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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
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RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10215 13-3490602
(State or other (Commission file (I.R.S. Employer Identification
jurisdiction of number) No.)
incorporation or
organization)
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-6388 56-0950247
(State or other (Commission file (I.R.S. Employer Identification
jurisdiction of number) No.)
incorporation or
organization)
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(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.)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH NAME OF EACH
EXCHANGE ON EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED TITLE OF EACH CLASS WHICH REGISTERED
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RJR NABISCO HOLDINGS CORP. 7 3/8% Sinking Fund Debentures, Due
Common Stock, par value $.01 per share New York February 1, 2001 New York
$.835 Depositary Shares New York 7 5/8% Notes due September 15, 2003 New York
Series B Depositary Shares New York 8 5/8% Notes due 2002 New York
RJR NABISCO, INC. 8% Notes due 2000 New York
Subordinated Discount Debentures due 9 1/4% Debentures due 2013 New York
May 15, 2001 New York 8 3/4% Notes due 2005 New York
15% Payment-in-Kind Subordinated Debentures due
May 15, 2001 New York SUBSIDIARIES OF THE REGISTRANTS
13 1/2% Subordinated Debentures due May 15, 2001 New York Nabisco, Inc.
10 1/2% Senior Notes due 1998 New York 7 3/4% Sinking Fund Debentures Due May 1, 2001 New York
8.30% Senior Notes due April 15, 1999 New York 7 3/4% Sinking Fund Debentures Due
8.75% Senior Notes due April 15, 2004 New York November 1, 2003 New York
Standard Brands Incorporated
7 3/4% Sinking Fund Debentures, due May 1, 2001 New York
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANTS' KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF RJR
NABISCO HOLDINGS CORP. ON JANUARY 31, 1994 WAS APPROXIMATELY $4.9 BILLION.
CERTAIN AFFILIATES OF KKR ASSOCIATES AND DIRECTORS OF RJR NABISCO HOLDINGS CORP.
ARE CONSIDERED AFFILIATES FOR PURPOSES OF THIS CALCULATION BUT SHOULD NOT
NECESSARILY BE DEEMED AFFILIATES FOR ANY OTHER PURPOSE. NONE OF THE VOTING STOCK
OF RJR NABISCO, INC. IS HELD BY ANY NON-AFFILIATE.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS'
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: JANUARY 31, 1994:
RJR NABISCO HOLDINGS CORP.: 1,138,110,712 SHARES OF COMMON STOCK, PAR VALUE,
$.01 PER SHARE
RJR NABISCO, INC.:2,566.07515 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER SHARE
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RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE DEFINITIVE PROXY STATEMENT OF RJR NABISCO HOLDINGS CORP. TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A OF
THE SECURITIES EXCHANGE ACT OF 1934 ON OR PRIOR TO APRIL 30, 1994 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
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INDEX
PAGE
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PART I
Item 1. Business....................................................................................... 1
(a) General Development of Business....................................................... 1
(b) Financial Information about Industry Segments......................................... 2
(c) Narrative Description of Business..................................................... 2
Tobacco........................................................................... 2
Food.............................................................................. 8
Other Matters..................................................................... 11
(d) Financial Information about Foreign and Domestic Operations 13
and Export Sales..................................................................
Item 2. Properties..................................................................................... 13
Item 3. Legal Proceedings.............................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............................................ 13
Executive Officers of the Registrants.......................................................... 14
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters.......................... 16
Item 6. Selected Financial Data........................................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and 19
Results of Operations........................................................................
Item 8. Financial Statements and Supplementary Data.................................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and 29
Financial Disclosure.........................................................................
PART III
Item 10. Directors and Executive Officers of the Registrants............................................ 30
Item 11. Executive Compensation......................................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 30
Item 13. Certain Relationships and Related Transactions................................................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 31
PART I
ITEM 1. BUSINESS
(a) General Development of Business
RJR Nabisco Holdings Corp. ("Holdings") was organized as a Delaware
corporation in 1988 at the direction of Kohlberg Kravis Roberts & Co., L.P.
("KKR"), a Delaware limited partnership, to effect the acquisition of RJR
Nabisco, Inc. ("RJRN"), which was completed on April 28, 1989 (the
"Acquisition"). As a result of the Acquisition, RJRN became an indirect, wholly
owned subsidiary of Holdings. After a series of holding company mergers
completed on December 17, 1992, RJRN became a direct, wholly owned subsidiary of
Holdings. The business of Holdings is conducted through RJRN. Holdings and RJRN
are referred to herein collectively as the "Registrants".
RJRN's operating subsidiaries comprise one of the largest tobacco and food
companies in the world. In the United States, the tobacco business is conducted
by R. J. Reynolds Tobacco Company ("RJRT"), the second largest manufacturer of
cigarettes, and the packaged food business is conducted by the Nabisco Foods
Group ("NFG"), the largest manufacturer and marketer of cookies and crackers.
Tobacco operations outside the United States are conducted by R. J. Reynolds
Tobacco International, Inc. ("Tobacco International") and food operations
outside the United States and Canada are conducted by Nabisco International,
Inc. ("Nabisco International"). NFG and Nabisco International are sometimes
referred to herein collectively as "Nabisco". Together, RJRT's and Tobacco
International's tobacco products are sold around the world under a variety of
brand names. Nabisco's food products are sold in the United States, Canada,
Latin America and certain other international markets. For financial information
with respect to RJRN's industry segments, lines of business and operations in
various geographic locations, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 15 to the
consolidated financial statements, and the related notes thereto, of Holdings
and RJRN as of December 31, 1993 and 1992 and for each of the years in the
three-year period ended December 31, 1993 (the "Consolidated Financial
Statements").
RJRN was incorporated in 1970 and can trace its origins back to the
formation of R. J. Reynolds Tobacco Company in 1875. Activities were confined to
the tobacco industry until the 1960's, when diversification led to investments
in transportation, energy and food. With the acquisition of Del Monte
Corporation ("Del Monte") in 1979, RJRN began to concentrate its focus on
consumer products. This strategy led to the acquisition of Nabisco Brands, Inc.
in 1985. RJRN today conducts its tobacco line of business through RJRT and
Tobacco International and its food line of business through NFG and Nabisco
International.
In recent years the Registrants have completed a number of acquisitions
within these lines of business. These included the 1992 acquisitions of (i) the
assets of New York Style Bagel Chip Company, Inc., the country's leading
producer and marketer of bagel chips and pita chips; (ii) Plush Pippin
Corporation, a leading regional supplier of frozen pies to in-store supermarket
bakeries; (iii) Stella D'oro Biscuit Co., Inc., a New York based specialty
bakery ("Stella D'oro") which manufactures breadsticks, breakfast biscuits,
specialty cakes, pastries and snacks; and (iv) the Now & Later confection brand,
a fruit chewy taffy product. In 1992, the Registrants also acquired Industrias
Alimenticias Maguary S.A., Brazil's largest producer and marketer of packaged
fruit-based beverages, Lance S.A. de C.V., one of Mexico's leading biscuit and
pasta manufacturers, and six food and pet food businesses in Mexico in exchange
for Nabisco International's previous minority interest in a joint venture
operating those and other businesses in Mexico. During 1993, Nabisco
International acquired a 50% interest in both Royal Brands, S.A. in Spain and
Royal Brands Portugal, acquired approximately 95% of Cia. Arturo Field y la
Estrella Ltda., S.A. in Peru and increased its equity interest in a partially
owned business in Venezuela to 100%. In addition, Tobacco International acquired
a 52% interest in a cigarette factory in St. Petersburg, Russia in 1992, and
constructed a factory in Turkey and acquired a 70% interest in two cigarette
factories in the Ukraine in 1993.
1
On January 4, 1993, the Registrants completed the sale of NFG's
ready-to-eat cold cereal business to Kraft General Foods, Inc. and one of its
affiliates, for an aggregate cash purchase price of approximately $456 million
in cash, prior to post-closing adjustments.
NFG acquired the Knox gelatin brand in January 1994 and has contractual
arrangements pursuant to which it expects to acquire the remaining 50% of Royal
Brands, S.A. and Royal Brands Portugal during 1994.
RJRN will continue to assess its businesses to evaluate their consistency
with strategic objectives. Although RJRN may acquire and/or divest additional
businesses in the future, no decisions have been made with respect to any such
acquisitions or divestitures. The Registrants' credit agreement, dated as of
December 1, 1991, as amended (the "1991 Credit Agreement") and credit agreement,
dated as of April 5, 1993, as amended (the "1993 Credit Agreement", and together
with the 1991 Credit Agreement, the "Credit Agreements"), prohibit the sale of
all or substantially all or any substantial portion of the businesses of certain
subsidiaries of RJRN.
(b) Financial Information about Industry Segments
During 1993, the Registrants' industry segments were tobacco and food.
For information relating to industry segments for the years ended December
31, 1993, 1992 and 1991, see Note 15 to the Consolidated Financial Statements.
(c) Narrative Description of Business
TOBACCO
The tobacco line of business is conducted by RJRT and Tobacco
International, which manufacture, distribute and sell cigarettes. Cigarettes are
manufactured in the United States by RJRT and in over 30 foreign countries and
territories by Tobacco International and subsidiaries or licensees of RJRT and
are sold throughout the United States and in more than 160 markets around the
world. In 1993, approximately 61% of total tobacco segment net sales (after
deducting excise taxes) and approximately 65% of total tobacco segment operating
income (before amortization of trademarks and goodwill and the effects of a
restructuring expense) were attributable to domestic tobacco operations.
DOMESTIC TOBACCO OPERATIONS
The domestic tobacco business is conducted by RJRT, which is the second
largest cigarette manufacturer in the United States. RJRT's largest selling
cigarette brands in the United States include WINSTON, DORAL, SALEM, CAMEL,
MONARCH and BEST VALUE. RJRT's other cigarette brands, including VANTAGE, MORE,
NOW, STERLING, MAGNA and CENTURY, are marketed to meet a variety of smoker
preferences. All RJRT brands are marketed in a variety of styles. Based on data
collected for RJRT by an independent market research firm, RJRT had an overall
share of retail consumer cigarette sales during 1993 of 29.8%, an increase of
approximately one share point from 1992. During 1993, RJRT and the largest
domestic cigarette manufacturer, Philip Morris U.S.A., together sold
approximately 73% of all cigarettes sold in the United States.
A primary long-term objective of RJRT is to increase earnings and cash flow
through selective marketing investments in its key brands and continual
improvements in its cost structure and operating efficiency. Marketing programs
for full-price brands are designed to build brand awareness and add value to the
brands in order to retain current adult smokers and attract adult smokers of
competitive brands. In 1993, these efforts included expansion of continuity and
relationship-building programs such as CAMEL Cash and the WINSTON Winners Club,
and the introduction of line extensions such as CAMEL Special Lights and WINSTON
Select Lights. RJRT believes it is essential to compete in all segments of the
cigarette market, and accordingly offers a range of lower-priced brands
including DORAL, MONARCH and BEST VALUE intended to appeal to more
cost-conscious adult smokers.
2
For a discussion on competition in the tobacco business, see "Other
Matters--Competition" in this Item 1 and "1993 Competitive Activity" under Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
RJRT's domestic manufacturing facilities, consisting principally of
factories and leaf storage facilities, are located in or near Winston-Salem,
North Carolina and are owned by RJRT. Cigarette production is conducted at the
Tobaccoville cigarette manufacturing plant (approximately two million square
feet) and the Whitaker Park cigarette manufacturing complex (approximately one
and one-half million square feet). RJRT believes that its cigarette
manufacturing facilities are among the most technologically advanced in the
United States. RJRT also has significant research and development facilities in
Winston-Salem, North Carolina.
RJRT's cigarettes are sold in the United States primarily to chain stores,
other large retail outlets and through distributors to other retail and
wholesale outlets. Except for McLane Company, Inc., which represented
approximately 10.9% of RJRT's sales, no RJRT customers accounted for more than
10% of sales for 1993. RJRT distributes its cigarettes primarily to public
warehouses located throughout the United States that serve as local distribution
centers for RJRT's customers.
RJRT's products are sold to adult smokers primarily through retail outlets.
RJRT employs a decentralized marketing strategy that permits RJRT's sales force
to be more flexible in responding to local market dynamics by designing
individual in-store programs to fit varying consumption patterns. RJRT utilizes
print media, billboards, point-of-sale displays and other methods of
advertising. Since 1971, television and radio advertising of cigarettes has been
prohibited in the United States.
INTERNATIONAL TOBACCO OPERATIONS
Tobacco International operates in over 160 markets around the world.
Although overall foreign cigarette sales (excluding China, in which production
data indicates an approximate 2% per annum growth rate) have increased at a rate
of only 1% per annum in recent years, Tobacco International believes that the
American Blend segment, in which Tobacco International primarily competes is
growing significantly faster. Although Tobacco International is the second
largest of two international cigarette producers that have significant positions
in the American Blend segment, its share of sales of this segment is
approximately one-third of the share of Philip Morris International Inc., the
largest American Blend producer.
Tobacco International has strong brand presence in Western Europe and is
well established in its other key markets in the Middle East/Africa, Asia and
Canada. Tobacco International is aggressively pursuing development opportunities
in Eastern Europe and the former Soviet Union.
Tobacco International markets over 55 brands of which WINSTON, CAMEL and
SALEM, all American Blend cigarettes, are its international leaders. WINSTON,
Tobacco International's largest selling international brand, has a significant
presence in Puerto Rico and has particular strength in the Western Europe and
Middle East/Africa regions. CAMEL is sold in approximately 135 markets worldwide
and is Tobacco International's second largest selling international brand. SALEM
is the world's largest selling menthol cigarette and has particular strength in
Far East markets. Tobacco International also markets a number of local brands in
various foreign markets. None of Tobacco International's customers accounted for
more than 10% of sales for 1993.
Approximately 30% of Tobacco International's cigarette volume for 1993 was
manufactured by RJRT in the United States for sale in foreign markets. The
remainder was manufactured overseas, principally in owned manufacturing
facilities or by licensees or joint ventures. Tobacco International operates two
tobacco manufacturing facilities in Germany and one located in each of Canada,
Hong Kong, Hungary, Malaysia, Poland, Puerto Rico and Switzerland. Tobacco
International opened a factory in the People's Republic of China in 1988 as a
part of the first cigarette manufacturing joint venture in that country, and in
1993 constructed a factory in Turkey and acquired a 70% interest in two
3
cigarette factories in the Ukraine. In addition, in 1992, Tobacco International
acquired a 52% interest in a cigarette factory in St. Petersburg, Russia.
Certain of Tobacco International's foreign operations are subject to local
regulations that set import quotas, restrict financing flexibility and affect
repatriation of earnings or assets. In recent years, certain trade barriers for
cigarettes, particularly in Asia and Eastern Europe, have been liberalized. This
may provide opportunities for all international cigarette manufacturers,
including Tobacco International, to expand operations in such markets; however,
there can be no assurance that the liberalizing trends will be maintained or
extended or that Tobacco International will be successful in pursuing such
opportunities.
RAW MATERIALS
In its domestic production of cigarettes, RJRT primarily uses domestic
burley and flue cured leaf tobaccos purchased at domestic auction. RJRT also
purchases oriental tobaccos, grown primarily in Turkey and Greece, and certain
other non-domestic tobaccos. Tobacco International uses a variety of tobacco
leaf from both United States and international sources. Tobacco leaf is an
agricultural commodity subject in the United States to government production
controls and price supports that can affect market prices substantially. The
tobacco leaf price support program is subject to Congressional review and may be
changed at any time in the future. In addition, Congress enacted legislation
during 1993 (the Omnibus Budget Reconciliation Act of 1993), which stipulates
that, effective January 1, 1994, financial penalties will be assessed against
manufacturers if cigarettes produced in the United States do not contain at
least 75% (by weight) domestically grown flue cured and burley tobaccos.
Currently RJRT expects that compliance with the content regulation will increase
its future raw material costs. RJRT and Tobacco International believe there is a
sufficient supply of tobacco in the worldwide tobacco market to satisfy their
current production requirements.
LEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY
The advertising, sale and use of cigarettes has been under attack by
government and health officials in the United States and in other countries for
many years, principally due to claims that cigarette smoking is harmful to
health. This attack has resulted in a number of substantial restrictions on the
marketing, advertising and use of cigarettes, diminishing social acceptability
of smoking and activities by anti-smoking groups designed to inhibit cigarette
sales, the form and content of cigarette advertising and the testing and
introduction of new cigarette products. Together with manufacturers' price
increases in recent years and substantial increases in state and federal excise
taxes on cigarettes, this has had and will likely continue to have an adverse
effect on cigarette sales.
Cigarettes are subject to substantial excise taxes in the United States and
to similar taxes in many foreign markets. In 1990, Congress enacted legislation
to increase the federal excise tax per pack of 20 cigarettes to 20 cents from 16
cents on January 1, 1991 and provide for an increase in the federal excise tax
on January 1, 1993 to 24 cents. In addition, all states and the District of
Columbia impose excise taxes of levels ranging from a low of 2.5 cents to a high
of 65 cents per pack on cigarettes, and increases in these state excise taxes
could also have an adverse effect on cigarette sales. In 1993, thirteen states
and the District of Columbia enacted excise tax increases ranging from less than
2 cents per pack to 41 cents per pack.
In addition, the Clinton Administration and members of Congress have
introduced bills in Congress that would significantly increase the federal
excise tax on cigarettes, eliminate the deductibility of a portion of the cost
of tobacco advertising, ban smoking in public buildings and workplaces, add
additional health warnings on cigarette packaging and advertising and further
restrict the marketing of tobacco products.
In January 1993, the U.S. Environmental Protection Agency (the "EPA")
released a report on the respiratory effects of environmental tobacco smoke
("ETS") which concludes that ETS is a known
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human lung carcinogen in adults; and in children causes increased respiratory
tract disease and middle ear disorders and increases the severity and frequency
of asthma. RJRT has joined other segments of the tobacco and distribution
industries in a lawsuit against the EPA seeking a determination that the EPA did
not have the statutory authority to regulate ETS, and that, given the current
body of scientific evidence and the EPA's failure to follow its own guidelines
in making the determination, the EPA's classification of ETS was arbitrary and
capricious.
In September 1991, the U.S. Occupational Safety and Health Administration
("OSHA") issued a Request for Information relating to indoor air quality,
including ETS, in occupational settings. OSHA has announced that it will
commence formal rulemaking in 1994. While the Registrants cannot predict the
outcome, some form of regulation of smoking in workplaces may result.
Legislation imposing various restrictions on public smoking has also been
enacted in nineteen states and many local jurisdictions, many employers have
initiated programs restricting or eliminating smoking in the workplace and nine
states have enacted legislation designating a portion of increased cigarette
excise taxes to fund either anti-smoking programs, health care programs or
cancer research. Federal law prohibits smoking on all domestic airline flights
of six hours duration or less and the U.S. Interstate Commerce Commission has
banned smoking on buses transporting passengers inter-state.
A number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. In June 1988, Canada enacted a
ban on cigarette advertising, the constitutionality of which is before the
Supreme Court of Canada.
On December 11, 1990, RJRN and other U.S. cigarette manufacturers, through
The Tobacco Institute, announced a tobacco industry initiative to assist
retailers in enforcing minimum age laws on the sale of cigarettes, to support
the enactment of state laws requiring the adult supervision of cigarette vending
machines in places frequented by minors, to seek the uniform establishment of 18
as the minimum age for the purchase of cigarettes in all states, to distribute
informational materials to assist parents in combatting peer pressure on their
children to smoke and to limit voluntarily certain cigarette advertising and
promotional practices. In 1992, the Alcohol, Drug and Mental Health Act was
signed into law. This Act contains a provision, effective January 1, 1994, that
requires states to adopt a minimum age of 18 for purchase of tobacco products to
receive federal funding for mental health and drug abuse programs.
In 1964, the Report of the Advisory Committee to the Surgeon General of the
U.S. Public Health Service concluded that cigarette smoking was a health hazard
of sufficient importance to warrant appropriate remedial action. Since 1966,
federal law has required a warning statement on cigarette packaging. Since 1971,
television and radio advertising of cigarettes has been prohibited in the United
States. Cigarette advertising in other media in the United States is required to
include information with respect to the "tar" and nicotine content of
cigarettes, as well as a warning statement.
During the past three decades, various legislation affecting the cigarette
industry has been enacted. In 1984, Congress enacted the Comprehensive Smoking
Education Act (the "Smoking Education Act"). Among other things, the Smoking
Education Act: (i) establishes an interagency committee on smoking and health
that is charged with carrying out a program to inform the public of any dangers
to human health presented by cigarette smoking; (ii) requires a series of four
new health warnings to be printed on cigarette packages and advertising on a
rotating basis; (iii) increases type size and area of the warning on cigarette
advertisements; and (iv) requires that cigarette manufacturers provide annually,
on a confidential basis, a list of ingredients used in the manufacture of
cigarettes to the Secretary of Health and Human Services. The warnings currently
required on cigarette packages and advertisements (other than billboards) are as
follows: (i) "Surgeon General's Warning: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, And May Complicate Pregnancy"; (ii) "Surgeon General's
Warning: Quitting Smoking Now Greatly Reduces Serious Risks To Your Health";
(iii) "Surgeon General's Warning: Smoking By Pregnant Women May Result in Fetal
Injury, Premature Birth, and
5
Low Birth Weight"; and (iv) "Surgeon General's Warning: Cigarette Smoke Contains
Carbon Monoxide." Similar warnings are required on outdoor billboards. In August
1990, the Fire Safe Cigarette Act of 1990 was enacted, which directed the
Consumer Product Safety Commission to conduct and oversee research begun under
direction of the Cigarette and Little Cigar Fire Safety Act of 1984 and to
assess the practicability of developing a performance standard to reduce
cigarette ignition propensity. The Commission presented a final report to
Congress in August 1993 describing the results of the research. The Commission
concluded that while "it is practicable to develop a performance standard to
reduce cigarette ignition propensity, it is unclear that such a standard would
effectively address the number of cigarette-ignited fires." The Commission
further found that additional work would be required before the actual
development of a performance standard. Nevertheless, the Commission reported
that a test method developed by the National Institute of Standards and
Technology was valid and reliable within reasonable limits and could be suitable
for use in a performance standard. Although the Registrants cannot predict
whether further legislation on this subject may be enacted, some form of
regulation of cigarettes based on their propensity to ignite soft furnishings
may result.
Since the initial report in 1964, the Secretary of Health, Education and
Welfare and the Surgeon General have issued a number of other reports which
purport to link cigarette smoking with certain health hazards, including various
types of cancer, coronary heart disease and chronic obstructive lung disease.
These reports have recommended various governmental measures to reduce the
incidence of smoking.
In addition to the foregoing, legislation and regulations potentially
detrimental to the cigarette industry, generally relating to the taxation of
cigarettes and regulation of advertising, labeling, promotion, sale and smoking
of cigarettes, have been proposed from time to time at various levels of the
federal government. Various Congressional committees and subcommittees have
approved legislation in recent years that (i) would subject cigarettes to
regulation in various ways under the U.S. Department of Health and Human
Services, (ii) would subject cigarettes generally to regulation under the
Consumer Products Safety Act, (iii) could increase manufacturers' costs, (iv)
would mandate anti-smoking education campaigns or establish anti-smoking
programs, (v) would provide additional funding for federal and state
anti-smoking activities, (vi) would require a new list of six health warnings on
cigarette packages and advertising, expand the number or required size of the
warnings and restrict the contents of cigarette advertising and promotional
activities, (vii) would provide that neither the provisions of the Federal
Cigarette Labeling and Advertising Act, as amended (the "Cigarette Act"), nor
the Smoking Education Act should be interpreted to relieve any person from
liability under common law or state statutory law and (viii) would permit state
and local governments to restrict the sale and distribution of cigarettes and
the placement of billboard and transit advertising of tobacco products.
It is not possible to determine what additional federal, state or local
legislation or regulations relating to smoking or cigarettes will be enacted or
to predict any resulting effect thereof on RJRT, Tobacco International or the
cigarette industry generally but such legislation or regulations could have an
adverse effect on RJRT, Tobacco International or the cigarette industry
generally.
LITIGATION AFFECTING THE CIGARETTE INDUSTRY
Various legal actions, proceedings and claims are pending or may be
instituted against RJRT or its affiliates or indemnitees, including those
claiming that lung cancer and other diseases have resulted from the use of or
exposure to RJRT's tobacco products. During 1993, 16 new actions were filed or
served against RJRT and/or its affiliates or indemnitees and 18 such actions
were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or
indemnitees without trial. A total of 35 such actions in the United States, one
in Puerto Rico and one against RJRT's Canadian subsidiary were pending on
December 31, 1993. As of February 7, 1994, 35 active cases were pending against
RJRT and/or its affiliates or indemnitees, 33 in the United States, one in
Puerto Rico and one in Canada. Four of the 33 active cases in the United States
involve alleged non-smokers claiming injuries resulting from exposure to
environmental tobacco smoke. One of such cases is currently scheduled for trial
on
6
September 5, 1994 and if tried, will be the first such case to reach trial. The
United States cases are in 15 states and are distributed as follows: eight in
Louisiana, eight in Texas, three in Mississippi, two in Indiana, two in New
Jersey and one each in Alabama, Florida, Illinois, Kentucky, Maryland,
Massachusetts, Minnesota, New York, Oregon and West Virginia. Of the 33 active
cases in the United States, 24 are pending in state court and 9 in federal
court. One of the active cases is alleged to be a class action on behalf of a
purported class of 60,000 individuals.
The plaintiffs in these actions seek recovery on a variety of legal
theories, including strict liability in tort, design defect, negligence, breach
of warranty, failure to warn, fraud, misrepresentation and conspiracy. Punitive
damages, often in amounts totalling many millions of dollars, are specifically
pleaded in 20 cases in addition to compensatory and other damages. The defenses
raised by RJRT and/or its affiliates, where applicable, include preemption by
the Cigarette Act of some or all such claims arising after 1969; the lack of any
defect in the product; assumption of the risk; comparative fault; lack of
proximate cause; and statutes of limitations or repose. Juries have found for
plaintiffs in two smoking and health cases, but in one such case, which has been
appealed by both parties, no damages were awarded. The jury awarded $400,000 in
the other case, Cipollone v. Liggett Group, Inc., et al., which award was
overturned on appeal and the case was subsequently dismissed.
On June 24, 1992, the United States Supreme Court in Cipollone held that
claims that tobacco companies failed to adequately warn of the risks of smoking
after 1969 and claims that their advertising and promotional practices
undermined the effect of warnings after that date were preempted by the
Cigarette Act. The Court also held that claims of breach of express warranty,
fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's
decision was announced through a plurality opinion, and further definition of
how Cipollone will apply to other cases must await rulings in those cases.
Certain legislation proposed in recent years in Congress, among other
things, would eliminate any such preemptive effect on common law damage actions
for personal injuries. RJRT is unable to predict whether such legislation will
be enacted, if so, in what form, or whether such legislation would be intended
by Congress to apply retroactively. The Supreme Court's Cipollone decision
itself, or the passage of such legislation, could increase the number of cases
filed against cigarette manufacturers, including RJRT.
RJRT understands that a grand jury investigation being conducted in the
Eastern District of New York is examining possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research-USA,
Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this
investigation.
RJRT recently received a civil investigative demand from the U.S.
Department of Justice requesting broad documentary information from RJRT.
Although the request appears to focus on tobacco industry activities in
connection with product development efforts, it also requests general
information concerning contacts with competitors. RJRT is unable to predict the
outcome of this investigation.
Litigation is subject to many uncertainties, and it is possible that some
of the legal actions, proceedings or claims could be decided against RJRT or its
affiliates 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 and its affiliates or indemnitees and increase the number of such
claims. Although it is impossible to predict the outcome of such events or their
effect on RJRT, a significant increase in litigation activities could have an
adverse effect on RJRT. RJRT believes that it has a number of valid defenses to
any such actions, including but not limited to those defenses based on
preemption under the Cipollone decision, and RJRT intends to defend vigorously
all such actions.
7
FOOD
The food line of business conducted by NFG, which comprises the Nabisco
Biscuit Company, the LifeSavers Division, the Planters Division, the Specialty
Products Company, the Fleischmann's Division, the Food Service Division and
Nabisco Brands Ltd, and by Nabisco International.
Food products are sold under trademarks owned or licensed by Nabisco and
brand recognition is considered essential to their successful marketing. None of
Nabisco's customers accounted for more than 10% of sales for 1993.
NABISCO FOODS GROUP OPERATIONS
Nabisco Biscuit Company. Nabisco Biscuit is the largest manufacturer and
marketer in the United States cookie and cracker industry with the nine top
selling brands, each of which had annual sales of over $100 million in 1993.
Overall, in 1993, Nabisco Biscuit had a 39% share of the domestic cookie
industry sales, more than double the share of its closest competitor, and a 55%
share of the domestic cracker industry sales, more than three times the share of
its closest competitor. Leading Nabisco Biscuit cookie brands include OREO,
CHIPS AHOY! and NEWTONS. Leading Nabisco Biscuit cracker brands include RITZ,
PREMIUM, WHEAT THINS, NABISCO GRAHAMS and TRISCUIT.
OREO and CHIPS AHOY! are the two largest selling cookies in the United
States. OREO, the leading sandwich cookie, is Nabisco Biscuit's largest selling
cookie brand. CHIPS AHOY! is the leader in the chocolate chip cookie segment
with recent line extensions such as CHUNKY CHIPS AHOY! broadening its appeal and
adding incremental sales.
NEWTONS, the oldest Nabisco Biscuit cookie brand, is the third leading
cookie brand in the United States. The introduction of FAT FREE FIG and APPLE
NEWTONS in 1992 and the addition of the FAT FREE CRANBERRY, RASPBERRY and
STRAWBERRY NEWTONS in 1993 has expanded the appeal of NEWTONS and brought
incremental sales to the franchise.
Nabisco Biscuit's cracker division is led by RITZ, the largest selling
cracker brand in the United States, which accounted for 12% of cracker sales in
the United States in 1993. In addition, PREMIUM, the oldest Nabisco Biscuit
cracker brand and the leader in the saltine cracker segment, is joined by WHEAT
THINS, NABISCO GRAHAMS and TRISCUIT to comprise, along with RITZ, the five
largest selling cracker brands in the United States.
In 1991, Nabisco Biscuit introduced MR. PHIPPS PRETZEL CHIPS, the first
such product of its kind. Nabisco Biscuit expanded the MR. PHIPPS franchise with
the introduction of MR. PHIPPS TATER CRISPS in 1992, which deliver salty snack
taste with only half the fat of potato chips, and the introduction of MR. PHIPPS
TORTILLA CRISPS in 1993.
In 1992, Nabisco Biscuit became the leading manufacturer and marketer of no
fat/reduced fat cookies and crackers with the introduction of the SNACKWELL'S
line. In 1993, the SNACKWELL'S brand recorded over $200 million in sales to
become the sixth largest cookie/cracker brand in the United States.
In October 1992, Nabisco Biscuit acquired STELLA D'ORO, a leading producer
of breadsticks, breakfast biscuits, specialty cakes, pastries and snacks. This
line of specialty items gives Nabisco Biscuit an entry to new users and usage
occasions, further broadening NFG's cookie and cracker portfolio.
Nabisco Biscuit's other cookie and cracker brands, which include NUTTER
BUTTER, NILLA WAFERS, BARNUM'S ANIMALS CRACKERS, BETTER CHEDDARS, HARVEST
CRISPS, CHICKEN IN A BISKIT, CHEESE NIPS and NEW YORK STYLE BAGEL and PITA
CHIPS,
8
compete in consumer niche segments. Many are the first or second largest selling
brands in their respective segments.
Nabisco Biscuit's products are manufactured in 13 Nabisco Biscuit-owned
bakeries and in 16 facilities with which Nabisco Biscuit has production
agreements. These facilities are located throughout the United States. Nabisco
Biscuit is in the process of implementing plans to modernize certain of its
facilities. Nabisco Biscuit also operates a flour mill in Toledo, Ohio, which
supplies 85% of its flour needs.
Nabisco Biscuit's products are sold to major grocery and other large retail
chains through Nabisco Biscuit's direct store delivery system. The system is
supported by a distribution network utilizing ten major distribution warehouses
and 130 shipping branches where shipments are consolidated for delivery to
approximately 111,000 separate delivery points. NFG believes this sophisticated
distribution and delivery system provides it with a significant service
advantage over its competitors.
LifeSavers Division. The LifeSavers Division manufactures and markets hard
roll and bite-size candy and gum primarily for sale in the United States.
LifeSavers' well-known brands include LIFE SAVERS hard roll and bite-size candy,
BREATH SAVERS sugar free mints, BUBBLE YUM bubble gum, CARE*FREE sugarless gum,
NOW & LATER fruit chewy taffy and LIFE SAVERS GUMMI SAVERS fruit chewy candy. On
the basis of the most recent data available, LIFE SAVERS is the largest selling
hard roll candy in the United States, with an approximately 25% share of the
hard roll candy category, BREATH SAVERS is the largest selling sugar free breath
mint in the United States and BUBBLE YUM is the largest selling chunk bubble gum
in the United States. LifeSavers' confectionery products are seasonally
strongest during the third and fourth quarters.
LifeSavers sells its products in the United States primarily to large
retail outlets, chain accounts and to other retail and wholesale outlets. These
include grocery stores, drug/mass merchandisers, convenience stores, and food
service and military suppliers. The products are distributed from 13
distribution centers located throughout the United States. LifeSavers currently
owns and operates three manufacturing facilities for its products, one in
Holland, Michigan, one in Brooklyn, New York and the other in Las Piedras,
Puerto Rico. Sales, for the LifeSavers Division, as well as the Planters,
Specialty Products and Fleischmann's Divisions, are handled through NFG's Sales
and Integrated Logistics group, which utilize both direct sales and broker sales
organizations.
Planters Division. The Planters Division produces and/or markets nuts and
snacks largely for sale in the United States, primarily under the PLANTERS
trademark. On the basis of the most recent data available, PLANTERS nuts are the
clear leader in the packaged nut category, with a market share of more than five
times that of its nearest competitor. Planters' products are commodity oriented
and are seasonally strongest in the fourth quarter.
Planters sells its products in the United States primarily to large retail
outlets, chain accounts and to other retail and wholesale outlets. These include
grocery stores, drug/mass merchandisers, convenience stores, and food service
and military suppliers. The products are distributed from the same 13
distribution centers utilized by the LifeSavers Division. Planters currently
owns and operates three manufacturing facilities for its products, all located
in the United States.
Specialty Products Company. NFG's Specialty Products Company manufacturers
and markets a broad range of food products, with sauces and condiments, pet
snacks, ethnic foods and hot cereals representing the largest categories. Many
of its products are first or second in their product categories. Well-known
brand names include A.1. steak sauces, GREY POUPON mustards, MILK-BONE pet
snacks, ORTEGA Mexican foods and CREAM OF WHEAT hot cereals.
Specialty Products' primary entries in the sauce and condiment segments are
A.1. steak sauces, the leading steak sauces, and GREY POUPON mustards, which
include the leading Dijon mustard.
9
Specialty Products also markets REGINA wine vinegar, the leader in its segment
of the vinegar market. A.1., GREY POUPON and REGINA products are manufactured in
one facility.
Specialty Products is the leading manufacturer of pet snacks in the United
States with MILK-BONE dog biscuits. MILK-BONE products include MILK-BONE
ORIGINAL BISCUITS, FLAVOR SNACKS, DOG TREATS, BUTCHER BONES and BUTCHER'S
CHOICE. Pet snacks are produced at a single manufacturing facility.
Specialty Products produces shelf-stable Mexican foods under its ORTEGA
brand name. Specialty Products also participates in the dry mix dessert category
with ROYAL gelatins and puddings and the non-dessert gelatin category with KNOX
unflavored gelatins and has lines of regional products including COLLEGE INN
broths, VERMONT MAID syrup, MY-T-FINE puddings, DAVIS baking powder and BRER
RABBIT molasses and syrup.
NFG, through its Specialty Products Company, is the second largest
manufacturer in the hot cereal category, participating in both the cook-on-stove
and mix-in-bowl segments of the category. The Quaker Oats Company, with over 60%
of the hot cereal category volume sales, is the most significant participant in
the hot cereal category. CREAM OF WHEAT, the leading wheat-based hot cereal, and
CREAM OF RICE, participate in the cook-on-stove segment and at least seven
varieties of INSTANT CREAM OF WHEAT participate in the mix-in-bowl segment. Hot
cereals are manufactured in one facility.
Specialty Products sells its products to retail grocery chains through
independent brokers and to drug/mass merchandisers and other major retail
outlets through a direct salesforce. The products are distributed from the same
13 distribution centers utilized by the LifeSavers Division.
Fleischmann's Division. The Fleischmann's Division manufactures and markets
various margarines and spreads as well as an egg substitute.
Fleischmann's margarine business is the second largest margarine producer
in the United States. Fleischmann's currently participates in all three segments
of the margarine category, with FLEISCHMANN'S in the premium health segment,
BLUE BONNET in the volume segment and MOVE OVER BUTTER in the premium blend
segment. Fleischmann's margarines are currently manufactured in three
facilities. Fleischmann's is also the market leader in the egg substitute
category with EGG BEATERS. Distribution for the Fleischmann's Division is
principally direct from plant to stores.
Food Service Division. The Food Service Division of NFG sells a variety of
specially packaged food products of the other groups of NFG through non-grocery
channels, including cookies, crackers, cereals, sauces and condiments for the
food service and vending machine industry. The Food Service Division is a
leading regional supplier of premium frozen pies to in-store supermarket
bakeries, wholesale clubs and food service accounts through the Plush Pippin
Corporation. The Food Service Division provides NFG with an additional
distribution method for its products.
Nabisco Brands Ltd. Nabisco Brands Ltd conducts NFG's Canadian operations
through a biscuit division, a grocery division and a food service division. The
biscuit division produced nine of the top ten cookies and nine of the top ten
crackers in Canada in 1993. Nabisco Brands Ltd's cookie and cracker brands in
Canada include OREO, CHIPS AHOY!, FUDGEE-O, PEEK FREANS, DAD'S, DAVID, PREMIUM
PLUS, RITZ, TRISCUIT and STONED WHEAT THINS. These products are manufactured in
five bakeries in Canada and are sold through a direct store delivery system,
utilizing 11 sales offices and distribution centers and a combination of public
and private carriers.
Nabisco Brands Ltd's grocery division produces and markets canned fruits
and vegetables, fruit drinks and pet snacks. The grocery division is the leading
canned fruit producer in Canada and is the second largest canned vegetable
producer in Canada. Canned fruits and vegetables and fruit drinks are marketed
under the DEL MONTE trademark, pursuant to a license from Del Monte, and under
the AYLMER trademark. The grocery division also markets MILK-BONE pet snacks and
MAGIC
10
baking powder, each leading brands in Canada. Excluding the facility sold in
connection with the sale of Nabisco's ready-to eat cold cereal business, the
division operated six manufacturing facilities in 1993, five of which are
devoted to canned products, principally fruits and vegetables, and one of which
produced pet snacks. The grocery division's products are sold directly to retail
chains and are distributed through six regional warehouses.
Nabisco Brands Ltd's food service division sells a variety of specially
packaged food products including cookies, crackers, canned fruits and vegetables
as well as condiments to non-grocery outlets. The food service division has its
own sales and marketing organization and sources product from Nabisco Brands
Ltd's other divisions.
NABISCO INTERNATIONAL OPERATIONS
Nabisco International is a leading producer of powdered dessert and drink
mixes, biscuits, baking powder and other grocery items, industrial yeast and
bakery ingredients in many of the 17 Latin American countries in which it has
operations. Nabisco International also exports a variety of NFG products to
markets in Europe and Asia from the United States. Nabisco International is one
of the largest multinational packaged food businesses in Latin America.
Nabisco International manufactures and markets yeast, baking powder and
bakery ingredients under the FLEISCHMANN'S and ROYAL brands, biscuits and
crackers under the NABISCO brand, dessert and drink mixes under the ROYAL brand,
processed milk products under the GLORIA brand, and canned fruits and vegetables
under the DEL MONTE brand pursuant to a license from Del Monte. Nabisco
International's largest market is Brazil, where it operates 15 plants. Nabisco
International is the market leader in powdered desserts in most of Latin
America, the yeast category in Brazil, biscuits in Peru, Spain, Venezuela and
Uruguay, and canned vegetables in Venezuela. Nabisco International also
maintains a strong position in the processed milk category in Brazil.
During 1993, Nabisco International significantly increased its presence in
Europe through the acquisition of a 50% interest in each of Royal Brands S.A. in
Spain and Royal Brands Portugal. Nabisco International has contractual
arrangements pursuant to which it expects to acquire the remaining 50% of such
businesses in 1994. Nabisco International's products in Spain now include
biscuits marketed under the ARTIACH and MARBU trademarks, powder dessert mixes
marketed under the ROYAL trademark and various other foods, including canned
meats and juices.
Nabisco International's grocery products are sold to retail outlets through
its own sales forces and independent wholesalers and distributors. Industrial
yeast and bakery products are sold to the bakery trade through Nabisco
International's own sales forces and independent distributors.
RAW MATERIALS
Various agricultural commodities constitute the principal raw materials
used by Nabisco in its food businesses. Other raw materials used by Nabisco are
purchased on the commodities market and through supplier contracts. Prices of
agricultural commodities tend to fluctuate due to various seasonal, climatic and
economic factors, which factors generally also affect Nabisco's competitors.
Nabisco believes that the raw materials for its products are in plentiful
supply and all are readily available from a variety of independent suppliers.
OTHER MATTERS
COMPETITION
Generally, the markets in which RJRN conducts its businesses are highly
competitive, with a number of large participants. Competition is conducted on
the basis of brand recognition, brand loyalty and price. For most of RJRN's
brands substantial advertising and promotional expenditures are
11
required to maintain or improve a brand's position or to introduce a new brand.
With respect to the tobacco industry, anti-smoking groups have undertaken
activities designed to inhibit cigarette sales, the form and content of
cigarette advertising and the testing and introduction of new cigarette
products.
Because television and radio advertising for cigarettes is prohibited in
the United States and brand loyalty has tended to be higher in the cigarette
industry than in other consumer product industries, established cigarette brands
in the United States have a competitive advantage. RJRT has repositioned or
introduced brands designed to appeal to adult smokers of the largest selling
cigarette brand in the United States, but there can be no assurance that such
efforts will be successful.
In addition, increased selling prices and taxes on cigarettes have resulted
in additional price sensitivity of cigarettes at the consumer level and in a
proliferation of discounted brands in the growing savings segment of the market.
Generally, sales of cigarettes in the savings segment are not as profitable as
those in other segments.
In April 1993, RJRT's largest competitor announced a shift in strategy
designed to gain share of market while sacrificing short-term profits. The
competitor's tactics included increased promotional spending and temporary price
reductions on its largest cigarette brand, followed several months later by list
price reductions on all its full-price and mid-price brands. RJRT defended its
major full-price brands during the period of temporary price reductions and, to
remain competitive in the marketplace, also reduced list prices on all its
full-price and mid-price brands in August 1993. The cost of defensive price
promotions and the impact of lower list prices were primarily responsible for
the sharp drop in RJRT's 1993 operating company contribution.
Although some improvement to the stability of the competitive environment
has occurred in the fourth quarter of 1993, RJRT cannot predict if or when any
further improvement to the competitive environment will occur or whether such
stability will continue. In addition, growth in lower price brands was slowed in
the second half of 1993 due to net price reductions on full price brands. RJRT
is unable to predict whether this trend will continue.
ENVIRONMENTAL MATTERS
The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the EPA and other governmental agencies under various
statutes have resulted in, and will likely continue to result in, substantial
expenditures for pollution control, waste treatment, plant modification and
similar activities.
Certain subsidiaries of the Registrants have been named "potentially
responsible parties" with third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to
approximately fifteen sites.
RJRN has been engaged in a continuing program to assure compliance with
such laws and regulations. Although it is difficult to identify precisely the
portion of capital expenditures or other costs attributable to compliance with
environmental laws and the Registrants can not reasonably estimate the cost of
resolving the above mentioned CERCLA matters, the Registrants do not expect
such expenditures or costs to have a material adverse effect on the financial
condition of either of the Registrants.
EMPLOYEES
At December 31, 1993, the Registrants together with their subsidiaries had
approximately 66,500 full time employees. None of RJRT's operations are
unionized. Most of the unionized workers at Nabisco's operations are represented
under a national contract with the Bakery, Confectionery and Tobacco Workers
International Union, which was ratified in August 1992 and which will expire
in August 1996. Other unions represent the employees of a number of Nabisco's
operations. In addition, several of Tobacco International's operations are
unionized. RJRN believes that its relations with its employees and with the
unions in which its employees are members are good.
12
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
For information about foreign and domestic operations and export sales for
the years 1991 through 1993, see "Geographic Data" in Note 15 to the
Consolidated Financial Statements.
ITEM 2. PROPERTIES
For information pertaining to the Registrants' assets by lines of business
and geographic areas as of December 31, 1993 and 1992, see Note 15 to the
Consolidated Financial Statements.
For information on properties, see Item 1.
ITEM 3. LEGAL PROCEEDINGS
For information relating to litigation and legal proceedings, see "Other
Matters-Environmental Matters" and "Litigation Affecting the Cigarette Industry"
contained in Item 1 hereof.
------------------------------
The Registrants believe that the ultimate outcome of all pending litigation
and legal proceedings should not have a material adverse effect on either of the
Registrants' financial position; however, it is possible that the results of
operations or cash flows of the Registrants in a particular quarterly or annual
period could be materially affected by the ultimate outcome of certain pending
litigation matters. Management is unable to derive a meaningful estimate of the
amount or range of such possible loss in any particular quarterly or annual
period or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
EXECUTIVE OFFICERS OF THE REGISTRANTS
EXECUTIVE OFFICERS OF HOLDINGS
The executive officers of Holdings are Charles M. Harper (Chairman of the
Board and Chief Executive Officer), Lawrence R. Ricciardi (President and General
Counsel), Eugene R. Croisant (Executive Vice President), Stephen R. Wilson
(Executive Vice President and Chief Financial Officer), Robert S. Roath (Senior
Vice President and Controller) and John J. Delucca (Senior Vice President and
Treasurer). The following table sets forth certain information regarding such
officers.
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT AND FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
- -------------------------- --------- ------------------------------------------------------------------------------
Charles M. Harper 66 May 1993-Present, Chairman and Chief Executive Officer; prior thereto,
Chairman and Chief Executive Officer, ConAgra, Inc., 1981-1993.
Lawrence R. Ricciardi 53 May 1993-Present, President and General Counsel; prior thereto, Co-Chairman
and Chief Executive Officer and General Counsel, March, 1993-May, 1993;
Executive Vice President and General Counsel, 1989-1993; Executive Vice
President and General Counsel, American Express Travel Related Services Co.,
Inc., 1985-1989.
Eugene R. Croisant 56 1989-Present, Executive Vice President of Human Resources and Administration;
prior thereto, Chief Operations Officer, Continental Bank Corporation,
1988-1989.
Stephen R. Wilson 47 May 1993-Present, Executive Vice President and Chief Financial Officer; prior
thereto, Senior Vice President, Corporate Development, 1990-1993; General
Manager, North America, Franklin Mint, 1989-1990; President, Cadbury
Beverages North America, 1987-1989.
Robert S. Roath 51 1991-Present, Senior Vice President and Controller; prior thereto, Vice
President and Controller, 1990-1991; Vice President and Corporate
Controller, Colgate-Palmolive Company, 1988-1990.
John J. Delucca 50 September 1993-Present, Senior Vice President and Treasurer; prior thereto,
Managing Director and Chief Financial Officer, Hascoe Associates, 1991-1993;
President and Chief Financial Officer, Lexington Group, 1990-1991; Senior
Vice President, Finance and Managing Director, Trump Group, 1988-1990.
14
EXECUTIVE OFFICERS OF RJRN NOT LISTED ABOVE
Set forth below are the names, ages, positions and offices held and a brief
account of the business experience during the past five years of each executive
officer of RJRN, other than those listed above.
PRESENT PRINCIPAL OCCUPATION
OR EMPLOYMENT AND FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
- ------------------------------ ----------- ---------------------------------------------------------------------------
H. John Greeniaus 49 May 1993-Present, Chairman and Chief Executive Officer, NFG; prior thereto,
President, NFG, 1992-1993; President and Chief Executive Officer of
Nabisco Brands, Inc., 1987-1991. Director since 1989.
James W. Johnston 47 1989-Present, Chairman and Chief Executive Officer, R. J. Reynolds Tobacco
Company; Chairman, R. J. Reynolds Tobacco International, Inc. since
October 1993; prior thereto, Division Executive, Citibank, N.A.,
1984-1989. Director since 1989.
Anthony J. Butterworth 56 October 1993-Present, President and Chief Executive Officer, R.J. Reynolds
Tobacco International, Inc.; prior thereto, Managing Director and Chief
Executive Officer, London International Group plc, 1991-1993; Chief
Operating Officer, London International Group plc, 1989-1991.
H.F. Powell 61 January 1994-Present, Chairman and Chief Executive Officer, Nabisco
International, Inc.; prior thereto, President, Nabisco International,
Inc., 1993-1994; Executive Vice President, Nabisco International, Inc.,
1989-1993.
M.B. Oglesby, Jr. 51 1989-Present, Senior Vice President, Government Affairs; prior thereto,
Deputy Chief of Staff to President Ronald Reagan, 1988-1989.
J. Thomas Pearson 52 1988-Present, Senior Vice President, Taxation.
Jeffrey A. Kuchar 39 November 1993-Present, Vice President and General Auditor; prior thereto,
Director of Finance and Business Development, Specialty Products Company
of NFG, 1993; Director of Financial Planning, Specialty Products Company
of NFG, 1992-1993; Assistant Corporate Controller, 1987-1991.
Robert F. Sharpe, Jr. 41 1989-Present, Vice President, Assistant General Counsel and Secretary;
prior thereto, Assistant General Counsel, 1988-1989.
Jason H. Wright 33 March 1993-Present, Vice President of Worldwide Communications; prior
thereto, Vice President of Financial Communications, 1990-1993; Director
of Corporate Communications, Aetna Life & Casualty, 1988-1990.
15
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Holdings, par value $.01 per share (the "Common
Stock"), is listed and traded on the New York Stock Exchange (the "NYSE"). Since
completion of the Acquisition there has been no public trading market for the
common stock of RJRN.
As of January 31, 1994, there were approximately 51,000 record holders of
the Common Stock. All of the common stock of RJRN is owned by Holdings. The
Common Stock closing price on the NYSE for February 22, 1994 was $7 1/2.
The following table sets forth, for the calendar periods indicated, the
high and low sales prices per share for the Common Stock on the NYSE Composite
Tape, as reported in the Wall Street Journal:
HIGH LOW
--------- ---------
1993:
First Quarter................................................... $ 9 1/4 $ 7 5/8
Second Quarter.................................................. 8 1/8 5 1/8
Third Quarter................................................... 5 7/8 4 1/2
Fourth Quarter.................................................. 7 3/8 4 3/8
HIGH LOW
--------- ---------
1992:
First Quarter................................................... $ 11 3/4 $ 8 3/4
Second Quarter.................................................. 10 3/8 8 3/8
Third Quarter................................................... 9 7/8 8
Fourth Quarter.................................................. 9 1/4 7 7/8
Holdings has never paid any cash dividends on shares of the Common Stock.
Cash dividends paid by RJRN to Holdings are set forth in the Consolidated
Statements of Cash Flows in the Consolidated Financial Statements.
The operations of the Registrants are conducted through RJRN's subsidiaries
and, therefore, the Registrants are dependent on the earnings and cash flow of
RJRN's subsidiaries to satisfy their respective debt obligations and other cash
needs. The Credit Agreements, which contain restrictions on the payment of cash
dividends or other distributions by Holdings in excess of certain specified
amounts, and the indentures relating to certain of RJRN's debt securities, which
contain restrictions on the payment of cash dividends or other distributions by
RJRN to Holdings in excess of certain specified amounts, or for certain
specified purposes, effectively limit the payment of dividends on the Common
Stock. In addition, the declaration and payment of dividends is subject to the
discretion of the board of directors of Holdings and to certain limitations
under Delaware law.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1993 and 1992 and for each of the years in the three-year period ended December
31, 1993 for Holdings was derived from the Consolidated Financial Statements,
which have been audited by Deloitte & Touche, independent auditors. In addition,
the consolidated financial data as of December 31, 1991, 1990 and 1989, for the
year ended December 31, 1990 and for the period from February 9, 1989 through
December 31, 1989 for Holdings and for the period from January 1, 1989 through
February 8, 1989 for RJRN was derived from the consolidated financial statements
of Holdings and RJRN as of December 31, 1991, 1990 and 1989, for the year ended
December 31, 1990 and for each of the periods within the one-year period ended
December 31, 1989, not presented herein, which has been audited by Deloitte &
Touche, independent auditors. The data should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial information
included herein.
HOLDINGS RJRN
-------------------------------------------------------- -----------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE
AMOUNTS) 1993 1992 1991 1990 1989
--------- --------- --------- --------- -------------------------
2/9 TO 12/31 1/1 TO 2/8
------------ -----------
RESULTS OF OPERATIONS
Net sales.................................. $ 15,104 $ 15,734 $ 14,989 $ 13,879 $ 12,114 $ 650
--------- --------- --------- --------- ------------ -----------
Cost of products sold...................... 6,640 6,326 6,088 5,652 5,241 332
Selling, advertising, administrative and
general expenses......................... 5,731 5,788 5,358 4,801 4,276 295
Amortization of trademarks and goodwill.... 625 616 609 608 557 10
Restructuring expense...................... 730 106 -- -- -- --
--------- --------- --------- --------- ------------ -----------
Operating income(1)...................... 1,378 2,898 2,934 2,818 2,040 13
Interest expense........................... (1,190) (1,429) (2,113) (3,000) (2,893) (44)
Amortization of debt issuance costs........ (19) (20) (104) (176) (447) --
Change in control costs.................... -- -- -- -- -- (247)
Other income (expense), net................ (58) 7 (69) (44) 169 15
--------- --------- --------- --------- ------------ -----------
Income (loss) from continuing operations
before income taxes.................... 111 1,456 648 (402) (1,131) (263)
Provision (benefit) for income taxes....... 114 680 280 60 (156) (66)
--------- --------- --------- --------- ------------ -----------
Income (loss) from continuing
operations............................. (3) 776 368 (462) (975) (197)
Income (loss) from operations of
discontinued businesses, net of income
taxes(2)................................. -- -- -- -- (1) 24
Extraordinary item--(loss) gain on early
extinguishments of debt, net of income
taxes.................................... (142) (477) -- 33 -- --
--------- --------- --------- --------- ------------ -----------
Net income (loss).......................... (145) 299 368 (429) (976) (173)
Preferred stock dividends.................. 68 31 173 50 -- 4
--------- --------- --------- --------- ------------ -----------
Net income (loss) applicable to common
stock.................................... $ (213) $ 268 $ 195 $ (479) $ (976) $ (177)
--------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- ------------ -----------
PER SHARE DATA
Income (loss) from continuing operations
per common and common equivalent share... $ (0.05) $ 0.55 $ 0.22 $ (1.19) $ (3.21) $ (0.89)
Dividends per share of Series A Preferred
Stock(3)................................. 3.34 3.34 0.49 -- -- --
BALANCE SHEET DATA
(AT END OF PERIODS)
Working capital............................ $ 202 $ 730 $ 165 $ (1,089) $ 106
Total assets............................... 31,295 32,041 32,131 32,915 36,412
Total debt................................. 12,448 14,218 14,531 18,918 25,159
Redeemable preferred stock(4).............. -- -- -- 1,795 --
Stockholders' equity(5).................... 9,070 8,376 8,419 2,494 1,237
(Footnotes on following page)
17
(Footnotes for preceding page)
- ---------------
(1) The 1992 amount includes a gain of $98 million on the sale of Holdings'
ready-to-eat cold cereal business.
(2) The 1989 amount for Holdings included $237 million of interest expense
allocated to discontinued operations.
(3) On November 8, 1991, Holdings issued 52,500,000 shares of Series A
Conversion Preferred Stock, par value $.01 per share ("Series A Preferred
Stock") and sold 210,000,000 $.835 depositary shares (the "Series A
Depositary Shares"). Each Series A Depositary Share represents a one-quarter
ownership interest in a share of Series A Preferred Stock. Each share of
Series A Preferred Stock bears cumulative cash dividends at a rate of $3.34
per annum and is payable quarterly in arrears on the 15th day of each
February, May, August and November. Because Series A Preferred Stock
mandatorily converts into Common Stock by November 15, 1994, dividends on
shares of Series A Preferred Stock are reported similar to common equity
dividends.
(4) On December 16, 1991, an amendment to the Amended and Restated Certificate
of Incorporation of Holdings was filed which deleted the provisions
providing for the mandatory redemption of the redeemable preferred stock of
Holdings on November 1, 2015. Accordingly, such securities were presented as
a component of Holdings' stockholders' equity as of December 31, 1992 and
1991. Such securities were redeemed on December 6, 1993 (see Note 12 to the
Consolidated Financial Statements).
(5) Holdings' stockholders' equity at December 31 of each year from 1993 to 1989
includes non-cash expenses related to accumulated trademark and goodwill
amortization of $3.015 billion, $2.390 billion, $1.774 billion, $1.165
billion and $557 million, respectively. (See Note 13 to the Consolidated
Financial Statements.)
See Notes to Consolidated Financial Statements.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RJR Nabisco, Inc.'s ("RJRN") operating subsidiaries comprise one of the
largest tobacco and food companies in the world. In the United States, the
tobacco business is conducted by R. J. Reynolds Tobacco Company ("RJRT"), the
second largest manufacturer of cigarettes, and the packaged food business is
conducted by the Nabisco Foods Group ("NFG"), the largest manufacturer and
marketer of cookies and crackers. Tobacco operations outside the United States
are conducted by R.J. Reynolds Tobacco International, Inc. ("Tobacco
International") and food operations outside the United States and Canada are
conducted by Nabisco International, Inc. ("Nabisco International").
The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJR Nabisco Holdings Corp. ("Holdings"),
the parent company of RJRN. The discussion and analysis should be read in
connection with the historical financial information included in the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Summarized financial data for Holdings is as follows:
% CHANGE FROM
PRIOR YEAR
------------------------
1993 1992 1991 1993 1992
--------- --------- --------- ----------- -----------
(DOLLARS IN MILLIONS)
Net Sales:
RJRT..................................................... $ 4,949 $ 6,165 $ 5,861 (20)% 5%
Tobacco International.................................... 3,130 2,862 2,679 9% 7%
--------- --------- ---------
Total Tobacco............................................ 8,079 9,027 8,540 (11)% 6%
Total Food............................................... 7,025 6,707 6,449 5% 4%
--------- --------- ---------
$ 15,104 $ 15,734 $ 14,989 (4)% 5%
--------- --------- ---------
--------- --------- ---------
Operating Company Contribution(1):
RJRT..................................................... $ 1,200 $ 2,112 $ 2,226 (43)% (5)%
Tobacco International.................................... 644 575 500 12% 15%
--------- --------- ---------
Total Tobacco............................................ 1,844 2,687 2,726 (31)% (1)%
Total Food............................................... 995 947 920 5% 3%
Headquarters............................................. (106) (112) (103) 5% (9)%
--------- --------- ---------
$ 2,733 $ 3,522 $ 3,543 (22)% (1)%
--------- --------- ---------
--------- --------- ---------
Operating Income:
RJRT..................................................... $ 480 $ 1,704 $ 1,860 (72)% (8)%
Tobacco International.................................... 413 537 462 (23)% 16%
--------- --------- ---------
Total Tobacco............................................ 893 2,241 2,322 (60)% (3)%
Total Food............................................... 624 769 715 (19)% 8%
Headquarters............................................. (139) (112) (103) (24)% (9)%
--------- --------- ---------
$ 1,378 $ 2,898 $ 2,934 (52)% (1)%
--------- --------- ---------
--------- --------- ---------
(Footnotes on following page)
19
INDUSTRY SEGMENTS
The percentage contributions of each of Holdings' industry segments to net
sales and operating company contribution during the last five years were as
follows:
1993 1992 1991 1990 1989(3)
----------- ----------- ----------- ----------- -----------
Net Sales:
Total Tobacco.......................................... 53% 57% 57% 58% 55%
Total Food............................................. 47 43 43 42 45
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Operating Company Contribution(1)(2):
Total Tobacco.......................................... 65% 74% 75% 77% 73%
Total Food............................................. 35 26 25 23 27
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
- ---------------
(1) Operating income before amortization of trademarks and goodwill and
exclusive of restructuring expenses (RJRT: 1993-$355 million, 1992-$43
million; Tobacco International: 1993-$189 million, 1992-$0; Total Food:
1993-$153 million, 1992-$63 million; Headquarters: 1993-$33 million, 1992-
$0) and a 1992 gain ($98 million) on the sale of Holdings' ready-to-eat cold
cereal business as discussed below.
(2) Contributions by industry segments were computed without effects of
Headquarters' expenses.
(3) Includes predecessor period January 1, 1989 through February 8, 1989.
TOBACCO
Holdings' tobacco business is conducted by RJRT and Tobacco International.
1993 vs. 1992. Holdings' worldwide tobacco business experienced continued
net sales growth in its international business that was more than offset by a
significant sales decline in the domestic business, resulting in reported net
sales of $8.08 billion in 1993, a decline of 11% from the 1992 level of $9.03
billion. Operating company contribution for the worldwide tobacco business of
$1.84 billion in 1993 declined 31% from the 1992 level of $2.69 billion,
reflecting sharp reductions for the domestic business which were partially
offset by gains in the international business. Operating income for the
worldwide tobacco business in 1993 of $893 million declined 60% from $2.24
billion in 1992, reflecting the lower operating company contribution and a $544
million restructuring expense in 1993 versus a restructuring expense of $43
million in 1992. The 1993 restructuring expense includes expenses to streamline
both the domestic and international operations by the reduction of personnel in
administration, manufacturing and sales functions, as well as rationalization of
manufacturing and office facilities.
Net sales for RJRT amounted to $4.95 billion in 1993, a decline of 20% from
the 1992 level, reflecting the impact of industry-wide price reductions and
price discounting on higher price brands, a higher proportion of sales from
lower price brands and an overall volume decline of approximately 3.6%. The 1993
decrease in overall volume resulted from a decline in the full-price segment
that more than offset growth in the lower price segment. The growth in lower
price brands was slowed in the second half of 1993 by net price reductions on
full-price brands. RJRT's operating company contribution was $1.20 billion in
1993, a 43% decline from the 1992 level of $2.11 billion, primarily due to the
lower net sales and a higher proportion of sales from the lower margin segment,
offset in part by lower operating expenses. RJRT's operating income was $480
million in 1993, a decline of 72% from $1.7 billion in 1992. The decline in
operating income reflected the lower RJRT operating company contribution as well
as a restructuring expense of $355 million in 1993 which is significantly higher
than the $43 million restructuring expense recorded in 1992.
Tobacco International recorded net sales of $3.13 billion in 1993, an
increase of 9% from the 1992 level, due to higher volume in all regions of
business, the expansion of markets through ventures in Eastern Europe and
Turkey, contract sales to the Russian Republic, favorable pricing in certain
regions
20
and a change in fiscal year end, which more than offset unfavorable currency
developments in Western Europe. Tobacco International's operating company
contribution rose to $644 million in 1993, an increase of 12% compared to the
prior year due to higher volume and pricing which was offset in part by higher
operating expenses and to a lesser extent foreign currency developments. Tobacco
International's operating income was $413 million for 1993, a decline of 23%
from the 1992 level. The decline in operating income reflects a restructuring
expense of $189 million in 1993 that more than offset the increase in operating
company contribution.
1993 Competitive Activity. During recent years, the lower price segment of
the domestic cigarette market has grown significantly and the full price segment
has declined. The shifting of smokers of full price brands to lower price brands
adversely affects RJRT's earnings since lower price brands are generally less
profitable than full price brands. Although the difference in profitability is
often substantial, it varies greatly depending on marketing and promotion levels
and the terms of sale. Accordingly, RJRT has in recent years experienced
substantial increased volume in the lower price segment, but the earnings
attributable to these sales have not been sufficient to offset decreased
earnings from declining sales of RJRT's full price brands.
In April 1993, RJRT's largest competitor announced a shift in strategy
designed to gain share of market while sacrificing short-term profits. The
competitor's tactics included increased promotional spending and temporary price
reductions on its largest cigarette brand, followed several months later by list
price reductions on all its full-price and mid-price brands. RJRT defended its
major full-price brands during the period of temporary price reductions and, to
remain competitive in the marketplace, also reduced list prices on all its
full-price and mid-price brands in August 1993. The cost of defensive price
promotions and the impact of lower list prices were primarily responsible for
the sharp drop in RJRT's 1993 operating company contribution.
Currently, the domestic cigarette market has consolidated list prices for
cigarettes from four or more tiers into two tiers, with price competition being
conducted principally through trade and retail promotion on a brand-by-brand
basis. The resulting effects from increased list prices on lower price brands
and reduced promotional spending by RJRT on its full price brands have not been
sufficient to offset the effect of decreased list prices on RJRT's full price
brands. This has resulted in lower aggregate profit margins for RJRT. These
depressed margins are expected to continue until such time as the competitive
environment improves and operating costs are further reduced.
Although some improvement to the stability of the competitive environment
has occurred in the fourth quarter of 1993, RJRT cannot predict if or when any
further improvement to the competitive environment will occur or whether such
stability will continue. In addition, growth in lower price brands was slowed in
the second half of 1993 due to net price reductions on full price brands. RJRT
is unable to predict whether this trend will continue. RJRT's domestic cigarette
volume of non-full price brands as a percentage of total domestic volume was 44%
in 1993, 35% in 1992 and 25% in 1991 versus 37%, 30% and 25%, respectively, for
the domestic cigarette market.
1993 Governmental Activity. Legislation recently enacted restricts the use
of imported tobacco in cigarettes manufactured in the United States and is
expected to increase RJRT's future raw material cost. In addition, the Clinton
Administration and members of Congress have introduced bills in Congress that
would significantly increase the federal excise tax on cigarettes, eliminate the
deductibility of a portion of the cost of tobacco advertising, ban smoking in
public buildings and workplaces, add additional health warnings on cigarette
packaging and advertising and further restrict the marketing of tobacco
products. It is not possible to determine what additional federal, state or
local legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on RJRT, Tobacco
International or the cigarette industry generally but such legislation or
regulations could have an adverse effect on RJRT, Tobacco International or the
cigarette industry generally.
21
1992 vs. 1991. Net sales for RJRT rose 5% from 1991 to $6.17 billion in
1992 as higher unit selling prices and volume were offset in part by a higher
proportion of sales from lower price brands. Overall volume for the 1992 year
increased 3% from the prior year as a result of gains in the lower price segment
more than offsetting a decline in the full price segment. RJRT's operating
company contribution in 1992 was $2.11 billion, a 5% decline from the prior
year. The decline in operating company contribution was primarily due to the
higher proportion of sales of lower margin brands and higher marketing and
selling expenditures, which when combined more than offset the effect of higher
unit selling prices and volume. RJRT's operating income of $1.70 billion in 1992
declined 8% from the prior year as a result of the decline in operating company
contribution as well as a $43 million charge incurred in connection with a
restructuring plan, the purpose of which was to improve productivity by
realigning operations in the sales, manufacturing, research and development, and
administrative areas.
Tobacco International recorded net sales of $2.86 billion in 1992, an
increase of 7% from 1991. Excluding contract sales to the Russian Republic, for
which there were major shipments in 1991, Tobacco International would have
reported an increase in net sales in 1992 of 10%. The sales increase is a result
of volume gains in Eastern Europe (where the company made several acquisitions),
Asia and the Middle East, favorable currency developments and higher selling
prices that more than offset lower volume in Western Europe. Operating company
contribution and operating income for 1992 rose 15% and 16%, respectively, from
the prior year to $575 million and $537 million. The increase in operating
company contribution and operating income was due to higher volume, favorable
currency developments and higher selling prices offset in part by a higher
proportion of sales in the lower margin segment.
For a description of certain litigation affecting RJRT and its affiliates,
see Note 11 to the Consolidated Financial Statements.
FOOD
Holdings' food business is conducted by NFG, which comprises the Nabisco
Biscuit Company, the LifeSavers Division, the Planters Division, the Specialty
Products Company, the Fleischmann's Division, the Food Service Division and
Nabisco Brands Ltd, (collectively the "North American Group") and Nabisco
International.
1993 vs. 1992. NFG reported net sales of $7.03 billion in 1993, an increase
of 5% from 1992. Excluding the 1992 operating results of the ready-to-eat cold
cereal business, which was sold at the end of that year, net sales in 1993
increased 9% from 1992, resulting from higher volume, sales from recently
acquired businesses and modest price increases in both the North American Group
and Nabisco International. The North American Group volume increase was
primarily attributable to the success of new product introductions in the U.S.,
including the Snackwell's line of low fat/fat free cookies and crackers, Fat
Free Newtons, Life Savers Gummi Savers candy and Planters' stand-up bag line of
peanuts and snacks. Nabisco International's net sales increased as a result of
the 1993 acquisitions in Spain and Peru and higher volume and prices from its
Latin American businesses.
NFG's operating company contribution of $995 million in 1993 was 5% higher
than the 1992 amount. Excluding the 1992 operating results of the ready-to-eat
cold cereal business, operating company contribution increased 14%, with the
North American Group up 13% and Nabisco International up 18%. The North American
Group increase was primarily due to the gain in net sales, savings from
productivity programs, and contributions from the recently acquired businesses,
offset in part by higher expenses for consumer marketing programs. Nabisco
International increased operating company contribution through acquisitions and
gains in net sales.
22
NFG's operating income was $624 million in 1993, a decrease of 19% from
1992, as a result of the $153 million restructuring expense in 1993, which was
significantly higher than the restructuring expense of $63 million recorded in
1992, that more than offset the gain in operating company contribution.
Excluding the 1992 operating results of the ready-to-eat cold cereal business
and the related gain on its sale, as well as the restructuring expenses in both
1993 and 1992, NFG's operating income was up 16% as a result of the increase in
operating company contribution. The 1993 restructuring expense primarily
consists of expenses related to the reorganization and downsizing of
manufacturing and sales functions which will reduce personnel costs, both
domestically and internationally, in order to improve productivity and, to a
lesser extent, the rationalization of facilities.
1992 vs. 1991. NFG reported net sales of $6.71 billion in 1992, an increase
of 4% from 1991. The increase primarily results from higher volume and pricing
in the Latin American subsidiaries and the addition of recently acquired
businesses in Mexico and Brazil. Net sales for the North American Group were
relatively flat, as higher unit selling prices and volume in U.S. cookie and
selected grocery products, including new products and product varieties, were
offset by lower sales in the balance of the food lines as a result of restrained
consumer spending. NFG's operating company contribution increased 3% from 1991
to $947 million in 1992 as a result of the increase in net sales in Latin
America. Operating company contribution in the North American Group was about
even with last year reflecting the modest net sales performance in 1992. Margins
in the North America Group were maintained in 1992 as a result of productivity
gains offsetting the industry trends toward higher trade promotion spending.
NFG's 1992 operating income, which included a restructuring expense of $63
million, as well as a gain of $98 million on the sale of the ready-to-eat cold
cereal business, rose 8% from 1991 to $769 million as a result of the increase
in 1992 operating company contribution. The $63 million charge was incurred in
connection with a restructuring plan, the purpose of which was to reduce costs
and improve productivity by realigning sales operations and implementing a
voluntary separation program.
RESTRUCTURING EXPENSE
Holdings recorded a pre-tax restructuring expense of $730 million in the
fourth quarter of 1993 ($467 million after-tax) related to a program announced
on December 7, 1993. Such restructuring program was undertaken in response to a
changing consumer product business environment and is expected to streamline
operations and improve profitability. Implementation of the program, although
begun in the latter part of 1993, will primarily occur in 1994. Approximately
75% of the restructuring program will require cash outlays which will occur
primarily in 1994 and early 1995. As an offset to the cash outlays, Holdings
expects annual after-tax cash savings of approximately $250 million.
The cost of providing severance pay and benefits for the reduction of
approximately 6,000 employees throughout the domestic and international food and
tobacco businesses is approximately $400 million of the charge and is primarily
a cash expense. The workforce reduction was undertaken in order to establish
fundamental changes to the cost structure of the domestic tobacco business in
the face of acute competitive activity in that business and to take advantage of
cost savings opportunities in other businesses through process efficiency
improvements. Legislation enacted during the third quarter of 1993
stipulates that, effective January 1, 1994, financial penalties will be assessed
against manufacturers if cigarettes produced in the United States do not contain
at least 75% (by weight) of domestically grown flue cured and burly tobaccos. As
a result, the domestic and international tobacco businesses accrued
approximately $70 million of related restructuring charges resulting from a
reassessment of raw material sourcing and production arrangements. In addition,
a shift in pricing strategy designed to gain share of market by RJRT's largest
competitor has resulted in a redeployment of spending and changes in sales and
distribution strategies resulting in a restructuring charge of approximately
$80 million primarily related to contract termination costs. Abandonment of
leases related to the above changes in the businesses results in approximately
$60 million of restructuring charges. The remainder of the charge,
approximately $120 million, represents
23
non-cash costs to rationalize and close manufacturing and sales facilities in
both the tobacco and food businesses to facilitate cost improvements.
INTEREST EXPENSE
1993 vs. 1992. Consolidated interest expense of $1.19 billion in 1993
decreased 17% from 1992, primarily as a result of the refinancings of debt that
were completed during 1992 and 1993, lower debt levels from the application of
net proceeds from the issuance of preferred stock in 1993 and lower effective
interest rates and the impact of declining market interest rates in 1993.
1992 vs. 1991. Consolidated interest expense of $1.43 billion in 1992
decreased 32% from 1991, primarily due to the refinancings completed during 1991
and 1992, lower effective interest rates and the impact of declining market
interest rates in 1992.
INCOME TAXES
Effective January 1, 1993, Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. SFAS
No. 109 superseded Statement of Financial Accounting Standards No. 96, the
method of accounting for income taxes previously followed by the Registrants.
The adoption of SFAS No. 109 did not have a material impact on the financial
statements of either Holdings or RJRN.
Holdings' provision for income taxes for 1993 was increased by $96 million
as a result of the enactment of certain federal tax legislation during the third
quarter of 1993 which increased federal corporate income tax rates to 35% from
34%, retroactively to January 1, 1993. The components of this increase to
Holdings' provision for income taxes included an $86 million non-cash charge
resulting primarily from the remeasurement of the balance of deferred federal
income taxes at the date of enactment of the new federal tax legislation for the
change in the income tax rates, and a $10 million charge resulting from the
increase in current federal income taxes accrued for the change in the income
tax rates and other effects of the new tax legislation. Also during 1993,
Holdings' provision for income taxes was decreased by a $108 million credit
resulting from a remeasurement of the balance of deferred income taxes for a
change in estimate of the basis of certain deferred tax amounts relating
primarily to international operations.
NET INCOME
1993 vs. 1992. Holdings reported a net loss of $145 million in 1993, a
decrease of $444 million from 1992. Included in Holdings' 1993 net loss is an
after-tax extraordinary loss of $142 million related to the repurchases of high
cost debt during 1993 and an after-tax restructuring expense of $467 million.
Excluding the extraordinary loss and restructuring expense recorded in 1993,
Holdings would have reported net income of $464 million in 1993. Excluding a
similar after-tax extraordinary loss and an after-tax restructuring expense of
$477 million and $66 million, respectively, in 1992, as well as a 1992 after-tax
gain on the sale of Holdings' ready-to-eat cold cereal business of $30 million,
Holdings would have reported net income of $812 million in 1992. The decrease in
net income in 1993 from 1992, after such exclusions, is due to the lower
operating income offset in part by lower interest expense.
1992 vs. 1991. Holdings' net income of $299 million in 1992 includes an
after-tax extraordinary loss of $477 million related to the repurchases of high
cost debt during 1992. However, after excluding the extraordinary loss, Holdings
would have reported net income of $776 million for 1992, an increase of $408
million over last year, primarily as a result of significantly lower interest
expense. Net income in 1991 was reduced by $28 million of net charges included
in "Other income (expense), net" as a result of the write-off of $109 million of
unamortized debt issuance costs and the recognition of $144 million of
24
unrealized losses from interest rate hedges related to the refinancing of
existing credit lines, partially offset by a $225 million credit for a change in
estimated postretirement health care liabilities.
Holdings' net income (loss) applicable to its common stock for 1993, 1992
and 1991 of $(213) million, $268 million and $195 million, respectively,
includes a deduction for preferred stock dividends of $68 million, $31 million
and $173 million, respectively.
Effective January 1, 1993, RJRN adopted Statement of Financial Accounting
Standards No. 112 ("SFAS No. 112"), Employers' Accounting for Postemployment
Benefits. Under SFAS No. 112, RJRN is required to accrue the costs for
preretirement postemployment benefits provided to former or inactive employees
and recognize an obligation for these benefits. The adoption of SFAS No. 112 did
not have a material impact on the financial statements of either Holdings or
RJRN.
25
LIQUIDITY AND FINANCIAL CONDITION
DECEMBER 31, 1993
Holdings continued to generate significant free cash flow in 1993, although
at a lower level than in 1992. Free cash flow, which represents cash available
for the repayment of debt and certain other corporate purposes before the
consideration of any debt and equity financing transactions, acquisition
expenditures and divestiture proceeds, was $1.0 billion for 1993 and $1.6
billion for 1992. The lower level of free cash flow for 1993 primarily reflects
lower operating company contribution in the domestic tobacco business, higher
capital expenditures for tobacco manufacturing facilities in Eastern Europe and
Turkey and for Nabisco Biscuit facilities and higher taxes paid, offset in part
by lower inventory levels in the domestic tobacco business, higher sales of
receivables, and a decrease in interest paid.
The components of free cash flow are as follows:
YEAR ENDED
DECEMBER 31,
--------------------
1993 1992
--------- ---------
(DOLLARS IN MILLIONS)
OPERATING INCOME........................................................................... $ 1,378 $ 2,898
Amortization of intangibles.............................................................. 625 616
Restructuring expense, net of a 1992 gain from the sale of the ready-to-eat cold cereal
business............................................................................... 730 8
--------- ---------
OPERATING COMPANY CONTRIBUTION............................................................. 2,733 3,522
Depreciation and other amortization...................................................... 524 530
Increase in operating working capital.................................................... (121) (196)
Capital expenditures..................................................................... (615) (519)
Change in other assets and liabilities................................................... (21) (298)
--------- ---------
OPERATING CASH FLOW*....................................................................... 2,500 3,039
Taxes paid............................................................................... (332) (116)
Interest paid............................................................................ (912) (1,102)
Dividends paid........................................................................... (241) (214)
Other, net............................................................................... 19 31
--------- ---------
FREE CASH FLOW............................................................................. $ 1,034 $ 1,638
--------- ---------
--------- ---------
- ---------------
* Operating cash flow, which is used as an internal measurement for evaluating
business performance, includes, in addition to net cash flow from (used in)
operating activities as recorded in the Consolidated Statement of Cash Flows,
proceeds from the sale of capital assets less capital expenditures, and is
adjusted to exclude income taxes paid and items of a financial nature (such as
interest paid, interest income, and other miscellaneous financial income or
expense items).
---------------
In 1993, Holdings and RJRN continued to enter into a series of transactions
designed to refinance long-term debt, lower debt levels and lower interest
costs, thereby improving the consolidated debt cost and maturity structure.
These transactions included the issuance of preferred stock and the repurchase
and redemption of certain debt obligations with funds provided from the issuance
of debt securities (including medium-term notes), borrowings under Holdings' and
RJRN's credit agreement, dated as of December 1, 1991, as amended (the "1991
Credit Agreement"), and free cash flow, as well as RJRN's management of interest
rate exposure through swaps, options, caps and other interest rate arrangements.
As a result of these transactions and lower market interest rates during 1993,
Holdings reduced the effective interest rate on its consolidated long-term debt
from 8.7% at December 31, 1992 to 8.4% at December 31, 1993. Future effective
interest rates may vary as a result of RJRN's ongoing management of interest
rate exposure and changing market interest rates as well as refinancing
activities and changes in the ratings assigned to RJRN's debt securities by
independent rating agencies.
One of Holdings' current financial objectives is to achieve a
capitalization ratio of 43% over time. Holdings' capitalization ratio was 44.5%
at December 31, 1993. The capitalization ratio, which is
26
intended to measure Holdings' long-term debt (including current maturities) as a
percentage of total capital, is calculated by dividing (i) Holdings' long-term
debt by (ii) the sum of Holdings' total equity, consolidated long-term debt,
deferred income taxes and certain other long-term liabilities.
Certain of Holdings' other current financial objectives, which are all
based on income before extraordinary items excluding after-tax amortization of
trademarks and goodwill and referred to below as cash net income, are to achieve
a 20% return on year beginning common stockholders' equity, a 2.7 interest and
preferred stock dividend coverage ratio and a trendline average annual earnings
per share growth of 15% over time.
The 20% return on year beginning common stockholders' equity objective,
which is intended to measure the return to Holdings' common equity holders on
the net assets employed in the business, is calculated by dividing (i) cash net
income (after deducting preferred stock dividends) by (ii) total stockholders'
equity at the beginning of the year exclusive of preferred stockholders' equity
interest. For purposes of calculating the return on year beginning common
stockholders' equity, Series A Preferred Stock and similar convertible preferred
stock securities, if any, are considered common equity and the related dividends
thereon are considered common dividends. The 2.7 interest and preferred stock
dividend coverage ratio objective, which is intended to measure Holdings'
ability to service its annual interest and preferred stock dividend payments, is
calculated by dividing (i) operating income before amortization of trademarks
and goodwill and depreciation by (ii) the sum of cash interest expense and
preferred stock dividends. The trendline average annual earnings per share
growth of 15% as adjusted for after-tax amortization of trademarks and goodwill,
is intended to measure Holdings' ability to achieve a certain level of earnings
per share growth over time.
At December 31, 1993, Holdings had an outstanding total debt level (notes
payable and long-term debt, including current maturities) and a total capital
level (total debt and total stockholders' equity) of approximately $12.4 billion
and $21.5 billion, respectively, each of which is lower than the corresponding
amounts at December 31, 1992. Holdings' ratio of total debt to total
stockholders' equity at December 31, 1993 improved to 1.4-to-1 versus 1.7-to-1
at December 31, 1992. RJRN's ratio of total debt to common equity at
December 31, 1993 was 1.3-to-1, compared with 1.6-to-1 at December 31, 1992.
Total current liabilities and long-term debt of RJRN's subsidiaries was
approximately $3.4 billion at December 31, 1993 and 1992.
Management believes that the improvement to Holdings' and its subsidiaries'
financial structure since 1991 has enhanced its ability to take advantage of
opportunities to further improve its capital and/or cost structure. Management
expects that it will continue to consider opportunities as they arise. Such
opportunities, if pursued, could involve further acquisitions from time to time
of substantial amounts of securities of Holdings or its subsidiaries through
open market purchases, redemptions, privately negotiated transactions, tender or
exchange offers or otherwise and/or the issuance from time to time of additional
securities by Holdings or its subsidiaries. Acquisitions of securities at prices
above their boo