currency translation. The
first six months reflects higher net income offset by the unfavorable impact of
foreign currency translation.
RESTRUCTURING
Savings objectives set in our 1998 restructuring programs are on target
despite lower than anticipated spending to-date. The June 1998 program is
expected to be substantially completed in 1999 and the December 1998 program is
expected to be substantially completed by mid-year 2000. Pre-tax savings in 1999
will be approximately $80 million including cash savings of $73 million and,
after completion of the programs, are expected to be approximately $145 million
annually including cash savings of $135 million. For a further discussion of
restructuring programs see Note 5 to the Consolidated Condensed Financial
Statements.
DISCONTINUED OPERATIONS
Total income from discontinued operations increased approximately $2.9
billion in the second quarter of 1999 compared to the second quarter of 1998 and
increased approximately $3.0 billion for the first six months of 1999 compared
to the comparable 1998 period. The increases were due primarily to the gain on
the sale of Reynolds International in May of 1999.
EXTRAORDINARY LOSS
The extraordinary loss for the quarter and first six months of 1999 includes
a loss of approximately $384 million ($250 million after-tax) on the repurchase
of approximately $4 billion of debt securities by RJR and a loss of
approximately $44 million ($29 million after-tax) related to the purchase and
redemption of NGH's trust preferred securities.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from continuing operating activities amounted to $18 million
for the first six months of 1999 compared to $86 million for the first six
months of 1998. The decrease in net cash flows from operating activities
primarily reflects higher interest and income tax payments.
14
Cash flows used in investing activities for the first six months of 1999
increased $16 million from the first six months of 1998 to $204 million,
primarily due to an investment in commercial paper, partially offset by lower
capital expenditures.
Capital expenditures were $99 million in the first six months of 1999.
Management expects that the current level of net investment for property, plant
and equipment will be $200 million, as spending for capital expenditures will be
approximately $225 million offset by proceeds from asset sales, which is
sufficient to support the strategic and operating needs of Nabisco Holdings'
businesses. Management also expects that cash flow from operations will be
sufficient to support its planned capital expenditures in 1999.
Cash flows used in financing activities were $1.92 billion for the first six
months of 1999, an increase of $1.70 billion from the first six months of 1998,
principally due to the purchase and redemption of trust preferred securities,
the repurchase of ESOP preferred stock and the early payout of NGH's and Nabisco
Holdings' second quarter 1999 dividend.
During the third quarter of 1999 Nabisco expects to exercise a call option
to redeem $200 million of floating rate notes due August 2009 and recognize an
after tax extraordinary loss of approximately $3 million. This redemption is
expected to be refinanced with commercial paper.
As of June 30, 1999, Nabisco's $1.5 billion revolving credit facility was
unutilized and available to support borrowings. In addition, the 364-day $1.11
billion credit facility was utilized to support outstanding commercial paper
borrowings of $364 million, and accordingly, $746 million was available.
The companies believe that they are currently in compliance with all
covenants and restrictions imposed by the terms of their indebtedness.
Before the distribution, NGH had been paying a regular quarterly cash
dividend at an annual rate of $2.05 per share of common stock. On May 12, 1999,
NGH declared its regularly scheduled quarterly cash dividend of $0.5125 per NGH
common share. This cash dividend was paid on June 9, 1999 to holders of NGH
common shares as of May 27, 1999. NGH currently anticipates that it will pay a
regular quarterly cash dividend that is approximately equal to the amount of the
regular Nabisco Holdings' quarterly cash dividend that NGH expects to receive.
However, the dividend payable on each NGH common share will be less than the
dividend payable on each Nabisco Holdings' common share because the number of
outstanding NGH common shares exceeds the number of Nabisco Holdings' shares
owned by NGH. Passing through Nabisco Holdings' current annual dividend of $0.75
per share on NGH's 213,250,000 shares of Nabisco Holdings' stock would yield an
annual dividend of approximately $0.49 per share of the 326,107,880 shares of
NGH stock outstanding on June 30, 1999.
FOREIGN MARKET RISK
Nabisco's international businesses are exposed to financial market
volatility in the countries in which it operates, which can impact the
International Food Group's financial position. As of June 30, 1999, Brazil's
currency, the Real, devalued approximately 46% from December 31, 1998, compared
to the U.S. Dollar, which resulted in an unfavorable foreign currency
translation adjustment of approximately $84 million after minority interest for
the six months ended June 30, 1999.
YEAR 2000 ISSUE
Nabisco has developed plans to address the implications of the Year 2000 on
its computer systems and business operations. The Year 2000 Issue stems from
computer applications that were written using two digits rather than four digits
to define the applicable year. The issue is whether computer systems will
properly interpret date-sensitive information when the year changes to 2000.
15
Nabisco has completed an inventory and assessment of its financial,
information and operational systems, including equipment with embedded
microprocessors, and has developed detailed plans for required systems
modifications or replacements.
Software remediation of information technology systems ("IT systems") has
been completed and remediation of non-information technology systems with
embedded technology ("non-IT systems") is 70% complete and scheduled to be 100%
complete by the end of the third quarter of 1999.
Software testing following remediation is approximately 95% complete for IT
systems and is scheduled to be completed by the end of the third quarter of
1999. With respect to non-IT systems, testing is 50% complete and is expected to
be complete by the third quarter of 1999.
Approximately 95% of IT systems are remediated and in production. Management
expects the remainder to be completed and in production by the third quarter of
1999. 95% of non-IT systems are compliant and are expected to be fully Year 2000
compliant by November 1999.
Incremental costs, which include contractor costs to modify or replace
existing systems, and costs of internal resources dedicated to achieving Year
2000 compliance are charged to expense as incurred and are funded by operating
cash flows. Costs are expected to total approximately $40 million to $45
million, of which $27 million has been spent through June 30, 1999.
In 1998 Nabisco began a process of contacting key third parties (suppliers,
services providers and customers) to determine their progress on Year 2000
compliance issues and to assess the potential impact on operations if key third
parties are not successful in converting their systems in a timely manner. In
early 1999, Nabisco initiated an effort to gain greater assurance that it will
not suffer any material adverse affects of third party non-compliance. This
effort consisted of re-contacting these third parties and contacting additional
selected third parties to obtain more accurate and up-to-date status of their
Year 2000 compliance. As of June 30, 1999, Nabisco had sent correspondence to
100% of these third parties. As of June 30, 1999, Nabisco has received responses
from 60% of all third parties, with 58% of all third parties indicating
compliance. Responses from all third parties are expected to be received by the
third quarter of 1999. For third parties who have not responded or where
non-compliance was indicated, management has considered this in their assessment
of risk.
Progress against Year 2000 compliance plans is monitored by management as
well as the internal audit department. Results are reported to the Board of
Directors on a regular basis.
Nabisco's existing systems risk management program includes emergency backup
and recovery procedures to be followed in the event of failure of a
business-critical system. In addition, contingency plans to protect the business
from Year 2000-related interruptions have been developed, which will include
development of backup procedures, identification of alternate suppliers and
possible increases in safety inventory levels. The possible consequences of
Nabisco or key third parties not being fully Year 2000 compliant include
temporary plant closings, delays in the delivery of products or receipt of
supplies, invoice and collection errors, and inventory obsolescence. However,
Nabisco believes its Year 2000 implementation plan, including contingency
measures, should be completed in all material respects by the end of 1999,
thereby reducing the possible material adverse effects of the Year 2000 on
Nabisco's business, results of operations, cash flows or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Nabisco is exposed to changes in interest rates primarily as a result of its
borrowing activities which include commercial paper, short-term borrowings and
long-term fixed rate debt used to maintain liquidity and fund its business
operations. Nabisco employs a variance/co-variance approach to its calculation
of Value at Risk ("VaR"), which is a statistical measure of potential loss in
terms of fair value, cash flows, or
16
earnings of interest rate sensitive financial instruments over a one year
horizon using a 95% confidence interval for changes in interest rates. The model
assumes that financial returns are normally distributed. For options and
instruments with non-linear returns, the model uses the delta/gamma method to
approximate the financial return.
The VaR of the potential loss in fair value associated with Nabisco's
exposure to changing interest rates was $178 million after tax, net of minority
interest at June 30, 1999, a decrease of $20 million from the December 31, 1998
amount. This exposure is primarily related to long-term debt with fixed interest
rates.
The VaR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by Nabisco, nor does it
consider the potential effect of favorable changes in market factors.
COMMODITY PRICE EXPOSURE
The VaR associated with Nabisco's derivative commodity instruments due to
reasonably possible near-term changes in commodity prices, based on historical
commodity price movements, would not result in a material effect on the future
earnings of Nabisco.
The VaR associated with Nabisco's net commodity exposure (derivatives plus
physical contracts less anticipated future consumption) would result in a
potential loss in earnings of $35 million after tax, net of minority interest at
June 30, 1999, an increase of $21 million from the December 31, 1998 amount
primarily due to the volatility of soy oil and wheat commodity prices on our
underlying position in those commodities.
The VaR associated with either Nabisco's derivative commodity instruments or
its net commodity exposure would not have a material effect on the fair values
or cash flows of Nabisco.
------------------------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements concerning, among other things, the impact of Year 2000 on systems
and applications, the level of restructuring-related expenses and the amount of
savings from the restructuring program, the level of future capital
expenditures, and the level of dividends. These statements reflect management's
current views with respect to future events and financial performance. These
forward-looking statements are based on many assumptions and factors including
competitive pricing for products, commodity prices, success of new product
innovations and acquisitions, economic conditions in countries where Nabisco
Group Holdings' subsidiaries do business, the effects of currency fluctuations
and the effects of government regulation. Any changes in such assumptions or
factors could produce significantly different results.
17
PART II
ITEM 1. LEGAL PROCEEDINGS
As of August 10, 1999, NGH was a defendant in 20 lawsuits arising out of the
tobacco business conducted by Reynolds Tobacco or its subsidiaries. In two
additional cases, NGH has been voluntarily dismissed subject to plaintiffs'
discretion to restore NGH to the case within a limited period of time. These 20
cases name NGH on a variety of theories, not always specifically pled, that seek
to impose liability on NGH for injuries allegedly caused by the use, sale,
distribution, manufacture, development, advertising, marketing or health effects
of, exposure to, or research, statements or warnings regarding cigarettes.
Most of these 20 active suits were brought in state courts by union
health-benefit trust funds -- and, in two instances, Native American tribes --
seeking to recover the health-care costs they claim to have incurred for their
members whose illnesses are allegedly related to cigarettes. One health-care
cost recovery suit is being brought in a Texas state court by a foreign state
government (RIO DE JANIERO VS. PHILIP MORRIS COMPANIES). Three of the cases are
non-union class action suits, one in Indiana state court, one in Missouri state
court and one pending in Lagos, Nigeria. NGH's defenses in all the cigarette
cases in which it is named include the merits defenses of Reynolds Tobacco plus
separate arguments that NGH is a holding company that does not engage in any of
the activities for which plaintiffs seek to impose liability. NGH also seeks to
be dismissed from some of these cases based on the fact that it has no presence
in the state in which a particular case is pending and therefore should not be
subject to the jurisdiction of the applicable court.
Some of the claims against NGH seek recovery of hundreds of millions and
possibly billions of dollars. This is also true of the litigation pending
against Reynolds Tobacco and RJR. Litigation is subject to many uncertainties.
Management is unable to predict the outcome of the litigation against NGH, or to
derive a meaningful estimate of the amount or range of any possible loss in any
quarterly or annual period or in the aggregate.
For information about other litigation and legal proceedings, see note 8 to
the Consolidated Condensed Financial Statements.
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 NGH (formerly named RJR Nabisco Holdings Corp.) held on May 12,
1999. 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 two stockholder proposals. Holders present in person or
by proxy at the meeting were entitled to vote 255,685,635 shares of Common Stock
and 1,693,486 shares of ESOP Convertible Preferred Stock.
(a) Election of Nine Directors.
NAME VOTES FOR VOTES WITHHELD
- --------------------------------------------------------------- ------------- --------------
John T. Chain, Jr.............................................. 254,569,202 2,809,919
Julius L. Chambers............................................. 254,626,852 2,752,269
John L. Clendenin.............................................. 254,640,274 2,738,847
Steven F. Goldstone............................................ 254,662,790 2,716,331
Ray J. Groves.................................................. 254,663,353 2,715,768
Fred H. Langhammer............................................. 254,825,215 2,533,906
H. Eugene Lockhart............................................. 254,866,031 2,513,090
Theodore E. Martin............................................. 254,672,091 2,707,030
Rozanne L. Ridgway............................................. 254,515,078 2,864,043
18
(b)Ratification of Appointment of Deloitte & Touche LLP as Independent
Auditors.
For:................................... 256,190,461
Against:............................... 732,625
Abstain:............................... 456,035
(c)Stockholder Proposal on Tobacco Advertising and Youth.
For:................................... 9,230,356
Against:............................... 159,304,661
Abstain:............................... 14,415,742
Broker Non-Votes:...................... 74,428,362
(d)Stockholder Proposal on Smuggling.
For:................................... 9,136,578
Against:............................... 161,408,847
Abstain:............................... 12,405,334
Broker Non-Votes:...................... 74,428,362
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Certificate of Ownership and Merger merging Nabisco Group Holdings Corp. into RJR
Nabisco Holdings Corp. filed June 14, 1999.
3.1 Restated Certificate of Incorporation of Nabisco Group Holdings Corp. dated June
16, 1999.
3.2 By-laws of Nabisco Group Holdings Corp. as Amended Effective November 11, 1998 and
reflecting Company Name Change effected June 14, 1999.
10.1 Nabisco Group Holdings Corp. 1990 Long Term Incentive Plan as Amended and Restated
effective June 15, 1999.
27.1 Nabisco Group Holdings Corp. Financial Data Schedule for the six months ended June
30, 1999.
27.2 Nabisco Group Holdings Corp. Financial Data Schedule for the six months ended June
30, 1998.
(b)Reports on Form 8-K
Report on Form 8-K dated March 9, 1999, announcing, among other things,
that (i) RJR Nabisco, Inc. ("RJRN") and RJR Tobacco Company had entered into a
definitive sale of the international tobacco business of RJR Tobacco Company and
its subsidiaries to Japan Tobacco, Inc., and (ii) the Board of Directors of RJR
Nabisco Holdings Corp. ("RJRNH") had approved a plan to distribute shares of its
domestic tobacco business to RJRNH's shareholders in the form of a tax-free
spin-off transaction.
Report on Form 8-K dated April 13, 1999, regarding the commencement of
cash tender offers and consent solicitations for approximately $4.4 billion in
debt and $373.8 million in Trust Originated Preferred Securities.
Report on Form 8-K dated May 12, 1999 reporting the completion of the
sale of the international tabacco business, declaration of dividend of 100% of
common stock of R.J. Reynolds Tobacco Holdings, Inc. and other related
transactions.
Report on Form 8-K filed June 3, 1999 which restated Nabisco Group
Holdings' consolidated financial statements at December 31, 1998 and 1997 and
for each of the three years ended December 31, 1998 and its consolidated
condensed financial statements at March 31, 1999 and December 31, 1998 and for
the three months ended March 31, 1999 and 1998 to reflect businesses
discontinued during the quarter ended June 30, 1999.
Report on Form 8-K dated June 14, 1999 regarding the completion of the
distribution of 100% of the common stock of Nabisco Group Holdings' former
subsidiary R.J. Reynolds Tobacco Holdings, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NABISCO GROUP HOLDINGS CORP.
(Registrant)
/s/ DAVID B. RICKARD
------------------------------------------
David B. Rickard
Senior Vice President and Chief Financial
Officer
Date: August 13, 1999 /s/ RICHARD G. RUSSELL
------------------------------------------
Richard G. Russell
Senior Vice President and Controller
20