-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SdTWOzld/41OhYD+6jDSaHMQzG1yH+QlQZoZ4BSQVIJ4MZBnugmCeZQO1guefkQf uZjX21ZtT7Tr4cm+YfLaiw== 0000912057-97-026644.txt : 19970811 0000912057-97-026644.hdr.sgml : 19970811 ACCESSION NUMBER: 0000912057-97-026644 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970808 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RJR NABISCO HOLDINGS CORP CENTRAL INDEX KEY: 0000847903 STANDARD INDUSTRIAL CLASSIFICATION: COOKIES & CRACKERS [2052] IRS NUMBER: 133490602 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10215 FILM NUMBER: 97654356 BUSINESS ADDRESS: STREET 1: 1301 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019-6013 BUSINESS PHONE: 2122585600 MAIL ADDRESS: STREET 1: 1301 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019-6013 FORMER COMPANY: FORMER CONFORMED NAME: RJR HOLDINGS CORP DATE OF NAME CHANGE: 19891116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RJR NABISCO INC CENTRAL INDEX KEY: 0000083612 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 560950247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06388 FILM NUMBER: 97654357 BUSINESS ADDRESS: STREET 1: 1301 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2122585600 MAIL ADDRESS: STREET 1: 1301 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: REYNOLDS R J INDUSTRIES INC DATE OF NAME CHANGE: 19860501 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 ------------------------ RJR NABISCO HOLDINGS CORP. (Exact name of registrant as specified in its charter) DELAWARE 1-10215 13-3490602 (State or other jurisdiction (Commission file number) (I.R.S. Employer of Identification 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 (Commission file number) (I.R.S. Employer of Identification No.) incorporation or organization)
1301 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6013 (212) 258-5600 (Address, including zip code, and telephone number, including area code, of the principal executive offices of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc.) -------------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES_X_. NO ____. -------------------------- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS' CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: JUNE 30, 1997: RJR NABISCO HOLDINGS CORP.: 323,717,664 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER SHARE -------------------------- RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX
PAGE --------- PART I--FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Statements of Income--Three Months Ended 1 June 30, 1997 and 1996................................................................... Consolidated Condensed Statements of Income--Six Months Ended 2 June 30, 1997 and 1996................................................................... Consolidated Condensed Statements of Cash Flows--Six Months 3 Ended June 30, 1997 and 1996............................................................. Consolidated Condensed Balance Sheets--June 30, 1997 4 and December 31, 1996.................................................................... Notes to Consolidated Condensed Financial Statements....................................... 5-13 Item 2. Management's Discussion and Analysis of Financial Condition and 14-20 Results of Operations.................................................................... PART II--OTHER INFORMATION Item 1. Legal Proceedings.......................................................................... 21-22 Item 6. Exhibits and Reports on Form 8-K........................................................... 23 Signatures............................................................................................. 24
PART I ITEM 1. FINANCIAL STATEMENTS RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS THREE MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 -------------------- --------------------- RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN --------- --------- ---------- --------- NET SALES*............................................................ $ 4,286 $ 4,286 $ 4,203 $ 4,203 --------- --------- ---------- --------- Costs and expenses: Cost of products sold*.............................................. 1,954 1,954 1,941 1,941 Selling, advertising, administrative and general expenses........... 1,456 1,455 1,437 1,441 Amortization of trademarks and goodwill............................. 160 160 160 160 Restructuring expense............................................... -- -- 428 428 --------- --------- ---------- --------- OPERATING INCOME.................................................. 716 717 237 233 Interest and debt expense............................................. (231) (206) (230) (207) Other income (expense), net........................................... (47) (47) (23) (23) --------- --------- ---------- --------- Income (loss) before income taxes................................. 438 464 (16) 3 Provision for income taxes............................................ 175 184 53 63 --------- --------- ---------- --------- INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME (LOSS) OF NABISCO HOLDINGS.......................................................... 263 280 (69) (60) Less minority interest in income (loss) of Nabisco Holdings........... 20 20 (42) (42) --------- --------- ---------- --------- NET INCOME (LOSS)................................................. 243 260 (27) (18) Less preferred stock dividends........................................ 11 -- 10 -- --------- --------- ---------- --------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK...................... $ 232 $ 260 $ (37) $ (18) --------- --------- ---------- --------- --------- --------- ---------- --------- Net income (loss) per common and common equivalent share.............. $ 0.71 $ (0.11) --------- ---------- --------- ---------- Dividends per share of Series C preferred stock....................... $ 0.751 $ 1.503 --------- ---------- --------- ---------- Dividends per share of common stock................................... $ 0.5125 $ 0.4625 --------- ---------- --------- ---------- Weighted average number of common and common equivalent shares outstanding (in thousands).......................................... 325,607 325,879 --------- ---------- --------- ----------
- ------------------------ * Excludes excise taxes of $879 million and $960 million for the three months ended June 30, 1997 and 1996, respectively. See Notes to Consolidated Condensed Financial Statements 1 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 -------------------- -------------------- RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN --------- --------- --------- --------- NET SALES*............................................................. $ 8,065 $ 8,065 $ 8,089 $ 8,089 --------- --------- --------- --------- Costs and expenses: Cost of products sold*............................................... 3,674 3,674 3,742 3,742 Selling, advertising, administrative and general expenses............ 2,704 2,704 2,724 2,728 Amortization of trademarks and goodwill.............................. 318 318 318 318 Restructuring expense................................................ -- -- 428 428 --------- --------- --------- --------- OPERATING INCOME................................................... 1,369 1,369 877 873 Interest and debt expense.............................................. (463) (415) (464) (417) Other income (expense), net............................................ (76) (76) (58) (58) --------- --------- --------- --------- Income before income taxes......................................... 830 878 355 398 Provision for income taxes............................................. 341 360 216 234 --------- --------- --------- --------- INCOME BEFORE MINORITY INTEREST IN INCOME (LOSS) OF NABISCO HOLDINGS....................................................... 489 518 139 164 Less minority interest in income (loss) of Nabisco Holdings............ 33 33 (32) (32) --------- --------- --------- --------- NET INCOME......................................................... 456 485 171 196 Less preferred stock dividends......................................... 22 -- 21 -- --------- --------- --------- --------- NET INCOME APPLICABLE TO COMMON STOCK.............................. $ 434 $ 485 $ 150 $ 196 --------- --------- --------- --------- --------- --------- --------- --------- Net income per common and common equivalent share...................... $ 1.33 $ 0.46 --------- --------- --------- --------- Dividends per share of Series C preferred stock........................ $ 2.254 $ 3.006 --------- --------- --------- --------- Dividends per share of common stock.................................... $ 1.025 $ 0.925 --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding (in thousands)........................................... 325,998 328,224 --------- --------- --------- ---------
- ------------------------ * Excludes excise taxes of $1.731 billion and $1.855 billion for the six months ended June 30, 1997 and 1996, respectively. See Notes to Consolidated Condense Financial Statements 2 NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------------------ ------------------------ RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN ----------- ----------- ----------- ----------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income................................................................ $ 456 $ 485 $ 171 $ 196 ----- ----- ----- ----- Adjustments to reconcile net income to net cash flows from (used in) operating activities: Depreciation and amortization........................................... 579 579 577 577 Deferred income tax benefit............................................. (1) (1) (163) (162) Changes in working capital items, net................................... (608) (452) (321) (238) Restructuring and restructuring related expense, net of cash payments... (146) (146) 361 361 Other, net.............................................................. (7) (14) (40) (42) ----- ----- ----- ----- Total adjustments..................................................... (183) (34) 414 496 ----- ----- ----- ----- Net cash flows from operating activities.................................. 273 451 585 692 ----- ----- ----- ----- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Capital expenditures...................................................... (308) (308) (332) (332) Acquisition of businesses................................................. -- -- (129) (129) Disposition of businesses and certain assets.............................. 100 100 126 126 ----- ----- ----- ----- Net cash flows used in investing activities............................. (208) (208) (335) (335) ----- ----- ----- ----- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Net borrowings (repayments) of long-term debt............................. 68 68 (139) (139) Increase in short-term borrowings......................................... 239 239 374 374 Dividends paid on common stock and preferred stock, including dividends paid to Nabisco Holdings' minority common shareholders.................. (383) (16) (347) (14) Other, net -- including intercompany transfers and payments............... 20 (524) (4) (442) ----- ----- ----- ----- Net cash flows used in financing activities............................. (56) (233) (116) (221) ----- ----- ----- ----- Effect of exchange rate changes on cash and cash equivalents................ (10) (10) (7) (7) ----- ----- ----- ----- Net change in cash and cash equivalents................................. (1) -- 127 129 Cash and cash equivalents at beginning of period............................ 252 251 234 232 ----- ----- ----- ----- Cash and cash equivalents at end of period.................................. $ 251 $ 251 $ 361 $ 361 ----- ----- ----- ----- ----- ----- ----- -----
See Notes to Consolidated Condensed Financial Statements 3 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN MILLIONS)
JUNE 30, 1997 DECEMBER 31, 1996 -------------------- -------------------- RJRN RJRN HOLDINGS RJRN HOLDINGS RJRN --------- --------- --------- --------- ASSETS Current assets: Cash and cash equivalents........................................... $ 251 $ 251 $ 252 $ 251 Accounts and notes receivable, net.................................. 1,489 1,485 1,418 1,413 Inventories......................................................... 2,847 2,847 2,636 2,636 Prepaid expenses and excise taxes................................... 593 593 445 445 --------- --------- --------- --------- TOTAL CURRENT ASSETS............................................ 5,180 5,176 4,751 4,745 --------- --------- --------- --------- Property, plant and equipment, net.................................. 5,771 5,771 5,835 5,835 Trademarks, net..................................................... 7,890 7,890 8,030 8,030 Goodwill, net....................................................... 12,080 12,080 12,268 12,268 Other assets and deferred charges................................... 380 359 405 382 --------- --------- --------- --------- $ 31,301 $ 31,276 $ 31,289 $ 31,260 --------- --------- --------- --------- --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings............................................... $ 741 $ 741 $ 609 $ 609 Accounts payable and accrued liabilities............................ 3,124 2,947 3,375 3,217 Current maturities of long-term debt................................ 39 39 63 63 Income taxes accrued................................................ 282 407 259 235 --------- --------- --------- --------- TOTAL CURRENT LIABILITIES......................................... 4,186 4,134 4,306 4,124 --------- --------- --------- --------- Long-term debt (less current maturities).............................. 9,409 9,409 9,256 9,256 Minority interest in Nabisco Holdings................................. 806 806 797 797 Other noncurrent liabilities.......................................... 2,202 1,623 2,223 1,872 Deferred income taxes................................................. 3,577 3,514 3,605 3,542 Contingencies (Note 3) RJRN Holdings' obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures*......................................................... 954 -- 954 -- Stockholders' equity: Series C convertible preferred stock................................ -- -- 3 -- Other preferred stock............................................... 528 -- 534 -- Common stock (327,094,964 shares issued at June 30, 1997)........... 3 -- 3 -- Paid-in capital..................................................... 10,042 11,886 10,038 11,890 Retained earnings................................................... 68 190 -- -- Cumulative translation adjustments.................................. (286) (286) (221) (221) Other stockholders' equity.......................................... (188) -- (209) -- --------- --------- --------- --------- TOTAL STOCKHOLDERS' EQUITY........................................ 10,167 11,790 10,148 11,669 --------- --------- --------- --------- $ 31,301 $ 31,276 $ 31,289 $ 31,260 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ * The sole asset of the subsidiary trust is the junior subordinated debentures of RJRN Holdings. Upon redemption of the junior subordinated debentures, which have a final maturity of December 31, 2044, the preferred securities will be mandatorily redeemed. The outstanding junior subordinated debentures have an aggregate principal amount of approximately $978 million and an annual interest rate of 10%. See Notes to Consolidated Condensed Financial Statements 4 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1--INTERIM REPORTING GENERAL For interim reporting purposes, certain costs and expenses are charged to operations in proportion to the estimated total annual amount expected to be incurred. Certain prior year amounts have been reclassified to conform to the 1997 presentation. In management's opinion, the accompanying unaudited consolidated condensed financial statements (the "Consolidated Condensed Financial Statements") of RJR Nabisco Holdings Corp. ("RJRN Holdings") and RJR Nabisco, Inc. ("RJRN" and together with RJRN Holdings, the "Registrants") contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The Consolidated Condensed Financial Statements should be read in conjunction with the consolidated financial statements and footnotes included in the Annual Report on Form 10-K of RJRN Holdings and RJRN for the year ended December 31, 1996. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share, which establishes new standards for computing and presenting net income per share. As a result, RJRN Holdings will begin reporting in the fourth quarter of 1997 both a basic and diluted net income per share amount for each period presented. It is anticipated that basic net income per share, which excludes any dilution, and diluted net income per share will not be significantly different than net income per share calculated under current accounting standards. RESTRUCTURING EXPENSE In the second quarter of 1996, Nabisco Holdings Corp. ("Nabisco Holdings") recorded a $428 million ($241 million after-tax, net of minority interest) restructuring expense related to a program undertaken to streamline operations and improve profitability. As of June 30, 1997, approximately $260 million of the restructuring accruals were utilized as follows: $146 million for severance and related benefits, $82 million for product line rationalizations, $26 million for contract terminations and $6 million for plant closures. NOTE 2--INVENTORIES The major classes of inventory are shown in the table below:
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------- Finished products.................................................... $ 876 $ 830 Leaf tobacco......................................................... 1,290 1,161 Raw materials........................................................ 248 234 Other................................................................ 433 411 ----------- ------ $ 2,847 $ 2,636 ----------- ------ ----------- ------
5 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CONTINGENCIES TOBACCO-RELATED LITIGATION OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJRN) or indemnitees, including those claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During the second quarter of 1997, 124 new actions were filed or served against RJRT and/or its affiliates or indemnitees (as against only 44 in the second quarter of 1996) and 57 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. Since the close of the second quarter, through August 7, 1997, an additional 117 suits have been filed or served, and 14 dismissed. There have also been noteworthy increases in the number of these cases pending. On August 7, 1997, there were 448 active cases pending against RJRT and/or its affiliates or indemnitees, as compared with 203 cases in July 1996 and 68 in July 1995. Of these cases, 443 are in the United States, one in Canada, three in Puerto Rico, and one in Guam. The United States cases are in 44 states and are distributed as follows: 179 in Florida, 61 in New York, 36 in Texas, 18 in Louisiana, 11 in each of New Jersey and Pennsylvania, ten in each of Alabama, California, and Ohio, eight in each of Tennessee and Mississippi, six in West Virginia, five in each of Indiana and Massachusetts, four in each of Kansas, Michigan, and Oklahoma, three in each of Arizona, Colorado, District of Columbia, Hawaii, Minnesota, New Mexico, Oregon, and Washington, two in each of Connecticut, Georgia, Illinois, Iowa, Maryland, Missouri, Montana, New Hampshire, South Dakota, and Wisconsin, and one in each of Alaska, Arkansas, Idaho, Kentucky, Nevada, North Carolina, South Carolina, Utah, and Vermont. Of the 443 active cases in the United States, 331 are pending in state court and 112 in federal court. THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a variety of legal theories, including, among others, strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, anti-trust, Racketeer Influenced and Corrupt Organization Act ("RICO"), indemnity and common law public nuisance. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. Eight of the 443 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. Thirty-six cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, flight attendants alleging personal injury from exposure to environmental tobacco smoke in their workplace and Blue Cross/Blue Shield subscribers claiming reimbursement for premiums paid. Sixty-six of the active cases seek, INTER ALIA, recovery of the cost of Medicaid funds or other health related costs paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco. DEFENSES. The defenses raised by RJRT and/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act ("the Cigarette Act") of some or all such claims arising after 1969; the lack of any defect in the product; assumption of the risk; contributory or comparative fault; lack of proximate cause; and statutes of limitations or repose; and, in the attorneys general cases (discussed below), additional equitable and constitutional defenses. RJRN has asserted additional defenses, including 6 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CONTINGENCIES (CONTINUED) jurisdictional defenses, in many of the cases in which it is named. Juries have found for plaintiffs in three smoking and health cases in which RJRT was not a defendant, but in one such case, no damages were awarded and the judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on appeal and the case was subsequently dismissed. In the third such case, on August 9, 1996, a Florida jury awarded damages of $750,000 to an individual plaintiff. The defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking to reverse the judgment on appeal. On May 5, 1997, in an individual case filed against RJRT, brought by the same attorney who represented plaintiffs in the CARTER case, a Florida state court jury found no RJRT liability. On June 24, 1992, the United States Supreme Court in CIPOLLONE held INTER ALIA that claims that tobacco companies failed adequately to 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 certain claims sounding in breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. CERTAIN CLASS ACTION SUITS. In May 1996, there was an important ruling in one of the purported class action cases, CASTANO V. THE AMERICAN TOBACCO COMPANY, originally filed in March 1994 in the United States District Court for the Eastern District of Louisiana against tobacco industry defendants, including RJRT and RJRN. Plaintiffs sought to obtain 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 alleged 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 but, on May 23, 1996, the Fifth Circuit Court of Appeals overturned the certification and ordered the case remanded to the district court for decertification of the class on the grounds that a class consisting of all "addicted" smokers failed to meet the standards and requirements of Federal Rule 23 governing class actions. The class has been decertified and the case is proceeding as an individual suit. Another purported class action, filed shortly after CASTANO, remains stayed in federal district court in Louisiana. Since the federal appeals court decision in CASTANO, class action suits based on similar claims have been brought in state courts in Alabama, Arkansas, the District of Columbia (D.C. court), Georgia, Hawaii, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, New Mexico, Ohio, Oklahoma, New Jersey, New York, Pennsylvania, South Dakota, Tennessee, Texas, West Virginia and Wisconsin. A similar suit had previously been filed in Indiana. Similar suits are also expected to be filed in additional jurisdictions and there are additional class action suits pending in Canada and Puerto Rico. Each such suit asserts claims on behalf of residents of the particular jurisdiction who allegedly are or claim to be addicted, injured, or at greater risk of injury by the use of tobacco, or are the legal survivors of such persons. In addition, two earlier class action suits are still pending in Florida. In one case, BROIN V. PHILIP MORRIS COMPANY, a class consisting of all non-smoking flight attendants who work or have worked for U.S. airlines has been certified, and the first phase of the case is currently being tried. In a second case, ENGLE V. R.J. REYNOLDS TOBACCO COMPANY, a class consisting of Florida residents or their survivors who claim to have diseases or medical conditions caused by their "addiction" to cigarettes has been certified, and the case, previously scheduled for trial in September 1997, will be rescheduled based on when the BROIN trial is completed. A class was certified in another purported class action suit, SCOTT V. AMERICAN TOBACCO 7 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CONTINGENCIES (CONTINUED) COMPANY, on April 11, 1997. Defendants have removed the case to federal court and are seeking reconsideration of the certification. Another suit, GEIGER V. AMERICAN TOBACCO COMPANY, was certified as a class action by a New York State court on July 24, 1997 and defendants have filed a notice of appeal. A class action filed in Tennessee seeks reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout the United States. During the second quarter of 1997, class certification was denied in two other cases: one, ARCH V. AMERICAN TOBACCO COMPANY, pending in the United States District Court for the Eastern District of Pennsylvania, on June 3, 1997 and another, SMITH V. BROWN & WILLIAMSON, pending in the United States District court for the Western District of Missouri, in which RJRT is not a defendant, on May 22, 1997. THE ATTORNEYS GENERAL AND RELATED CASES. In June 1994, the Mississippi attorney general brought an action, MOORE V. THE AMERICAN TOBACCO COMPANY, against various industry members including RJRT. This case was brought on behalf of the state to recover state funds paid for health care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. This suit, which was brought in Chancery (non-jury) Court, Jackson County, Mississippi, also sought an injunction against "promoting" or "aiding and abetting" the sale of cigarettes to minors. Both actual and punitive damages were sought in unspecified amounts. The case was scheduled for trial on July 7, 1997, but on July 2, 1997, the parties arrived at an agreement in principle settling the claims relating to the subject matter of the litigation, subject to the drafting and execution of a comprehensive settlement agreement. See "Proposed Resolutions" below. Following the filing of the MOORE case referred to above, other states, through their attorneys general and/or other state agencies, have sued RJRT and other U.S. cigarette manufacturers as well as, in some instances, their parent companies, in actions to recover the costs of medical expenses incurred by the state or its agencies in the treatment of diseases allegedly caused by cigarette smoking. Some of these cases also seek injunctive relief and treble damages for state and/or federal antitrust law and RICO violations. Certain of the actions also seek statutory penalties and other forms of relief under state consumer protection statutes. On August 7, 1997, there were 36 such cases pending in the following states or territories: Alaska, Arizona, California, Colorado, Connecticut, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, South Carolina, Texas, Utah, Vermont, Washington, West Virginia and Wisconsin. Jury selection has begun in the Florida attorney general's case and the Texas case is scheduled for September 29, 1997. The suit by the State of Florida raises special issues because it was brought under a July 1994 amendment to a Florida statute which allows the state to bring an action in its own name against the tobacco industry to recover the state's Medicaid payments for the treatment of illnesses statistically associated with cigarette smoking. The amendment did not require the state to identify the individuals who received medical care, permitted claims to be filed in the aggregate and eliminated the comparative negligence and assumption of risk defenses. The amendment was challenged on state and federal constitutional grounds in a lawsuit brought by Philip Morris Companies Inc., Associated Industries of Florida and others in June 1994. The trial court ruling in this case was appealed to the Florida Supreme Court which, on June 27, 1996, issued its opinion limiting the amendment in several respects. Among other things, the court ruled: that provisions abrogating affirmative defenses available to tobacco companies if sued by individuals could only be applied to claims brought by the state arising out of payments made after 8 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CONTINGENCIES (CONTINUED) July 1, 1994, the effective date of the amendment; that the state must identify individual recipients of Medicaid payments; and that claims previously barred by the statute of repose could not be revived. The Florida Supreme Court, in a 4-3 decision, expressly stated that although it found provisions of the statute to be "facially" constitutional, it was specifically leaving open the right to challenge those provisions as applied in any specific lawsuit. The plaintiffs in that lawsuit were unsuccessful in their request to obtain United States Supreme Court review of the Florida Supreme Court's decision. In an order dated September 16, 1996, the Florida trial court hearing the attorney general's case applied the Florida Supreme Court decision to that case. The order dismissed fifteen of plaintiff's eighteen causes of action, but left standing the claims of negligence and/or products liability and one count of the complaint which seeks to enjoin certain acts, including the sale of cigarettes to minors. It also required the attorney general to identify the individual Medicaid recipients for whom the state is seeking recovery within 30 days and precluded recovery by the state on payments made prior to July 1994, except by subrogation and assignment. Following this ruling, the State of Florida filed an amended complaint that restated the counts of the prior complaint left standing by the September order and added five additional counts. One of these counts alleged various statutory and criminal violations arising under the Florida Drug and Cosmetic Act, based on alleged wrongful and illegal targeting of minors, fraudulent practices, public nuisance and deceptive and unfair trade practices. The other four new counts alleged violations of various sections of the Florida RICO Act. Defendants' motion to dismiss the RICO counts was denied. In response to certain pretrial motions filed by the defendants, the Court has ruled INTER ALIA that: (1) all claims for punitive damages under Counts One (negligence) and Two (strict liability) of the complaint are dismissed; and (2) the state's cause of action does not accrue until such time as it has paid Medicaid benefits and that the state's action must be limited to its past damages and may not include a claim for future damages. In addition, in ruling on certain procedural motions, the judge in this case has severely limited the affirmative evidence that defendants may present at trial, which could have a significant adverse impact on the course and outcome of this trial. In addition to the 36 actions brought by the various state attorneys general, 30 actions advancing similar theories have been brought by private attorneys and/or local officials purportedly on behalf of the citizens of certain states, counties and/or cities, union health and welfare funds, a university and four native American tribes. Although RJRT and most other cigarette manufacturers have agreed to the Memorandum described below, the uncertainty of its enactment into law requires that they continue to defend these attorneys general and related cases vigorously and they continue to do so (as does RJRN in the cases where it is a named defendant). In addition, these tobacco company defendants filed for declaratory judgment in several of the states in which attorneys general cases are now pending including Massachusetts (federal court), Texas (state court), Maryland (state court), Connecticut (federal court), Utah (state court), New Jersey (state court), Alaska (federal court) and Hawaii (federal court). Motions to dismiss on behalf of the state government defendants in three of the declaratory judgment actions (Maryland, New Jersey and Connecticut) have been granted. RJRT and the other cigarette manufacturers involved in those cases have noticed appeals seeking to overturn these rulings. PROPOSED RESOLUTIONS. Following several months of negotiations among tobacco companies, state attorneys general, representatives of the public health community and plaintiffs' lawyers, on June 20, 1997, 9 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CONTINGENCIES (CONTINUED) counsel representing RJRT and certain other parties signed a Memorandum of Understanding and Resolution (the "Memorandum") that sets forth concepts for federal legislation and a contractual protocol to resolve a variety of litigation and regulatory issues concerning tobacco. The Memorandum is subject to any necessary approvals by the various states and the Boards of Directors of RJRT and the other participating tobacco companies. For the complete terms of the Memorandum, see the Companies' Report on Form 8-K, filed with the Securities and Exchange Commission on June 20, 1997, which includes the Memorandum as an exhibit. There can be no assurance that legislation to implement the Memorandum will be enacted or that it will be enacted without modification that is materially adverse to the tobacco industry, particularly in light of the complex legal and factual issues involved and the need to reconcile the views of many competing interests. It is not certain that any proposed legislation that emerges from this process will be acceptable to RJRT. If enacted, the legislation could face challenges on the grounds, among others, that the federal government lacks the authority to regulate the tobacco industry or limit its liability in the manner contemplated by the Memorandum. Regardless of the legislative outcome, the negotiation and signing of the Memorandum could adversely affect other federal, state and local regulation of the tobacco industry, alter the climate for pending litigation against RJRN, RJRT and other tobacco companies and affect the number of new smoking and health claims filed against the industry. The Memorandum requires the tobacco companies to make an initial $10 billion payment and subsequent annual multi-billion dollar payments. Discussions with other manufacturers who were participants in the negotiations which led to the Memorandum are still in progress, but, RJRT believes that its share of the initial payment will be in the range of $600 to $700 million and that subsequent payments will be allocated within the industry based on market share. However, the financial effects of this legislation and the related contractual protocol are difficult to predict. They depend, among other things, on (i) the amount and timing of the payments actually required of RJRT by the legislation; (ii) the means used to finance these payments; (iii) the impact of increased cigarette prices and other aspects of the legislation and the contractual protocol on domestic cigarette consumption; (iv) the effect of the legislation and the contractual protocol on the consumption of tobacco products and the regulatory and litigation environment outside the United States; (v) their effect, if any, on public attitudes toward smoking and the tobacco industry; and (vi) their impact on RJRT's competitive position in the tobacco industry. Despite these uncertainties, RJRN believes that implementation of the Memorandum would increase the costs and reduce the consumption of RJRT's tobacco products in the United States and that it could have a significant negative effect on the business of RJRT and the stated financial position of RJRN and RJRT. Any significant negative effect on the financial position of RJRN could ultimately impact the share repurchase and dividend policies of RJRN Holdings. On the other hand, the proposals contemplated by the Memorandum offer a measure of relief from certain litigation that could otherwise materially affect the results of operations or cash flows of RJRN in particular quarterly or annual periods or its financial condition. In evaluating any legislation to resolve tobacco issues, RJRN and RJRT will continue to weigh carefully the potential benefits, principally greater regulatory and litigation certainty and a reduction in aggregate contingency risk, against the resulting monetary, regulatory and other costs. THE MISSISSIPPI AGREEMENT. Because the Memorandum, unless and until it is enacted into law, will not resolve any pending litigation scheduled for trial in advance of such enactment, the parties in each of these cases must decide, on a case-by-case basis, whether to proceed to trial or seek some other resolution. The 10 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CONTINGENCIES (CONTINUED) first attorney general case scheduled for trial after adoption of the Memorandum was MOORE V. AMERICAN TOBACCO COMPANY. In that case, a settlement was agreed to on July 2, 1997, based on a Memorandum of Understanding and subject to a number of conditions, including the negotiation and execution of a full settlement agreement. The agreement calls for the defendants to pay an aggregate of $170 million to the State of Mississippi, as well as additional amounts to the Attorney General and plaintiffs' private counsel for their litigation costs and expenses. It also provides for continuing payments commencing December 31, 1998, and annually thereafter, based on Mississippi's 1.7% share of $4 billion in the first year, escalating to 1.7% of $8 billion in year eight and thereafter, adjusted upward by no less than 3% per year and further adjusted upward or downward to reflect increases or decreases in volume of domestic tobacco product sales. If the U.S. Congress enacts federal legislation in keeping with the Memorandum discussed above, the terms of that legislation would supersede the terms of the Mississippi agreement and defendants would receive credit for these payments against the obligations arising under the federal legislation for payments already made to Mississippi. If, instead, the defendants enter into a number of separate settlement agreements with the other individual states that have brought cost recovery suits against tobacco companies, Mississippi would be entitled to payment adjustments to assure that it receives at least as favorable a settlement as any other separately settling non-federal governmental plaintiff. On July 15, 1997, the settling defendants made their first payment under the Mississippi agreement into an escrow account to be released to the State when certain conditions, including the execution of a definitive agreement, have been satisfied. RJRT's payment into that escrow account was $12,410,000. An additional aggregate payment of $15 million relating to plaintiffs' legal expenses (subject to later adjustment) was paid on July 30, 1997. RJRT's share of that payment was $3,765,000. RJRT has participated and may continue to participate in discussions with certain other states with health care cost recovery actions scheduled to be tried in the coming months in order to postpone or settle those actions while awaiting passage of the legislation contemplated by the Memorandum. There can be no assurance that any such postponement or settlement can be achieved, or, if achieved, as to the terms ultimately agreed to. In the absence of postponement or settlement, these actions would be tried as scheduled and any final judgment reached prior to enactment of the contemplated legislation would not be affected by the passage of the legislation. RECENT AND SCHEDULED TRIALS. As of August 7, 1997, there were 12 cases scheduled for trial in 1997 against RJRT and/or RJRN alleging injuries relating to tobacco. Among these are three class action suits (one of which is currently in trial) and two attorneys general suits. Cases against other tobacco company defendants are also scheduled for trial in 1997 and thereafter. Although trial schedules are subject to change and many cases are dismissed before trial, it is likely that there will be an increased number of tobacco cases, involving claims for possibly billions of dollars, against RJRT and RJRN coming to trial over the next year as compared to prior years when trials in these cases were infrequent. OTHER DEVELOPMENTS. On May 28, 1997, a suit was filed against RJRT in the U.S. District Court for the Northern District of Georgia, Atlanta Division, FARR V. R.J. REYNOLDS TOBACCO COMPANY, alleging claims under Title VII and the Equal Pay Act on behalf of female RJRT employees and applicants for employment in the "southeast sales region", seeking equitable relief, back pay and lost benefits, as well as 11 RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CONTINGENCIES (CONTINUED) punitive damages, based on allegations that plaintiffs had been denied employment, desirable job assignments, training, promotion and equal pay. RJRT has filed an answer in the case and intends to defend it vigorously. Other lawsuits filed by RJRT against various government agencies are described below. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tobacco-- Governmental Activity." RJRT, R.J. Reynolds Tobacco International ("RJRTI") and Northern Brands International, another subsidiary of RJRN, each received document subpoenas dated July 24, 1997, from a federal grand jury sitting in the Northern District of New York. RJRT understands that the grand jury is investigating possible smuggling activities. RJRT, RJRTI and Northern Brands International will respond to these subpoenas, but are unable to predict the outcome of the grand jury's 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 (including RJRN Holdings and RJRN) or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and could encourage an increase in the number of such claims. There have been a number of political, legislative, regulatory and other developments relating to the tobacco industry and cigarette smoking that have received wide media attention, including the recent Liggett settlements of certain health care cost recovery actions and a purported nationwide smoking and health class action, and a decision by a federal district court on a motion for summary judgment to uphold the FDA's regulation of cigarettes as "drugs" or "medical devices." These developments, as well as the widespread media attention given to the Memorandum referred to above, may negatively affect the outcomes of tobacco-related legal actions and encourage the commencement of additional similar litigation. Although it is impossible to predict the outcome of such events on pending litigation and the rate at which new lawsuits are filed against RJRT and RJRN, a significant increase in litigation and/or in adverse outcomes for tobacco defendants could have an adverse effect on RJRT and RJRN. RJRT and RJRN each believe that they have a number of valid defenses to any such actions and intend to defend vigorously all such actions in which they are named defendants. RJRN Holdings and RJRN believe that notwithstanding the quality of defenses available to them and RJRT in litigation matters, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). Management is unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. ------------------------ 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of RJRN Holdings' financial condition and results of operations should be read in conjunction with the historical financial information included in the Consolidated Condensed Financial Statements. RESULTS OF OPERATIONS Summarized financial data for RJRN Holdings is as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1997 1996 % CHANGE 1997 1996 % CHANGE ------ ------ -------- ------ ------ -------- (DOLLARS IN MILLIONS) NET SALES: RJRT.................................................................. $1,216 $1,173 4% $2,292 $2,230 3% Reynolds International................................................ 879 852 3 1,677 1,691 (1) ------ ------ ------ ------ Total Tobacco....................................................... 2,095 2,025 3 3,969 3,921 1 ------ ------ ------ ------ Nabisco Biscuit....................................................... 907 914 (1) 1,708 1,785 (4) U.S. Foods Group...................................................... 647 639 1 1,174 1,202 (2) ------ ------ ------ ------ Domestic Food Group................................................... 1,554 1,553 -- 2,882 2,987 (4) International Food Group.............................................. 637 625 2 1,214 1,181 3 ------ ------ ------ ------ Total Food.......................................................... 2,191 2,178 1 4,096 4,168 (2) ------ ------ ------ ------ $4,286 $4,203 2 $8,065 $8,089 ------ ------ ------ ------ ------ ------ ------ ------ OPERATING COMPANY CONTRIBUTION:(1) RJRT.................................................................. $ 395 $ 390 1% $ 775 $ 770 1% Reynolds International................................................ 179 162 10 374 359 4 ------ ------ ------ ------ Total Tobacco....................................................... 574 552 4 1,149 1,129 2 ------ ------ ------ ------ Nabisco Biscuit....................................................... 183 146 25 317 271 17 U.S. Foods Group...................................................... 93 81 15 158 144 10 ------ ------ ------ ------ Domestic Food Group................................................... 276 227 22 475 415 14 International Food Group.............................................. 44 63 (30) 98 113 (13) ------ ------ ------ ------ Total Food.......................................................... 320 290 10 573 528 9 ------ ------ ------ ------ Headquarters.......................................................... (18) (17) (6) (35) (34) (3) ------ ------ ------ ------ $ 876 $ 825 6 $1,687 $1,623 4 ------ ------ ------ ------ ------ ------ ------ ------ OPERATING INCOME: RJRT.................................................................. $ 303 $ 298 2% $ 592 $ 587 1% Reynolds International................................................ 167 151 11 352 338 4 ------ ------ ------ ------ Total Tobacco....................................................... 470 449 5 944 925 2 ------ ------ ------ ------ Domestic Food Group................................................... 226 (177) -- 374 (40) -- International Food Group.............................................. 38 (18) -- 86 26 231 ------ ------ ------ ------ Total Food.......................................................... 264 (195) -- 460 (14) -- ------ ------ ------ ------ Headquarters.......................................................... (18) (17) (6) (35) (34) (3) ------ ------ ------ ------ $ 716 $ 237 202 $1,369 $ 877 56 ------ ------ ------ ------ ------ ------ ------ ------
- ------------------------ (1) Operating Company Contribution represents operating income before amortization of trademarks and goodwill and restructuring expense. 13 TOBACCO The tobacco line of business is conducted by RJRT and R.J. Reynolds International ("Reynolds International"). RJRT's net sales for the second quarter of 1997 were $1.22 billion, an increase of $43 million or 4% from the second quarter of 1996, and $2.29 billion for the first six months of 1997, an increase of $62 million or 3% over 1996. The increase for both periods is mainly attributable to higher pricing, partially offset by lower overall volume. Overall volume decreased 4% in both the second quarter and the first six months of 1997 over the prior year. Full price segment volume for the second quarter and the first six months of 1997 decreased 5% and 4%, respectively, over 1996, while savings segment volume decreased 3% and 5%, respectively. Industry volume was flat for the quarter but continues its shift to the full price category with full price volume up 1% and savings volume down 5%. Industry volume for the first six months of 1997 decreased 2% with full price volume flat and savings volume down 5%. RJRT's overall market share decreased to 25.44% during the second quarter of 1997 from 26.00% for the second quarter of 1996. Overall market share for the first six months of 1997 decreased to 25.45% from 26.12% in 1996. The Camel brand remained the company's strongest performing brand with volume increases of 8% in both the second quarter and the first half of 1997. The rollout of the Red Kamel line extension to single-pack-oriented retail outlets was completed in April 1997 and market response to the Camel Menthol styles introduced in January 1997 continues to be positive. Doral, the industry's leading savings brand, posted volume gains of 4% for the second quarter and first six months of 1997. Offsetting these increases were declines in Winston and Salem and other low margin savings brands for both periods in 1997. The company continues its program of ceding market share of low margin brands. RJRT continues to study Eclipse, a cigarette featuring 90% reduced second-hand smoke, along with the Moonlight Tobacco Company brands, featuring innovative packaging and product concepts. Additionally, during the second quarter of 1997, RJRT announced that the Winston "No Bull" marketing campaign, which had been tested in the state of Florida for the past year, will be rolled out nationally during the third quarter of 1997. The new positioning will establish Winston as a brand with a "straight-up" attitude leveraged by a unique product point-of-difference: a 100-percent tobacco blend with no additives. RJRT's operating company contribution increased 1% for the second quarter and the first six months of 1997 to $395 million and $775 million, respectively, compared to 1996. The increase in operating company contribution for both periods is primarily due to increases in pricing and operating efficiencies, partially offset by decreases in volume, higher marketing spending, and legal costs. Operating income increased 2% for the second quarter and 1% for the first six months of 1997 over the comparable 1996 periods due primarily to the increases in operating company contribution. Reynolds International's net sales amounted to $879 million for the second quarter of 1997, a 3% increase over 1996 primarily due to an increase in volume and pricing, partially offset by unfavorable foreign currency translation. Excluding the impact of unfavorable foreign currency translation, net sales would have increased 9% over 1996. Overall volume of 50.7 billion units increased 13% from 1996 primarily due to a 37% gain from markets in the Commonwealth of Independent States (CIS) and Baltic regions. Shipments into the CIS and Baltic regions rebounded sharply after disruptions in the first quarter of 1997. Volume in that region increased 62% in the second quarter versus the first quarter of 1997. Sales in Russia remained strong during the second quarter, with demand for the locally produced Peter 1st brand continuing to exceed capacity. Volumes in Central Europe increased 22% over 1996, driven by Turkey and Romania. Reynolds International continued to experience strong growth in Japan where volume increased 35%, driven by the "low smoke, low smell" Pianissimo brands. The company also reported volume momentum in South Africa and strong performance in Tanzania, despite a difficult economic climate. Offsetting this growth were declines in Western Europe, where flat to declining consumption and price pressures in a number of markets, such as Spain and France, contributed to volume softness. Reynolds 14 International is continuing to move aggressively to offer medium and low-tar/nicotine alternatives in Western Europe. Camel Lights, now introduced in 30 countries, remained on a strong growth track, with volume up 19% for the first six months of 1997. Reynolds International launched Camel Medium in Holland, Greece, Germany, Switzerland, Belgium and Hungary during the second quarter of 1997. New Winston Lights and Superlights brand styles were launched in Switzerland, Greece and Spain as part of the company's plans to expand participation of its largest-selling international brand in the growing worldwide lights segment. Salem continued its strong performance in Asia, with volume up 19% in the second quarter of 1997. Reynolds International's net sales decreased slightly to $1.68 billion for the first six months of 1997 over the 1996 comparable period primarily due to unfavorable foreign currency translation and unfavorable region mix, partly offset by increased pricing. Excluding the impact of unfavorable foreign currency translation, net sales would have increased 4% over 1996. Overall volume of 92.3 billion units increased slightly from 1996 as a result of the volume gains in Central Europe which more than offset the volume softness in Western Europe and the disruptions during the first quarter of 1997 in the CIS and Baltic regions. Operating company contribution of $179 million for the second quarter of 1997 increased 10% from 1996 driven primarily by increased pricing, partially offset by unfavorable foreign currency developments. Operating company contribution was $374 million for the first six months of 1997, an increase of 4% over the comparable 1996 period, due primarily to increased pricing and region sales mix, partially offset by unfavorable foreign currency developments and higher product costs. Operating income increased 11% and 4% for the second quarter and first six months of 1997, respectively, primarily as a result of the increases in operating company contribution. Reynolds International has commenced a European distribution rationalization program to improve productivity and reduce costs that will not have a material impact on the consolidated financial statements. The program includes inventory realignment, as well as the sale and closure of certain facilities. GOVERNMENTAL ACTIVITY If the legislation contemplated by the Memorandum discussed at Note 3 of the Consolidated Condensed Financial Statements above ("Note 3") is enacted, RJRT and other cigarette manufacturers would be subject to certain actions taken (or to be taken) by certain governmental regulatory agencies that could be expected to have an adverse effect on cigarette sales. As described in Note 3, RJRT would be prepared to support the enactment of such legislation as part of a comprehensive resolution of a variety of tobacco issues. Nonetheless, in the absence of such legislation, regulatory initiatives such as the following remain of significant importance to RJRT. In August 1996, the U.S. Food and Drug Administration (the "FDA") asserted jurisdiction over cigarettes and certain other tobacco products by declaring such products to be medical devices and adopting regulations, first proposed in 1995, on the advertising, promotion and sale of cigarettes. The regulations include a phased in schedule of effectiveness over a two year period. The first phase began February 28, 1997, when regulations relating to the sale of cigarettes to minors became effective. Among other things, the 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 rules also limit advertising in print and on billboards to black and white text and impose new labeling language. 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 four other major domestic cigarette manufacturers and an advertising agency, filed suit on the day of the initial proposal in 1995 in the U.S. 15 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). On the day the final regulations were announced, the plaintiffs filed an amended complaint challenging the regulations. Similar suits were filed in the same court by manufacturers of smokeless tobacco products, by operators of retail stores and by advertising interests. On April 26, 1997, the court ruled on a motion for summary judgment, that based on the facts alleged by the FDA, that agency was not barred from asserting jurisdiction over tobacco but lacked authority to issue certain of the regulations bearing on marketing and advertising. The court immediately certified its decision for appeal to the Fourth Circuit Court of Appeals and stayed the effectiveness of that portion of the regulations which had not yet been implemented pending appeal or further court action. RJRT is unable to predict the ultimate outcome of this litigation seeking to find the FDA's regulations to be unlawful. If the full regulations do go into effect, they could be expected to have an adverse effect on cigarette sales and RJRT. On May 28, 1997, the Federal Trade Commission (the "FTC") issued an unfairness complaint against RJRT, seeking to stop the use of Joe Camel advertising, to require RJRT to undertake certain public education activities, and to monitor sales and share of sales of each of RJRT's brands to smokers under the age of 18. On June 17, 1997, RJRT filed suit against the FTC in the Federal District Court for the Middle District of North Carolina, challenging the FTC's action as procedurally improper. The FTC has moved to dismiss the action. 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 1996, Massachusetts enacted legislation that would require manufacturers of tobacco products sold in Massachusetts to report yearly, beginning in 1997, the ingredients of each brand sold. RJRT believes that the disclosure of trade secrets required by this law could damage the competitive position of its brands. The statute requires the reporting of nicotine yield ratings in accordance with procedures to be established. Together with other cigarette manufacturers, RJRT has filed suit in the U.S. District Court for the District of Massachusetts seeking to have the statute declared null and void and to restrain Massachusetts officials from enforcing it. A similar suit has been filed by manufacturers of smokeless tobacco products. The Massachusetts district court denied the manufacturers' motion for summary judgment based on preemption grounds, but certified the case for appeal of this issue to the First Circuit which heard oral argument in June 1997. RJRT is unable to predict the outcome of this litigation. Minnesota and Texas have also recently enacted legislation requiring ingredients reporting. RJRT believes that the Minnesota and Texas laws also violate the U.S. Constitution. RJRT has filed suit in the U.S. District Court for the District of Minnesota seeking to restrain the enforcement of the Minnesota law. RJRT is unable to predict the outcome of this litigation. 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. RJRT is unable to predict the effect of the recent Memoranda on the regulatory environment for its products abroad. As part of a balanced budget agreement, subject to legislative enactment, the White House and the U.S. Congress have agreed to increase the excise tax on cigarettes by $.10 per pack in the year 2000 and an 16 additional $.05 in 2002. It is not possible to determine what additional federal, state, local or foreign legislation or regulations relating to smoking or cigarettes will be enacted or to predict any resulting effect thereof on RJRT, 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. For a description of certain litigation affecting RJRT and its affiliates, see Note 3 to the Consolidated Condensed Financial Statements. FOOD The food business is conducted by operating subsidiaries of Nabisco Holdings. Nabisco's businesses in the United States are comprised of the Nabisco Biscuit company and the U.S. Foods Group (collectively, the "Domestic Food Group"). The U.S. Foods Group is comprised of the Specialty Products, LifeSavers, Planters, Tablespreads and Food Service companies. Nabisco's businesses outside the United States are conducted by Nabisco Ltd and Nabisco International, Inc. ("Nabisco International" and together with Nabisco Ltd, the "International Food Group"). The Domestic Food Group's net sales were flat for the second quarter and 4% lower for the first six months of 1997, with Nabisco Biscuit down 1% and 4%, respectively, and the U.S. Foods Group up 1% and down 2%, respectively. The declines in Nabisco Biscuit were primarily due to lower volume in SnackWell's and breakfast snacks, which more than offset higher volume in core cookie and cracker brands. The U.S. Foods Group's net sales increase in the second quarter was primarily due to higher volume for nuts, candy and gum which was partially offset by lower sales volume for tablespreads and condiments. The U.S. Foods Group's decline in net sales for the first six months of 1997 was primarily due to lower sales volume for tablespreads and condiments, partially offset by higher sales volume for nuts, candy and gum. The International Food Group reported net sales increases for the second quarter and first six months of 1997 of 2% and 3%, respectively. The increases in net sales were primarily driven by the second half 1996 business acquisitions, principally Lucky in Taiwan and Fontaneda in Spain, and improved results in Mexico, China and Venezuela. Partially offsetting these gains were volume declines in Brazil, resulting from aggressive competitive activity in the biscuit and milk categories, and Argentina. The Domestic Food Group's operating company contribution for the second quarter and first six months of 1997 increased 22% and 14%, respectively. Excluding the impact of one-time items in 1997 and 1996 discussed below, operating company contribution increased 13% for the second quarter and 10% for the first six months of 1997. On the same basis, Nabisco Biscuit was up 22% and 15%, respectively, and the U.S. Foods Group was down 2% and even, respectively. The Nabisco Biscuit increases resulted largely from restructuring driven margin improvements and on-going productivity initiatives. The U.S. Foods Group's decline for the second quarter was primarily due to reduced sales of higher margin condiment products, while the first six months' profit level was maintained due to restructuring efficiencies and lower consumer promotion expense. The International Food Group's operating company contribution for the second quarter and first six months of 1997 decreased 30% and 13%, respectively. Excluding the impact in 1997 of a one-time item discussed below, the International Food Group's operating company contribution for the second quarter and first six months of 1997 declined 19% and 7%, respectively, principally due to lower earnings in Latin America, most notably lower sales in Brazil and lower sales and increased expenses in Argentina. Higher expansion costs in China and Indonesia also impacted the International Food Group's results unfavorably. In 1997, Nabisco's U.S. Foods Group sold certain domestic regional brands for $50 million resulting in a $32 million pre-tax gain. In addition, one-time expenses of $31 million were recognized which included a $14 million provision for the additional write-down of a business held for sale by the U.S. Foods Group, $10 million of expenses for the reorganization of the U.S. Foods Group's selling organization, and $7 million to relocate the International Food Group's headquarters from New York City to New Jersey. In 17 1996, restructuring related expenses of $4 million at Nabisco Biscuit and $6 million at the U.S. Foods Group were recognized in connection with the implementation of the June 1996 restructuring program. NET INCOME Net income for the second quarter and six months of 1997 reflects a decrease in the overall annual effective tax rate resulting primarily from lower taxes on foreign earnings, the benefit of which was more than offset by unfavorable foreign currency developments. LIQUIDITY AND FINANCIAL CONDITION Net cash flows from operating activities for the first six months of 1997 were $273 million, a decrease of $312 million from the six months of 1996 level. The decrease in net cash flows from operating activities reflects increased working capital requirements resulting from higher inventory levels and foreign excise tax prepayments, and higher restructuring and related payments. Free cash flow, another measure used by management to evaluate liquidity and financial condition, represents cash available for the repayment of debt and certain other corporate purposes such as common stock dividends, stock repurchases and acquisitions. It is essentially net cash flow from operating activities and investing activities from the Consolidated Condensed Statement of Cash Flows adjusted for acquisitions and divestitures of businesses, less preferred dividends. Free cash flow resulted in an outflow of $67 million for the first six months of 1997 and an inflow of $297 million for the first six months of 1996. The decrease in free cash flow from 1996 to 1997 primarily reflects the higher working capital requirements and restructuring and related payments and a higher level of proceeds from the disposition of businesses and certain assets in the prior year. In May 1997, 26,675,000 shares of Series C preferred stock mandatorily converted into 53,350,000 shares of common stock. In July 1997, RJRN issued $150 million 8.25% notes due 2004 and $200 million 8.50% notes due 2007. Interest on the notes is payable semi-annually on January 1 and July 1 of each year, beginning January 1, 1998. The net proceeds from the issuance of the notes was used to repay a portion of outstanding commercial paper borrowings. Management of RJRN Holdings and its subsidiaries are continuing to review various strategic transactions, including but not limited to, acquisitions, divestitures, mergers and joint ventures. No assurance may be given that any such transactions will be announced or completed. Capital expenditures were $308 million for the first six months of 1997. The current level of expenditures planned for 1997 is expected to be in the range of approximately $825 million to $875 million (approximately 51% Food and 49% Tobacco), which will be funded primarily by cash flows from operating activities. The current planned level of capital expenditures for 1997 is higher than 1996 primarily due to increased capital investments for Reynolds International (notably in the CIS and Baltic regions). Management expects that its capital expenditures program will continue at a level sufficient to support the strategic and operating needs of RJRN Holdings' operating subsidiaries. LITIGATION For a description of certain litigation affecting RJRT and its affiliates, see Note 3 to the Consolidated Condensed Financial Statements. 18 ------------------------ The foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements, particularly with respect to capital expenditures, which reflect management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, the effect on financial performance and future events of competitive pricing for products, success of new product innovations and acquisitions, local economic conditions and the effects of currency fluctuations in countries in which RJRN Holdings and its subsidiaries do business, the effects of domestic and foreign government regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in the case of the tobacco business, litigation. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. ------------------------ 19 PART II ITEM 1. LEGAL PROCEEDINGS TOBACCO-RELATED LITIGATION OVERVIEW. Various legal actions, proceedings and claims are pending or may be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates (including, with increasing frequency, RJRN) or indemnitees, including those claiming that lung cancer and other diseases as well as addiction have resulted from the use of or exposure to RJRT's tobacco products. During the second quarter of 1997, 124 new actions were filed or served against RJRT and/or its affiliates or indemnitees (as against only 44 in the second quarter of 1996) and 57 such actions were dismissed or otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without trial. Since the close of the second quarter, through August 7, 1997, an unprecedented additional 117 suits have been filed or served, and 14 dismissed. There have also been noteworthy increases in the number of these cases pending. On August 7, 1997, there were 448 active cases pending against RJRT and/or its affiliates or indemnitees, as compared with 203 cases in July 1996 and 68 in July 1995. Of these cases, 443 are in the United States, one in Canada, three in Puerto Rico, and one in Guam. The United States cases are in 44 states and are distributed as follows: 179 in Florida, 61 in New York, 36 in Texas, 18 in Louisiana, 11 in each of New Jersey and Pennsylvania, ten in each of Alabama, California, and Ohio, eight in each of Tennessee and Mississippi, six in West Virginia, five in each of Indiana and Massachusetts, four in each of Kansas, Michigan, and Oklahoma, three in each of Arizona, Colorado, District of Columbia, Hawaii, Minnesota, New Mexico, Oregon, and Washington, two in each of Connecticut, Georgia, Illinois, Iowa, Maryland Missouri, Montana, New Hampshire, South Dakota, and Wisconsin, and one in each of Alaska, Arkansas, Idaho, Kentucky, Nevada, North Carolina, South Carolina, Utah, and Vermont. Of the 443 active cases in the United States, 331 are pending in state court and 112 in federal court. For additional information about tobacco-related litigation and other legal proceedings, see Note 3-- Contingencies--Tobacco Litigation of Notes to Consolidated Condensed Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tobacco--Governmental Activity." ------------------------ Litigation is subject to many uncertainties and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJRT or its affiliates (including RJRN Holdings and RJRN) or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT or its affiliates or indemnitees and could encourage an increase in the number of such claims. There have been a number of political, legislative, regulatory and other developments relating to the tobacco industry and cigarette smoking that have received wide media attention, including the recent Liggett settlements of certain health care recovery actions and a purported nationwide smoking and health class action, and a decision by a federal district court on a motion for summary judgment to uphold the FDA's regulation of cigarettes as "drugs" or "medical devices." These developments, as well as the widespread media attention given to the Memorandum referred to above, may negatively affect the outcomes of tobacco-related legal actions and encourage the commencement of additional similar litigation. Although it is impossible to predict the outcome of such events on pending litigation and the rate at which new lawsuits are filed against RJRT and RJRN, a significant increase in litigation and/or in adverse outcomes for tobacco defendants could have an adverse effect on RJRT and RJRN. RJRT and RJRN each believe that they have a number of valid defenses to any such actions and intend to defend vigorously all such actions in which they are named defendants. 20 RJRN Holdings and RJRN believe that not withstanding the quality of defenses available to them and RJRT in litigation matters, it is possible that the results of operations or cash flows of RJRN Holdings or RJRN in particular quarterly or annual periods or the financial condition of RJRN Holdings and RJRN could be materially affected by the ultimate outcome of certain pending litigation matters (including litigation costs). Management is unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. ------------------------ ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 Registrants agree to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrants and their consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrants and their consolidated subsidiaries to the Securities and Exchange Commission upon request. *10.1 RJR Nabisco Holdings Corp. 1990 Long-Term Incentive Plan as amended and restated effective April 16, 1997. *10.2 Form of Deferred Stock Unit Agreement between RJR Nabisco Holdings Corp. and the Director named therein dated as of April 16, 1997. *10.3 Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the Director named therein dated as of April 16, 1997. *10.4 Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein (1997 grant--1 year period) dated as of February 28, 1997. *10.5 Form of Restricted Stock Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein dated as of June 16, 1997. *10.6 Fourth Amendment to the 364 Day Credit Agreement among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and certain lending institutions dated as of April 4, 1997. *12.1 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges for the six months ended June 30, 1997. *27.1 RJR Nabisco Holdings Corp. Financial Data Schedule. *27.2 RJR Nabisco, Inc. Financial Data Schedule.
- ------------------------ * Filed herewith. (b) Reports on Form 8-K Report on Form 8-K dated June 20, 1997, regarding the signing of a Memorandum of Understanding setting forth concepts for federal legislation and a contractual protocol to resolve a variety of litigation and regulatory issues concerning tobacco and attaching as exhibits, the Memorandum of Understanding and related RJRT press release. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. (Registrants) Date: August 8, 1997 /s/ DAVID B. RICKARD - ------------------------------------------------ David B. Rickard Senior Vice President and Chief Financial Officer /s/ RICHARD G. RUSSELL - ------------------------------------------------ Richard G. Russell Senior Vice President and Controller 22 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 RJR NABISCO HOLDINGS CORP. 1990 LONG TERM INCENTIVE PLAN (As Amended and Restated effective April 16, 1997) 1. Purpose of Plan The RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan, as amended and restated effective April 16, 1997, subject to the approval of RJRN's shareholders (the "Plan"), is designed: (a) to promote the long term financial interests and growth of RJR Nabisco Holdings Corp. and subsidiaries (the "Corporation") by attracting and retaining management personnel with the training, experience and ability to enable them to make a substantial contribution to the success of the Corporation's business; (b) to motivate management personnel by means of growth-related incentives to achieve long range goals; and (c) to further the identity of interests of participants with those of the stockholders of the Corporation through opportunities for increased stock, or stock-based, ownership in the Corporation. 2. Definitions As used in the Plan, the following words shall have the following meanings: (a) "Base Value" means not less than the Fair Market Value on the date a Stock Appreciation Right is granted, or, in the case of a Stock Appreciation Right granted retroactively in tandem with (or in replacement of) an outstanding stock option, not less than the exercise price of such option; (b) "Board of Directors" means the Board of Directors of RJRN; (c) "Code" means the Internal Revenue Code of 1986, as amended; (d) "Committee" means the Compensation Committee of the Board of Directors; (e) "Common Stock" or "Share" means common stock of RJRN which may be authorized but unissued, or issued and reacquired; (f) "Effective Date" shall have the meaning set forth in Section 12; (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended; (h) "Fair Market Value" means such value of a Share as reported for stock exchange transactions and/or determined in accordance with any applicable resolutions or regulations of the Committee in effect at the relevant time; (i) "Grant Agreement" means an agreement between RJRN and a Participant that sets forth the terms, conditions and limitations applicable to a Grant; (j) "Grant" means an award made to a Participant pursuant to the Plan and described in Paragraph 5, including, without limitation, an award of an Incentive Stock Option, Other Stock Option, Stock Appreciation Right, Restricted Stock, Performance Units or Performance Shares or any combination of the foregoing; (k) "Incentive Stock Options" shall have the meaning set forth in Section 5(a); (l) "Other Stock Options" shall have the meaning set forth in Section 5(b); (m) "Options" shall mean Incentive Stock Options and Other Stock Options; (n) "Participant" means any employee, or other person having a unique relationship with RJRN or one of its Subsidiaries, to whom one or more Grants have been made and such Grants have not all been forfeited or terminated under the Plan; provided, however, a non-employee director of RJRN or one of its Subsidiaries may not be a Participant; (o) "Performance Units" shall have the meaning set forth in Section 5(e); (p) "Performance Shares" shall have the meaning set forth in Section 5(f); (q) "Restricted Stock" shall have the meaning set forth in Section 5(d); (r) "RJRN" means RJR Nabisco Holdings Corp.; (s) "Stock Appreciation Rights" shall have the meaning set forth in Section 5(c); and 2 (t) "Subsidiary" means any corporation or other entity in which RJRN has a significant equity or other interest as determined by the Committee. 3. Administration of Plan (a) The Plan shall be administered by the Committee or, in lieu of the Committee, the Board of Directors. The Committee may adopt its own rules of procedure, and the action of a majority of the Committee, taken at a meeting or taken without a meeting by a writing signed by such majority, shall constitute action by the Committee. The Committee shall have the power and authority to administer, construe and interpret the Plan, to make rules for carrying it out and to make changes in such rules. Any such interpretations, rules, and administration shall be consistent with the basic purposes of the Plan. (b) The Committee may delegate to the Chief Executive Officer and to other senior officers of the Corporation its duties under the Plan, subject to such conditions and limitations as the Committee shall prescribe, except that only the Committee may designate and make Grants to Participants who are subject to Section 16 of the Exchange Act. (c) The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, RJRN, and the officers and directors of RJRN shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Participants, RJRN and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Grants, and all members of the Committee shall be fully protected by RJRN with respect to any such action, determination or interpretation. 4. Eligibility The Committee may from time to time make Grants under the Plan to such employees, or other persons having a unique relationship with RJRN or any of its Subsidiaries, and in such form and having such terms, conditions and limitations as the Committee may determine. No Grants may be made under this Plan to non-employee directors of RJRN or any of its Subsidiaries. Grants may be granted singly, in combination or in tandem. The terms, conditions and limitations of each Grant under the Plan shall be set forth in a Grant Agreement, in a form approved by the Committee, consistent, however, with the terms of the Plan; provided, however, such Grant Agreement shall contain provisions dealing with the treatment of Grants in the event of the termination, death or disability of 3 a Participant, and may also include provisions concerning the treatment of Grants in the event of a change of control of RJRN. 5. Grants From time to time, the Committee will determine the forms and amounts of Grants for Participants. Such Grants may take the following forms in the Committee's sole discretion: (a) Incentive Stock Options - These are stock options within the meaning of Section 422 of the Code to purchase Common Stock. In addition to other restrictions contained in the Plan, an option granted under this Section 5(a), (i) may not be exercised more than 10 years after the date it is granted, (ii) may not have an option price less than the Fair Market Value of Common Stock on the date the option is granted, (iii) must otherwise comply with Code Section 422, and (iv) must be designated as an "Incentive Stock Option" by the Committee. The maximum aggregate Fair Market Value of Common Stock (determined at the time of each Grant) with respect to which any Participant may first exercise Incentive Stock Options under this Plan and any Incentive Stock Options granted to the Participant for such year under any plans of RJRN or any Subsidiary in any calendar year is $100,000. Payment of the option price shall be made in cash or in shares of Common Stock, or a combination thereof, in accordance with the terms of the Plan, the Grant Agreement, and of any applicable guidelines of the Committee in effect at the time. (b) Other Stock Options - These are options to purchase Common Stock which are not designated by the Committee as "Incentive Stock Options". At the time of the Grant the Committee shall determine, and shall have contained in the Grant Agreement or other Plan rules, the option exercise period, the option price, and such other conditions or restrictions on the grant or exercise of the option as the Committee deems appropriate. In addition to other restrictions contained in the Plan, an option granted under this Section 5(b), (i) may not be exercised more than 15 years after the date it is granted and (ii) may not have an option exercise price less than the Fair Market Value of Common Stock on the date the option is granted. Payment of the option price shall be made in cash or in shares of Common Stock, or a combination thereof, in accordance with the terms of the Plan and of any applicable guidelines of the Committee in effect at the time. Payment of the option price may also be made by tender of an amount equal to the full exercise price which has been borrowed from RJRN or one of its Subsidiaries if the Participant also authorizes the concurrent sale of the exercised Common Stock by a broker (through an arrangement established by RJRN, or one of its Subsidiaries, for Participants) and repays the borrowing, all in accordance with any applicable guidelines of the Committee. 4 (c) Stock Appreciation Rights - These are rights that on exercise entitle the holder to receive the excess of (i) the Fair Market Value of a share of Common Stock on the date of exercise over (ii) the Base Value multiplied by (iii) the number of rights exercised in cash, stock or a combination thereof as determined by the Committee. Stock Appreciation Rights granted under the Plan may, but need not be, granted in conjunction with an Option under Paragraphs 5(a) or 5(b). The Committee, in the Grant Agreement or by other Plan rules, may impose such conditions or restrictions on the exercise of Stock Appreciation Rights as it deems appropriate, and may terminate, amend, or suspend such Stock Appreciation Rights at any time. No Stock Appreciation Right granted under this Plan may be exercised more than 15 years after the date it is granted. (d) Restricted Stock - Restricted Stock is a Grant of Common Stock or stock units equivalent to Common Stock subject to such conditions and restrictions as the Committee shall determine. Any rights to dividends or dividend equivalents accruing due to a grant of Restricted Stock shall also be determined by the Committee. Grants of Restricted Stock shall be subject to a normal minimum vesting schedule of 3 years. The number of shares of Restricted Stock and the restrictions or conditions on such shares, as the Committee may determine, shall be set forth in the Grant Agreement or by other Plan rules, and the certificate for the Restricted Stock shall bear evidence of the restrictions or conditions. (e) Performance Units - These are rights, denominated in cash or cash units, to receive, at a specified future date, payment in cash or stock of an amount equal to all or a portion of the value of a unit granted by the Committee. At the time of the Grant, in the Grant Agreement or by other Plan rules, the Committee must determine the base value of the unit, the performance factors applicable to the determination of the ultimate payment value of the unit as set forth in Section 7 and the period over which performance will be measured. (f) Performance Shares - These are rights granted in the form of Common Stock or stock units equivalent to Common Stock to receive, at a specified future date, payment in cash or Common Stock, as determined by the Committee, of an amount equal to all or a portion of the Fair Market Value at which the Common Stock is traded on the last day of the specified performance period of a specified number of shares of Common Stock based on performance during the period. At the time of the Grant, the Committee, in the Grant Agreement or by Plan rules, will determine the factors which will govern the portion of the Grants so payable as set forth in Section 7 and the period over which performance will be measured. 5 6. Limitations and Conditions (a) The number of shares available for Grants under this Plan shall be 33 million shares of the authorized Common Stock as of the Effective Date. The maximum number of Shares subject to Grants of Options and Stock Appreciation Rights made after December 31, 1996 to any one Participant in any calendar year shall not exceed 2 million shares for each type of Grant, plus any amount of shares that were available within this limit for such type of Grant for any prior year such limitation was in effect and which were not covered by Options or Stock Appreciation Rights granted to such Participant during such year. No more than 3 million shares of Common Stock may be granted as Incentive Stock Options after December 31, 1996. The maximum payment that any one Participant may be paid in respect of any Grant of Performance Units granted for any specified performance period shall not exceed $10 million. The maximum payment that any one Participant may receive in respect of any Grant of Performance Shares granted for any specified performance period shall not exceed 500,000 shares of Common Stock or the cash equivalent thereof. The aggregate maximum number of shares of Common Stock to which Restricted Stock or Performance Shares granted after December 31, 1996 may relate shall not exceed 3 million shares. Shares related to Grants that are forfeited, terminated, cancelled, expire unexercised, settled in cash in lieu of stock, received in full or partial payment of any exercise price or in such manner that all or some of the Shares covered by a Grant are not issued to a Participant, shall immediately become available for Grants. A Grant may contain the right to receive dividends or dividend equivalent payments which may be paid either currently, credited to a Participant or deemed invested in shares or share units of Common Stock. Any such crediting of dividends or dividend equivalents or reinvestment in Shares may be subject to such conditions, restrictions and contingencies as the Committee shall establish, including the reinvestment of such credited amounts in Common Stock equivalents. Subject to the overall limitation on the number of shares of Common Stock that may be delivered under this Plan, the Committee may use available shares of Common Stock as the form of payment for compensation, grants or rights earned or due under any other compensation plans or arrangements of RJRN, including the plan of any entity acquired by RJRN. (b) At the time a Grant is made or amended or the terms or conditions of a Grant are changed, the Committee may provide for limitations or conditions on such Grant. RJRN may adopt other compensation programs, plans or arrangements as it deems appropriate. (c) Nothing contained herein shall affect the right of the Corporation to terminate any Participant's employment at any time or for any reason. 6 (d) Deferrals of Grant payouts may be provided for, at the sole discretion of the Committee, in the Grant Agreements. (e) No benefit under the Plan shall, prior to receipt thereof by the Participant, be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the Participant. (f) Except to the extent otherwise provided in any other retirement or benefit plan, any grant under this Plan shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of RJRN or its Subsidiaries and shall not affect any benefits under any other benefit plan of any kind or subsequently in effect under which the availability or amount of benefits is related to level of compensation. This Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. This Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between RJRN and any Participant or beneficiary of a Participant. To the extent any person holds any obligation of RJRN by virtue of an award granted under this Plan, such obligation shall merely constitute a general unsecured liability of RJRN and accordingly shall not confer upon such person any right, title or interest in any assets of RJRN. (g) Unless the Committee determines otherwise, no benefit or promise under the Plan shall be secured by any specific assets of RJRN or any of its Subsidiaries, nor shall any assets of RJRN or any of its Subsidiaries be designated as attributable or allocated to the satisfaction of RJRN's obligations under the Plan. 7. Performance Factors The performance factors selected by the Compensation Committee in respect of Performance Units and Performance Shares shall be based on any one or more of the following: price of Common Stock or the stock of any affiliate, shareholder return, return on equity, return on investment, return on capital, return on invested capital, economic profit, economic value added, net income, cash net income, free cash flow, earnings per share, cash earnings per share, operating company contribution or market share. These factors shall have a minimum performance standard below which no amount will be paid and may have a maximum performance standard above which no additional payments will be made. The applicable performance period shall not exceed 10 years. 8. Adjustments 7 (a) In the event of any stock split, spin-off, stock dividend, extraordinary cash dividend, stock combination or reclassification, recapitalization or merger, change in control, or similar event, the Committee may adjust appropriately the number or kind of shares subject to the Plan and available for or covered by Grants, share prices related to outstanding Grants and the other applicable limitations of Section 6(a), and make such other revisions to outstanding Grants and the LTIP as it deems are equitably required. (b) In the event of a Change of Control, except as otherwise set forth in the terms of a Grant: (i) Options granted pursuant to paragraphs 5(a) or 5(b) hereof shall become fully vested and exercisable; provided, however, that the Committee may make a cash payment to Participants (A) in cancellation of such Options as provided in the applicable Grant Agreements or any amendments or deemed amendments thereto entered into by RJRN and the Participant in such amount as shall be provided in such Grant Agreements or amendments or (B) in lieu of the delivery of shares upon exercise, equal to the product of (x) and (y), where (x) is the excess of the Fair Market Value on the date of exercise over the exercise price, and (y) is the number of Shares subject to the stock options being exercised; (ii) Stock Appreciation Rights shall become fully vested and exercisable; (iii) Restricted Stock shall have all restrictions removed; (iv) Performance Units whose performance period ends after the date of the Change of Control shall become vested as to a percentage of Performance Units granted equal to the number of months (including partial months) in the performance period before the date of the Change of Control, divided by the total number of months in the performance period. The value of the Performance Units shall be equal to the greater of the target value of the Performance Units or the value derived from the actual performance as of the date of the Change of Control; (v) Performance Shares whose performance period ends after the date of the Change of Control shall become vested pro rata as to the number of Performance Shares granted equal to the number of months (including partial months) in the performance period before the date of Change of Control, divided by the total number of months in the performance period. The prorated number of Performance Shares derived from the preceding calculation shall be further adjusted by applying the higher of target or actual performance to the date of Change of Control; and 8 (vi) The Committee shall have authority to establish or to revise the terms of any such Grant or any other Grant as it, in its discretion, deems appropriate; provided, however, that the Committee may not make revisions that are adverse to the Participant without the Participant's consent unless such revision is provided for or contemplated in the terms of the Grant. (c) For purposes of the Plan, a "Change of Control" shall mean the first to occur of the following events: (i) an individual, corporation, partnership, group, associate or other entity or "person", as such term is defined in Section 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than any employee benefit plans sponsored by RJRN, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the combined voting power of RJRN's outstanding securities ordinarily having the right to vote at elections of directors. (ii) individuals who constitute the Board of Directors on October 11, 1995 (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to such date whose election, or nomination for election by RJRN's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of RJRN in which such person is named as a nominee of RJRN for director), but excluding for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate or other entity or person other than RJRN's Board, shall be, for purposes of this paragraph (ii), considered as though such person were a member of the Incumbent Board; (iii) the approval by the shareholders of RJRN of a plan or agreement providing (1) for a merger or consolidation of RJRN other than with a wholly-owned subsidiary and other than a merger or consolidation that would result in the voting securities of RJRN outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of RJRN or such surviving entity outstanding immediately after such merger or consolidation, or (2) for a sale, exchange or other disposition of all or substantially all of the assets of RJRN. If any of the events enumerated in this paragraph (iii) occur, RJRN's Board shall determine the effective date of the Change of Control resulting therefrom for 9 purposes of this Plan and the Grants hereunder. 9. Amendment and Termination The Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding Grants as are consistent with this Plan, provided that, except for adjustments under Paragraph 8(a) hereof, no such action shall modify such Grant in a manner adverse to the Participant without the Participant's consent except as such modification is provided for or contemplated in the terms of the Grant. Except as provided in Section 8(a), the exercise price of any outstanding Option or Stock Appreciation Right may not be adjusted or amended, whether through amendment, cancellation or replacement, unless such adjustment or amendment is properly approved by RJRN's shareholders. Likewise, the share and payment limitations set forth in Section 6(a) cannot be increased, and the minimum Option or Stock Appreciation Right grant price limitations set forth in Sections 5(a), 5(b) and 5(c) cannot be reduced, in either case without proper shareholder approval. Subject to the foregoing, RJRN's Board of Directors may amend, suspend or terminate this Plan as it deems necessary and appropriate to better achieve the Plan's purpose. 10. Foreign Options and Rights (a) The Committee may make Grants to employees who are subject to the tax laws of nations other than the United States, which Grants may have terms and conditions that differ from the terms thereof as provided elsewhere in the Plan for the purpose of complying with the foreign tax laws. Grants of stock options may have terms and conditions that differ from Incentive Stock Options and Other Stock Options for the purpose of complying with the foreign tax laws. (b) The terms and conditions of stock options granted under Paragraph 10(a) may differ from the terms and conditions which the Plan would require to be imposed upon Incentive Stock Options and Other Stock Options if the Committee determines that the Grants are desirable to promote the purposes of the Plan. 11. Withholding Taxes The Corporation shall have the right to deduct from any payment or settlement made under the Plan any federal, state or local income or other taxes required by law to be withheld with respect to such payment. 12. Effective Date and Termination Dates The Plan shall be effective on and as of April 16, 1997, subject to the approval of RJRN's shareholders, and shall terminate ten years later, subject to 10 earlier termination by the Board of Directors pursuant to Paragraph 9. The terms of Grants made on or before the expiration of the Plan shall extend beyond such expiration. Grants made under the Plan prior to the Effective Date shall be governed by the terms of the Plan as in effect on the date such Grant was made. 11 EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 Dir DSU 1997 RJR NABISCO HOLDINGS CORP. EQUITY INCENTIVE AWARD PLAN FOR DIRECTORS AND KEY EMPLOYEES OF RJR NABISCO HOLDINGS CORP. AND SUBSIDIARIES DEFERRED STOCK UNIT AGREEMENT DATE OF GRANT: APRIL 16, 1997 W I T N E S S E T H: 1. GRANT. Pursuant to the provisions of the Equity Incentive Award Plan For Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries (the "Plan"), RJR Nabisco Holdings Corp. (the "Company") on the above date has granted to ((FIRSTNAME)) ((LASTNAME)) (THE "GRANTEE"), subject to the terms and conditions which follow and the terms and conditions of the Plan, a Grant of 1,000 DEFERRED STOCK UNITS. A copy of the Plan is attached and made a part of this agreement with the same effect as if set forth in the Agreement itself. All capitalized terms used herein shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. VALUE OF DEFERRED STOCK UNITS. Each Deferred Stock Unit shall be equal in value to one share of Common Stock. 3. DIVIDENDS. As of the date any dividend is paid to shareholders of Common Stock, the Grantee shall be credited with additional Deferred Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at the closing price of Common Stock on such date with the dividend paid on the number of shares of Common Stock to which the Grantee's Deferred Stock Units are then equivalent. In case of dividends paid in property, the dividend shall be deemed to be the fair market value of the property at the time of distribution of the dividend, as determined by the Committee. 4. PAYMENT OF DEFERRED STOCK UNITS. (a) Unless a Grantee has elected to receive installment payments as provided below, payment of a Grantee's Deferred Stock Units shall be made in one lump-sum as soon as practicable following the end of the year in which the Grantee ceases to be a Director. At the election of the Grantee made in writing and delivered to the Committee at any time on or before December 1 of the year of termination of the Grantee's service as a Director, distribution of all of his or her Deferred Stock Units, commencing as soon as practicable following the end of the year in which the Grantee ceases to be a Director, shall be made in any number of annual installments not exceeding ten. Any such election, unless made irrevocable by its terms, may be changed by written notice to the Committee at any time prior to December 1 of the year of a Grantee's termination of service as a Director. (b) Distribution of a Grantee's Deferred Stock Units shall be made in cash. The amount of distribution shall be determined by multiplying the number of Deferred Stock Units attributable to the installment by the average of the closing price in Common Stock on each business day in the month of December immediately prior to the year in which the installment is to be paid. (c) In the event a Grantee has elected to receive distribution of his or her Deferred Stock Units in more than one installment, the amount of each installment shall be determined by multiplying the remaining number of Deferred Stock Units by a fraction, the numerator of which is one, and the denominator of which is the number of installments yet to be paid. 5. TRANSFERABILITY. Other than as specifically provided in the Plan with regard to the death of the Grantee, this Agreement and any benefit provided or accruing hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Grantee, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Grantee. 6. CONSIDERATION TO THE COMPANY. In consideration of the Grant by the Company, the Grantee agrees to render faithful and efficient services to the Company, with such duties and responsibilities as the Company shall from time to time prescribe. Nothing in this Agreement or in the Plan shall confer upon the Grantee any right to continue in the service of the Company or any Subsidiary as a director or in any other capacity or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries and their respective shareholders, which are hereby expressly reserved, in connection with the removal of the Grantee from the Board of Directors of the Company or any Subsidiary at any time for any reason whatsoever, with or without cause, subject to applicable law and the relevant certificate of incorporation and bylaws. 7. ADJUSTMENTS IN DEFERRED STOCK UNITS. In the event that the outstanding shares of the Common Stock subject to the Grant are, from time to time, changed into or exchanged for a different number or kind of shares of the Company or other securities by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, spinoff, combination 2 of shares, or otherwise, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares or other consideration as to which the Grant, shall be equivalent. Any adjustment made by the Committee shall be final and binding upon the Grantee, the Company and all other interested persons. 8. APPLICATION OF LAWS. The Grant and the obligations of the Company hereunder shall be subject to all applicable laws, rules, and regulations and to such approvals of any governmental agencies as may be required. 9. TAXES. Any taxes required by federal, state, or local laws to be withheld by the Company on the grant or payment of Deferred Stock Units shall be paid to the Company before payment of the Deferred Stock Units is made to the Grantee. 10. NOTICES. Any notices required to be given hereunder to the Company shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019-6013 and any notice required to be given hereunder to the Grantee shall be sent to the Grantee's address as shown on the records of the Company. 11. GRANTEE. In consideration of the grant, the Grantee specifically agrees that the Committee shall have the exclusive power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan and Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretation and determinations made by the Committee shall be final, conclusive, and binding upon the Grantee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Agreement. The Committee may delegate its interpretive authority to an officer or officers of the Company. 12. OTHER PROVISIONS. (a) Titles are provided herein for convenience only and are not to serve as a basis for interpretation of the Agreement. (b) This Agreement may be amended only by a writing executed by the parties hereto which specifically states that it is amending this Agreement. (c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. 3 IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Grantee have executed this Agreement as of the Date of Grant first above written. RJR NABISCO HOLDINGS CORP. By___________________________ Authorized Signatory ______________________________ GRANTEE Grantee's Home Address Date:_________________________ ______________________________ Grantee's Taxpayer Identification Number: ______________________________ ________________________________ ______________________________ 4 EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 Director's Option 97 (Annual) RJR NABISCO HOLDINGS CORP. EQUITY INCENTIVE AWARD PLAN FOR DIRECTORS AND KEY EMPLOYEES OF RJR NABISCO HOLDINGS CORP. AND SUBSIDIARIES STOCK OPTION AGREEMENT ___________________________ DATE OF GRANT: April 16, 1997 W I T N E S S E T H : 1. GRANT OF OPTION. Pursuant to the provisions of the Equity Incentive Award Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries (the "Plan"), RJR Nabisco Holdings Corp. (the "Company") on the above date has granted to (FIRST NAME)(LAST NAME)(THE "OPTIONEE"), subject to the terms and conditions which follow and the terms and conditions of the Plan, the right and option to exercise from the Company a total of 1,300 SHARES of Common Stock, par value $.01 per share, of the Company, at the exercise price of $33.50 per share (the "Option"). A copy of the Plan is attached and made a part of this Agreement with same effect as if set forth in the Agreement itself. All capitalized terms used herein shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. EXERCISE OF OPTION. (a) Shares may be purchased by giving the Corporate Secretary of the Company written notice of exercise, on a form prescribed by the Company, specifying the number of whole shares to be purchased. The notice of exercise shall be accompanied by: (i) tender to the Company of cash for the full purchase price of the shares with respect to which such Option or portion thereof is exercised; together with payment for taxes pursuant to Section 9 herein; OR (ii) the unsecured, demand borrowing by the Optionee from the Company on an open account maintained solely for this purpose in the amount of the full exercise price together with the instruction from the Optionee to sell the shares exercised on the open market through a duly registered broker-dealer with which the Company makes an arrangement for the sale of such shares under the Plan. This method is known as the "broker-dealer exercise method" and is subject to the terms and conditions set forth herein, in the Plan and in guidelines established by the Committee. The Option shall be deemed to be exercised simultaneously with the sale of the shares by the broker-dealer. If the shares purchased upon the exercise of an Option or a portion thereof cannot be sold for a price equal to or greater than the full exercise price plus direct costs of the sales, then there is no exercise of the Option. Election of this method authorizes the Company to deliver shares to the broker-dealer and authorizes the broker-dealer to sell said shares on the open market. The broker-dealer will remit proceeds of the sale to the Company which will remit net proceeds to the Optionee after repayment of the borrowing, deduction of costs, if any, and withholding of taxes. The Optionee's borrowing from the Company on an open account shall be a personal obligation of the Optionee which shall bear interest at the published Applicable Federal Rate (AFR) for short-term loans and shall be payable upon demand by the Company. Such borrowing may be authorized by telephone or other telecommunications acceptable to the Company. Upon such borrowing and the exercise of the Option or portion thereof, title to the shares shall pass to the Optionee whose election hereunder shall constitute instruction to the Company to register the shares in the name of the broker-dealer or its nominee. The Company reserves the right to discontinue this broker-dealer exercise method at any time for any reason whatsoever. The Optionee agrees that if this broker-dealer exercise method under this paragraph is used, the Optionee promises unconditionally to pay the Company the full balance in his open account at any time upon demand. Optionee also agrees to pay interest on the account balance at the AFR for short-term loans from and after demand. (b) This Option shall be exercisable in three installments. The first installment shall be exercisable on the first anniversary following Date of Grant for 33% of the number of shares of Common Stock subject to this option. Thereafter, on each subsequent anniversary, an installment shall become exercisable for 33% and 34%, respectively, of the number of shares subject to this Option until the Option has become fully exercisable. To the extent that any of the above installments is not exercised when it -2- becomes exercisable, it shall not expire, but shall continue to be exercisable at any time thereafter until this Option shall terminate, expire or be surrendered. An exercise shall be for whole shares only. (c) This Option shall not be exercisable prior to six months after the Date of Grant. (d) If any shares of the Common Stock are to be disposed of in accordance with Rule 144 under the Securities Act of 1933 or otherwise, the Optionee shall promptly notify the Company of such intended disposition and shall deliver to the Company at or prior to the time of such disposition such documentation as the Company may reasonably request in connection with such sale and, in the case of a disposition pursuant to Rule 144, shall deliver to the Company an executed copy of any notice on Form 144 required to be filed with the SEC. 3. RIGHTS IN THE EVENT OF RESIGNATION OR NON-ELECTION TO THE BOARD. Except as may be otherwise provided in this Section 3, after the Optionee's resignation or non-election to the Board of Directors of the Company (the "Board"), the Option shall NOT become exercisable as to any shares in addition to those already exercisable pursuant to the schedule described in Section 2(b). Notwithstanding the foregoing, if a non-election of the Optionee to the Board is due to death or Permanent Disability (as defined in the Company's Long Term Disability Plan), the Option shall immediately become exercisable as to all shares. 4. EXPIRATION OF OPTION. The Option shall expire or terminate and may not be exercised to any extent by the Optionee after the tenth anniversary of the Date of Grant. 5. TRANSFERABILITY. Other than as specifically provided with regard to the death of the Optionee, this Agreement and any benefit provided or accruing hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Optionee, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Optionee. 6. CONSIDERATION TO THE COMPANY. In consideration of the granting of this Option by the Company, the Optionee agrees to render faithful and efficient services to the Company, with such duties and responsibilities as shall from time to time prescribe. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the service of the Company or any Subsidiary as a director or in any other capacity or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries and their respective shareholders, which are hereby expressly reserved, in connection with the removal of the Optionee from the Board of Directors of the Company or any Subsidiary at any time for any reason whatsoever, with or without cause, subject to applicable law and the relevant certificate of incorporation and bylaws. -3- 7. ADJUSTMENTS IN OPTION. In the event that the outstanding shares of the Common Stock subject to the Option are, from time to time, changed into or exchanged for a different number or kind of shares of the Company or other securities by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares, or otherwise, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares or other consideration as to which the Option, or portions thereof then unexercised, shall be exercisable. Any adjustment made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. 8. APPLICATION OF LAWS. The granting and the exercise of this Option and the obligations of the Company to sell and deliver shares hereunder shall be subject to all applicable laws, rules, and regulations and to such approvals of any governmental agencies as may be required. 9. TAXES. Any taxes required by federal, state, or local laws to be withheld by the Company on exercise by the Optionee of the Option for Common Stock, shall be paid to the Company before delivery of the Common Stock is made to the Optionee. When the Option is exercised under the broker-dealer exercise method, the full amount of any taxes required to be withheld by the Company on exercise of stock options shall be deducted by the Company from the proceeds. 10. NOTICES. Any notices required to be given hereunder to the Company shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019-6013, and any notice required to be given hereunder to the Optionee shall be sent to the Optionee's address as shown on the records of the Company. 11. ADMINISTRATION AND INTERPRETATION. In consideration of the grant, the Optionee specifically agrees that the Committee shall have the exclusive power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan and Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final, conclusive, and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Agreement. The Committee may delegate its interpretive authority to an officer or officers of the Company. 12. OTHER PROVISIONS. a) Titles are provided herein for convenience only and are not to serve as a basis for interpretation of the Agreement. b) This Agreement may be amended only by a writing executed by the parties hereto which specifically states that it is amending this Agreement. -4- c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Optionee have executed this Agreement as of the date of Grant first above written. RJR NABISCO HOLDINGS CORP. By ____________________________ Authorized Signatory _______________________________ Optionee Optionee's Taxpayer Identification Number: _______________________________ Optionee's Home Address: __________________________ __________________________ __________________________ -5- EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 Performance Units Performance Notes 1997 Special - One Year RJR NABISCO HOLDINGS CORP. 1990 LONG TERM INCENTIVE PLAN GRANT AGREEMENT DATE OF GRANT: FEBRUARY 28, 1997 WITNESSETH: 1. GRANT. Pursuant to the 1990 Long Term Incentive Plan (the "Plan"), RJR Nabisco Holdings Corp. (the "Company") on the above date has granted to (FIRST NAME)(LAST NAME)(THE "GRANTEE"), subject to the terms and conditions of this Agreement and the Plan, ( ) PERFORMANCE UNITS AND ( ) PERFORMANCE NOTES A copy of the Plan is attached and constitutes an integral part of this Agreement. All undefined capitalized terms in this Agreement have the same meaning as in the Plan or, if not defined therein, the Annual Incentive Award Plan. 2. PERFORMANCE UNITS. Each Performance Unit has an initial value of $1,000. The Committee will value each Performance Unit at the end of 1997 using the performance measures set forth in the grid attached as Exhibit A, but the Committee has the discretion to reduce the resulting valuation. You agree that these Performance Units are in lieu of an award under the Annual Incentive Award Plan for 1997. 3. PERFORMANCE NOTES. (a) The Performance Notes have a three year term commencing January 1, 1997 and ending December 31, 1999 (the "Performance Period"). The value of the Notes as of January 1, 1997 is $32.00. Promptly after 1997, 1998 and 1999, the Committee will value the Performance Notes as of December 31 of the preceding year using the performance measures and payment formula set forth in the grid attached as Exhibit B. The Committee has the discretion to reduce the resulting valuations and, on the basis of the Company's performance in 1997, to cancel some or all of the Performance Notes. (b) PURCHASE NOTES. You may elect to receive additional Performance Notes in lieu of from 5% to 100% (in 5% increments) of the cash that you receive for your Performance Units pursuant to Section 5 below (the "Discount Note Program"). The number of Performance Notes issued will equal 103% of the value of the Performance Units that you take in the form of Performance Notes, divided by 85% of the value of the Notes on January 1, 1998. The Performance Notes issued pursuant to the Discount Note Program will have the same value and performance period as Performance Notes issued at the same time pursuant to the Annual Incentive Award Plan. You must make your election to convert the proceeds of Performance Units into additional Performance Notes at the same time and in the same manner as the election to defer awards pursuant to Section 6. 4. VESTING. (a) Performance Units vest on December 31, 1997 or, if earlier, your death, Disability or Retirement. If your employment is involuntarily terminated without Cause, your Performance Units will vest in proportion to the ratio of (i) the number of partial or complete months of employment during 1997, to (ii) 12. If termination is voluntary or with Cause, the Performance Units will be canceled immediately. (b) Performance Notes granted pursuant to Section 1 vest on December 31, 1999 or, if earlier, your death, Disability or Retirement. If your employment is involuntarily terminated without Cause, these Performance Notes will vest in proportion to the ratio of (i) the number of partial or complete months of employment between January 1, 1998 and December 31, 1999, to (ii) 24. If termination is voluntary or with Cause, these Performance Notes will be canceled immediately. Notes issued pursuant to the Discount Note Program are vested when issued. 5. PAYMENT OF AWARDS. (a) Subject to Section 5(b), the Company will pay you the value of your vested Performance Units and Performance Notes as soon as practicable after the end of 1997 and 1999, respectively. (b) Subject to Section 5(c), if your employment terminates before you receive payment for your vested Performance Notes, you will receive payment in an amount equal to their value as of the beginning of the year in which employment terminates. Payment will be made as soon as practicable. (c) If your employment terminates voluntarily or for Cause prior to December 31, 1999, you will receive payment for Performance Notes issued pursuant to the Discount Note Program in an amount equal to (i) 85% of the value of the Performance Notes when issued, or (ii) the value of the Performance Notes as of the end of the most recently completed year, whichever is less. If your employment terminates prior to December 31, 1999 for any other reason, you will receive payment for these Performance Notes in an amount equal to their value as of the end of the most recently completed year. (d) All payments will be in cash and in exchange for the Performance Units and Performance Notes, as applicable. You may not obtain payment for them in Common Stock or other Company securities, and they do not give you any rights as a holder of such securities. 6. DEFERRAL. (a) You may elect to defer payment of Performance Units as of December 31, 1997 and Performance Notes as of December 31, 1999. Your election must be in writing, signed by you and delivered to the Company on or before the foregoing dates. Your election will be irrevocable and must specify the percentage (from 5% to 100%, in 5% increments) of the Performance Units and Performance Notes (collectively, the "Grants") which will be paid (i) as soon as practicable after the year your death, Retirement, Disability or other termination of employment occurs or (ii) in January of any designated future year. If your employment with the Company and its subsidiaries terminates before the designated year, your Grants will be paid as of January of the year following termination. Common Stock credits will not be paid until at least six months after the date of deferral. The Company will contribute an additional 3% to the amount deferred on account of the 3% Company match that you would have received under the Capital Investment Plan if you had not deferred payment. The 3% match will not apply to amounts deferred on account of Performance Notes issued pursuant to the Discount Note Program. (b) You must specify, on the notice electing deferred payment pursuant to Section 6(a)(i), whether payment of the Grants will be deferred by cash credit, Common Stock credit, or a combination of the two. If you elect to defer payment pursuant to Section 6(a)(ii) or fail to choose a mode of deferral, your deferral will be by means of a cash credit. Cash credits and stock credits will be recorded in accounts established in your name on the books of the Company. At the direction of the Company, your accounts may be consolidated on the books of the Company or any of its subsidiaries. (i) If your deferral is wholly or partly a cash credit, your cash credit account will be credited, as of January 1 of the year that payment of the Grants would have been made, with the dollar amount of the portion of the Grants deferred by means of a cash credit. In addition, your cash credit account will be credited as of the last day of each calendar quarter with an interest equivalent in an amount determined by applying to the current balance in the account an interest rate equal to the average prime rate of Morgan Guaranty Trust Company of New York during the quarter. Interest will be credited for the actual number of days in the quarter using a 365-day year. (ii) If the deferral is wholly or partly a Common Stock credit, your Common Stock credit account will be credited, as of January 1 of the year that payment of the Grants would have been made, with the Common Stock equivalent of the number of shares of Common Stock (including fractions of a share) that could have been purchased with the portion of the Grants deferred by means of a Common Stock credit at the closing price of the Common Stock on the date that payment of the Grants would otherwise have been made. As of the date any dividend is paid to shareholders of Common Stock, your Common Stock credit account will also be credited with an additional Common Stock equivalent equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at the Closing Price on such date with the dividend paid on the number of shares of Common Stock to which your Common Stock credit account is then equivalent. If dividends are paid in property, the dividend will be deemed to be the fair market value of the property at the time of distribution of the dividend, as determined by the Committee. (c) Payment of deferred Grants will be made in a single cash payment; provided, however, that if you elect in writing before December 31 of the year your employment terminates due to Retirement or Disability, payment will be made in substantially equal annual installments (not to exceed ten) commencing on the January following the Retirement or Disability. Notwithstanding any election under Section 6(b) to defer awards by means of a Common Stock credit, your Common Stock credit account, if you elect to receive installment payments, will be converted into a cash credit account as of January 1 of the year in which such installment payments commence. (d) At your one-time election in writing to the Committee, all or any designated portion of your Common Stock credit account may be converted to, and you will be credited with, a cash credit account as of the first business day of the calendar quarter following the quarter in which the election is made. The amount credited to the cash credit account will be determined by multiplying the number of shares of Common Stock to which your Common Stock credit account is then equivalent and as to which such election has been made by the Closing Price on the first business day of the calendar quarter following the quarter in which the election is made. Any Common Stock credits attributable to dividends paid on Common Stock during the calendar quarter in which the election is made will be credited before making the conversion. You may make this election at any time prior to the end of the calendar year in which termination of employment occurs. An election by you under this Section 6(d) will be irrevocable. (e) If the number of outstanding shares of Common Stock is increased as the result of any stock dividend, subdivision or reclassification of shares, the number of shares of Common Stock to which your Common Stock credit account is equivalent will be increased in proportion to the increase in the number of outstanding shares of Common Stock. If the number of outstanding shares of Common Stock is decreased as the result of any combination or reclassification of shares, the number of shares of Common Stock to which your Common Stock credit account is equivalent will be decreased in proportion to the decrease in the number of outstanding shares of Common Stock. In the event the Company is consolidated with or merged into any other corporation and holders of the Company's Common Stock receive common shares of the resulting or surviving corporation, your Common Stock credit account, in place of the shares then credited thereto, will be credited with a stock equivalent determined by multiplying the number of common shares of stock given in exchange for a share of Common Stock upon such consolidation or merger, by the number of shares of Common Stock to which your account is then equivalent. If in such a consolidation or merger, holders of the Company's Common Stock receive any consideration other than common shares of the resulting or surviving corporation, the Committee will determine the appropriate change in your account. In the event of any extraordinary dividend, including any spin-off, the Committee will make appropriate adjustments to your Common Stock credit account. (f) If you die, whether before or after termination of employment, any cash credit account and Common Stock credit account to which you are entitled, including any award approved after your death as to which an election to defer was made, will be distributed in cash (unless the Committee otherwise provides) to your beneficiaries pursuant to Section 7. 7. BENEFICIARIES. If you die, the Company will make payments pursuant to this Agreement to the beneficiary designated in writing by you specifically for the Plan or, if there is no such designation or the named beneficiary is dead, to the beneficiary most recently designated by you to receive the proceeds of any Company-paid group life insurance coverage provided to you. Otherwise, the distribution will be made to default beneficiaries as provided under the Company-paid group life insurance plan. Only you may change or revoke your designation. 8. TAX WITHHOLDING. The Company or one of its subsidiaries will deduct any taxes required to be withheld by federal, state, local or foreign governments from the awards that you receive pursuant to this Agreement. 9. TRANSFER. Except as set forth in this Agreement, you may not transfer, pledge or encumber your Grants or any other benefits that you receive pursuant to this Agreement. Except as required by law, creditors may not attach or seize such Grants or benefits. 10. INTERPRETATION. The Committee has the power to interpret this Agreement and complete discretion in making valuations and determinations and taking other action pursuant to the Agreement. All interpretations, determinations and actions by the Committee will be final and binding on all parties. The Company, the Board of Directors, the Committee and the officers and employees of the Company and its subsidiaries will not be liable for any action taken in good faith in interpreting and performing this Agreement. 11. NO RIGHT TO EMPLOYMENT. The execution, delivery and performance of this Agreement do not constitute an agreement or understanding, express or implied, on the part of the Company or its subsidiaries to employ you for any specific period or in any specific capacity and do not prevent the Company or its subsidiaries from terminating your employment at any time with or without Cause. "Termination of employment" under this Agreement means termination from active employment; it does not mean the termination of pay and benefits at the end of salary continuation or other forms of severance pay or pay in lieu of salary. 12. NOTICES. Any notices to the Company pursuant to this Agreement should be addressed to: The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019-6013. Any notice to you pursuant to this Agreement will be sent to your address as shown on Company records. 13. CHANGE OF CONTROL. In the event of a Change of Control: (i) all unvested Performance Notes and Performance Units issued to you will vest if you are terminated without Cause within two years after the date of the Change of Control, and (ii) the value of the Performance Notes will not be less than the Closing Price of Common Stock on the date of the Change of Control. 14. YOUR OBLIGATIONS. (a) You agree that, until the third anniversary of (i) your last day of employment with the Company or any of its subsidiaries, or (ii) the last date on which you receive any payment pursuant to this Agreement, whichever is later: (A) you will personally provide reasonable assistance and cooperation to the Company or any of its subsidiaries in activities related to the prosecution or defense of any pending or future lawsuits or claims involving the Company or any of its subsidiaries; (B) you will promptly notify the Company upon receipt of any requests from anyone other than an employee or agent of the Company for information regarding the Company or any of its subsidiaries or if you become aware of any potential claim or proposed litigation against the Company or any of its subsidiaries; (C) you will refrain from providing any information related to any claim or potential litigation against the Company or any of its subsidiaries to any non-Company representatives unless you have the Company's written permission or are required to provide information pursuant to legal process; (D) you will not disclose or misuse any confidential information or material concerning the Company or any of its subsidiaries; and (E) you will not engage in any activity contrary or harmful to the interests of the Company or any of its subsidiaries. You agree that if required by law to provide sworn testimony regarding any matter relating to the Company or any of its subsidiaries: you will consult with and have Company-designated legal counsel present for such testimony (the Company will be responsible for the costs of this counsel); you will confine your testimony to items about which you have knowledge rather than speculation, unless otherwise directed by legal process; and you will assist the efforts of the Company's attorneys to hold all privileged attorney-client matters in strictest confidence, especially matters you have been privy to. (b) If the Company reasonably determines that you have materially violated any of your obligations under this Agreement, then the Grants hereunder shall terminate, effective no later than the date on which such violations began. In that event, you agree to return to the Company on its demand any amounts paid to you pursuant to this Agreement. If you fail to do so, the Company may deduct from any amounts the Company owes to you (including, but not limited to, wages or other compensation), or commence judicial proceedings against you, to recover these amounts and related attorneys' fees and expenses. In addition, you agree that the Company may pursue any other remedies available in law or at equity, including injunctive relief, for any breach of this Section 14. 15. CHOICE OF LAW. This Agreement will be governed by the substantive law of the State of New York. Any legal action or proceeding with respect to this Agreement may be brought in the federal or state courts located in the Borough of Manhattan in New York City. IN WITNESS WHEREOF, the Company and you have executed this Agreement as of the Date of Grant. RJR NABISCO HOLDINGS CORP. By _________________________ Authorized Signatory _______________________________ GRANTEE Grantee's Taxpayer Identification Number: Grantee's Home Address _________________________ ______________________________ ______________________________ Date: ______________________ EX-10.5 6 EXHIBIT 10.5 EXHIBIT 10.5 RESTRICTED STOCK UNITS 1997 - Conversion 1990 RJR NABISCO HOLDINGS CORP. LONG-TERM INCENTIVE PLAN RESTRICTED STOCK PROGRAM RESTRICTED STOCK UNIT AGREEMENT _____________________________________ DATE OF GRANT: June 16, 1997 W I T N E S S E T H 1. GRANT OF RESTRICTED STOCK UNITS. Subject to (i) cancellation of any prior outstanding Restricted Stock awards granted to the Grantee pursuant to the provisions of the 1990 RJR Nabisco Long-Term Incentive Plan and the Restricted Stock Program (collectively, the "Plan") and (ii) surrender to RJR Nabisco Holdings Corp. (the "Company") of any stock certificates in respect of such restricted stock, the Company on the above date has granted to (FIRST NAME)(LAST NAME)(THE "GRANTEE") subject to the provisions of the Plan and the terms and conditions of the Plan and this agreement (the "Agreement"), a total of ( ) RESTRICTED STOCK UNITS which entitle the Grantee to receive an amount in cash equal to the fair market value of an equivalent number of shares of Common Stock of the Company ("Common Stock") as of the Payment Date determined in Section 4. A copy of the Plan is attached and made a part of this Agreement with the same effect as if set forth in the Agreement itself. All capitalized terms used below shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. VESTING OF RESTRICTED STOCK UNITS. The Restricted Stock Units granted hereunder shall vest on the earliest of: (i) July 15, 1997; (ii) the date of the Grantee's death; (iii) the date of the Grantee's Disability, as defined in RJR Nabisco Inc.'s Long Term Disability Plan; (iv) the date of the Grantee's involuntary termination, if such termination is a result of a "Reorganization" (as defined in the Continuing Excellence Recognition Program); (v) one year after the date of the Grantee's transfer, as a result of a Reorganization, to "Operating Company" (as defined in the Continuing Excellence Recognition Program), or an affiliated company; (vi) the date the Grantee is involuntarily terminated without Cause within one year after the transfer described in (v). For purposed of subparagraph 2 (iv) above, an involuntary termination as result of a Reorganization shall not occur as result of a refusal to accept a comparable position at an Operating Company or an affiliated company. 3. PRORATA REMOVAL OF RESTRICTIONS. In the event that the Grantee's termination prior to a date listed in Paragraph 2 is (a) by action of the Company and without Cause, or (b) by retirement, the Grantee, if approved by the Chief Executive Officer of the Company, may receive, a portion of such Restricted Stock Units determined by multiplying the number of such Restricted Stock Units by a fraction, the denominator of which is the total number of months between the Date of Grant and the date specified in subparagraph 2 (i) above (the "Restricted Period"), and the numerator of which is the number of months (including any portion thereof) of the Grantee's Active Employment during the Restricted Period. "Active Employment" shall not include any period of Salary Continuation or any compensation period in lieu of Salary Continuation. If the Grantee is or becomes Chief Executive Officer of the Company, actions and approvals required herein shall be made by the Committee. 4. PAYMENT OF RESTRICTED STOCK UNITS. Unless the Grantee has elected to defer receipt of payment in accordance with Section 7, the Grantee will receive a payment in cash in respect of Restricted Stock Units granted to him based upon the closing price of Common Stock on the date of vesting (the "Payment Date"). The payment shall be made as soon as practicable following vesting of such Restricted Stock Units. If the Grantee has elected to defer receipt of such payment in accordance with Section 7, the Payment Date will be the last day of the deferral period and payment will be made as soon as practicable thereafter. 5. FORFEITURE OF RESTRICTED STOCK UNITS. Except as otherwise provided in Section 3, Restricted Stock Units that are not vested as of the Grantee's Separation Date shall be cancelled, and the Grantee shall forfeit all right, title and interest in and to such Restricted Stock Units along with the right to any dividend equivalents paid thereon pursuant to Section 6. "Separation Date" means termination from active employment; it does not mean the termination of pay and benefits at the end of a period of salary continuation (or other form of severance pay or pay in lieu of salary). 6. DIVIDEND EQUIVALENT PAYMENTS. At all times prior to the Payment Date, the Grantee shall receive cash payments at the same time and in the same amount as any cash dividends paid on an equivalent number of shares of Common Stock. 2 7. DEFERRAL. The Grantee may elect to defer payment of vested Restricted Stock Units in accordance with procedures established by the Committee; provided, that the Grantee may not defer payment in respect of Restricted Stock Units that vest in connection with the Grantee's termination of employment for any reason and further, provided, that in no event may the period of deferral extend beyond January of the year following the Grantee's termination of employment for any reason. Deferred Restricted Stock Units will continue to have a value based on the fair market value of an equivalent number of shares of Common Stock. 8. NO RIGHT TO EMPLOYMENT. The execution and delivery of this Agreement and the granting of Restricted Stock Units hereunder shall not constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company or its subsidiaries to employ the Grantee for any specific period or in any particular capacity and shall not prevent the Company or its subsidiaries from terminating the Grantee's employment at any time with or without Cause. 9. TRANSFERABILITY. Other than as specifically provided in the Plan with regard to the death of the Grantee, this Agreement and any benefit provided or accruing hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Grantee, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Grantee. 10. CHANGE IN COMMON STOCK OR CORPORATE STRUCTURE. a) If at any time the number or nature of outstanding shares of Common Stock of the Company shall be increased or changed as the result of any spinoff, stock dividend, subdivision or reclassification of shares, or similar event the number or nature of Restricted Stock Units subject to this Agreement after such an event shall be increased or changed in the same proportion or manner as the outstanding shares of Common Stock are increased or changed, or if the number of outstanding shares of Common Stock shall at any time be decreased as the result of any combination or reclassification of shares, the number of Restricted Stock Units subject to this Agreement after such an event shall be decreased in the same proportion as the outstanding number of shares of Common Stock is decreased. b) In the event the Company shall at any time be consolidated with or merged into any other corporation and holders of the Company's Common Stock receive common shares of the resulting or surviving corporation, there shall be an adjustment to the Restricted Stock Units subject to this Agreement after such an event, and in place of the Restricted Stock Units so subject, a stock equivalent shall be determined by multiplying the number of common shares of stock delivered in exchange for a share of Common Stock upon such consolidation or merger, by the number of Restricted Stock Units subject to this Agreement. If in such a consolidation or merger, holders of the Company's Common Stock shall receive any consideration other than common shares of the resulting or surviving corporation, the Committee shall determine the 3 appropriate adjustment to shares held pursuant to this Agreement after such an event; provided, however, such adjustment shall not be to the detriment of the Grantee. 11. TAXES. Any taxes required by federal, state or local laws to be withheld by the Company on the Grant of Restricted Stock Units or any other payment or event hereunder shall be paid to the Company by the Grantee by the time such taxes are required to be paid or deposited by the Company. The Grantee hereby authorizes the Company to withhold or offset a sufficient amount from any payment hereunder to satisfy any such tax withholding obligations. 12. NOTICES. Any notices required to be given hereunder to the Company shall be addressed to The Secretary, RJR Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019-6013, and any notice required to be given hereunder to the Grantee shall be sent to the Grantee's address as shown on the records of the Company. 13. GRANTEE. In consideration of the grant, the Grantee specifically agrees that the Committee shall have the exclusive power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan and Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretation and determinations made by the Committee shall be final, conclusive, and binding upon the Grantee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Agreement. The Committee may delegate its interpretive authority to an officer or officers of the Company. 14. OTHER PROVISIONS. a) Titles are provided herein for convenience only and are not to serve as a basis for interpretation of the Agreement. b) The Agreement may be amended only by a writing executed by the parties hereto which specifically states that it is amending this Agreement. c) THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. 4 IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Grantee have executed this Agreement as of the Date of Grant first above written. RJR NABISCO, INC. By: _____________________________ Authorized Signatory ____________________________ Grantee Grantee's Taxpayer Identification Number: ____________________________ Grantee's Home Address: ____________________________ ____________________________ 5 EX-10.6 7 FOURTH AMENDMENT Exhibit 10.6 FOURTH AMENDMENT TO THE 364 DAY CREDIT AGREEMENT FOURTH AMENDMENT (this "Amendment"), dated as of April 4, 1997, among RJR NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), RJR NABISCO, INC., a Delaware corporation (the "Borrower") and the lending institutions party to the Credit Agreement referred to below (the "Banks"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, Holdings, the Borrower and the Banks are parties to a Credit Agreement, dated as of April 28, 1995 (as amended, modified and supplemented to the date hereof, the "Credit Agreement"); and WHEREAS, the parties to the Credit Agreement wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: I. AMENDMENT TO CREDIT AGREEMENT. 1.Effective June 2, 1997, the definition of "Measurement Date" appearing in Section 10 of the Credit Agreement shall be amended to read in its entirety as follows: "Measurement Date" shall mean June 2, 1997. II. CONDITIONS PRECEDENT TO AMENDMENT EFFECTIVE DATE. 1. This Amendment shall become effective on June 2, 1997 (the "Amendment Effective Date"), so long as each of the following conditions shall have been met to the satisfaction of the Senior Managing Agents on or prior to the Amendment Effective Date: (a) EXECUTION OF AMENDMENT. On or prior to the Amendment Effective Date, Holdings, the Borrower and each of the Banks shall have signed a copy hereof (whether the same or different copies) and shall have delivered (including by way of facsimile transmission) the same to the Payments Administrator at the Payments Administrator's Office. (b) NO DEFAULT; REPRESENTATIONS AND WARRANTIES. On the Amendment Effective Date, both before and after giving effect to this Amendment, (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained in the Credit Agreement and in the other Credit Documents shall be true and correct in all material respects. III. GENERAL PROVISIONS 1. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 2. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with Holdings and the Payments Administrator. 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. * * * -2- EX-12.1 8 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.1 RJR NABISCO, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
SIX MONTHS ENDED JUNE 30, 1997 ------------- Earnings before fixed charges: Income before income taxes....................................................................... $ 878 Less minority interest in pre-tax income of Nabisco Holdings..................................... 55 ------ Adjusted income before income taxes.............................................................. 823 Interest and debt expense........................................................................ 415 Interest portion of rental expense............................................................... 28 ------ Earnings before fixed charges...................................................................... $ 1,266 ------ ------ Fixed charges: Interest and debt expense........................................................................ $ 415 Interest portion of rental expense............................................................... 28 Capitalized interest............................................................................. 3 ------ Total fixed charges............................................................................ $ 446 ------ ------ Ratio of earnings to fixed charges................................................................. 2.8 ------ ------
EX-27.1 9 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN HOLDINGS' CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000847903 RJR NABISCO HOLDINGS CORP. 1,000,000 6-MOS DEC-31-1997 JUN-30-1997 251 0 1,489 0 2,847 5,180 8,903 (3,132) 31,301 4,186 9,409 954 528 3 9,636 31,301 8,065 8,065 3,674 3,674 318 0 463 830 341 489 0 0 0 456 1.33 1.33
EX-27.2 10 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000083612 RJR NABISCO, INC. 1,000,000 6-MOS DEC-31-1997 JUN-30-1997 251 0 1,485 0 2,847 5,176 8,903 (3,132) 31,276 4,134 9,409 0 0 0 11,790 31,276 8,065 8,065 3,674 3,674 318 0 415 878 360 518 0 0 0 485 0.00 0.00
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