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[DRAFT FEBRUARY 20, 1996]
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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, 1995
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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 jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-6388 56-0950247
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(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
EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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RJR NABISCO HOLDINGS CORP.
Common Stock, par value $.01 per
share New York
Series B Depositary Shares New York
Series C Depositary Shares New York
RJR NABISCO, INC.
8.30% Senior Notes due April 15, 1999 New York
8% Notes due January 15, 2000 New York
8% Notes Due 2001 New York
8 5/8% Notes due 2002 New York
7 5/8% Notes due September 15, 2003 New York
8.75% Senior Notes due April 15, 2004 New York
8 3/4% Notes due 2005 New York
8 3/4% Notes due 2007 New York
9 1/4% Debentures due 2013 New York
SUBSIDIARIES OF THE REGISTRANTS
RJR NABISCO HOLDINGS CAPITAL TRUST I
10% Trust Originated Preferred
Securities 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, 1996 WAS APPROXIMATELY $8.9 BILLION.
CERTAIN 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, 1996:
RJR NABISCO HOLDINGS CORP.: 272,973,182 SHARES OF COMMON STOCK, PAR VALUE, $.01
PER SHARE RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR
VALUE $1,000 PER SHARE
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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, 1996 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................................... 3
Tobacco........................................................... 3
Food.............................................................. 13
Other Matters..................................................... 18
(d) Financial Information about Foreign and Domestic Operations
and Export Sales.................................................. 18
Item 2. Properties.................................................................. 18
Item 3. Legal Proceedings........................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......................... 19
Executive Officers of the Registrants....................................... 20
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 23
Item 6. Selected Financial Data..................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and 26
Results of Operations.....................................................
Item 8. Financial Statements and Supplementary Data................................. 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrants......................... 42
Item 11. Executive Compensation...................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 42
Item 13. Certain Relationships and Related Transactions.............................. 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 43
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The operating subsidiaries of RJR Nabisco Holdings Corp. ("RJRN Holdings")
and its wholly-owned subsidiary, RJR Nabisco, Inc. ("RJRN") (collectively the
"Registrants"), 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 Nabisco Holdings Corp. ("Nabisco
Holdings") through its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"), the
largest manufacturer and marketer of cookies and crackers. Outside the United
States, the tobacco operations are conducted by R. J. Reynolds Tobacco
International, Inc. and beginning on January 1, 1996, R.J. Reynolds
International (collectively "Reynolds International"), and the food operations
are conducted by Nabisco International, Inc. ("Nabisco International") and
Nabisco Ltd (formerly Nabisco Brands Ltd). RJRT's and Reynolds 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,
certain European countries 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 16 to the consolidated financial statements, and the
related notes thereto, of RJRN Holdings and RJRN as of December 31, 1995 and
1994 and for each of the years in the three-year period ended December 31, 1995
(the "Consolidated Financial Statements").
RJRN 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 RJRN, which was completed on April 28,
1989 (the "Acquisition"). As a result of the Acquisition, RJRN became an
indirect, wholly owned subsidiary of RJRN Holdings. After a series of holding
company mergers completed on December 17, 1992, RJRN became a direct, wholly
owned subsidiary of RJRN Holdings. The business of RJRN Holdings is conducted
through RJRN.
RJRN was incorporated as a holding company in 1970. RJRT can trace its
origins back to its formation 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 (which was sold in 1989), RJRN began to concentrate its
focus on consumer products. This strategy led to the acquisition of Nabisco
Holdings Corp. (formerly Nabisco Brands, Inc.) in 1985.
In recent years subsidiaries of RJRN Holdings and RJRN have completed a
number of acquisitions and have divested certain businesses. In 1995, these
acquisitions included (i) certain trademark and other assets of Kraft Foods'
U.S. and Canadian margarine and tablespreads business; (ii) certain trademarks
and other assets of Primo Foods Limited, a Canadian manufacturer of dry pasta,
canned tomatoes and pasta and pizza sauces; (iii) a 50% interest in Royal
Beech-Nut (pty) Ltd., a South African subsidiary of Del Monte Royal Foods, Ltd;
(iv) the assets of Avare and Gumz, two Brazilian milk product companies; (v)
O.y. P.c. Rettig Ab, Finland's second largest tobacco company and (vi) a
significant interest and management control of the Tanzania Tobacco Company. The
1995 divestitures included (i) the sale of the Ortega Mexican Food business
and (ii) the sale of New York Style Bagel Chip business.
In 1994, acquisitions included (i) the KNOX gelatin brand; (ii) an
approximately 99% interest in Establecimiento Modelo Terrabusi S.A., Argentina's
second largest biscuit and pasta maker; (iii) a 76% interest in the Yelets
tobacco processing plant in Russia; (iv) a controlling interest in a cigarette
manufacturer in the Krasnodar region of southern Russia; and (v) a 90% interest
in Shimkent Confectionery Enterprises and a site for a new cigarette factory in
Kazakhstan.
1
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 other decisions have been made with respect to any
such acquisitions or divestitures. RJRN Holdings' and RJRN's credit agreement,
dated as of April 28, 1995, as amended (the "1995 RJRN Credit Agreement"), and
credit agreement, dated as of April 28, 1995, as amended (the "RJRN Commercial
Paper Facility" and, together with the 1995 RJRN Credit Agreement, the "New
RJRN Credit Agreements"), prohibit the sale of all or any substantial portion of
certain assets of RJRN Holdings or its subsidiaries.
On January 26, 1995, Nabisco Holdings completed the initial public offering
of 51,750,000 shares of its Class A Common Stock at an initial offering price of
$24.50 per share. Nabisco used all of the approximately $1.2 billion of net
proceeds from the initial public offering to repay a portion of its initial
borrowing under its credit agreement, dated as of December 6, 1994 (the "1994
Nabisco Credit Agreement"). RJRN owns 100% of the outstanding Class B Common
Stock of Nabisco Holdings, which represents approximately 80.5% of the economic
interest in Nabisco Holdings and approximately 97.6% of the total voting power
of Nabisco Holdings' outstanding common stock. In connection with the offering,
RJRN Holdings, RJRN and Nabisco Holdings entered into agreements to exchange
certain services, to establish tax sharing arrangements and to provide RJRN with
certain preemptive and registration rights with respect to Nabisco Holdings and
Nabisco securities.
In 1995, RJRN and Nabisco engaged in a series of related transactions that
were designed, among other things, to enable Nabisco to obtain long term debt
financing independent of RJRN and to repay its intercompany debt to RJRN.
Specifically, on April 28, 1995, Nabisco Holdings and Nabisco entered into a
credit agreement with various financial institutions (as amended, the "1995
Nabisco Credit Agreement") to replace the 1994 Nabisco Credit Agreement. Among
other things, the 1995 Nabisco Credit Agreement was designed to permit Nabisco
to prepay intercompany debt and incur long-term debt, to increase Nabisco's
committed facility from $1.5 billion to $3.5 billion and to extend its term from
364 days to five years. On June 5, 1995, RJRN and Nabisco consummated offers to
exchange approximately $1.8 billion aggregate principal amount of newly issued
notes and debentures (the "New Notes") of Nabisco for the same amount of notes
and debentures (the "Old Notes") issued by RJRN (the "Exchange Offers"). As part
of the transaction, RJRN returned to Nabisco approximately $1.8 billion of
intercompany notes that had been issued by Nabisco and were held by a
non-Nabisco affiliate of RJRN. The New Notes issued by Nabisco in the Exchange
Offers have interest rates, principal amounts, maturities and redemption
provisions identical to the corresponding Old Notes issued by RJRN. Nabisco
subsequently borrowed approximately $2.4 billion under the 1995 Nabisco Credit
Agreement to (a) repay or repurchase an additional $2.1 billion of intercompany
notes of Nabisco and its subsidiaries; (b) repay approximately $125 million of
outstanding borrowings under the 1994 Nabisco Credit Agreement; (c) repay
approximately $89 million of an intercompany note from Nabisco to Nabisco
Holdings; and (d) pay a $79 million dividend to Nabisco Holdings. Nabisco
Holdings used the payments it received to repay the balance of a $168 million
intercompany note to RJRN. Concurrently with the Exchange Offers, RJRN also
obtained consents to certain indenture modifications from holders of the Old
Notes and holders of approximately $3.58 billion of its other outstanding debt
securities (the "Consent Solicitations").
During 1994, the percentage voting power of RJRN Holdings held by
partnerships affiliated with KKR (the "KKR Partnerships") decreased
substantially and in 1995 the KKR Partnerships divested their remaining
interests in RJRN Holdings voting securities primarily in connection with the
acquisition of Borden, Inc. by certain of the KKR Partnerships.
(b) Financial Information about Industry Segments
During 1995, 1994 and 1993, RJRN's industry segments were tobacco and food.
For information relating to industry segments for the years ended December
31, 1995, 1994 and 1993, see Note 16 to the Consolidated Financial Statements.
2
(c) Narrative Description of Business
TOBACCO
The tobacco line of business is conducted by RJRT and Reynolds
International, which manufacture, distribute and sell cigarettes. Cigarettes are
manufactured in the United States by RJRT and in over 40 foreign countries and
territories by Reynolds International and subsidiaries or licensees of RJRT and
are sold throughout the United States and in more than 170 markets around the
world. In 1995, approximately 58% of total tobacco segment net sales (after
deducting excise taxes) and approximately 69% of total tobacco segment operating
income (before amortization of trademarks and goodwill) 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, CAMEL, SALEM,
MONARCH and VANTAGE. RJRT's other cigarette brands, including MORE, NOW, BEST
VALUE, 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 1995 of 27%, a decrease of
approximately 1 share point from 1994. During 1995, RJRT and the largest
domestic cigarette manufacturer, Philip Morris Incorporated, together sold, on a
shipment basis, approximately 72% of all cigarettes sold in the United States.
In November 1994, RJRT confirmed press reports that it was developing
ECLIPSE, a cigarette that primarily heats rather than burns tobacco and thereby
substantially reduces second-hand smoke. The cigarette remains under development
and RJRT continues to assess a possible market introduction of an ECLIPSE
cigarette.
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 by building brand loyalty among current adult smokers and attracting
adult smokers of competitive brands. In 1995, these efforts included the
continuation and refinement of conversion, continuity and relationship-building
programs such as the CAMEL Genuine Taste Mission, the expanded regional
introduction of the SALEM Preferred line extension and the introduction of a
line of cigarette brands from a new operating unit, Moonlight Tobacco. RJRT
believes it is essential to compete in all segments of the cigarette market, and
accordingly it offers a range of lower-priced brands including DORAL, MONARCH
and BEST VALUE, intended to appeal to more cost-conscious adult smokers. For a
discussion on competition in the tobacco business, see "Business--Tobacco--
Competition" in this Item 1.
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 13% of RJRT's sales, no RJRT customers accounted for more than 10%
of sales for 1995. RJRT distributes its cigarettes primarily to public
warehouses located throughout the United States that serve as local distribution
centers for RJRT's customers.
3
RJRT's products are sold to adult smokers primarily through retail outlets.
RJRT employs a decentralized marketing strategy that permits its sales force to
be flexible in responding to local market dynamics by designing individual
in-store programs to fit varying consumption patterns. RJRT uses 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
Reynolds International operates in over 170 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, Reynolds International believes that the
American Blend segment, in which Reynolds International primarily competes, is
growing significantly faster. Although Reynolds International is the second
largest of two international cigarette producers that have significant positions
in the American Blend segment, its share of sales in this segment is
approximately one-third of the share of Philip Morris International Inc., the
largest American Blend producer.
Reynolds 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. Reynolds International is aggressively pursuing development
opportunities throughout the world.
Reynolds International markets nearly 100 brands of which WINSTON, CAMEL and
SALEM, all American Blend cigarettes, are its international leaders. WINSTON,
Reynolds 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 140 markets worldwide
and is Reynolds International's second largest selling international brand.
SALEM is the world's largest selling menthol cigarette and is particularly
strong in Far East markets. Reynolds International also markets a number of
local brands in various foreign markets. None of Reynolds International's
customers accounted for more than 10% of sales in 1995.
More than 20% of Reynolds International's 1995 volume was U.S.-made product,
with the remainder manufactured outside the U.S. Reynolds International brands
are manufactured in owned or joint-venture facilities in 19 locations outside
the United States, and through licensing agreements in about 20 other countries.
Reynolds International owned or joint-venture manufacturing locations include
Canada, the Canary Islands, China, the Czech Republic, Finland, Germany, Hong
Kong, Hungary, Indonesia, Kazakhstan, Malaysia, Poland, Portugal, Romania,
Russia, Switzerland, Tanzania, Turkey, Ukraine and Vietnam.
Certain of Reynolds International's foreign operations are subject to local
regulations that set import quotas, restrict financing flexibility, affect
repatriation of earnings or assets and limit advertising. 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 Reynolds International, to expand operations
in such markets; however, there can be no assurance that the liberalizing trends
will be maintained or extended or that Reynolds 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. Reynolds International uses a variety of tobacco
leaf from both United States and international sources. RJRT and Reynolds
International believe there is a sufficient supply of tobacco in the worldwide
tobacco market to satisfy their current production requirements.
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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 addition, Congress
enacted the Omnibus Budget Reconciliation Act of 1993, which assesses financial
penalties against manufacturers if cigarettes produced in the United States do
not contain at least 75% (by weight) domestically grown flue cured and burley
tobaccos. In December 1994, Congress enacted the Uruguay Round Agreements Act to
replace this domestic content requirement with a tariff rate quota system that
keys tariffs to import volumes. The tariff rate quotas have been established by
the United States with overseas tobacco producers and became effective on
September 13, 1995. Compliance with domestic content restrictions increased raw
material costs slightly in 1994 but these costs were down slightly in 1995
during the period when the domestic content requirement was not applicable.
COMPETITION
Generally, the markets in which RJRT and Reynolds International conduct
their businesses are highly competitive, with a number of large participants.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. For most of RJRT's and Reynolds International's brands,
substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new brand. 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 savings segment of the market.
Generally, sales of cigarettes in the savings segment are not as profitable as
those in other segments.
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. The federal excise tax per pack of 20
cigarettes was last increased in January 1993 to its current rate of 24 cents
per pack. In addition, all states and the District of Columbia impose excise
taxes at levels ranging from a low of 2.5 cents to a high of 81.5 cents per pack
of cigarettes. Increases in these state excise taxes could also have an adverse
effect on cigarette sales. In 1994, five states enacted excise tax increases
ranging from 7.5 cents to 50 cents per pack. In 1995, the cigarette excise tax
in four states was increased by amounts which ranged from 5 cents to 24 cents
per pack. In one state, a temporary 10 cent tax, scheduled to expire in 1995,
was extended through 1997.
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
5
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 parties from 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 February 1994, the Commissioner of the U.S. Food and Drug Administration
(the "FDA"), which historically has refrained from asserting jurisdiction over
cigarette products, stated that he intended to cause the FDA to work with the
U.S. Congress to resolve the regulatory status of cigarettes under the Food,
Drug and Cosmetic Act. During the second quarter of 1994, hearings were held in
this regard, and RJRT and other members of the United States cigarette industry
were asked to provide voluntarily certain documents and other information to
Congress. In August 1995, the Commissioner of the FDA, with the support of the
Clinton Administration, announced that he was asserting jurisdiction over
cigarettes and certain other tobacco products and issued a notice and request
for comments on proposed regulations. The proposed regulations would prohibit or
impose stringent limits on a broad range of sales and marketing practices,
including bans on sampling, sponsorship by brand name, and distribution of
non-tobacco items carrying brand names. The FDA's proposed rule would also limit
advertising in print and on billboards to black and white text, impose new
labeling language, and require cigarette manufacturers to fund a $150
million-a-year campaign to discourage minors from using tobacco products. RJRT
and other cigarette manufacturers have submitted responses to the proposed
rules.
The purported purpose of the FDA's assertion of jurisdiction was to curb the
use of tobacco products by underage youth. RJRT believes, however, that the
assertion of jurisdiction and the scope of the proposed rules would materially
restrict the availability of cigarettes and RJRT's ability to market its
cigarette products to adult smokers. RJRT, together with the other four major
domestic cigarette manufacturers and an advertising agency, filed suit on the
day of the Commissioner's announcement in the U.S. District Court for the Middle
District of North Carolina seeking to enjoin the FDA's assertion of jurisdiction
(Coyne Beahm v. United States Food & Drug Administration). Similar suits have
been filed in the same court by manufacturers of smokeless tobacco products, by
operators of retail stores and by advertising interests. RJRT is unable to
predict whether or when the FDA will adopt final rules asserting jurisdiction
over cigarettes or the scope of such final rules if adopted, but such rules
could have an adverse effect on cigarette sales and RJRT. It is also unable to
predict the outcome of the litigation seeking to enjoin the FDA's rulemaking.
In March 1994, the U.S. Occupational Safety and Health Administration
("OSHA") announced proposed regulations that would restrict smoking in the
workplace to designated smoking rooms that are separately exhausted to the
outside. Although RJRT cannot predict the form or timing of any regulations that
may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT
expects that many employers who have not already done so would prohibit smoking
in the workplace rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. RJRT submitted comments on the proposed
regulations during the comment period which closed in February 1996. Because
many employers currently do not permit smoking in the workplace, RJRT cannot
predict the effect of any regulations that may be adopted, but incremental
restrictions on smokers could have an adverse effect on cigarette sales and
RJRT.
In July 1994, an amendment to a Florida statute became effective which
allows the state of Florida to bring an action in its own name against the
tobacco industry to recover amounts paid by the state under its Medicaid program
to treat illnesses statistically associated with cigarette smoking. The amended
statute does not require the state to identify the individual who received
medical care, permits a lawsuit to be filed as a class action, and eliminates
the comparative negligence and assumption of risk defenses. The Florida statute
is being challenged on state and federal constitutional grounds in a
6
lawsuit brought by Philip Morris Companies Inc., Associated Industries of
Florida, Publix Supermarkets, and National Association of Convenience Stores in
June 1994. On June 26, 1995, the trial court judge granted in part the
plaintiffs' motion for summary judgment finding portions of the statute
unconstitutional. Both plaintiffs and defendants appealed this decision which
the Florida supreme court accepted for direct appeal. Oral argument was heard on
November 6, 1995.
The Florida House and Senate passed a bill that would repeal the Florida
statute retroactively which was vetoed by the Governor. The Florida House and
Senate have indicated that they are considering action to override that veto.
Similar legislation, without Florida's elimination of defenses, has been
introduced in the Massachusetts and New Jersey legislatures. RJRT is unable to
predict whether other states will enact similar legislation and whether lawsuits
will be filed under these statutes or their outcome, if filed. A suit against
the tobacco industry was filed under the Florida statute on February 21, 1995.
See "Business--Tobacco--Litigation Affecting the Cigarette Industry" below in
this Item 1.
Legislation imposing various restrictions on public smoking has also been
enacted in forty-eight states and many local jurisdictions, and many employers
have initiated programs restricting or eliminating smoking in the workplace.
Seventeen 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.
Certain common carriers have imposed additional restrictions on passenger
smoking.
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, which was struck down on grounds of
constitutionality by the Supreme Court of Canada in 1995.
In 1990, RJRT 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 1995, wholesalers, retailers and the tobacco industry
including RJRT formed the Coalition for Responsible Tobacco Retailing and
launched a new program (We Card) focused on stopping underage access to
cigarettes. In 1992, the Alcohol, Drug Abuse and Mental Health Act was signed
into law. This act requires states to adopt a minimum age of 18 for purchases of
tobacco products and to establish a system to monitor, report and reduce the
illegal sale of tobacco products to minors in order to continue receiving
federal funding for mental health and drug abuse programs. In January, 1996,
regulations implementing this legislation were announced by the Department of
Health and Human Services.
7
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 yield content of
cigarettes, as well as a warning statement.
During the past three decades, various laws affecting the cigarette industry
have 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 health
warnings to be printed on cigarette packages and advertising on a rotating
basis; (iii) increases type size and area of the warning required in 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 Low Birth Weight"; and (iv) "Surgeon General's
Warning: Cigarette Smoke Contains Carbon Monoxide." Similar warnings are
required on outdoor billboards. In 1990, the Fire Safe Cigarette Act of 1990 was
enacted, which directed the Consumer Product Safety Commission to conduct and
oversee research begun under the direction of the Cigarette and Little Cigar
Fire Safety Act of 1984 to assess the practicability of developing a performance
standard to reduce cigarette ignition propensity. The Commission presented a
final report to Congress in 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 RJRT 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 (now the Secretary of Health and Human Services) and the Surgeon General
have issued a number of other reports which purport to find the nicotine in
cigarettes addictive and to link cigarette smoking and exposure to cigarette
smoke 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. During the last Congress, the Clinton administration and
federal legislators introduced bills that would have significantly increased the
federal excise tax on cigarettes, eliminated the deductibility of the cost of
tobacco advertising, banned smoking in public buildings and on any scheduled
airline flight, and given the Food and Drug Administration authority to reduce
and eliminate nicotine in tobacco products. This legislation was not enacted.
It is not possible to determine what additional federal, state, local or
foreign legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on
8
RJRT, Reynolds International or the cigarette industry generally, but such
legislation or regulations could have an adverse effect on RJRT, Reynolds
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 1995, 101 new actions were filed or
served against RJRT and/or its affiliates or indemnitees and 22 such actions
were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or
indemnitees without trial. A total of 132 such actions in the United States and
two against RJRT's Canadian subsidiary were pending on December 31, 1995. As of
February 16, 1996, 144 active cases were pending against RJRT and/or its
affiliates or indemnitees, 142 in the United States and two in Canada. The
United States cases are in 22 states and are distributed as follows: 90 in
Florida; 10 in Louisiana; 5 in Texas; 4 in each of Indiana, Kansas and
Tennessee; 3 in each of Mississippi, California, Pennsylvania; 2 in each of
Alabama, Colorado, Massachusetts and Minnesota; and one in each of Missouri,
Nevada, New Hampshire, New Jersey, New York, North Carolina, Rhode Island,
South Carolina and West Virginia. Of the 142 active cases in the United
States, 116 are pending in state court and 26 in federal court.
Five of the 142 active cases in the United States involve alleged
non-smokers claiming injuries resulting from exposure to environmental tobacco
smoke. Six cases, which are described more specifically below, purport to be
class actions on behalf of thousands of individuals. Purported classes include
individuals claiming to be addicted to cigarettes and flight attendants alleging
personal injury from exposure to environmental tobacco smoke in their workplace.
Four of the active cases were brought by state attorneys general seeking, inter
alia, recovery of the cost of Medicare funds paid by their states for treatment
of citizens allegedly suffering from tobacco related diseases or conditions. In
addition, one case was brought by the State of Florida seeking similar rulings
under a special state statute.
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, unfair trade practices,
conspiracy, unjust enrichment, indemnity and common law public nuisance.
Punitive damages, often in amounts ranging into the hundreds of 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 Federal Cigarette Labeling and Advertising
Act, as amended (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 in which RJRT was not
a defendant, but in one such case, which has been appealed by both parties, no
damages were awarded. The jury awarded plaintiffs $400,000 in the other such
case, Cipollone v. Liggett Group, 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 Supreme 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 and, if so, in what form, or whether such legislation would be
9
intended by Congress to apply retroactively. The passage of such legislation
could increase the number of cases filed against cigarette manufacturers,
including RJRT.
Set forth below are descriptions of the class action lawsuits, a suit in
which plaintiffs seek to act as private attorneys general, actions brought by
state attorneys general in Massachusetts, Minnesota, Mississippi and West
Virginia, an action brought by the State of Florida and pending investigations
relating to RJRT's tobacco business.
In 1991, Broin v. Philip Morris Company, a purported class action against
certain tobacco industry defendants, including RJRT, was brought by flight
attendants claiming to represent a class of 60,000 individuals, alleging
personal injury caused by exposure to environmental tobacco smoke in their
workplace. In December 1994, the Florida state court certified a class
consisting of "all non-smoking flight attendants who are or have been employed
by airlines based in the United States and are suffering from diseases and
disorders caused by their exposure to secondhand cigarette smoke in airline
cabins." The defendants appeal of this certification to the Florida Third
District Court of Appeal was denied on January 3, 1995. A motion for rehearing
has been filed.
In March 1994, Castano v. The American Tobacco Company, a purported class
action, was filed in the United States District Court for the Eastern District
of Louisiana against tobacco industry defendants, including RJRT, seeking
certification of a class action on behalf of all United States residents who
allegedly are or claim to be addicted, or are the legal survivors of persons who
allegedly were addicted, to tobacco products manufactured by defendants. The
complaint alleges that cigarette manufacturers manipulated the levels of
nicotine in their tobacco products to induce addiction in smokers. Plaintiffs'
motion for certification of the class was granted in part on February 17, 1995.
The district court certified core liability issues (fraud, negligence, breach of
warranty, both express and implied, intentional tort, strict liability and
consumer protection statutes), and punitive damages. Not certified were issues
of injury-in-fact, proximate cause, reliance, affirmative defenses, and
compensatory damages. In July 1995, the Fifth Circuit Court of Appeals agreed to
hear defendants' appeal of this class certification. A decision is expected in
1996.
In March 1994, Lacey v. Lorillard Tobacco Company, a purported class action,
was filed in Circuit Court, Fayette County, Alabama against three cigarette
manufacturers, including RJRT. Plaintiff, who claims to represent all smokers
who have smoked or are smoking cigarettes manufactured and sold by defendants in
the state of Alabama, seeks compensatory and punitive damages not to exceed
$48,500 per class member and injunctive relief arising from defendants' alleged
failure to disclose additives used in their cigarettes. In April 1994,
defendants removed the case to the United States District Court for the Northern
District of Alabama.
In May 1994, Engle v. R.J. Reynolds Tobacco Company, was filed in Circuit
Court, Eleventh Judicial District, Dade County, Florida against tobacco
manufacturers, including RJRT, and other members of the industry, by plaintiffs
who allege injury and purport to represent a class of all United States citizens
and residents who claim to be addicted, or who claim to be legal survivors of
persons who allegedly were addicted, to tobacco products. On October 28, 1994, a
state court judge in Miami granted plaintiffs' motion to certify the class. The
defendants appealed that ruling to the Florida Third District Court of Appeal
which, on January 31, 1996, decided to certify a class limited to Florida
citizens or residents. The defendants are considering seeking a rehearing.
In September 1994, Granier v. American Tobacco Company, a purported class
action apparently patterned after the Castano case, was filed in the United
States District Court for the Eastern District of Louisiana against tobacco
industry defendants, including RJRT. Plaintiffs seek certification of a class
action on behalf of all residents of the United States who have used and
purportedly became addicted to tobacco products manufactured by defendants. The
complaint alleges that cigarette manufacturers manipulated the levels of
nicotine in tobacco products for the purpose of addicting
10
consumers. By agreement of the parties, all action in this case is stayed
pending determination of the motion for class certification in the Castano
case.
In January 1995, a purported class action was filed in the Ontario Canada
Court of Justice against RJR-MacDonald, Inc. and two other Canadian cigarette
manufacturers. The lawsuit, then captioned Le Tourneau, v. Imperial Tobacco
Company, seeks certification of a class of persons who have allegedly become
addicted to the nicotine in cigarettes or who had such alleged addiction
heightened or maintained through the use of cigarettes, and who have allegedly
suffered loss, injury, and damage in consequence, together with persons with
Family Law Act claims in respect to the claims of such allegedly addicted
persons, and the estates of such allegedly addicted persons. Theories of
recovery pleaded include negligence, strict liability, failure to warn, deceit,
negligent misrepresentation, breach of implied warranty and conspiracy. The
relief sought consists of damages of one million dollars for each of the three
named plaintiffs, punitive damages, funding of nicotine addiction rehabilitation
centers, interest and costs. On June 2, 1995, the plaintiffs, on consent, were
granted leave to file an amended statement of claim to remove Le Tourneau as
representative plaintiff and add two additional representative plaintiffs. The
case is now captioned Caputo v. Imperial Tobacco Limited.
In June 1994, in Mangini v. R.J. Reynolds Tobacco Company, the California
Supreme Court ruled that the plantiffs' claim that an RJRT advertising campaign
constitutes unfair competition under the California Business and Professions
Code was not preempted by the Cigarette Act. The plantiffs are acting as private
attorneys general. This opinion allows the plaintiffs to pursue their lawsuit
which had been dismissed at the trial court level. The defendants' Petition for
Certiorari to the United States Supreme Court was denied in December 1994. The
case has been remanded to the trial court.
In June 1994, in Moore v. The American Tobacco Company, RJRN and RJRT were
named along with other industry members as defendants in an action brought by
the Mississippi state attorney general on behalf of the state to recover state
funds paid for health care and medical and other assistance to state citizens
allegedly suffering from diseases and conditions allegedly related to tobacco
use. This suit, which was brought in Chancery (non-jury) Court, Jackson County,
Mississippi also seeks an injunction from "promoting" or "aiding and abetting"
the sale of cigarettes to minors. Both actual and punitive damages are sought in
unspecified amounts. Motions by the defendants to dismiss the case or to
transfer it to circuit (jury) court were denied on February 21, 1995 and the
case will proceed in Chancery Court. RJRN and other industry holding companies
have been dismissed from the case.
In August 1994, RJRT and other U.S. cigarette manufacturers were named as
defendants in an action instituted on behalf of the state of Minnesota and of
Blue Cross and Blue Shield of Minnesota to recover the costs of medical expenses
paid by the state and by Blue Cross/Blue Shield that were incurred in the
treatment of diseases allegedly caused by cigarette smoking. The suit, Minnesota
v. Philip Morris, alleges consumer fraud, unlawful and deceptive trade
practices, false advertising and restraint of trade, and it seeks injunctive
relief and money damages, trebled for violations of the state antitrust law.
Motions by the defendants to dismiss all claims of Blue Cross/Blue Shield and
certain substantive claims of the State of Minnesota, and by plaintiffs to
strike certain of the defendants' defenses, were denied on May 19, 1995. An
intermediate appeals court declined to hear the defendants' appeal from the
ruling denying the motion to dismiss all claims of Blue Cross/Blue Shield on the
ground that it lacks standing to bring the action, but the Minnesota Supreme
Court has agreed to do so. Oral argument was heard January 29, 1996 and a
decision is pending.
In September 1994, the Attorney General of West Virginia filed suit against
RJRT, RJRN and twenty-one additional defendants in state court in West Virginia.
The lawsuit, McGraw v. American Tobacco Company, is similar to those previously
filed in Mississippi and Minnesota. It seeks recovery for medical expenses
incurred by the state in the treatment of diseases statistically associated with
cigarette smoking and requests an injunction against the promotion and sale of
cigarettes and tobacco products to minors. The lawsuit also seeks a declaration
that the state of West Virginia, as plaintiff, is
11
not subject to the defenses of
statute of repose, statute of limitations, contributory negligence, comparative
negligence, or assumption of the risk. On May 3, 1995, the judge granted
defendants' motion to dismiss eight of the ten causes of action pleaded. The
defendants have filed motions to dismiss the remaining two counts. On October
20, 1995, at a hearing on the defendants' joint motion to prohibit prosecution
of the action due to plaintiff's unlawful retention of counsel under a
contingent fee arrangement, in a ruling from the bench, the contingent fee
agreement between the West Virginia Attorney General and private attorneys
preparing the case was held to be void on the grounds that the Attorney General
has no constitutional, legislative, or statutory authority for entering into
such an agreement.
On February 21, 1995, the state of Florida filed a suit under a special
state statute against RJRT and RJRN, along with other industry members, their
holding companies and other entities. The state is seeking Medicaid
reimbursement under various theories of liability and injunctive relief to
prevent the defendants from engaging in consumer fraud and to require that
defendants: disclose and publish all research conducted directly or indirectly
by the industry; fund a corrective public education campaign on the issues of
smoking and health in Florida; prevent the distribution and sale of cigarettes
to minors under the age of eighteen; fund clinical smoking cessation programs in
the state of Florida; dissolve the Council for Tobacco Research and the Tobacco
Institute or divest ownership, sponsorship, or membership in both; and disgorge
all profits from sales of cigarettes in Florida. On defendants' motion, the case
was stayed until July 7, 1995 and that stay has been extended pending appeals by
the plaintiffs and the defendants in connection with the constitutional
challenge to the Florida statute discussed above. See "Business--Tobacco--
Legislation and Other Matters Affecting the Cigarette Industry" in this Item 1.
On November 28, 1995, RJRT and other domestic cigarette manufacturers filed
petitions for declaratory judgment in Massachusetts (Federal Court) and Texas
(State Court, Austin Texas) as to potential Medicaid reimbursement suits that
had been threatened by the Attorneys General of those states. On January 22,
1996, a similar petition for declaratory judgement was filed in Maryland (State
Court).
On December 19, 1995, the Commonwealth of Massachusetts filed suit against
cigarette manufacturers including RJRT and additional defendants including trade
associations and wholesalers, seeking reimbursement of Medicaid and other costs
incurred by the state in providing health care to citizens allegedly suffering
from diseases or conditions purportedly caused by cigarette smoking. The
complaint also seeks orders requiring the manufacturing defendants to disclose
and disseminate prior research; fund a corrective campaign and smoking cessation
program; disclose nicotine yields of their products; and pay restitution.
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 received a civil investigative demand dated January 11, 1994 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 tobacco-related 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 or
12
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.
RJRN Holdings and RJRN believe that the ultimate outcome of all pending
litigation matters should not have a material adverse effect on the financial
position of either RJRN Holdings or RJRN; however, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters. Management is unable to derive a meaningful estimate of the
amount or range of any possible loss in any particular quarterly or annual
period or in the aggregate.
FOOD
The food line of business is conducted by operating subsidiaries of Nabisco
Holdings. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco
Holdings, which represents approximately 80.5% of the economic interest in
Nabisco Holdings and approximately 97.6% of the total voting power of Nabisco
Holdings' outstanding common stock. Nabisco's businesses in the United States
are comprised of the Nabisco Biscuit, Specialty Products, LifeSavers, Planters,
Food Service and Fleischmann's companies (collectively, the "Domestic Food
Group"). Nabisco's businesses outside the United States are conducted by Nabisco
Ltd and Nabisco International (collectively, the "International Food Group").
Nabisco Ltd was recently shifted from the Domestic Food Group (formerly the
North American Food Group) to the International Food Group.
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 1995.
DOMESTIC FOOD GROUP OPERATIONS
Nabisco Biscuit Company. Nabisco Biscuit Company is the largest manufacturer
and marketer in the United States cookie and cracker industry with nine of the
ten top selling brands, each of which had annual net sales of over $100 million
in 1995. Overall, in 1995, Nabisco Biscuit had a 40.8% share of the domestic
cookie category and a 55.3% share of the domestic cracker category, in the
aggregate more than three times the share of its closest competitor. Leading
Nabisco Biscuit cookie brands include OREO, CHIPS AHOY!, NEWTONS and
SNACKWELL'S. Leading Nabisco Biscuit cracker brands include RITZ, PREMIUM,
NABISCO HONEY MAID GRAHAMS, WHEAT THINS 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. Line extensions such as OREO DOUBLE STUF, FUDGE COVERED OREO and
Reduced Fat OREO continue to increase the brand's appeal to targeted consumer
groups. CHIPS AHOY! is the leader in the chocolate chip cookie segment with line
extensions such as CHUNKY CHIPS AHOY! and CHEWY CHIPS AHOY! broadening its
appeal and adding incremental sales.
NEWTONS, the oldest Nabisco Biscuit cookie brand, is the fourth leading
cookie brand in the United States. The introduction of FAT FREE FIG and APPLE
NEWTONS in 1992, FAT FREE CRANBERRY, STRAWBERRY and RASPBERRY NEWTONS in 1993
and FAT FREE REDUCED CALORIE CRANBERRY and BLUEBERRY, as well as NEWTONS
COBBLERS in 1995 have expanded the appeal of NEWTONS and added incremental
sales.
13
Nabisco Biscuit's cracker business is led by RITZ, the largest selling
cracker in the United States, as well as RITZ BITS, RITZ BITS SANDWICHES
and REDUCED FAT RITZ successful product line extensions which, together with
RITZ, accounted for 13.2% of cracker sales in the United States in 1995. In
addition, PREMIUM, the oldest Nabisco cracker brand and the leader in the
saltine cracker segment, is joined by NABISCO HONEY MAID GRAHAMS, WHEAT THINS
and TRISCUIT to comprise, along with RITZ, five of the six largest selling
cracker brands in the United States.
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, which is now the third largest cookie brand in the U.S. Nabisco Biscuit
also acquired Stella D'oro, a leading producer of breadsticks, breakfast
biscuits, specialty cakes, pastries and snacks. This line of specialty items
gave Nabisco Biscuit access to new areas within supermarkets, further
broadening Nabisco's cookie and cracker portfolio.
Nabisco Biscuit's other cookie and cracker brands, which include NUTTER
BUTTER, NILLA WAFERS, BARNUM'S ANIMAL CRACKERS, BETTER CHEDDARS, HARVEST CRISPS,
CHICKEN IN A BISKIT and CHEESE NIPS, compete in consumer niche segments. Many
are the first or second largest selling brands in their respective segments.
In 1994, Nabisco entered the breakfast snack aisle with the launch of
SNACKWELL'S cereal bars and granola bars and the repositioning of TOASTETTES
toaster pastries.
Nabisco Biscuit's products are manufactured in 14 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 modernizing certain of its facilities. Nabisco
Biscuit also operates a flour mill in Toledo, Ohio which supplies over 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 10 major distribution warehouses
and 129 shipping branches where shipments are consolidated for delivery to
approximately 119,000 separate delivery points. Nabisco believes this
sophisticated distribution and delivery system provides it with a significant
service advantage over its competitors.
Specialty Products Company. The Specialty Products Company manufactures and
markets a broad range of food products, with sauces and condiments, pet snacks,
hot cereals and dry mix desserts 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,
CREAM OF WHEAT hot cereals and ROYAL desserts. In September 1995, Specialty
Products exited the Mexican food category, with the sale of its Ortega Mexican
food business.
Specialty Products' primary entries in the sauce and condiment segments are
A.1. and A.1. BOLD steak sauces, the leading lines of steak sauces, and GREY
POUPON mustards, which include the leading Dijon mustard. Specialty Products
also markets REGINA wine vinegar, the leader in its segment of the vinegar
market.
Specialty Products is the second largest 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 and BUTCHER'S CHOICE.
Specialty Products participate in the dry mix dessert category with ROYAL
and SNACKWELL'S brand gelatins and puddings. Specialty Products also
participates in 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
14
molasses and syrup.
Nabisco, through the Specialty Products Company, manufactures hot cereals,
participating in the cook-on-stove and mix-in-bowl segments of the category.
CREAM OF WHEAT, the leading wheat-based hot cereal, and CREAM OF RICE
participate in the cook-on-stove segment and eight varieties of INSTANT CREAM OF
WHEAT participate in the mix-in-bowl segment. Quaker Oats Company is the most
significant participant in the hot cereal category.
Specialty Products manufactures its products in four plants as well as in
six facilities with which it has production agreements. Specialty Products
sells to retail grocery chains through independent brokers and to drugstores,
mass merchandisers and other major retail outlets through a direct sales
force. The products are sold and distributed by Nabisco's Sales & Integrated
Logistics Group.
LifeSavers Company. The LifeSavers Company manufactures and markets
non-chocolate candy and gum primarily for sale in the United States. LifeSavers'
well-known brands include LIFE SAVERS candy, BREATH SAVERS sugar free mints,
BUBBLE YUM bubble gum, FRUIT STRIPE gum, CARE*FREE sugarless gum, NOW & LATER
fruit chewy taffy and GUMMI SAVERS fruit chewy candy. LIFE SAVERS is the largest
selling non-chocolate candy brand in the United States, with a 1995 share of
4.9% of the non-chocolate 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' products are
seasonally strongest in the fourth quarter.
LifeSavers sells its products in the United States primarily to grocery
stores, drug stores, mass merchandisers, convenience stores, membership club
stores and food service, military and vending machine suppliers. The products
are sold and distributed by Nabisco's Sales & Integrated Logistics Group.
LifeSavers currently owns and operates four manufacturing facilities.
Planters Company. The Planters Company produces and/or markets nuts and
snacks largely for sale in the United States, primarily under the PLANTERS
trademark. Planters is the clear leader in the packaged nut category, with a
market share of seven 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 grocery
stores, drug stores, mass merchandisers, convenience stores, membership club
stores and food service, military and vending machine suppliers. The products
are sold and distributed by Nabisco's Sales & Integrated Logistics Group.
Planters currently owns and operates two manufacturing facilities.
Food Service Company. The Food Service Company sells through non-grocery
channels a variety of specially packaged food products of the Domestic Food
Group, including cookies, crackers, hot cereals, sauces and condiments for the
food service and vending machine industry. Food Service is also a leading
regional supplier of premium frozen pies to in-store supermarket bakeries,
wholesale clubs and food service accounts through Plush Pippin. The Food
Service products are distributed by Nabisco's Sales & Integrated Logistics
Group.
Fleischmann's Company. The Fleischmann's Company manufactures and markets
various margarines and spreads as well as no-fat egg products and non-fat
chocolate yogurt.
Fleischmann's is the second largest margarine producer in the United
States. Fleischmann's participates in all segments of the margarine category,
with the FLEISCHMANN'S, BLUE BONNET and MOVE OVER BUTTER brands. Fleischmann's
Company strengthened its position in the margarine category in 1995, with the
purchase of the Kraft margarine business which includes the PARKAY, TOUCH OF
BUTTER and CHIFFON brands acquired from Kraft Foods, Inc. in October, 1995.
Fleischmann's margarines are currently manufactured in two owned facilities and
in six facilities
15
with which Fleischmann's has production agreements. Fleischmann's is the
market leader in the healthy packaged egg category with EGG BEATERS and in
1995, introduced SNACKWELL'S Nonfat Chocolate Yogurt. Distribution for
Fleischmann's is principally direct from plant to retailer warehouses through
Nabisco's Sales & Integrated Logistics Group and with respect to the 1995
acquired products, for a temporary period through Kraft's distribution system.
Sales & Integrated Logistics Group. The Sales & Integrated Logistics Group
handles sales and distribution for the Specialty Products, LifeSavers, Planters
and Fleischmann's Companies and distribution for the Food Service Company. It
sells to retail grocery chains through independent brokers and a direct sales
force, and to drug stores, mass merchandisers and other major retail outlets
through its direct sales force. The products are distributed from twenty-one
distribution centers located throughout the United States.
INTERNATIONAL FOOD GROUP OPERATIONS
Nabisco Ltd. Nabisco Ltd conducts Nabisco's Canadian operations through a
biscuit division, a grocery division and a food service division. Excluding
private label brands, the biscuit division produced nine of the top ten cookies
and nine of the top ten crackers in Canada in 1995. Nabisco 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 Ltd also
markets a variety of single-serve cookies, crackers and salty snacks under such
brand names as MINI OREO, RITZ BITS SANDWICHES and CRISPERS.
Nabisco Ltd's grocery division produces and markets canned fruits and
vegetables, fruit juices and 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, vegetables, soups and fruit juices
and drinks are marketed under the DEL MONTE trademark, pursuant to a license
from the Del Monte Corporation, and under the AYLMER trademark. The grocery
division also markets MILK-BONE pet snacks and MAGIC baking powder, each a
leading brand in Canada. Nabisco Ltd's grocery division operated six
manufacturing facilities in 1995, five of which were 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 five regional warehouses. In 1995, Nabisco Ltd acquired the
PRIMO brand of dry pasta, canned tomatoes and other Italian food products which
are manufactured in two facilities and sold and distributed by a direct store
delivery system.
In 1995, Nabisco Ltd re-entered the margarine and tablespread business with
its acquisition of the PARKAY, TOUCH OF BUTTER and CHIFFON brands from Kraft
Canada Inc. These products are currently manufactured and distributed under
agreements with Kraft Canada.
Nabisco Ltd's food service division sells a variety of specially packaged
food products including cookies, crackers and 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 Ltd's other
divisions.
Nabisco International. Nabisco International is a leading producer of
biscuits, powdered dessert and drink mixes, baking powder, pasta, milk products
and other grocery items, industrial yeast and bakery ingredients. Nabisco
International also exports a variety of Domestic Food Group products to markets
in Europe and Asia from the United States and is one of the largest
multinational packaged food businesses in Latin America.
16
Nabisco International manufactures and markets biscuits and crackers under
the NABISCO brand, yeast, baking powder and bakery ingredients under the
FLEISCHMANN'S and ROYAL brands, desserts 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 the Del Monte Corporation.
Nabisco International's largest market is Brazil, where it operates 16 plants.
Nabisco International is the market leader in powdered desserts in Spain and
most of Latin America, in the yeast category in Brazil and certain other Latin
American countries, in biscuits in Peru, Spain, Venezuela and Uruguay, and in
canned vegetables in Venezuela. Nabisco International also maintains a strong
position in the processed milk category in Brazil and expanded its market share
through the 1995 acquisitions of Avare and Gumz. In Argentina, Nabisco
International acquired 71% of Establecimiento Modelo Terrabusi S.A. in April
1994 and increased its interest in the Argentine biscuit and pasta company to
approximately 99% in October and November 1994. Nabisco International has
operations in 17 Latin American countries.
Nabisco International significantly increased its presence in Europe through
its 1993 and 1994 100% acquisition of Royal Brands S.A. in Spain and Royal
Brands Portugal. Nabisco International's products in Spain include biscuits
marketed under the ARTIACH and MARBU trademarks, powdered dessert mixes marketed
under the ROYAL trademark and various other foods, including canned meats and
juices.
Nabisco International reentered the South African market through the
acquisition of 50% of Royal Beech-Nut (Pty) Ltd., which it previously owned.
Royal Beech-Nut markets baking powder and powdered dessert mixes under the ROYAL
brand, chewing gum under the BEECHIES and CARE*FREE brands and candy under the
LIFESAVERS and BEECH-NUT brands.
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. These raw materials 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 generally also affect Nabisco's competitors. Nabisco believes that
all of the raw materials for its products are in plentiful supply and are
readily available from a variety of independent suppliers.
COMPETITION
Generally, the markets in which the Domestic Food Group and the
International Food Group conduct their business are highly competitive.
Competition consists of large domestic and international companies, local and
regional firms and generic and private label products of food retailers.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. Substantial advertising and promotional expenditures are
required to maintain or improve a brand's market position or to introduce a
new product.
The trademarks under which the Domestic Food Group and the International
Food Group market their products are generally registered in the United States
and other countries in which such products are sold and are generally renewable
indefinitely. Nabisco and certain of its subsidiaries have from time to time
granted various parties exclusive licenses to use one or more of their
trademarks in particular
17
locations. Nabisco does not believe that such licensing arrangements have a
material effect on the conduct of its domestic or international business.
OTHER MATTERS
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 Environmental Protection Agency 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.
In April 1995, RJRN Holdings was named a potentially responsible party (a
"PRP") with certain third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to a superfund
site at which a former subsidiary of RJRN had operations. Certain subsidiaries
of the Registrants have also been named as PRPs with third parties or may have
indemnification obligations under CERCLA with respect to an additional thirteen
sites.
RJRN Holdings' subsidiaries have been engaged in a continuing program to
assure compliance with U.S., state and local 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 to estimate the
cost of resolving these CERCLA matters, RJRN Holdings and RJRN do not expect
such expenditures or other costs to have a material adverse effect on the
financial condition of either RJRN Holdings or RJRN.
EMPLOYEES
At December 31, 1995, RJRN Holdings together with its subsidiaries had
approximately 76,000 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, Confection and Tobacco Workers Union,
which was ratified in September 1992 and which will expire in September 1996.
Other unions represent the employees of a number of Nabisco's operations and
several of Reynolds International's operations are unionized. RJRN believes that
its relations with these employees and with their unions are good.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
For information about foreign and domestic operations and export sales for
the years 1993 through 1995, see "Geographic Data" in Note 16 to the
Consolidated Financial Statements.
ITEM 2. PROPERTIES
For information pertaining to the RJRN Holdings' and RJRN's assets by lines
of business and geographic areas as of December 31, 1995 and 1994, see Note 16
to the Consolidated Financial Statements.
For information on properties, see Item 1.
ITEM 3. LEGAL PROCEEDINGS
In the fourth quarter of 1995, purported RJRN Holdings stockholders for
themselves and derivatively for RJRN Holdings and Nabisco Holdings filed three
putative class and derivative actions in the Court of Chancery of the State of
Delaware in and for New Castle County against members of
18
RJRN Holdings Board of Directors. The actions were consolidated in December
1995. The plaintiffs allege, among other things, that the individual
defendants breached their fiduciary duty and wasted corporate assets by
undertaking the Exchange Offer and Consent Solicitations completed by RJRN
and Nabisco in June 1995 and by amending, in August 1995, RJRN Holdings By-Law
provisions concerning the calling of shareholder meetings and procedures for
shareholder action by written consent. The plaintiffs allege that management
took these and other actions to wrongfully obstruct a spin-off of Nabisco, to
enrich the defendants at the expense of RJRN Holdings, its shareholders and
Nabisco Holdings and to entrench the defendants in the management and control
of RJRN Holdings. RJRN Holdings believes that these allegations are without
merit and is defending the consolidated action vigorously.
For information about other litigation and legal proceedings, see
"Business--Tobacco--Litigation Affecting the Cigarette Industry" and "Other
Matters--Environmental Matters" in Item 1.
------------------------
Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants in
similar actions, even if such rulings are not final, could adversely affect the
litigation against RJRT or its affiliates or indemnitees and 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.
RJRN Holdings and RJRN believe that the ultimate outcome of all pending
litigation matters should not have a material adverse effect on the financial
position of either RJRN Holdings or RJRN; however, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters. Management is unable to derive a meaningful estimate of the
amount or range of any possible loss in any particular quarterly or annual
period or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In January, 1996, Brooke Group Ltd. commenced a solicitation of consents
from the shareholders of RJRN Holdings to (i) a non-binding resolution seeking
the immediate spin-off of the shares of Nabisco Holdings, and (ii) certain
changes to the By-laws of RJRN Holdings which would allow holders of not less
than 25% of its Common Stock to require a special meeting and would delete By-
law provisions establishing certain administrative procedures for actions by
written consent. The consent solicitation closed on February 15, 1996. A
ministerial review of the validity of the consents by an independent inspector
of elections had not been completed as of February 22, 1996. On February 20,
1996, however, Brooke Group Ltd. declared that it had received consents from
holders of 50.4 percent of the voting stock with respect to a spin-off and
53.8 percent of such holders with respect to By-law changes.
19
EXECUTIVE OFFICERS OF THE REGISTRANTS
EXECUTIVE OFFICERS OF RJRN HOLDINGS
The executive officers of RJRN Holdings are Charles M. Harper (Chairman of
the Board), Steven F. Goldstone (Chief Executive Officer and President), Gerald
I. Angowitz (Senior Vice President, Human Resources and Administration), John J.
Delucca (Senior Vice President and Treasurer), Robert S. Roath (Senior Vice
President and Chief Financial Officer), Richard G. Russell (Senior Vice
President and Controller), Robert F. Sharpe Jr. (Senior Vice President and
General Counsel), and H. Colin McBride (Vice President, Assistant General
Counsel and Secretary). Mr. Roath is married to Jo-Ann Ford who was, until
December 31, 1995, Senior Vice President, Law and Secretary. The following table
sets forth certain information regarding such officers.
YEAR
FIRST
ELECTED BUSINESS EXPERIENCE DURING THE PAST
NAME AGE DIRECTOR FIVE YEARS AND OTHER INFORMATION
---- --- -------- -----------------------------------
Charles M. Harper 68 1993 Chairman since May 1993; Chief Executive Officer, May
1993-December 1995. For more than five years prior
thereto, Chairman and, until 1992, Chief Executive
Officer of ConAgra, Inc. Member of the Board of
Directors of Nabisco Holdings, Nabisco, ConAgra,
Inc., E.I. du Pont de Nemours and Company, Norwest
Corp., Peter Kiewit Sons', Inc. and Valmont
Industries, Inc.
Steven F. Goldstone 50 1995 Chief Executive Officer since December 1995; President
since October 1995; prior thereto General Counsel,
March 1995-January 1996; previously Senior Partner
with law firm of Davis, Polk & Wardwell until October
1995 and for more than five years prior thereto.
Gerald I. Angowitz 46 -- Senior Vice President of Human Resources and
Administration, March 1995-Present; prior thereto,
Vice President of Human Resources, January 1994-March
1995; Vice President of Employee Benefits, January
1992-December 1993; Senior Director of Benefits
Planning and Analysis, June 1991-December 1991;
previously Principal of the consulting firm of Kwasha
Lipton, 1989-1991.
John J. Delucca 52 -- Senior Vice President and Treasurer, September 1993-
Present; Treasurer of Nabisco Holdings, October 1994-
February 1995; 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.
20
YEAR
FIRST
ELECTED BUSINESS EXPERIENCE DURING THE PAST
NAME AGE DIRECTOR FIVE YEARS AND OTHER INFORMATION
---- --- -------- -----------------------------------
Robert S. Roath 53 -- Senior Vice President and Chief Financial Officer, May
1995-Present; prior thereto, Senior Vice President
and Controller, 1991-May 1995; Vice President and
Controller, 1990-1991; previously Vice President and
Corporate Controller, Colgate-Palmolive Company,
1988-1990.
Richard G. Russell 50 -- Senior Vice President and Controller, May 1995-Present;
previously Partner at the accounting firm of Deloitte
& Touche LLP for more than five years.
Robert F. Sharpe Jr. 43 -- Senior Vice President and General Counsel, January
1996-Present; previously Vice President, Tyco
International Ltd., July 1994-January 1996; Vice
President, Assistant General Counsel and Secretary,
RJRN Holdings and RJRN, 1989-July 1994.
H. Colin McBride 50 -- Vice President, Assistant General Counsel and
Secretary, December 1995-Present; previously Vice
President and Assistant General Counsel for more than
five years.
EXECUTIVE OFFICERS OF RJRN HOLDINGS OR ITS SUBSIDIARIES 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 certain
executive officers of RJRN Holdings or its subsidiaries, other than those listed
above.
YEAR
FIRST
ELECTED BUSINESS EXPERIENCE DURING THE PAST
NAME AGE DIRECTOR FIVE YEARS AND OTHER INFORMATION
---- --- -------- -----------------------------------
H. John Greeniaus 51 1992 Vice Chairman since June 1995; President and Chief
Executive Officer of Nabisco Holdings and of
Nabisco since October 1994; prior thereto,
Chairman and Chief Executive Officer of Nabisco,
1993-1994, and President and Chief Executive
Officer of Nabisco, 1987-1993. Member of the Board
of Directors of Nabisco Holdings and Nabisco.
James W. Johnston 49 1992 Vice Chairman since June 1995; Chairman of RJRT
since 1989, Chairman of R.J. Reynolds Tobacco
Worldwide since October 1993 and Chairman of
Reynolds International since October 1993; Chief
Executive Officer of RJRT, 1989-July 1995. Member
of the Board of Directors of Sealy Corporation and
Wachovia Corporation.
21
YEAR
FIRST
ELECTED BUSINESS EXPERIENCE DURING THE PAST
NAME AGE DIRECTOR FIVE YEARS AND OTHER INFORMATION
---- --- -------- -----------------------------------
Pierre de Labouchere 41 -- Chief Executive Officer and President of Reynolds
International, December 1995-Present; prior
thereto, President of Eastern Europe, Middle East
and Africa Region, Reynolds International,
1994-December 1995; Regional Vice
President--European and Special Markets, Reynolds
International, 1991-1994; Vice
President--Scandinavia and Tax-Free Europe,
Reynolds International, 1987-1991.
Andrew J. Schindler 51 -- President and Chief Executive Officer of RJRT since
July 1995; previously President and Chief
Operating Officer of RJRT, May 1994-June 1995;
Executive Vice President--Operations, RJRT,
1991-1994; Senior Vice President-Operations, RJRT,
1989-1991.
J. Thomas Pearson 54 -- Senior Vice President, Taxation, 1988-Present.
Huntley R. Whitacre 53 -- Senior Vice President of Investor Relations, August
1995-Present; prior thereto, Vice President of
Investor Relations for more than five years.
Jason H. Wright 35 -- Senior Vice President of Worldwide Communications,
February 1994-Present; prior thereto, Vice
President of Worldwide Communications, 1993-1994;
Vice President of Financial Communications,
1990-1993.
Jeffrey A. Kuchar 41 -- Vice President and General Auditor, 1993-Present;
prior thereto, Director of Finance and Business
Development, Specialty Products Company, Nabisco,
1993; Director of Financial Planning, Specialty
Products Company, Nabisco, 1992-1993; Assistant
Corporate Controller, 1987-1991.
22
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of RJRN 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, 1996, there were approximately 65,000 record holders of
the Common Stock. All of the common stock of RJRN is owned by RJRN Holdings.
The Common Stock closing price on the NYSE for February 20, 1996 was $32 5/8.
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
---- ---
1995:
First Quarter*.................................. $ 32 1/2 $25
Second Quarter*................................. 31 1/4 25 1/4
Third Quarter................................... 33 1/4 26 3/8
Fourth Quarter.................................. 33 3/8 27 7/8
HIGH LOW
---- ---
1994:
First Quarter*.................................. $ 40 5/8 $28 1/8
Second Quarter*................................. 35 27 1/2
Third Quarter*.................................. 35 5/8 28 1/8
Fourth Quarter*................................. 36 1/4 26 9/16
- ------------
* Adjusted to reflect a one-for-five reverse stock split
The Board of Directors of RJRN Holdings declared an initial quarterly cash
dividend of $.375 per share payable on April 1, 1995. During 1995, RJRN Holdings
continued to pay such a quarterly cash dividend on the Common Stock, adjusted to
take into account the one-for-five reverse split of the Common Stock described
below. Cash dividends paid by RJRN to RJRN Holdings are set forth in the
Consolidated Statements of Cash Flows in the Consolidated Financial Statements.
The operations of RJRN Holdings and RJRN are conducted through RJRN's
subsidiaries and, therefore, RJRN Holdings and RJRN are dependent on the
earnings and cash flow of RJRN's subsidiaries to satisfy their respective
obligations and other cash needs. Certain Nabisco credit facilities limit the
amount of dividends, distributions and advances by Nabisco Holdings and its
subsidiaries to RJRN Holdings and its non-Nabisco subsidiaries. Moreover, the
New RJRN Credit Agreements and certain policies adopted by the Board of
Directors of RJRN Holdings limit the payment by RJRN Holdings of dividends on
the Common Stock in excess of certain specific amounts. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Financial Condition" and "RJRN Holdings' Board of
Directors Policies" and Note 11 to the Consolidated Financial Statements. RJRN
Holdings does not believe that the provisions of the New RJRN Credit Agreements
or its adopted policies concerning distributions to stockholders will limit its
ability to pay its anticipated quarterly dividends.
A one-for-five reverse split of the Common Stock of RJRN Holdings was
approved by its stockholders on April 12, 1995. The reverse stock split resulted
in a dividend and earnings per share five times higher with a corresponding
reduction in the number of shares outstanding.
RJRN Holdings has indicated that, under normal circumstances, it does not
plan to issue additional equity securities for purposes of balance sheet
improvement.
23
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data of RJR Nabisco Holdings Corp.
("RJRN Holdings") presented below as of December 31, 1995 and 1994 and for each
of the years in the three-year period ended December 31, 1995 was derived from
the consolidated financial statements of RJRN Holdings (the "Consolidated
Financial Statements"), which have been audited by Deloitte & Touche LLP,
independent auditors. In addition, the consolidated financial data of RJRN
Holdings presented below as of December 31, 1993, 1992 and 1991 and for each of
the years in the two year period ended December 31, 1992 was derived from the
audited consolidated financial statements of RJRN Holdings as of December 31,
1993, 1992 and 1991 and for the years ended December 31, 1992 and 1991, which
are not presented herein. The data should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial information
included herein.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
RESULTS OF OPERATIONS
Net sales....................................... $16,008 $15,366 $15,104 $15,734 $14,989
------- ------- ------- ------- -------
Cost of products sold........................... 7,468 6,977 6,640 6,326 6,088
Selling, advertising, administrative and
general expenses.............................. 5,412 5,210 5,731 5,788 5,358
Amortization of trademarks and goodwill......... 636 629 625 616 609
Restructuring expense........................... 154 -- 730 106 --
------- ------- ------- ------- -------
Operating income(1)........................... 2,338 2,550 1,378 2,898 2,934
Interest and debt expense....................... (899) (1,065) (1,209) (1,449) (2,217)
Other income (expense), net(2).................. (173) (110) (58) 7 (69)
------- ------- ------- ------- -------
Income before income taxes.................... 1,266 1,375 111 1,456 648
Provision for income taxes...................... 580 611 114 680 280
------- ------- ------- ------- -------
Income (loss) before minority interest in
income of Nabisco........................... 686 764 (3) 776 368
Minority interest in income of Nabisco.......... (59) -- -- -- --
------- ------- ------- ------- -------
Income (loss) before extraordinary item....... 627 764 (3) 776 368
Extraordinary item--loss on early
extinguishments of debt, net of income taxes
and minority interest......................... (16) (245) (142) (477) --
------- ------- ------- ------- -------
Net income (loss)............................... 611 519 (145) 299 368
Preferred stock dividends(3).................... 110 131 68 31 173
------- ------- ------- ------- -------
Net income (loss) applicable to common stock.... $ 501 $ 388 $ (213) $ 268 $ 195
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PER SHARE DATA
Income (loss) before extraordinary item per
common and common equivalent share(4)(5)...... $ 1.58 $ 2.06 $ (0.26) $ 2.73 $ 1.10
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Dividends per share of Common Stock............. $ 1.50 -- -- -- --
Dividends per share of Series A Preferred
Stock(4)...................................... -- $ 2.92 $ 3.34 $ 3.34 $ 0.49
Dividends per share of Series C Preferred
Stock(4)...................................... $ 6.01 $ 3.94 -- -- --
BALANCE SHEET DATA
(AT END OF PERIODS)
Working capital(6).............................. $ 436 $(1,231) $ 202 $ 730 $ 165
Total assets.................................... 31,518 31,408 31,295 32,041 32,131
Total debt(6)................................... 9,847 11,149 12,448 14,218 14,531
RJRN Holdings' obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely junior subordinated
debentures(3)................................. 954 -- -- -- --
Stockholders' equity(3)(4)(7)................... 10,329 10,908 9,070 8,376 8,419
(Footnotes on following page)
24
(Footnotes from preceding page)
- ------------
(1) The 1995 amount includes approximately $49 million for the consolidation and
relocation of the international tobacco headquarter's operations and certain
of its sales facilities. The 1992 amount includes a gain of $98 million on
the sale of the ready-to-eat cold cereal business.
(2) The 1995 amount includes approximately $103 million for fees and expenses
incurred in connection with certain debt refinancings by RJRN, Nabisco
Holdings and Nabisco.
(3) On September 21, 1995, RJR Nabisco Holdings Capital Trust I (the "Trust")
exchanged approximately $949 million of its preferred securities (the "Trust
Preferred Securities"), representing undivided interests in 97% of the
assets of the Trust, for 37,956,060 of the 50,000,000 Series B Depositary
Shares (the "Series B Depositary Shares") outstanding, each representing
one-tenth of a share of the 50,000 outstanding shares of RJRN Holdings'
Series B Cumulative Preferred Stock, par $.01 per share (the "Series B
Preferred Stock"). RJRN Holdings retired the exchanged shares, leaving
12,043.94 shares of the Series B Preferred Stock outstanding. The sole
asset of the Trust is junior subordinated debentures of RJRN Holdings.
Upon redemption of the junior subordinated debentures, which have a final
maturity of December 31, 2044, the Trust Preferred Securities will be
mandatorily redeemed. The outstanding junior subordinated debentures have
an aggregate principal amount of approximately $978 million and an annual
interest rate of 10%.
(4) On November 8, 1991, RJRN 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 of which represented one-quarter of a share of
Series A Preferred Stock. On May 6, 1994, RJRN Holdings issued 26,675,000
shares of Series C Conversion Preferred Stock, par value $.01 per share (the
"Series C Preferred Stock"), and sold 266,750,000 Series C Depositary Shares
(the "Series C Depositary Shares"), each of which represented one-tenth of a
share of Series C Preferred Stock. On November 15, 1994, each outstanding
Series A Depositary Share converted into one share of RJRN Holdings' Common
Stock.
(5) The loss before extraordinary item per common and common equivalent share
reported for the year ended December 31, 1993 would have increased by $.82
per share if the weighted average number of shares of Series A Depositary
Shares outstanding during the period had been excluded from the earnings per
share calculation.
(6) Working capital at December 31, 1994 included $1.35 billion of borrowings
under the 1994 Nabisco Credit Agreement, a substantial portion of which was
used in connection with the refinancing of certain debt. On January 26,
1995, such borrowings were substantially reduced through the application of
approximately $1.2 billion of net proceeds received from the initial public
offering of 51,750,000 shares of Nabisco Holdings' Class A Common Stock.
(7) RJRN Holdings' stockholders' equity at December 31 of each year from 1995 to
1991 includes non-cash expenses related to accumulated trademark and
goodwill amortization of $4.280 billion, $3.644 billion, $3.015 billion,
$2.390 billion and $1.774 billion respectively.
See Notes to Consolidated Financial Statements.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The operating subsidiaries of RJR Nabisco Holdings Corp. ("RJRN Holdings")
and its wholly-owned subsidiary, RJR Nabisco, Inc. ("RJRN"), 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 Nabisco Holdings Corp. ("Nabisco Holdings") through its
wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"), the largest manufacturer and
marketer of cookies and crackers (the "Domestic Food Group"). Outside the United
States, the tobacco operations are conducted by R.J. Reynolds Tobacco
International, Inc. and beginning on January 1, 1996, R.J. Reynolds
International (collectively "Reynolds International"), and the food operations
are conducted by Nabisco International, Inc. and Nabisco Ltd (collectively, the
"International Food Group").
The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJRN Holdings. The discussion and
analysis should be read in connection with the consolidated financial statements
and the related notes thereto of RJRN Holdings as of December 31, 1995 and 1994
and for each of the years in the three year period ended December 31, 1995 (the
"Consolidated Financial Statements").
RESULTS OF OPERATIONS
Summarized financial data for RJRN Holdings is as follows:
% CHANGE FROM
PRIOR YEAR
-------------
1995 1994 1993 1995 1994
------- ------- ------- ---- ----
(DOLLARS IN MILLIONS)
Net Sales:
RJRT............................................. $ 4,480 $ 4,570 $ 4,949 (2 )% (8)%
Reynolds International........................... 3,234 3,097 3,130 4 % (1)%
------- ------- -------
Total Tobacco.................................... 7,714 7,667 8,079 1 % (5)%
------- ------- -------
Domestic Food Group.............................. 6,020 5,729 5,491 5 % 4%
International Food Group......................... 2,274 1,970 1,534 15 % 28%
------- ------- -------
Total Food....................................... 8,294 7,699 7,025 8 % 10%
------- ------- -------
$16,008 $15,366 $15,104 4 % 2%
------- ------- -------
------- ------- -------
Operating Company Contribution(1):
RJRT............................................. $ 1,420 $ 1,450 $ 1,173 (2 )% 24%
Reynolds International........................... 643 755 644 (15 )% 17%
------- ------- -------
Total Tobacco.................................... 2,063 2,205 1,817 (6 )% 21%
------- ------- -------
Domestic Food Group.............................. 890 935 813 (5 )% 15%
International Food Group......................... 239 177 136 35 % 30%
------- ------- -------
Total Food....................................... 1,129 1,112 949 2 % 17%
Headquarters..................................... (64) (138) (33) 54 % --%
------- ------- -------
$ 3,128 $ 3,179 $ 2,733 (2 )% 16%
------- ------- -------
------- ------- -------
Operating Income:
RJRT............................................. $ 954 $ 1,085 $ 453 (12 )% 140%
Reynolds International........................... 546 716 413 (24 )% 73%
------- ------- -------
Total Tobacco.................................... 1,500 1,801 866 (17 )% 108%
------- ------- -------
Domestic Food Group.............................. 687 730 478 (6 )% 53%
International Food Group......................... 215 157 100 37 % 57%
------- ------- -------
Total Food....................................... 902 887 578 2 % 53%
Headquarters..................................... (64) (138) (66) 54 % (109) %
------- ------- -------
$ 2,338 $ 2,550 $ 1,378 (8 )% 85%
------- ------- -------
------- ------- -------
(Footnotes on following page)
26
INDUSTRY SEGMENTS
The percentage contributions of each of RJRN Holdings' industry segments to
net sales and operating company contribution during the last five years were as
follows:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net Sales:
Total Tobacco................................... 48 % 50 % 53 % 57 % 57 %
Total Food...................................... 52 50 47 43 43
---- ---- ---- ---- ----
100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Operating Company Contribution(1)(2):
Total Tobacco................................... 65 % 66 % 66 % 74 % 75 %
Total Food...................................... 35 34 34 26 25
---- ---- ---- ---- ----
100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- ------------
(1) Operating company contribution re