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Kueper Vs. R.J. Reynolds Tobacco Co. Discovery Deposition of G. Robert Dimarco, Ph.D. November 20, 1991 (911120).

Date: 20 Nov 1991
Length: 122 pages
512671076-512671413
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RJR Employee Deposition
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7 1 2 Q At Rutgers--is New Jersey? Rutgers the State University of 3 A Yes, it is. 4 5 Q What year did A 1959 you obtain your Ph .D., sir? . 6 Q Would you tell me the topic of y our or title of your 7 di t ti ? sser a on 8 A I can't give it to you exactly, Mr. Cook, but it had 9 to do with the preservation of fruits and vegetables. 10 Q Do you still keep a copy of that document or are 11 they all sold out? 12 13 A I suspect if I looked real hard in the attic, I 14 could find it. Q You're employed by the RJR Reynolds Tobacco Company; 15 are you not? 16 17 A I am. 18 Q You've worked for them since 1982? 19 A I have. 20 Q Prior to that you worked for General Foods? 21 A Yes, I did. 22 Q Does General Foods have any corporate relationship 23 to the Reynolds group or was that a separate-- 24 A It didn't then and it doesn't now. 25 Q What did you do at General Foods, ir? Gt.+*••l i h U it i g h h ll h e esearc n . e r. er A I ran w at t ey ca t i ~ r/'a.r~l.2,~Oev& fluccin/e~- \ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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4 1 STIPULATIONS 2 This discovery deposition is being taken pursuant to the 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Rules of the Supreme Court of the State of Illinois. n N N ~ J N m J l0 ~~oiuloa.~ii~er.rY~~JJOCda(vJ11 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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®R0OOHAL 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 CONFIDENTQAL IN THE CIRCUIT COURT TWENTIETH JUDICIAL CIRCUIT ST. CLAIR COUNTY, ILLINOIS NO. 91-L-734 CHARLES KUEPER and PATRICIA ) KUEPER, Individually, and ) PATRICIA KUEPER, as Mother ) and Next Friend of JEFFREY ) KUEPER, ) ) Plaintiffs, ) DISCOVERY ) vs. ) G. ROBERT ) R.J.R., INC., R. J. REYNOLDS ) TOBACCO CO., and REESE DRUGS, ) INC., ) ) Defendants. ) - - - - - - - - - - - - - - - - - - - DEPOSITION OF: DiMARCO, Ph.D. The discovery deposition of G. ROBERT DiMARCO, Ph.D. was taken in Meeting Room 542 of the Marriott Hotel, *1 Marriott Drive, Piedmont Triad International Airport, Greensboro, North Carolina, commencing at 2:00 p.m. on Wednesday, November 20, 1991. JaNll12 af[ll1~PN S' .XtJJO!!lllG' 1 Q+ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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1 INDEX 3 2 WITNESS EXAMINATION BY PAGE 3 4 5 6 7 8 9 10 11 12 13 G. Robert DiMarco, Ph.D. Mr. Cook HIBITS 6 14 NUMBER IDENTIFIED 15 16 17 Deposition Exhibit Deposition Exhibit Deposition Exhibit No. No. No. 1 2 3 5 5 5 18 19 20 21 22 23 24 25 Deposition Exhibit No. 4 5 n r N 0) J r B JlfH(~1Il~.1flLt`ICV AIlXi[IIP.I' J co 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q What is your current capacity with RJRT? A I am the Senior Vice President of Research and Development. Q How long have you been so employed? A Since 1983. Q Who is your immediate superior? A Mr. James Johnston. Q What is his job description? A He is the Chief Executive Officer and Chairman of the Board of Directors of the company. Q Who is the President of RJRT or do they have one? A They don't have one. Q How long has he been the CEO of RJRT? A I'm guessing but it's probably around three years plus or minus. Q Who was his predecessor? ~nyiaa/ A A fellow by the name of Ralph-Aagiv+i--no, no, I'm Von~, sorry; we've had a few of them--Dolph ita~n'71rx. Q Dolph? n A Dolph v '~i~\r)x like dolphins. Q I'm not particularly interested in what your salary is at RJRT but do you have any stock option plans or anything like that as an employment incentive or payment at RJR Reynolds Tobacco Company? MR. BOYLE: It's not RJRT; it's just R. J. Reynolds ~ ~aru/ia3~aa~eev8''s%,~cr:ale,t~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone:(919)768-3694
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2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 APPEARANCES On behalf of the Plaintiffs: BRUCE N. COOK, ESQUIRE Cook, Shevlin & Keefe, Ltd. 12 West Lincoln Street Belleville, Illinois 62220 On behalf of R. J. Reynolds Tobacco Company= ROBERT F. McDERMOTT, JR., ESQUIRE Jones, Day, Reavis & Pogue Metropolitan Square 1450 G Street, N.W. Washington, D.C. 20005-2088 PAUL G. CRIST, ESQUIRE STEPHEN J. KACZYNSKI, ESQUIRE Jones, Day, Reavis & Pogue North Point 901 Lakeside Avenue Cleveland, Ohio 44114 RICHARD E. BOYLE. ESQUIRE Gundlach, Lee, Eggmann, Boyle & Roessler 5000 West Main Street Box 899 Belleville, Illinois 62223 CHARLES A. BLIXT, ESQUIRE Assistant General Counsel R. J. Reynolds Tobacco Company Winston-Salem, North Carolina 27102 On behalf of Reese Drug Stores, Inc.: MICHAEL J. NESTER, ESQUIRE Donovan, Rose, Nester & Szewczyk, P.C. 8 East Washington Street Belleville, Illinois 62220 Also Present: DANIEL W. DONAHUE, ESQUIRE Vice President & Deputy General Counsel - Litigation R. J. Reynolds Tobacco Company Winston-Salem, North Carolina 27102 SANDRA HARPER, NOTARY PUBLIC AND COURT REPORTER \ .Sl'mu/.m.~as~iev 8~'.t7.uaiale~J ut ~ N ~ J r m J J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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9 1 Tobacco Company. 2 MR. COOK: It isn't RJRT; isn't it RJRT? 3 THE WITNESS: The full name is R. J. Reynolds 4 C b ompany. acco To 5 l ' Q (By Mr. Cook) it RJRT? t you cal Don 6 A We've called it lots of things including RJRT. 7 Q You don't mind if I refer to it as RJRT? 8 A I don't have any objections. 9 MR. McDERMOTTi For convenience. 10 ' MR. COOK: I'm sorry, Mr. Boyle, but I m going to 11 say RJRT; it's easier. 12 Q (By Mr. Cook) RJRT stands for what? 13 A R. J. Reynolds Tobacco Company. 14 15 Q All right, and what does CRT stand for? A CRT? 16 Q CTR, I'm sorry. 17 18 A Council for Tobacco Research, that's just so far out of context . 19 20 Q I note in your deposition that that's how you refer 21 to it? 22 A It's Council for Tobacco Research. 23 Q Do you still have any connection with them? 24 A I'm a member of the Board of Directors. Q Back to my original question about stock option 25 plans--do you have those type of things at Reynolds? ~ ~antGtv~iri~eea~?~.9/.c.acialet~ ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WHEREUPON, G. ROBERT DiMARCO, Ph.D. first being duly sworn, testified as follows: (Deposition Exhibits Nos. 1 - 4 were marked for identification) MR. CRISTi I'd just like to make a statement on the record if I may. We're starting here with Dr. DiMarco pursuant to Mr. Cook's notice. Tomorrow there will be a little bit different sequencing than had been noticed. We anticipate starting with Ms. Creighton, then moving to Ms. Cook, then Mr. Blackmer, Dr. Lloyd and then Mr. Pearson and on Friday with Mr. Stockdale and then with Dr. Hayes although I understand Mr. Cook, you may not-- MR. COOKs We're thinking about going home tomorrow and seeing how much we can get finished. MR. CRIST: I'm not sure about the availability of the people that we had confirmed their availability for Friday. MR. COOK: That's fine; we'll catch them some other time. MR. CRIST: In addition to that we have set up another room down here and in that room we have available some of the "Caravans," an internal employee type newsletter, as well as a number of other similar type ~ .t/.ua:ialrj- ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A Yes, I do. Q Do you participate in them? I assume you don't have to take stock option; I mean, you don't have to buy them since they're options? A Yes, I have. Q Do you have stock; do you own stock in RJRT? A I don't believe I do; I have stock options, but I ~41 A~ don't think the stock has beeyou're in an area I don't know very much about. I know how to work, but I don't know how to make money. Q With respect to the stock options, are the options in one of the holding companies or RJR Reynolds or RJR Nabisco? A I really don't know. Q You don't know if you own any stock or whether or not Reynolds Tobacco Company is wholly owned by RJR Nabisco? A That's a different question now. Q Yes, sir, I understand it's a different question. A If your question-- Q Well, if it's wholly owned, you can't own any of the stock; that's why I asked you. It's actually the same question and it's just different. A You're in an area that I want to get cleared on. Yes, R. J. Reynolds Tobacco Company is wholly owned by RJR Nabisco. JaR[l4Q~afflsa~leV ~eFlJlGKla~eJ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone~(919)768-3694
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13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q You owned some of that I assume? MR. McDERMOTT: Now or then? MR. COOK: Then. THE WITNESS: I want to be clear now on the question. You're asking me whether I owned R. J. Reynolds Tobacco Company stock then? I don't i_I : .,.., ..------- L_a _i. «.._..- «s...~,. _ ueltcve nOn uUmyauy uau bIULR uacu: uwic was°- Q (By Mr. Cook) There was a holding company? A Well, there was a larger company at any rate. Q That's the point that I am trying to muddle through; perhaps you're the wrong person to muddle through this with. A Obviously. Q Well, maybe not though--you can't always tell. If you don't know the answers, it might be better for me. Do you know when you started with them what companies existed in the Reynolds conglomerate for want of a better word? A We had R. J. Reynolds Tobacco International. We've had so many companies come in and out since that time that I don't know that I can really honestly put my finger on which other ones there were. Q How many companies are you aware of now that are in the RJR group? A The RJR Nabisco group? Q Yes. r N A It would be R. J. Reynolds Tobacco Company, m ~ r A W J(!II(~f2ef[(sa/fBV g'~.P/JJOCi!lIC.V 0) 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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6 1 documents. I think there are about fivqboxes of that o t ll 2 material from the material. They are the original L ' ,- r 3 company, but y ou had asked for those in the notice. 4 5 we MR. COOK: If you don't finish Dr. DiMarco. mind I'll look at them after 6 MR. CRIST: We will try to make further arrangements 7 for that. Thank you. 8 EXAMINATION BY MR. COOK 9 Q (By Mr. Cook) Are you ready, Dr. DiMarco? 10 A Probably as ready as I' m going to be. 11 Q Would you state your name and address? 12 A C. Robert DiMarco, 1806 Barnstable Road, and I think 13 d L i ill h we ju st c ange to ew sv e. 14 Q You are a Boilermaker; is that true? 15 A If you call a Ph.D. a Boilermaker. 16 17 Q You got it from Purdue University; is that correct? A Oh, no, no, no. 18 19 Q I thought you went to Purdue; where did you go? 20 A Rutgers University. Q Cne of your depositions is wrong; I'm sure it said 21 Purdu e. Oh, well, I know you taught at Rutgers. 22 A Y 23 es. 24 Q But you didn't go to Purdue; where did you get your 25 bache lor 's degree, Doctor? A At Rutgers. 8-~.r/.AUxin/r1501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q So, therefore, I hope that I can assume that you own no stock in RJR Reynolds Tobacco Company since all of the stock is owned by RJR Nabisco? A Again I must answer I don't know because there's a series of companies involved, and I don't know who owns the stock. Q That's what I'm trying to find out. You're not aware of what company your stock options exist. How would-- if you wanted to find out, who would you ask other than these fellows? A I use someone to help me handle my affairs in New York, and he's an old, personal friend of mine; and I'd say-- Q With respect to what your employment plan is, your salary, your bonuses, your stock options, I just assumed that you probably had stock options in your employment since that seems to be a way that executives are sometimes paid. Since I knew that RJRT or at least I suspected it from what I've been told before was a wholly owned subsidiary of one of the other companies-- A RJR Nabisco. Q Right, I assume then that your stock options probably were in RJR Nabisco which is traded over the market? A Again I really don't know. Q Let me show you Plaintiff's Deposition Exhibit No. 4 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 R. J. Reynolds Tobacco International and Nabisco are the ones I'm aware of. Q In one of your depositions. I noticed--I believe this was '84 or '85 or '86 when you were giving it--you said that you would do test work for some of the related companies? A Uh-huh. Q Do you still do test work for related companies or are there no related companies anymore? A We will do some test work for Nabisco as well as R. J. Reynolds Tobacco International. Q You work on shredded wheat and things like that? A No, we do not. Q What type of things do you work on for Nabisco? A We happen to have a very strong analytical group and one of the things we do for them is some analytical things where they don't have the capability of doing their own. Q I'm trying--what type of things are you analyzing? I am--other than remembering that Nabisco makes cookies and shredded wheat, I really know very little about their business and so, you know, I mean, do you do analytical work on Nabisco cows or what do they--what types of things do you analyze? A May I ask my legal counsel? MR. COOK: You may ask them anything you like. (Conference between Mr. McDermott and the witness) MR. COOK: I don't want to know any trade secrets. C.YR/l!(e!!J!!31/!6V V JIJJ(/L!(I(P1' J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 would be involved with it. We're a pretty close company and, you know, we have people that deal together all the time. Q Who do you deal with from Nabisco? A I deal with a man by the name of Dr. Robert Smith who is my counterpart. Q He's in charge of their R&D? A They just had a change there; he's in charge of their Basic R&D. Q Where is their R&D Center located? A In Morristown, New Jersey. Q Near Rutgers, right? A A long walk from Rutgers. Q What is the school mascot for Rutgers in the name of the school? A Scarlet Knights. Q I'm sorry; I had forgotten that. I'm sure somewhere in the past I remembered that. MR. McDERMOTT: That's with a"K" I take it? Q (By Mr. Cook) Dr. DiMarco, when you work with Dr. Smith, do you have any accounting system for billing or anything like this or is this a courtesy between the-- A A lot of what we do for Dr. Smith is as I said before would be outside contract work, and he pays directly for that. Q Is there money that is billed from Nabisco to RJRT JR/i(CilL.>[!!t,lAY ~ .F/SlOfflll@.I' ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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12 1 2 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and this is the 1990 Annual Report of RJR Nabisco, Part I, and I have in my hand Deposition Exhibit No. 3 which is Part III. Do you get things like this; have you seen this? A I probably get them, and I probably don't read them. Q I'm going to hand you Plaintiff's Exhibit No. 3, and I'd like you to read into the record the first sentence under "Tobacco" for me please; I'd like you to read it out loud if you would? A All right. "RJRN's tobacco business includes the operation of RJRT and Tobacco International which manufacture, distribute and sell cigarettes." Q Would that be an accurate statement to you? A Oh, yes. Q Thank you. What was the name of the company that you initially started to work for? A R. J. Reynolds Tobacco Company. Q I remember when the merger occurred between Nabisco and RJR Reynolds; at that time it wasn't a subsidiary of RJR Nabisco, was it? A In 1982? Q Yes, sir. A No, it was not. Q Was it a corporation whose stock to your knowledge was traded? A . , , Ty+t S/ack nF Ae r7f- ~ia~ctIn' tv"^y was publ~cly frad~~~~rc ~ . s1~.uxinle.t- ~ J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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18 1 2 3 4 5 6 7 8 9 10 it 12 13 14 15 16 17 18 19 20 21 22 23 24 25 or does he pay a third person? A He would pay directly the contract party for that. Q What about for the use of your spectrometers? A Where the project gets to be of good size, we will charge them for that. Q Well, what about if it's not a good size? A No, we see a lot of each other and if he's down there, and he says, "Would you do so-and-so?," we do it. Q What type of people do you employ who would be knowledgeable about food things? A Probably--my people are not very knowledgeable about food things; they know the basic analytical tools and,~ (~whether SC/lriCe y5 ~ you're looking at food or tobacco and the retty much the same. MR. McDERMOTTt Object. Q The vegetables are vegetables; is tobacco a vegetable? A I don't believe it's ever been called a vegetable. Q Why wouldn't it be called a vegetable? A Vegetables are normally consumed. Q Are edible? Snlanaceae ` A Are edible and tobacco is a member of the family which has vegetables in it like-- Q I was excited about that. A --like potatoes and tomatoes. ` JRf!llfrs-.1Lrsi/!Ee' ~.FIJ.b[i!lICY \ 501 Shepherd Street Winston-Salem, N.C.27103 Phone: (919) 768-3694
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20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q The Tobacco Board? A I don't know. Q Do you know Mr. Gerstner? A I sure do. Q Where do you know him from? A When he took over as CEO of the company, he came down to visit us to see what we do. Q Has he ever worked in tobacco? A Has he ever worked in tobacco? Q Yes. A Not to my knowledge--do you mean before he joined the company? Q Yes. A Oh, I don't know. Q Who is the highest ranking person with RJR Nabisco who has a tobacco background, a Reynolds Tobacco background; do you know or is there any? A There isn't any that I know. Q With respect to a couple other institutions that I think maybe that you're familiar with, are you familiar with the Tobacco Institute? A I am familiar with who they are; I've never met with them. q Do you know what they do? A Yes, they're a lobbying organization for the tobacco \ .Y(!H![i2JUL1~Qi'V WlJJ[YY?~fJ J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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15 1 2 3 4 5 6 7 6 9 10 11 12 13 14 15 16 17 16 19 20 21 22 23 24 25 THE WITNESS: Well, the reason for the question is ro ,<ithr some of the things we're doing for them i-- f+'A Q (By Mr. Cook) Why don't you tell me things that aren't trade secrets? A We will run a lot of chemical tests for them n 1R ~]s ~ especially those that include mass spectrometers, MR;'"or large, complicated equipment that they just don't have themselves. Q What I was really interested in was what type of products rather than-- A That's where I'm feeling a little shaky because-- Q How about some kind of product that I know they make--like I already said shredded wheat, I don't assume they-- A Almost everything we're working with them on is on a very important but not publicly known project--proprietary. MR. BLIXT: I think it's safe to say that we don't do work for Nabisco on current products that they're working in. Q (By Mr. Cook) So you're working with them on the development of new product? A New product or a new ingredient. Q Or new? A Or a new ingredient. Q In an old product, okay-- / J(!N(`I(Y.flliJ`lPV~ellJJO[i!!IN' \ ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q You know of it; you know there's local chapters? A Sure. Q Do you belong to any professional associations yourself outside of tobacco? A I belong to the Food Technology Institute. Q Has the Food Technology Institute ever taken a position on whether or not there is a relationship between tobacco use and cancer? A None that I know. Q How many institutions--before I ask you that--in order not to unduly use your time, I've read several of your depositions that have been courteously given to me by your counsel, very nice fellows that they are, and with respect to the relationship to tobacco and disease, have your opinions changed at all in the last seven years? A Do you mean seven years or nine years--when I joined the company? Q I mean seven because the first deposition was in 1984. A It's hard for me to split seven and nine. Q Nine is fine then. A When I joined the company, I had assumed that we knew a lot more about the relationship between tobacco and its associated diseases than we really do know. Q Now what I would like to know is, have your opinions n ~ N a, J \ J[!/JllilvJ[!!1//EF~eIILGOf[ltlfY 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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16 1 A And to cont in ue with that, we also because again we 2 have special expertise contract with outside houses to do some 3 of the more special w or k like nutrition for instance. 4 Q What types of products does Nabisco have that you're 5 familiar with other than shredded wheat? 6 A Oh, boy, th ey are very, very large in the cookie and 7 cracker business; Ore os are theirs, Ship-Ahoy chocolate 8 chips--they have hund re ds of products--Premium Crackers-- 9 Q Mostly food ? 10 A Almost tota ll y food I think. 11 Q I probably co uld tel l that if I coul d look in the 12 report to the-- >A'~ FJGiSC~1M4n~')~S ~' 13 14 A i h They have m ar garine; - F+ei-sckman-'- s margarine is e rs. t F/ai5d.wwnn's 15 ^ i i h d hi k d Q -. ma~ s margar ne--w at o you t n ; o you 16 think you can tell a dif ferenc e between margarine and butter 17 or not? You're an It ali an; I k now you c an . There's no 18 question about it; yo u w ouldn' t use-- 19 A I have a da ugh ter-- 20 Q --margarine on pasta ; would you? 21 A --that does . 22 Q On your ut ana a, you wouldn't use margarine; would h fl i f 23 SC e M4Yln S you--maybe -Plieisrcliii~ ut have you tested in the past for 24 Nabisco on any products that you can talk about? 25 A We might have, you know, but I don't know that I \ Jaiu~~2ei[llf`ieYiuetl.AfLYi[(~('1' / 501 Shepherd Street Winston-Salem, N.C. 27103 Phone:(919)768-3694
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 SmlaOqceaC 19 MR. BLIXT: You may want to spell for the benefit of the court reporter. Q THE (By WITNESS: No, I don't want to spell it. Mr. Cook) Does RJR Reynolds Tobacco Company have a Board of Directors? A Yes, it does. Q Are you on that Board? A No. I am not. Q Have you ever been? A No, I have not. Q Do you know who is on the Board? A I might not know all of them, but I- Q Who do you know? ~ A Certainly James Johnston would be on itx-eerEeiwiq* fS hOf en 7»r.. So4•d.~,n('~ Jim Schroerr---'4 Q Where is Mr. Schroer employed? A He's our Executive Vice President of Marketing and Sales and certainly our legal counsel would be on it. Q Who is that? A It would be Mr. Wayne Juchat2. I have not met with this Board so, you know, I don't claim to know who is on the Board and once I go beyond that, I would be guessing. Q What about Mr. Gerstner, do you suspect he might be on the Board--Gerstner? A On the--on whose Board? 4mrd.m ~cr~ier 8 R%ucrsa/er J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 organization? A Charitable? Q Charitable, not for profit? A I understand it to be a nonprofit organization. Q You don't understand them to be a--I would say charitable; when I say they're supported by charity, is that what your understanding would be? MR. McDERMOTT: If you have an understanding. MR. COOK: If he doesn't, of course, Robert, he can't answer my question. THE WITNESS: The word "charity" had thrown me; I know them to be a nonprofit organization. Q (By Mr. Cook) What do you understand their function is in our society or do you have an understanding as to their function? A I know that they support research primarily in the field of cancer. Q Is it your understanding that they are an organization who is trying to fight cancer as a disease; is that what your understanding is? A As I said a minute ago, my understanding is that they support research trying to understand cancer. Q You would agree that their purpose is to try and prevent or retard cancer? u, ~ A Of course, uh-huh. m ~ r m .~'as~~luv.~isrfeeoR~'..eJ.i,roriu(nt~ 00 501 Shepherd Street Winston-Salem, N.C.27103 Phone: (919) 768-3694
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22 1 Q (By Mr. Cook) Well, why don't you tell me what you 2 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think propaganda means? A Again propaganda to me might have the connotation that would say things whether they're true or not. Q There's an implication that it may not be true-- A That's right. Q --when I say propaganda? A Yes, that's why I hesitated. Q So you don't really have--in your duties and your experience, you haven't had a lot of connection with the Tobacco Institute? A I personally have not. Q Have you ever met any people who are employed by the Tobacco Institute? A The one person that I met was the President when I first joined the company--a fellow by the name of Kornegay; I couldn't tell you who the President is today. He was either the President or the Executive Director; I don't know how they-- Q I believe I've read his name before. Have you ever read any speeches or any publications by Mr. Kornegay? A None that I can remember. Q Are you familiar with the American Cancer Society? A I know who the American Cancer Society is Q Do you understand them to be a charitable ~ -~ \ .~'rrnia•.~f'iii~iev V .,~.uuia(e~~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 industry. Q Would it be fair if I also called them a trade association; would you-- ~~ff/? al~uf A You're talking about a subject matter I knol--like I say I've never met with them. Q Who would interface with them at the Tobacco Company; do you know? A Mr. James Johnston is the primary person. Q Is he a member of the Tobacco Institute or is he on its Board of Directors or do you know? A I really don't know. Q Do you receive publications from time to time from the Tobacco Institute? A None that I'm aware of. Q Are you aware that from time to time they make public statements which appear to be made tobacco industry? on behalf of the A I'm aware that they make public statements; I'm assuming they're public statements that tell the truth. Q Would you agree that they issue propaganda statements on behalf of the tobacco industry? MR. McDERMOTT: Would you explain what you mean by "propaganda"? THE WITNESS: Againr I'd have to know what you did mean by the word "propaganda." C ~a.rdra- ~cr~e•v Y< s9uo in/e~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 16 19 20 21 22 23 24 25 changed since you gave your first deposition that I read I believe in the Browner case? A I thought I just answered that though. Q No, you said--you qualified it to nine and what I'm trying to do now is to get you two years into your position and ask you whether or not your opinions have changed since you've given your depositions? A I'm sure that they have. Q Will you tell me--your opinions basically were that you didn't think a relationship between or a causal connection between tobacco use and cancer existed; you said that in 1984 I believe. Do you think there is a relationship between tobacco use and cancer? MR. McDERMOTT: Well, I object to the form of the question characterizing his earlier testimony; what he said speaks for itself but if your question is his view today, you may answer it. THE WITNESS: I was going to ask you; I don't-- since I haven't read my deposition in many years--now again ask me the question. Q (By Mr. Cook) Do you think that cancer is caused by cigarette smoking? A I don't think there's any proof of that. Q That largely was your position seven years ago. Do you think people are addicted to the use of tobacco; you don't ~ ~an~/.w.~rr~ew?~'.a%uocude~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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1 2 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 24 Q What is the Council for Tobacco Research? A What is the Council for Tobacco Research? Q Yes. A It's an organization funded primarily by the tobacco industry that does essentially the same thing--supports research in several fields to include cancer. Q Who else funds them besides the tobacco industry? A There are some tobacco suppliers who might not be viewed as part of the tobacco industry that also support them. Q Do you know when the Council for Tobacco Research was organized? A No, I do not. Q If I suggested 1954 would that seem about right? A I wouldn't--I just don't recall; it was certainly organized when I joined the company. Q Is it your understanding that they were organized because of concerns that were being expressed that there might be a relationship between the use of tobacco and disease? A I can tell you that that's what we do today is fund those diseases where tobacco has been accused of causing _IA2._~ D`UI1~ ' disease; I m assuming that was pretty much why they were started in the first place. Q Are you familiar with the American Heart Association? A Again I know-- .~{'a.u/ua.7~iir~resS~ .r2wir<alel- Ln N J r N m 501 Shepherd Street Winston-Salem, N.C. 27103 Phone:(919)768-3694
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28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q What did you smoke in 1981? A I don't remember; I really don't. I might not even have been smoking in 1981. Q I thought that you had smoked for over forty years? A I've smoked most of my life. Q Before--I mean, I'm sure they're not going to think that you're disloyal if you smoked a Lucky once or twice in your life. MR. McDERMOTTs We may have to put that part of the transcript under seal, however. Q (By Mr. Cook) When you were a young man, and you were in college, what was your general cigarette that you smoked, Luckys? A Luckys, how did you know that? Q Well, you just look like a Lucky guy. I brought you a present; I brought you a pack of Lucky 70s because I was almost positive--I can't find them. You know, once I had a malpractice case and a lady had taken douche powder orally in the hospital. She was in for a stomach ailment. I think it was Trichotine. And it turned out as they gave her a lavage, and she vomited and everything since it upset her quite a bit--it turned out that douche powder is merely something to cleanse the mucous membranes and it has exactly the same formula as the mouthwash, Vince, and the guy who invented it brushed his teeth in it every day--in this Trichotine--but in CJ[[fN[K( .1!!s1`IC{' F ePlJJLYilelf.l 501 Shepherd Street Winston-Salem, N.C. 27103 Phone:(919)768-3694
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27 1 think that under standards of what addiction is that they are, 2 d o you? 3 A That's the question; what are the standards? You 4 can get all kinds of definitions for addiction. My definition 5 of addiction. I think cigarettes are not addictive. 6 Q What is your definition? 7 A My definition is that when you have an addictive 8 drug that you must consume more and more of it to get the 9 euphoria--the euphoria is kind of the key word--that you get 10 from addictive drugs and that you're--the withdrawal symptoms 11 are excruciating. 12 Q You smoke; do you not, sir? 13 A Yes, I do. 14 Q And you've smoked for quite some time? 15 A Yes, I have. 16 Q What brand cigarettes do you smoke? 17 A They are ours obviously. 18 Q I assumed so. 19 A I tend to smoke-- 20 Q Me too--I'm loyal. 21 A I tend to smoke all of our brands but over a period 22 of a day when I'm smoking without testing something--today I 23 tested five brands--I'll smoke a very light cigarette. 24 Sometimes it's Premiery ometimes it's--most of the time it 25 would be Vantage Ultra f`i~ghts. .~aarlv.~.~P..e'iev 9F s~a+or+'nle.~ 501 Shepherd Street Winston-Salem, N.C. 27103 Ahone:(919)768-3694
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30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A I said, "I don't remember." but I could have. Q Did a lot of people smoke in your high school; were you in an inner city high school--I guess you were in Camden-- did a lot of people smoke in high school? A Again I just don't remember; I really don't. Q You don't remember if you smoked or not in high school? A That's been a long time; I could have smoked in high school, but I just don't remember. Q How long have you been married? A Forty some years. Q Did you meet your wife when you were in high school? A No, I don't believe I knew her when I was in high school, but I met her shortly thereafter; she lived in the same neighborhood. Q Did you smoke when you met your wife? A I'm sure I smoked sometime during the time I met my wife but whether I was when I met her or not. I don't remember. Q Do you have any occasion to remember why you started smoking? A Good gravy, no. Q Do you remember the first time you inhaled a cigarette? I find that strange because I do and it was decidedly unpleasant. You don't remember getting sick from ` ~uulaa~2r`ees~d~J.u.rlli~e.lJ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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29 1 2 3 4 any event they had an expert witness, and she swallowed six ounces of it; and he said it wouldn't bother her. And I said, "What kind of mouthwash do you use?," and he said, "As a matter of fact. I use Listerine." Boy, I had all of them in 5 my briefcase, and I just poured him six ounces and said, 6 "Drink this"; and he wouldn't do it. How many years did you 7 smoke Luckys? 8 A I don't remember. 9 Q Did you used to roll them up in your shirt like 10 that? 11 A I might have. 12 Q I did; this is what I smoked when I was younger. 13 What was the first cigarette that you smoked regularly? 14 A I believe it was a Lucky. 15 Q Did your parents smoke Luckys--either one? 16 ' t smoke; my A No, my parents to my knowledge didn 17 mother never smoked and my dad smoked an Italian stogy once in 18 $ ~, \ RB, but I don't ever remember seeing them smoking a ~whi 19 cigarette. 20 Q Where were you raised, Doctor? 21 A Camden, New Jersey. 22 Q Did you start smoking when you were in high school 23 or before? 24 A I really don't remember. 25 r Q Did you smoke when you were in high school? N M J r r m \ .S~a.etl.w.7[~as~eev 8~.x9Seoc.alcy ~ t+ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it stunt your growth and asking for cancer sticks and asking for coffin nails; very seldom they would ask for cigarettes-- now mind you I was a young boy. Q And so when you started smoking then, you had some indication that at least some people thought that cigarettes had a relationship with cancer? A Oh, sure, yes. Q Do you think now that cigarettes have a relationship with cancer? A I think that there is a risk factor associated with cigarettes. Q Have you ever thought that cigarette smoking might be good for people? A I think cigarette smoking does have benefits today. Q What are they? A Cigarettes we know--cigarette smoke that is--will ameliorate stress; that work has been done by some of our wv%A ls people as well as by others^in tMe literature. It makes you more acute in terms of performing functions. We will publish within the next two weeks--I should say it may take a little longer than that--a publication that talks about cigarettes, primarily nicotine, vis-a-vis Alzheimer's and Parkinson disease again either delaying the onset or because it turns on the right-hand side of the brain allows these people to 0 1 function better. That paper is going to be published in +hcNvl Ca~asulra.~i~`iw 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 thought that cigarettes were bad for people and your depositions at least before today have indicated that you think that that's not proved? A That's right. Q And you're still of that opinion? A That's right. Q Now what I'm trying to find out is, are you aware of any reason why these Surgeon Generals might have a bias or some reason, some reason to be against the tobacco industry? A The industry per se? Q Yes. A I don't believe that; no, I don't believe that. Q Is there some reason that you think, Dr. DiMarco, why these men may have made these statements in bad faith? A What statements? Q The statements that cigarette smoking causes lung cancer, the statements that cigarette smoking is addictive, those statements that you don't agree with. A I think they believe those^ sta ments. What I have To r ~ said is. I don't know of any proof to ffhose statements. Q This is Deposition Exhibit No. 1 which is a Surgeon General's Report on nicotine addiction dated 1988; I'm sure you're familiar with that document, are you not? A I haven't read the document, but I've had some synopses of it, yes. 501 Shepherd Street Winston-Salem, N.C. 27103 Phone:(919)768-3694
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31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 smoking? A No. Q Do you remember the first time you smoked a cigar? c& q arS A No, I don't; I have smoked K Q Did you smoke them before you graduated from high school? A I don't remember. Q Did you chew tobacco before you graduated from high school? A I've never chewed tobacco. Q Have you taken snuff ever? A I've never taken snuff. Q When you started smoking cigarettes, did you think that cigarettes caused cancer? A When I started smoking cigarettes, I thought cigarettes were not good for you. Q I'm younger than you are but not considerably younger than you are, and I recall when my parents were trying to stop me from smoking. I was about thirteen when I started; I had a misspent youth though, and you probably didn't. I remember they used to tell me that if you smoked it would stunt your growth; do you remember that that was a thing that people said? A I worked in a grocery store when I was very young by the way, and I can remember people coming in and asking, does `y'a.ulrw~o e~ 4i r'l.uorln/e.r~ 501 Shepherd Street Winston-Salem, N.C.27103 Phone: (919) 768-3694
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35 t today? 2 THE WITNESSi No, I haven't. 3 Q (By Mr. Cook) Look at the back of it. 4 A I don't know what it is. 5 Q The front of it is fairly easy to read; it says, 6 " If you look at "Smoking, Tobacco and Health - A Fact Book. 7 ' s the back of it, you'll see who did those things. That 8 published by the United States Government. I assume that 9 you're familiar with the United States Government; are you 10 not? 11 A Do you really want an answer? 12 Q Are you familiar with the United States Government, 13 sir? 14 A The United States Government is a very large thing 15 and if you're talking about its entirety-- 16 Q You've heard of the Public Health Agencies and the 17 Surgeon General and the former Department of Health. Education 18 and Welfare, those types of folks; haven't you, sir? 19 ~' ~v ~ A I've not only--I've actually served on^commitRes ° 9 C 20 Q What committees have you served on? T 21 A Primarily when I was at the University, we 22 considered those as Review Committees for, you know, requests 23 for grants when they would come in. 24 Q The Department of Health, Education and Welfare? t.n r 25 N A In those days it must have been; it was probably m ~ .~ ~ r m .9'andetv<;rlict~iev 9G J/dJa~ia~ee- 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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34 1 Q You guys have spent hundreds of millions of dollars; 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 haven't you? A Yes, but not on a Framingham Study. Q Well, that's why I asked; I don't know. A The only point I'm trying to make is there are benefits as well as perceived risks. Q Are you aware of the fact that most people when they start smoking or least people suggest that most people when they start smoking are under twenty-one? A I don't know any statistics in that area at all. Q Would you like to see some? I've got some with me. A What would be the purpose? Q Are you really suggesting you're not aware of the fact that most people start smoking before they are age twenty-one? A If you are asking me, do I know that, then the answer is, I do not know that. Q Are you familiar with the fact that people and agencies of the federal government have suggested that people start--most people start smoking before they're twenty-one? A I've never seen--I personally have never seen any data to that effect. I'm a data looker; I'm a scientist. Q Have you ever seen the Plaintiff's Exhibit No. 2. Doctor? MR. McDERMOTT: Have you ever seen that before 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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40 1 way. 2 Q Do you mean you just can't deal with hypotheticals 3 or you can't deal with abstract reasoning? 4 MR. McDERMOTT: He's not--this flies in the face 5 of his own experience. 6 MR. COOK: Oh, hell, I can ask him to assume facts 7 that are different than wh at he believes to be true and B for him to act like he can 't assume, that is not candid. 9 THE WITNESS: Can I d o that in a different context? 10 I really want to answer yo ur questions. 11 d b o. et you MR. COOK: I 12 THE WITNESS: Yes, would you say that again? 13 MR. COOK: Sure. 14 15 Q (By Mr. Cook) I want you to assume just for a 16 minut e-- A The tone of your voice was that you don't believe 17 that; I do want to answer your questions. 18 19 Q Yes-- 20 A But I want to be sure that I understand your quest ions . 21 Q Okay, my question is very easy, and I'll restate it 22 for y ou, sir. 23 A I understand your question but let me answer it in a 24 25 diffe rent con text. MR. McDERMOTTr Let him answer the question please. ~ .aiuli2d&* eevF~.t'/JJOCin/c,1' ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I'm asking him to assume something that he doesn't believe to be correct. MR. McDERMOTT: I'm not sure he can do that. Do you understand the question, Dr. DiMarco? THE WITNESSs Well, again I'm having some trouble with it. Q (By Mr. Cook) What I would like for you to do is to assume that Dr. Koop, the Surgeon General of the United States, in his report is correct; can't you do that? You just can't assume he's correct? A Do you know how these reports are put together? Q I'm asking you a question, sir, and I don't really care how it's put together-- A I'm saying this because you're implying the Surgeon General writes those reports, and he doesn't. He's a good baby doctor; he's an excellent baby doctor. Q Rather than doing that, sir, would you indulge me for a moment and assume that the Surgeon General's Reports made by the Surgeon General and published under his name says that cigarette smoking is addictive; would you assume that that hypothetical set of facts which I know you think are wrong is true, that they are addictive? A It's difficult. Q Is that really hard for you, sir? A Yes, really, honestly, it is; I've never lived that .~/'awl..vxa.eP,V &'',r1uaPlalP~' 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q You don't agree with his conclusions; do you? A I don't agree with all of his conclusions. Q You don't agree with his conclusion that smoking cigarettes causes addiction? A As he's defined it, no, I do not. Q But you don't think--and that's the whole purpose of my question--you don't think that Dr. Koop I believe would have been the Surgeon General at that time, that he did this out of any malice or smallness; you do believe that he thinks that-- A Oh, sure, sure--oh, absolutely. Q If you believed that cigarette smoking was addictive, what would you do? A First of all that's conjectural. Q Pardon? A First of all that's conjectural. I happen to be a smoker, a very heavy smoker. If I left for vacation tomorrow for a month, I would not smoke a cigarette unless I was playing bridge. I love to win and under pressure. I'd smoke. Now if cigarettes were addictive, I just couldn't do that. Q But if cigarettes were addictive, would you continue to work for RJRT? MR. McDERMOTTr You're asking him to assume something that is not true. MR. COOKi Sure, I'm asking him to assume something; c ~ N T ~ .aaderv.I& thev 4F.A/.ucr~ale,,- \ \ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694 J r N w
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ~~ 33 ,r revjewfd jour.,al. ~ Just this week by the way there was an article published by Professor Seltzer. I'm not a good name rememberer but because I just saw it this week-- Q Maybe you should smoke more. A --at Harvard University that says that probably the longest and largest heart study ever conducted, a Framingham Study, shows that women who smoke have less angina and, therefore--and that's by the way the major cause of heart disease--and also implicates arteriolosclerosis by 30 to 40 percent and the more they smoke by the way, the less problem they have and the whole idea of the article was that this Framingham Study is the largest and the best and that people don't have that understanding, and he clearly says in the review that I saw of the article that we ought to let people know that. Q Is there any chance that his studies could have been sponsored by the Council for Tobacco Research? A There might be a chance, but he--it's not his study; he was quoting the Framingham Study which as I said is the largest study of its kind in the world. Q I was saying about the Framingham Study; was that sponsored by the Council for Tobacco Research? A Oh, good gravy, no, the Framingham Study costs hundred of millions of dollars; it's the longest, largest prospective study ever run. JU/H<M~JflN~P•V ~'~.F/JJl~['l!lIF.V ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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V2 1 MR. McDERMOTTi We will take that as a withdrawal. 2 MR. COOKr You can take it for anything that you 3 would like. I think it's very intelligent fo r you to 4 assume that. 5 Q (By Mr. Cook) Dr. DiMarco, I want you t o assume, 6 sir, that cigarette smoking within your definition of smoking 7 cigarettes was addictive just for a minute or two; could you 8 th d t? h umor me an assume a 9 A Yes, I could if I understood it--within my 10 defin ition? 11 Q Sure. 12 A Which would make caffeine addictive, running 13 addic tive, yes, I'll make that assumption. 14 Q I didn't ask you anything about running, sir, or 15 ff -- i ca e ne so 16 A But that's--I'm just trying to-- 17 Q You've already said what your definition is so we 18 can g o back to that. Now if cigarette smoking was addictive, 19 would you continue to work for the Reynolds Tobacco Company? 20 A Under my definition? 21 s Y . Q e 22 A Absolutely. 23 Q If cigarette smoking caused lung cancer, would you 24 conti nue to work for the Reynolds Tobacco Company? Ln r 25 N MR. McDERMOTTr You're asking him to assume that m ~ N r r J / .'w/tlstv.f[(NfieV i<F.pil,luin~r! 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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36 1 2 3 4 5 6 7 B 9 10 11 12 13 I 14 15 16 17 18 19 20 21 22 23 24 25 called something else though because Health, Eduqation and Welfare I think is a new name for the agonc y. Q I'll find it for you, but you're familiar I believe that you've said before with reports by the Surgeon General of the United States that relate to smoking and the risks of disease to smokers; are you not? A I'm familiar with the Surgeon General Reports, vis-a-vis tobacco and health, yes. Q You understand the Surgeon General to be an employee of the United States Government? A Yes. Q Is there any reason why you can think of that the Surgeon General argues his department might want to--for want of a better term--issue propaganda against cigarette smoking with this negative inference that we've talked about before? A The word "propaganda" is throwing me. Q I think you and I kind of agreed that propaganda is a statement that contains--that has implied in it some type of falsity. A I believe you're asking me, but I want to be sure; is there any political science involved in the Surgeon General's pronouncements either publicly or in his reports? Q Yes, I'm trying to find out whether or not--as I understand it and perhaps I don't know enough about this but all the Surgeon Generals since 1964 have indicated that they 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it's a proven cause; is that your question? MR. COOK: My question is very clear and if you can't answer the question, that's not my problem. I don't have to make questions clear to you, Bob. MR. McDERMOTT: I want to understand, however, so I can do my job. MR. COOK: You may do your job as you see fit. Why don't you order him not to answer it? MR. McDERMOTT: I just want to understand what the question is; if you don't want to clarify the question, that's fine but would you read it back please? MR. COOK: Would you read the question back please? (The last question was read back by the Court Reporter.) THE WITNESS: If I understood your question correctly, you're saying for me to assume that it does-- assume that we know it does, would I continue to work for the Tobacco Company. That's the heart of why I am at the Tobacco Company. If we knew that cigarette smoke caused cancer, we would know how it caused cancer, and I'd be delighted to be with the Tobacco Company because we could then fix it; and people could have all the benefits and not worry about the risks, the perceived risks. Q (By Mr. Cook) Do you have any idea how much money the tobacco industry spends on advertising annually? \ ~a+uf.w Y~a,~ev & r9uarinle y / 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. McDERMOTTr Do you want him to read both paragraphs or just the first paragraph? MR. COOKs He can read both. MR. McDERMOTTr Just read it into the record. MR. COOK: No, he can read it to himself. THE WITNESSr I was going to add something to my last question but--"Teenagers appear to be turning"-- MR. COOKa You don't have to read it out loud; I just want you to read it. THE WITNESS: Oh, okay. MR. COOK: I just want to ask you some questions about it. THE WITNESS: (Reading paragraphs) MR. COOK: You've read those two paragraphs, sir? THE WITNESS: Yes, I've read them. Q (By Mr. Cook) The figures and numbers that are contained in there, are those surprising to you or are those in keeping with your experience as a human being? A First of all remember I read just that; I haven't read the documents so I don't know what context they're in. Q I understand. A And secondly, you've got to understand that when people put something like any of these paragraphs and tables in a document like this, they're not always--not always based on all facts, and I can give you an example of that that was ~~aulrz-.Tfr're`iev 8'sl.utrinle.v~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 41 MR. COOK: No, I'm going to ask the question and-- MR. McDERMOTT: But once you pose a question, he can answer it . MR. COOK: That's true, and I'm going to pose one right now. MR. McDERMO TT: Well, you've got one pending I b li e eve. MR. COOK: Well, if you don't mind, I'll ask a new one. MR. McDERMO TT: You're withdrawing t he question? MR. COOK: I'm asking a new question. MR. McDERMOTTr Are you withdrawing the question? MR. COOKr I am not answering questions for you. MR. McDERMOTT: I understand that. MR. COOK: All right-- MR. McDERMOTT: But I want to understand what's going on. MR. COOK: Are you going to continue to interrupt this deposition? MR. McDERMOTTr Excuse me just a moment. I want to--are you withdrawing--is this a new question, and you're withdrawing the previous question because if there's a previous question pending, Dr. DiMarco is going to answer it. Q (By Mr. Cook) Dr. DiMarco. I want you to assume-- / rn .vn .~ \ .'[uXli(b.f!!N/IBt~ ~.X/}JOttlt~P.Y J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A No. Q How much did they spend on research at RJRT? MR. BLIXT: Do you mean within the company? MR. COOK: Yes. MR. BLIXT: We11, I don't know what the status of the protective order is. MR. COOK: There isn't one. MR. BLIXT: Well, then the amount of money spent at Reynolds is a proprietary number. MR. COOK: Certify the question please. I take it you're advising him not to answer? MR. BLIXT: Yes. MR. COOK: Okay. Q (By Mr. Cook) What is your budget for your department? MR. BLIXT: Again that's the same-- THE WITNESS: That's the same. Q (By Mr. Cook) Those would be the same numbers; is that true? A Yes. Q What is your salary annually, sir? MR. McDERMOTT: Let me confer a moment. (Conference between Mr. McDermott and Mr. Blixt) THE WITNESS: $240,000.00 or $260,000.00, I don't really know. oO,u«~<ale.r J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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48 1 A I was a Captain in the Corps of Engineers. 2 Q In the A rmy, is that correct? 3 A A b h ranc . 4 Q Well, br anch wou ld be Navy, Army. Marine Corps or 5 th e? Ai F e r orc 6 A Yes, it would be the Army. 7 Q Your com bat arms would have been the Corps of 8 Engineers; is that true? That's how the Army would say it ; is 9 that right? 10 A I have n o idea. 11 Q You have no idea. When were you in the Army? 12 A Oh, boy, either in '58 or '59-- 13 Q The firs t sentence-- 14 A b h --or ot . 15 Q The firs t sentence of Plaintiff's Exhibit No. 2 16 " says Teenagers appear to be turning away from cigarettes , . 17 In t he years between 1976 and 1981, the percentage of high 18 scho ol seniors who smoke every day declined from 29 percent to 19 20 p ercent." Now do you have a problem with that; do you 20 thin k that-- 21 A I don't-- 22 MR. McDERMOTT: I object to the form of the 23 question. I don't think there's any foundation that this 24 witness is familiar with that, and he doesn't have any 25 Ln familiarity with the underlying studies or statistics; F. N a) v N h+ N W 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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45 1 Q (By Mr. Cook) What type of stock option plan do you 2 have, sir? 3 A I have only one which is the original one given to 4 all officers of the corporation where you didn't really get 5 stock as I understood it. Again I told you I'm very vague in 6 this area, but you get some kind of a certificate that says if 7 you buy--if you commit some dollars for buying stock when they 8 had stock if they didn't have stock, you would get so many 9 options for it. 10 Do you have a bonus plan; do you have an annual Q 11 bonus at Reynolds Tobacco Company? 12 A Yes, I do. 13 Q What did that amount to last year? 14 A My wife can answer that better than I could. 15 Q We'll get her right in here; I may have to subpoena 16 her. Is she Italian too? 17 ' s pretty. A No, she's Ukrainian, but she 18 Q I bet she is. You're Italian; why wouldn't she be 19 pretty? 20 A I'm guessing it's over $100,000.00. 21 Q The document that I've marked Deposition Exhibit 22 No. 2; would you refer to page 6 of that document with me, 23 " Smoking, Tobacco sir? That's the document that's entitled, 24 and Health--A Fact Book." Could you read the paragraph on u ~ 25 teenagers and smoking? ~ \ J[!fil~1(I J[U1~CV ~ JVIdO(ia~e.Y J N m 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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56 1 only time that you would be allowed on the record to 2 raise any objection is except to form at any time. Do 3 you recall the question? 4 THE WITNESSs I thin k I do. 5 MR. COOK: Good. 6 MR. McDERMOTT: Then answer it. 7 THE WITNESSz You're asking me--just to be sure-- 8 whose duty I think it is-- 9 MR. COOKs No, I really want you to know what 10 Mr. Boyle thinks. I don't know how else you could answer 11 a question like that other than-- 12 13 THE WITNESSi You fellows speak d a language that I really am not use to-- 14 Q (By Mr. Cook) The question was , who do you think 15 has the responsibility to teach kids? Here's how we get here 16 just so that you have a context which you like tha t. You say 17 ' re that I asked you, should children be aware before they 18 eighteen years old, and they make this decision that these 19 things exist, and you told me--rather than answering my 20 question--you said that you believe they already are and 21 that's fine for you to believe that. I would prefer that you 22 had answered my question but that's okay. And then I said. 23 "Who do you think has the responsibility of imparting this 24 information to them?" And that's really just my question. I 25 assume you're going to say their parents, and we've been all C.~R~ulna~e~a~ ~ R131oria~eY J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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k Tl 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in a document like this that the Surgeon General had his name on. Q Is there any problem with your answering my question, sir? A I'm trying to put it in context. Q I don't want it particular In context; I want you to tell me whether or not these meet with your experience with respect to teenagers and smoking or whether or not you're surprised by them? A As it turns out I don't know what they mean because they're out of context, and I've already told you that, you know. I really--I was President of my high school class; and I can't tell you whether I smoked or not when I was in high school. Q That is true. Do you know that teenagers smoke? A I know some teenagers smoke. Q Do you have children? A Oh, yes. Q Did they smoke when they were kids? A I don't remember any of them smoking but my children were--I just don't remember any of them smoking when they were children. Q Were you in the service? A For a short period of time. Q Which branch? 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q If 20 percent of the high school seniors smoke now or smoked in 1981 when you came to-- A 1982. Q In 1981 and in 1982 you came--1981--if 20 percent of the high school seniors smoked, is that too many or you don't have any--you don't have any objection if they're eighteen? A I don't have any objection if they're eighteen and old enough, yes, to make that^decision for themselves; I don't 49 ~e think people under thatrshou d smoke. Q why? A And neither does the company because they're just not old enough to make that decision. Q Make what decision? A The decision to smoke, vis-a-vis not smoke, the drink dnti le- (1 decision to vis-a-vis not d+i-4Le. ~Yp Q Do you know what year the company made that decision? A What decision? Q The decision that people under eighteen should not smoke. A We've had that as a policy matter published on it since I joined the company; it could have been forever before I joined the company, but I don't know. Q You think it's an appropriate policy? A Oh, yes. .SOaieds[v.7~a~~rev PG.P/JJtrtale.t- ~ / 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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54 1 he'll tell you that when-- 2 MR. McDERMOTTs I'm not. 3 THE WITNESSs See, this is all new to me. 4 MR. COOKs It isn't new to us. 5 THE WITNESSs It gets a bit confusing. 6 MR. McDERMOTTs Don't speculate about legal duties 7 and legal obligations but beyond that you can answer the 8 question. 9 MR. COOK: I object to you instructing him about 10 what is speculative, what is not, what his knowledge 11 might be with respect to legal duties. You can't say 12 and instruct your witness that he can't comment on a 13 legal duty. He's a person and whatever his wealth of 14 knowledge is is what his wealth of knowledge is and there 15 are many legal duties he may be aware of, and I object to 16 you instructing him. 17 MR. McDERMOTTi I instructed him not to speculate 18 about legal duties. 19 MR. COOK: And I will tell you that if you do that 20 ' again, it re not will terminate the deposition; and you 21 ' going to be pleased re not allowe about it. You d to 22 instruct him not to speculate. 23 MR. McDERMOTT; I believe I am. 24 MR. COOKi Okay, then, we'll just test that ; you do 25 that next time, and we'll see if he wants to com e to 9'a.ulur.TGcr~iev 9G r2uncrale.y 501 Shepherd Street Winston-Salem, N.C. 27103 Phone:(919) 768-3694
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49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and you can't authenticate this information through a witness that hasn't seen this before and just doesn't know. Q (By Mr. Cook) Do you have any problem with that-- with those numbers; do you think they're too high or too low? A Again, they're just out of context for me. Q Okay, now-- A Remember I read papers all the time; that's my job. I read them cover to cover three times before I learn something from them. Q If, in fact, this information is true which I don't know whether it's true or not; all I'm doing is just reading it right along with you. If it's true that in 1976 29 percent of the high school seniors smoked every day, is that much higher than you would have thought from your experience or much lower? A I just have no way to put that in context--high or low or-- Q Twenty-nine is almost three out of ten-- A Yes. Q --of people--29 percent, right? A Yes. Q So if I understand your answer then, you have no argument with that; you just don't know whether it's true or false? It doesn't appear to be too high to you and it doesn't! S7a.u(ntvv JPa.frev &' tluca ~ ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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52 1 Q Do you think that high school seniors should be told 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that smoking and people younger than the senior age should be told that smoking may cause cancer? A I don't think they have to be told that at all-- Q I didn't ask you if they have to be; I said, "Do you think they should be?" A Kids that age already know that; I think they should be told that it is a decision they shouldn't make until they are eighteen. Q Should they be told at whatever time prior to their making the decision that some people are of the opinion that smoking causes cancer? A Again I don't think you have to tell them. Q I didn't ask you if you have to tell them, sir; I'm asking should they be told? A I'm telling you I believe they know that. Q But do you agree that it is appropriate that they have that information? A Absolutely. Q Who do you think has the responsibility to give children the information that there may be a relationship between smoking and cancer? MR. McDERMOTT: I object to the form of the question to the extent you're asking this witness to talk about legal duties and legal obligations; he's not a lawyer. ~ So~.~d.a~.~ss~rev?7s9aursalev ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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53 1 If you're asking for his personal views and his personal 2 reactions, he may answer. 3 THE WITNESS: Well, again you're asking my 4 personal-- 5 Q (By Mr. Cook) How can I ask you anybody else's 6 ? h h an yours opinion ot er t 7 MR. McDERMOTTs But he's not addressing legal 8 duties I take it? 9 MR. COOK: I don't know whether he's addressing 10 legal duties or not ; all I'm doing is asking him a 11 question and if you have an objection, make it. 12 MR. McDERMOTT: I believe I did make it. 13 MR. COOK: Okay, now can you an swer my question? 14 MR. McDERMOTT: Answer. 15 THE WITNESS: Now I've got to k now the question 16 17 again. Q (By Mr. Cook) Who do you think has the 18 responsibility to notify children during their tender years or 19 during their minority that there exists a relationship or some 20 21 people think there ex ists a relationship between smoking and 22 cancer? MR. McDERMO TT: I object to the form of the 23 question again to the extent it calls for anything which 24 relates to legal duties and legal obligations. 25 MR. COOK: He's not instructing you not to answer; \ J[lIJ(!HI Jl(11~I1EV QG ePJOJOf'.!!l~P.Y 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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50 1 appear to be too low to you? 2 A I have no way to put it into context; I haven't been 3 on a high school campus for so long that it's--give away my 4 age. 5 Q Well, let me ask you; do you think there's something 6 wrong if three out o f every ten high school students smoked 7 B every day in 1976; i s there something wrong with that or is that okay? 9 A If they we re under eighteen, there would be 10 something wrong with it; if they're over eighteen, old enough 11 to make that decision for themselves. I wouldn't have a 12 problem with it at all. 13 Is Q it your experience that most high school seniors 14 are over or under eighteen? 15 A They tell me the kids stay in school a lot longer 16 these days but as I told you, I haven't been on a high school 17 campus for many, many years. 18 Q Well, it's kind of easy to figure up; isn't it, sir? 19 Eighteen is normally where people--the age that people are 20 obtaining as they graduate from high school? 21 A No, no, no, as I said--I prefaced that by saying 22 that people do stay in school, both high school, grammar 23 school through high school and college much, much longer than 24 they've ever stayed before but what that number is I really 25 don't know. a~n i She^y;ierAi.C.tr.°.et Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Belleville or not. THE WITNESSc Why do I get caught in the middle of this? MR. COOK: You just do; it goes with the territory-- with the $240,000.00-- THE WITNESS: Let me put that in perspective by the way just so you know on the record. As a person who runs the kind of organization that I run, the size and its complexity, that's being underpaid. MR. COOK, Oh, I think so too. Smith makes $2.3-- because frankly, I don't know how you get along with that. Do you recall the question? THE WITNESS: No, would you repeat it? MR. COOK: And don't speculate and all these other things. I'm just asking you and not you as a lawyer but you as a human being and whatever else you are, whose responsibility is it to teach children, to tell them, during their minority that this problem may exist? MR. McDERMOTT: I've got to object to the form of the question to the extent it calls for speculation about legal duties. If you can answer you may answer. MR. COOK: I might point out to you that under Illinois Rules is that all of your objections are reserved except to the form of the question, and I will agree with you so you don't have to argue. The \ .~a.uLus.;~ev 964urtalew 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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58 1 and warnings that the Surgeon General has put out? 2 A I know that those reports would not have an effect 3 on me simply because like I say the general awareness was 4 since th I was-- ere 5 Q Would you agree that probably you're a little 6 smarter than the "average Joe"? 7 A Oh, I've been called worse than the "average Joe." 8 Q Do y ou think that yo u probably are more highly 9 educated and r ead more than th e aver age citizen I assume? 10 A I mi ght assume that, yes. 11 Q Do y ou know that there is a statistical relationship 12 between smoking and education; are you aware of that? 13 h h i ' A at t ere T s a--I m sorry? 14 Q Yes, the people who are more highly educated 15 statistically smoke less than people who have less education; 16 f t h t? are you aware o a 17 A I think I've seen some statistics on that. 18 Q Do you find those interesting at all; you're not 19 interested i n statistics, are yo u? 20 21 A Oh , I love statistics. Q Yo u do? 22 23 A I just want them used right. Q We ll, what would that statistic suggest to you if 24 people with sixteen years of education plus smoked much less 25 than people with less than a high school education? I have 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 both by the way--less than a high school education and more than sixteen. A Since when can you get a legal degree-- Q I did something strange but it's all right. A You're sure? Q Yes. A Now let me see if I can get you to repeat that question. Q Sure, I was asking you--I've seen some statistics and as a matter of fact in this document that's in front of you and if you'll refer to page 6, the same page that you're on, you can see that on male smokers, that at least this document says that 38 percent of the males who have eleven or fewer years of education smoke whereas sixteen plus years of education, only 18 percent. That's less than half. And I was just wondering with you as a man who is interested in statistics and a scientist, what significance you draw from that? A Just what it says; the numbers are--again I'm looking at a table and what I love to do is take a document, read it three times-- Q Well, read it three times. A It might take me awhile. Q Look at it; we've got plenty of time. A So that I can put it into context because I have no ~ .~andu~.;~a~eerQG.R'/aiaialel\ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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61 t 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 school education? A Especially when it comes to economics--they live a totally different--they have to--a struggle. Q You don't think it has anything to do with their ability to appreciate the risks that are posed by cigarettes? A It's not very complicated. They're told over and over again that cigarettes are bad for you; why is that complicated? Q How long have they been told that? A Well, you know, we just decided their parents started telling them that sometime ago. Q The cigarette industry has routinely demeaned the warnings with respect to the relationship between cigarette smoking and disease; have they not? A I don't know that they have. Q Have you ever read anything where they criticized the American Cancer Society? That's why I asked you to define the word "propaganda" for me because that's what the President, the fellow with the "K"--I forgot his name--of the Tobacco Institute called the American Cancer Society's "No Smoking Day"; it was "propaganda." That's why I asked you that. MR. McDERMOTT: Is there a question pending? Q (By Mr. Cook) Isn't that your experience, sir, that the cigarette industry including several presidents of your C.y'a.ra/ntv.ii.rev P~'.d/s+orirslsr~ J 501 Shepherd Street Winston-Salem, N.C. 27103 Phone:(919)766-3694
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57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 through this. A I was going to answer that my parents were the ones who informed me, yes. Q And you think generally that--I assume--that with respect to smoking as opposed to drinking and driving when you're drunk and wearing your seat belts that generally, that's the responsibility of people's parents to teach them that? A I ran on that platform for many years when I was President of the Board of Education. Q Now with respect to cigarette smoking and its use, are you aware of the fact that the use of cigarettes--that the number of cigarette smokers has declined in the last--since 1964? A I was not aware that it had declined since 1964, but I am aware that the use of cigarettes is declining in the United States today. Q Do you think that that has anything to do with the warnings that the Surgeon General has mandated be placed on cigarettes? A My personal feeling is that it has to do with a lot of things to include the risks associated with smoking, the cost of smoking, the fact that they can't smoke everyplace today that they'd like to smoke. Q Do you think it has anything to do with the reports .~antlta~.~n'+~ev QL.1~IJCriale.V / 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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62 1 own corporation have been highly critical of the Surgeon 2 General's Reports, of reports by the American Cancer Society 3 trying to discourage people from smoking; you don't know that? 4 A Since I've been under-- 5 Q You don't think that they've criticized--that your 6 company has not criticized the American Cancer Society since 7 1982? 8 A I surely can't recall--the American Cancer Society? 9 Q Yes. 10 A I can't recall it's ever criticized--I was not 11 involved in it. 12 Q Do you think that the American Cancer Society is an 13 organization whose goals and information with respect to 14 smoking should be demeaned or criticized by the cigarette 15 industry? 16 A I would not criticize them. 17 Q That, of course, is not what I asked you. 18 A No. 19 Q I asked you, should they be criticized; you might 20 just be nice and not want to say something like that. 21 A It's according to what they said. 22 Q Well, they say that cigarette smoking causes cancer; 23 do you think they should be criticized for that? 24 A I think if the industry is going to respond, they ~ 25 ought to say what they think of whatever the situation might N m 501 Shepherd Street Winston-Salem, N.C. 27103 Phone~ (919) 768-3694
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63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1s 19 20 21 22 23 24 25 be--put it in that context--and then they can say what they want. Q How many organizations are you aware of either public bodies or not for profit organizations that suggest there's a relationship between smoking and cancer? A Suggest there's a relationship--oh, gee--many including--if I understood your question right--the industry itself. Q You think the industry itself suggests there's a relationship between smoking and cancer? A That there is--that smoking based on the statistics is a risk factor, yes. Q What does that mean to you--a risk factor? A That simply says, since we don't know, we have run as an industry and actually more than an industry--many, many organizations outside the industry, hundreds--and have spent millions of dollars trying to show that cigarette smoke causes mo'Sf qpproPr,eck f rst cancer and the aa}y-Syatetx theAnow how to run is animal systems and through inhalation, and they've never been able to do it. Now as I said to you before, if it were to be proved that it does, we would know the mechanism; and you'd be able to sit here and tell me what it is, and I'd be able to sit back here and say, "Gee, relax, tomorrow I'll fix it." Q What are the risk factors that you were discussing that are posed by cigarette smoking? rJa.ul.m 2Pa.~e.,• 4" s/aurialer ~ 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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65 10 11 12 13 14 15 1s 17 18 19 20 21 22 23 24 25 Q I understand that. I understand all that, but I'm asking you about the risk factors. Would you agree that 87 percent of the people who contract lung cancer are smokers? A I don't know whether that number is the right number or not. Q Does it sound to you like it's in the ballpark? A It sounds very high to me but let's assume that's the right number and-- Q You can't assume anythinY. A We11, you're asking me to aesume. Look at the other risk factors which are known to include living with a bird-- living with a bird by the way is very large factor for lung canceYAr@~pdon, exercise, how many fruits and vegetables he eats, beta~carotene. Q That's all very interesting. How long has your industry been aware of the fact of the relationship between cigarette smoking and lung cancer? A I don't know that they've ever--"fact"--that bothers mei if you're asking me how long has my company said or believed that cigarettes are a risk factor, since I joined the company for sure and probably long before that. Q You don't have any information--if they knew before that, do you think that they had an obligation to tell the general public of that? MR. MCDERMOTT, I again object to the forw of the $01 ShepMrd Street Winston-Selem, N.C.27103 Phcne. (910) 768,9s94
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69 1 that relationship? 2 A It's the word "ahould" I gaeas that bothers me. 3 Q "Should" is a mandatory word. I realize they might 4 have but what I'm trying to understand or trying to get from 5 you is whether or not if the cigarette companies beoome aware 6 of t he fact that there may be a hasard with their product, 7 shou ld they tell the pubtic at large about the hazard? e MR. McDERHOTT, I object to the form of the question 9 to the extent it calls for legal conclusioni if you are 10 asking for his personal viewa. I have no objection to 11 him giv ing those. t2 TH E WITNESSr My personal view? t3 lfR . CooKr Any view you would likei you can give me 14 Bob's i f you'd like. 15 THE WITNESSr Well, my personal view would be if the 16 tobacco industry at that time thought tha t they weren't 17 aware, yes, they should have. 18 Q (By Mr. Cook) Should the tobac co in dustry at that 19 20 time out? have attacked the people who wanted to pu t this knowledge 21 A Gee, I have no way-- 22 Q It wouldn't be appropriatel would it ? 23 ' A I don t know. 24 Q Well, do you think it would have beens for example, 25 do yo u thi nk that the tobacco industry has agreed to and 501 Shepherd Straet Winston-Salem, N.C, 27143 Phone: (919) 7883W
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66 t question to the extent it calls for speculation 2 testimony about legal obligations but if you have a 3 nal view-- perso 4 THE WITttESSs While you guys are doing that. I just 5 want to step down the hall and take a little walk. 6 MR. COOK, Off the record. 7 (Break taken from 30 0 p.m. until 3140 p.m.) 8 MR. COOKr Back on th e record. 9 Q (By Mr. Cook) Dr. Di Marco, to your knowledge how 10 long has there be en a pu blic aw areness of a statistical 11 relationship betw een cig arette smoking and lung cancer? 12 A A statistical relatio nship, that's your question? I 13 14 Q Yes. A I'm just trying to th ink of the date when the 1s ' iority ma of the statistics were published) I'm assuming s it I , 16 somewhere around the late 'Ses. 17 Q Whenever the Council for Tobacco Research was 18 organized, that was in the same period of time that these 19 statistics were collated and ma de publiet is that true? 20 A I don't know that for a fact. 21 22 Q That would seem reasonable? 23 A It would seem, Q When the tobacco industry became aware of the 24 statistical relationship between smoking and cancer, do you ?6 think that the tobacco industry should have told the public of 501 8hepherd Street Wlnston-Balem, N.C. 27103 ptwne: (919) 768-3694
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s4 A If you will read the statistics and that's what 8,ah 1P i~ & Ntk. Fa61or Iror statistica are for by the way, you'd say !un t4nce,rj e,1,PlyfWia, Rlant dielafe, 4 5 6 7 a 9 to 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q What is the risk factor for a person who smokes as opposed to a nonsmoker with respect to contacting or having to experience lung cancer? A I don't understand the question. Q How many people are going to get lung who smoke as opposed to people who will get lung cancer who don't emoket do you know how big ehe ciek is4 A The risk relative to the statistics? You know, I've got to tell you a story so that you will understand something about etatistics. Would you sit still for it? Q I don't know how I'm going to avoid it. A When I was a graduate student, there was a professor--and a plant pathologist by the way--professor in the department who published a paper that said in effect that a perfect correlation--perfect statistical correlation--was a peach yellow virus and polio; it couldn't have been any better--really couldn't. The timing was right, the exposure was rightt everything was right about it, and he published it. And do you know where is today? He's a,ianitor. I learned a lesson I have never forgotten. 6tatisticaAtnon~include epidemiologyqcannot be causal; they don't pfove cause. But they do tell;vu, start looking, and we do look. 501 Shepherd Street Wineton•Satem, N,C,27103 Phone: (919) 768-3604
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68 1 2 3 4 6 10 11 12 13 14 15 16 17 18 19 0 21 22 23 24 25 wanted to place the warnings on cigarettes that were mandated whenever they were--in 1964 or-- A I have no idea. Q Do you think those warnings are appropriate; do you think they're a good idea? A I think the wording of the warnings is probably inappropriate, but I do think that the warnings are appropriate, yeat they're a matter of law, and they're appropriate. Q If they weren't lew, would you think that some warning like that is appropriate? A well, my personal view--personal view now--is that we wern people--we should not warn people of thinge they already know. I used this example before. You could warn people that knives can cut you but should you7 Wall, no, because you trivialize warnings. Q But things that not everybody knows, warnings are importanti aren't they? A If there is not universal knowledge, that's right but again for as long as I can remember, I think people have known. Q Universally? A Everybody that I've ever had any contact with. Q I want to read to you from page 22 of the Surgeon aeneral's Report of 1989 which was marked Deposition Exhibit 501 Shepherd Street Winaton•Selem, N,C.27103 Phone; (9101788.9894
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69 1 No. 1 in our previous depositions. This corresponded with the 2 the one that I've shown you. I'm going to read fr om page 22 3 and it says. "Trenda and public beliefs, attitudes and 4 opinions about smoking--in the 1950s 40 to 50 perc ent of 5 adults believed that cigarette smoking is a cause of lung 6 cancer. By 1986 this proportion had increased to 92 percent 7 including 85 percent of current sraokers." That's contrary to 8 what you thought would have existed in the 1950sl is that 9 ? true 10 11 A It ia contrary to what I thought, b l but I don't know 12 whether I ieve that either. e 13 Q I know that you don't necessarily believe it. Have you done any studies yourself or are you aware of any studies 14 that have been done to determine what public knowledge wae in 16 the 'S8s and early '68s with respect to cigarette smoking? 16 A I h t d t di 17 ave no one any s u es. 18 Q You don't have any reason to tak e issue with the 19 Surgeon General's Report in that regard if I read it tl ? 20 correc y A I do have reason to take issue. I know a that the 21 people that write some of those documenta have^ pQ¢'~tical ` 22 agenda. I have personal experience with that . 23 Q So you believe then that more than half of the 24 25 people in the 1952s thought there was a relationship with lung cancer and-- 601 Shepherd Street I Wlneton-Salern, NA. 27103 Ahone: (979) 769-0694
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70 1 A No, I didn't say that ( what I said ie hat some of 2 the people that write for that document haveilpolitical agenda. 3 Q Well, let me ask you the question--do you believe 4 that during the 19SGJs that more than half of the public at 6 large was aware of the fact that there was a statistical 6 relationship between lung cance r and cigarett e smoking? 7 A I have no way to make that judgment other than my 8 own personal experience; I con tell you my ow n personal 9 experience and everybody that I knew was swar e of it. I 10 didn't do any studies. 11 Q Sow far did your wife go in school, sir? 12 A She went through high school. 13 $d Q A She doesn't No, she does have a college degree? not have a college deg ree, 15 Q Does she have any college time? 16 A No, she does not have any college t ime. 17 Q Does ahe have that type of intellig ence that Mario 18 CuoMe'• 19 d ? mother has that has not been corrupt ed by formal 20 e ucetion A She's smarter than I am if that's your question. 21 Q That's what Mario says about his mom . 22 A And that's the truth by the way. 23 Q I know it's the truth. 24 A But anybody--I mean, I've been in public education 26 for years or in education for years and anybod y that be lieves 501 Shepherd StreoL Winston•Saiem, N.C. 27103 Ahone: (919) 788-3894
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72 3 9 10 11 12 13 14 16 16 17 me. Mr. cook. I'll let you answer the question if you understand it, but we're getting pretty far afieldt aren't we? MR. COOKi No, we're working on a point. MR. MoDBRNOTT, I meea-- Q (By Mr. Cook) Radiation is something that you can't necessarily see, right? A Precisely. Q And so if there is a radiation hazard present, there is a particular type of warning decal that is plaoedt you've seen the yellow with the black fans on it, haven't you? Do you think that would be appropriate if there was a radiation hazard present? A Let me put that in my context: yea, if I were being exposed to radiation and didn't know it, yes, I'd like to be warned. Q And there are certain types of--well, let me use a good example that you're probably--are you familiar with the use of natural gas; do they use natural gas around here to heat hones? A I'm sure some homes do. Q Are you aware of the fact that they put odorant in natural gas because normally people can't smell it and if you have a leak in your house, they have this foul smell that is supposed to notify your olfactory nerve that you have a leek? 601 Shepherd Street Winston-Salem, N.C. 27103 Phone, (e16) 7aa-3eD4
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75 1 you aware of the fact that some people suggest that they are 2 unable to quit smoking? 3 A Yea, I am. 4 Q Are you aware of the fact that most of the people 5 who smoke wish they didn't? 6 A No, I'm not. 7 Q You've never seen anythin g written of that nature? 8 A You said "most of the people.* 9 os id " Y I t " Q , es, sa m . 10 A No, I'm not aware of that at all. 11 Q Would you think-- 12 A And I'm around smokers all the tim e who just love to 13 smoke who could quit tomorrow, I could quit tomorrow. 14 Q Have you ever tried to quit? 15 A Uh-huh, I have. 16 Q For how long? 17 A One time I'm sure several years. 18 Q Do you ever do an y studies to determine how many 19 people wou ld like to quit a nd who say they are unable? 2D A I'm not aware of any; I'm not aware of anyone who A 'h 21 ~ tsa really wan ted to quit who #ada=i uit. Thirty-five million 22 people hav e already quit. 23 Q They've quit since 1964, haven't they, when the 24 Surgeon General put out his Report and warned them? 26 A I have no idea. 501 Shepherd Street Wingon•Saiem, N.0.27103 PhOhe: (019) 7685604
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79 you--not read you but told you something that Ijust read about--that I don't believe they know. Q What about the American Medical Associations are you familiar with their stand on cigarette smoking? A I know that their stand ie they like to see people stop smoking. Q A Q They think it causes cancert did you know that? Yes. But they're wrongt they really don't understand? 10 A I didn't sey they were wrongt I say that that is n primarily a political agenda. I personally by the way-- 12 listen to me--I personally have gone to th e American Hedical 13 Association with a group of acientiets, me t with their 14 acientists, showed them some of the things we're doing. 15 Assuming now I take the position--let's assume that the 16 ' statistics are right--that's a valid--assume that they re 17 right--and here's what we are doing with a cigarette under 18 " that assumption and their sci entists said, Gee, that's 19 wonderful." But when it got to their Boar d of Directors, they 20 would have nothing to do with it. 21 22 Q Do we have any reason to believe their statistica 23 are wrong? 24 A The statistics are wrong? 25 Q Yes. A I have no reason to believe that . 501 Shepherd Street WUnton-Selem, N.C, 27103 Phone: (910) 768-3604
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81 10 profit, nontobacco industry organization that thinks that cigarette smoking does not have a relationship with disease auch aa suggested by the Surgeon General? A "Does not have a relationahip," by that you mean is a risk factor? Q Do you know if perhaps the American Pharsaceutical Association, maybe they believe that cigarette smoking--have taken a public position that there's no relationship between cigarette smoking and cancer; do you know any body like that? A Not even our industry. Q How many bodies like the AMA--what about the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 American Dental Association-- A I said--I'm answering your questiont I said "not even our industry believes that." Q What about the American Dental Association's positiont have they taken-- A I have no idea. Q Aren't you familiar with their position on the use of smokeless tobacco and the cause of oral cancert you are familiar with that, aren't you? A Well, I thought we were talking about cigarettesl now ask your question, vis-a-vie. Q I'm talking about tobacco--periodically cigarettes-- I'm talking about organizations though. I'm trying to find out if you know of any of these which I would call public 501 t3hepherd Street Wlnaton-8alem, N.C. 27103 Phone: (910) 766•9694
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excise tax on cigarettea," What do you think about that statement•-horse manure9 have to stop cigarette smoking? A Just that. Q What is the political agenda that you think people you, much of what I read--what I have read or have had abstracted for me--are political statements. all aboutt it's out of context and as I've already said to A I'd have to read the whole thing and see what it's Q that I don't believe they have all the facts, and Ijuat read A They can have any political agenda they wantl I said in trying to stop people from smoking7 think that they think that--that they have a political agenda Q Whet about the American Heart Association, do you associated with cigarettes. goals because they really don't understand the benefits has made that one of their goalsi they have lots of other A I have a feeling that the American Cancer Society Q Is that a political agenda as far a you're concerned or ia that a health agenda? A They've made that part of their agenda I'm sure. stomp out smokinga did you know that? Society. I mean, the American Cancer Society really wants Why, I mean, that's why I asked you earlier about the bias of the Attorney General or the American Cancer 801 Shepherd Street WihetofFSalem, N.C.27t03 Phone:(CiA)78B•3s04
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76 1 Q If they started quitting in those numbers since the 2 Surgeon General's Report, would it be fair to assume that it 3 aay have something to do with the people quitting? 4 A I know that these studies--some tudies have been 5 run, and I think most of the quitting }~aeTT`associated more with e economics than anything else. You know, what you went to do 7 is loo k at the statieticsi every time we've added a tax to e I cigare tt es, the number of people who q uit 9 jump e ve ry tiee that etgarette prices go up especially when 10 dd you a tax. 11 Q Do you think that people pay aore taxes in real 12 dollars on cigarettes now than they did twenty-five or thirty 13 ? years ag o 14 ' A I haven't st udied it so I t knowt really don I would 15 assume s o though. 18 Q Why do you a ssume that? 17 A 6ecause re ce ntly we' ve had several large FET taxes. 18 Q Row thoroughly have you read the Surgeon General's 19 Reports? 20 A Not very thoroughly. 21 Q Let me read to you from page 27, "Economic 22 Incentives." This is just so that next time you answer this 23 you'll know. "Cigarette excise taxes are imposed by the 24 Federal Government 16 cents per pack--all State Governments 25 and nearly 400 cities and counties. On average Federal and 501 Shepherd Street Winston-Sa1em, N.C. 27103 Dhona: (01G) 768-38D4
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74 true, if half of the people didn't know and Dr. Aitterco is wrong--I assume that you acknowledge from time to tiae you're wrong? A Q All right, do you not acknowledge it often or you're (Joly.,gly); ~jY A Not often. b h f ot ? ten or not wrong o MR. McDERMOTT, Well, I object to the form of the question to this extentl I believe what you read said that 50 percent believed. It doesn't say "knowa"t it 10 says "believed." It doesn't talk about awareness at all. 11 Q (By Mr. Cook) I f 50 percent of the people aren't 12 aware or don't believe tha t cigarette smoking has a 13 stati stical relationship w ith cance r in the 1950a, would you 14 agree with me that at that point if that were true that the 15 cigar ette industry had an obligatio n so t hat they could make a 18 valid choice to smoke or n ot to tell theln that these facts 17 eXist 7 18 NR. McDERMOTT, I object to the forn of the 19 " " question to the exten t that it awareness is compounds 20 and "belief" are not the same, You may answer one or the 21 22 other or both. THE WITNEg3o I' 11 anewer both. If they were not 23 aware, 50 percent of the population, you know, I think 24 they do have an obligation but believe, no. 25 Q (By Mr. Cook) Now with respect to addiction, are 601 ghepherd Street Winoton-Sabm, N.C. 9710.3 phon0: (919) 76a.4091
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» State excise taxes add 34 cents per pack to the price of cigarettes." That's a lot of moneys isn't it? A Relative to what? Q "Cigarette excise tax rates have fallen since 1964 in real terms because the rate and magnitude of periodic tax increases have not kept pace with inflation"t did you know that? A 2 didn't know that but it doesn't change my answer 9 and my answer is every time we aea that--the best example was 10 that 16 cent tax--the number of people that quit fer exceeded 11 anything you would have guessed. 12 Q Do y ou think it would be good if m ore people quit? 13 A I ca n't make that statements I told you there's a 14 risk and there 's a benefit like lots of things we do in life i5 and as long as you're adult enough to make that decision, 16 17 that's a personal choice. Q Let me read you t he next paragraph because this 18 really agrees with you. 'S tudies demonstrate that increase 19 " ' in the s what you --thet price of cigarettes decrease smoking 20 " Do you know what just said--"particularly by adolescents. an 21 adolescent is7 22 A I'm assuming it's someone under eighteen. 23 Q "It has been estimated that an additional 100,000 or 24 more persons will live to age sixty-five as the result of the 25 Y price increases introduced by the 1983 doubling of the Federal, ~ I J 601 Shepherd Street winelorrsalem, N,c. 27103 Phone: (919) 768-9894
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84 1 Q Yea, sure did. Do you know anything about the 2 advertising code? 3 A I know there's a code, but I don't know anything 4 about it. 5 Q You don't have much to do with the marketing-- 6 A I have enough to do with research. 7 MR. COOKi Excuse me one minutet I'm going to look 8 for this thing on the pharmaceutical people. D Q (By Mr. Cook) Did you personally oppose further 10 restrictions on advertisement or further warninge--the 11 requirement of further warnings on cigarettes? 12 MR. McDERKOTTi That was a compound question. 13 MR. COOKi Yes, it was. 14 MR. McDERMOTT+ Take them one at a time. 15 THE WITNESSr Now he has to repeat it. 16 Q (By Mr. Cook) Do you have any problem with--let me 17 ask you this question. If the American Pharmaceutical 16 Aesociation'a Committee on Professional Affairs felt that the 19 display of tobacco products in drugstores was in direct 20 contradiction of the role of the pharmacy as a public health 21 facility, do you think that the American Pharmaceutical 22 Association should be criticized for adopting that position? 23 A Your question is, they took the position that-- 24 Q The display of tobacco products in drugstores is in 25 et direct contradiction to the role of a pharmacy as a public ~ 601 Shepherd Street Winstan•Selem, N,C.27103 Phone, (919) 76B-36QI
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spirited bodies like the--what about the American 8ar Aesociationt do you know if they've taken a position on it? A I have no idea. Q How many organisations are you familiar withi like the American Pharmaceutical Association, are you familiar with what their standing is on cigarettes and tobacco and health? A I don't know that the American Pharmaceutical Association would take a position. Q Did you know that they took a position banning the displays of cigarettes in drugatorest did you know that? A No, I did not. Q Why do you think they would take a position like A You see, if you're saying that these organizations believe, they have a right to believe. I'm simply saying that normally-- Q I'm Just asking you questions, air. A Yes, but I'm trying to answer your questions. Q I know. My question is, why do you think--if they did ban the display of cigarettes in drugstores, why do you think that they would do something like that? That's really the question I have asked youi we're not engaged in a debate here. A Yes, but I'm trying to put it in context. MR. McDERtdOTTi Answer the question the way you see 6o1 Shepherd Street WinelonSelem, N.C. 27103 Phone; (®1B) 769•3B®4
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73 A Olfactory nerve, yes, I know that. MR. COOKr I don't know what the hell I asked that for. MR. ltcDERHOTTr I think that was my point. Q (By Mr. Cook) If the tobacco industry knew that the 6 8 10 I 12 13 14 15 16 17 1S 19 20 21 22 23 24 25 causal relationship existed statistically or the risk factor or whatever you have described it between smoking and cancer in the 1950s--if the tobacco industry was aware of that and half of the adult population was not aware of that, do you personally think that the tobacco industry should have informed the public, its users, that the statistical relationship existed? A I find that question so full of conjecture that it's hard for me honestly to relate to it. My experience is that they were aware of it. Q I read it from a public document and it may or may not be true-- A I've already told you something about that. Q I understand that you've said that, and I nnderstand also, sir, that you've done no research on thias and I understand this is published by the United States Covernment and the facts in it may not be true, but they've said it and so I don't think it's asking too much to ask you to assume that these statistical evaluations may be true. I didn't say they were true because I don't know either but if they're 501 Shepherd Street Wineton-Safem, N.C. 27103 Phone:(919) 788-3894
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71 1 that the amount of education you have and how smart you are 2 are synonymous just don't know the facts. 3 Q Would you agree that most people in your 4 experience--most adults--in the 1958s knaw that edge tools 6 might cut them or knives, for example? 6 A Yes, I suspect they would know, yes. 7 Q That's the reason why--are you familiar with the 8 ANSI standard of warnings, the 8-29.11 you're not? 9 A No. 10 Q It ~ust says ehet warninz_s when appropriate can save 11 human he alth and lifei you agree with that, don't you? 12 A Yes, but I also agree--"when appropriate" is the key 13 wordt I also agree that we have a tendency to do too much 14 warning when it's not appropriate and, therefore, it makes 15 those that are appropriate inappropriate. 18 Q A warning that a knife might cut you is 17 inappropriate? 1s A It would seem to me it's general knowledge that you 19 don't have to warn people about; that's right. 20 Q A warning that there might be a radiation hazard 21 ' t it? present might be appropriatet isn 22 McDERMOTTe I object to the form of MR the . 23 question.' There 's really no foundation, and he's not an 24 expert on legal duties or when warning are approp ria te. 26 This is a pretty tangential line of inquiry it see ms to 1 601 8hepheM Street WinttonSaiem, N.C. 27103 Phon.: (91i) 76S-38a4
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85 . health facility? A I believe that's a misinformed position. Q Do you think that it would be appropriate for the tobacco industry, the Tobacco Institute, to criticize the American Pharmeceutical Association-- A That's out of my fieldt I simply said that I do believe that's a misinformed position. Q Do you think that they should be criticized for taking such a position? 10 A I haven't thought about it. tt 0 Think about it. 12 A I have to put it in some kind of contextt I don't-- 13 Q I don't anderstan dt you know, the word "context" 14 seems to be a nice word for~ you. 15 A It is for me beca use my whole lif e I depend on dats. 16 That's what I dot I do it d ay in and day ou t and when I don't, 17 I'm misled and so that's th e way I live. 1S W ll-- Q e 19 A You may be critic al of that, but I'm sorry. 20 Q Well, the America n pharmaceutical Association, you 21 can see why they would thin k drugstores should be a public 22 health faciiityt I mean, that's pretty easy to understand, 23 isn't it? 24 A Yea, they sell diapers and dirty books and lots of 25 vI other thinsst why would I assume so? It's a choice. r N J 501 Shepherd Sueel Wnaton-Selem. N.C. 27103 Phone: (819) 768S681
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83 t 2 10 11 12 13 14 16 18 17 58 19 20 21 22 23 24 25 fit and proper. Go ahead. THE WITNEBS: If that group believes, that's totally different fros having proof and that's the only thinQ we've said. If they had proof, I'd like to see it. Q (By Hr. Cook) Well, that, of course, is not what I asked you, eir. I want to you show you-- HR. MeDERMOTT, Let's Qo off the record for a moment. (Discussion off the record) HR. McDERMOTTi Back on the record. Q (By Mr. Cook) Just assume for a minute that the American Pharmaceutical Association promulgated a rule that cigarettes should not be displayed in druBatoresi why do you think that they would do something like that? If you don't know, that's fine. A I wouldn't have a clue. Q Do you think they should be criticised for coming up with a policy like that? baw A Only if it hadleffeC'tive, you know, a more global effect. I didn't even know it so it couldn't have had too much of an effect. Q Did you watch the Gary Moore Show? A I'm afraid not. Q You didn't? A Does he play football? 501 Shspherd Street Win9tM-Sttlem,l3.C. 27100 Phone: (919) 788•889d
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A I said that the document is misinformed, at least what I read in the document but whether the Surgeon General 311resd it or not, I have no idea. Q Now my question has nothing to do with their 5I infordationt my question has to do with whether or not the 6 position that they take is right or wrong. A Relative to4 Q Secondary effacta of cigarette smoking. A What is that position as you understand it? Q That people can be exposed to it and, in effect, have a health hatard. A I think that statement is wrongi I believe there's no data to support that. q Again so that I understand, do you think that the statement that I made characterizing the Surgeon General's Report is wrong? A Would you make that statement again? Q Right, my statement was, it's my understanding from reading the Surgeon General's Report is that secondary--is that they have arrived at an opinion that secondary cigarette emoke may cause--may be a health hazard to people who are exposed to it. Would you agree that that is one of the conclusions of the Surgeon General's Reports? HR. KcDERHOTTi Are you asking him to agree to your characterization of what the Surgeon General says or are 601 Shepherd Street VJinston-Salem, N,C. 27103 Prwna (ef8) 788-3e94
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8g 6 9 10 11 12 13 14 16 16 17 18 19 20 21 22 23 24 25 Q Your company did too, but you think that's appropriate? A I aaid, "r would object"1 I didn't know they had. Q They did. Do you know anything about the efforts that your company has taken to lobby and try to influence legislative bodies against further restriction on cigarettes? A Relative to environmental tobacco smoke, yes, I am aware. Q Did you have a public policy at R. J. Reynolds in that regard? A I don't know what you mean by "public policy." Q Well, I mean a company policy for internal-- A Our Job in research is to get the data, vis-a-vis environmental tobacco smoke, and that data says that it is no risk and, therefore, the company ia working with the EPA and OSHA with that data head to head. Q Trying to get them to agree that people should smoke more in the workplace or what or that there should be regulations? A All they're trying to do is to give them the facts, vis-a-vis the hazards, if any, of environmental tobacco smoke and our data says there aren't any. Q Do you disagree with the regulation of cigarette smoke on airlines? A Yes, I do. 6018hepherd Street Wlnnon-Salem, N,C. 27103 phone: (819) ?88•36fl4
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g9 1 Q I mean, when you asked them to assume that the 2 statistics are right, you believe they're right too; don't 3 ? you 4 A No, I don't believe they're rightt what I said by 5 the way is that it had not been proven. I didn't say they 6 were right or wrong. Statistics speak for themselves if 7 they're done right. Sometimes they're done right and 8 i th ' t somet nes ey re no . 9 Q Well, what I'm asking you now i not about the cause 10 of cancert I'm asking you about the statistics that are the 11 basis of the epidemiological studies that are the subject 12 matter of what we're talking about. Do you think those 13 statistics of the risk factors that you've discussed--do you 14 think they are erroneous? Nave you seen some that you think 15 I r are wrong? 16 A Yes, I think those statistica have concentrated 17 primarily on what they call a single cause and have just not-- t6 looking at all the confounding factors that could cause the 69 same diseases and when you do that, your statistics are in 20 error, and textbooks are full of that--pointing that out. 21 Q what about the American Academy of Obstetrics and 22 Gynecology; are you familiar with their position on cigarette 23 smoking and human health? 24 A No, I'm not. 25 Q Do you know of any public, charitable, not for 60i Shepherd Street Wirtlton-Stl9m, PLC. 27100 Phone: t8/9) 768-3894
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91 I you asking him about the underlying proposition? 2 MR. COOK, I'm trying to find out if he agrees with 3 my characterization of the reports otherwise-- 4 MR. McDERMOTTs That you state the proposition 5 correctly? 6 MR. COOKs Right, that the Surgeon General's Report 7 has come to a position that secondary cigarette amoke, B environmental saoke, poses a risk to people who are 9 exposed to it. I think that is one of the opinions of 10 11 12 13 14 15 16 17 16 10 20 21 22 23 24 25 the Surgeon Generals would you agree with that? THE TiITNESS, That it poses a risk, yes, I dot whether that's the exact wording I don't know. Q (By Mr. Cook) I'm trying to find out what you and I are talking about here. Then the next statement would be, in your opinion that conclusion is not only a misinformed conclusion or based on bad information but it is also wrong? A I'm saying I don't know of any data that makes it right end whatever you interpret that to mean is fine. Q But you do know of date that makes it wrong? A No, I don't. Q Oh, I thought that you said that you were--then I misunderstood you entirely. I thought that you had worked with OSHA on environmental cigarette smoke, and you had concluded as a result of what you had done that it posed no risks or health hazards? 601 Shepherd Street wfnston-salom, N.C.27t03 Phon.: (019) 7aB-38W
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87 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that right? THE WITSEESSr I'm a teacher by training, and I'm bound to do that. HR. COOKr Well, don't bother to teach me. HR. HcDERHOTTr Wait until there's a question. He will answer as he eeea fit, Hr. Cooki ask your questions. Q (By Hr. Cook) So you don't think that the American Pharmaceutical Association, that pharmacists have a role in public healthl do you think they do? A A role in public health? Q Do you? A Do I think that pharmacists heve a role in public health? Q Yes. A The role they play is to fill out prescriptions and in that context, yes, they do have a role. Q That isn't the only thing that they doi they make the compounds too, don't they? A They make the compounds according to the prescriptions, y.es. Q Would you object to the American Pharmaceutical Association promulgating a rule that cigarettes shouldn't be displayed in drugstores? A Yes, I would. 601 Shepherd Street Wmcton-Sa1em, N,C. 27103 Phone:(919) 768-389<
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86 t 2 3 10 I1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q The pharmacists have-- A No, drugstores. Q Tobacco is a druel isn't it? A Tobacco is not a druQ, no, Q It isn't? What about nicotine, is that a drug? A Nicotine is classified as a drug as is caffeine, as Q I didn't ask you about caffeine, sir. A No, but I want to put it in aome-- Q But I don't want you to be delivering your context or your lecture, Doctorl I want you to answer my questions. MR. HaDERNOTT, He is answering your questions-- MR. COM No, he's not anewering-- MR. McDERNOTT, --to the beat of his ability. Now you can ask another question when be's done but let him finish. MR. COOKs I don't want him to continue to add the unwanted--I asked him if nicotine was a drua, end he said, "Yes"; and then he said, "As is caffeine." When I want to know about caffeine, I'11 raise my hand and then you give me some caffeine, okay? THE WITNESSr I was just trying to put that in context for you. MR. C00K, But that isn't--I don't need your context, you knowi I mean, you have your own oontextt is 501 Sheplrerd Street Wlnston•6elem, N.D.27103 Phone, (e19~ 768-3804
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89 8 10 11 12 13 14 15 16 17 1a ts 20 21 22 23 24 25 Q Why? A Because there is no evidence, none, that environmental tobacco in an airplane or other places is a risk. Q Is there any evidence that environmental tobacco smoke, secondary smoke, is a risk at a11 or is there not? A I don't know of any evidence that says that there's a risk associated with it. ~ Q~eQThat the risk is what? A v That there is a risk associated with ETS. Q Are you familiar with the Surgeon General's Reports in that regerd? A Yes. Q The Surgeon General's Reports are erroneous in your opinion? A I think they're misinformed. Q Does that mean that they're wrong? A "Wrong" is a funny statement; if I believe--my wife reminds me several times and if she believes, she's right but that doesn't make ber right. She'believea she thinks she's right. Q But see, I didn't ask you what the Surgeon General beiieved& I aaked you what you believe. I asked you if you believe the Surgeon General is wrong, and you said that he was mieinformed-- u ~ N O. J 501 Shepherd Street VVinton-Salem, N.C. 27103 Phone: (s19) 788-s694
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96 4 5 6 7 6 9 10 11 12 13 14 15 16 17 19 19 20 21 22 23 24 25 internally? I assume that you have the capability to do it if you wanted to? A The kind of research we're talking about--I went to be clear on that--is mechanistic research on the diseases which cigarettes have been accused of causing. I choose not to do that internally because that's a very inefficient way to do that. I would far rather go through soma of the best universities and institutes in the world to get that work done. I could never afford to do that internally. Q It wasn't being done when you case there either? A What wasn't being done when I csme therel Q That type of research we're discussing? A Mecheniatic type research? Q Whatever type of research-- A I've got to know so I can answer your question. Q Well, I'm ,}ust talking about researchl you limited it to mechanistic research. I talked about studieet you limited--you made your own context and then you asked me am I referring to that. You know, it's what you're referring to. A But it'a the only way that I can answer your question. Q I don't understsndt research means something, doesn't it? A It sure does. Q As I underetand-- N r N ~ 50/ Shepherd Street Wlnaton-Selem, N.C, 27103 Phona (919) 766-0eC4
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93 1 A Hay I answer that question? 2 MR. BLIXTe I think the number of personnel who are 3 employed within the R&D Department is also proprietary. 4 MR. COOKt Does that mean he's not going to answer? 5 MR. BLIXTe Well, I think--I'm not exactly sure I 6 understand what you're asking. 7 MR. KcD£RMOTTI Let's confer for Just a moment if we 6 can. 9 '(Discusaion between Mr. McDermott and Mr. Blixt) 10 THE WITN£SSs Without giving the total number which 11 evidently is--which I believe would be proprietary too, 12 we have about 100 Ph.D.s. 13 14 Q (By Mr. Cook) What do you believ " i t " means? e the terA 15 propr e ery A It would mean that our competitor s would like to 16 knowt I would love to know how many people are working for our 17 18 competitors in research. 19 Q Would you really? 20 A Yes. Q I'll find out for you. 21 A Would yout now there's a friend. 22 Q I'll Just have one of the guys put a cigarette case 23 against one of the other guys, and I'll ask him. 24 MR. BLIXTs They'll probably have some Jerk like me ( 25 in there that won't let him answer. 641 Shepherd Street WlnstarSalem. NA, 27103 Phone: (918) 789-3894
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98 1 as they defined it, there is tar in tobacco. 2 Q So you've always agreed with it as they define it? 3 A Why, of course. 4 Q When did they define it ? 5 A I have no idea but long before Ijoiaed the 6 company--many, many years before I joined t he co mpany. 7 to the FTC's definition of D bj ti h Q o you ave any o ec on B l k ? b tar as it re ates to to acoo smo e 9 A The definition of tar by the FTC is such that 10 laboratories throughout the country can compa re their 11 cigarettes, vis-a-vi s what is definedi I ha ve no objection to 12 h ll t at at a . 13 Q Is there a ny relationship with ta r and health 14 haaarda that you're aware of? 15 A If you read the literature in thi s field, those 18 constituents of amoke that have been allege d to cause lung 17 cancer would be in the tar fraction. 18 Q What does that mean? 19 A Just what I said it means, 20 Q Is there a relationship between t he tar factor, a 21 statistical relationship, and health hazard s? 22 A Tar fraction you're talking about 7 23 Q Tar factor. 24 A No I said, "fraction," 28 s Q Ch, okay, I said, "factor.' Is there a 501 Shepherd SMeet ~ wlneton.Selem. N.C. 27103 phone: (91e) 766•9804
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95 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 contract research? MR. COOKs i'n talking about the company, internal. MR. McDERMOTTs Directly, internally, all right. THE WITNESS# The question is, do we do it at the facility at R&D? MR. COOKe Yes. THE WITNBSSi No, we do not. Q (By Mr. Cook) Do you have the capability--are there scientists who are employed there to do that? A No, we do nott we do it on the outeide because we can go to the beat people in every field to get it done far more efficiently than we could ever do it. Q Do you know who made the decision that you wouldn't do any internal studies or research on health hazarda and cigarette use? A Well, now I have to aak you some questions, I don't know what you mean by "won't do any studies on health hszarde." Q And cigarette usa--I mean, and tobacco use--I'm sorry. It'e my underetanding from your other answer and from your other deposition that you depend upon the Council for Tobacco Research to meet with this whatever need exists and that for whatever reaeon--that's certainly valid for you to choose how you're going to do your own research--but my question is, who made the decision that you would not do it 0 Shepherd Street Winaton-Selem, N.C. 27103 PhOnY. (We) 7es-06o4
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V2 6 6 9 10 11 12 13 14 15 6 17 18 19 20 21 22 23 24 26 A That the date says--the date tells us that there isn't a health haaardi that's right but that's what the deta tells us. That doesn't mean that there isn't any health haaards. The data that we have simply eays, "Hey, there isn't any health hasard here based on this date." Q But that data might be wrong, of course? A All data might be wrong but these are done by very good people. That's not only true by the way-- Q I bet it was real neat by the wayt I think that you've done a real good job there. I think that was good for you. MR. McDERMOTT, What was the question? THE WITNESSi I was going to educate. MR. McDERMOTTo Don't educate{ wait until there's a question. Q (By Mr. Cook) Do you know Dr. Koopj have you met Dr. Koop? A No, I have not. Q Kind of an ugly old fellowt isn't he? MR. McDERMOTT, I think he looks like Captain Ahab. MR. CCOK, Damn it, whale. I think be does look like Ahab. Let me ask you juat a few more questions here. Q (By Mr. Cook) With respect to--in your own department, how many scientists do you supervise, sir? 501 Shepherd Street Winston-Salem, N.C.27103 Phone: (919) 76"94
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A Research is this broad (witness indicating). Q That's true and as I underatand, the people who are under your direction internally at Reynolds do not do research into the relationship of tobacco and human disease? A If by that you wean mechanistic research, the answer is, no, we don't, Q What other types of research are there other then mechanistic research? A Well, e a policy by the way--this is also true of other industries--we simply say since tobacco is a risk factor, then what you doa't want to do is add to the biolo¢ical activity of the natural material which is tobacco. we do a tremendous amount of research to be sure that we don't and as a matter of fact, we do a tremendous amount of research to reduce the tar in tobacco as does as fer as I know every other company. Now if you want to call that "related to." then be my guest. Q Is there tar in tobacco? A Tar as defined by the FTC, yes, there is. MR. McpERMCTT, In tobacco or tobacco smoke--I think there may be some confusion there. THE WITNESSr There would be in tobacco srwoke. Q (By Mr. Cook) And how SonII have you agreed that there ha been tar in tobacco smoke? A Tar as defined by the Federal Trade Commission and 601 Shepherd Street Wlnston-Selem, N.C. 2710.1 Phone: (01e) 768369{
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99 1 relationships a statistical relationship--and perhaps again we 2 don't understand each other--tar has been reduced in some 3 ciQarettesi as defined by'the FTC, tar has been reduced in 4 cigarettes over the last period of years4 5 A Yea. 5 Q Is there a statistical relationsbip between a 7 reduction of tar and the incidence of disease? e A I can give you--we have never run those statisticsi e r can te ll you that there are arguments on both sides. 10 Q Who argues that there is? it A I can't tell you who argues that there is, but I can 12 tell you that the American Medical Association argues that 13 there is notl I just happen to hav e that piece of data in my 14 i d m n . 15 Q You are a big subsoriber to the American Medical 16 Association? 17 ta A Q No. Is there any scientific proof that tar has 19 significance in terms of human health? 20 21 A None that I know of. Q And, in fact, when we started on this, you were 22 talking about mechanistic researcho what other types of 23 research are there? 24 A Gee, any kind you want to talk about. 25 Q Well, you're going to'have to tell me what they are 801 SheplMrd Stroet Wineton-Seiem, N.C. 27103 Phono: (419) 7883804
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94 1 MR. COOK1 They'll make him answer eventually. 2 Q (By Mr. C ook) How many employ ees generally oth er 3 than Ph.D.s do you supervise? 4 A Unfortunately, that would answer the question that 5 I've bee n instructe d not to answe r. 8 MR. COOKr Can he answer as a generalitys I mean, is 7 it hundreds or thousands? 8 MR. HLIX1', Yes, that's fine. 9 THE WITNESSr It's hundreds. 10 Q (By Mr. Cook) Do you supervis e any physicians? 11 A No, I do not. 12 Q Do you have any physicians oth er than to treat your 13 emplo yee s who work at RJR'+ 14 MR. McDERNOTT, Do you mean th e company as a whole i5 or the R&D Department? ,,(~ 18 MR. COOK1 The company .a~sa}a whole--anything that 1) you know. 18 THE WITNESSs we do not have any physicians in the 19 R&D Department. 20 Q (By Mr. Cook) Since you have been there, have you 21 done any research, the company--I'm not talking about the 22 Counc il or somebody from Harvard or anything else--but have 23 you d one any research to try and determi ne whether or not 24 there exists a health hatard by the use of tobacco products? 25 MR. MoDERNOTT, Your question is outside of CTR and 501 Shepherd Street Winston-Salem, N.C. 77103 Phona (819) 7ae3584
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103 4 6 6 7 8 9 10 11 12 13 14 15 18 17 18 10 20 21 22 23 24 25 world, via-a-vis competency. Q How about good looking--would you colnpare-- A He sure as heck is not good looking. q I can't wait to take these next two ladies' depositions we have coming tomorrow because whoever does the hiring here--I should do it. A You wouldn't have hired Randy Ralph. Q Yes, we hire ugly people to workt that's why I'm working. A But he is one heck of a librarian. Q With respect to your people who came up with the-- would you say basic research would be a fair way to describe what they may have come up with to suggest this relationship, this beneficial relationship, of tobacco to Alzhaimer's or Parkinson, would that be basic research? A it would be but the basic part of that research in terms of the receptors in what we call the nicotine research, we funded on the outside under our direction. Q That would not-- ~ : Aj'I talked about r.~l A Again the same prinnipla before. Q But that would have been funded by RJRT or would it have been funded by CTR4 A It would be funded by Reynolds Tobacco Company, R. J. Reynolds Tobacco Company. 501 Shepherd Street Wlnston-Setem, N.C. 27103 Phone; (919) 768-3894
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101 1 Q Have you been a scientific advisor to the President 2 of CTR7 3 A Oh, no, no, that's a very specialized person who 4 works full-time for the CTR. 5 Q Who is it now7 6 A A fellow by the name of Harmon HcAllister. 7 Q What's Mr. McAllister's professional background? 8 A He'a a scientist, but I can't tell you in what 9 field. 10 Q Without getting in to it in-depth too much --I've met 11 some of your scientists who work for you but genera lly 12 speaking, what do they dot do they work on product trying to 13 meke your product more competitive? 14 is A Q We do that. What else do you do? I know about the new smokeless 16 cigarettet I already know about that. 17 A Well, we do work on products to try to make them 18 more competitive. We have a whole group of people that work 19 on our processes and try to make them better. We have a whole 20 group of people that work on future producte, one of them 21 which I believe you're referring to and then a whole group of 22 people to be sure that we don't increase the biological 23 activity of natural tobacco and that'a a large group. We also 24 have a group of people that try to understand the role of 25 nicotine and the work that I referred to sometime ago in our sD18hepherd Street WinsttonSelem, N.C. 21103 Phone: (919) 7a8-9a94
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107 1 Q Who did you have do that research on nicotine and 2 Park inson or nicotine and Alaheimer's? 3 A There's a group at Colorado and by the way I'm not 4 dire ctly associated--they report to me but over the, you know, 6 the big umbrella. There's a group in London and there are B seve ral other groups--one in Florida I'm sure. 7 Q Is this a proprietary-- 8 A There is a proprietary aspect to it, but you can 9 reed about it. Some of the stuff is already published. 10 Q Are you doing further study on it or have you 11 rele ased it to the public domain? 12 A We have released the basic knowledge to the public 13 d i oma n. 14 Q Are you familiar with Nicorette gum? 15 A I have never seen it, but I've heard about whet it 16 is, yes. 17 Q Is nicotine a etimulant like caffeine--I raised my 18 hand l 19 A Nicotine can have that effeet. 20 Q Do you drink? I thought we'd aend out for a round. 21 No, do you drink socially? 22 A Yes. 23 Q Do you enjoy smoking when you drink? 24 A Sometimes yes and sometimes no--I enjoy smoking more 25 than I do drinking by the way so I do more smoking thsn 801 Shepherd Street W~naton-Sslem, N.C. 27103 PhOna: (010) 788•38D4 i
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1 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 102 ~pr/Gnsen's deposition here, vis-a-vis disease and Alaheirmer's disease started with our knowledge base. We have a whole group of people who work on packages by the way for our product. We have a group of people that are quality assurance people. We have a group of people that deal with paper, tobacco. We have another group of people that do our instrumentation work, our analytical work. We have a group of people that run our computers, large computers. We have a group of people that run our library. Q Ie the library function under you? A Yea, it is. Q Who is your librarian? A A fellow by the name of Ken (Rush)--¢ee, I juat talked to him this morningi I'11 think of his name in a minute. Q We'll put it in later and show that you knew his nemet we'll allow you to amend your answer on that. Does he have a doctorate in library science? A No, he doesn't. Q He doesn't? A No, he doesn't. Q Is he a trained librarian? A He ie not, but Randy Ralph 1f. Kth hse responsibility greater than the libraryl Randy Ralph runs the library, and I would compare him to any librarian in the 501 Shepherd Sireel Wirnton-SSfent, N,C. 27103 Phone: (efa) 708•3694
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100 4 5 6 because mechanistic is a new word to me. A Mechanistic research deals with causes, actual causes, down at the molecular level, vis-a-vis chronic diseases or any other kind of disease in the context we're talking about. These are very specialized studies done by people who spend their whole lives doing it and normally, they're found at universities or institutions. Q Do you have the capability of hiring people like that to do studies? 10 A There's no way that my company or any other company 11 that I know of no matter what its size can afford to do the 12 kind of work that these people do when you can pick and choose 13 those experts throughout the world to do the work where they 14 are. You would have to have hundreds of theee people. 15 Q What ere your duties at the Council on Tobacco 6 Research, Doctor? 1? A We are--I am a member o f the Board of Directors and IB as such choose the officers of th e Council and approve th e 19 ts fo the b d ost t r u ge m par . 20 Q Who chooses the people who will get the research 21 grants? 22 A There is a Scientific Advisory Board that does that. 23 Q Who chooses them? 24 A G11e3en ~~, They are normally vheseTby the President of the CTR 25 and his scientific advisor. 5018nephord Sureet Wintton•Salem, N.Q 27103 PhoM: (019) 766-8694
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109 2 3 6 7 8 9 10 11 12 13 14 15 16 17 16 19 20 21 22 23 24 25 Pat Lippiello. Dr. Pat Lippiello, and I--the part that deals-- Q is he Italian? A You better believe it. Q There seems to be a lot of Italians around here. A I didn't hire him. A fellow by the name of Wally Pritchard is very active with the Florida State University where they have a super computer down there trying to tease-- which is what you have to do with brain date by the way because it's very noisy dats--tessa that data with the super computer in a new technique called Chaos which is a statistical technique. In faet, they've gotten so far with that that they now are beginning--they've bad two international conferences and going to have another one--based on that science and are now putting together a journal or attempting to put together a journal on that subject. Q would you pronounce the gentleman's name again for me who was your man? A Dr. Wally Pritchard. Q what was the first name, the Italian name? A Pat Lippiello. Q Lippiello--what are Mr. Pritchard's and Mr. Lippiello's backgroundsj are they biocheaiets7 A One is a biochemist and the other is a paychologiat. Q Are they both Ph.D.a7 A Oh, yes. 601 Shepherd Street Winaion•Salem. N.C. 27103 Phoaa: (91B) 766-36a1
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166 10 tl 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A There are carbonyl groups again which you were exposed to at lunch if that's what you had. Q At lunch I had turnip greens-- A Oh, my--there are nitrides of oxygen--I'm sorry, oxides of nitrogen--I better say that right--as s group some of which have been shown to produce cancer in animal systems at very high levels. Q Do you add anything to tobacco in your production of cigarettes that has been accused of being in any form a carainogen? A No, we do not. Q These nitrosaeines or whatever they were--those are natural components of-- A All natural-•they're natural components of all natural things. Q Do you know how much of your tobacco that you use for cigarettes at RJR is domestic tobacco? A No. I wouldn't knowi I'd only be sure that it was a big majority of it, but I wouldn't know precisely--no way. Q Do you use oriental tobaccos in your cigarettes? A Yes, we do. Q And do you use tobaccos from South America in your cigarettea--Braeil7 A I'm sure we buy some tobaccos from Brazil once in awhile. 501 Shepherd Street Wineton•Selem, N.C. 27103 Phone: (919) T6&3894
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116 i 2 3 B B 9 10 11 12 13 1P 20 21 22 23 24 N 25 HR. COOK, I believe that's s1i I have, Dr. DiMarco. MR. HcDERMOTTi Any questions by others? (No response) MR. MoaERMOTTt That concludes the deposition. (END OP THE EXAMINATION AT bz00 P.M.) 601 Shepherd Street Winston•Selem, M.C. 27103 Phons: (019) 76eSe64
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1 Q I assume that since you did--and correct me if I'm 2 wrong--but there is e--thie would be research for product 3 l d t h ? eve opm en per aps 4 A There are two points that would be relevant to thatl 5 I have two points that would be relevant to that. One, w e 6 produce a p roduct that delivers ni eotines and we ought to know 7 all there is to know about it. An d two, there might be a B 9 proprietary position knowing what there is you do learn and normally, . 10 Q Now tlty inquiry has to do with why Reynolds as 11 opposed to CTR--CTR as I understand it wa s set up to discover 12 the relationship of tobacco and human hea lth? 13 A If any. 14 Q If any, okay--this, o f course, has something to do 15 with the relationshi p of tobacc o and human bealth, but you 16 did 't th h CT R? n go roug 17 A CTR as I said before fa dealing with those diseases 16 which tobacco has been accused of causing. 19 20 Q Okay. Sbown {-a Ca1ALe A Nicotine has never be en any 21 disease. We believe that nicotine --we should know all there 22 23 is to know about nicotine and, therefore, we do that research ourselves. 24 Q Do I understand you correctly that nicotine has not 25 ever been accused of being a earcinogen7 $01 Shepherd Slreel Winslon-Selem, N.C. 27103 Phone: (919) 76e-3694
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115 making it illegal to sell cigarettes to minors, that would be wrong; wouldn't it? A Q In my opinion it would be wrong. If those figures are accurate, Dr. DiNarco, about 6 20 percent of teenagers smokiog, should something be done about that; should we do some further education or some kind of reinforcement to try and stop them from starting to smoke 8 before they are of the age of consent? A I honestly--how would you answer that question? lo what would you do? 11 Q I guess-- 12 A Spank them? 13 Q Do you have a problem with corporal punishment in 14 high schools? 16 A tlh•-hui++~ 1u/~ 1s Q I thought it was the best thingi of course, I didn't 1i graduate. Maybe th at was where I went wrong. Can't you think 18 of some things you could do a a cigarette industry? 19 A You lst children under eighteen know that it'a wrong 20 for them to do that. You ought t o let them know that it's 21 wrong for them to drink and let t hem know it 's wrong for them 22 to do several other things. They know it's wrong. whet can 23 you do--beat them, go see their parents? We know it's wrong 24 to play truancy in school, but they do that all the time-- not 25 a11 of them though. 501 Shepherd 8treel Wlnelon-801em, N.C. 27103 Phon.: (910) 768-3804
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110 Q Do you have any NBAs who work for you? 7 8 9 s0 11 12 13 14 1s 16 17 1s 19 20 21 22 23 24 25 A I have MBAs who work for us in research but don't work in that capecitye tbey're people that we hired that are technical which all--"a11" is a bad word--but almost all have technical degrees and a lot of them will go ahead snd get an MBA on the side, but they don't use that skill for the most part with us, Q What do you have do with packaging? A We develop--"we" being our Packaging Research Division--the packages used in our product. Q Because that would be a technical thingi wouldn't it? A Precisely. Q The way you vacuum pack them or whatever you do--I saw it's "The Wrap"t did you do that? A I didn't do it but our group did it. Q With respect to your people who work on the biological•components of your cigarettes that you don't add anything to them, ie that what you said they did or something like that? A We will add a flavoring to a tobacco if, in fact, the consumer tells us that they like it but before we will even test it with a consumer, we just simply make sure that that flavor, whatever we're adding, doee not add to the natural activity, biological activity, of tobacco. 6o1 Shepherd Street Wtrnlon-Selem, N.C. 27103 Phone: (949) 788-0691
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105 1 A Absolutely. 2 Q Which things as opposed to describing them as 3 chemicals or compounds or whatever that are contained in your 4 cigarette have been describe d as carcinogens or been accused 5 of being carcinogens? 6 A There are compounds in tobacco smoke which i n a neat 7 form, pure form, at very high concentrations have been shown 8 to produce cancer in animal systems. That's also true of the 9 food you had this morning for breakfast and the food you had 10 this afternoon for lunch just to put that in context. 11 Q I had an Egg McMuffin, and I'm turning you in. 12 A By the way--you can do that( you can do that. 13 Q With respect to my question is that there are 14 phenols in tobacco and tobacc o amokel are thera not? Is A There are polyphenols in tobacco smoke erFrieie some of 16 W M ~~ 17 i neat forsl at higher concentrations have been t a shown to produce cancer in animal systems. 1e Q What other types of compounds, elenents7 19 A Normally, they are in groups and the groups I can 20 give you because I'm not a chemist would ba--nitrosamines 21 would be considered the same as a group of those. ' 22 23 Q What ere the nitrosaminest A What are the nitrosamines4 They are a group of 24 compounds that I can't explain to yout I'M not a chemist. 26 Q You don't--okay. 501 Shepherd 8treet Winfton•Sslem, N.C.271P3 PhoM; (910) 768-8694
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Q I don't understand how you would do that. Can you-- A Well, for the most part the whole industry does it. The pharmaceutical industry does it and the food industry does itj we do it-- Q They're all trying not to add something to tobacco? A No, no, no, they all try--there are such things as A --and the pharmaceutical industry does come up with new things, and they run the same kind of tests we run. Q What type of tests do you run? A For the most part they are what we call mutagenicity tests. Every known--again that word "every"--almoat all known CoNMAqtts~ primary carcinogens are mutagenic and so the pharmaeeuticald. ~M{+ablti the food¢ and we ke sure that what we're adding is not mutagenic. Not all mutasens are carcinogenic too by the wayl X should add that. MR. McDERMOTTi Can we go off the record for just a moment and take a one minute break? MR. COOKi Sure, off the record. (Break taken from 4,50 p.m. until 4r55 p.m.) MR. COOKe Back on the record. Q (By Mr. Cook) Dr. DiMarco, do you think that the I Federal Government has overregulated the tobacco induatry7 A In what area? pt' 6018hepherd Street Wlnaton•Salem, N.C. 27103 Phone; (6ti01769•889e
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112 S 2 3 4 ep Q Well, in requiring you, for example, to put warnings on your product? A I honestly think the warnings are adequste, and we do comply with the warningsl what else is there to know? Q My point is I know that you are forced to do thisi what I'm asking you ie, do you think it's improper that they 7 have placed this regulation on you? 8 A I don't believe personally that it was neceasary, 9 but I don't have any problem complying with it at all. 10 d Q Whet about do you object to not advertising--not 11 bein g allowed to advertise cigarettes on television4 12 ~ A I don't have a cl ue. I don't know whether it even 13 does us any goodi it might save us a lot of money. 14 Q It probably doea. 15 A You're talki ng ab out a field I don't kn ow a thing 16 17 abou t. Q Right, that' s why I'm asking you about it. 16 19 MR. McDERMOT T, Interesting technique. ' Q (By Mr. Cook s fair t ) Do you thiak it hat they can 20 adve rtise automobilea on television but that your industry is 21 t ? not allowed to advertise cigaret es 22 A When you look at the little bit I know about 23 adver tising, and I do know very little about it, our ads are 24 desig ned to get competitive smokers to smoke our products. 25 Now w hether, in fact, you can do that more efficiently and by 501 Shepherd Street Winoton-Sa1em, N.C.21103 Phonr (919) 768-3890
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TM 1 the way I also know that--I'm not involved in the tests, but 2 they run tests to be s ure that that 's true- -whethe r, in f act, 3 you can do that more effectively on T.V. or not, I have n o 4 hat ver id --no ne w soe . ea 5 Q It Just isn't a matter that you've given much 8 thought to one way or the other? 7 A No, that's not my field. e Q Do you know that the cigarette advertising code-- 9 that they try not to target youthful actors in their to advertisements so not to encourage children to smokel are you 11 aware of that? 12 A I'm not only aware of it, but I know that our 13 company literally puts ads out saying that people in thei r 14 earl teens shouldn't smoke y . 16 Q I know when they started doing itj would you li ke to fe 17 know? f960s7 Do you think that they did that during the ]950s a nd 18 A I wouldn't have a clue. 19 Q Is there any knowledge that you're aware of tha t the 20 tobacc o industry has gained since the 1950s and 19605 that 21 would compel them to make sure that advertisement is not 22 hild ? d direct to c e ren 23 A You're talking about something--they might have been 24 25 doing it for a hundred yeare, but I have no idea. Q And you've already stated that the body of knowledge 601 Shopherd gtreet Winston•8atem, N,C. 27103 Phone: (919) 788-389/
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__ . C!~31 Deposition of Ci. Robert DiMarco, Ph.D. Taken on November 20, 1991 In the Circuit t,ourt,'hventieth )udicial Circuit St. Clair County, Illinois Kueper v. R.J.R.. Inc_ R.1. Re^olds Tobacco Co.. et al. No. 91•L734 Reason for PM jA(p~ J~gygdg Should Read Chanae 75 21 hadn't hasn't 3 76 5 got is 3 76 8 are far -• they just jump -- they just 2 83 19 had effective had been effective 5 89 9 A Q 1 94 16 company was a whole company as a whole S 100 24 chose chosen S 102 1 Parkinson Parkinson's S 102 23 Randy Ralph really -- he Randy Ralph is. Ken 2 103 20 principle, what principle that 1 104 20 accused of causing shown to cause 2 105 15-16 which some of them some of which 3 111 14-15 pharmaceuticais, the foods pharmaceutical companies, 2 the food companies Signature of Witness: ' ~ Date Signed:', -4- ~ ~ N ~ A r/-,cr ~ / ~ r J
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ERRATA 9 HEET Deposition of G. Robert DWaroo, Ph.D. Taken on November 20, 1991 In the Circuit Court,'riventieth Judicial Circuit St. Clair County, Iilinois Y"ner v. R.7.R.. Inc.. RJ. Revnolds Tobacco Oo..et_al. No. 91-L734 EM LjM Now Reads Reason for Should Read . ii1180gt:' 6 2 viable file I 7 25 Basic Central 2 8 17 Angioli Angiuoli 5 8 18 Van Von 5 8 20 Van Von 5 10 8 has been -• you're has been issued - you're 1 12 25 Oh, yes, it was. The stock of the parent holding 2 company was publicly traded. 15 2 is -• is proprietary -• 1 15 6 IORs IRs 1 16 13 Fieischman's Fkischntattn's S ' I - inaccurate transcription 2 - more accurate 3 • grammatical error 4 - punctuation error 5 - tvno¢raehic error , 2~„/ Signature of Witness: Date Signed: it
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Deposition of 0. Robert DiMarco, Ph.D. Taken on November 20, 1991 In the Circuit Court, Twentieth Judicial Circuit St. Clair County, Llinois :on:r _17I7PF No. 91-If734 Reason for b.ge_ Line NqyKReads Should Read „ChWjgL 36 2 government agency 2 37 20 proof to those proof for those 1 51 9' that should that age should 1 51 15 drive, vis-a-vis not drive drink, vis-a•vis not drink 1 60 21 more and tnore under stress and 1 63 18 only system most appropriate test 2 64 2-3 that the risk factors are that It Is a risk factor for 2 lung cancer and heart disease. lung cancer, emphysema, and heart disease. 64 23-24 Statistics to include Statistics -- to include 4 epidemiology cannot epidemiology - cannot 65 13 cancer, radon, exercise, cancer -- radon, exereise, 4 69 21 documents have political agenda. documents have a politieal 1 agenda. 70 2 documents have political agenda. documents have a political I agenda. 70 17-18 Mario Provost's Mario Cuomo's 1 74 4 Not often. (Jokingly): Not often. 2 Signature of Witnea : . Date Signed$ L f1 -3-
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114 11 12 13 14 15 16 17 is 19 20 21 22 23 24 26 as far as you're concerned with the risk factora of cigarette smoking and health hszarda, you're of the opinion that that was well known by everybody in the 195Ss1 aren't you4 A I'm of the opinion that the common person--common person--people--believed in the 1950s. or were aware of the fact that cigarettes could be harmful. Q well, there is no reason--I take it you think it's appropriate that your company advertises since you volunteered that--that they don't want kids to smokel you think that's appropriate, don't you? A Yea. Q All right, it was as appropriate in 1950 as it is todayt isn't it? A I suspect it would be. Q Do you know if the cigarette industry has ever opposed laws regulating the sale of cigarettes to minors? A I have no--I would have no way of knowing. Q As an educator.ycu would think that that was wrong if they didl wouldn't you? A Based on what I know of my company, I think they would think it would be wrong too, yas. Q You also would think it was wrong if-- A To advertise to children under eighteen? Q No, and I didn't say your company, but I said "the cigarette induetry." If the cigarette industry opposed laws 601,Stepherd Street Winekm-9alem, NA.27103 Fhone: (i191764-0894
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Deposition of 0. Robert DiMarco, Ph.D. Taken on November 20,1991 In the Circuit Court, Twentieth Judicial Circuit St. Clair County, Illinois KueFer v. R.J.R.. Inc.. R.J. Reynpjds Tobacco Co.. eLaL No. 91-Ir734 Reason for EM j,in Now Reads Should Read Changa 16 15 Fleischman's Fleischmann's 5 16 23 F7eischman's F7eischmann's 5 18 13 the scientists pretty the science is pretty 1 18 22 Solonaceae Solanaeeae 19 1 Solonaceae Solanaceae S 5 19 14-15 be on it; certainly Jim Schroer ...be on it. Jim Schroer is not 2 would be on it. on the Board. 21 4 I know -- like I I ktnow little about -- like I 2 24 20-21 causing disease causing the disease 1 27 24 Premiere Premier 5 29 18 awhile a while 5 31 4 smoked a cigar smoked cigars 2 32 18 others in the others and is in the 1 32 25 published in the published in a 1 33 1 "Peer Review Journal." peer reviewed journal. I 35 19 served on committees. Signature of Hitnesei _2- served on several committees 2 of government agencies. W r N ~ J Date Signed: r VI
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achieve our goal of a smoke•free eociety, we must give this problem the serious attention it deeerves, C. Everett Koop, M,D., &.U. Surgeon General ~-4 vii
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117 1 2 3 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 26 seEATIZIfATUN I. Sandra Aarper, Notary Public in and for the County of Porsyth, State of North Carolina at Large, do hereby certify, That there appeared before me the foregoing witoeas at the time and place herein aforementionedl That the said witness was sworn by me to state the truth, the whole truth and nothing but the truth ia said casel That the testimony was taken before me by stenomask end thereafter reduced to typewriting under my supervision, and the foregoing one hundred and sixteen (116) pages contain a full, true end correct record of all the testimony given by said witnesal That the undersigned is not of kin, nor in any wiee associated with any of the parties to said cause of action, nor their counsel, and that I am not interested in the event thereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25th day of November, 1991. OifiClAl fEAI SANDRA HARPER W B~H 3 Notary Public and Court Reporter O ~~uN R F TY Ug", pq.m0a 19, Ie9f 601 Shepherd Street VJiraton-Sa1em, N.C. 27103 Phone: (919) 788-3604
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The Health Consequences Of Smoking NICOTINE ADDICTION a report of the Surgeon General 1988 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Puellc Hahh Serrtce 1 Cemara for Wuasa Confrol i Cenler for HeNlh Promotbn and Education Oflice on Smoking and Heaflh Rockrlfle, Mary W w R0637
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IIs 5 8 10 11 12 13 14 1fi 16 17 18 19 20 21 22 23 j{XTNESS CERTI ICATION I, G. ROBERT DiKARCO, Ph.D., do hereby certi£y, That I have read and examined the contents of the foregoing pages of testimony as given by me at the time and piace herein aforementionedl And that to the best of my knowledge and belief, the foregoing pages of testimony are a complete and accurate record of all the testimony given by me. except for the changes andlor corrections (if any) on the attached errata sheet. Changes and/or corrections have have not , been made on the attached errata sheet, 7 (0. ROBERT DlHARCO, Ph.D.) i, Notary Public for the County of State of do hereby certify, That personally appeared before me this the I ~ day of, 19 ~91 a And I personally witnessed the execution of this document for the intents and purposes herein above described. ssio~n E~xpiresr p1y1'6 ez~ J/ °ff`"A L9AL bli i Notary Pu c CHRISTA N, MATHIS N°TAAY rU/UC•Ne/fN CA/l°lHM CouNTYpr foR .91,«d+rrB(lp$rf.r 8o auoaw.Gr 601 Sht{pherd Street Wtnaton•Satem, N.C. 27103 Phone, (619y 768 98A4
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CHAPTER I INTRODUCTION, OVERVIEW, SUMMARY, AND CONCLUSIONS 1 . S-........_...
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TABLE OF CONTENTS Pbreword ................................................... .............. i Prefaoe .......................................... :....................... iii Acknowledgments .................................................... ix 1. Introduction, Overview,. Summary, and Conclusions .......................................... .......,...1 II. Nicotine: Pharmaookinetioa, Metabolism, and Phat- macodynamice .................................................21 III, Nicotine: Sites and Mechanisms of Actiona........... 7b IV. Tobacco Use as Drug Ikpendenoe .....................145 V. Tobacco Use Compared to Other Drug Dependen c ies ................................................. 241 VI• Effects of Nicotine That May Promote Tobacco Uae........ .............................•...........,....•.••....877 VII. Treatment of Tobacco Dependenoe..................... 469 Appendix A: Trends in Tobacco Use in the United States .................. • .......... • ................. 861 Appendix B: Toxicity of Niootine .............................589 Index ........... • ..................................... . •... •........... 618 J •'.w.~. N .;. o. n .. .... •. ... . .. ~ ,,~ ~.. v . . . . . . . . , I P N m
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CONTENTS Introduction ............................................................ iS Development and Organization of this Report ...,.....5 Overview ............. ~......... ...,....................... .............. 6 Major Conciusions ....................................................9 Brief History Relevant to this Report ............... 9 Chapter Conciusions................................................ 19 Chapter 11.• Nicotine; Phatmacokinatlcs, Metabo. 1iam, and Phexmaoodynamice ............18 Chapter III: Nicotine: Sites and Mechanisms of Actions .........................................14 Chapter IV: Tobacco Use as Drug Dependence...... 14 Chapter V: Tobacco Use Compared to Other Drug Dependenciet ..................................1b Chapter VT: Effects of Nicotine That May Promote Tobacco Use...................................16 Chapter VII: 4teatment of Tobacco Dependenoe .,,..1b Appendix A: Trends in Tobacco Use In the United States ............................. ..............16 Appendix B: Toxicity of Nicotine .................. ......16 References .............................................................19 . . >..>..,,.:~.,~,w-+.~.•,...,:- . .,......._..... .... . . .•
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.,y...n.. , PREFACE This Report of the Surgeon General is the U.S. Public Health Service's 20th Report on the health consequences of tobacco use and the 7th fseued during my tenure as Surgeon Qeneral, Eighteen Reports have been released previously as part of the health consequences of smoking series; a report on the health consequenoes of using smokeless tobacco was released in 1888. Previous Reports have reviewed the medical and scientific evl• dence establishing the health effects of oigarette smoking and other forms of tobacco use.'1'ens of thousands of studies have documented that smoking causes lung cancer, other cancers, chronic obstructive lung disease, heart diseaae, complications of pregnancy, and several other adverse health effects.. Epidemiologic studies have shown that cigarette smoking is responsible for more than $00,000 deaths each year in the United States, As I stated in the Preface to the 1982 Surgeon deneral's Report, smoking is the chief avoidable cause of death in our soctety. From 1964 through 1979, each Surgeon General's Report ad• dreeeed the major health effects of smoking. The 1979 Report provided the most comprehensive review of these effects. Following the 1979 Report, each subsequent Report has focused on specific populations (women in 1980, workers in 1985), spedflc diseasas (cancer in 198Z cardiovascular disease in 1983, chronic obstructive lung disease in 1984), and specific topics (low-tar, low•niootine cigarettes in 1981, involuntary smoking in 1986). This Report explores in great detail another specific topic: nicotine addiction. CarefLl examination of the data makes it clear that cigarettes and other forme of tobacco are addicting. An extensive body of research has shown that nicotine is the drug in tobacco that causes addiction. Moreover, the processes that determine tobacco addiction are similar to those that determine addiction to drugs such as heroin and cocaine. I Actions of Nicotine All tobacco products contain substantial amounts of nicotine. Nicotine Is absorbed readily from tobacco emoke in the lungs and from smokeless tobacco in the mouth or nose. Levels of nicotine in iii
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.v- Y.:'u:~ FOREWORD This 20tk Report of the Surgeon General on the health conse• quenees of tobacco use provides an additional important piece of evidence concerning the serious health risks associated with using tobacco. The subject of this Report, nicotine addiction, was first mentioned in the 1964 Report of the Advisory Committee to the Surgeon General, which referred to tobacco use as "habituating." In the landmark 1979 Report of the 8urgeon General, by which time considerably more research had been conducted, smoking was called "the prototypical subatance•abuse dependency." Scientists In the field of drug addiction now agree that niootine, the principal pharmacologic agent that Is oommon to all forms of tobacco, is a powerfully addicting drug. Recognizing tobacco use aa an addiction Es critical both for treating the tobacco user and for understanding why people continue to use tobacco despite the known health risks. Nicotine ia a psychoactive drug with actions that reinforce the use of tobacco. Efforts to reduce tobacco use in our society must address all the major influenoes that encourage continued use, including social, psychological, and phar• maooiogic factors. After carefully examining the available evidence, this Report concludes that: • Cigarettes and other forme of tobacco are addicting. • Nicotine is the drug in tobacco that causes addict7on, • The pharmaoologic and behavioral processes that determine tobacco addiction are similar to those that determine addiction to drugs such as heroin and cocaine. We must recognize both the potential for behavioral and pharma- cologic treatment of the addicted tobacco user and the problems of withdrawal. Tobacco use is a disorder which can be remedied through medical attention; therefore, it should be approached by health care providers just as other substance-use disorders are approached: with knowledge, understanding, and persistence. Each health care provider should use every available clinical opportunity to encourage or assist smokers to quit and to help former smokers to maintain ahstinence. i . . .+•:{.}..Yl....~ .l..Y -i ..nY, 's tl Wk,.. ..~.. ap...,..
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chew exceeslve amounes of nlcotine poipcdiex gum, Toleranee to theee effecta develops rapidly. S. Nicotine exposure in long•term tobacco users fe eubatantial, affecting many organ systems (Chapters Ii and 1II). Pharmaco- logic actions of nicotine may contribute to the pathogenesis of smoking•related diseases, although direct causation has not yet been determined. Of particular oonoern arp cardiovascular disease, complications of hypertension, reproductive disorderi, cancer, and gastrointestinal disorders, including peptic ulcer disease and gastroesophageal reflux. 4.'fhe risks of short-term nicotine replacement therapy as an aid to smoking cessation in healthy people are acceptable and substantially outweighed by the risks of cigarette amoking. I 17
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51267 1226 The cigarette epidemic reached its peak in 1963 and is now receding. The percentage of people who smoke has fallen, and per capita consumption is the lowest in 45 years. However, over 50 million adults still smoke, ~.nd each year one million teenagers take up smoking. ........ ..,wr.p..-...:-_~.y;ac::: Per Capita Consumption of Cigarettes (18 years and older), 1925-1988 Number of Cigarettes Number of Cigarettes 1925-29 1,285 1970 3,985 1930-34 1,389 1971 4,037 1935-39 1,779 1972 4,043 1940-44 2,558 1973 4,148 1945-49 3,459 1974 4,141 1950 3,522 1975 4,123 1951 3,744 1976 4,092 1952 3,886 1977 4,051 1953 3,778 1978 3,967 y 1954 3 546 1979 861 3 , , ~ 1955 3,597 1980 3,849 j 1956 3,650 1981 3,836 i 1957 3,755 1982 3,739 1958 3,953 1983 3,488 1959 4,073 1984 3,446 1960 4,171 1985 3,370 1961 4,266 1986 3,274 1962 4,265 1987 3,196• 1963 4,345 1988 3,121" 1964 4,195 1965 4,259 1966 4,287 1967 4,280 1968 4,186 1969 3,993 ' Srbi.ctIo rwi.ion. ^EartmaNd. 2 E<onomic Reaearch S.rrica, USDA Z v~
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determine tobacco addiction are similar to those that determine addiction to other drugs, including illegal drugs. In addition, some smokers may not believe that tobacco ia addicting beeause of a reluctance to admit that one's behavior is largely controlled by a drug. On the other hand, most smokers admit that they would like to quit but have been unable to do so• Smokers who have repeatedly failed in their attempts to quit probably realize that smoking is more than just a simple habit. Many smokers have quit on their own C'spontaneous remission") and some smokers smoke only oa'asionally. However, spontaneous remission and occasional use also occur with the illicit drugs of addiction, and in no way disqualify a drug from being classified as addicting. Most narcotla users, for example, never progress beyond occasional use, and di those who do, approximately 30 percent spontaneously remit. Moreover, it seems plausible that spontaneous remitters are largely those who have either learned to deliver effective treatments to themselves or for whom environmental circumstances have fortuitously changed in such a way as to support drug cessation and abstinence, Treatment L9ke other addictions, tobacco use can be effectively treated• A wide variety of behavioral interventions have been used for many years, including aversion procedures (e.g., satiation, rapid smoking), relaxation training, coping skills training, stimulus oontrol, and nicotine fading• In recognition of the Important role that nicotine plays in maintaining tobacco use, nicotine replacement therapy ie now available• Nicotine polacrilex gum has been shown In controlled trials to relieve withdrawal symptoms. In addition, some (but not all) studies have shown that nicotine gum, as an adjunct to behavioral interventions, inereases smoking abstinence rates. In recent years, muiticomponent Interventions have been applied successfully to the treatment of tobacco addktion. Public Health Stratepiee The conclusion that cigarettes and other forms of tobacco are addicting has important Implications for health professionals, educa• tors, and poiicymakera. In treating the tobacco user, health profes. sionals must address the tenacious hold that nicotine has on the body. More effective interventions must be developed to counteract both the psychological and pharmaoologic addictions that accompa• ny tobacco use. More research te needed to evaluate how best to treat those with the strongest dependence on the drug. Treatment of tobacco addiction should be more widely available and should be V : , {~wuyx: ,p .:., :.. ... ... ut H N ~ • J r N N
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telping people to achieve and maintain tobacco abstinenoe (Chapter 1II). In addition, appendices are included that summariie informa- ion regarding trends in tobacco use (Appendix A) and it1formation egarding the toxicity of nicotine lteelf (Appendix B). A summary of he main findings of the Report follows. lsjor Conclusions 1. Cigarettes and other forms of tobacco are addicting. 2. Nicotine is the drug In tobacco that causes addiction. 3. The pharmacologio and behavioral processes that determine tobacco addiction are similar to those that determine addiction to drugs such as heroin and oooaine: riet History Rslevant to this Report Tobacco products have been used for centuries. The tobacco plant as native to ihe New World. Thg qldest cited evidence of tobacco ie appears on s' Mayan stone oaeving dated from 600 to 900 A.D. here are reports of tobacco smoking In Christopher Columbue ary in 1492; reports of tobacco smoking appear in the logs of other uropean explorers of the New World in the 16th century.l9ince the donia) period, tobacco has been an Integral part of the American +onomy (Robert 19d9). Tobaooo use permeated the Naw World and quickly spread ,roughout the reet of the world during the 16th and 17th oenturies. s use of tobacco products spread, so did controversy over the effects these products. Throughout history, while some persons extolled ,e virtues of tobacco (including numerous alleged medicinal uses), hers condemned its use. Ueorge Washington is attributed with :horting the home front during the Revolutionary War, "if you n't send money, send tobacco." In eontrast, Dr. Benjamin Rush ndemned tobacco use in his 1798 book Esaaya. The controversy ntinued into the 19th century with no convincing scientific or edical evidence to support either position (Robert 1949). In 1856-57 the British medical Journal Lancef published opinions 60 physicians on tobacco use. Many opponents attributed in• eased crime, nervous paralysis, loss of intellectual abilities, and rual impairment to tobacco use-•all of these claims lacked nvincing evidence. In restating the main argumenta of the tobacco oponente, thelancel editors wrote that tobazop use "...muet have me good or at least pleasurable effeets; that, if its evil effects were i 9
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51267 1224 y This is an update of a fact book rnst published by the Public Health Service in 1969. Like its predecessors, it deals with the medical, sociaf, and economic aspects of cigarette smoking. It identifies cigarette smoking as the chief preventable cause of death in the United States. Sources for most medical information are the annual Reports of the Surgeon General on the Health Gonsequences' of Smoking, which are issued by the Department of Health and Human Services each year. Information on thetobacco economy comes prin- cipally from the Economic Research and the Foreign Agricultural Services of the U.S. Department of Agricultural, with additional data from the U.S. Department of Commerce and the Federal Trade Commission. ~~. r`
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his Report. Finally, recent developments in the use of nl0otine .acement in smoking cessation emphasize the lmportance of rmaoologic aapects of cigarette smoking. oncepts of drug addiction or drug dependence are discuseed in all in Chapters IV and V. It Is useful to begin this Report with a f summary of main points about drug dependence that provide foundation for the findings of the Report. ne terms "drug addiction" and "drug dependence" are acientifi- r equivalent: both terms refer to the behavior of repetitively sting mood4ltering aubstanoea by individuals. The term "drug mdence" has been increasingly adopted in the scientific and ioal literature as a more technical term, whereas the term "drug Ftlon" continues to be used by NIDA and other organizations n It Is important to provide information at a more general level. )ughout this Report, both terms are used and they are used wymously. ie main conclusions of the Report are based upon concepts of t dependence that have been developed by expert committees of World Health Organization, as welL as in publications of NIDA the American Psychiatric Association. These concepts were used evelop a aet of criteria to determine whether tobacco-delivered tine is addicting. The criteria for drug dependence include rary and additional indices and ara summarirad below. 3ITERIA FOR DRUG DEPENDENCE •imary Criteria , Highly controlled or compulsive use ~ Paychoactive effects ~ Drug•reinforced behavior iditional Criteria , Addictive behavior often involves: -stereotypic patterns of use -use despite harmful effects -relapse following abstinence -recurrent drug cravings . Dependenoe-producing drugs often produce: -tolerance -physical dependence -pleasant (euphorlant) effects ic primary criterla listed above are sufficient to define drug mdence. Highly controlled or compulelve use Indicates that drug- 7
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Overv)ew ' This Report of the Surgeon General on tobacco and health focuses on the pharmaoologic basis of tobacco addiction. Previous Surgeon General's Reporte have reviewed the medical and scientific evidence establishing that cigarette'smoking and tobacco use in ather forms are deleterious to health. Several reports emphasized particular diseases (e$., 1982 Report on eancer (US DHfIS 1982), 1983 Report on cardiovascular disease (US DHH81988a),1984 Report on chronic obstructive lung disease (US DHHS 1986a)); some reports concentrab ed on specific populations (e.g.,1980 Report on women (US DHHS 1980)); and some reports dealt with particular aspects of smolting (e.g.,1988 Report on Involuntary smoking (US DHHS 1988a))•'1'hese reports have been important because so many individuak engage in a behavior that causes morbidity and premature mortality. The present Report addresses a central issue of the tobaooo and health problem: Why do people smoke and in other ways consume tobacco products? Specifically, this Report reviews the pharraacolog- ic basis of the dlsease•producing and life-threatening behavfor of tobacco use. Psychological and social factors ara also important influences on tobacco use, but a detailed review of these factors ie beyond the scope of this Report, Reviews of this literature include previous reports of the Surgeon.(ieneral (US DHEW 1979; US DHHS 1980, 1982, 1983a, 1984a), research monographs from the National lnetitute on Drug Abuse (NIDA) (Jarvik et a1.1977; Krasnegor 1978, 1979a,b,c; Grabowski and Bell 1983), and articles by scientists who study tobacco use and nicotine (Russell 1971. 1978; Grits 1980; Henning(feld 1984). This Report reviews evidence that tobacco use is addicting and that nicotine Is the active pharmacologlc ageat of tobacco that oausee this addictive behavior. Previous Surgeon General's Reports have focused on evidence that cigarette smoking and tobacco use are health hazards. Now that those relationships are well-documented and well-known, this Report addreaees addictive properties of cigarette smoking and tobacco use in order to help develop more effective prevention and oessatfon programs, This Report topic is particularly timely because of recent advances and extensive data gathered in the 19808 relevant to the issue of tobacco addiction. Since the early 1900s scientific literature and historical anecdotes have provided evidence that tobacco use is a form of drug addiction. In the 1970s, however, research efforts increased considerably on various aspects of tobacco addiction, lncluding nicotine pharmaooklnetica, pharmscodynamica, selGad- ministration, withdrawal, dependence, and tolerance. In addition, advances in the neuroeclenees have begun to reveal effects of nicotine in the brain and body that may help to explain why tobacco use Is reinforcing and difficult to give up. These issues are addressed e i . ~i.b:+:.). ..~.p . . . . df
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tapter Vr Tobaooo Use Compared to Other Drug Dependen• +s 1. The pharmacologic and behavioral processes that determine tobacco addiction are similar to those that determine addiction to drugs such as heroin and cocaine. 2, Environmental factors including drug•assoolated stimuli and social pressure are Important influenoes of init7atton, patterns of use, quitting, and relapse to use of opiolds, alcohol, nicoUne, and other addicting drugs. e. Many per5ons dependent upon oploids, alcohol, nicotine, or other drugs are able to give up their drug use outside the context of treatment programs; other persons, however, re- quire the assistance of formal cessation programs to achieve lasting drug abstinence. A. Relapse to drug use often occurs among persons who have achieved abatinence from optoide, alcohol, nicotine, or other drugs. b. Behavioral and pharmacologie Intervention techniques with demonstrated efficacy are available for the treatment of addiction to opioids, alcohol, nicotine, and other drugs. iapter VI: Effects of Nicotine That May Promote Tobaaco tpendence ' 1. After smoking cigarettes or receiving nicoUne, smokers per- form better on some cognitive taska (inciuding sustained attention and selective attention) than they do when deprived of cigarettes or nicotine. However, smoking and nicotine do not Improve general iearntng. 2. Stress increases cigarette consumption among smokers. Fur- ther, stress has been Identified sa a risk factor for initiation of smoking in adolescence. 8. In general, cigarette smokers weigh lesa (approximately 7 lb less on average) than nonimokers. Many smokers who quit smoking gain weight. 4. Food intake and probably metabolic factors are Involved In the inverse relationship between smoking and body weight. There is evidence that niootine plays an Important role in the relationship between smoking and body weight, hapter VIG Treatment of Tabaoao Dependence 1. Tobacco dependence can be treated suocessfully. 2.Effective interventions include behavioral approaches alone and behavioral approaches with adjunctive pharmacologic treatment, 16 ,
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.+ .~ .dMIk., M/ M M / ~ L J 1 1 m«~ " d : ~ : , ~ . . J - - • - ~~ M i 0 Mw . . ~ • : '.-rA.r~ :r.. ~ u- -m WE rr~`0 r-~~ • EZZT L9ZiS
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SMOKING, TOBACCO, & HEALTH Cigarette smoking can legitimately be termed the most devastating preventable cause of disease and pre- mature death this country has ever experienced. Fach year it causes the death of nearly 400,000 Americans --115,000 from coronary heart disease, 27,000 from stroke, 136,000 from cancer, 60,000 from chronic obstructive pulmonary disease and an estimated 50,000 deaths from other diseases and other caures. The epidemic began 75 pears ago. In 1915, most tobacco was used for pipes, cigars and chewing tobacco, and fewer than 20 billion cigarettes were sold; In 1987, 575 billion cigarettes were sold. As late as 1935, lung cancer was a rare disease; in 1987, 136,000 persons died from it. Cigarette Consumption and Lung Cancer Deaths, 1900-1988 (billions of cigarelbs) 1000 800 600 400 200 (number al deo'hs) 150,000 , ltl 120,000 ~ 90,00Q ,W 60,000 I 40P 30,000 1900 i 1910 1920 1930 1940 1950 1960 1970 1980 1 '1988  Consumption mm Deaths Economic Reseorch Ser.in, USDA. Amedwn Canc.. SoNety 1 SZZL L9Zi5
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so dreadful as stated the human race would have ceased to exist" (Lanaet 1867). While the health•promoting and health-damaging effects of tobac- co products were being debated throughout the 17th and 18th centuries, scientists were trying to determine the chief active . ingredient in tobaoco. In the early 1800s the oily essence of tobacco was discovered by Cerioll and by Vauquelin. This active substance was named "Nicot)anine;" atkr Jean Nioot, rho sent tobacco eeeds from Portugal to the French court at the end of the 16th century. In 1828, Posselt and Relmann at the University of Heidelberg isolated the pure form of Nicotlanine and renamed it "Nikotin," The chemical's empirloal formula, C,oH„N„ was determined in the 1840s, and "nicotine" was synthesited ln the 1890s (Robert 1949). Since the late 1800s, research on the pharmacologic actions of nicotine has contributed substantially to basic Information about the nervous system (Khsrkevich 1980; Vo)le 1980). The classic work by Langley and Dickinson (1889) on nicotine's effecte in autonomic ganglia led to the postulates that chemicals transmit information between neurons and that there are receptors on celle that respond functionally to stimulation by specific chemicals. As early as the 1920s; and 1980s, some investigators were concluding that nicotine was responsible for the compulsive use of to2tao¢o products (Arm- strong-Jones 1927; Dorsey 1888; I.ewin 1981). 'Johnaton (1942) concluded that, "smoking tobaoco is essentially a means of adminis- tering nicotine, just as smoking opium le a means of administering morphine." Throughout the 20th oentury, research has continued to inveeti• gate the role of nicotine in tobacco usee. The 1964 Report of the Surgeon General's Advisory Committee on Smoking and Health (US PS3 1964) held thatr "4fie habitual use of tobacco is related primarily to psychological and social drives, reinforced and perpetu- ated by the pharmacologic actions of nicotine on the central nervous system. Nicotine-free tobacco or other plant materials do not satisfy the needs of those who acquire the tobacco habit"The 1964 Report, relying upon a distinction (that Is no longer made) between "habituating" and "addicting" drugs, asserted that tobacco was habituattng and not addicting. The distinction in 1984 between habituating drugs (including cocaine and amphetamines) and addict- ing drugs (including opiates and barbiturates) was based on: pU whether the drug produced clear physical dependence; (2) whether damage was mainly to the individual user (habituating drugs) or to society (addicting druge); and (8) the strength of the habitual behavior that developed. There was no question at the time of the 1984 Report that nicotine was the critical pharmscologic agent for tobacco use, but Its role was then considered to be more similar to cocaine and amphetamines than to opiates and barbiturates. Later t0 ....41t::?•/.:r.YM ! .r. . .. .
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WHO SMOKES CIGARE7TES In 1965, 50.2 percent of American men and 31.9 per- cent of women smoked cigarettes; by 1987 this had dropped to 3'1.7 and 26.8 percent The decline has occurred in every age group and at every income level, but has been greatest among the better edurated Smoking among college graduates has dropped by half since 1966, while smoking among those with less than high school education has hardly changed. On the average, fewer white collar workers smoke than blue collar workers, and fewer whites than blacks. Blacks, however, smoke fewer cigarettes than whites. Declines in Smoking by Education Level, 1966-1987 Total Smoking Population, 1965-1987 IPesenruge smoking, by yenr ond educallon le..ell Less than Some HS Grad HS Grad College College Grad Overall Population 1965 40.4% 1966 36.5% 41.1% 42.5% 33.7% 40.7 1970 34.8 38.3 36.7 28.1 37.0 1974 36.5 37,6 36.9 28.3 36.9 1976 35.8 37.8 36.4 27.4 36.1 1977 35.8 38.4 35.2 25.6 35.6 1978 35.3 36.5 32.7 23.8 34.0 1979 34.9 35.4 33.3 23.4 33.5 1980 35.5 35.7 31.2 24.6 33.3 1983 34.7 35.6 30.0 19.9 31.8 T985 34.1 33.8 27.8 18.4 30.4 1987' 35.7 33.1 26.1 16.3 29.1 •Preliminory Reducing the Heallh Consepoencea of Smoking, 75 Yeers of Progress, 1989 6 :, f!. ~ .. NT.':niiiW.Y.y.....r--~i.~_: :-. ............... . .. - - ----- - ----------- 6ZZL L9ZiS
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Cancer Cancer is second to heart disease as a cause of death, and cigarette smoking is the most important prevent- able cause of cancer. Some 30 percent of all cancer deaths-nearly 90 percent of lung cancer deaths- are due to smoking. Among the cancers caused by smoking are cancers of the cervix, larynx, oral cavity, esophagus, bladder, pancreas, and kidney. One of the tragedies of the mid-20th century has been the uptake of cigarette smoking by women. Men began smoking cigarettes in large numbers immedi- ately before and during World War 1, and their death rates from lung cancer began to rise 20 years later. Women began smoking Intensively during World War 11, and 20 years later their lung cancer death rates began to rise, too. Now, lung cancer surpasses breast cancer as the chief cause of cancer death among women. Relative Risk of Lung Cancer Deaths, by Sex I 1 Nonsmokers ~ 11.94 Current Smokers, 35-64 - 9.36 _ 4.69 Former Smokers, 35-64  Men  Women 22.36 Reducing the Heolth Canseauences of Smcking, 1989 Amedmn Cencer society preliminory dala n S£ZT L9ZTS
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Introduotion Development and Organization of this Report This Report was developed by the Office on Smoking and Health, Center for Health Promotion and Education, Centers for Disease Control, Public Health Service of the U1i. Department of Health and Human Servioes as part of the Department'a responsibility, under Public Law 81•222, to report new and current information on smoking and health to the United 8tates Congress, The scientific content of this Report reflects the contributions of more than 50 acientists representing a wide variety of relevant disciplines. These experta, known for their undentanding of and work in specific content areas, prepared manuscripts for ineorpora- tion Into this Report. The Office on Smoking and Health and its consultants edited and consolidated the individual manuscripts into appropriate ohapters. Thesb draft cbaptere were subJected, to an extensive outside peer review (aee Acknowledgments for individuals and their affiliations) whereby each chapter was reviewed by up to 11 experts, Based on the comments of these reviewera, the chapters were revised and the entire volume was assembled. This revised edition of the Report was resubjected to review by 20 diAtinguished scientists Inside and outside the Federal Oovernment, both In this country and abroad. Parallel to this review, the entire Report was also submitted for review to 12 inatitutee and agencies within the US, Public Health Serviee. The comments from the senior scientific reviewers and the agencies were used to prepare the final volume of this Report. This Report contains a Foreword by the Assistant Secretary for Health, a Preface by the Rurgeon General of the U.S. Public Health Service, and the following chapters and appendices: Chapter 1. Introduction, Overview, 9ummary, and Conclu- alons Chapterll. Nicotine: Pharmacokineties, Metabolism, and Pharmacodynemies Chapter iIl. Nicotine: Sites and Mechanisms of Actions Chapter IV. Tobacco 11ee as Drug Dependence Chapter V. Tobacco Use Compared to Other Drug' Dependencies Chapter VJ. Effects of Nicotine That May Promote Tobacco Use Chapter VII. Tieatmeis't ot Tobxoco• Dependozce Appendix A. Trends in Tobacco Use in the United States Appendix 8. Toxicity of Nicotine ' S:4w•4'.At.sQSS'n•,.;.K,;Ay~ ..a.........:,.v.~s....w.•.+wv..;....w ... . ..... ....... . . . . ~. . . ' I ,
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51267 1228 .... ... Current and Former Smokers, 1965-1987 Current smoker Former smoker 1965 1976 198,} 1987 1965 , 1976 1983 1987 (ae.,race,and age) Percentage al Persons All males 20 yeors and over 52.1 41.6 35.4 31.5 20.3 29.6 31.1 31.4 8 20-24 years 59.2 45.9 36.9 31.1 9.0 12.2 9.1 7. 25-34 years 60.7 48.5 38.8 34.8 14.7 18.3 19.8 17.4 1 35•44 years 58.2 47.6 41.0 36.6 20.6 27.3 27.5 28. 45-64 years 51.9 41.3 35.9 33.5 24.1 37.1 40.1 40.1 65 years and over 28.5 23.0 22.0 17.2 28.1 44.4 48.1 53.4 White: . 20 years and over 51.3 41.0 34.7 30.7 21.2 30.7 32.0 32.6 i Block: 20 years and over 59.6 50.1 42.6 40.3 12.6 20.2 23.2 22.2 ! All females 20 years and over 34.2 32.5 29.9 27.0 8.2 13.9 16.4 18.0 Z. E 20-24 years 25 34 s 41.9 43.7 34.2 37.5 37.5 32.6 28.1 31.8 7.3 9.9 10.4 10.8 12.9 13.8 10.5 15.6 ~ year - 35-44 years 43.7 38.2 33.8 29.6- 9.6 15.8 17.1 19.4 1 32 0 8 31.0 34 28.6 8.6 15.9 18.6 20.7 45-64 years 65 years ard over . 9.6 . 12.8 13.1 13.7 4.5 11.7 18.7 19.8 E t White: 1 20 years and over Black: 20 years and over 34.5 32.7 32.4 29.8 34.7 32.5 27.3 27.9 8.5 5.9 14.6 17.2 10.2 10.7 18.9 13.2 i 1 1 ~ Meallh, UNted Slates, 1988, Cemere /or QISease Comrcl, Nalional Cenler far Meobh 9aGslics ~ The above data ore wdghlad; 4 ~.
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51267 1230 , .,wn:4w: `r~. i-~!!!.[fi? .?!lLhlS{{{{ :{:{{{{{ry~(yt'i~ sW~a&dA~6Ya~01~i,.~TTt:{hL4:0~v;aM:R{sss. a:X.....,: \ s'.Na+. . 7sY.9r:'~...{..se. tS•: Prevalence of Cigarette Smoking by Socio-Demographic Characteristics (17 years and older), 1986 Percentoge Male Female Marital status Never Married 25.5% 20.6% I Currently Married 29.5 24.1 Widowed 27.1 16.1 Seporoted or Divorced 41.8 38.6 Education 11 orFewerYears 38.0 27.8 12 Years 33 2 25 9 1 13-15 Years . 25.4 . 22.9 16+ Years 18.0 135 Household Income 10,000 or Less 354 25.9 1 10,001-20,000 31.8 25.6 ~ 20,001-30,000 34.9 28.1 001-40 30 000 30 0 25 1 , , 40,000+ . 24.1 . .20.0 i Region Midwest 32.3 21.7 I Northeast 28.0 24.0 Southeast 30.4 26.1 ~ West 26.7 22.7 ! Cenlers fer Disease Conlrol. OBice on Smoking and Heullh ' 6 \ TEENAGERS AND SMOKING Teenagers appear to be turning away from cigarettes. In the years between 1976 and 1981, the percentage of high school seniors who smoke every day declined from 29 percent to 20 percent; since then, a small , decline has occurred. Young men are doing much better than young women, and there are now more !: girls who smoke than boys. Children take up smoking in three stages. The first ; is experimental; 70 percent of children experiment with smoking during the course of their childhood, , 40 percent while they are still in grade school. The second, and more dangerous stage, is occasional use, ; on weekends, at parties, on dates. The final stage is " when the young person becomes a confirmed, regular `. smoker. By the time the age of 20 is reached, the process is usually completed About a third of the young men and young women at this age have become smokers and two-thirds have escaped. k
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, I989 the World Health Organization dropped this semantic etinction between habttuating and addicting drugs because it was +oognired that habitual use could be an strong,ly developed for "ine as for morphine, that social damage generally accompanied )rsonal damage, and that behavioral characteristics of drug use iuld be similar for the soealled habituating and addicting drugs. in i effort to shift the focus to dependent patkrna of behavior and way from moral and social issues associated with the term Idiction, the term dependence was recommended. It is now clear that even by the earlier diatinction In nomencla• ire, cigarettes and other forms of tobacco are addicting and actione ! nicotine provide the pharmacologic baeis of tobacco addiction. The irm "dependence producing" may also be used to describe cigarettes nd other forms of tobacco use, analogous to actiona of other drugs ng„ opiates, cocaine), Since 1964, considerable additional evidence as been compiled that substantiates these conclusions. The present .eport reviews this information and the relevant literature. Previous Surgeon General's Reports provided current reviews or ie health consequences of cigarette smoking particularly relevant ) public health. For example, despite the accumulating evidence, ln ne early 1960s there was little recognition by the public of the .ealth harards of smoking. Each Report examined specific Informs• ton considered to be important for public dtseemination. A brief eview of topics addressed in these reporta provides the background ar the present Report. In the late 1950s, the U.S. Public Health Service, the National )ancer Institute, the National Heart Institute, the American Cancer ioclety, and the Amerban Heart Association appointed a study fioup to examine the available evidence on smoking and health. Phis study group concluded that excessive cigarette smoking is a ausativo factor in lung cancer. In 1962, Surgeon General Luther Terry established an advisory )ommittee on smoking and health. This eommittee released its ieport on January 11, 1964, concluding that cigarette smoking is a sause of lung cancer in men and a suspected cause of lung cancer in women, and increased the risk otdying from pulmonary emphysema. Che next Report was Issued in 1967 (US PH81968a) and stated that 'the caee for cigarette smoking as the principal cause of lung cancer is overwhelming." Further, the 1987 Report concluded that: "There Is an Increasing convergence of many types of evidenoe ... which strongly suggests that cigarette smoking can cause death from coronary heart disease." The 1967 Report also concluded that "Cigarette smoking Is the most Important of the causes of chronic non•neoplastic bronchopulmonary disease in the United States." The 1968 and 1969 Reports (US PHS 1968b, 1969) strengthened the conclusions reached in 1967. The 1971 Report provided a detailed I 11
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a ......:,_ _.....~..._.......~_~._....... .:~..... ......~._ -----.-- --_ _..... _ SMOKING AND HEALTH Survival of Male Smokers and Nonsmokers from Age 35 People who smoke cigarettes run a greater risk of pre- mature death than people who do not smoke. This is true at every age, among men and women alike, but the difference is greatest at younger ages. The accompanying illustration compares the sur- vival of male smokers and nonsmokers. As can be seen, 10 percent of smokers die before they reach 55, but only four percent of the nonsmokers. By age 65, 28 percent of the smokers are dead, but 11 percent of the nonsmokers. By age 75, 57 percent of the smokers are dead, but 30 percent of the nonsmokers. Cigarette smoking brings economic loss as well as human suffering. It accounts for $22 billion in medi- cal costs each year and another $43 billion in lost production. Medicare and Medicaid alone pay out at least $4.2 billion annually to care for those who are i ll from cigarette-related diseases. (Ihousnnd.) 100 --- .~: 1%a \ -**% 80 - q% 4* % , 60 ~- ; 40 20 35 40 45 50 55 60 65 70 75 80  Smokers =-Nonsmokers 5oriey ef A<tiorle. 9 ...................... -r.. ..•.. ..... . . ££ZT L9ZtS
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The Cigarette Business in 7985 (billions of dollars) E<cncmlc Reseorch Serviae, USDA 22 ® e 51267 1246 i
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Daily Cigarette Smoking by High School Seniors, 1975-1987 tVercenn 50 40 10 1975 1977 1979 1981 1983 1985 1987  Totol m ~Mo1es.. . Females Na6onotIn.NuWS of D.uq Abus. A. S .....-uSYr.::m..w--......_ .........................._... LEZZ L9ZiS Smoking causes harm even to the youngest smoker. It almost immediately brings about reduced lung function, smoker's cough, and other respiratory diErculties. Its most harmful consequence is the likelihood of lifelong addiction. The earlier a person starts smoking, the more difficult it is to be able to quit later in life. Seventy five percent of all teenage smokers come from homes where parents smoke. FORMER SMOKERS Most people who smoke would like to quit. At least two-thirds have tried at one time or another, and at least one-third try in any one year. Quitting, however, can be difficult_ Out of every 100 smokers who try to quit, 60 percent go back to smoking before the first Vear is out. The rate of relapse for tobacco use appears to be very similar to that for alcohol and heroin. Surveys have shown that quitting smoking is as hard for smokers as giving up heroin is for heroin users, or giving up alcohol for alcohol abusers. In one study 7
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rwt tltte taa r a M r.tM Nq r, W x. M t.Ktt W8 W lha tlrardls Jtwt Yr11ht IMaku ti ekt Yana of itpraantatlwt tlnhlytar D.C. 10111 Owr Mr. lpttkrrl I tt ftatrcl u tetwtlt to tha Ctqr.a tM Itt! Wrpn Ottant't M/trt a tM In1th eawtlrataa af taktt{ tt aw/tW h NMltt $(a) .t /M (uklte yullk Clpnttt IwHV Me of 11M. Ra 6ee ratlret tkt Menta7 of tulth aM luat taMat ta tntasll 06 ttwtl laparr H Oratran st tM Mtllh taanwaae N.txrfM aM eueh nMUeMttlttt Cat la(ttlttta sr tM Mcratary ul Iea apprMtltw. Wq1pn Otanl•t ttttnt at to tM .dtaal llwr.tun Yilaty to ttt t.ry HOOr• Mnua ot tht tnat aq.uta.l.ntank tn t1la.wt. a eMra{M raNt• of tnla teplt It wrratel, pafttt tM ttp Iftuee Ma/sh rttlt H eabatta wt wtl/ad to pralwt nµrttr Yq t.eMtet Mw ,nte i/ffteeitt to twetlyt fall reNrt .aalww aLt awh olt/fleultp fa.tt lat/c ltrl /ut P tht M1ttl1V PnpcriNa af Mattn. MICF tt rnNnt 4, ell /ora $ a.Me<e. SM eepart /uttktl ta<lY/tt aMt tM .tataeat IYt /aeer\la t.wea • tcatatw ara tlMlu la Ikaa tMt NitrMta N{/tttw tr.that.rup pa0 at Mwn el1 etattr. fFeatf tueh t"aneeMt4. kalNrtata /rallert af M Mttar Alt it 4aut ItMat W.w to ptttlq, pttwn taltk tfpWatlta. Italtkytw /ta/4et, tatrmtt7 /raN. aM Vwr.wnt qaeta dwla tnttltw te ttra/eMe Ileptw M t.law eka paLlte ef tFa atll.tlY attn iI tafita Wa. Anntn< ItMI a eM W ltely awla tf ItMcea us tMal/ Ie ntetel vtlp .eMt Malth wenlt/1 Nu tNUlfd a Mlarala td awMlat ta4aa Ne4/a atC tMntttaat, prtvctttq tM #StLStta a saMaa .aa .ute M a/rltrltr Meewt o/ tM /tttieulq tt ear<w4 daew I41ata aaa tt St nn1/ ttta.lftMe. ue.aa taet aaa rf tieatta N/Ntla lrltt /aat/ eh/l/Mat aM Yelaseaat, tMal anleula w 114 /tatnetta.l /n/ an ehwl/ ala lecle.. taMeca. Cltretttt raklep the shlat .wtectla anr4 at pna[Yre Nath to thlr aanarf, to ntMalkle far nata tNt 300.000 pewtt.ra tuttht ottk Yar. 7ka 4104004 talat of atckttl l.ttlt/ra pltclt/ tM,.t011a af taMCea u.t tt tM tN of tM Wtll<Melth ytnia ihe etalrtttw of th11 npart Prarlie wthar <anUtal ratste fae ttnytMeMt eut ttbnr le et1.u eaMCea .tc Ie oar aclttq• ttat 0 t art ateteuq• 7M Ltwt of ntaeea MI[etlst Mt Iata tlhtttal ta Irarlrar eutLat the 1{tUl/lta a aw 1LLt nfettr tttltltl enna„t. Ittetralf, ~ '. har atl. u, ..w., w,o. a<r.e.q
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and nicotine levels be displayed in advertising. These are measured by machine, and what a machine measures does not necessarily correspond to what a smoker actually obtains. A cigarette found to be in the I to 5 mg. tar range can become a 15 to 20 mg. tar cigarette if the smoker takes more or deeper puffs or even partially blocks the ventilating holes or channels which are found in some cigarette filters. SMOKING AND THE WORKPLACE Both cigarette smoking and occupational exposures can cause lung disease. In some cases, as with coal miners' Black Lung disease, the two exposures work independently to increase the risk and severity of the disease. In other cases, the,v interact to create more disease than would be anticipated simply by adding the separate effects. One of the first industrial products shown to inter- act with cigarette smoking was asbestos. Workers exposed to asbestos who do not smoke experience five times the risk of lung cancer as nonsmokers who are not exposed, but those who work with asbestos and are smokers encounter a 50-fold risk. Heaw smokers have an 87-fold risk. Lung Cancer Mortality Risks, Asbestos Exposure. and Smoking 11.00 Nonsmokers, no exposure to asbestos = 5.17 Asbestos workers who do not smoke ~ 10.85 Smokers, no exposure to asbestos 53.24 Asbestos workers who smoke 87.36 Asbestos workers who smoke more than 1 pack a day The Health Consepaencer o! Smokinp. Cancer cnd Chronfc Lung Di.eose in the Wor4place, 1985 17 T6ZT L9Zi5
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51267 1234 ..,...-~+.•:,i...,. -; ~ ,.....®.,r..,.-.- -.~_.._.:~.>~as..~sdeY HEART D/SEASE, CANCER, STROKE, AND CHI;'ONIC PUIM(7NARY DISEASE In 1982, the American Cancer Society enrolled more than 1,2U0.000 persous in a six-year study of the health effects of smoking. Information has been obtained for the first four years of this study which provides new estimates of the relative risks of death encountered by smokers and nonsmokers. Near! Dixuse More people die of heart disease than of any other disease or cause, and one-fifth of these deaths are due to cigarette smoking. Smokers are at nearly uvice the risk as nonsmokers; those between the ages of 45 to 64 are at nearly three times the risk. Smoking, hypertension, and elevated cholesterol are major risk factors for heart disease. Smoking, alone, doubles the risk. When it is combined with either high blood pressure or elevated cholesterol, the risk increases to four times. When all three risk factors are present, the risk is eight times greater. Women who use oral contraceptives substantially increase their risk of heart disease if they smoke. 10 Relative Risk of Heart Disease Death, by Age and Sex Risk Factors for Coronary Heart Disease Iroie per 1,000 men age 30-59 at entryl 200 Nonsmokers 2.81 160 03.00 Current Smokers, 35-64 120 1.75 1.43 Former Smokers, 35-64 80 ~ 1.62 -1.60 40 Current Smokers, 65+ - 1.29 1.29 Former Smokers, 65+ None One Two Three ~: of 3 Factor Factors Factors>: Risk factors: Smoking, Elevated Cholesterol,$; y. Hypertension  Men  Women Reducing Ihe Health Consequences ol Smoking, 1989 American Cancer Society preliminary data The Healrh Can.equences of Smoking: Cnrdiovmculnr Diseose,1983
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CIGARETTEdfARKETING Average Tar Contents of U.S. Cigarettes, 1968-1987 The cigarette has changed over the years. In 1945, five cigarette brands, unfiltered and 70 mm long, ac- (milliqroou ot ler) counted for 90 percent of all cigarette sales. In the 25.0 1950s, filtered and longer cigarettes became popular, in the 1960s, low-yield cigarettes made their appear- ance, and in the 1970s, new ultra low-yield cigarettes 20.0 began to be marketed. These changes have brought about a radical reduction in tar,vields. The average tar yield in 1954 15.0 was 36.5 mg., was 21.6 mg. in 1968, and is 13.2 mg. today. This has been accomplished by new tobacco processing methods, new filters of varying design and 10.0 materials, and changes in the design and construc- tion of the cigarette. More than 50 brands of cigarettes are offered for 5.0 sale, packaged in more than 200 varieties and sizes. The choice is wide. One leading brand is offered In eight different versions, In hard pack and soft pack, in 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 lengths of 85 and 100 mm, and with tar vields of 16 mg. and IQ mg. Another brand is offered IIl six pack- Faderel Trada Commi.,ioe ages, with and without filters, in hard and soft packs, in 70 mm, 80mm, 85mm :md ]00 mm lengths, and with tar yields of 21 mg., !6 mg., and 9 mg. 23 L5ZZ L9ZtS
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Relative Risk of Death from Stroke by Age and Sex Chronic Obstructive Pulmonary Disease Deaths: Smokers vs. Nonsmokers ® 1 (dealhr per 1DU,epO pancns~ 500 Nonsmokers 3.67 400 4.80 Current Smokers, 35-64 ~ 1.38 300 - 1.41 Former Smokers, 35-64 200 ~ 1.94 - 1.47 100 Current Smokers, 65 + ~ 1.27 a ~ . Age 35-44-- --45 54 - 55-64 65-74 75-80 _ 1.06 Former Smokers, 65+  Men  Women Reducing the Health Conrequencec of Smoking, 1989 American Cancer Sn<ietr preliminary data  Smokers mm Nonsmokers U.S. Veteran. Study, vnpublished data 13 ...................___._.,_._-..........- ~'~"TUn • ....... - .; , .. y. g LEZT L9ZL5
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Cigarettes are taxed by the Federal Government, by all 50 states and the District of Columbia, and by several hundred munidpalities. State and local taxes range from 2 cents to 38 cents a package. Federal, State and local taxes now make up less than 30 per- cent of the retail price of cigarettes, down from 50 percent 25 years ago. i ~ 1 ~ f '  ! ' 26 State Cigarette Tax Per Pack, 1987 2C North Carolina 2.5c Virginia 3e Kentucky 7c South Carolina 84: Wyoming 12C Georgia 13c Maryland Missouri Tennessee 144: Delaware 154 Arizona New Mexico 15.54 Indiana 164; Alaska Louisiana Montana 16.5c Alabama 174; New Hampshire District of Columbia Vermont West Virginia 18C Idaho Mississippi Ohio Pennsylvania 20c Colorado Nevada Illinois 214 Arkansas Michigan New York 23c South Dakota Oklahoma Utah 51267 1250 , \ 244 Kansas Florida \ ~; . 25c ~ Rhode Island k'26c ~ Connecticut ~Iowa \ Massachusetts Texas 27c Oregon New Jersey North Dakota Nebraska 28c Maine 30c Wisconsin Hawaii 354: California 38C Minnesota
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CIGARETTE PRICES AND TAX6S The retail price oE cigarettes doubled in the years between 1979 and 1987, from 60 cents to $1.19. The biggest inazase came in the three years between 1981 and 1983, when the Federal excise tax rose by eight cents and the retail price rose overall by 25 cents. (In these years, cigarette consumption dropped from 640 billion to 600 billion.) Prices of Cigarette Packages, 1965-1987 Icanb) 200 160 1965 1967 1969 1971 1973 1975 1977 1979 1981  State & Federal Taxes E Weighted Average Price Tobocco ImKWia 1983 1985 1987
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PIPBS, CIGARS, AND S610KELESS TOBACCO The use of pipes, cigars, and smokeless tobacco has been declining for many years, except for one prod- ua, moist snuff. Sales of this product increased during the early 1980s. Tobacco in any form is addictive and presents health risks. Those who smoke pipes and cigars are at greater risk of cancers of the oral cavim, lanout, pharynx and esophagus and have higher death rates than nonsmokers, although not nearly as high as those of cigarette smokers. Smokeless tobacco is a cause of mouth cancer, other oral diseases, and other adverse health effects. Young people who use smokeless tobacco often move on to cigarette smoking. In 1986, Congress be• tame concented that the use of smokeless tobacco was increasing among young people. It enacted legislation which bans its advertising on radio and television and requires health warnings on packages and in advertis- ing, The warnings are,"This product may cause mouth cancer", "This product may cause gum disease and tooth loss", and "This product is not a safe alternative to cfgarettes". 5126? 1242 ~h<~. MMM. Per Capita Consumption of Cigars, Pipe Tobacco, Chewing Tobacco and Snuff, Agr; ` 18 and Over . > Cigars tnumberj 1960 1988 Pipe Tobacco (poundsi Chewing Tobacco (pounds) 80 40 Economlc Reseerch Servlcq USDA
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Cash Receipts and Exports by Agricultural Commodities, 1954 & 1986 ~million. of dollan) 1954 Cash receipts Volve of exports 1986 Cash receipts Value of exports Total crops & livestock 529,632 f3,053 $135,184 $27,859 Total livestock & livestock products 16,276 332 71,572 25,013 Total crops 13,556 2,271 63,612 22,846 Grains & feed crops 4,876 750 23,797 9,059 Cotton 2,702 780 2,920 1,419 Oil bearing crops 942 306 10,507 6,293 Fruits & tree nuts 1,220 171 6,900 1,281 Vegetables 1,548 101 8,705 1,174 Tobacco • 1,161 303 1,918 1,203 Other crops 1,017 311 8,865• • 2,417'• 'Culendar yeer '•Fiunl yeor bpinninp Ocraber 1, 1996 Ecenomic R.s.arcA $.nrice, USDA 29 t:
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51267 1254 1987 Crop Val of Tobaccc ~o Seveo Stotes, 1983-1987 1986 1984 1985 ly.y ~o 1983 $699 18.6 % $730 (ddton in m~ttio"sl $936 23.8% 441 18.2 $1,054 21.5% 554 23.1 N. Carolino $1,020 28.1% 756 28.0 858 28.8 112 12.5 149 16.0 KenluckY 713 27.0 788 16.3 167 16.0 116 7.1 149 6.7 203 20.2 184 10.9 129 6.3 S. Corolina 195 10.7 150 7.7 186 12.9 Virginio 253 11.9 222 10.9 108 3.4 117 3.8 237 13.2 7ennessee 155 4.3 140 4•3 37 3.1 28 2.5 Georgio 174 5•5 2,4 40 . 3.3 57 5.5 31 Moryland •The Paresnlo9es represeM th. ProPOn'an ol toml lorm receipls Irom wboc<c Econemic ReseorcF 5ervwe, USDA 30 \\
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51267 1232 ''.;•,a,eKw++iurlbYdl.W"d~ilJlGY`1bYG'fYv7~67i.9W/.•:N.i+!!iA'in~7.W.}r!:,~i~ldei37t9Q1:1Mlb06~A~Y .~l.{i . ~.. . ~ :7//~70t{Uf1fi7COk'8r.W31R.QY.~.}S:SStit(Sy.~'~M•h[::+fn~ki::52'..?sii`.r•~:'~..n." 1 ?l~ conducted solne years ago it was found that 40 per- cent of smokers, drinkers, and heroin users were still abstaining after two months, and that by the end of the first year 35 percent of the drinkers and 25 perca:nt each of the smokers and heroin users were abstaining• Although it may be difficult to give up smolqng, it can be done; 40 million men and women in our population have done it and the number keeps increasing every year. What is required for success is strong motivation, the support of friends and family, and for some smokers, professional help, obtained individually or in formal smoking cessation pro- grams. Nicotine chewing gum is being used in many of these programs to help the smoker. For those who succeed, quitting pays. Ten years after quitting, the death rate of former smokers is approximately the same as for those who have never smoked at all. a Relapse Rate Over Time for Heroin, Smoking, and Alcohol (ant ot abslainars) E 80 60 40 -~y L 20 L t 2 weeks 3 week 3 m ~/ 6 months 12 months \ ~  Alcohol Abuse 110001011ISmoking . .. Heroin Use ~ ~ Hunt, a1 al. 1971 The Heallh Consequences of Smoking; Nicotine Addiction, 1987 ~ t ~ X r
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drugs. A two-pack-a-day smoker spends from 3 to 4 hours each day with a cigarette in mouth, hand, or ash tray; takes about 400 puffs, and inhales up to 1,000 milligrams of tar. Tar is the oilv material which remains after tobacco smoke has been passed through a filter. It consists of more than 4,000 chemical substances. Fony-three of these are known to cause or promote cancer, and 401 others are toxic or harmful in other ways. There is no safe level of exposure for many of them. Carbon monoxide is one of the gasses in tobaccn smoke. When it is inhaled, it combines with hemo- globin in the blood to form carbosyhemoglobiu, which interferes with the body's ability to obtain and utilize oxygen. It is this gas which is present in auto- mobile exhaust which kills those who commit suicide by running a car engine in an enclosed garage. It is implicated in mam, of the diseases associated with cigarette smoking, including heart disease and harm- ful effects on the development of the fetus. Smokers have levels of carboxyhemoglobin from two to 15 times higher than nonsmokers. Nicotine is a drug produced by the tobacco plant and In large quantities Is extremely poisonous. It is an addictive drug which affects the bodp in different wa,vs. In stressful situations, it can act as an anti- anxiety agent like a tranquilizing drug. while in A Smoker's Level of Nicotine over 24 hours (blood nteottne concentration • np/ml) 50 40 Som Bsnowil:, Kuyl, Jacob (1982) The Health Con:equences of Smokinp; Nieorine Addicrion, 1987 8pm 8am 6£Zi L9ZTS
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Cigarettes gained their popularity over other forms of tobacco for several reasons. They are Inexpensive (or were until recently), they are the only form of tobacco which large numbers of women have ever used, and they are profitable to manufacture, which has made it possible for the cigarette companies to spend large sums of money advertising and promot- ing them. The overriding reason why people continue to smoke cigarettes is that although all tobacco is addic- i tive, cigarettes are most addictive. Cigarette smoke is , relatively mild and can be more easily inhaled than pipe or cigar smoke, which enables the smoker to absorb more nicotine, more quickly. An analogy B the , more immediate and purportedly more gmtifying re-, sponse which cocaine users obtain when they smoke it as crack. In the early 1940s, a precipitous rise in lung, cancer deaths began, and by the mld-1950s scientists were able to say with cenainry that cigarette smoking was the overriding cause of these deaths. Later, they established that cigarette smoking causes other dis- eases, Including other cancers, heart disease, and , chronic obstructive pulmonary disease. The turning point in America's epidemic of smok- ing came on January 11, 1964, when the Public Health Service issued its epochal Smoking and Healtb: Re/iort oj fhe Advisory Committee to rhe Surgeon Ceneral, which identiHed cigarette smoking as a cause of illness and premature death. This began a national and worldwide effort by Government and private agencies to alert the public to the hazards of tobacco use. This effort is continuing. The World Health Organization and the health agencies of virtually every country in the world now have anti-smoking programs in progress. in the United States the effort at the Federal level is mandated by law. State and local health and education departments and medical and health agencies are carrying on aggressive programs, among them the American Cancer Society, the American Heart Association, the American Lung Association, and the American Medical Association. Although cigarette smoking has declined, the ciga- rette companies have prospered. In 1985 they reported profits after taxes of $3.4 billion, the largest amount In the history of the industry until that year. However, the tobacco farmer and the tobacco-growing economy have suffend. 3 LZZZ L9ZTS
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PASSIVE SMOKING Nonsmokers who live or work in the company of smokers absorb nicotine, carbon monoxide and other constituents of tobacco smoke just as smokers do, although in smaller amounts. How much they absorb depends on the smoke concentration, the quality of the ventilation, and the time spent in the area. Non- smokers heavily exposed to other people's smoking may "smoke" the equivalent of one or two cigarettes a day. Tobacco smoke is a health hazard to nonsmokers, a cause of lung cancer, and is harmful to babies and young children. It is annoying and physically irritat- ing to many people, and can worsen the symptoms of asthma, chronic bronchitis, and allergies. Separating smokers from nonsmokers may reduce, but does not eliminate nonsmokers' exposure. At the present time, 42 States and more than 300 local municipalities restrict smnking in restaurants and other public places, and 13 States have extended this protection to prilate work places. 61anr employers have instituted their own regulations. All Federal agencies restrict or ban smoking in public areas and work places, and smoking is banned entirely on air- plane flights scheduled for two hours or less. A Nonsmoker's Absorbtion of Nicotine (.rinery cellnine-ng/ml( 30 0-1.5 1.5-4.5 4.5-8.6 8.6-20 20-80 hours per week exposed to sidestreom smoke Wald, et ol., 1984 ihe MeoBA ConeeQu<nce. or /nrolon/ory Smoking, 1986 The previous section describes the enormous impact that tobacco use'has on public health in the United States. The health effects of tobacco on smokers and those exposed to tobacco smoke are numerous and well documented. However, removing the cause of the problem, in this case tobacco, is not a simple task. The tobacco industry In the United States is exten- sive, profitable and deeply rooted in the tradition of American agriculture. The production and marketing of tobacco has driven availability and use of the prod- uct. Conversely, these activities over the past 25 years have been influenced by health concerns. To accom- plish the public health goal of reducing, and ultimately eliminating, tobacco use in the United States, an understanding of the complex interrelation- ships among the economic, social, political, and medical aspects of tobacco use is necessary. This next section describes the ecolwmic a.y)ects of the industry today. 19 £bZT L9ZLS :f.
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Tobacco has been buffeted by declining markets and foreign competition. The cigarette companies have leamed to produce cigarettes using less tobacco and are importing more tobacco from abroad, while their total production is turning downward. At the same time the market for cigar, pipe, and smokeless tobacco has fallen. SSZT L9Zt5 Tobacco Utilized per 1,000 Cigarettes, 1950•1987 (poundf) 3.0 2.4 1.8 1.2 0.6 1950 1955 1960 1965 1970 1975 1980 1985 1987 Economic Rnearch S.rvtc.., USDA 31
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use of tobaoco products, such as in adole8cetlts first beginning to smoke, is usually aecompanted by a number of unpleasant symptoms which disappear foltowing chronic tobacco use. Chapter III: Nicotine: Sites and Meohaniame of Actions 1. Nicotine ie a powerful pharmacologio agent that acts in the brain and throughout the body. Actions include electrocortical activation, skeletal muscle relaxation, and oardio'vascular and endocrine effecta. The many biochemical and electrooortioal effects of nicotine may act ln concert to reinforce tobacco use, 2. Nlcotine acta on specific binding sites or receptors throughout the nervous system. Nicotine readily croeees the blood-brain barrier and accumulates in the brain shortly after it enters the body. Once In the brain, It interacts with specific receptors and alters brain energy metabolism in a pattern consistent with the distribution of specific binding sites for the drug, 8. Nicotine and smoking exert effects on nearly all components of the endocrine and neuroendocrine systems (including oatechol• am,ines, serotonin, corticoeterolde, pituitary hormones). Some of these endocrine effects are mediated by actions of nicotine on brain neurotranamitter systems (e.g., hypothalam• ic-pituita .ry.axis) In.sddition,.Ait+pRAnQ,~,as,d~rect perlpherally mediated effects (e.g., on the adrenal medulla and the adrenal cortex). Chapter IVi Tobacco Use as Drug Dependence 1. Cigarettes and other forms of tobacco are addicting. Patterns of tobacco use are regular and compulsive, and a withdrawal syndrome usually accompanies tobacco abstinence. 2. Nicotine ie the drug in tobacco that causes addiction. Speclfi• cally, nicotine is peychoactive ("mood altering") and can provide pleasurable effects. Nicotine can serve aa a reinforcer to motivate tobaax~aeeking and tobaoco-using behavior. To1er ance develops to actions of nicotine such that repeated use results in diminished effects and can be accompanied by increased intake. Nicotine also causes physical dependence characterized by a withdrawal syndrome that usually accompa• nies nicotine abstinence. S. The physical characteristics of nicotine delivery systems can affect their toxicity and addictiveneee. Theretbre, new nicotine delivery systems should be evaluated for their toxic and addictive effects. 14 ..,~, . . . ... , , . ,:r...,,,,, . . .. .. ... i I
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51267 1244 CIGARETTE MANUFACTURING AND MARKETING Few businesses are as closely held and almost no busi- ness is as profitable as the cigarette business. For nearly 80 years, six companies have produced virtu- ally all the cigarettes manufactured in America. The companies are Philip Morris, R.J. Reynolds, Brown and Williamson, Lorillard, American Brands, and Liggett Group. Share of Market Among U.S. Cigarette Companies, 1987 Philip Morris Alpine B.nson 6 Nedges Cambridge Marlboro Merit Pcrlim.nt Ployen Sarotogo Virginio Slim. generic. ~ ; ~ ~ , ~. ~ 1 \ R.J. Reynolds ~? Bright Camel Cenlary Dnral More Now Ritx Snlem Slerling Vontoge Winston Liggett Group Ere Lark L&M generics American Brands Cerbon Locky Strike Mocba PoIlMall Silw Thins Tall Toreylon 20 NewYork Times, Jone 12, 1980 Lorillard Kenl Moa NewpoA Old Gold Satin True Brown & Williamson Barclay Bsloir Kool Raleigh Richlcnd Viceroy generics
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Women's Deaths, Lung Cancer and Breast Cancer, 1950-1988 ot"aund,j 50 10 1950 1955 1960 1965 1970 1975 1980 1985 1988 ow t Lung Cancer  Breast Cancer Amarrtan Conpr Suciefy n 51267 1236 Stroke More than 2 million persons in America suffer from ' the effects of cerebrovascular disease or stroke, and s more than 150,000 die from this each year. Nearly 20 ;; percent of these deaths are due to cigarette smoking ` Cbronic obstruch'ce' puhnonary duruse Chronic obstructive pulmonary disease is a debilitu- ing disease, with death commonly preceded by years : of disability and suffering. Eighty percent of deaths ;.. from this disease are attributable to smoking. ,'. Emphysema is a form of this disease. More than ,' 2 million persons suffer from it, at least a quarter of ;` whom are so seriously handicapped that they are no longer able to work or maintain a household. Emphysema was once mainly a man's disease but it is now a woman's disease as well, as more women have :: taken up smoking. :i
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All six companies have been involved in mergers, acquisitions, and corporate change. R.J.Reynolds in 1984 became RJR Nabisco and in 1988 was purchased by an investment house, in the largest corporate take- over in Amerlca's history. Philip Morris has become the owner of General Foods and Kraft Foods. Brown & Williamson's parent company, BAT Industries, has added the insurance giant, Farmers Group, Inc. to its components, and Lorillard has become a part of Loews Corporation. Liggett & Myers, once part of a conglomerate, is now the Liggett Group. Tens of billions of dollars have been involved in these restructurings, all of which have had their ori- gin in profits from the cigarette business. Cigarettes are the most profitable of company lines overall. Among the five largest companies, they accounted for 27 percent of sales in 1985, but 60 percent of profits. Cigarettes are an international business. Of the four largest cigarette companies worldwide, three are based In the United States; Philip Morris, RJR Nabisco, and American Tobacco. The fourth company is BAT Industries of Great Britain. The structure of the United States cigarette busi- nes is shown in the accompanying illustration, which describes the 1985 business year. Total domes- tic sales in that year were $30.2 billion, to which was added $1.2 billion in foreign sales. Of this, $8.9 bil- lion went to Federal, State and local governments in taxes, $7.6 billion to distributors, and the rest to the six companies. The companies netted a profit after taxes of $3.4 billion, which was more than their com- bined payroll of $1.5 billion and their domestic tobacco purchases of $1.7 billion. Cigarette consumption in the United States has been falling, but profits have been rising. In 1982, company profits after taxes were $1.3 billion, while three yeats later they were $3.4 billion. The compa- nies accomplished this by controlling costs and raising prices. Although cigarette company sales and profits are large, the business itself is relatively small. In 1985, it employed 35.500 persons, 5,000 less than three years earlier. Manufacturing is almost entirely automated. Machines take the stems and midrib portions of the tobacco leaf, add natural tobacco and additives, and form this into one continuous cigarette with filters if required, which is then cut to the required length and placed In packages. 21 SbZi L9ZT5
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aeekinQ and drug•teking behavior is driven by strong, often irresistl- blc urges. It can persist despite a desire to quit or even repeated attempts to quit. Such behavior Is also referred to as "habitual" behavior. To distinguish drug dependence from habitual behaviors not involving drugs, it must be demonstrated that a drug with psychoactive (mood•altering) effects In the brain enters the blood stream. Furthermore, drug dependence (s defined by the occurrence of drug-motivated behavior; therefore, the psychoactive chemical must be capable of functioning as a teinforoer that can directly strengthen behavior leading to further drug Ingestion. Additional criteria are often used to help characterize drug dependence. Several are associated with the drug•taking behavior itself: (1) the behavior may develop into regular temporal and physical patterns of aea (repetitive and stereotyple); (2) drug uso may persist despite adverse physical, psychological, or social conse• quences; (8) quitting episodes are often followed by resumption of drug use (relapse); (4) urges (cravings) to use the drug may be recurrent and persistent, especially during drug abstinence. Similar• ly, several common effecte of dependenoe•producing drugs can strengthen their control over behavior and inorease the likelihood of harm by contributing to the regularity and overall level of drug intake: (1) diminished responsiveness (tolerance) to the effects of a drug occurs, arid may be accompanied by increased intake over time; (2) abstinence•aseoclated withdrawal reactions (due to physical dependence) can motivate further drug intake; (3) effects that are considered pleasant (euphorlant) to the drug user can be provided by the drug itself. Dependence•producing drugs can also produce effects that Individuals find useful, For example, many addicting drugs have therapeutic uses In medical treatments of various disorders. Most medically approved drugs that are addicting, however, are generally only available by prescriptlon. Effects of a drug considered by the individual to be useful can promote initiatlon of drug use, strengthen the addiction, and contribute to relapse following ceesa• tion of use. Tobacoo and nicotine are considered in the Report in light of the above criteria. In brief, the organization of the Report ia as follows: review of evidence that tobacco use Is accompanied by orderly patterns of uptake of nicotine in the body and brain resulting In the development of tolerance (Chapter II); review of how effects of nicotine (n the brain and the rest of the body are chemically mediated (Chapter lIl); review of the evidence that tobacco is addicting and that nicotine is an addicting drug (Chapter IV); comparison of tobacco use with other addictions and of nicotine with other addicting drugs (Chapter V); review of possible effects of nicotine that may promote the use of tobacco and present impedi• menta to quitting smoking (Chapter VI} review of strategies for 8
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CI GARE7TE ADVERTISING The cigarette companies spent nearly $2.4 billion In 1986 to promote the sale of their products. Almost $1 billion was for advertising, $630 million went to retailers in promotional allowances, and the remain- der was spent for a myriad of promotional entetprises-premiums, testimonials, public entertainment, direct mail promotions, and street- corner and mail order sampling. The companies sponsor or support many sporting events, such as ten- nis tournaments, auto races, and basketball games. One company publishes a magazine which it distrib- utes free to 11 million addressees. The cigarette companies were the largest advertis- ers on television and radio until 1971, when Congress banned such advertising, and they are now among the leaders in magazine and national newspaper advertising.'I'hey are first in outdoor and transit advertising. In 1984,'Congress enacted legislation which requires that cigarette advertisements and packages contain four warnings, which are to be rotated every three months. The warnings are based on medical information contained in the Surgeon General's reports on the health consequences of smoking. Cigarette Advertising and Promotion, Cigarette Health Warnings 19&6 (mnrona of dollorr) Advertising 'Newspopers $120 340 M in SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart Disease. Emphysema, And May Complicate Pregnancy: agaz es Outdoor 301 Transit 35 Point of Sale 136 Total $932 SURGEON GENERAL'S WARNING: Duitting Smoking Greatl Reduces Serious Risks to Your Health No Promotional allowances to retoilers 630 . y w Oth r : e Sampling Premiums & others items Public entertainment All others 99 210 71 440 SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal Injury. Premature Birth, And Low Birth Weight. Total 820 Totai 2,382 SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide. Federol Trode Commlesion Pvblle Low 98-l7l,'Comprehanriw Smoking E&cntion Acl- 1984' 2'7 \ rSr.wx(ddt iW+a. . .. . . . , f j' . F .. ;~~ .... ..... :..... ... ~'.: .r ._ ... .. . ' _ . TSZT L9ZiS
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24 Like many other consumer products, cigarettes are . produced and promoted to appeal to different audi- . ena5. Some brands are "upscale" or "high-end", offered at premium prices, some are aimed at women smokers, and others are "macho" brands. Menthol cigarettes are preferred by many black smokers and are consequently promoted heavily to this market. For the first time since the depression years of the 1930s, price competition is occurring in the cigarette business. Several strategies are being employed- rebates and coupons, packs of 25 rather than 20 ciga- rettes offered at the same price, and new, generic brands sold at discounted prices. At least half of all cigarettes are sold in super- markets and other food stores, mostly by the carton. In recent years, sales by gasoline stations have increased while sales from vending machines have declined. About half of all cigarettes are sold to retail- ers through wholesalers and the rest are sold directly to chains and other large outlets. Tobacco Sales by Outlet, 1982 Food Stores Gasoline service stations Drug Stores Vending machines Department stores Liquor stores Cigar stores- Eating and drinking places Other Bureuu of Gnua. qa R+alla.a__ - ! i•. ., Z S
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Y' 34 Farm Value per Acre for Selected Crops,l988 (dollora per acr., gros, income to grower( 1200 800 _ ~ Wheot Hay Soybeans foom Cotton Peonuts ~oent Treenuts To acco groin _ 400 Econamic Re.earch Servica, USDA
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serene situations it can act as a stimulant like amphetamines. Smokers tend to develop their own, unique patterns of obtaining nicotine, which they vary only slightly from day-to-day. Diseases caused by cigarette smoking are dose- responsive; the more one smokes, the greater the risk. This is true for all diseases associated with smoking, including lung cancer. Those who smoke two or more packs a day are at six times the risk of dying of lung cancer as those who smoke half-a-pack-a-day. The effect continues after one has stopped smoking. How many cigarettes are smoked each day is only one measure of exposure. Others are how many puffs are taken and how deeply the smoke is inhaled Some smokers switch to lower tar and nicotine cigarettes in the hope of reducing their risks of dis• ease. To some extent they may benefit, unless they begin to smoke more or change their smoking behav ior in other ways, but the benefit will be miniscule compared to the benefits of quitting entirely. Some reduction in the risk of lung cancer will occur, but there are no data to show that other health risks are reduced. The pederal Trade Commission requires that tar 16 Mortafity Ratios by Number of Cigarettes Smoked 21-39 per day 40 or more per day U.S. Velercn. Sl.dy 1.29 51267 1240 1.67 I 2.03
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position of NIDA regarding tobacoo and nicotine (US DHHS 1989b). in the 1984 Nli]A Trlennial Report to Congrass, nicotine was labeled a prototypic dapendence•producing drug and the role of nicotine in tobacco use was considered to be analogous to the roles of morphine, oocaine, and ethanol, in the use of opium, oooaderlved products, and alcoholie beverages, respectively (US DHHS 1984b), In 1888, a ronaensus conference of the National Institutes of Health and the Report of the Advisory Committee to the Surgeon General on the health consequences of using smokeless tobaeoo concluded that imokeless tobacco can be addicting and that nicotine Is a depen• lence•producing (i.e., addicting) drug (US DHHS 1988b?. The present Report is the 20th such report Issued by the Public liealth Service on the health consequences of tobacco use. The leleterlous effects of cigarette smoking are now well known. Cherefore, this Report focusea on pharmaoologie Information to help inderstand why people smoke. Such information will assist health -irofesslonals in developing effective strategies to prevent initiation md to promote cessation. The literature reviewed In this Report ndicates that tobacco use is an addictive behavior. It is the purpose if this Report to thoroughly review the relevant literature, 7hapter Conclusions In addition to the three overall conclusions of this Report, there ire many other substantive conclusions. These• points are listed inder the appropriate Chapter and Appendix headings. :hapter Il: Nicotines Pharmacoklneties, Metabolism, and Phan nacodynamics I 1. All tobacco products contain substantial amounts of nicotine and other alkaloids. Tobaocos from low-yleld and high•yield cigarettes contain similar amounts of nicotine. 2. Nicotine is absorbed readily from tobacco emoke in the lungs and from smokeless tobaoco in the mouth or aose, l.evels of nicotine in the blood are similar in magnitude In people using different forms of tobacco. With regular use, lewls of nicotine accumulate in the body during the day and persist overnight. Thus, daily tobacco users are exposed to the effects of nicotine for 24 hr each day. 3. Nicotine that enters the blood ie rapidly distributed to the brain. As a result, effects of nicotine on the central nervous system occur rapidly after a puff of cigarette smoke or after absorption of nicotine from other routes of adminietration, 4. Acute and chronic tolerance develops to many effects of nicotine, Such tolerance Is consistent with reports that initial 13
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GROWING TOBACCO Tobacco is sixth amongAmerirrn crops as a source of farm income and fifth as an agricultural export. [t is the leading source of farm income in two States, North Carolina and Kentucky, and a major contrib- utor to farm income in five other States. About 150,000 families planted 600,000 acres in 1987, and harvested 1.2 billion pounds. This is far less than in 1950, when 535,000 families farmed 2 mil- lion acres and harvested 2 billion pounds. The price the farmer gets for tobacco fs also relatively lower; it was $1.55 per pound in 1987, but 52 cents in 1950, the equivalent in today's consumer dollars of E2.40. 51267 1252 Acreage, Production Unit Prices and Crop Value of Leaf Tobacco, 1950-1987 1950 1955 1960 1965 1970 1975 1980 1983 1984 1985 1986 1987' Acreage /thousonds) Production Unit Price Total cro value ~ (million pounds) (dollor per pound) (millionaoPdollms) ~: 1599 2,030 $ .52 I $1,050 1495 2,193 .53 1,166 1142 . 1,944 . .61 1,184 977 1,855 .65 1,207 898 1,906 .73 1,389 1083 2,182 1.03 2,238 921 1,786 1.52 2,721 789 1,429 1.75 2,496 792 1,728 1.81 3,128 688 1,511 1.65 2,486 582 1,163 1.53 1,774 602 1,230 1.55 1,904 •Etlimabd Economic Reseorch Services, USDA 28
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SMORING, BABIES, AND CNIIyXEN Exposure to tobacco smoke poses grave risks to babies, before thev are born and after. Spontaneous abortion, pre-term births, low birth- Risks from Smoking During Pregnancy 1.0 ~:i:2 xl 4?~l\ weight full-terrn babies, and fetal and infant deaths 1.7 all occur more frequently among mothers who smoke Spontaneous Abortion during their pregnancies. About 30 percent of girls and women are cigarette smokers at the time they 1•0 become pregnant 1.36 One should not smoke in the presence of babies Preterm Births and small children. Hospital admissions for bron- chitis, pneumonia, and related illnesses occur twice as often for children whose parents smoke. The greater the exposure--two parents smoking rather than one-the greater the risks. Sadly, there are smokers living in 40 percent of all American homes where babies are present. 7be constlluents of dgarette smoke C• rettes cause harrn because of what is in the a t Full-Term Low Birth Weights Perinata! Deaths g tobacco smoke, and because of the smoker s extraor- M Nonsmokers 1 Smokers dinary exposure to this smoke over days, months. and Th. H.elrh Cons.q.ences of Smokinp for Women, 1980 yeam;. Smokers expose themselves to cigarettes more con- stantly and to a greater extent than do users of other 14 1.0 1.0 1.25 51267 1238 tg.
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8. Behavioral interventions are most effective when they include multiple oomponente (procedures such as avarsive smoking, skills training, group support, and sel[ reward). Inclusion of too many treatment procedures can lead to lees successful outG come. 4. Nicotine replacement can reduce tobacco withdrawal aymp• toms and may enhance the efficacy of behavioral treatment. Appendix Ai Trends in Tobaooo Use In the United States 1. An estimated 82.7 percent of inen and 28.8 percent of women smoked cigarettes regularly In 1985. The overall prevalence of smoking in the United States decreased from 88.7 percent in 1976 (52.4 million adults) to 80.4 percent in 1985 (51.1 million adulta). 2, In 1985, the mean reported number of cigarettes smoked per day was 21.8 for male smokers and 18,1 for female smokers. 8. Smoking is more common In lower socioeconomic categories (blue-collar workers or unemployed persons, less educated persons, and lower income groups) than In higher socioeconom- ic categories. For example, the prevalence of smoking In 1985 amorqg persons withoqt a high school diploma was 86A percent, compared with 1&5 percent among persons with postgraduate college edueation, 4. An estimated 18.7 percent of high school seniore reported daily use of cigarettes in 1986. The prevalence of daily use of one or more cigarettes among high school seniors declined between 1975 and 1986 by approximately 85 peroent. Most of the decline occurred between 1977 and 1981. Sinoe 1976, the smoking prevalence among females has consiistently been slightly higher than among males. 5. The use of cigars and pipes has declined 80 percent since 1964. 6, Smokeless tobacco use haa increased substantially among young men and has declined among older men since 1875. An estimated 8.2 percent of 17. to 19•yearold men were users of smokeless tobdoco products in 1986. Appendix Di Toxicity of Nicotine 1. At high exposure levels, nicotine ii a potent and potentially lethal poison. Human poisonings occur primarily as a result of accidental ingestion or skin contact with niootinesontaining insecticides or, In children, after ingestion of tobacco or tobacco juices, 2. Mild nicotine intoxication oocura in ftrsbtime smokers, non- smoking workers who harvest tobacco leaves, and people who 16
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Domestic and Foreign Tobacco Uti4ized in Cigarettes, 1971-1987 tmilliana of poendal 1500 1971 1973 1975 ; 1977 1979 1981 1983 0 OrientalTobaccos'  Other Imported Tobaccos'  U.S. Tobaccos •Break.oo of Orientnl ond other imporls bn.ed on mld•yeor swcks of Ihess typea Economic Resecrch Servke, USDA , 32 1985 1987 The American cigarette has always contained Oriental tobacco, but until a few years ago the ciga- rette companies did not import other tobacco types. Now they do, and up to some 35 percent of the tobac- cos in American-manufactured cigarettes come from Brazil, Zimbabwe, and other countries. 1lventy-five years ago, a package of cigarettes cost 30 cents and about four cents or 13 percent, went to the American tobacco farmer. Today, the average cost of a package is $1.19, but the farmer's return has not changed. It is still about four cents, or three percent. IN 8 A'1
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A second change in the support program has been the adoption of a"no-net-cost" provision in answer to public criticism that taxpayers have been subsidiz- ing a harmful product. Under this provision, the tobacco farmer is required to undenvrite all but the administrative costs of the program. The provision was to begin with the 1982 crop year, but in 1986 Congress exempted the 1983 burley crop, which was of poor quality. The changes in the Federal support program have come not without cost, either to the tobacco farmer or the taxpayer. In 1986, the average support price for cigarette tobacco was reduced from $1.72 per pound to $1.46 and the farmers' production quotas reduced by six percent The taxpayer on his part has contrib- uted well over half-a-billion dollars to liquidate unsold tobacco stocks. The Government has sold this tobacco to manufaaurers and exporters, some of it at 10 cents on the dollar and some at 90 cents on the dollar. An issue of national policy Is whether it is appro- priate for the taxpayei s money to be involved in any manner in the growing of tobacco. Many persons and health agencies have taken the position that this runs counter to the public good, tn seeming to support a product clearly idenUfied as a threat to health. Others disagree, saying that no public health issue is in- volved, that providing support to farmers does not encourage people to smoke. 37
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:1 THE TOBACCO FARM Many types and kinds of tobacco are grown in the United States. Three are used in cigarettes; burley, flue-cured, and Southern Maryland. In 1984, domes- tic burley accounted for 33 percent of the tobacco used in cigarettes, domestic flue-cured 35 percent, and Southern Maryland 2 percent, while the remainder was imported. Kentucky produces two-thirds of all burley grown In the United States and North Carolina produces two-thirds of all flue-cured tobacco. Tobacco famu are small. The farms which grow burley average 86 acres in size, of which 40 acres are cropland and from one to three acres are devoted to tobacco. The farms which grow flue-cured tobacco average 114 acres, of which 14 acres are planted with tobacco. As might be expected, most tobacco fanners supplement their income with other crops and with jobs off the farm. LSZT L9ZTS The tobacco growth cycle in America starts with the sowing of tiny tobacco seeds on a small plot of fertilized land. Transplanting of plants from the seed- bed to the f eld takes place from mid-March through June, beginning In Florida, and ending in the north- em States with the shorter growing season. Harvecting begins three months later, and curing Immediately after. Burley, flue-cured and Southern Maryland vary in plant variety, in harvesting methods, and in curing. Burley and Southern Maryland are cured by exposing the tobacco to air for a period of weeks, while flue- cured is cured in a shorter period by exposure to heated air. Many changes have taken place in tobacco farm- ing. Total acreage has declined, yields per acre have Increased, the farmt are larger, and there is more mechanizdtion. The changes are most striking in the case of Hue-cured tobacco, where labor hours have dropped from 425 hours per acre to about 150 hours since 1965 as the result of a switch from tied to untied leaf sales, a changeover to labor-saving bulk barns and mechanical harvesters, and more efficient preharvest operatio u. In the case of burley, a satisfac- tory harvester has not yet been developed and the smaller size of the tobacco farms impedes more ef- ficient farming. Even here, however, labor hours have dropped from an average 360 hours per acre to 300 hours. Tobacco is a high-value crop, with harvests in recent years yielding more than $3,000 per acre. 33
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review of the evidenee to date regarding health consequenoes of smoking (US DHEW 1971). The subsequent reports (1972 to 1976) continued to review the Increasing evidence associating cigarette smoking with many health hasards. The 1972 Report also discussed involuntary or passive smoking (US DHEW 1972). The 1978 Report included some data on the health hazards of smoking pipes and cigars (US PHS 1978). The 1975 Report updated information on the health effects of involuntary or passive smoking (US DHEW 1976). .The combined 1977-78 Report discussed sntokingaelated problems unique to women (US DHEW 1978). At the time of ita release, the 1979 Report was the most comprehensive review by a Surgeon General's Report of the health oonsequenoes of smoking, smoking behavior, and smoking control. In addition to providing a thorough review of the health consequences of smoking, the 1979 Report discussed the health consequences of using forms of tobacco other thsn cigarettes (pipes, cigars, and smokeless tobacco). Moreover, the 1979 Report expanded the scope of the previous reports and examined behavioral, pharmaaologio, and social factors influencing the initiation, mafntenancs, and oeeeatlon of cigarette smoking. Relevant to the topic of the present Report, the 1979 Report concluded that "it is no exaggeration to say that smoking ,ts the prototypical substanoe•abuse dependency and that improved knowledge cf this prooess holds great promise for preven- tion of risk." Since the release of the 1979 Report, each subsequent Report has focused on a specific population or setting (women In 1980 (US DHHS 1980), the workplace in 1985 (US DHHS 1986)), a epeciflc topic (health effeets of low•tar and low•nlcotine cigarettes In 1981618 DHHS 1981), Involuntary smoking In 1986 (US DHHS 1988a)), or a specific disease (cancer in 1982 (US DHHS 1982), cardiovascular diseases in 1988 (US DH1i51988a), chronic obstruc- tive lung disease in 1986 (US DHHS 1986a)). In addition to the previous Surgeon Cieneral's Reports, several other developments and publications provide relevant background for the present Report. For example, numerous monographs pra- pared in the 1970s by the National Institute on Drug Abuse (NIDA) considered tobacco use as a form of drug dependence. In 1980, the American Psychiatric Association, in its Diagnostic and Statistieal Manual of Mental Disorders, inciuded tobacco dependence as a substance abuse disorder and tobacco withdrawal as an organic mental disorder (APA 1980). The 1987 revised edition of this manual (APA 1987), in recognition of the role of niootine, changed "tobacco withdrawal" to "niaotine withdrawal," In 1982, the Director of NIDA testified to Congress that the poiltion of NIDA was that tobacco use could lead to dependence and that nicotine was a prototypic dependence•producing drug. In a 1983 publication, "Why People Smoke Cigarettes," the U.S. Public Health Service supported this 12
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RJR NABISCO 1990 ANNUAL REPORT l PART 2 fORM 10-I(
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(681ot paslaaH) L6£8-L8(00~1 'oN uopeallqnd SHHO yqoaH puo 6wlowSuo aaiy0 uoqowoid yqoaF{ puo uolluana.d asoasfp :'ryoJyD ioy Aa1ua:) ImJuo] asoaslQ io} sialua) "niaS yqoaH Dq9^d sa'>twAag uownt{ puo ylloaH 10 suawNOdap •S•n 0 ..- ~. -_PW ... .. ~1 _.~~~ . . . - - 99ZT L9ZT5
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Tobacco Loan Stocks at Beginning of Marketing Year, Burley and Flue-Cured, 1960-1988 (milllons of • Po,na:l Flue-cured Burley Flue-cured Burley 1960 557.3 98.0 1975 1961 506.7 38.6 1976 1962 377.0 33.2 1977 1963 496.3 94,4 197B 1964 696.9 265.4 1979 1965 918.5 316.4 1980 1966 836.4 261.9 1981 1967 685.4 276.7 1982 ' 1968 773.4 321.7 1983 1969 800.5 340.8 1984 1970 744.9 454.8 1971 761.9 468.4 1972 617.8 327.6 1973 402.3 276.7 1974 276.7 139.2 •6i,mcred Economic Research Services, USOA 179.9 12.0 359.2 44.8 556.9 54.9 534.0 113.5 564.0 155.4 554,4 66.3 595.8 0 518.7 .7 688.4 226.1 797.5 377.2 1985 833.1 548.9 1986 790.4 525.7 1987 647.8 329.7 1988' 466.1 240.0 Under the revised program, price levels have beea J lowered, poundage allotments have been reduced, and •:'. ~: the cigarette companies have been brought into the process of setting quotas. The companies must provide~> the Secretary of Agriculture with estimates of their \ tobacco needs a year in advance, under conditions of?; confidentiality, and are required to buy at least 90 percent of these estimates. ~ ~ k ` ~ K Lv r's?'~IW :
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THE FEDERAL TOBACCO PROGRAM Along with corn, wheat, cotton, peanuts, and rice, tobacco is protected by a Federal price support and supply control program, which has a major effect on tobacco production, prices, and income. The tobacco program is voluntary, accepted or rejected by vote of farmers in a given region, and is operated through regional tobacco cooperatives. Under the program, farmers limit their production in return for a guaranteed buyer and a guaranteed mini- mum support price. The price is set by the Secretary of Agriculture under a prescribed formula. If the farmer is unable to sell his crop at the time of harvest at or above the support price, he sells it to the cooperative, which places it in storage until a buyer can be found: In 1938, local committees assigned tobacco acre- age allotments to individual farms and 50 years later the allotments are still in effect. They are worth $2,000 to $4,000 per acre for flue-cured and burley tobacco, and can be used by their owners, or rented or leased to others. Congress has taken several steps to limit the ownership of allotments to those who are actually farming the land. Institutions are barred from owning allotments, and those who hold flue- cured quotas must dispose of them if tobacco has not been planted (or considered planted) during at least two of the previous three years. The Federal support program kept supply and de- mand in relatively good balance for many years, and gave strong protection to the small, family-owned farm. Most of the tobacco placed on loan was even- tually sold, making the program more successful from a financial standpoint than most of the other price-support programs. This period of stability came to an end in the early 1980s, and in the face of strong economic and political pressures Congress has reformed and recast the program. The most significant change has been to reduce the price support levels and the production allot- ments. American tobacco had become overpriced in the world market by an estimated 40 to 60 cents a pound, which hampered exports abroad and led American companies to import tobacco from foreign countries. Stncks of unsold lnbacco as a consequence rose to record levels, until at the end of the 1985 crop year, Govemmenthguaranteed loans covering these stocks stood at $3.5 billion in principal and interest. 35
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.-.: ..d+! mr In the late 195Us, the l:nitt.d States gnw approxi- mately one-hali o( :dl tohacco grown in the world outside of China, whereas tod:n• it accounts for less thxn teu percent. '111e World Health Or?~uliz:aioa esti- ouaes that by the year 1995, America's Share will be even smaller. World Tobacco Growing, 1964-66 to 1995 (IhoVsonds of mllriC lons) 4200 3600 2400 1964-66 51267 1264 (aclocl) (projeciadj Developing Countries:  China ® C. European Socialist Countries B Southern Europe 40 Industrial Countries  USA 0 Other WHO Vropromme on Tobacco or Heoflh, March 3, 1986. World Mealth Orgonixotion ' ~
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RefereflCes AMERICAN PSYCHIATRIC A680CIATION. Diynertbc and Staebrleot Manual of Mentat Di+arden. Waahlneran, D.C.i Amerlcan Psychiatric Association. 1960. AMERICAN PSYCHIATRIC A39GCIATKIN• DiaptWek and Sktkdkal Manuo/ of Meata1 Dirorrkn, Third Edition, Revised. Washington, D,C.: American Psychiatric A.eoeistlen, 1987. ARMSTRONGJONEB, R. Tobaeoo, In use and abusm EYom the nervous and mental upeot. Aortllionv 118:6-19, 1921. DORBEY, J.L Control of the tobacco hebit. Annab oflnkrnat M4dldne It)(4):628-681, 1996, ORABOWBKI, J., BELL, CS, Aleasunxnent /s tAtAeallsfr and 7lratment of Bmol7ry &Moior, NIDA Research Monograph 49. U.S. Department of Health and Human Berviea, Public Health 8ervky, Alcohol, Drtq Abuu, and Manul Health Administration, National Institute on Dru{ Abuse, DHHS PubUat(on Mo. (ADM) 8SS98S, 1985. 0R1T2, E.R. Smoking behwior and tobacco abuu. In: M.tlo, N,K. (edJ Aduonea in Subtana Abun, Volume 1. Oreeuwlch, Coeneetiwt: JAI Press,1990, pp. 91d88. HENNINOFYELD, J•E. Behavioral pharmaaolop ef eljantte amoklng. In: Thompoon, T., Dews, P•B., Barrett, J.E. (ada) Adwder (n &Aovlorof Pharmacalop, Volume 4. Orleedo: Academic Press, 198/, pp, 181••410. JARVIK, M•E,, CULLBN, J.W. GRCIZ, E.R, VOGT, T.M., WEST, LJ. (eda.) RarorcA on Smolint&hau(er, NIDA Retprch Mone`raph 17. US. Department of Hedth, Education, and Welfare, Public Heatth 8ervlet, Aleahol, Drut Abute, snd Menb( Health Administration, Natlonal insUtuu on Drug Abuse. DHEW Publication No. (ADM) 7B681, 1977.' • JCHNBTON, L.M. Tobacco imokin8 and nkatine, Lanat 9:749, 1942, 1(HARKBVICH, D.A. (eda Handbook of8sprlnunki Plwnnota(qp. Berlin: Bprln;• er•Varlap, 1980, pp. 1-B. KRASNEOOR, N.A. (ed,) &lf,Admfn4fntlan of Abured $abebnar: A.ftt6adr fa Stady, NIDA Research Monotraph 80. U8, Daparhnent of Health, Eduation, and Welfare, Public Halth 8,tvlae, Alcohol, Dru=' Abtw, and Mental Hwlth Administration, National Institute on Drug Abufe, DHEW Publication No. (ADMI 78•727, 1978.• KRABNEOOR, N.A. (ad.) Behavioral Annpt(t and 11.otmant of 6u6etana Abua4 N(DA Research Monograph 25. U.B, Department af Health. Education, and Wslfare, Public Heakh 8ervloa, Aleohot, Drug Abuse, and Mental Health Administration, National Institute on Drug Abuse. DHEW Publiation No. (ADM) 798A9, 1979e. KRABNEOOR, N.A. (ed.) The &Aavioral Aaprte of SmoM(nl, NIDA Research Mono9raph 9& U.B. Department of Health, Eduatlon, and Welfare, Public Health Service, Alcohol, Drug Abuee, and Mental Health Administration, National Institute on Drug Abuae. DHEW Publication No. (ADM) 79482, 1979b. KRASNECOR, N.A. (edJ Ctdantte 8moAby as a Drpendenee Proaam, NIDA Reaearch Monograph 93. U,B. DepartmentorHulth, Education, and Walfare, Public Heelth 8ervia, Alcohol, Drug Abuse, and Mental Health Administration, National Institute on Dru; Abuse. DHEW Publkation No. (AD(d') 7M, 1979c. LANCET, (Editoriai,) 270. March 18, 1887, LANGLEY, J.N., DICKINBON, W.L On the local paralyals or the peripheral san9lla and on the eonnaxlon of different alaaeu of nerve Ilben with them, Pror. Royal Sac. London 46:423-491, 1889. LEWIN, (., TAantnstica; Noncotie and &(mxtatind Dnrpi, Thelr (lre and Abuts London: Paul, Trench, Trubner, 1931. ROBERT, J.C. The Story of 7b6aeeo tn America, Chapel t(ill: Uniwrsity of North Carolina Preee, 1949. 18
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The negotiations were carried on under Section 301 of the revised U.S. Trade Act, whose purpose is to give American companies the same access to foreign markets for their products as foreign companies enjoy for their exports to the United States. Until these nego- tiations, tarifs and quotas had virtually barred American and other foreign companies from expon- Ing cigarettes to these countries. The opening of Eastem markets has brought advertising and promotion to countries where pre- viously such advertising was limited or did not exist. Health officials are concerned with advertising directed to women and adolescents, the absence of warning labels, and the introduction of cigarette advertlsing on television. Exports of U.S. Cigarettes to Leading Destinations (b;niu~s ni ctga..iros) 1983 1984 1985 1986 1987 1987-88' Japan 5.5 6.5 6.5 9.9 32.0 34.2 Belgium-Luxembourg 13.0 11.2 .12.2 15.5 23.0 25.2 Hong Kong 7.4 7.5 8.4 9.2 11.9 14.9 Saudi Arabia 6.2 6.1 6.6 5.8 5.7 5.6 Taiwan no no 0.2 0.2 5.1 5.5 Singapore no no 3.1 2.8 3.2 3.5 United Arab Emirates 1.5 0.8 2.2 3.1 2.2 2.5 Kuwait 1.5 1.5 1.5 1.5 1.5 1.9 Netherlands Antilles 1.4 1.1 1.2 1.2 1.7 1.6 Others 22.5 20.9 16.1 14.4 13.9 17.5 Total 60.7 56.5 59.0 64.3 100.2 112.1 •b!y 1997-Jen. 1988 Ece.wmic Rs.erch Sanic., USDA. , . . . . - .;.~.-~ . ~ . . ~ V~a~~i4K.•rlNf+f!/intnMYiitii•Nl:~qP~+-'a»w~nr~v+mrr ..w-.. £9ZT L9ZLS
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4. Per Capita Consumption of Cigarettes by Selected Countries, 1985 115 yroR of age and werl Consumption Cyprus 4,050 Cuba 3,920 Greece 3,640 Poland 3,300 U.S. 3,270 Japan 3,270 Hungary 3,260 Canada 3,180 Iceland 3,100 Yugoslovia 3,000 Czechoslovakia 2,550 United Kingdom 2,120 Venezuela 1,890 Netherlands 1,690 Nicaragua 1,380 Paraguay 1,000 Jamaica 820 Kenya 550 Molowi 390 Cape Verde 210 Papua New Guinea 30 World Heallh Organisu6un Cigarette consumption is declining in the devel- oped countries and Increasing in other parts of the world. The World Health Organization credits this to "Intensive and ruthless promotional campaigns on the part of the transnationals." The percentage of people who smoke in some developing countries is higher than In the United States, but people do not smoke as heavily. China Is now both the largest producer and the largest consumer of tobacco In the world. In 1984 it enacted legislation banning cigarette advertising, warning its people that "smoking is harmful to human bodies." China is one of a growing number of nations which have banned cigarette advertising, including most recently Canada and Nigeria. The World Health Organization has said that the Third World's limited available land and limited ' resources should be devoted to food and other crops, and that the widespread advertising and promotion of cigarette smoking should be forbidden. In 1978 it stated, "failing Immediate action, smoking diseases will appear in developing countries before commu- nicable diseases and malnutrition have been controlled, and the gap between rich and poor coun- tries will thus be further expanded." 41 ~!~1'I~BM1}WIMM'TF.~~f4Alr,'~,.~T^'•6YHR(M1'eM!i•: 59Zi L9ZL5
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INDEX PLge Partl Item 1. Business ........................................................... I (a) General Development of Business ................................. Recent Dispositions ......................................... (b) Fwneial Information about Industry Segments ..................... I I 2 (c) Narrative Description of Business ................................ 2 Tobacco .................................................. 2 Food ..................................................... 7 Other Matters ............................................. 11 (d) Finaneial Information about Foreign and Domestic Operations and Export Sales ........................................... '12 ltem 2. Properties .......................................................... 12 Item 3. Legal Proceedings ................................................... 12 Item 4. Submission of Matters to a VoWe of Security Holders ........................ 17 Partll Item 5. Market for Registrants' Comaan Equity and Related Stocklwlder Matters ...... IS Item 6. Selected Financial Data ............................................... 19 Item 7. Management's Discussion and Analysis or Financial Condition and Results of Operations ............................................... 21 Item S. Financial Statements and Supplementary Data ............................. 29 Item 9. Changa in aad Disagreements wi•.L Accountants on Accounting and Financial Disclosure ................................................ 29 Part IR Item 10. Directors and Executive Officers of the Registrants ......................... 30 Item 11. Executive Compensation .............................................. 33 Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 40 Item 13. Certain Relationships and Related Transactions ............................ 41 Part IV Item 14. Exhibits, Fioancial Statement Schedules, and Reports on Form 8-K ............ 42 Ln r N ~ J r N 01 ko
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U,B. DEPARTHENT OF HEALTH, EDUCATION, AND WEf.PARE, TAa Naa1tA tbn..qa.navse~3metiy. A RepaM oJ1Ae8ur2aon fhnerok 1972 US. Department of Health, Eduation, and Welfare, Public Health Servka, Health Servica and Mental Health Adminteteatlon. DREW Pubtlaatton No. (HSMI 7?•7616, 1971. U.S. DEPARTMENT OF HEALTH, EDUCATION, AND WELPARE. 71ie HeoltA Conreque+uw of SmoAing, 1016. U.B. Department of Health, F.dueation, and Walfan, Pubiio Haalth Serv/ee, Center for Dlaw C.+ptrol. DHEW Publication No. (CDC) 774704, 1976. U.B. DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE. The HaltA Contequenca o/SnaUn` l977•7p76, U.B, Department of Health, EduaUon, and Wdfara, Public Health Service, Ofllea of tM A6eletant Boentary for Health, Office on 8mokin9 and Health. DREW Publication No. (PH8) 79•60066, 1978. U,S. DEPARTMENT 0F HEALTH. EDUCATION. AND WELPARE. SmoAtag and HahAr A Reporr of the Surpon Oeaxal. U,B. Depattment of HaRh, Eduailon, and W6lfare, Public Health 8erria, Offia of tM Awi6tant 8ecntary for Health. Office on Smoking and Health. D[{EW Publication No. (PHS) 79•60066, 1970. U.S. PUBLIC HEALTH BERVIOE. SmoAfng and HaIM. Repon of the AduGary Commhtee to tha8urpoa Ornerol oJlAe Arblk Health Sauka U:& Depattment of Health, Eduation, and Walfaa, Public Health Service, Oentef for Diaeata Control. PH8 Publicatlon No. 1103, 1966. U.S. PUBLIC HEALTH SERVICE, TAr Health Conatpuanea orSmoAle6. A i46lk Se.uke Reukua 1907. UU.S. Depattmant of Hulth. Eduation, and Walfaro, Public Health Servla. Halth Servlce6 and Mental Health AdminUtr.tion. PH8 Publia- tion N0. SB88 Reriard, 1Y88a. U.S. PUBLIC HEALTH BERVICE. TAe Hao1tA lbneequeaex of SaaAlnf, f96d Suppfement to tbe 1961 Publk Health Snviee Reukue UB, Depatment of Health, : Education, and Welfare, Public Health Servia, Health Servica and Mmtal' Health Admialttntton. DHEW Publiatlon No, 1696, 1966b. US. PUBLIC HEALTH SERVICE, 7Ma 1fakA QNtraquenere of SetoAJns l969. Sapylement to tAe 1067 Publk HeoltA Serviee Retdea Department of Ha1th. Education, and Welfare, Public Health 8erda., Health Services and Meatal Health Adminl6tatlon. DHB1V Publication No. 1989•9, 1969. U& PUBLIC HEALTH SERVICE. TAe HebetA Gbnaeqorneu of 8mAlnr. A Rapore of rAa Surgeon Wnenrl US. Department of Health, Eduatlon, and Welfare, Public Health Service, Healah Servit.a and Montal Health Adminhtration. DHEW Publication No. (HS1.D 134704,1073. U.S. PUBLIC HEALTH SERVIC& 7he HealtA Cbnapueneee oJSn.o6fn` 1971. U.S. Department of Health. FAuation, and Welfan, Public Health Sarriee, Center for Diaae Control. DHEW Publication No. (CDC! 7{.870{, 1i76. U.S. PUBLIC HEALTH SERVICE.7he HeaftACoaequeneaefBmoAlrg. A Re/arana Bditioa• 1976. U.B. Department of Ha1th. Education, and Welfare, Public Health Service, Center for Disease ControL DHEW Publlatlon No. tCDC176S367,1976. VOLLE, R.L. Nlcatnla 6an{lions/lmulatinQ a6enta. Pharmacology of OortSlionfc 7/nnemBaion 9:281-307, 1980, * U.6. OOV6nNM6NT imNTNX! oF7I0E;1066•; p 3 y- 6 7 2/ 0 20 . .. .. .:........ . .. . . . . .;~.+o.rn:>4:"r ot '{
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PART I Item 1. Business (a) General Devrfapmenr of Busfness RJR Nabisco Holdings Corp. ("Holdings"), through its wholly-owned, indirect subsidiary. RJR Nabisco, Inc. ("RJRN"), is among the largest tobacco and food companies in the world. In the United States, the tobacco business is conducted by R. J. Reynolds Tobacco Company ("RJRT'), the second largest producer of cigarettes, and the packaged food business is conducted by Nabisco Brands, Ine. ("Nabisco"), the largest manufacturer and marketer of oookies and crackers. RJRN's tobacco products are sold around the world under a variety of brand names and its food products are sold in the United States, Canada, Latin America and certain other international markets. Together with RJRT and Nabisco. RJRN's principal subsidiaries are R. J. Reynolds Tobacco International, Inc. ("Tobacco International") and Planters LifeSavers Company ("Planters Lifesavers"). For financial information with respect to RJRN's industry segments, lines of business and operations in various geographic locations, see "Management's Discussion and Analysis of Financial Condition and Results of Opera- tions" and Note 17 to the Consolidated Financial Statements. RJRN was incorporated in 1970 and can trace its origins back to the formation of R. J. Reynolds Tobacco Company in 1875. Activities were confined to the tobacco industry until the 1960's, when diversification led to investments in transportation, energy and food. With the acquisition of Del Monte in 1979, RJRN began to concentrate its diversification efforts toward consumer products. RJRN's strategy led to the acquisition of Heublein, Isw- in 1982 and culminated in the aequisition, at a total cost of $4.9 billion, of Nabisoo, including Planters LifeSavers, in 1985. During the past several years RJRN has continued to refine its focus on tobacco and food products. In 1986, RJRN divested several operations not considered to be within its consumer products focus, including its quick service reatau- rant businesses, conducted principally by Kentucky Fried Chicken Corporation, for $840 million in cash. During 1987, RJRN sold its spirits and wines businesses, conducted principally by Heublein, lnc., for $1.2 billion in cash. . Holdings, RJR Nabisco Holdings Group, Inc. ("Group") and RJR Nabisco Capital Corp. ("Capital") were organized as Delaware corporations in 1988 at, the direction of Kohlberg Kravis RobMs & Co., L.P. ("KKR"), a Delaware 6mited partnership, to effect the acquisition of RJRN, which was completed on April 28, 1989 (the "Acquisition"). As a result of the Acquisition, RJRN became, and presently is, a direct, wholly owned subsidiary of Capital, which in turn is a direct, wholly owned subsidiary of Group, which in turn 8 a dirod,wbolly owned subsidiary of Holdings. The business of Holdiogs. Group and Capital is conducted through RJRN. The business of RJRN continues to be conducted under the name "RJR Nabisco, Inc.". Holdings, Group, Capital and RJRN are referred to herein collectively as the "Registrants". For additional information with respect to the Acquisition and the series of transactions eontem- plated by the recapilalivation program announced by Holdings in July 1990 (the "Recapitalization Program"), see Note I to the Consolidated Financial Statements. Recent Dispositions Consistent with the Registrants' long-term strategic goals, as well aa obligations under a Federal Trade Commission ("FTC") consent deoree•relaling to the Acquisition (the "Consent Decra") to sell certain businesses of RJRN or of Beatrice Company and the Registrants' obligations to repay certain loans in the amount of $5.0 billion prior to February 9, 1990 pursuant to the terms of the Credit Agreement, dated as of January 31, 1989 (as amended, the"1989 Credit Agreement"), entered into in connection with the financing of the Acquisition, during 1989 and 1990, the Registrants divested a number of businesses and operating units. In 1989, such dispositions included the sales of (i) Nabisco Internalional's food businesses in the United Kingdom, France and Italy, (ii) Associated Biscuits International Limited and Stalwart Holdings Limited in the United Kingdom; (iii) Oxford Biscuit I
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1U88ELL, M.A.H, Cigarette smoking: Natural hletory of a dependence of diaorder. BrUrah Journal of Medko! Pqchokyy 44111'd-t8, May 1971. IUSSELL, M.A.H. Tabaew amokin8 aM pieotine dependence. im Cibbina, RJ., Israel, Y., KalanL H„ Popham, R.E., &hmMt, W., Smart, R C. (eda.lRaoarrh Aduantu (n Alcohol and Arud Probkme. Now York: John Wiley aed Bona, 1076. pp. 1-47. 1S. DEPARTMENT OF HEALTH AND HUMAN BERVICE+S. TAe Health drtae quenca o/8ntok/y for Women. ARepoN e/ehe Suryna Oenaoi. US. Dapartment of Health and Human Serrka, Public Health &rvia, OJ1be of the Awl.tant Secretary for Health. Ottla on Smoking and Health. 1990, IS. DEPARTMENT OF HEALTH AND HUMAN 8ERV1CB8. The Heafth 6onat. queneu o/Srnohfnj: The Cheaglnd GYjantta A Repon of,he SurPton Qenaal. Ub. Department of Health and Human Services, Public Health Service, Office of the Aaaiatant Secretary (or Health, Offla on Smoking and Health. DHHS Publiation No. (PHS) $10156. 3981. 3.8. DEPARTMENT OF HEALTH AND HUMAN 8ERVICE& rAe Health Cimee• quenacr oJSmoklnd: Cancer, A Rrport o/tha Surpon Oaerot US, Department of Health and Human Services, Public Health Servla, ORice on Smuklnp and Haalth. DHHS Publkatkm No. (PHS) 88'J0179, IOU 1.8. DEPARTMENT OF HEALTH AND HUMAN SERVICEB. TJu Health Gbnae• quenea o/Smoking: Cardleaaecufor p4eaea A Reporf o/theburyeon Oenerof. U.S. • Department of Health and Human Services, Public Health Servia. Offia on Smoking and Health. DHHS Publication No. (PHS) $440204, 1988a. J.S. DEPARTMENT OP HEALTH AND HUMAN SERVICES. Why PYOpte 8moke CJprNta. U.B. Department of Halthand Human Services, Public Health Service. • ' 1983b. • • . ).S. DEPARTMENT OF HEALTH AND HUMAN SERVICEB. The Heolth Omit- quennr o/Smoklnd. Chronk Obehvetiw Lung Aiwaa A ftport orthe Suraecn frtu' ra4 US. Department of Health and Human &rvbea, Public Health Service, Offue on Smoking and Health. DHHS Publiatbn Na (PHS) 8660906, 19Saa. J.S DEPARTMENT OP HEA},TH ATtD HUMAN SERVICBS. Virutf Abua and Orud Abtae Rweoroh, Trknntef Reporf to (knpaet /ram the Sanetary, Deportnuet of Heafrh ond Human Servteea U,S. Departmetd of Health and Human Servku, Public Health Servla, Alcohd, Drug Abuu, and Mental Health Adminlatratlen, National ]nttitute on Drug Abuw. DHHS Publication No. (ADMI8141971, January 198/b. J.8 DEPARTMENT OF HEALTH AND HUMAN BERVIC88. The Health Lbnat• quenera o(Smohind: Canrer and CAronie Lartg Dieeoee fn the Workptace. A Reyort of the &ugron oentrof. US. Department of Health and Human Services, Public Health 8ervlce• Office on SmokinY and Health, DHHS Publlaatkm No. (PHS) 8!~ bD207, 1985. J.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES. TAe Health Conao quenra o/lnwluntary Smokb4 A Repore of the Surdewt Oenena[ U.S. Dap.rt• meN of Health and Human SarvioK Public Health Service, Office on Smoking and Health. DHHS Publication No. (COC) 87.8998, 1984. U.S. DEPART1dENT OF HEALTH AND HUMAN SERVICES. The Health Cbnae• quentw of Udnq Smokelae tbbaoro. A Report of the Adu6ory Qtmmlttee to ihe Swyeon Oane,ut US. Department of Health and Human Services, Public Health Service, National tnetituts of Hnlth NIH Publication Na 862874, 1988b. US. DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE. 7ha Health Cbnrequenen o/Smokiny A RepoN oJtheBurReon Oenerah 1971. US. Department of He.lth, Education, and Wolfare, Pub1k Health Sarvke, Halth &rviaa and Mentel Health Adminltlution. DHEW Publication No. (HSM) 71•7d18, 1971. 19 I . .r,MwYN4F,.~.,. . . ...n•... r...
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Item 14. E xhi PART IV bits, Finaaclal Statement Sehedales, and Reports on Form S-K -. (a) 1. The financial statements listed in the accompanying Index to Finaneial Statements and Financial Statement Schedules are filed as part of this report. ' 2. The financial statement schedules listed in the accompanying Index to Fnancial 3. Statements and FiPancial Statement Schedules are filed as part of this report. The exhibits listed in the acoompanying Index to Exhibita are filed as part of this (b) reporl. Reports on Form 8-K filed in Fourth Quarter 1990 (c) None Ex8/btta (d) See Exhibit Index. . Financial Statement Schedules. See Index to Financial Statements and Financial Statement Schedules. 42
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(FOUinoles fnr prevlaus page) (1) The 1989 amount for Holdings includes the effects of the implementation of a plan to eliminate excess domestic trade inventories of its tobacco products which redueed operating income by an estimated $360 million. (See Note 2 to the Consolidated Financial Statements.) (2) The 1988 amount includes the effects of the additional tax provisions for the repatriation of certain foreign eamings and advirory fees and certain other expenscs that were incurred in anticipation of the Merger. The tombined effect was a reduction of income from continuing opentions by S70 million for the year ended December 31, 1988. The 1990 amount includes $75 million of advisory fees incurred in connection with the Recapitalization Program and the establishment of fixed interest rates on the Converting Debentures and Group Debentures. (See Note 2 to the Consoli- dated Financial Statements.) (3) The 1989 amount for Holdings includes $237 million of interest expense allocated to discontinued operations. (See Note 4 to the Consolidated Financial Statements.) (4) The 1987 amount includes net after-tax gains on the sale of RJRN's discontinued oyerations of $215 million. In addition, the 1987 amount includes an extraordinary loss of $80 million from the early extinguishment of debt. The 1990 amount includes an extraordinary gain of $33 million which resulted from the early extinguishments of debt and consists of a pre-tax gain of $220 million from the repurchase of Group Debentures on the open market, a writeofl of debt issuance oosu aggregating $79 million and a provision for income taxes of 5108 million related to the Recapitati- zation Program. (See Note S to the Consolidated Financial Statements.) (5) The 1990 working capital amount for Holdings includes current maturities of bng-term debt of f 1.425 billion which is expected to be repaid during 1991 primarily from cash fbws from operating activities. (6) Holdings common alockholders' equity at December 31, 1990 and 1989 includes non-cash expenses related to accumulated trademark and goodwill amortization of $1.165 billion and $557 million, respectively. (See Note IS to the Consolidated Financial Statements.) See Notes to Consolidated Financial Statements. 20
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BONE dog snacks, the leading brand in Canada, and MAGIC baking powder. The groccry division currently operates eight manufacturing facilities, five of which are devoted to canned products, principally fruits and vegetables, two of which manufacture cereals and one of which produces pet snacks. The grocery division i products are sold directly to retail chains and are distributed through six regional warehouses. Nabisco fnternationaL Nabisco InternaAonal is a leading producer of powdered dessert and drink mixes, biscuits, baking powder and other grocery items, industrial yeast and bakery ingredients in many of the 16 Latin American countries in which it has operations. Nabisco International also exports a variety of Nabisco products to markets in Europe and Asia from the United States. Nabisco International manufactures and markets yeast, baking powder and bakery ingredients under the FLEISCHMANN and ROYAL brands, biscuits and crackers under the NABISCO brand, desserts and drink mixes under the ROYAL brand, processed milk products under the GLORIA brand, and canned fruits and vegetables under the DEL MONTE brand pursuant toa license from Del Monte. Nabisco International's largest market is Brazil, where it operates 11 plants. Nabisco International is the market leader in powdered desserts in most of Latin America, the yeast category in Brazil, biscuits in Venezuela and Uruguay, and anned vegetabla in Venezuela. Nabisco International also maintains a strong position in the processed milk category in Brazil. Nabisco International's grocery products are sold to retail outlets through its own sales forces and independent wholesalers and distributors. Industrial yeast and bakery products are sold to the bakery trade through Nabisco International's own sales forces and independent distributors. Certain of Nabisco International's businesses have been sold. See 'Yienenl Development of Business-Reanl Dispositions^. Plaattrs UJeStrtn . Planters I.ifeSavaa manufactures and markets nuts, bard roll andy, gum and snteks primarily for sale in the United States. Planters LifeSavers• well-known brands include PLANTERS nuts, LIFE SAVERS hard roll candy, BREATH SAVERS sugar free mints, BUBBLE YUM bubble gum and CARE•PREE sugarlas gum. On the basis of the most recent dna available, PLANTERS nuU are currently the dear leader in the packaged nut category, LIFE SAVERS is currently the largest selling hard roB andy in the United Suta, with an approximately 32% share of the hard roll andy category in 1990, BREATH SAVERS is wrrently the largest selling sugir free breath mints in the United States and BUBBLE YUM is currently the largest selBng chunk bubble gum in the United States. Planters LifeSaven also manufactures PLANTERS salty snacks and markets PLANTERS peanut and popcarn oils. - Planters LifeSavers'snaek products, soid priararily under the PLANTERS name, are eommodity oriented, are marketed to the trade customer and are seasonally strongest in the fourth quarter. Its confectionery products, including LIFE SAVERS and BUBBLE YUM, are marketed to the consumer and are seasonally strongest during the third and fourth quartrs. Planters LifeSavers sells its products in the United States primarily to large retail outlets, chain accounts and to other retail.nd wholesale outlets. These include grocery stores, drug/mass merchan- disers, convenience stores, food service, military and vending machine suppliers. None of Planters LifeSavers' customers accounted for more than 10% of sales during 1990. The products are distributed from 13 distribution ceaters located througbout the United States. Planters LifeSavers currently owns and operates 6ve manufacturing facilities, three for its PLANTERS label products and two for its confectionery products. 10
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federal excise taxes on eigarettes, this hu had and will likely continue to have an adverse effect on cigarette sales. In 1964, the Report of the Advisory Committee to the Surgeon General of the U.S. Public Health Service concluded that cigarette smoking was a health fiazard of sufficient importance to warrant appropriate remedial action. Since 1966, federal law has required a warning statement on cigarette packaging. Federal law also requires annual reports to Congress from the FTC and the Secretary of Health and Human Services. The FTC has recommended in such reports to Congress that Congress enact legislation requiring stronger warnings and that funding be provided for anti-smoking messages in mass media. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States. Cigarette advertising in other media in the United States is required to include information with respect to the 'tar' and nicotine content of cigarettes, as well as a warning statement. During the past two decades, various legislation affecting the cigarette industry has been enacted. In 1984, Congress enacted the Comprehensive Smoking Education Act (the "Smoking Education Act"). Among other things, the Smoking Education Act: (i) establishes an interagency committee on smoking and health that is charged with carrying out a program to inform the public of any dangers to human health presented by cigarette smoking; (ii) requires a series of four new health warnings to be printed on cigarette packages and advertising on a rotating basis; (iii) increases type size and area of the warning on cigarette advertisements; and (iv) requires that cigarette manufacturers provide annually, on a confidential basis, a list of ingredients used in the manufacture of cigarettes to the Secretary of Health and Human Services. The warnings currently required on cigarette packages and advertiso- ments (other than billboards) are as follows: (i) "Surgeon General's Warning: Smoking Causes Lung Caneer, Heart Diuue, Emphysema, And May Complicate Pregnancy"; (ii) "Surgeon General's Warning: Quitting Smoking Now Greatly Reduoes Serious Risks To Your Hnltb"; (iii) 'Surgeon General's Warning: Smoking By Prcgnant Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight'; and (iv) "Surgeon Genenl's Waming: Cigarette Smoke Contains Carbon Monox- ide." Similar warnings are required on outdoor billboards. In October 1984, the Cigarette and l.ittle Cigar Fire Safety Act of 1984 also was enacted which, among other things, created an interagency committee on cigarette fire safety. In December 1987, the interagency committee submitted a report to Congress that concluded, atnong.other things, that a cigarette with reduced ignition propensity was technically feasible and may be eoamtereially feasible, but recommended further study. In August 1990 the Fire Safe Cigarette Act of 1990 was eaackd, which directs the Consumer Product Safety Commission to conduct and oversee further research and to assess the praetieability of developing a performance standard to reduce cigarette ignition propensity. A final report is due to Congress in 36 months. A new federal law prohibits smoking on all domestic airline flights of siwr hour duration or less and the Interstate Commerce Commission has taken steps to ban smoking on busd transporting passengers inter-state. - Since the initial report in 1964, the Secretary of Health. Education and Welfare and the Surgeon General have issued a number of other reports which purport to link cigarette smoking with certain health ha7rrds, including various types of cancer, coronary heart disease and chronic obstructive lung disease. These reports have recommended various governmental measures to reduce the incidence of smoking. The Surgeon General's 1988 and 1989 reports concluded, among other things, that cigarettes and other forms of tobacco are addictive and contain a series of recommendations for achieving a "smokeless" society by the year 21100. In February 1990, the Surgeon General released a report surveying smoking patterns of Americans based on various age, sex and race categories and compiling various governmental anti-smoking legislation and adivities. On September 25, 1990, the Surgeon General released a report on the benefits of quitting smoking and recommending that insurers pay for smoking cessation programs. Cigarettes are subject to substantial excise taxes in the United States and to similar taxes in many foreign tnarkets. Recently enacted legislation increased the federal excise tax per pack of 20 cigarettes to 20 cents from 16 cents on January 1, 1991 and provides for an increase in the federal excise tax on 5
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Fabrik A/S and Nabisco Brands Norge A/S in Scandinavia; (iv) the assets of the Chun King business; (v) the food businesses of R1RN in Spain and Portugal; and (vi) the fresh fruit business of De1 Monte Corporation ("Del Monte"). The aggregate cash purchase priccs for these businesses totalled approzi- mately $3.57 billion. During 1990, a number of other businesses were sold as discussed below. On January 9, 1990, RJRN eompleted the sale of thc Del Monte processed foods business to DMPF Corp., for a purchase price of approximately $1.475 billion in eash, subject to certein post- dosing adjustments. DMPF Corp. is a corpontion formed by Merrill Lynch & Co., Inc. and certain other investors, , On February 23, 1990, RJRN completed the sale of the assets of the Curtiss Confections business to Nestle Foods Corporation and Nestle S.A., for a purchase price of approximately $370 million in psh. On April 2, 1990, RJRN completed the sale of Nabisoo's food businesses in New Zealand to Suffell Holdings Ilmiled and Nabisoo's food businesses in Singapore, Malaysia and Hong Kong to Britannia Brands Pte. Ltd. The aggregate purchase price for Nabisoo's New Zealand and Far East food burine<scs was approximately $180 million in eash, subject to certain pos4eiosing adjustments. Britannia Brands Pte. Ltd. is a Singaporebased joint venture of Britannia lndustiiea Pte. Ltd. and BSN Groupe. On April 9, 1990, RJRN completed the sale of its Brazilian tobacco operations to Dibrell Brothers, Incorporated for a purchase price of approximately S50 million in cash, subject to certain post-closing adjustments. On November 8, 1990, RJRN completed the sale of its 20% interest in FSPN, Inc. to The Hearst Corporation for a purchase price of approximately 5168 million in cash. ~ , RJRN will continue to auess its businesses to evaluate the'v consistency with strategic objectives. Although RJRN may divest additional businesses in the future, no decisions have been made with respect to any such divestitures. The Credit Agreement, dated as of July 9, I990 (u amended, the "1990 Credit Agreement") entered into in oonnation with the implementation of the Recapitaliration Program prohibitsthe ak prior to February 9, 1993 of all or substantially all,or.any substantial portion, of RJRN's domestic tobacco operations or the operations of Nabisco re4tmg to the manufao tare and sale of eookies and crackers in the United Statea. The 1989 Credit Agreemeat and the 1990 . Credit Agreement also proht'bil the sale of any capital stock owned directly by RJRN and pledged fo «are the obligations under the 1989 Credit Agreement and the 1990 Credit Agreement. The FTC has found that certain of the divestitures described above, together with the divestiture of Fpher Nut Co. by Beatrice Company, satisfy all divestiturc obligations under the ConsentDeeree. As required by the 1989 Credit Agreement, the asset sale bridge facility under the 1989 Credit Agreement (the "Asset Sale Bridge Facility") has been repaid and at least $5.0 billion of aue6 repayment consisted of the net e.ab proceeds from the above divestitures. - (b) £rnanciaf ftt(ornaiton about lndurrry Segments During 1990, the Registrants' industry segments were tobacco and food. For information relating to industry segments for the years ended December 31, 1990, 1989 and 1988, see Note 17 to the Consolidated Financial Statements. (c) Nanative Descripiion ojBusfnas Tobacco RJRN's tobacco business ineludes the operations of RJRT and Tobacco International, which manufacture, distribute and sell cigarettes. Cigarettes are manufactured in the United States and in 30 foreign oountriea and territories by Tobacco International and subsidiaries or lieensees of RJRT and are sold throughout the United_States and in nare than 160 markets around the world. In 1990, 2
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closest competitor. Leading Nabisco Biscuit cookie brands include OREO, CHIPS AHOY!, NEW- TONS and TEDDY GRAHAMS. Leading Nabisco Biscuit cracker brands include RITZ, WHEAT THINS,PREMIUM, NABISCO GRAHAMS and TRISCUIT. OREO and CHIPS AHOY! are the two largest selling cookies in the United States. OREO, the leading sandwich eookie, is Nabisco Biscuit's largest selling cookie brand. Line extensions such as OREO BIG STUFand FUDGE COVERED OREOcontinue to increase the brand's appal to targeted consumer groups. CHIPS AHOY! is the leader in the chocolate chip eookie segment with recent line extensions such as SELECTIONS, SPRINKLES and MINI CHIPS AHOY! broadening its appeal and adding incremental sales. NEWTONS, the oldest Nabisco cookie brand, has no significant national competitor in the fruit- filled segment During the 1980's, additional fruit flavor fillings expanded the appeal of NEWTONS, helping it to become the third leading cookie brand in the United States. After its highly successful introduction in late 1988, TEDDY GRAHAMS was the fourth largest selGng cookie brand in the United States in 1990. Nabisco Biscuit's cracker division is led by RITZ, the largest selling cracker in the United States, and RITZ BITS, a successful product line extensio, which together accounted for more than 14% of cracker sales in the United States in 1990. In addition, PREMIUM, the oldest Nabisco cracker brand and the leader in the saltine cracker segment, is joined by NABISCO GRAHAMS, W HEAT THINS, and TRISCUIT, to comprise, along with RITZ, the five largest selling cracker brands in the United States., . . Nabisco Biuuit's other cookie and cracker brands, which include NILLA WAFERS, NUTTER BUTTER, BARNUM'S ANIMALS CRACKERS, BETTER CHEDDARS, HARVEST CRISPS and AMERICAN CLASSIC, compete in consumer niche segments. Many are the Cust or second largest idling brands in their respective segments. - Nabisco Biuuit's products are manufactured in nine RJRN-owned bakeries and in I I facilities with which R1RN has pruduotion agreements. Nabisco Biscuit is in the proeess of implementing plans to modernize its facilities. Nabisco Biscuit also operates a flour sn1B in Toledo, Ohio, which supplies 85% of its 8our needs, and a facility in Wrighastown; Wisoonsin, which produces EASY CHEESE . . . pasteurized process cheese spreads. Nabisoo Baaiit's produas are sold to major: grocery ind other large retail chains through Nabisco Biscuit's direct sala/direct store'door delivery system- The systemis tupported by a distribution network utiliang nine major distribution warehouses and 137 shipping branches where shipments are consolidated for delivery to approximately 106,000 separate delivery points. ' Nabiseo Foodr. Nabisco Foods markets a broad range of food products, with cereals, margarine and pet foods representing the lugest categories. Many,of Nabisco Foods' products are first or second in their product categories. Well-ia_qwn brand names include NABISCO SHREDDED WHEAT and CREAM OF W HEAT cerals, FLESCHMANN'S, and BLUE BONNET tmrgariaa, MILK-BONE pet snaeks, A.1. steak sauoe, GREY POUPON mustards, ORTEGA Mexican foods and EGG BEATERS egg sdbstitutes. . . . . . . . , NabisooFop¢s'ready-to<atoe,tealsincludeNABISCOSHREDDED WHEAT,NABISC.O 100% BRAN and TEAM FLAKES id the adult segment of the category .nd FRUIT WHFATS and FROSTED WHEAT SQUARES in the all family segment. NABISCO SHREDDED WHEAT is a leading brand in the adult aegment Nabisco Foods' FRUIT WHEATS and FROSTED WHEAT SQUARES have proved to be successful line extensions in thee all family segmea4 Nabisco Foods' rady-tocat cereals aro manufactured ia thra faeilides, which aha manufacture TRISCUIT aackers. ' Nabisco Foods is the second largest manufacturer in the hot cereal ategory, participating in the eookon-stove .hd oook-in-bowl segments of the hotettals category. CREAM OF WHEAT, the lading wheat-based bot'eeral, and CREAM OF RICE participate in the oook-0n-stove segment and 8
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Tobacco International has strong brand presence in Western Europe and is well established in its other key markets in the Middle East/Africa, Asia and Canada. Tobacco International has over 55 brands of which WINSTON. CAMEL and SALEM, all American Blend cigarettes, are its interna- tional leaders. WINSTON, Tobacco International's largest international brand, has a significant presence in Puerto Rico and has particular strength in the Western Europe and Middle East/Africa regions. CAMEL is sold in approximately 135 markets worldwide and is Tobacco International's second largest international brand. SALEM is the world's largest selling menthol cigarette and has particular strength in Far East markets. Tobacco International also manufactures and markets a number of local brands in various foreign markets. None of Tobacco International's customers accounted for more than 10% of sales during 1990. , Approximately 32% of Tobacco International's cigarette volume for 1990 was manufactured by RJRT in the United :tatea for saly in foreign markets. The remainder was manufactured overseas, either in Tobacco International-0wned manufacturing facilities or by licensees. Tobacco International- owned facilities are locatcd in Canada, the Canary Islands, Hong Kong. Malaysia, Puerto Rico, Switzerland and Germany. In 1988, Tobacco International opened a factory in the People s Republic of China as a part of the first tobacco business joint venture in that country. Cerlain of Tobacco International's foreign operations are subject to local regulations that set import quotas, ratrict financing flexibility and affect repatriation of earnings or assets. In recent years, certain trade barriers for cigarettes, particularly in Asia and, to a lesser extent in Western Europe, have been liberalized. Such liberalization msy provide opportunities for all international cigarette tnanufac- turers, ineludiag Tobacco International, to expand operations in such markets; however, there can be no assurance that suth Gbenlizing trends will be maintained or extended or that Tobacco International will be successful in pursuing such opportunities. During thefall of 1990, Tobacco International ruched an agreement to supply 14.1 billion eigarettes to the Soviet Union during the following twelve months and is currently In the pro«ss of finalizing negotiations to supply an additional 2 to 3 billion cigarettes to the Soviet Union during such period. These transactions are tat expected to have a material effect on the results of operations of any of the Registrants. - - Raw Materriafs . . In Its domestic production of eigarUtes. RJRT primarilyuses domestic burley and flue cured leaf tobaooos purchased at domestic auction.R]RT also purchases oriental tobaocos, grown primarily in TLrkey and Greece, .ad certain other noe-0omratic tobaccos. Tobacco International uses a variety of fobaooo leaf from both United. States aad international saureu. Tobacco kaf is an agricultural commodity iubject in the United States ta aovernmeat prodqctioo controls and pria supports that nn affect market prices substantially. . ;Ibe tobacco leaf price support program was lut substantially revised in 1986 and domestic tobacco production has increased over the last five years. The program is subject to Congressional review and may be changed at any time in the future. A bill was introduced in Congress In June 1990 that would have eliminated the federal price support program, but no action was taken with respect thereto. RJRT is unable to predict whether such a bill will be reintroduced or the e8ect of the enactment of that or any other bill related to the program or RJRT. RJRT and Tobacco Iateraatiaaal believe there Is a sufficient supply of tobacco in the worldwide tobacco market to satisfy their current production requirements. Jsglsfnies ta/ Other Alatren Affeeriag the Cigarare ladasrry For over 23 years, the advertising, sale and use of cigarettes has been under attack by government and health officials in the United States and other countries, principally due to elaims that cigarette smoking is harmful to health. This attack has resulted in a number of substantial restrictions on the marketing, advertising and use of cigarettes, diminishing social acceptability of smoldng and activities by anti-smoking groups designed to inhibit cigarette sales and the testing and introduction or new cigarette products. Together with manufacturera' priceinereases and substantial increases in state and 4 ._,........, . . . ...__., T„ . ......,..--._~,.~ ,
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at least six varieties of MIX 'N EAT wheat-based cereal participate in the oook-in-bowl segment. Hot cereals are manufactured in one facility. Kellogg Company has approximately 37%of the ready-totat cereals category volume sales and is the largest producer in the ready-to-tat category. The Quaker Oats Company, with over G0%of the hot cereals category volume sales, is the meet significant participant in the hot cereals category. Although Nabisco Foods' cereals have sizeable niche positions in the wheat-based segment of both the ready-to- eat and hot cereals categories, recent enlries by competitors in both the ready-to-cat wheat segment and the hot cereals oatmeal segment have required Nabisco Foods to respond by increasing its marketing expenditures. Nabisco Foods' margarine business is the second largest margarine producer in the United States. Nabisco Foods currently participates in all three segments of the margarine category, with FLEISCH- MANN'S in the premium health segment, BLUE BONNET in the selected intermediate segment and BETTER BLEND in the, margarine and butter blends segment. Nabisco Foods' margarines are manufaetured in four facilities. Nabisco Foods is the market leader in the egg substitute category with FLEISCHMANN'S EGG BEATERS, the first retail egg substitute. Nabisco Fooda is the leading manufacturerof dog snacks in the United States with MILK-BONE dog biscuits. Recent entries by competitors have increased the competitive environment, requiring additional product development and marketing support spending. Two new MILK-BONE products, MILK-BONE T.C. BISCUITS and MILK-BONE T.C. RAW HIDE STRIPS were introduced in early 1990, Other Nabisco Fo6ds' pet snacks include FLAVOR SNACKS, DOG TREATS and BUTCHER BONES. Pet snacks are produced at a single manufacturing facility. Nabisco Foods' primary entries in thesauce and condiment segments are A.1. steak sauce, the ieading steak sauce, and GREY POUPON mustard, the leading Dijon mustard. Nabisco Foods also produces-REGINA wine vinegar, the kader in its segment of the vinegar market. A:1., fiREY POUPON and REGINA products are manufactured in one facility. Nabisco Foods produces sbelf-stable Mexican foods under its ORTEGA brand name. Nabisco Foods also participates in the dry mix dessert category with ROYAL gelatins and puddings and has lines oi regional products including COLLEGE INN broths. VERMONT MAID syrup, MY-T-FINE puddings, DAVIS baking powder and BRER RABBIT molasses and syrup. Nabisco Foods' products are sold to retail grocery chaias, drug/mass merchandisers and other major retail oullets. All products are sold by irtdependent brokers. •Nabisoo Foods also sells a variety of specially packaged food products, including cookies, erackers, cereal's'and sauces for restaunnt; instilution and table top uses. - • . Nabisca Brands 7/d. Nabisco Brands Ltd eonduets Nabiaco's Canadian operations, which aom- prise two divisions, biscuit and grocery. In 1990, the biscuit division produced nine of the top ten cookies and the top ten crackers in Canada. Nabisco Brands Ltd's oookie and cracker brands in Canada include OREO, CHIPS AHOY!, FUDGEFlO, PEEK FREANS, DAD5, DAVID, PREMIUM PLUS, RITZ,TRISCUITandSTtUNEDWHEATTHINS. Thebiseuitdivisionlproductsarcmanufactured in five bakeries in Canada. One bakery.is undergoing moderniration which is expected to be completed in 1991. The biscuit division's products are aold through a direct store delivery system, utilizing I I saies offias and distribution centers and a eoptbinatioo of public and private carriers. Nabisco Brands Ltd's grocery division produces and markets rady-totat cereal, canned fruits and vegetables and pet snacks. The grocery division is the second largest rudy-to-aat cereal manufacturer in Canada with core brands including SHREDDIES, SHREDDED W HEAT, FRUIT WHEATS and 100% BRAN. In 1990, SHREDDIBS and SHREDDED WHEAT were the second and sixth largest selling brands of ready-to-eat cereal in C.nada, respectively. The grocery division is the leading canned fruit producer in Canada and is the second largest canned vegetable producer in Canada. Canned fruit and vegetables and fruit drinks are marketed under the DEL MONTE trademark, pursuant to a license from Del Monte, and under the AYLMER trademark. The grocery division also markets MILK- 9 71~
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pound, Swiss franc, and cross rate exposure between the French franc, the Belgian franc, Italian lira and the German mark. RJRN manages these exposures to minimize the effects of foreign currency transactions on its cash flows. Fluctuations in the value of foreign currencies cause US. dollar translated amounts to change in comparison with previous periods and, accordingly, RJRN cannot quantify in any meaningful way the effect of such fluctuations upon fulure iocome. This is due to the large number of currencies involved, the constantly changing exposure in these currencies, the complexity of intercompany relationships, the hedging activity entered into to minimize the effect of exchange rate changes and the fact that all forpign currencies do not re8d in the same manner against the US. dollar. The Registrants believe that they arc currently in compliance with all covenants and restrictions of the 19B9 Credit Agreement, the 1990 Credit Agreement and their otha indebtedness although plaintifl's in certain pending actions have alleged that certain covenants in certain indentures have been breached. See Item 3. "Legal Proceedings." Item & financial Statemeots ard Supplementary Data Refer to the Index to Financial Statements and Financial Statement Schedules on page 46, for the required information. ftem 9. (kanges io and pisagreemeaU with Accountants on Accounting aad FuuncW Disclosure None 29
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January 1, 1993 to 24 cents. In addition, states impose excise taxes of levels ranging from 2 cents to 41 cents per pack on cigarettes, and increases in these state excise taxes could also have an adverse effect on cigarette sales. In 1989, California raised its state excise taxes on cigarettes by 25 cents per pack and in 1990 eight states have enacted excise tax increases ranging from 3 cents to 15 cents per pack. In addition to the foregoing, legislation and regulations potentially detrimental to the cigarette industry, generally relating to the taxation of cigarettes and regulation of advertising, labeling, promotion, sale and smoking of cigarettes, have been proposed from time to time at various levels of the federal government. Bills were introduced in the last Congress (i) that would subject cigarettes to regulation in various ways under the US. Department of Health and Human Services, including regulation by the US. Food and Drug Administration and by the Centers for Disease Control, (u) that would subject cigarettes generally to regulation under the Consumer Products Safety Act, (iii) that could increase manufaaureri costs, (iv) that would mandate anti-smoking education campaigns, (v) that would provide additional funding for federal and state anti-smoking activities, potentially allowing state and lecal governments to restrict cigarette advertising and promotion and (vi) that would require a new list of nine health warnings on cigarette packages and advertising, expand the required size of the warnings, restrict the contents of cigarette advertising and promotional activities and repeal the preemptive effects of the Fedenl Cigarette fabeling and Advertising Act (the "Qigarette Act") in civil litigation. The US. Environmental Protection Agency has also released draft documents which conclude that environmental tobacco smoke is a known human carcinogen and call for a virtual ban on smoking in workplaces. Legislation imposing restrictions on public smoking has also been enaded~in a number of state and local jurisdictions, certain employers have initiated programs restricting or eliminating smoking in the workplace and one state has eoaded legislation designating a portion of increased cigarette excise taxes to fund anti-smoking advertising. It is not possible to determine whether additional federal, state or local legislation or regulations relating to smoking or cigarettes will be enacted or to predict any «suiting effect thereof on RJRT, Tobacco International or the cigarette industry. A number of foreign countries have also taken steps to discourage cigarette smoking, to restrict or prohibit cigarette advertising and promotan and to Increase taxes on eJgarettea. Such restrictions are, in somo cases, more onerous than restrictions imposed in the United States. On December 11, 1990, RJRN and other U.S. cigarette manufacturers, through The Tobacco Institute, announced a tobacco industry initiative to assist retaBerg*in enforcing minimum age laws on the sak of tSgarettes, to seek the uniform establishment of 18 as the minimrrm age for the sale of cigarettes in all states, to distribute informationall materials to assist parents in oombattiug peer prmura on their children to smoke and to limit voluntarily oortain cigarette advertising and promo. tional practices. . . Litigarioa Affecsiag t8e Cigarrre /alarrry Various legal actions, prooeedings and claims ane pending or may be instituted against RJRN or its subaidiuies, including those claiming that lung ianoer and other diseases have resulted from the ase of RJRTs tobacco products. During 1990, 7 new.ctions were fded against RJRTor its indemnitees and 11 actions were dismissed or otherwisa'nesolved in favor of RJRT or Its indemnitea without trial. A total of 28 such actions in the United Stater and one against RJRT's Canadian company were pending on December 31,1990. As of February.20,1991, 26 active cases were pending in the United States and one in Canada. The United States cases are in 10 states and aie distributed u foBows:10 in Texas, 5 in New Jersey, 3 in Pennsylvania, 2 in Louisiana, and one eaeh In Arizona, Indiana, Minnesota, Mississippi. New York and West V'rrginia. Of the 26 active cases in the United States, 19 aro pending in state oourt and 7 in federal court. The plaintiffs in these actions seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligena, breach of warranty, failure to warn and conspiracy. Punitivc damagcs, often in amounts totalling many millions of dollars, are specifically pleaded in 19 eases in addition to 6
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approximately 12% of total tobacco segment net sales (after deducting excise taxes) and 85% of total tobacco segment operating income before amortization of trademarks and goodwill were attributable to domestic tobacco operations. Domestic Tobacco Operations The domestic tobacco business is eondueted by RJRT, which is the second largest cigarette manufacturer in the United States. According to data prepared by an independent source that develops retail market share information for the UrS. tobacco industry. R]RT had an overall share of retail consumer cigarette sales during 1990 of 31.3%, a decrease of slightly more than one share point from 1989. RJRT believes that the sampling techniques customarily used in preparing this data may overstate RJRrs actual retail share by approximately one share point. RJRT's largest selling cigarette brands in the United States include WINSTON, SALEM, DORAL, CAMEL and VANTAGE RJR7's other cigarette brands, including MORE, NOW, CENTURY. MAGNA and STERLING, are marketed to meet a variety of smoker preferences. Most RJRT brands are marketed in a variety of styles. On December 3, 1990, RJRT introduced nationally CAMEL ULTRA LIGHTS, a line extension of the popular CAMEL brand, During 1990, RJRT and the largest domestic cigarette manufacturer, Philip Morris USA., together sold approximately 70% of all cigarettes sold in the United States. RJRT has long been an innovator in the cigarette industry, introducing the first national branded cigarette, CAMEL, in 1913, the first filter cigarette, WINSTON, in 1954, the first filtered menthol cigarette, SALEM, in 1956, the first "low-tar" agarette, VANTAGE, in 1970 and the first branded cigarette in the growing savings segment, DORAL, in 1984. HORIZON, a recent product innovation which is arrently in test markets, uses new technology to givc the lit-end smoke a pleasant aroma. Substantially all of RJRrs domestic manufacturing facilities, consisting principally of factories and leaf storage facilities, are located in or near WinstortSalem, North Carolina. All such facilities are owned by RJRT. Included in such facilities are the Tobaeonville cigarette manufacturing plant of approximately two million square feet that became fully operational in 1987 and the Whitaker Park cigarette manufacturing eompfex, which underwent an extensive modernization that was completed early in 1989. Both the construction of the Tobaeooville plant and the modernization of the Whitaker Park facility were part of a ten-year $2 billion facilities modernization program that was completed in 1989. RJRT believes that its manufacturing facilities are the most technologically advanced cigarette manufacturing facilities in the United States. R]RT also has significant research and development facilities in Winston-Salem, North Carolina. RJRrs eigarettes aro sold in the United States primarily to chain stores, other large retail outlets andthroughdistributontootherneta7and.rholesakoutlets. NatteofRJRTscuutomersaccatntedfor more than 10% of sales during 1990. RJRT distributes its cigarettes from distribution ecaters in WinstonSalem, North Carolina primarily to public warehousa located throughout the United States, which serve as local distribution centers for RJRrs customers. RJRTs products are marketed to adult smokers through distributors and retail outlets. RJRT utilizes print media, billboards, pointof-sale displays and other methods of advertising. Since 1971, television and radio advertising of cigaretta has been prohibited in the United States. lnteraatioaaf Tobacco Operation.r Tobacco International operates in over 160 markets around the world. Although overall foreign cigarette sala (excluding China) hare increased at a rate of only 1% per annum in recent years, the American Blend segment, in.which Tobacco International primarily competes, is believed by RJRN to be growing significantly faster. Tobacco International is the second largest of two international cigarette producers that have significant positions in the American Blend segment. The share of sales of Philip Morris International Inc., the largest American Blend producer, however, is approximately three times larger than that of Tobacco International. 3
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SIGNATURFS Furitutnt to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly cvused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on March 8, 1991. RJR NABISCO HOLDINGS CORP. RIR NABISCO HOLDINGS GROUP, INC. 1~j LOUt$ V, GERSPNER JR. By :...................................... (l.ouis V. Gmtner, Jr.) Chairman of the Ilmrd, Praident and Chief Eaa.vtive Officer Purauant to the requirements of the Securities Exchange Act of 1934, this report has becn tigned below by the following persons on behalf of the registrants and in the capacities indicated on March 8, 1991. Sut'n . ~f~ LOU4S V. GERSYNER, JR. . (LOuis V. Gcntner, Jr.) [llFNARL M.VON DER ([EYDEN (Karl M. von der Heydcn) M,RaFaV; Ronm _, (Robert S. Roat6) . ............................. (R. Thaodarc Amman) ..... ~ .............. (Jamcs H. Greenc, Jr.) . ..... (Vernon E. Jordan, Jr.)...... .......................... H. Krau•.. 0 ............................. (John 0. ModUn, Jr.) ............. ~.............. (Paul E Raetber) . ............................. (Rorsnne 1.. Ridgway) ............. ~............... (Ctifton S. Rohbitu) ~ ••..•.(Goorge R. Robcns)••.•. (Scott M. Stuan) 7ide Chalrman of the Board, Praidenl and Chief EROtutive OfFar (principal eRecutive otficer) and Director Executive Via President and Chief F~rn~ 1 Officer (principal financial Sen7or Vku Prerideot and C,ontroller (prindpal scoounting o(6cer) Director Director Director Director Director Director Director Director Director Director .By. /s~ R08ERT F. SHARPE, JR. (Robert F. Sherpc,~Jr.) Allorney-in-Fact 43 H W N /v
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1988, due primarily to the significantly higher amortization of trademarks and goodwill associated with the Acquisition. Business Unit Contribution increased 2% to $742 million in 1989 compared to 19g8. Excluding the impact of purchase oost allocation adjustments and a non-recurring gain from the sale of certain confectionery operations in 1988, Business.Unit Contribution would have increased 24%. Nabisco reported higher net salea of S4.6 billion and Business Unit Contribution of 5571 million in 1989 compared to $4.3 billion and $502 million, respectively, in 1988. The improvement in Business Unit Contribution resulted primarily from higher pricing, productivity cost reductions and volume gains. Volume gains in the US. biscuit business (led by successful new product introductions- primarily TEDDY GRAHAMS, RITZ BITS and TRISCUIT BITS) were partially offset by lower volume in grocery products, principally in ready-to-cat cereal markets. Planters f3feSaven reported lower net sales of $1.2 billion in 1989 compared to $1.3 billion in 1988, primarily due to volume declines in bard roll andy and nut products. The decrease in Business Unit Contribution to $171 million in 1989 compared to $228 million in 1988 was due to a gain on the sale of eerufn confectionery operations in 1988 and the lower 1989 sales volume. Pottrerinavear Beaefits OlAer Than Peasioas During December 1990, Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"), "pmployers Aocounqng for Postretirement Benefits Other Than Pensions", was issued. SFAS No.106 will be effective for years beginning after 1992 and will require the aazual of eosu for retirees' halth and other postretiremeat benefrts other than pensions and the recognition or an unfunded and unrecognized accumulated benefit obligation for these benefits. Although RJRN has not yet adopted SFAS No. 106, rnanagement currently estimates that the accumulated benefit obligation for these benefits could range from approximately $1.0 billion to $1.5 billion when adopted. RJRN's retiree health care and other postretirement benefit plans other than pensions are currently under study, therefore, the wet amount of the accumulated benefit obligation at adoption annat be determined. Neither has RJRN derermined whether it will adopt SFAS No. 106 prospectively or by recording the cumulative effect as a one•time adjustment to inoome. However, in connection with the purchase cost alloation as af February 9, 1989, RJRN recorded an atimated present-valued obligation for these bene6ts, and aooordingly, an accrual of approximately $1.1 billion is re8ected in RJRN's Balance Sheet at Deamber 31, 1990. - 25 i.~Y1.YYL%i::::R:: ~ . .. ..... .
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allocation of the purchase cost associated with the Acquisition. Business Unit Contribution was $2.6 billion in 1989, an increase of 5%over 1988. However, Business Unit Contribution increased 29% from 1988, after adjustments for the one-time impact of the program to eliminate excess domestic tobacco trade inventories in the second half of 1989, the allocation of the purchase cost associated with the Acquisition and a*non-recurring gain on the sale of certain confectionery operations in 1988. Consolidated interest expense increased substantially from the 1988 level of $337 million to $2.9 billion in 1989, due primarily to interest charges on the debt incurred in connection with the Acquisition. The 1989 amount includes $1.2 billion in non-cash interest expense. Holdings reported a loss of $1.2 billion from continuing operations in 1989, compared to RJRN's income from continuing operations of S 1.2 billion in 1988. The loss in 1989 was due primarily to the significantly higher interest expense, amortization of debt issuance costs, adjustments including intangi- ble amortization resulting from the allocation of the purchase eost associated with the Acquisition, one- time change in control costs and the impact of the decision to eliminate excess domestic tobacco trade inventories. Included in the loss from continuing operations in 1989 was $2,8 billion of non-cash ehargea, primarily nonauh interest, amoriization of debt issuance costs, amortization of trademarks and goodwill and depreciation expense. ledastry Segauata The percentage contributions of each of RJRN'a industry segments to net ules and Business Unit Contribution during the last five years were as follows: 19" 1967(t) 19" tft7 19" Net sales Tobacco ................................ 58% 55% 56% 54% 51% Food ................................... 42 45 44 46 49 ' 100% 100% 100% I00% It10% Business Unit Contribution(2) Tobacco ................................ 77% 73% 73% 74% 73% Food ................................... 23 27 27 26 27 100% !00% 100% lf10% 100% (1) Includes Predecessor period January 1, 1989 through February 8, 1989. (2) Contributions by industry segment computed without effocts of Corporate expenses. 22
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INDEX TO FINANCIAL STATEMENiS AND FINANCIAL STATEMENT SCHEDULFS P.te Financial Statements . . Report of Deloitte & Touche, Independent Auditors ........................... F-I Report of Ernst & Young, Independent Auditors .............................. F-2 Summary of Significant Accounting Policies .................................. F-3 Consolidated Statements of Income and Retained Earnings-Yars Ended December 31.I990.1989 and 1988 ............................................... F-4 Consolidated Statements of Cub Fbwa-Yars Ended Deaembu 31, 1990, 1989 and 1999 ....................................................... F-5 Consolidated Balance Sheets-Dooember 31, 1990 and 1989 ..................... F-6 Notes to Consolidated F'mancial Statements .................................. F-7-F-32 Flnand.l Shtenent Schedales For the year ended Deoember 31. 1990 and the period February 9, 1989 through December 31, 1989: Schedule III -JCondensed Fuundal Information of Registrants ................. S-1-S-8 Schedule V -Property. Plant and Fquipment ............................... S•9 Schedule VI -Accumulated Depredation, Depletion, and Amortization of Property, Plant and Equipment ...................................... S-10 Schedule VII[ -Valuation and Qualifying Aoeounts ............................ S-11 Schedule IX -Short-Term Borrowings ..................................... S-12 Schedule X- -Supplementary-Intoe+e-State-ment-I.n.forinateon-: ................. S-13 For the period January 1, 1989 through February 8, 1989; Schedule V -Property. Plant and Equipnxnt ............................... S-14 Schedule VI -Accumulated Depreaiatan. Depletian, and Amortization of Propeny. Plant and Equipment ...................................... S•15 Schedule VIII-Valuation and Qualifying Aaoaunu ............................ Sl6 Schedule IX -Short-Term Borrowings ..................................... S-17 Schedule X -Supplementary Income Statement Information ................... S-18 For the year ended Deeember 31, 1988: Schedule V -Property. Plant and Fquipmat ............................... S-19 Schedule VI -Accumulated Depreoiation, Depletion, and Amortization of Property, Plant and Equipment ...................................... S-2C Schedule VIII -V.luation and Qualifying Aocounts ............................ S-21 Schedule IX -Short-Term Borrowings ..................................... S-2i Schedule X -Supplementary Income Statement Information ................... " S-2; All other schedules for which provision is made in the applicable regulations of the Securities anc Exchange Commission are omitted because they are not required under the related instructions or arn not applicable or the required information is shown in the financial statements or notes thereto. 46
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REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS R]R Nabisco, (nc- We have audited the accompanying consolidated financial statements for the year ended Ikcem- ber 31, 1988 of RJR Nabisco, Ine, and subsidiaries (Predeeecsor) listed in the accompanying Index to Financial Statements and Financial Statement Schedules (Item 14(a)). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally acceptcd auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the ovenll financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedules (Item 14(a)) present fairly, in all material respects, the consoli- dated mults of operations and cash flows of RJR Nabisco, Inc. and subsidiaries (Predecessor) for the year ended December 31, 1988 in conformity with generally accepted accounting principles. ERnsr & Youraa Atlanta, Georgia January 30, 1989 (except with respect to the dis- continued opcntions discussed in Note 4, as to which the date is September 24, 1989) F-2 tn r tJ ~ J r w r J
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L!ligarion,Consolidated C.A. No. 10389 (Del. Ch: Ct., dated Dec. 2, 1988) (the "Consolidated Delaware Action"). The amended complaint in the Consolidated Delaware Action names as defendants RJRN and its then current directors and KKR, RJR Acquisition Corporation ("Merger Sub"), a direct, wholly-owned subsidiary of Capital which was merged (the "Merger") with and into RJRN in connection with the Acquisition on Apri128, 1989 and Holdings (collectively, the "KKR Defendants"). The amended complaint In the Consolidated Delaware Action alleges that the board of directors of RJRN violated its fiduciary duty to stockholders by favoring KKR in the conduct of the auction through, among other things, accepting KKR's $109 bid to acquire RJRN (which bid allegedly presented antitrust and financing concerns) without seeking to obtain a higher bid from the competing group comprised of F. Ross Johnson, certain other members of then current management of RJRN, Shearson I.ehman Hutton Inc. ("Shearson") and Salomon Brothers Inc (collectively, the "Johnson Group"), whose bid allegedly was superior and did not pose similar concerns. The amended complaint in the Consolidated Delaware Action also alleges that the director defendants violated their fiduciary duty byagreeing in the Agreement and Plan of Merger, dated as of November 30,1988 and amended as of April 3, 1989 (the "Merger Agreement"), among RJRN, Holdings, Group and Merger Sub that Holdings would receive a $1.00 per share termination fee plus expenses in the event the directors decided to terminate the Merger Agreement to accept a better proposal from a third party. The KKR Defendants are not accused of any wrongdoing, but are named, according to the amended complaint, in order to effectuate complete relief. The amended complaint in the Consolidated Delaware Action sought to enjoin the KKR Defendants from consummating the tender offer to acquire shares of RJRN which was completed on February 9, 1989 (the "Tender Otfer") and to invalidate the Merger Agreement's break-up fee provision. On January 31, 1989, the Chancery Court denied plaintiffs' motion for a preliminary injunction. On February 2, 1989, upon direct application to the Delaware Supremc Court, plaintiffs' requests for certification of the Chancery Court's ruling for.n expedited appeal and for a stay pending such appeal were denied. On July 17,1990, plaintiffs filed a motion for a preliminary injunction toeking to enjoin RJRN and the KKR Defendants from implemeating the Recapitalization Program and on August 2, 1990, plaintiffs filed a motion for leave to file a second amended and supplemental complaint (the "Second Amended Complaint"): The proposed Second Amended Complaint reiterates plainfidi' initial allegations and further alleges that the exchange offers which were commenced on'Oetober 3,1990 and completed on November 1,1990 (the"1990 Exchange Offers") aro coercive and that the procedure whereby the fixed interest rates on the Seniw Converting Debentures Due 2009 of Holdings (the "Converdng. Debentures") and the Subordinated Exchange Debentures Due 2007 of Group (the "Group Debentures", and collectively, with the Converting Debentures, the "Debentures") were established failed to cause the Debentures to trade at par, as allegedly represented and eovenanted. The parties to the Coasolidated Delaware Action have recently reached an undepunding to settle such action. Under the terms of the proposed aettkment, certain desaes ot security balden will receive payments, without interest therooe, subject to the holdera' submission of valid proofs of claim. The proposed settlement is subject to the parties' execution of a definitive agrccment and the approval of the Court. It is anticipated that in ligbt of these and other contingencies, including possible appeals, and the time needed to process valid proofs of elaim, no payment to holders under any settkmeat would be made until at least 1992. A portion of any amounts payable in resped of the settlement is expected to be covered by insurance. The Registrants do not believe that the proposed settlement will have a material effect on the Registnnts'finaneial condition. In an order entered March 8, 1989, four previously filed actions, Brown, er a!, v. RJR Nabisco. lnc., er af., 88 Civ. 7905 (JMW) (S.D.N.Y., dated November 7, 1988) (the "Brown Action"), Handel v. R!R Nabisco, Jnc., er al, 88 Civ. 9252 (S.D.N.Y., dated December 29, 1988) (the "Handel Action"), Friedman v. RJR Nabirco, Jnc., 88 Civ. 8739 (S.D.N.Y., filed December 9, 1988) (the "Friedman Aetion")-and Foster v. RJR Nabisco. Inc., er al., 88 Civ, 9033 (S.D.N.Y" filed Docem- her 21, 1988) (the "Foster Action") were consolidated under the Brown Action case caption and dvil 13
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SIGNATURES Pursuant to the requirenumta of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant h duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nt York, State of New York on March 8, 1991. RJR NABISCO CAPITAL CORP. By : /i/ IAUL4 V. GBNSTNER, JR. ....................................... (I.ouu V. Gentner, Jr.) Chairman of the BoerA. Preeident and Chief Executive OlKcer Pursuant to the requ'uements of the Securities Exchange Act o(1934. this report has been signed below by t following persons on behalf of the registrant and in the capacities indicated on March 8, 1991. Sit- ...Is/ La~LS V.,GPwsniFx. JR..... ([euia V. Gerstna, JrJ ..(r/ Kuc~ M.,ra~ nPat HerDr,x... ((C.rl M. von der Hcyelee) ... . . ]i(.RaeF.tT S, RoArn ...... (Robert S. Raih) ~ ... ...... ...... R. Thcadore Amoan) , ..... ..... (Vernon E. Jadan. Jr.j. ....... (Henry ...... R. ravic ~. K.....)........ ............. ~............... (John 0. Medtin, Jr.) .............. ............. . (Paul & Raetha) . ............................. (Roa.nne L Ridgway) , ...:......................... (Clifton S. Robbiru) , ..... .......(Scou . M.. Stuart.).... 1we Chairuun of the Boar(, President and Chief Executive Officer (principal executive el6cer) and Director Executive Vice President and Cbkf rn)dal Oflioer (principal 6naneid Satbr Vice President and fbntroller (principal accounting otrieet) D'veaor Direetor Dirator Director Dirattor Director Director Direcior ,By. /a/ RoeeaT F. SwuPe, JR. ................................. (Ratharpe, 1r) Attonrydn-Fad 44
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F item 6. Selected Financial Data The selected consolidated financial data presented below as of December 31, 1990 and 1989 and for the year ended December 31, 1990 and the period from February 9, 1989 through December 31, 1989 for Holdings and for the period from January ), 1989 through February 8, 1989 for RJRN were derived from the 1990 Consolidated Financial Statements, which have been audited by Deioitte & Touche, independent auditors. The selected consolidated financlal data for each of ihe years in the three-year period ended December 31, 1988 was derived from the Consolidated Financial S.taternents of RJRN, which have been audited by Prnst Ai Yormg, independent auditors. The data should be read in conjunaion with the Consolidated Financial Statements, related aota and other financial information included herein. (DaR.n 1. MHG.m g,aapt Pa SWe A.e,.n) Flddi.a• RJRN F« rk Ya,t Frkd Den.A.r )1, 1990 f969 t9N fm 2 re1S31 1102 . ReWltr of Operation Net akr ............................. $13_879 S17,114 Ccst of products ruld ..................... 5,652 5,241 Selling, advertuing, administrative and gcncralexpenus ...................... 4.801 4.276 Amortization of trademarln and goodwill ...... 608 557 RenruGuring npenu, ner................. . - - Openting Saowne(1) ................... 2.818 2,040 Interat ecpense ........................ (3,000) (2,893) Amoniation o( debt irwanc<eow .......... (176) (N7) ciunge in =trol eoW ................... - - OaSrr Income (ealmre). aet ............... (M) 169 Income (bn) from oontinuing operations () (1,t31) before inaame taxes .................. Proruion (baidd) for hwnax uaer .......... 60 (156) Inoonx (Ima) from continuing opentions(2) .. s 4621 S(975) Income (lon) fran opcntions of diswntiaued `- burincsses, nd of inuome usa(3).......... f= f (i) Net inooow (Incs)(4) ..................... S (429) S (976) Pr<ferred uark diidend... . ............... 50 - Nrt Inoomc (lou) appliable to aommnn tladc .. S 479) S(976) Otker Daa Income (lop) from ountinuing operations per oummon sMrc(2) ...................... S (1.19) $ (3.21) Di+idends per common sh.re ............... - - RaWn Sheet Data (al e.d af perind+) working capital(S) ...................... i(1.089) $ 106 Total assets ............................ 32,915 36,412 Total debt ............................. 18.675 24,761 Redeemable preferred stock ................ 1,795 - Commen stockhnlden equity(6) ............ 2,494 1,217 ug6 S 650 $12,635 f11,765 511.117 332 5,661 5,458. 5,402 295 4,486 4,043 3,994 10 121 117 122 _ 232 _ 13 2.367 1,913 2,009 (44) (537) (448) (527) - (12) (6) (4) (247) - - - is 7 -i) ~S29 ) (263) 1,B2S 1,455 1,449 _(66) 654 591 646 LL197) $ 1,171 8 864 S 803 s 24 s 222 s 210 S 300 f(173) S 1.393 S 1.209 8 1,064 4 15 30 102 S(177) 8 11~78 S1,179 7 962 S(0.89) S 4.97 S 333 8 2.79 - 2.06 1.76 1.51 S 1.436 S 1,010 f 631 16,013 15}50 15,230 5,518 4,279 5591 125 173 291 5,694 6,038 5,312 (Fadrotet an Jallowing Oal) 19 r N tp 07
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action number for all purposes in the United States District Court for the Southern District of Ncw York. Pursuant to a stipulation and order dated January 30, 1991, plaintiffs in the Brown, Handel, Friedman and Foster Actions filed a consolidated amended class action complaint (the "Consolidated Complaint"). The Consolidated Complaint names as defendants RJRN and eight former officers and directors of RJRN. Also pursuant to the January 30, 1991 stipulation and order. Holdings, Group and Merger Sub, each of which had previataly intervened as defendants in the consolidated actions, are dismissed from the consolidated actions without prejudiee and without costs. The consolidated actions are brought as purported class actions on behalf of former stockholders of RJRN who sold shares of common stock between March 30, 1988 and October 20, 1988 (the "purported class periad") (1) in the RJRN issuer•tender offer that expired ao April 26, 1988, (2) in the exercise o: certain employee stock option or stock appreciation rights pursuant to a Prospectus and Special Vesting Offer that was in effect for the month of August 1988 and (3) in open-market transactions. The Consolidated Complaint generally alleges that defendants failed to disclose during the purported class period the alleged respective interests of KKR, F. Ross Johason, then RJRN's President and others, in acquiring RJRN in a leveraged buyout. 11e Consolidated Complaint alleges that the defendants' failure to disclose the alleged information constitutes a violation of the federal securities laws, as well as breach of fiduciary duty and negligent misrepresentation. The Consolidated Complaint also seeks damages. Discovery is proceeding in these consolidated actions. On Octobei 28, 1988, a complaint entitled Bluegraas Partners, Ltd, v. RJR Nabisco, et al., No. 8817090-18 (Sup. Ct. Ga., Cobb County, filed October 28, 1988) (the "Bluegrass Action") was filed in the Superior Court for the County of Cobb. State of Georgia. Plaintiff brought the Bluegrass Action as a class action on behalf or all stockholders of RJRN against RJRN and its then current directors. On or ab,out December 12,1988, plaintiB fded an amended complaint which alleges that the diroctoas breached their fduciery duties by accepting KKR's $109 offer to acquire RJRN, by conducting an auction which was proadurally unfair and by approving certain severance agreements with certain of RJRN's minageateat. Defendants moved to stay the Bluegrass Action an the ground that it is substantially idential to the Consolidated Delaware Action. 7Lis motion was granted on July 8, 1989. On or about February 28, 1989, an action entitled Schneider, et a!L v. Lazard Fri'ies d Co. and LMlfon, Read d! Cb:, lne. (N.Y: Sup. Ct., dated February 28, 1989) was eommeoood in the Supreme C.aurt of the State of New York,'l7ounty of New York (the'Schneider Action"). lLe Schndder Action is brought on behalf of a purportad class of stockholders of RJRN as of November 30, 1988. The complaint alltga that the defendanta, I.aurd Fr2rea and Dilba Read, acted negligently in thelr capacity as financial advison to lhe special committee of the Board or Directors of RJRN formed to consider proposals for the acquisition or RJRN during the auction for RJRN which culminated in the uewtion of the Merger Agreement and in valuing the bids made by the Johnson Group and KKR. Plaintiffs seek compensatory damages. The Schneider Action is now stayed pending resolution of the claims raised in the'tbnaolidated Dehware Action. It is contemplated that if the proposed settlement or the Consolidated Delaware Action Is approved by the Courl, the Schneider Action will be dismissed. At the present time, no eLs+ has been certified in any of the above stockholder actions. On or about May 10, 1989, an action entitled Cook, et al. v. Joknron, er af., 89-CVS2272 (N.C. Gen. Ct. JuslSce, Sup. Ct. Div., Forsyth Co., filed May 10, 1989) was commenced in North Carolina state court (the'Y'.ook Action"). Tbe Cook Action is brought by nino former employees of RJRN, in their individual capacities and not as a class aetion, who exercised employee stock optioos and stock appreciation rights pursuant to the Prospectus and Special Vesting Offer in effect for the month of August 1988. The complaint names as defendants F. Raas Johnaon, eight other officers and directors or RJRN, Holdings, Group, Merger Sub, Shoarson and a corporation organized by certain members of RJRN management in connection with their bid to acquire RJRN. The complaint in the Cook Adion, as amended, generally alleges that the defendants, other than Holdings, Group and Merger Sub, failed 14
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on March 8, 1991. . RJR NAelsm, INC. By Louls V. GERSfNER, JR. ......................................... (Louis V. Gerstner, .Chairman of the Boad Preddcnt and ehier sxeWtiYe officCr Pursuant to the requirements of theSecuriAes Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 8, 1991. Sl.a+re Tltk [.ouls Chairrnan of the Board. President and (LUUis V. Gcetner, Jr.)Chief ERecutive Officer (principal executive officer) and Director /{f ]GRL M. VON ~ER HEYDEN ExeWlive VICC President and Chief (KarI~M. von der Heyden) Financial IMixr (Principal financtal ofiar) ud INrectar ..... lal.ROeEaT s; RMni ...... Senior Vice Prcsidrnt and Controller (Roberi S. Raaifi) (P^ncipal accounting officer) • Dirodnr ......... .......... (R.Tcodore Ammon) Director • ... .. . (Jima W. Jahniton)~ . • .. ........................... Vernon E. Jordan, Jr.) ~ ...... ....... • • . •••• ( . H . . . avy . R. Rravis)~ • .................. ~ ~ ~ ~ ~ ~(Jo6n G. Medlin, Jr.) • .... ....~ ..(Paul E. Raether) ~..: • ............................. (Rovannc L. Ridgwty) • .........:.................. (Chfu.n S.. Robbim) Director DiraYor Director Director Diroctor Director Director • Diroetor ............................. (Soott M. Stuan) . By : ... . ROBERT F. SHARPE, JR. /.a/ .............. ........ (Roberl F. Sharpe, Ir.) AttorneyinmFact 45
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Based on favorable test market results, national distribution of LIFE SAVERS HOLES, a miniature hard candy, commenced in October 1990. In January 1991, in response to a few isolated incidents where misuse of the package caused the package's cap to detach, the product as so packaged was voluntarily withdrawn from the market as a precautionary safety measure. It is anticipated that the product will be back in distribution with a modified package in the second quarter of 1991. Raw Mataialt Various agricultural commodities constitute the principal raw materials used by RJRN in its food businesses. Other raw materials used by RJRN arc purchased on the commodities market and through supplier contracts. Prices of agricultural commodities tend to fluctuate due to various seasonal, climatic and economic factors, which factors generally also affect RJRN's competitors. RJRN believes that the raw materials for its products are in plentiful supply and all are readily available from a variety of independent suppliers. Other Matters Compttition Generally, the rmrketa in which RJRN's tobacco and food businesses are conducted are highly competitive, with a number of large participants. Competition is conducted on the basis of brand recognition and brand loyalty and substantial advertising and promotional expenditures are required to maintain or improve a brand's position or to introduce a new brand. In addition, antiamoidng groups have undertaken activities designed to inhibit cigarette sales and the testing and introduction of new cigarette products. Bacause television and radio advertising for dgarUter is prohibited in the United States, established cigarette brands in the United States have a competitive advantage. In addition, brand loyalty tends to be higher in the cigarette industry than in other consumer product industries. RJRT believes that of those individuals who start srnoking cigarettes, substantially fewer start smoking RJRT brands than the brands of Philip Morris USA., its major competitor. RJRT has repositioned or introduced brands designed to appeal to smoirers of the largest selling eigarette brand in the United States, but there ean be no assurance that such efforts will be successful. In additlon, increased selling prices and taxes on cigarettes have resulted in additional price sensitivity of cigarettes at the consumer level and in a proliferation of discounted brands in the growing savings segment of the market. Generally, sales of cigarettes in the savings segment are not as profitable as those in other segments. Er.iroamtaraf Maturs The US. Government and various state and local governments have enacted or adopted laws and regulations eoneeming protection of the environment. The regulations promulgated by the Environ- menul Protection Agency and other governmental agencies under various statutes have resulted in, and will likely continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities. RJRN has been engaged in a continuing program to assure compliance with such laws and regulations. Although it is difficult to ident'ify precisely the portion of capital expenditures or other eosts attributable to compliance with environmental laws, the Registrants do not expect such expenditures or other costs to have a material effect on any of the Registrants' finandal position. lI
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following termination of the oplionee's employment, in certain circumstances in which such optionecs are entitled or required to sell to Holdings all shares of Holdings Common Stock owned by them, and (if the committee administering the Stock Option Plan so determines) upon merger, consolidation or the sale of all or substantially all of Holdings' assets or voting stock, or upon liquidation or dissolution of Holdings. The Subscription Agreements restrict the transfer of any shares of Holdings Common Stock until the earlier of May 1, 1994 or a public offering of Holdings Common Stock resulting from the conversion of Converting Debentures into shares of Holdings Common Stock (a "Conversion Public Offering") or, subject to certain Hmitations, other qualifying public offerings of Holdings Common Stock. Neither the 1990 E-ehange Offers or the 1991 Exchange Offer, nor the offering of Holdings Common Stock issuable upon exercise of the warrants to purchase one share of Holdings Common Stock each with an exercise price of $.07 per share (the "Warrants") is such a Conversion Public Offering or qualifying public offering. . Holders of Purchase Stock and Management Options have limited "ptggyback" registration rights with respect to shares of Holdings Common Stock purchased upon the exercise of . Management Options and shares of Purchase Stock. - The Subscription Agreements provide that the Purchaser, his or her estate or beneficiary may require Holdings to repurchase all Purchase Stock and Holdings Common Stock purchased by the Purchaser on the exercise of Management Options and to redeem such Purchaser s Management Options upon the Purchaser's death or disability on or prior to the earlier of May 1, 1994 or the closing of a Convcrsion Publie'Offering., If, on or before the earlier of May 1, 1994 or the'dosing of a Conversion Public Offering, a Purchaser's employment by Holdings and its subsidiaries terminates for • any reason (other than the death or permanent disability of the Purchaser), or such Purchaser effects a prohibited transfer of his or her sharesof Holdings Common Stock, Holdings will have the right to purchase the above-described stock and exercisable Management Options at a price which varies according to the eircumstenas surrounding the termination of employment. The rights and obligations of a Purchaser with respect to shares of Holdings Common Stock purchased upon the exercise of a Management Option will be identical to the rights and obligations applicable to shares of Purchase Stock, except that in certain cireumstances, the price payable on repurchase of Holdings Cxunon Stock by Holdings may not be the same for shares acquired upon exercise of Management Options ss it ?s.for shara of PurehaseStock. , . ' During 1991, Holdings rold through a private placement subject to transfer restrietioas and other terms sirmilar to thoae contained in the Subscription Agreements additional shara of Holdings Common Stock at a purchase price of $5.75 per share and additional Management Options with an exercise price of 55.75 por share to certain officers and employees of Holdings and its subsidiaries who did not ltave the opportunity topartieipate in the initial Management Offering. , . Mr. Gerslner s subscription agreement is similar to those discussed above except that the May 1, 1994 date referred to above is March 10, 1993 with respect to Mr. Gerstner's agramont. In addition, under his subscription agreement, Mr. Geniner purchased 1,321,383 ratriUad, jhazes of Common Stock (the "Restrided Stock"), at a prioe of 5.01 per share. 25% of the sharos of Restricted Stock became vated immediately and the remaining shares will vat in equal installments on the second, third and fourth anniversaries of March 10,1989. Restricted Stock will case to vest and unvested shares of Restricted Stock will be cancelled upon termination of Mr. Gerstner's employment. Both Mr. Gerstner's and Mr. von der Heyderi s subscription agreements provide them with limited "piggyback" registration rights with respect to shares of Holdings Common Stock purchased upon the exercise of Management Options, shares of Purchase Stock and, in the case of Mr. Gerstner, vested shares of Restricted Stock similar to those discussed above except that Mr. Gentner's registration rights are applicable for a shorter period of time. 35
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r compensatory and other damages. The defenses raised by R7RT, where apphcablc, include precmption by the Cigarette Act of some or all such claims arising after 1965; the lack of any defect in the product; assumption of the risk lack of proximate cause; and statutes of limitations or repose. RJRT intends to defend vigorously all such actions that may be brought against it. The inue of whether state law tort claims are preempted by federal law, and if so, the scope of that preemption has been considered by a number of federal courts of appeal and two state supreme courts. Five federal courts of appeal and the Minnesota Supreme Court have held that the Cigarette Act has preempGve effect. The New Jersey Supreme Court and an intermediate Texas Court of Appeal have held that it does not. The issue is currently the question presented in a petition for certiorari to the United States Supreme Court in a case in which RJRT is not a party. It is not yet known whether the petition will be granted. In two roaat smoking and health eases in which neither RJRN nor any subsidiary was a party, Gpotlone v. /lgxer! Oroup, er a!. and Norton v. AnurJcan Tobacco Company, et af., juries,have found in favor of plaintiffs. In CYpolione, the jury awarded $400,000 in damages and in Horton, no damages were awarded. 7Te award of damages in Cipollone was reversed on appeal. Petitions seeking further review are pending in both eases. Litigation is subject to many uncertainties, and it is possible that some of the legal actions, proceedings or elaima could be decided against RJRN or its subsidiaries. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not 6nal, could adversely affect the litigation against RJRN and its subsidiaries and increase the number of such claims. RJRN previously had maintained product liability insuranee eovering certain of these tobacco- related legal actions, proceedings and claims. As of April 13, 1990, RJRN became wholly self-insured for existing tobaoco-relaled litigation risks. Food RJRN's food business is conducted by the RJR Nabisco Foods Group, which consists principally of Nabisco and Planters IifeSavers. Each of these subsidiaries is a kadu in certain segments of the food industry. Food products are sold unda trademarks owned or licensed by RJRN or its subsidiaries, and brand recognition is considered essential to their successful marketing. Nabisco Nabisco is one of the largest packaged food companies in the world. It rnanufactures or markets oooldu, eracken, snaeit foods; hot and ready-toeat eereals, margarinc, pet foods, dry-mix dessert products and other grocery products under established and wdl-knowa trademarks, including OREO, RITZ, CHIPS AHOY!, PREMIUM, FLEISCHMANN'S, BLUE BONNET, A.i, GREY POUPON and MILK-BONE. None of Nabiseo's customers accounted for nare than 1tl%of sales during 1990. Nabisco is comprised of four principal divisions: Nabisco Biscuit, Nabisco Foods, Nabisco Brands Ltd (Canada) and Nabisco International. See "Reant fhspositions^ for a discussion of the divestiture of eertain asrets of Nabisco and the sak of certain other food businesses and Note 4 to the Consolidated Financial Statements for a discussion of the decision to retain the remaining businesses of Nabisco International previously held for sak. NabGeo Bireuit. Nabisco Biscuit is the largest manufacturer and marketer in the United States cookie and cracker Industry with the top eight selling brands, each of which had annual sales of over $100 million in 1990. Overall, in 1990, Nabisco Biscuit had an estimated aharc of domestic cookie industry sales exoeeding35%, trtore than double the share of its closest eompetitor, and an estimated share of the domestic cracker industry sales exceeding 55%, more than three times the share of its 7
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Mr. von der Heyden's employment agreement provides for an initial salary of $450,000 per annum. If he is terminated within five years of employment, a special pension amount will be paid to him in a lump sum equalling 20% of his base pay times the number of fiscal years worked within the aforestated five-year period. If Mr. von der Heyden is terminated without eause or voluntarily terminates under certain conditions designated in his agreement, he will receive a severance payment equal to two years' base pay plus bonus. Mr. Johnston s employment agreement provides for an initial salary of $500,000 per annum. A special pension provision deems Mr. Johnston to have no less than 10 years of benefit calculation service under the Supplemental Executive Retirement Plan. If Mr. Johnston is terminated within five years of empbyment without etuse or voluntarily terminates within such five years under artain conditions designated in his agreement, be will receive a severance payment equal to three years base pay plus bonus. If Mr. Johnston is terminated without cause after the initial five years employment, his severance will be two years' base pay plus bonus, . . Mr. Greeniaus', Mr. Ricciardi s and one other executive officer's employment agreements provide that if such executive officer is involuntarily terminated other than for cause, be will receive three years compensation in Mr. Graniaus' case and two years compensation in Mr. Ricciardi's and such other executive officer's case. Payments would be made over three yean, except that such continuance would not extend beyond normal retirement age established under RJRN's Supplemental Executive Retiro- ment Plan. Compensation continuance Is based upon the annual rate of salary in elfeot Immediately prior to termination and the most recent annual incentive award or current target level, if higher. On February 20, 1991, RJRN implemented its proexisting severance agreement with one of its executive officers. This Agreement was a standard format severance agreement entered into with executives in 1988 and provides, in the event of separation of employment, for two years compensation and benefits to be paid over three years. In addition, in connection with his separation for purposes of the managemenl equity plan implemented by the Management Offering (as hereinafter defined), such executive o0icer a last day of active employment was February 28, 1991; his options were 20% vested and the book value on his Purchase Stock (as hercinafter defined) was deemed to be $6.05. Also, such executive officer, upao completion of his severana period, will be eligible to receive an unreduccd retuement benefit based on a deemed 20 years service with the Company and an attained age of 51 years and 5 months. ' Facec.8.e Compe.s.tioa Pawut to Plans RJRN maintains certain toatpeasation plans, programs and atrangetneats for its executive offiters and key employees of RJRN and its absidiarus, which are administered by the Compensation Committee of the board of directors (including prodoaxsor committees, the "Compensation Commia tee"). Set fortb below is a brief description of each such plan under which compensation or other benehts were paid during 1990 or arc proposed to be paid in the future. SsrBseripria Agraauatr During 1989, Holdings sold shares of Common Stock at a prioe of $5.00 per sharo to certain officers and key employees of Holdings and its subsidiaries, in addition to separate offerings to Messrs. Gerstner and voo der Heyden (the "Management Offering"). Each purcbuer (the "Purehaser") entered into a Common Stock Subscription Agreement (each, a "Subscription Agreement") with Holdings. Generally, each Purchaser was also granted options (the "Management Options") covering four shares of Common Stock for each share purchased pursuant to the Purchaser's Subscription Agreement (the "Purchase Stock"). The Management Options were issued pursuant to the Stock Option Plan for Directors and Key Employees of RJR Nabisco Holdings Corp. and Subsidiaries (the "Stock Option Plan") and Non-Qualified Stock Option Agreements executed in connection with such grant. The Management Options vest according to a vesting schedule and are subject to cancellation upon or 34
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The following table shows the estimated annual benefits payable upon retirement under the alternative average final compensation formula of the Supplemental Executive Retirement Plan described above to persons in specified remuneration and yeara-of-service classifications. The retire- ment benefits shown are computed without regard to the Social Security offset and are based upon retirement at age 65 and the payment of a ainglo-life annuity to the employee. The antounts shown for fewer than 30 years ot tervia aa adjusted to reflect the aggregate benefits payable to participants in the Supplemental Scecutive Retirement Plan who have attained the retirement age specified tor them pursuant to such plan. Fm Ya. ~ Estimated Annual Retirement Benefits Yean u( Su.ioc Comp undcn ttl 20 30 Q $ 300,000 5100,000 $ 150,000 $ 157,500 S 210,000 $ 400,000 133,333 200,000 210,000 . 260,000 $ 500,000 166,666 250,000 262,500 350,000 $ 600.t100 200,000 300,000 315,000 420,000 S 700,000 233,333 350,000 367,500 490,000 $ 800,000 266,666 400,000 420,000 560,000 S 900,000 300,000 450,000 472,500 630,000 t1,000,000 333,333 500,000 525,000 700,000 S1,2110,000 400,000 600,000 630,000 840,000 $1,400,000 466,666 700,000 735,000 980,000 $3,600,000 533,333 800,000 840,000 3,120,000 f 1,800,000 600,000 900,000 945,000 1,260,000 $2,000.000 666,666 1,000,000 1,050,000 1,400,1100 f2,200,t)00 733,333 1,100,000 1,155,000 1,540,000 The following aro estimated years of ttedited aervice at ago 65 (rouaded'to tbe ueateal year) under RJRN'a retirement plan for the peraooa fated in the table abore: LV. Getshter, Jr.: 29 years; HJ.Oroeniaus: 33 yeara; J.W. Jahristoa; 32 years; LR Riociardi: 32 yan; aad 1LM. von der Heyden: 12 yean. Section 415 of the Code plaaea oertain limitations on pensiont that way be paW ender pLns qualified under the Oode. Portiooa of the iaGiemett beae9ta abowa in the table above that exceed such limitations, as well as any benefits attributable to defened oompensatton, will be paid outside the qualified plan as an unfunded general and administrative expense by a atatutorily recognized excess benefit plaa, and, to the extent applicable, by the Supplemental Executive Retirement Plan. OrLa Pisative Cowrpeas.wioa During 1990, RJRN provided executive officers and other key employees of R3RN and its subsidiaries with other compensation In the form of benefits, including 6nanc1tl counseling, nupplemen- tti iosutanoe, club memberships, leased autotuobilea and use of RlftNewned or leased aircraft and meeting fadlitiea. RJRN'a aggregate incremerttal cost of providing such benefrts were as follows: LV. Creatner, Jr., $64,347; HJ. Graniaus, f33,g80; J.W. Johnston, $57,297; LR. Riaiudi, f32,027; and IC.M. von der Heyden, $39,095. Dinaon' Compeaaatioa Any director of Holdings, Group, Capital and/or RJRN who is not an employee of RJRN or its subsidiaries is compensated at the rate of S50,IX10 per year. In addition, each of the current directors 38 r W m J
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RIR NABISCO CAPITAL CORP. RJR NABISCO, INC CONSOLIDATED FINANCIAL STATEMENTS The Summary of Significant Accounting Policies below and the Notes to Consolidated Financial Statements on pages F-7 through F-32 are integral parts of the accompanying Consolidated Financial Statements. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This Summary of Significant Accounting Policies is presented to assist in understanding the Consolidated Finaneial Statements included in this report. These policies conform to generally . accepted accounting principles. Consoltdatlon Consolidated Financial Statements include the accounts of each Registrant and its subsidiaries, Cash Equivalents Cash equivalents include all short-term, highly liquid investments that are readily convertible to known amounts of eash and so near maturity that they present an insignificant risk of changes in value because of changes in interest rates. Inventories Inventories are stated at the lower of cost or market. Various methods are used for determining cost. The cost of U.S. tobacco inventories is determined principally under the LIFO method. The cost of remaining inventories is determined under the FIFO, specific lot and weighted average methods. In aecordana with recognized trade practia, stocks of tobacco, which must be eurod for more than one year, are classified as eurrent assets. Depreciation Property, plant and equipment are depreciated principally by the straight-line method. Trademarks and Goodwill Values assigned to tradeaurks are based on appraisal reports and are amortized on the straight-line method over a 40 year period. Goodwill is also amortized on the straight-line method over a 40 year period. . Other Income (Expense). Net Interest income, gains and losses on foreign currency transactions and other financial items are included in °Other income (expense), net". Income Taxes Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes" ("SFAS 96"), and are calculated for each Registrant an a separate return basis. Predeasaor bad not adopted SFAS 96. Excise Taxes Excise taxes arc excluded from "Net sales" and "Cost of products sold". Reclassfficatforsv Certain reclassifications have been made to prior year amounts to conform to the 1990 presentation. F-3
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RJRN and its subsidiaries, which reduced the amount available under the revolving credit facility to 51.2 billion. At December 31, 1990, $1.1 billion of this facility was unborrowed and available. On February 7, 1990, RJRN entered into a five-year arrangement to sell up to $500 million of certain of its domestic trade accounts reeeivable. In connection with this arrangement. $321 million of certain domestic trade accounts receivable were sold at December 31, 1990. Under the terms of Capital's subordinated debt indentures, Capital's ability to make certain paymeats to Group or Holdings for, among other things, dividends, retirement of certain securities and permitted investment in certain subsidiaries' was significantly restricted until the consolidated fixed charge ratio, as defined under such subordinated debt indentures, reached 2.0-tal. 7hereafter, an adjusted percentage of consolidated net operating income, as defined under such subordinated debt indentures, is available, inter alia, for such purposes. At December 31, 1990, Capital attained the 2.0.to-1 consolidated fixed charge ratio. The terms of the Converting Debentures and the Group Debentures required that the interest rates on these securities be set permanently at fixed rates designed to result in the respective debentures trading at par on a fully distributed buis, without taking into account any accrued and unpaid interest thereon and, in the eau of the Converting Debentures, without giving effect to the conversion feature of such securities, by no later than April 28, 1991 (or if substantially-all of the First Subordinated Increasing Rate Notes due 1997 and the Second Subordinated Increasing Rate Notes due 1997 (collectively, the "Increasing Rate Notes") of Capital had been refinaneed prior to Apri128,1990, one year from the date of such refinaneing). Bffective July 16, 1990, Holdings establisbod a permanent annual fixed Interest rate of 1T.i%on the Converting Debentures and Group established a permanent annual fixed interest rate of 17% on the Group Debentures. The Group Debentures arc subject to optional redemption by Group at any time.at 10096 of the principal amount thereof plus accrued and unpaid interest thereon. Group is currently prohibited from redeeming any Group Debentures under the 1989 Credit Agreement and the 1990 Credit Agreement without obtaining prior oonsent of the banks party thereto. At December 31, 1990, Holdings' total capital was approximately 523.0 billion, compared with total capital of approximately $26.0 billion at December 31, 1989. 7bis deoreate was primarily due to ' the repayment of approximately $2.3 billion of the Asset Sale Bridge Facility, the retirement and exchange of approximately f22 billion principal amount of Group Debentures and 51.5 biBion principal amount of ConveAing Debentures pursuant to the Recapitalization Program, aU of whieb were partially offset by S 1.7 brll'mn in proceeds from a new common equity investment by a partneabip al8liated with KKR and the issuance of $1.8 billion stated value of Holdings Preferrod Stock, also pursuant to the Reapitalization Program. At December 31, 1990, Holdings had rat'as of eonmlidated debt to total equity and eonsolidated debt and redeemable preferred stock to common stockholders' equity of 4.4-to-l and 8.2-to-l, respectively. 7he weighted average interest rate approximated 12.9% for Holdings' long- term debt outstanding as of December 31, 1990, compared to the weighted average interest rate of approximately 12.35% as of December 31,1989, principally due to repayment of debt with a 12%interest rate under the AasU Sale Bridge Facility and the higher rates from the setting of fixed interest rates on the Converting Debentures and the Group Debentures. As of December 31, 1990, approximately 56.4 billion (a decrease from approximately $ I6A billion at December 31, 1989) of consolidated indebtedness was subject to interest at fluctuating or increasing rates, before consideration of any interest rate protection taken. This detrease was primarily due to the setting or fixed interest ratea effective July 16, 1990, on the Converting Debentures and Group Debentures, representing an aggregate of approximately $6.3 billion principal amount at December 31, 1989, and the repayment of approximately $2.3 billion of the Asset Sale Bridge Facility. The exposure to changes in interest rates has been reduced through interest rate swap agreements and futures 27 N ~ m
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PART II Item S. Market for Registrants' Common Equity and Related Stockholder Matters In connection with the exchange offer eommenad on February 1, 1991 and completed on March 2, 1991 (the "1991 Exchange Offer"), trading of Holdings Common Stock commenced on the New York Stock Exchange (the "NYSE") on a when-issued basis on February 1, 1991. During the period from February I, 1991 to March 1, 1991, the high and low sales prices for Holdings Common Stock as reported in published financial sources were $10.25 and 55.50, respectively. There is no established trading market for the common stock of Group or Capital. Since completion of the Acquisition there has been no public trading market for the capital stock of R1RN. Aa of March 1, 1991 and prior to the closing of the 1991 Exchange OBer, there were approximately 505 holders of Holdings Common Stock. All of the common stock of Group is owned by Holdings. All or the common stock of Capital is owned by Group. All of the common stock of RJRN is owned by Capital. Holdings has nevet paid any cash dividends on shares of Holdings Common Stock. On January 15, 1991, Holdings paid a dividenE on its urnmulative Convertib9e Prcferred Stock, stated value-f45 per share and par value f.01 per share ("Holdings Preferred Stock") in an amount of approximately $50 million, which dividend was fundod from the S200 million dividend reserve (the "Diridend Reserve") set aside by Holdings during 1990 to create a reserve initially available to fund 1991 cash dividends on Holdings Preferred Stock. Substantially all of the remaining funds in the Dividend Reserve were subsequently released in connection with the completion of the 1991 Exchange Oder. '[Le ability of Holdings to pay dividends is resUided by provisions of the 1989 Credit Agreement, the 1990 Credit Agreement and various debt instrurnents of Capital. The 1989 Credit Agreemenl and the 1990 Credit Agreement prohibit any payment of eash dividends on Holdings Common Sto&. In 1989, prior to the consummation of the Merger, RIRN paid ao cash dividends on its common stock. Ia 1989, prior to the consummation of the Merger, RJRN paid two dividends of $2.875 per share on the then outstanding shares of its Seria B Cumulative Preferred Stock. In February 1989, RIRN redeemed all outstanding Prrfetrcd Stock Purchase Rights (each a"Right") associated with the RJRN common stock at a prloe of $0.05 per RighL The operatiorts of the Registrants are conducted through RJRN's subsidiaries and, therefore, the Registrants are dependent on the earnings and cash flow of RJRN's subsidiaries to satisfy their respective debt obligations and other cash needs. Funds are provided to RJRN by its direct subsidiaries and to Capital by RJRN through dividends and payments on intercompany indebtedness as to which there are ta restrictions under the 1989 Credit Agreement and the 1990 Credit Agreement or the indentures relating to Capital's end RJRN's debt seeurities. Tbe ability of Capital to pay dividcnds to Group or to rnake laans to Holdings is, howevtr, substantially restricted by the 1989 Credit Agreement and the 1990 Credit Agreement and the indentures relating to the debt secvritia of Capital. i8
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SECURITIES AND EXCHANGE COMMISSION Washington, D.C 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTTIES EXCHANGE ACf OF 1934 For t6e fescal year ended Detemba 31, 1990 RJR Nabisn R Holdings charter) Delaware 1-10215 13-3<90602 (State Or etha jurkdiaion of (Commiuian kk numba) (LRS Employer ldenQ6ntion No.) inmrpnraion or orSanintinn) RJR Nabisco Holdings Group, Inc. (Exact n.me of registrant u spea <d in iu charter) Delaware 1-10214 13•35M690 (Sute ar elhcr juriWialon of (Carnmiaion Fk .umbu) (I.RS. Employer IdemiM1atkn No.) RJR Nabisco Capital Corp. (Eua name of rcSBtnnt ar speaficd in its cbaner) Delaware 1-10248 13•350/693 (Sute Or other juri.dktion o( (Gmmiscion 6k number) (I.RS. Employer ldcnti(wtion No) inwrporatWn Or nr/aniLlian) RJR Nabisco, Inc. (Eracl eame of re`iNnnt a rpedfiedd in its charter) Delaware 16388 56-0950247 (State Or aber jrriediaian of (Canmlalaa Rk eum(w) (I.RS. Empbyer Mati6atien No.) ktmrpantan or nrµniatian) 1301 Awue o(16e Aener(as -New York, New York 10019 (212) 25&5600 (Addrcn, (ndudW' dp code, on6~ko(qnc .umba, (ndudinf ua code. of tbcp~,~pa 1 exar.utiec o(fiea d RIR Nsbirm Hokiny~orp~ RJR Nabiwo Hokfinp Group, lne., RJR Nabisco Capital Corp and RJR Nabi<oo, lnc.) Seeta(8a reSMlead ptamnt to SecUoo 12(b) of the Act W.e .( eek Nue ef uek Ttde e( u<k elen .Yrl~iqMaar 7k/r of uek eYr .YkY u RJR Nakkn Huldiqa Grp. RJR NabLeq I.r. Caumnn Stack.pa r nluc 5.01 pcr share New York 71(%Sinklaf Fund Debentara, Due Warrants to purchore Canmaa &.ck, por e.lu< $01 1 FeSruary 1, 2001 New Yark pcr aW re New York 1'i S&ekiq F.nd Debrrtuna, Due January IS. 30M New York Cumulati.< Can.eaible preferr<d S1ack, tlated .elue 6.k<Hi.rin f rk RMrtnata f25 and p.r ealue 5.01 per rWrc, Bqufdation RJ. REYNOLDS TOBACCO COMPANY preference of $25 per share plus aocrued and 7S(%Sinklnf Fund Debentura, Due unFed diridad. New Ycrk Sepkmbef 1, 1991 New York Ssnpr Canuertina Debcntna Due 2009 New York NABISCO BRANDS, INC. RJR Nabisco Holdings Grauq I.c Nsbieoo. Inc Subordinated EacMnge Dcbmlua Due 2007 Ncr York 7)(% Siakin6 Fund Dcbenturer Due May 1, 2001 New York RJR N<Wa Gplt.l C<rp 716% Sinkin Fund Dcbenmra Due Subardinaed Duewnt Deb<ntura due November 1, MO) New Yark May 15, 2001 ' New York Standard Brands Inoorporated 15% Payment-in-Kind Subordinated Debenturer due 616%SinkinS Fund Debentures, due June 1, 199) New Vark MrY 15, 2001 New York 7Y,%SinkinS Fund D<brntura, due May 1, 2001 New Vork I)'A% Sebordinated Debentures due May 15, 2001 New York 9'A%SiakinS Fund Debentura, due SuboMineted Fkatinf Rate Nala due May 15, 1999 New York Ducanber IS, 2004 New York Subordinated Eetrndibk Rnet Debentura due May 13. 1991 Nc. Yurk Searhks refbkred Fursuan/ to Seclioa 12(S) of the Act None lndiate by check wrk wYether (be ReSMtruta (1) Yarc BkW all reports required to be 6kd by Saefioa 13 or 15(d) of tbe Seeur(tks Exchange Act ef 193/duryt~ the preadkq 12 naalb (a for eaci tYorler p)od tkat the R ts werc roydred to Ble such repurtsl ud (2) Yoee been a3Jecr to pd feLnp reqaireae.b for the past 90 days. YFS Y N _ 71e aSSreple.arkel wl.e af eoliq qodt Wd by .n.afdiata of RJR Nnb)cea Holdiqr C.rp on March 1,1991..d before Ne tomp(e6nnafeieesehaeqeHfalMeopeMi~ wasoppax)eutdy 596.0dBine. CaUinalBliateaofKl(RAssocWauddiredonmd exeatlee alfioen of RJR Nabba HddwpUtFo ue e.ulderd alE(iata for Furpuca of this calculation bal should awt aw.«ar.r(Iy be deered affiB.ta for sq aMer Rmpnae. Nax sf tYe eetlq otocJ<nf RJR Nobireo Hald).Ss Group, lec. R!R Nabkseo Capital C.arp. or RJR Nabisco, Inu ks held by any t<on-a(ROate. Indie.te the .ueba of skaw a.lafattd'orf of aeY of the Rethtrnats' el.aa of rnmmon qocly as of the latest practicable d.te: March 1, 1991 and before the eompklku of tie exchange offer tYen pendinf: RJR Nabisco Holdings Corp: 580,676,863 shares of tanman stock, par nlue, 5.01 per ehere RJR Nabisco Holdings Group, l.<.: 1,000 shares of eommon stotk, par c.lue 5.01 per slure RJR Nabisco Capital Corp.: 1,000 shares of eommon stock par nlue $.01 per ahar< ' RJR Nebisco, fnc.: 2,247.61275 shera of eommon stock, par ealue $1,000 per alure ' Doeuments Incorporated by Reference Near inOVycntkn or a6an1ati0n)
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to disclose, in the period prior to the Special Vesting Offer, KKR's and Johnson i alleged respectivc interests in acquiring RJRN in a leveraged buyout..The eomplaint alleges that the defendants' failure to disclose the alleged information constitutes breach of fiduciary duty, fraud,violations of federal and North Carolina securities law and negligence. Holdings. Group and Merger Sub are sued as alleged indemnitors of certain of the other defendants. Plaintiffs soek compensatory and punitive damages. On June 8, 1989, the Cook Action was reawveQ by the defendants to North Carolina federal ooure and, on October 10, 1989 was transferred to the United States District Court for the So4thern District of New York for consolidated pro-trial prooeedings with the actions pending there. . Bondholder Litigation Two actions brought against RJRN and certain former of5eers of RJRN by holders of debt _ aecurides of RJRN are eurrently pending: Metropolitan L{je Inruranoe Co., et a/. v. RJR Nabisco, Inc., er al., 88 Civ. 8266 (JM W) (S.D.N.Y.) (the "MeOife Action") and Geko.rkt. et af. v. F. Ross Jafurron, et at, 88 Civ. 8636 (JMW) (S.D.N.Y) (the "Gekoskl Action"). The plaintiffs in the Metlife Action held debt securities of RJRN aggregating approximately $348.4 million at the time such action was filed and the named plaintdfs in the Gekosl3 Action held $35.000 at the time such action was filed. The Gekosld Action is a elau action on behalf of purehasers of debt aecuritws of RJRN. The elass is definedd as all persons and entities who purchased securities issued by RJRN from February 10, 1988 to October 19, 1988. The principal current claim in the Gehaski Action is alleged nondisclosure by RJRN of material Information in violation of federal securities taws. The principal remaining allegations in the Metlife Action are the alleged breach of covenants governing the relevant debt scaritia, alkged fraud and alleged fraudulent conveyances. In 1989, RJRN roeeIved aotioea from the two plaintiffs fn the Metlife Action purporting to be notices of default (and one notice of acceleration) under debt issues and a debt guarantee agreement of RJRN and its substdfaries with an aggregate ouktanding principal amount of approximately f1AS billion. Such noGax appear to allege that the arnogements pursuant to the 1989 Credit Agreement and certain existing indebtedness of RJRN and Its subsidiaries are searrod (hsdudiog the Indebtedness eoverod by the notiees) create ddaults under the "equal and ratabk" aovauats in the indentures 8oveming such fssuea. PlainfiBsIntheMtxlffeActioohaverepeatedtheseallegatioasinaseparatee(.imintheseoond amended aompt.int In the MUlite Action. In that complaint, plaintiffs sotight rodomplion of their debt securiths, among other remedica. In July 1990, Plalutiffs ameaded their complaint to Include a cLlm thdt the arrangements pursuant to which the 1989. Credit Agreeaumt.nd certain existing indebtedeess of RIRN and its subsidiaries are secured eeate dcfaults under*eertain additional covenants in the indeatures governing the debt securities held by plaintiffs. Those eovveruats require the granting of a prior lien if, upon a mages, the assets of the issuer or eertiin subsidiaries would, by reason of an aftcr- acquired property clause or similar provision, become subject to a mortgage, lien, pledge, charge or encumbrance. Such oovenants, or others similar to them, as well aa equal and ratabk covcnaots, are commonly found in corporate debt of many inuen, including much of the other outstanding long-term debt issued by RJRN. The Registtants believe that the provisions of the pfod8es seeuring the obligations under the 1989 Credit Agreement comply fully with the.requireaunts of the debt securities held by the plaintitfs in the Metlife Action and other similar debt, that the pLintiRs' interpretatiau of the covenants at issue are without precedent and that such purported notices of default and aeoeler.tion were Lssued improperly and without basis. . On May 25, 1989, RJRN sought an iajuoctlou in the Metlife Action staying the effea of the plaintiffs' notices, and requested permission to file counterclaims against the plaintiffs for leader liability and fa declaratory jud®nent that there was no violation of the "equal and rauble" eoveosats. On May 26, 1989, the Court issued an injunaive order tolling the effect of the notias and granting RJRN permission to file its counterclaims, which were filed on May 30, 1989. On June 9, 1989, the 15
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who is neither a partner or associate of KKR nor an employee and who had not previously been granted an option or entered into an agrccmcnt providing for the grant of an option has been granted an option pursuant to the Stock Option Plan to purchasc 30,000 shares of Common Stock. No additional compensation is paid to directors who are employees of RJRN or its subsidiaries in their capacity as • directors. RJRN maintains the Directors Retiremenl Plan for directors who have never been employees of RJRN or an affiliated company. The Directors Retirement Plan provides each eligible director with a monthly allowance equal to the monthly directors' fee payable on the date the director's service terminates. The maximum benefits payable under the Directors Retirement Plan are (a) for those directors with ten or more years of service, 180 monthly payments; (b) for those directors with less than ten but more than five years of servia, monthly payments equal to 180 multiplied by a fraction, the numerator of which is equal to the years of service of such director and the denominator of which is 10; or (c) for directors with less than five years of service, 48 monthly payments. For the purposes of computing years of service, partial years of service count as a full year. The Directors Retirement Plan also provides that upon a"ehange of control," the Directors Retirement Plan cannot be amended or terminated. Bmplayee Stock Owaerrklp Plaa Beginning in June 1990, Holdings undertook a review of certain alternative vehicles for increasing employee ownership of Holdings stock. As a result of such study and in furtherance of Holdings' long- term compensation and benefits strategy, Holdings is forming an employee stock ownership plan (the "ESOP") which will permit Holdings to meet certain benefits obligations in a taxsfficlent roanner. The ESOP is currently expected to be in the range of approximately $200 million to $250 million in size. The ultimate size of the ESOP will be determined following the completion of Holdings' analysis of the optimum ESOP size for Holdings. It is contemplated that the ESOP will purchase shares of Holdings Common Stock or convertible preferred stock from Holdings in exchange for an ESOP loan (the "ESOP Loan'). The ESOP Loan is expectod to be in two tranehes, the first tranche intended to be participated to an external lender (the "External ESOP Note") and the second tranche to be held by Holdings as an internal loan. The External ESOP Note will be in the prindpal amount of $125 million, will have a fiaal maturity in 1999 and will aoaue interest al a fixed market rate equal to a spread over corresponding US. Treasury notes. For information regarding the purahate by Metlife of a 100% participation in the External ESOP Note, see Item 3 "f.egal Proocedings". Other Beaefit Plait On October 12,1988, RJRN's Supplemental Benefits Plan was divided, with a portion of such plan being named RJRN'a Additional Benefits Plan. Both of these plans are excess benefits plans, designed to provide benefits in excess of those otherwise permitted by the Code to be funded in RJRN's qualified retirement plans and for cortain deferred compensation. Neither plan may be amended or terminated upon a"Change or Contrd". On July 21. 1988, the board of directors or RJRN amended the Supplemental Executive Retirement Plan, which provides additional retirement benefits to certain executive oHiara of RJRN, to provide that upon a "Change of Control" all benefits become immedi- ately vested and the plan may not be terminated. For purposes of all of these plans, Merger Sub's purchase of shares pursuant to the Tender Offer constituted a "Change of Control" and none of these plans may now be amended or terminated. In addition, benefits under the Supplemental Executive Retirement Plan have become vested. 39 rn N ON J N W O 00
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, ING NOTES TO CONSOLIDATED FTNANCIAL STATEMENTS-(ConBnxd) Note 3-faeome Taxa-(Caatiantd) Pre-tax ineome (lo6s) from continuing operations for domestic and foreign operations is 6hown in the following table: s.n.n« r..dr.,.« ~ Dan«Ix fududa Us. Oep.Iv 31. 19]6 fr..j hn. upnru) ............... s(6i6) u)53) fss] FordBn ................. 224 224 224 rro-u: 6. (loa) ....... IL4~) S ISq f177 FMa~q. .9~,Y If89 1.~l819 Y~Fided 31. DenYa 31, /9M ' Fd. 8, 19M 1988 R7RN 11~ G.. C.~ R7RN R1RN RJRN f25] f(1,4t'/) S(1d76) f(637) f 93 f(299) S1,606 224 286 286 786 286 36 219 S7] s_(1,171) f(890) s5=) s379 s(x6~1 sl,an The diiferrnrn betnroen the pravitioa (bene8t) for income taxes and income taxes computed at statutory U.S. federal income tax rates arc explained as follows: laease r.:.a mmpaled el sl.t- .mry US Fadenl lawme ru rata .............. State lera, w d k6ttd Yra e61 .................. Good.RlemMiaticn....... hdvrad wak d'i.{dnd ..... Replriufm d fweip evt ia8+ .............. Mi.oell..enm iumr ........ hw'rian (6ak60 f« weme Wn ................. Fdcaive tax nte .......... 8.a..ltt FrWraraer Ywr Fdsr Fiiwey 1989 J.a 989 9 , 1 , 1 Wv F.4d ~f4 ~ .~ . . r ~. . . O.a.NW r51,/98f FA.i9N 131, 1 G CL al WW7 r G" DOW R1RN RJRN RJRN f(1]7) 1(45) $162 $142 f(S85) f(]03) f(110) $128 S(9a) S 6]0 76 76 76 76 59 39 59 59 (2) 66 122 122 122 122 115 115 115 115 3. 39 - - - - $9 89 - - - - . - - - - - - - - - 29 _{t) __L1) _()) _i) ~_341 A34) ~) _J34) 27 00) f 60 S ISi $359 $359 fL%) S(70 S 20 $268 Lj") $ 651 14.8 116A)T, 75.796 752% 11.t)9 6 83 3.79a lo.M 29.1)96 75.8:6
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 3-faconR; Taxes The provision (benefit) for income taxes consisted of the following: S.cceuer Preaecenor Ynr tlkd FAr..rS 9. 1989 Daee.ber 31. brwt6 19% D.a.ber 31, 19a9 ilsld" Cro. Cyn41 RJRN HetCu~. Cm. hrllai RJRN CYrrcnL' Fedcnl .................... 5(413) S(2t2) S 7 S 7 S(4t2) S(33o) S(199) $(126) Forcign and'Nhcr ............. 177 177 177 177 211 711 211 211 236) s5) 4 < (01) ~119) 12 es nduroa: Fedenl .................... 282 243 161 161 41 41 4 179 ForQJn.nd 01her ............. 14 14 14 14 4 4 4 4 2% 257 173 175 45 45 a 183 Provition (heafit) for inoam taau.. S 60 S 152 5359 5359 f(136) ~) S 20 S 265 J... 1, 1999 Ye.r Fided uv.M Dee 31, Fe0. 1, 19/9 1968 RJRN RJRN S(54) $250 (u) zot _(s7) ~5s 1 241 _- 45) 1 196 y) F654 The touroea of the deferred income tax provision (benefit) and the tax effect of each were as follows: Ysr Fa1eJ Fearrry 9, 1919 . OeoeWu 31, 19" Dear.Yu I, 1919 SIey.Q f~r, 611M RJRN 11.MI~ Cr C"RJRN Ficcp af tu orer tauk drpnedaNan ............... Rquw.7uiq hcw ........... Tt.drmuk amorfintinn ........ Orijwl Wue dieoonat ......... Na opeaiut loa ............. Other heus' ................. Defured tamme iu proridan .... Ji.ewwx Pdaesx - S 71 S 7I S 71 S 71 S 152 S 152 S 1$2 S 157 90 90 90 90 147 147 147 147 (74) (74) (74) (74) (6a) (6t) (6a) (6e) J,a 1, 1989 Wv Fade/ 11. ..aS Dee. 31, Fd a, i9a9 1900 RJRN WRN S 1 $213 - 15 131 90 2 2 62 62 25 - - - 119 119 119 119 (195) (195) (195) - - - (41) (39) 13) -R-3) (57) _(53) SS) 48) - 32) $2% S 2!Y S175 $175 . S 45 $ 45 $ S S 183 $ 1 5196 -- ^ ~ c s= - - -. - _ The major types of temporary differenees that give rise to deferred income taxes on the Consolidated Balance Sheets are differences between the book and tax bases of tndemarks, property, plant and equipment and accrued liabilities. F-9
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REPORT OF DELAITI'E & TOUCHE, INDEPENDENT AUDITORS RJR Nabisco Holdings Corp.: - RJR Nabisco Holdings Group, Inc.: RJR Nabisco Capital Corp.: . RJR Nabsico, Inc.: We have audited the accompanying consolidated balance sheets of RJR Nabisco Holdings Corp. ("Holdings"), FUR Nabisco Holdings Group, Inc. ("Group"), RJR Nabisco Capital Corp. ("Capital") and RJR Nabisco, Inc. and subsidiaries ("RJRN") as of December 31, 1990 and 1989, the related consolidated statements of income and retained earnings and of cash flows for the year ended December 31, 1990 and for the period February 9, 1989 through December 31, 1989 of Holdings, Group, Capital and RJRN (collectively,'Successor Period"), and the related consolidated statements of income and retained earnings and of cash flows for the period January 1, 1999 through February 8, 1989 of RJRN ("Predecessor Period"). Our audits also included the financial statement schedules of Holdings, Group, Capital and R1RN as of December 31, 1990 and 1989, for the year ended December 31, 1990 and for the period February 9, 1989 through December 31, 1989 and of RJRN for the period January 1, 1989 through February 8, 1989 as listed in the accompanying Index to Financial Statements and Financial Statement Schedules. These financial statements and financial statement schedules are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosurea in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Holdings, Group. Capital and RJRN at [heemba 31, 1990 and 1989, the consolidated results of their operations and their cash flows for the year ended December 31, 1990 and for the period February 9, 1989 through December 31, 1989 and the consolidated results of RJRN's operations and its cash flows for the period January 1, 1989 through February 8, 1989 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As more fully described in Note 1 to the consolidated financial statements, Holdings, Group and Capital directly and indirectly acquired RJRN as of February 9, 1989 in a business combination accounted for as a purcbue. As a result of the acquisition, the consolidated financial statements for the Successor Period are presented on a different basis of accounting than that of the Predecessor Period and prior periods, and therefore are not directly eomparable. DEWt7TE & TOIKHE New York, New York February 5, 1991 (except with respect to the subsequent event discussed in Note 19, as to which the date is March 2, 1991) F-I ~ r N Q1 J r W H a,
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PART tta Item 10, Directors and Executive Ofhcers of the Registrants Directors and E:eturire Officers of Holdings, Group and Capital The directors of each of Holdings, Group and Capital are Louis V. Gerstner, Jr., R. Theodore Ammon, Vernon E. Jordan, Jr., Henry R. Kravis. John G. Medlin, Jr., Paul E. Raether, Rozanne L. Ridgway. Clifton S. Robbins and Scott M. Stuart. In addition, James H. Grane, Jr. and George R. Roberts are directors of Holdings and Group. The executive officers of each of Holdings. Group and Capital are Mr. Gcrstner (Chairmen of the Board, President and Chief Executive Officer), Eugene R. Croisant (Executive Vice President), Lawrence R. Ricciardi (Executive Vice President and General Counsel), Karl M. von der Heyden (Executive Vice President and Chief Financial Officer), Jon F. Danskl (Vice President and General Auditor), Robert S. Roath (Senior Vice President and Controller), Robert F. Sharpe, Jr. (Vice President, Assistant General Counsel and Secretary) and Frederick W. Zuckernun (Senior Vice President and Treasurer). The following table sets forth certain information regarding Messrs. Gerstner, Croisant, Ricciardi, von der Heyden, Danski, Raether, Roath, Robbins, Stuart, Sharpe, Zuckernian, Ammon, Greene, Jordan, Krevis and Medlin, Ms. Ridgway and Mr. Roberts. The business address of Messrs. Gerstner, Croisant. Riociardi, von der Heyden, Damki, Roath, Sharpe and Zuckerman is c/o RJR Nabisco, lnc., 1301 Avenue of the Arneriaa, New York, New York 10019. The business address of Messrs. Amnwn, Kravis, Raether, Robbins and Stuart is c/o Koblberg Kravis Roberts & Co, 9 West 57th Street, New York, New York 10019. The business address of Messra Greene and Roberts is c/o Kohlberg Kravis Roberts & Co., 101 California Street, San Francisco, California 94111. The business address of Mr. Jordan is Akin, Gump, Strauss, Hauer & Feld, 1333 New Hampshire Avenue, N.W.. Suite 400, Washington, D.C. 20036. The business address of Mr. Medlin is C'irat Waehovia Corpontion, P.O. Box 3099, Winston-Salem, North Carolina 27150. The business address of Ms. Ridgway is 1616 H Street, N. W., Washington, D.C. 20006. Each person has bad the principal oaupation or employment listed in the table below for more than the past five years except as otherwise noted. W.e ~ Prt.M ht.d Oocot.na ar .}~L Louis V. Gerstner, Jr. 49 1989-Present, Chairman of the Eoard. President and Chief ugene R. Croisant 3 Executive O9ieer, RJRN; 1985-1989, Presideat, Amcricaa E~xpras Company, 1982-1989, Chairman and Chief Executive O6eer, American Express Travel Related Services Co., Inc. Director since 1989. 1989-Present, Executive Vice President of Human Resources awrence R. Rictiardi 0 and Administration, RJRN; 1988-1989, Chief Operations Officcrr Continental Bank Corporation, previously Sector Executive (1985-1988). 1989-Preseot, Executive Vice Pretideot and General Counsel, Karl M. von der Heyden 54 RJRN; 1985-1989, Executive Vice President and General Counsel, American Express Travel Related Services Co., Inc. 1989-Present, Executive Vice President and Chief Financial Jon F. Danshi 38 Officer RJRN; 1983-1989, Senior Vice Presideat-Finance and Chief Iinancial OlGcer, HJ. Heinz Company. 1989-Prcsent, Vice President and General Auditor, RJRN, Paul E. Raether 44 prrnously Senior DireMOr-Internal Audit (1987-1989); 1984- 91 87, Group Controller, Electronic Data Systern.s Corp. 1986-Present, General Partner, KKR; 198o-1986, Associatc, KKR. Director since 1989. 30
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Summarized financial data for the tobacco and food industry segments were as foliowl (in~ millions): Tobacco: Net sales ..................... Business Unit Contribution(l)(2) .. Amortization of trademarks and goodwill .................... Operating inoome(!)(2) ......... Food: Net sales ..................... Businesa Unit Contribution(l)(2) .. Amortization of trademarks and goodwill .................... Operating income (loss)(1)(2) .... H"so, WRN . Yar Fided Fekwry 9, 1%9 D 31 L...ry i, 1989 Yar F..ded ~ 31 ~ eamA: , ~~ 1%9 Fe6w 1%9 , ' 58,053 6_,655 S $326 $7,068 S2,729 _ $1,964 S 52 $1,924 (403) (;68) ` _.(1) 52 326 31 396 S 52 31M ~ - ~ - - ~ 5_Sy816 55,459 $324 S_ 5,567 S 802 $ 757 S(IS) • S 730 (205) l89) 10 120) $ 597 $ 568 S 25) • $ 610 (1) Excludes Corporate expenses. (2) lbe 1990 and 1989 Holdings' periods inelude the impact of bigher depreeiation oosts associated with the appaisal value of property, plant and equipment and other adjustments resulting from the allocation of the purohase cost associated with the Aequisition. Tobacco 1990 vi. 1989. The worldwide tobacco business of Holdings reported aet sales of $8.1 billion in 1990, a 15% Increase from 1989, reflecting sales gains by both R3RT and Tobacco International. Operating income inaessed to $2.3 billion in 1990, up 41% from 1989. Business Unit Contribution was 52.7 billion in 1990, a 35% increase from 1989. RJRT recorded aet sales of $5.8 billion In 1990, an 18% Increase from 1989, refieUing higher volume and selling prioes. Business Unit Contribution In 1990 was $2.3 hlllion, an inercase of 37% from 1989, due to higher act sales combined with bcoe6ts from oort-reduction prognms, partially offset by higher marketing expenses. RJRTs lower volunw in 1989 re9etAed the decision to eliminate excess domestic trade inventories, whieb reduced Business Unit Contribution by approxiuwtely $360 million in 1989. Tobacco International recorded net sales of $2.3 billion in 1990, an increase or 9% from 1989, resulting principally from volume gains, primarily in the markets of Europe and Asia, higher selling prices and the favorable effects of the strengthening or foreign currencies against the US. do14r, primarily in Europe. Business Unit Contribution rose to $413 million in 1990, an increase of 26% from 1989, due primarily to higher net salea. In 1990, Tobacco International impmved or maintained market share in 19 or the 24 key markets principally due to volume increases in three primary international brands, WINSTON, CAMEL and SALEM. 1989 vs. 1988. The worldwide tobacco business of Holdings reported slightly lower net sales in 1989 of $7.0 billion due primarily to the decision to eliminate excess domestic trade inventories. Operating income decreased 14% to $1.6 billion when compared with 1999. due primarily to the significantly higher amort'vstion of trademarks and goodwill resulting from the allocation of the 23
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, ING CONSOLIDAlED STATFMENFS OF CASH FLOWS (DoUus in Millions) S.A,...f IS.I.aer ymr p.N IMay..p. .9~.~ 19R9 l...~q.. .1~. 1019 Ywr (.M ~]4 Dn..MJ1.Ht9 i.M.,ry1.19M nll. 1 G.. f~l I URN N.MfV f:nq C*0W R1RN R1RN RIRN NxabR...fn.(..dY)p.r.Ny KRd(In (N.u 6)................ S 3.716 $ 1701 1},701 1 3.1a/ 1 965 S 96/ { 96/ 3 1.531 3 SN) 3 1,909 CuY Nw, F.. p.d 6.) aA.hlm CaV'ul ap•da.re............... (426) (426) (Nx6) (424) (aQ (.e6) (1/1) (4u) (34) (R37) AquLi,bn d RSRN. Ws wF u,E a.6 q.lnknud3939 ............. - - - - (17j16) (11.146) (17.316) (17,1/6) - - haed, from di,pailiau d Muloena . 7,179 1,I I9 2,129 2,129 3113 1.313 3.315 3}/S - 115 Aq.iutba d bwina,u a.d minalty Intdau .................... - - - - - - - - - (176) aha..u .................... 43 (3 eS u 77 77 77 77 He o.h Ier+ fwm (wd le) F.eliy rAi.ilin ............ 1___71/ 1yy7/1 1,741 1y_ip Nj11) (11)13) (11,213) (1(.317) Ou1 M.s fn. (rd 1.) R+.cRK .[,Matc PmomE, fnm buu,m d bylam d.bt 3,115 3.115 3.113 3,115 S]116 22.1M .73.SS6 17.113 Rtpynau d byaum 6eh1 (ud.diy adyaayu6M,aud6eM(a1990) (1,635) (7/56) (6.333) (6}31) ('333) (9,533) (9535) (3,301) Lva,e (d~) I. ,m p3+bk a.A a4.YwM1-lanbrcm.ip....... (203) (1a3) (3a3) (10)) (193) (191) (19/) (1ri) Pweerd, from W..na d ~ w«k .nE ..m.u ................. 1,701 - - - 1~757 _ _ - fuudy..dad.i,aqfanpJd...... (7.93) (177) (203) (D05) (Y3) (377) ($52) (673) Q,piul mmlWnm. Gm pual ..... - 1'a1 - - - 1.300 1.SOU OOD tli.i6s.6, y.lE b p.,at ........... - (300) (100) (taa) - Dirke.d, pIJ ................. 20 29 (It) (369) - 1,133 /t) (30/) tl (41) ~ 22 - - - - - (4) (494) RapunL.e d.d a.od4wa, d tat admct.R6er .............. (fl3) (1.31a) dMr..d-iMdiy Yu,wmpay . . m.ra ..................... - (f6)-~ K) (SI)= ~t7 222 f33:) - He aai Ro., fnm (aad In) in..dy .ai.e:n ............ (Ij9Q (1,303) (1X )) 4.503) 13,392 11.19) 13.393 R7.3M 3a6) (671) Enoa dacl,ye nu d.ya eo u,\ aa6aAq.lnluu .............. 15 IS IS IS (3) (3) (3) (3) ~- 41 Nael.yckwh.deuh , qu'mlmu ................. 111 (36) (36) (36) 111 142 Itl 142 (1M) 40 C.uk nd o.h q.inleau at beRi.n7y d pnbA ..................... 111 112 142 113 1,331 136 CW W m! q.inbu u ad d peid 3 323 3 106 3 106 3 106 1 142 1 142 3 142 3 142 3 929 1 1173 See Notes ta Consolidated £inandol Sta(ementr. F-5
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC NOTES TO CONSOLIDATED FINANCIAL SCATEMENIS-(Cootinued) Note 1-Introduetion-(Conlinued) The accompanying Consolidated Financial Statements present the twelve-month period ended Deamber 31, 1989 in two oomponenls. The period January l, 1989 through February 8, 1989 includes the historical results of RJRN and the period after February 8, 1989 includes lhe results of RJRN afler the Acquisition, In these financial statements, RJRN is referred to as "predeassor" prior toFebruary 9, 1989, and, collectively with Holdings. Group and Capital, as "Successor" on and after this date. The Merger has been accounted for under the purchase method of acmunting as of February 9, 1989. Aocordingly, Holdings has allocated its total purchase cost of approximately S26 billion to the assets and liabili6es of RJRN. Capital and Group based upon their respective fair values determined by valuations and other studies, which included appraisals of trademarks and property, plant and equip ment. The remaining excess of purchase ceat over net assets acquired has been allocated to goodwill. Based upon such allocation, the Consolidated Statements of Income and Retained Earnings of Sueces- sor reflect amortization of trademarks and goodwill over a life of 40 yean, resulting in an annual amortization of $608 million for trademarks and goodwill. Because of this purchase price allocation, the accompanying Consolidated F'inandal Statements of Successor are not directly comparable to those of Prodeoessor. Note 2-Operalioas Net sales and oost of products sold exclude excise taxes of $3.398 billion and $3.177 billion for the 1990 and 1989 Successor periods, respectively, and S162 million and $3.448 billlon for the 1989 and 1988 Predecessor periods, respectively. . During 1990, $75 miBion of advisory feea incurred in connection with the Recapitalization Program and the est.blishmeat of fixed interest rates on "the Converting Debentures and Group Debentures were charged to "Other income (expense), oet". On September 21, 1989, R. 1. Reynolds Tobacco,Company ("RJRT) announced a plan.to eliminate exau trade Inventoriea of its tobacco products by the ead of 1989 through reduetion of domestic cigarette shipments during the remainder of the year and a refocusing of its distribution trade incentives. Management estimates the efkct on operating income of this plan was a $360 millionreduetion in the second half of 1989. The Predeoessor results for the 1989 period ended February 8, 1989 rcflcct a nonrecurring charge of $247 million attributable to change in control costs in connection with the closing of the Offer on February 9, 1989. In the year ended December 31, 1988, Predeceasor recorded a pre-tax gain of $61 million on the sale of certain confectionery operations. The Predecessor results for 1988 also include advisory fees and certain other expenses that were incurred in anticipation of the Merger that reduced net income by $41 million. . During 1988, $681 million of accumulated income of foreign subsidiaries was repatriated, inelud- ing $444 million in December in anticipation of the Merger, for which $29 million in taxes was provided in the fourth quarter. No gain or loss has been recognized for financial statement purposes on the businesses sold post- Merger since the estimated net proceeds of such transactions were reflected in the fair value of such businesses as of the date of lhe acquisition of RJRN. F-8 ~-.~
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Employees At Dcoemtrt 11, 1990, the Registrants bad approximately 55,000 full time employees, including employea of thr Nahtsco International businesses. None of R1RT's operations is unionized. At various tima in Ilt+ 1'^st, attempts have been made to unionize certain of RJRT's operations. The lasl attempt in 197/ wes unsuecasful. In 1989, the Bakery, Confection and Tobacco Workers Union (the "annmuu°'1 its tntention in the preu to oonduct a campaign to unionize R1RT's employea. w2221 reyurd 1'K avote has been fikd with the National Labor Relations Board. ]t is the view of management thnl 11te u^tontLtion of any group of employees within RJRT would have no beneficial impact on R1R,1M0°t of the unionized workers at Nabisco's operations are represented under a national eonlrart with the SCTU, which was ratified in September 1990 and which will expire in September 190!tNher unions represent the employees of a number of Nabisoo's and Planters LifeSaveri apersll'H°' tn addition, several of Tobaooo International's operations are unionized. R1RN believes that its trlalh,ns with its employees and with the unions in which its employea are members are good. (d) Finanetef Jnriwnarion about Foreign and Domestic Operations and Exporr Safes For inforntell''n about foreign and domestic operations and export sales for the years 1988 through 1990, ue "G~+Wtal'hle Data" in Note 17 to the Consolidated Financial Statements. Item 2. Propet[Me For inforntatuNt PeAaining to the Registrants' assets by continuing lines of business and geographic areas as of Dnrnder 71, t990 and 1989, see Note 17 to the Consolidated Fuancial St.tements. Substantiallp +11 of R1RTa domestic tobacco manufacturing facilitia, consistir.g priacipally of factories and leal rl`vage facilities, are located in or near WinstonSalem, North Carolina. All such fadlifia arc aaM+•11'y R1RT. laoluded in such facilities is the Tobaaooville dgarette manufaeturing feet plant of approxlnUl~ ~~~1l 987! In ad which p~ro and became full} s t dthe u modernization of its Whitaker Park eigaretrc manafacturing complex in eartty 989. a . Tobaooo IntNvAtio^al lus two tobacco manufacturing facilitia located in t^.rermany.nd one each in Switrutan<{, tMMada, Puerto Rico, the Gnary Islands, Hong Kong, Malaysia and the People's Republic of Cbtaa Nabiseol f;.,,loperatans have numaous operating propertia and facilities, bdth owned and leased, includin4 t"`t processing plants and related facilities located throughout the United States, Canada and 1 u,* America. Planters I He~y,vors has manufacturing plants at four locations in the United States and one in Puerto Rico. Item 3. I.egal StockFofder 1.r1°'a Since the tltW4l announamenton October 20, 1988 by the board of directon of RJRN that certain then arrent ~a of RJRN's management intended to develop a proposal to acquire RJRN in a leveraged bul+W•at least nine complaints purporting to be class actions have been Gkd in the Court of Chanary of tM ~ro of Ddaware. With the exception of one action, which is inaetive by stipulation of the parties, tMsr a`'t"wd have been consolidated under the title In re RlR Nabisco, Inc. Shanhofders 12
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO C1tPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENIS-(Continued) Note 7-Inventorks The major classes of inventory are shown in the table below: Deal~ 31. Dsa ~ 31. Finished products ................................... $ 617 $ 624 Leattobacao ....................................... 1,565 1,796 Raw materiaLs ...................................... 198 224 Other ............................................. 266 232 52,646 52,876 At December 31, 1990 and 1989, approximately $1.6 billion and $1.8 billion, respectively, of the inventory was valued under the LIFO method. The current cost of LIFO inventories at December 31, 1990 and 1989, was greater than the amount at which these inventories were carried on the Consoli- dated Balance Sheets by $216 million and $95 million, respectively. For tbe year ended December 31,1990 and for the periods February 9,1989 through December 31, 1989.nd January l, 1989 through February 8, 1989, net income was increased by $17 million, $8 nullion, and $0, respoaively, as a resultof LIPO inventory liquidations. The LIFO liquidations resulted from program to reduce leaf durations consistent with forecasts of future operating requirements. The overall cost of recent leaf purchases at auction has been increasing which results in higher cost of sales. Note S-Property, P4at and ErMdpnmeat Components of property, plant and equipment were-as follows: Da ~0 5/, De ~ 31, Land and land improvemeots .......................... S 264 $ 266 Buildings and learehold Improvements ................... 1,604 1,550 Machinery and equipment ............................ 3.510 3,162 Construction-in-prooess ........................... ... . 403 458 5,781 5,436 Less accumulated depreciation ......................... (915) 4l7 Net property, plant and equipment .................. $~4 866 S5L019 Note 9-Notes Payable and Related ldormation Notes payable oonsisted or the following: rkn.an 31, O.a.1a. 31, 1990 Nf9 Working capital facllity ............................... $ 65 $ 90 Notes payable to foreign banks ......................... 222 52 Commercial paper ................................... 8 39 $295 $181 F-15
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 9-Notes Payable and Related Inforon6on-(Contlnued) RJRN maintains a working capital facility which provides for extension of credit in an aggregate amount of $750 million. At December 31, 1990, approximately $614 million of this facility was available. A commitment fee of 'h% per annum is payable on the unused portion of the facility. On February 7,199Q RJRN entered into an arrangement in which it will sell for cash substantially all of its domestic trade aemunts roaivabk generated during a five-year period to a financial institution. The accounts receivable will be sold with limited recourse at a purchase price retkcting the rate applicable to the cost to the financial institution of funding its purchases of accounts receivable and certain administrativecasts. During 1990, total praooeds of approximately f8.2 billion were received by RJRN throughout the year in connection with this arrangement. Accordingly, the accounts receivable amount at December 31, 1990 has been «duoed by approximately $321 million with respect to the receivables sold. Note 10-Accounts Payable and Aeerued Accoaats Accounts payable and accrued accounts consisted of the following: Deee.6uJt. r.oa DeeWe+3t, ra9 Trade accounts ..................................... f 387 f 311 Marketing and advertising ............................ 693 530 Payroll and empbyee benefits .......................... 311 440 Restructuring and relocation ........................... 110 235 Exeisetaxes ........................................ 326 370 Accrued interest .................................... 267 284 Other ................................. '............ 920 11095 $3,014 f3,265 Note 11-Long-term Debt and laterest Expense Interest expense for Holdings (Sueoasor) and RJRN (Predecessor) consisted of the following: S.cea.er RNeua« Ye.r Fadd Fek.Wary ~9 1969 Je.ary 1, 19f9 Yar FaAN Urer ~r 31. Dece.Jerr ]I. ,9H F throvkh N89 ~ 71, Cash interest ..................... $1,401 $1,689 $42 Non-cash interest .................. 1,599 1204 2 Sy 3,000 F-16 f2,893 $44 $506 31 $537
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Lquidity and Financial Condition . Dea/mber 31, 1990 Despite Holdings' lasses from continuing operations of $462 million and 51.2 billion for 1990 and 1989, respectively, earnings before interest, taxes,, deprtciation and amortization ("EBITDA"), amounted to $4.0 billion and $3.4 billion for-the respective periods. Cash lbw available for repayment of debt, after working capital and other operating and investing requirements, but.e:cluding net divestiture ~prooeeds and fmaneing activitia, amounted to 52.7 billion and $647 vmillion; for 1990 and 1989, ttspectivety, as follows: ' . . . Ye.n F.kd DaaMer 31, 19" ,989 (i. M16ar) ~ . . - - Income (laa) from continuing operations ............................ S(462) S(1,172) Interest expense ............................................... 3.000 2.937 Amortization of debt issuutoe ooats ......................... ..... . 176 447 Income tax provision (bene5t) ................................... 60 ~ (222) Dcpredation of propcrty, plant and equipment ...................... 450 449 Anwrtiration (prindpally iataagiblea) .............................. 680 639 Changefn eonttoloats ........... ......................... - 247 Aeeretion of other noncunent liabilittes ............................. 86 75 EBITDA ...... :................................................ 3,990 - 3,400 dnteratpaid ...... .......... :............ ...... ............... (1.424) (1,909)• Taxea sefunded (paid), exduding divestiture related taxes ............. 32 (229) Decroese In working apital, exdudingwoome'takes and interest........ 379•• 93 Clpitalexpenditutea ............................................ (426) (522) thher.tkt ......................................... :............. I51 186 Cab dow availabletor repayment of debt ...:..........'.....:....:... S 702 S 647 • Indudea $339 million in 1989 of Interat allocated to discootinued operuiats. •• Includes $321 million of oettatn domestic trade aeoottnts receivable sold at December 31, 1990. At December 31,1990, Holdings bad outenndingdebt of approxintttdy $18.7 billion, compared to approximately t24.8 billion at December 31, 1989. This decrase is primarily due to the repayment of $2.3 billian of the Asset Sale 8ridge Facility, the retirement and exchange of approximatdy 52.2 billion prindpal amount of Group Debentures and approximatdy $1.5 billion principal amount of Converting Debentures pursuant to the Reapitalization Program. At Deoember 31, t990, Holdiags' working capital amount induded current maturities ot larg-term debt of $1.4 bBlian, which is expected to be repaid during 1991 primarily from ash 8ows from operadngaetivitiea. RJRldmaintainsawarldngapitalfadlityofS730miUionofwbiebapproximatdy $614 million was unbortowod and available as ot December 31, 1990. At Dexmber 3l, 1990, Gpital had a revolving credit facility that provided for the extension of credit in the aggregate amount of $1,750 billion. In addition, Capital has arranged for the extension of irrevocable letters of credit of approximately $550 million, which support the principal and interest on certain existing foreign debt of 26
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purchase oost associated with the Aoquisition and the program to eliminate excess trade inventorics. Business Unit (bntribution was $2.0 billion, a 5% increase from $1.9 billion in 1988. Excluding the impact of purchase cost allocation adjustments and the trade inventory decision, tobacco Business Unit Contribution would have increased 27% from 1988. RJRT recorded lower net sales of $4.9 billion in 1989 compared with $5.2 billion in 1999, ddue primarily to the itypacl of the decision to eliminate excess trade inventories and an induslry-wide downward volume trend. This program substantially reduced net sales in the second half of 1989 and decreased Business Unit Coatribution by approximately $360 million for the full year of f 989 compared to 1988. Nevertheless, Business Unit Contribution of 31.7 billion in 1989 increatcd over 1988 as the impact of lower volume was more than offset by higher price¢ and opentional cost savings, including staff reductions. Oa August 10, 1989, RJRT announced a reduction in its work force by 1,640 employees, including 825 salaried, 700 hourly and 115 temporary employees. Most employees were given salary continuation for a minimum of eight months and others were eligible for retirement. This program was nocessary in order to streamline tobacco operations. The cost of the program has been included in the allocation of the purchase cost associated with the Acquisition. Tobacco International recarded sharply higher act sales in 1989 of $2.1 billion, due primarily to strong volume growth of 6% over 1988 and favorable pricing. Business Unit Contribution of $328 million in 1989 increased 26% over 1989 due to the volume gains, favorable pricing and productivity improvements, which were partially offset by inerased marketing and selling expenses primarily in the development of Asian markets. In 1989, Tobacco International gained or maintained market share in 23 of 2S key markets principally due to volume increases in three primary International brands, CAMEL, WINSTON and SALEM. Food 1990 vs. 1989. Net sales for the food businesses of Holdings were $5,8 billion for 1990, a slight increase from 1989, despite the loas of sales from the Baby Rutb/Butterfinger business and Chun King, both of wbieb have been aold., Excluding the results for thnse businesses sold, net saks would have risen 5% in 1990 when compared with 1989. Operating inoome of 5597 million in 1990 increased 10%when compared with 1989. Business Unit Contribution inereated 8% to 5802 million in 1990 when compared with 1989. Excluding the rautu of the businrsaes sold, Business Unit Contribution would have risen 19% when compared with 1989. Nabisco reported net sales of $4.8 billion for 1990, a 4% increase from 1989 primarily due to bighor selling prioes in all businesses and volume gains in its US. biscuit business. Business Unit Contribution increased 18% to $671 million in 1990 when compared with 1989. Volume gains and margin Improvements in the US. bisait business and productivity gains in all businesses contributed to the Business Unit Contribution improvement in 1990. The volume gains of the US. biscuit business were driven by the solid performance of new products and the strength of key core brands, partially offset by lower volume in the areal and margarine businesses. Planters GfeSaven reported net aaks of S 1.1 billion for 1990, a decrease of 13% from 1989. The decrease Is due primarily to the Iess of sales from the Baby Ruth/Butterfiager andy business sold in the first quarter of 1990. Buainess Unit Contribution of $131 million for 1990 decreased apptozimately $40 million from 1989 due primarily to the absence of the andy business sold and one-time product recall costs. Excluding the results of the andy business sold from both periads and the one-time product recall costs, Business Unit Contribution would have increased by 26% for 1990 when compared with 1989, due primarily to higher selling prices and improved productivity. 1989 vs. 1988. Net sales for the food line of business were $5.8 billion in 1989, a 4% improvemen, over the $5.6 billion in 1988. Operating income decreased 11% to $543 million in 1989 compared witl 24 r N lp W
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Corporation, Berlitz International, Inc., Citicorp, Minnesota Mining and Manufacturing Company and Union Carbide Corp. Messrs. Kravis and Roberts are first cousins. Directors aad Esecatire Odcert.ojRJRN The directors of RJRN are Messrs. Gentner and von dor Heyden, H. John Greeniaus, James W. Johnston, Messra. Amaon, Jordan, Kravis, Medlin, Raether, Robbins and Stuart and Ms. Ridgway. Messrs. Groeniaus and Johnston were first eleetcd in June 1989. Mr. Jordan is a former director of RJRN who resigned in February 1989 upon oonsummation of the Tender OBer, Mr. Medlin is a formar directorof RJRN who resigned in April 1989 upon the completion of the Acquisition. Mr. Jordan and Mr. MedBn were reelected in June 1989. Set forth below are the names, ages, positions and offices held and a brief account of the business experience during the past five years of each director and/or executive officer of RJRN, other than those listed above. . Directors aad/or Executive Officers of RJRN Not Usted Above Naoe AM Prpat Ri.rt I Ott.yadm w Farlo ud FnrYn. ttM H. John Groeniaus 46 Director of RJRN since 1989 and Group Executive RJRN Food ames W. Johnston 4 Group since February 1991; President and Chief Executive Officer of Nabisco Brands, Inom since 1987; previously Executive Vice President of Nabisco Brands, Inc., 1987; President, Biscuit Division of Nabisco Brands, US.A., 1985-1987. Director of RJRN and Chairman and Chief BxeouGve Officer of Kenneth E. Glover 39 RJ. Reynolds Tobacco Company siaa 1989; previously Division Executive, C.}tibanlc, NA., 19841989. Senior Vice President, Corporate and Government Relations since avid B. Kilis 3 1990;prevto~taly Via Prestdrnt and Manager, Fust Chicago Gpital Markets, Inc., MatchJune 1990; Managing Director, Drexel Burnham Iambert Incorporated, 1983-1990. Senior Vice Praidcot, Worldwide Cotttmuniatiaas aina 1989; .B. Oglesby, Jr. 8 previously Seaior Vice President, Worldwide Communiations, American Express Travel Related Setric+ea !b, Inc., 1987-1989; Senior Vite President, Communiatioas, Frrwun's Fund Insurance Company, 1983-1987, Senior Vice Precident, Govuament Affairs since 1989; previously . Thants Patwn 9 Deputy Chief of Staff to President Ronald Rragan, June 1988- January 1989; Partner, Hecht, Sponacr and Oglesby, March 1986-June 1988; Assistant for lagitlative ARain to President Ronald Rag.n, November 1983-March 1986. Senior Vice President, Taxation since 1988; previoasly Vice Roger D. Semerad 50 President, Tanation, 1987-1988; Vice President, Tanation, Nabisco Brands, Ina, 1982-1987. Senior Vice President tirae 1989; previously Senior Vice Prcsident, Polic?%Developtttent, American Express Company, 1988-1989; Assistant Secretary of Labor for Employment and Training, 1985-1988. Dale F. Sisol 53 President and Chief Executive Officer of RJ. Reynolds Tobacco International, Inc. since 1989; President and Chief Operating Officer of RJ. Reynolds Tobacco International, Inc., 1986-1989; Executive Vice President of RJ. Reynolds Tobacco International, Inc., 1981-1986. 32
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Item 7. Management's Diseussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of Holdings .financial condition and results of operations covers periods before and after the Acquisition. The consolidated financial statements of Holdings for the period after February 8, 1989, are not directly comparable to the consolidated financial atatements of RJRN for prior periods, primarily dueao the allocation or the purehase cost in connection with the Acquisition and related financings. The following discussion and analysis should be read in connection with the historical fioaneial information included in the Consolidated Financial Statements. The following discussion and analysis does not address the resulu of operations for discontinued businesses. See Item 1. "Business--Recont Dispositions." Results of Opentioas Cnuolid.le! 1990 va. 1989. Consolidated net sales for 1990 were 113.9 billion, an increase of 9% from 1989, which includes results of RJRN before the Acquisition. Net sales for the tobacco line of business in 1990were $8.1 billion, up l5%comparedwitb 1989. Net sales for the food line or business in 1990 were $5.8 billion, a slight Increase from 1989. Consolidated operating income for 1990 was $2.8 billion, a 37% increase compared with $2.1 bil- fion for 1989. Operating income before amortistlon of trademarks and goodwill ("Business Unit Contribution") was 13.4 billion in 1990, an increase of 31% from $2.6 billion in 1989. Consolidated interest expense of $3.0 billion in 1990 increased 2% from the 1989 level of $2.9 billion due primarily to higher interest expense from the setting of fixed interest rates, etfalive July 16, 1990, on the Converting Debentures and the Group Debentures, partially off&ct by repayments of debt since the Aaquisitioo and the Initial effects of the Recapitalization Program. Holdings' loss from continuing operations was reduced to 1462 million in 1990, a 61% docrease from $1.2 billion in 1989. Included in the loes from continuing operations for 1990 was SI.B billion (S1.7 billion in 1989) of eon-aah interest and amortization of debt issuance oosts as wcil as 51.2 billion ($1.1 billion In 1989) of other non-eaab eharges, pr7marily amortization of tndeararka and goodwill and depraeiation expeuse. In addition, 175 million of advisory fees incurred in connection with the Recapitalization Program and the establishment of frxed Interest rates on the Converting Debentura and Group Debentures were charged to "Other income (expense), net" during 1990. . Holdings' net loss of $429 million in 1990 includes an extraordinary gain of $33 million whieb resulted from the early extinguishmenta of debt and consists ot a pre-tax gain or $220 million from the repurchase of Group Debentures on the open market, a write-off of debt issuance costs aggregating $79 million and a provision for income taxes of $108 million related to the Recapitalization Program. 1989 vs. 1988. Consolidated net sales for 1989 were $12.8 billioa, an increase of 1% from 1999. Net sales for the tobacco line of business in 1989 of $7.0 billion decreased $87 million from 1988 due to lower domestic tobacco volume, reflecting the impact of a program to elimittate excess domestic trade inventories in the second half of 1989 and an industry-wide downward trend, partially o&et by volume gains recorded in Tobacco International and price increases. Net aales for the food line of business in 1989 increased $216 million from 1988 to 15.8 billion, primarily due to higher pricing and new product introductions. Consolidated operating income for 1989 was $2.1 billion, a $314 million decrease from 1988 due primarily to the significantly higher amortization of trademarks and goodwill resulting from the 21
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Holdings has also undertaken to make exchangc offers to be consummated by December 15, 2002 for the 9'A% Sinking Fund Debentures, Due April 1, 2016, the 8r/.% Sinking Fund Debentures, Due February 1, 2017 and the 8'A% Sinking Fund Debentures, Due March 15. 2017 of RJRN then outstanding. Such exchange offers will be made at par and the consideration to be offered will consist of 90% ash and 10% Holdings Common Stock or, at the option of Holdings, a greater percentage of cash up to 100% with any balance in Holdings Common Stock, any such Holdings Common Stock to be priced in relation to the then current market pria. In connection with the final settlement of the litigation, Holdings will reimburse MetGfe for Metlife s and Jefferson-Pilot's legal, euative and other costs and expeases related to the litigation. Other Litigation For information relating to other litigation relating to the tobacco business, see "latigation , Affecting the Cigarette Industry" contained in Item I hereof. The Registrants believe that the ultimate outoorne of all pending stockholder, bondholder and other litigation tnatters should not bave a material adverse effea on the Registnnts' financial oondition. However, no assuratta an be given as to the decisions which may be rendered by the courts in any of the litigation matters described above, certain of which involve materia) c7sims. Item 4. Submfsdea bf Matteo to a Vote of Security Holders On November 7,1990 and ]anuary 15,1991, tbe board of directors of each of Holdings and Group was reekdad In its entirety. The election was approved by written eunr.enu dated as of Norember 7, 1990 and January 15,1991 of the bolden of an aggregate of $53,182,254 shara of Holdings Common Stock, in ehe atc of Holdings, constituting a majority of the then issued and otttstandiag shares of Holdings Contmon Stock of Holdings, and of an aggregate of 1,000 shara of common stock, par value 5.01 per share, In the ase of t7roup, oonatituting all of the issuod and outstanding shara of common stock of Group. ' . On November 7.1990 and January I S,1991, the board of diroctors of Capital was reelectod in iu entirety. The election was approved by written oomat dated as of Noveatber 7,1990 and January IS, 199I of the hoWe[s of an aggregate of 1,000 sbares of common stock, par value $.01 per share, constituting all of the issued and outstanding common stock of Capital. On November 7,1990 and January 15,1991, the board of diroctors of RJRN was rerJeqed in its entirety. 7be dectioa was approved by written eameat dated as of November 7,1990 and January 15, 1991 of the holdew of an aggregate of 2,247.61275 shara of eomnton stock, per ralue $1,000 per sham constituting all of the issued and outstanding common stock of RJRN. On January 29,1991, Holdings amended its certifiate of incorporation to increase the authorized number or shares of capital stock from 1,200,000,000 sbares or common stoek, par value 5.01 per share, and 150,1100,000 shares of preferred stock, par value f.0I per sham to 1,500,000,t100 shua of common stock and 150,000,000 shares of preferred stock The amendment was approved by consent dated as of January 15, 1991 of the holders of an aggregate of 553,182,254 sbara of Holdings Common Stock constituting a majority of the then issued and outstanding shares of Holdings Common Stock 17
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Hcfdiaga Stock Optioe'Plaa To provide an incentive to attract and retain key employees responsible for the rnanagemenl and odministration of the business affairs of Holdings and its subsidiaries, on June 15, 1989 the board or diroators of Holdings.dopted the Stock Option Plan pursuant to which options to purchase Common Stock ("Optbns") may be granted. On June 16, 1989 the Stock Option Plan was approved by the written consent of the holders of a majority of Holdings Common Stock. Any director or key employee of Holdings or any subsidiary of Holdings is eligible to be granted Options under the Stock Option Plan. A maximum of 3Q000,000 sharea of Holdings Common Stock (which way be adjusted in the evem of cerain capital changes) may be issued under the Stock Option Plan. . The Stock Option Plan is administered by the Compensation Committee of the Board of Directors of Holdings (the "Compeasation Conmittee"). The Compensation Committee has absolute discretlon. subject to lhe terms of the Stock Option Plan, to determine who is eligible to receive Options, to select thoeo who will actually receive Options and to determine the number of shara to be subject to such Options and the terms and eonditiaos of such Options. . Optioos under the Stock Option Plan are not intaded to be Wneeative stock options" under Section 422A of the fntenoal Revenue Code of 1986, as amended (the "Gode"). Under the Stock Option P4n, ach Option shall be evideaood by a written stock option agreemeat that will be esauted by the gaatee of the Option and by Holdings. The price per ahare of the Common Stock subject to each option dian be aa by the Compensation Committee and may be less than the talr marlut value of such shara on the datesuch Option 4 granted but may in oo iinnt be ka than SL1S6 of the fair market value on such d.ta The Cbmpenation Cammittee also determilla when and In what Installments Options shall become eierasabk and wha each Option eapira, provided that no Option may be exerciaed after the eapiration of ten yeus and one day from the d.te the Option b granted. The Compensation Committee may also accelerate the time at which an Option is exercwblo. y..g !mr I.aatLe P/a. - ~ . On August 1,1990, the board of dirators of Holdings adopted the 19901.o11g Term Inoattive Plan (the°I990 LTIP") whiah was approved on such date by the written consent of the holde/s of a majority of the Contluon Stodc. The 1990 LTIP authorizes grants of ineantive awards ("Gnnts") In the torm of yooeatire atoek cpNarts",under Section 422A of the Code, other stock optioa.; atock, approciation righta, tahiUed atotk, porehase'stock, dlvidend'equivalent righta,'performanee'opiu, Performaneo aWrea or otbelpack-based grants. Awards under the 1990 LTIY may be granted to key employaa of, or other peraoos h.r)ag a ludque relationship to, Hdldings and Its subridiarfes. fAroaort who arc not al.o employees aro Ineligible for Grants: A maximum of 25.6 million sharcs of Cmnmon Stock (whkh may be adjusted ln the event of certain capital ehanga) may be issued under the 19911 L17P pursuant to Grants. The 1990 LTH' also limits the amount of shares which may be usued pursuant to "inaative stock optlons" sod the amount of slrares subject to Grants which may be iawed to any one participant As of March 1, 1991, no incentive awards have been granted ander the 199o LTIP. The 1990 LTfP is administered by the Compenaation Committee. The Gbmpaution Committee has absolute discretion, subject to the terms ot the 1990 LTIP, to aeleot who will receive incentive swards and to detumine the forms of the awards and the ternu, eonditions and Rmitations of the awards. Under the t990 LTIP, each Grant will be evideaeod by a written agreement that will be executed by the p6rlielpant and by Holdings. The 1990 LTIP provides specific limitations on the option pAce and exercise period (wbere applicable) and certain other terms with respect to each form of Grant. 36 Ln r N ~ J F+ l9 tn
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTE3 TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 4-DCseontinued Opentioos-(Continued) Summarized information for discontinued operations is ahowa in the following table: 19t9• 198! Netsales ................................................. 52,460 $4,321 Operating income .......................................... 276 481 Interest allocation" ........................................ (237) - Income before income taxes .................................. S 34 $ 461 Provision for income taxes ................................... tI 239 Income from operations of discontinued businesses, net ofinoome taxes ....................................... $ 23 S 222 • Includes Predecessor period or January 1, 1989 through February 8, 1989. •• In addition, $102 million'of interest was allocated to the Consolidated Balance Sheets through December 31, 1989, representing interest on outstanding debt for the period subsequent to the divestiture measurement dates. Note S-Extraordiaary Item During 1990, in connection with the Recapitalization Program, the early extinguisbmenta of debt of Holdings, Group and Capital resulted in the following extraordinary gain.s and losses: Pro-tax gain on the repurchase of Group Debentures• .......... writeoff of debt issuance costs ............................ Extraordinary item--gain (lou) on early extinguishments of debt before inoane taxea ................................... Provision (benefit) for income taxes ......................... Extraordinary item-gain (lasc) on early extinguishments of debt, netofinoometaxet .................................... H"W G" Ck" ilPt $220 $220 _(") 57 S 41 41 141 163 (41) (41) 108 51 ~) 113) S 33 $112 M2 ) M2 ) • Pro•ta gain of $220 million resulted from open market purchases of a portion of the Group Debentures at prevailing market pri«s at an aggregate cost of $L304 billion. F-12 "j)
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.E r'~4 A~,e Praem Princrp.l Omp.rtun « p~r"1 and Fl.~-Ynr ~[aqlap,enr Hh4og Robert S. Roath 48 1991-Present, Senior Vice President and Controller RJRN; lifton S. Robbins 3 1990-1991, Vice President and Controller, RJRR; 1988-1990, Vice President and Corporate Controller, Colgate-Palmolive Company, 1984-1988, Vice President, Finance and Business Development, General Foods Canada. 1987-Present, Associate, KKR; prior thereto Investment Banker, Scott M. Stuart 31 Morgan Stanley & Co. Incorporated. Director siace 1988.• 1986-Praent, Associate, KKR; 1984-1986, Stanford Graduate Robert F. Sharpe, Jr. 38 School or Business. Director since 1988! 1989-Present, Vice President, Assistant General Counsel and Secretary RJRNr previously Assistant General Counsel 1986) 1989), Senior Counsd (1987-1988), Counsel (1985- Frederick W. Zuckerman 56 1991 (Fobruary)-Present, Senior Vice President and Treasurer, R. TLcodore Ammon 41 RJRN; 1981-1990, Vi¢c President and Treasurer, Chrysler Corporation. 1991-Present, General Partner, KKR; 1984-1990, Associate, James H. Greene, Jr. 40 KKR. Director since 1988.0 1986-Present, Associate, KKR; prior thereto, Vice President, Vernon B. Jordan, Jr. 55 , Bankers Trust Company. Drrector since 1988! Partner, Akin, Gump, Stna.ss,Hauer & Feld. Director since 1989. Henry R. Kravis 47 General Partner, KKR. Director since 1989. John G. Mcdlin, Jr. 57 1985-Prerent, Prcsident and Chief Exe<utive Officer, and 1987- ozanne L Ridgway 5 Present, Chairman, First WaehovisCprppratton; 1977-1985, President and Chief Executive Officer, The Wachovia Corporatioa. Director since 1989. 1989-Present, President of the Atlantic Council of the United eorge R. Roberts 7 States; 1985-1989 Assistant Secretary of State for European and Canadian Wairs; 1982-1985r Ambassador to the German Democratic Republic. Director since 1989. General Partner, KKR. Director since 1989. • Messn. Robbins, Stuart, Ammon and Greene became directors of RJRN in 1989. Mr. Gustner is. a dirodor of Amerisan Telephone & Telegraph Company, Bristol-Myers Squibb Company, Cateryrl4r, looQ and'fbe New York Timea Company. Messrs. Kravis and Robetis are each directors of Duracell Holdings Corporation, Hillsborough Holdings Corporation, IDEX Corporation, Owens-lUinois, ine.. Owcns-lllinoia Group, Inc., Safeway Inc., The S'top & Shop Companies, Inc., Stop & Shop Holdings, Inc., Union Texas Petroleum Holdings, Inc. and Walter Industries, Inc. Mr. Roberts is also a director of Red Lion Propertles, Inc. Mr. Raether is a director af Fred Meyer, Inc., Hillsbarough Holdings Corporation, IDEX Corpont'ron, The Stop & Shop Companier, Ine., Stop & Shop Holdings, lnoc and Walter Industries, lno. Mr, Greeae is a director of Owens-Illinois, Inc., Owens-Illiaois Group, Inc., Safevay Inc., The Stop & Shop Companiea,. Inc. and Stop & Shop Holditrgs, Inc. Mr. Robbins is a director of IDEX Corporatlon, The Stop & Shop Companies, Inc. and Stop & Shop Holdings, Inc. Mr. Jordan is a director of the American Express Company, Bankers Trust Company, Bankers Trust New York Corporation, Corn'mg Inoorponted, Dow Jones & Co., Inc., J. C. Penney Company, Ina, Revlon Group, Ryder System, Inc., Sara Lee Corporation, Union Carbide Corp. and Xerox Corporation. Mr. Medlin is a director of First Wachovia Corporation and its principal subsidiuies: First Atlanta Corporatwa, First National Bank of Atlanta, The Wachovla Corporation and WacJlovia Bank aad Trust Co., N.A.; Mr. Medlin is also a director of Bell South Corporation, National Services Industries, Inc, and USAir Group, Inc. Ms. Ridgway is a director of Bell Atlantic 31
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 11-Long-term Debt and Interest Expease-(Continued) Deaa6er 31, 1996 DeoeeEer 31, 1989 Due wlWa D.e After DYe D.e Whtl. Aner On Yer O.e Ya 1 Qu Year O.e Ynr Other Debentures and Notes: Subordinaled Debentures and Notes, fixed rates of 13'A% and 13'/,%, and variable interest (varies with 3-month LIBOR}-I 1.9 1% at December 31, 1990, due througb 2001 ......................................... ,000 ~ ,000 Partnership fkbe Subordinated Ikbentures, variable interest (varies with 7-year US. Treasury Notc)-16% at December 31, 1990,interest pay.blein-kind until February 8. 1994, due 1997 ..................................... _ 27 38 RJRN and Capital ............................ 1,425 13,740 _ 2,632 15,642 Group Debentures: Group Debenturea, 17% at December 31, 1990, interest payabloin-kind until May 1, 1995, due 2007(5) ....... _ 2,864 4,500 Group ...................................... 1,425 16,604 _ 2,632 20,142 Convuting Debentures: Converting Debentures, lRt%at December 31, 1990, interest payablein-kind until May 1, 1999, convertible into Holdings Common Stork on April 30. 1993, otherwisedue 2009 .............................. 51 1906 HHoldings .................................... 51,425 f16,955 _ f 632 f21,948 (1) The payment of debt tbrough December 31, 1995 is due as follows (in millions): 1992-$1,751; 1993-41,733; 1994-4532 and 199"1;177. (2) RJRN has entered into hedging arrangcmeats designed to offset the effects of future foreign eurreocy exchange rate movements on these debt issues. (3) Capital has entered into hedging arran$ements designed to offset the effects of future interest rate movements on approximately $4.1 billton of bank debt at December 31, 1990. (4) Qpital maintains areva1vmg aedit facility of f 1.750 billion of which $1.625 billion was unused at Deoember 31, 1990. Aailability of the unused portion of thb facility Is reduoed by $550 million for a separate Icttx of acdit facility. A eommitmeat fee of ~h% per annum is payable on the unused portion of the facility. (5) Ihe Group Debentures are subject to optional redemption by Group at anY time at 1 W% of the pnncipal amount thereof plus aecrued and unpaid interest thereon. Group Is currently prohibited from redetming any Group Debentures under the 1989 Credit Agreement and the 1990 Credit Agreement without obtaining prior consent of the banks party thereto. F-a8
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Court reaffirmed its injunctive order tolling the effect of the notices with the exception of the one notice of acceleration which pertains to $5.0 million of notes held by the Metropolitan Life Insurance Company ("Metlife"). The $5.0 million of notes were subsequently retired in connection with the sale of certain assets of Del Monte. On July 6, 1989, plaintiffs filed an appeal of the injunctive order. On June 25, 1990, the Court of Appeals issued an opinion vacating the preliminary injunction in the form issued by the District Court and reaunding the matter to the District Court for further proceedings not incauistent with that opinion. Prior to the decision by the Court of Appeals, the District Court established a schedule for the submission of brkfs and other papers supporting motions for summary judgment with respect to the covenants at issue. In compliance with that schedule, as revised, the motions were fully briofed and taken under consideration by the District Court as of October 19, 1990. The parties have agreed that the cure periods under the indentures containing the covenants at issue will extend until 18 days after the District Court renders its determination on the pending summary judgment motions as to whether tLere has been a covenant breach. In the event of an adverse decision by the District Court. RJRN would intend to seek leave to appeal and to obtain an expedited ruling from the Court or Appeals prior to expiration of the ISday cure period or a stay further extending the cure period to the extent that an appeal could not be resolved within the 18-day period. There an be no assurance that iuch an expedited ruling or stay would be granted. The limited duration of the cure period could adversely affect RJRN's ability to eHeduate any required cure or to obtain effective appellate reUet . On January 18, 1991, Hoidings, RJRN and Metlife agreed in prindpk to reinstitute normal business relations and to settle and dismiss the Meslife Action. As part of such agreement, Metlife will become an equity investor in Holdings aad one of the primary lenders with respect to the ESOP (as hereinafter defined) described in Item 11. "EeecWve Compeusatiou-Empioyee Stock Ownership Plan" below. Onlanuary 21,1991, Metlife, Jegerson•Pilot Life Insurance Company, the other plaintiff in the Metlifa Action ("JeBexson Pilot"), Holdings and RJRN requested that the District Court defer decision in the current action pending finalization of a definitive settlement agreement. The parties have undertaken to enter into a definitive settlement agreement containing customary tams and conditions which will provide for the exchange by Metlife with Holdings of an aggregate of $125 million principal amount of g.996 Debentures due 1996 (the "1996 Debentures") and 8% Debentures due 2007 (the "2007 Debentures") for a 100% participation (the "ESOP Par6cipation") in the External ESOP Note (as hereinafter defiaed) issued to Holdings in connection with the sale of Holdings stock to the PSOP. '[Le ESOP Participation will be guaranteed by Holdings which guarantee will be secured by a pledge of the unamortized portion of the 1996 Debentures and 2007 Debentures acquired by Holdings. It Is expected that the closing of the ESOP Participation will oo¢ur by the end of the first quarter of 1991, and in any event not later than August 1, 1991. The parties have further agreed in principle that, pursuant to the terma of the definitive settkment agroeescnt, Metlife will become an equity investor in Holdings by exchanging up to an aggregate of S32S million principal amount of 1996 Debentures and 2007 Debentures (the remainder of the 1996 Debentures and 2007 Debentures then owned by Metlife) with Holdings for Common Stock, par value $.01 per sham of Holdings ('Holdings Common Stoek") at a price equal to the average dosing pria for Holdings Common Stock over a specified period shortly before the date of iuuanoe. It is expected that the closing of the equity investment will oa.~ur on August 1,1991, and in any event not later than October 1, 1991. The Holdings Common Stock to be issued to Mdlife will be subject to contractual transfer restrictions whereby Metlife may not dispose of any of the shares of such Holdings Common Stock prior to March 1, 1992; provided that up to 50% of such Holdings Common Stock may be transferred after December 2,1991. In connection with its equity investment, Metlife wilt be granted demand registration rights providing for not more thantwoshelf registrations of such Holdings Common Stock for specified periods. In connection with the ESOP Participation and the equity invatment, Metlife has undertaken to offer to acquire all of the 2007 Debentures not now owned by it. 16 ~f
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTFB TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 3-Incoax Taxes-(Contisued) At December 31, 1990, Holdings bad a remaining eonsolidated net operating loss carryforward for U.S. tax purposes resulling from 1989 operations of $222 million. The related book tax benefits were recorded in the Consolidated Balance Sheets as of December 31, 1989. Income taxes accrued at December 31, 1990 relate primarily to the sales of discontinued operations and income taxes related to the Recapitalization Program. At December 31. 1990, there was $520 million of aaumulated and undistributed income of foreign subsidiaries. These earnings are intended to be reinvested abroad indefinitely. It these earnings were to be repatriated, withholding taxes of approximately $50 million would be required. There are a number of issues pending as a result of Internal Revenue Service audits. The resolution of these issues is not expected to have a material effect on RJRN's financial condition. Note 4-Distontinued Opentioos On April 2, 1990, the New Zealand and Far East food businesses of Nabisco International were sold for approximalely $180 million in cash, subject to certain post-closing adjustments. Furthermore, on June 6, 1989 five European food businesses of Nabisco International were sold for $2.5 billion in cash, subject to certain adjustments. The divestiture of Nabisco International's New Zealand, Far East and European food businesses and certain related completed transactions comprise substantially all of the Nabisco International sector. The net cash proceeds from these diveslilures were used to reduce amounts outstanding under the Asset Sale Bridge Facility (the 'AssU $ale Bridge Facility"). On January 9, 1990 the processed foods business of Del Monte was sold for approximately S 1.475 billion in cash, subject to certain posttlosing adjustments. Furthermore, on Deamber 5, 1989 the fresh fruit business of Del Monte was sold for $875 million in cash, subject to certain post<tosing adjustments. The net cash proceeds from these divestitures were also used to reduce amounts outstanding under the Asset Sate Bridge Facility. The Nabisco International and Del Monte operations, including the operations of the remaining unsold Nabisco International businesses, have been presented as discontinued operations through the respective divestiture measurement dates as initially reported during the third quarter of 1989. No gain or loss has been recognized for financial statement purpases on the discontinued businesses aold since the net procads from such transactions reflect the fair value of such businesses as of the date of Holdings' acquisition of RJRN. Management has decided for strategic business reasons not to sell the remaiaing unsold Nabisco Inlernational businesses, consisting principally of the Latin America operations. Accordingly, the identifiable assets and liabilities for these businesses as of December 31, 1990 have been consolidated based upon their respective fair market values which, in the aggregate, approximate the net earrying amount of these businesses previously included under the caption 'Net assets available for sale". Beginning in 1991, the results of operations and cash flows of the remaining unsold Nabisco Interna- tional businesses will be consolidated and included in continuing operations as a result of the decision to retain such businessa. F-11 tn ~ tJ J W tJ ON
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, WG RJR NABSICO CAPITAL CORP. RJR NABISCO, INC. CONSOLIA4TED BALANCE SHEEIS (Dollaf In Millions) M06e3L NM 1 C CWW RJIN fM AsseTs a,remt ewv,: Cash enE nlh peinkw (Hddinp' .etwst Induda f200 M6 u di.Nend raa.2 u Daamher 31, 199o) ~ (p1eac 6) .,..,....,f 313 f 106 f 106 f 106 f 162 Aaocunu ead RMn woAahk, ul (lu, eean.bka uld) (Nute 9) ........ 703 702 702 702 991 le.e.taiw (Nae 7) ........................... 2,646 1.616 2,666 3,646 2A76 prepld /apMa sed atbe laaq .................. 444 444 {N 444 356 Na enW ..eWbk fat nk (NRU 1) ............... 2a110 Tebl- nu.weu ......................... 4,116 -S,t91 3__191 y 6yy_616 5,191 5,741 5,181 5,761 3.436 PropenY. pkM ..6 W.ipwt-at ma ................ ~- ~_ ~_ . /n,.ara.l.uddepsi.boe ...................... 915) 915) 915) 915) 617 Net poprtY. pknt ud qdpwa (Nae /)............ 4,866 6_y,-/66 6`_166 6_t66 5,019 TndaeeM1a,.et ............................... 9331 9.531 9.531 9.S31 9.771 peedwpl, .q, , ,............................... 11.607 1I,607 1],607 13,607 13,%5 OUvr u.e4 s.d dderrtd tla fet ................... 795 791 773 713 1113 f3;915 f32A93 f32A75 f32.673 fM,112 L1.11LITICt ANY 6TOC9NOLYLSL' CQUIlF (IIRCI fxhl7Mk1: Nau feyLhle (Nat<1) ......................... f 295 f 295 f 295 f 195 A<m.w pHNe ud aoaRe6.moutr (Nuk 10) ...... 3A16 1,%0 ' 2,960 1.960 C1rnu wlaitip d Iwflan deht (Nale 11) ...... 1,A25 1A25 1,635 1A73 l.cm,el.aa.mad(16cIC3) .................... 411 471 471 471 rddsn.tWW ...................... Sy205 5__151 3_ts1 3_151 t.e.f.fmn deht (ka wluu .rtnNk.) (Nete 11) ....... 16,153 16A06 13,N0 13.740 Otirx.ewrteN lklililiet (NRts It) ................. 2f53 1,317 2.5/2 f,011 llefand 8,atne tua (Nau 3) ..................... 3,113 3419 3.545 3,927 CammileuU ud ennliysuitl(Nak 11) ............. Iladeemefk omva06k pdat+d pnd-72p32,000 LYrc. ke.cd ud a.waduf (Note 13) .................. 1,795 Caeunun LmdidddL'p~hy(N~e,a 14 ud IS): Comene pak-SfOp7a}IS wd 306p90,f13.4rt1 laoo6 .nd wuundi.f.t Doorm4Wr 31 1990 ud 1969 f 1/1 1,~632 490 6}61 11,9N 1,f73 3,716 6 - - 3 h~l ............................... ],f6d 3373 7.606 7.606 1A11 Qim+ktlrt inrlailoa dj.p.e.u ................. SS 35 35 35 1 RWl.ed.a~.pa (ecwnd4te6de6d) .............. (IA03) (9/Q (2f2) 200 (9761 lhenatimd..f+enf,ptrWadYaL ............... ~i)~_ (_) teldeR..w.metiellws•.pry .............. 1y696 L512 7a57 7.1]9 1,237 f32,915 f3;69] f37,675 $32,675 f36y612 . See Nota to Coafolidated Financial Sra/eauntr. F-6 o.awLs31. IK9 f.-9 C l1RN f 112 . 995 2.876 . SSs 2,10) f 112 995 1,176 359 2~300 f 112 99S 2.176 356 2`300 6,671 _671 6 6.671 5.436 _ 5.436 5.436 617 ~.--) 617) (417) 117) _ 5.019 5,019 5.019 9,171 A771 9,771 13,963 13,%5 13,963 973 950 950 134,1" $36,176 $36,376 3 111 ~ 1 111 3 ~ i 3 111 3.261 632 1, 7~6 1 32 $72 666 71) ~666 6710 6.187 10,N2 15.442 15,612 1A39 2}31 1.301 3,766 ),7t6 3,917 ]9S2 1,0/6 f.0/8 1 1 1 (/17) (372) 110 _ 3,166 7A71 4.159 S36J99 f7,776 tJ6J76
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1-Introduction Rcupitalisatina During I990, RJR Nabisco Holdings Corp. ("Holdings") announced a comprehensive rocapitali- vation program (the "Recapitalization Program"). The Recapitalization Program has included, among other things, (i) the purchase on July 16, 1990 of 272,000,000 newly issued shares of common ttock (the "Common Stock") of Holdings at $6.25 per share by a partnership affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR"), (ii) the exchange by KKR on July 16, 1990 of $200 million of the sum of principal of plus accrued and unpaid interest on a subordinated promissory note (the "Partnership Debt Securities') of RJR Nabisco Capital Corp. ("Capital") for 8,000,000 shares of Cumulative Convertible Preferred Stock (the "Preferred Stock") or Holdings, (iii) the exchange or 51.859 billion of the sum of principal of plus accrued and unpaid interest on Senior Converting Debentures Due 2009 (the 'Converting Debentures') issued by Holdings and $541 million of the sum of principal of plus accrued and unpaid interest on Subordinated Exchange Debentures Due 2007 (the "Group Debon- tures") issued by RJR Nabisco Holdings Group, Inc. ("Group") for approximately $800 million in cash and approximately $ L6 billion stated value of Preferred Stock pursuant to exchange offers (the "1990 Exchange Offers") which were commenced on October 3, 1990 and completed on November 1, 1990, (iv) the eommenoement o(a program providing for the acquisition of Group Debentures and Converting Debentures (the "Purchase Program"), including (a) the purchase of approximately $1.7 billion principal amount of Group Debentures and (b) the exchange of approximately S547 million in oash and 129.4 million shares or Comrnon Stock for approximately 51.176 billion principal amount of Group Debentures (the "1991 Exchange Offer"), which was commenced on February 1,1991 and oompleted 0o March 2, 1991, and (v) the repayment on July 18, 1990 of the refinancing bridge facility of Capital and the redemption on August 15, 1990 of the remaining $1 billion principal amount then outstanding of First Subordinated Increasing Rate Notes due 1997 of Capital (the "Increuing Rate Notes") with procecds from a $2.23 billion new bank credit facility (as amended, the "1990 Credit Agrament"). During 1990, Holdings also announced the establishment, effective July 16, 1990, of permanent fixed interest rates of 17si( percent on the Converting Debentures and 17 percent on the Group Debentures. Acqaisition ojR1R Nab&ca, laa On Apri127, 1989, the stockholders of RJRN approved and adopted the Agreement.nd Plan of Merger, dated as of November 30, 1988 and amended as of April 3, 1989 (the "Merger Agreement"), among RJRN, Holdings, Group, a wholly owned subsidiary of Holdings, and RJR Acquisition Corporation, an indirect wholly owned subsidiary of Holdings ("Merger Sub"), providing for the merger of Merger Sub with and into RJRN, with RJRN as the surviving corporation (the "Merger"). Substantial 6nancing for the transaction was obtained by Capital, a wholly owned subsidiary of Group. The Merger, which was consummated on April 28. 1989, was the second and final step in the acquisition by Holdings and its affiliates of all of the capital stock of RJRN (the "Acquisition"). The first step was a cash tender offer (the "Offer") consummated on February 9, 1989, pursuant to which Merger Sub acquired approximately 74% of the shares of the unrestricted common stock of RJRN outstanding prior to the Offer for $109 per share in cash and approximately 96% of the preferred stock of RJRN outstanding prior to the Offer for SI08 per share in cash. F-7
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC NOTES TO CONSOLIDATED FINANCIAL'STATEMENTS-(Continued) Note al-Long•term Debt and Interest Expense-(Continued) On November I, 1990, Holdings completed the exchange of $1.859 billion of the sum of principal of and accrued and unpaid interest on Converting Debentures and $541 million of the sum of principal of and accrued and unpaid interest an Group Debentures for an aggregate of spproximately $800 million in cash and approximately $1.6 billion stated value of Holdings Preferred Stock (64.032,000 shares) pursuant to the 1990 EExchange ONers. During 1990, Group purchased Group Debentures at prevail ing market prices at an aggtegate oost of $1.504 billion pursuant to the Purchase Program resulting in an extraordinary gain (See Note 5 to the Consolidated Financial Statements). The bank credit agreement, dated as of January 31, 1989, as amended (the "1989 Credit Agreement") required that the full amount ($6.0 billion) of the Asset Sale Bridge Facility be repaid by not later than August 9, 1990 and at least $5.0 billion of the funds used to repay the principal amount of the Asset Sale Bridge Facility be obtained from the net cash proceeds from the sale of certain assets of RJRN and its subsidiaries. On July 27, 1990, the outstanding balance remaining under the Asset Sale Bridge Facility was fully repaid. On July 16. 1990, a partnership affiliated with KKR exchanged $200 million of the sum of principal of and accrued and unpaid interest on the Partnership Debt Securities of Capital for $200 million stated value of unregistered shares of Preferred Stock of Holdings. On November 1, 1990, Holdings exchanged such shares in a share for share exchange for 8,000,000 registered shares of Preferred Stock. , On July 9, 1990, Holdings, Group, Capital and RJRN entered into the 1990 Credit Agreement under which Capital borrowed $2.25 billion in connection with the Recapitalization Program. On July 18, 1990, Capital repaid the outstanding balance of $1.15 billion remaining under the rc5nancing bridge facility due February 9, 1991, with a portion of the proceeds from borrowings under the 1990 Credit Agreement. In addition, Capital redermed the remaining 314 billion principal amount of Increasing Rate Notes on August 15, 1990 using a portion of the proceeds from borrowings under the 1990 Credit AgreemenL On July 17, 1989, Group exchanged, pursuant to the terms of its cumulative exchangeable preferred stock (the'"Group Preferred Stock"), all of the Group Preferred Stock (f4.065 billion stated value) for Group Debentures at the rate of $1 principal amount of Group Debentures (or aeh SI stated value of Group Preferred Stock The Group Debentures were classified as Iong-term debt as of Dooember 31,1989. Interest accrued on these Group Debentures from the Offer date and, aooordingly, previously recorded dividend aeerutls ha"ve been reclassified as interest. The terms of the Convertmg Debeatura and the Group Debentures required that the interest rates on such securities be set permanently at 5xed interat rates designed to result in the respective debentures trading at par on a fully distributed basis, without taking into account any accrued and unpaid interest thereon and, in the ease of the Converting Debentures, without giving effect to the conversion feature of such securities, by no later than April 28, 1991 (or if substantially all of Capital's Increasing Rate Notes had been refinanced prior to April 28, 1990, one yarfrom the date of such F-19
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Pnuet thiadpat Ocarpatian or 6npby~ aad Fi.eYar Name Ar 6nptoymeat Ht.ta g Stephen R. Wilson 44 Senior Vice President, Corporate Development since 1990; previousiy General Manager, North American Operations, Franklin Mint, 1989-1990; President, Cadbury Beverages North America, 1987-1989; Senior Vice President, Finance, Cadbury BeveragLa North America, 1985-1987. Item 11. Exewfire Caropenution The following table sets forth information concerning the compensation of the five vwst highly salaried executive olficers of RJRN and all executive otficers of RJRN during I990 as a group (including one who txa:ed to be an executive officer during 1990). Compensation shown represents cash compensation paid for 1990 services, including amounts paid to such individuals under RJRN's Annual Incentive Award Plan for 1990 performance. Natne .r 1.®rNw1 PA.dpd Gyadtb a.6 Caayeaatia Louis V. Gentner, Jr............... Chairman, President and Chief S 3,020,229 H. John Greenilus ................ Exesvtive Officer President and Chief Exeative Officer, $ l,013,000 James W. Johnston ................ Nabisco Brands, Inc. Chairman and Chief P.xecutive OOieer, S 994,774 Lawrence R. Riedardi ............. RJ. Rcynoids Tobacoo Company Executive Vice President and General $ 688,524 Karl M. von der Heyden ........... Counsel Executive Vice President and Chief $ 801,793 Finanetal OHicor All executive offwers as a group (19 persons) ..................... $11,226,227 Aaramear rrk6 Certai. Offturt In 1989, Holdings and R1RN entered into an employment agreement (the "Employment Agree ment"), with Mr. Gerstner that continues through Maroh 9,1994. RJRN will pay Mr. Gerstner a base saltry of $975,000 per annum, increasing each January I by at least 6%. Pursuant to the Employment Agreetnent, Mr. Gentxr is entitled to receive a minimum bonus to that his salary plus booaus for each of the yean 1991 and 1992 will be no lsas than $2.7 million and $3.0 million, respectively. In order to compensate Mr. Gastnet for certain other benefits offered by his previous employer, RJRN has provided Mr. Gentoer with a supplemental compensation arrattgement consisting of ten annual payments of f446,374 amnmandng upon his ittainmeat of age 60 and, in additioa, on hi death, his beae6ciary-or estate will receive a death benefit equal to $5,000,000. RJRN bas also agreed to provide Mr. Gerstner with a vested supplemental pension substantially similar to RJRN's Supplemental Executive Retirement Plan, except that Mr. Gerstner will be credited for his 11yi years of service with his previous employer in addition to his actual service with R.JRN. Yhe Employment Agreement provides for Ihe continuation of the payment to Mr. Gerstnet of compensation, for three years if RJRN terminates Mr. Gerstner's employment prior to Mucb 9,1994 other than for ause or if Mr. Genlncr terminates his employment during such period for certain reasons, including a change of control of Holdings. Such continued compensation will be based on Mr. Gerstna's then current hase salary and the highest annual boans paid to or accrued (or him. Mr. Geratner would also be reimbursed for the amount of the excise tax, if any, on his termination payments, as well as any incremental income taxes payable on the reimbursed amount. Mr. von der Heyden, Mr. Johnston, Mr. Greeniaus and Mr. Ricciardi also have employment agreements with RJRN. 33
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SCHEDIII.E IlI RJR NABISCO HOLDINGS CORP. SCHEDULE IH-CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS (Dollars In Millions) Yar EseeE Fe6mry 9, 1989 Deeewber 31, 1990 /Yr«eh Dnenler II, 1989 Administrativeexpeases ............................... S (11) S- Interest expense and amortization of debt issuance costs ...... (277) (241 ; Other insome (expense), net ............................ 17 - Income (loss) before income taxes .................. (271) (241) Provision (benefit) for income taxes ...................... (92) - (82) (179) (159) Equity, in income (loss) of subsidiary from operations of contlnuing businesses, net of income taxes ............... (283) 816) Income (loss) from continuing operations ............ (462) (975) Equity in inmme (kss) of subsidiary from operations of discontinued businesses, not of income taxea ............. . Inonme (lost) before extraordinary item ............. (462) (976) Extraordinary item-gain on early extinguishments of debt, net of income taxes (including extraordinary gain of $112 from subsidiary) .................................... 33 - Net incmne (loss) ................................ (429) (976) Less preferred stock dividends .......................... 50 - Net income (bss) applicable to common stoak......... (479) (976) Retained earnings (aceumulated deficit) at beginning of period - (976) - - Add proferted stock dividends oharged to paid-in apilal ..... 50 = Retained earnings (acamulated deficit) at end of period ..... $(1,405) S~) See Notes to Condensed Financial lnjormation. S-I
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOUDATED FINANC[AL STATEMENTS-(Continued) Note 6-Supplemtnt.l Cash Flows Information A recondliation of net ineome (loss) to net eub 6ows from (used in) operating activities folbws: S.c«r« Pr<damw Yer F.kd Decta8et 31, Fabary 9, 1989 Js...ry I, IM9 Ynr Fwded 6 Dec. 31, 1990 Deteder 1, Ife9 Fdwry 1919 1918 N Gw O td WRN ~ Grare G nI WRN RJRN RJIW r ~fn. (wtd ia) wtntla Ntt im~ (lon) ................. f (429) 8 171)f 90 3 90 8(976) S(817)8 (372)8 Ilo fS113) 81,393 Ad.[nntnt{ to rttMG lt nel intqM ~ou) to ad cash 60.. Irum (uw6 in) operating .aivitin: Dtprteivtfon of pape+ty, pl.nt.nd equiymcnt .................. . 450 450 450 450 417 417 417 417 32 380 AmarnnUon (pAndpRy Iat.neibla) 680 680 610 680 625 625 625 625 14 251 DefamcdIwomttu proruim...... 296 257 175 175 45 45 8 183 t 196 Nontath lataat apcme ........ 1,599 1.323 716 716 1,704 966 428 412 2 31 Amnrtiradan uf dtbt 6au.noe mW .. 176 175 175 175 447 444 443 266 - 12 (Gain) on d'apnitae of hainaw .. - - -- - - - - - - (61) Eatnpdinary hem-{Bdo lou on eadyatinpnhmau deht .... (141) (l63) 41 41 - Ch.nBe in contrd eoRa .......... -- - - - - - - -- 241 - (I.ereue) dntwa tn aomu W ud .nta nmci..bk .............. 367 364 364 364 (ISI) (148) (148) (148) 439 (115) (Inpa.e)danusemhneutories..) 188 168 188 188 265 265 265 265 (157) iI (i.rnwu) dnxue in pepid apeme.nd nmt las ....... (23) (23) (23) (23) (156) (56) (156) (156) 19 77 • . 56 56 16 56 (314) (313) (313) (268) (4) (163) . (176) ((76) (116) (176 (30) N) (N 35) (336) t4 . W (503) (429) (30Q (2W I599) ( l7) f387 ( I3) (97) (158) ' (35) (35) (35) (35) 148 148 148 148 (a) (116) . 99 99 99 99 27 27 27 29 . s2 63 OtEcr..a .................... 112 109 108 108 13 1: u 20 ll 24 Talal .Bwtmenb ........... 3,141 ----- ;675 ;611 2.614 1941 it,791 1a36 1,{/3 t9 116 Net aeh Eawt fram (wd in) uptntiq.qiritia ............ f2,716 f2,7tM S2y704 82y704 1965 8 764 1964 81 53 8(94) 81`909 Cash payments for income taxes and interest were as follows: s.ctw« h.knr. Ynr Fa6e8 FNw~,q. ~9,~ t9t9 J.rtlrry.. .18,i1N9 Ynr FidN a 31. Dsmitr St. 1989 Ft6nuf t, I9K 134 {LIf~ Gt CW. RfQN i(.K. Gro" C. RJIU! ttlRN WRN Inoume t.aes peld (na of rd.nds) ..... f 335 8 335 S 335 f 335 $ 242 f 242 8 242 8 242 8 36 S 196 Interest paid• .................... $1,424 $1.424 $1,424 $1,424 $1,1189 81,889 81,889 S052 $ 20 8 448 • The 1989 Suooessor amount includes $339 million of interest allocated to disoontinuod operations (See Note 4 to the Cansolidated Financial Statements). F-13 i t~.. 9 ~ ..
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. N(7fES TO CONSOLIDATED FINANCIAL STATEMENTS-{Continued) Note 6-Supplentental Cash Floas lnformation-{Continutd) Cash equivalents at December 31, 1990 and 089, valued at cost (approximates market), totaled $323 million and $76 million, respectively, and consisted principally of Eurodollar time deposits, commercial paper and certificates of deposit. During 1990, Holdings set aside $200 million of the S1.7 billion cash proceeds received in connection with the purchase by a partnership affiliated with KKR of 272,000,000 shares of Common Stock to create a dividend reserve initially available to fund the 1991 cash dividend payments on the Preferred Stock (the "Dividend Reserve"), On January IS, 1991, Holdings paid the initial dividend on the Preferred Stock of approximately $50 million with funds from the Dividend Reserve. Substantially all of the remaining funds in the Dividend Reserve were subsequently released in connection with the completion of the 1991 Exchange Ofler. On July 16. 1990, Holdings issued 8,000,000 unregistered shares of Preferred Stock ($25 stated value per share) in exchange for f200 million of the sum of principal of and aecrued and unpaid interest on Capital's Parmership Debt Securities held by a partnership affiliated with KKR. On November l, 1990, Holdings excbanged such shares in a share for share exchange for 8,000,000 registered shares of Preferred Stock. Also on November 1, 1990, S L859 billion of the sum of principal of plus accrued and unpaid interest on the Converting Debentures and $541 million of the sum of principal of plus accrued and unpaid interest on the Group Debentures were exchanged for an aggregate of approximately $900 million in eesb and approximately $1.6 billion stated value of Preferred Stock (64,032,000 shares) pursuant to the 1990 Exchange Offus. During 1990 and 1989, Crroup issued $557 million and t435 million, respeetivoly, of additional Group Debentures in lieu of tash interest to the holders of such debentures. In addition, Capital issued approximately $167 million and $71 million of additional subordinated debentures in lieu of cash interest on its payment-in-kind debentures during 1990 and 1989, respectively. A reconciliation for Holdings of the cash acquisition oost of RJRN to the purchase price follows: Total purchase price plus financing costs ...................... ' $25,597 Less: Non-cash issuance of securities for RJRN common stock: Group Debentures ................................. $4.065 Converting Debentures .............................. 2,257 Financing fees paid during 1989 ..... :................... 88g Unpsid financing/acqutsnion fees and expenses at December 31, 1989 ................................ 112 Cash and cash equivalents at acquisition .. .. .. ....... .... 929 _ 8,251 Acquisition of RJRN, icss cash and cash equrvalentsacquired ............................. $17,346 F-14
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Item I2. Secarity Owaership of Certain Beneficial Owners and Management Holdings owns 100% of the outstanding voting stock of Group, Group owns 100% of the outstand- ing voting stock of Capital and Capital owns i00% of the outstanding voting stock of RJRN. As of March 1, 1991 and before the completion of the 1991 Exchange Offer, there were approximately 505 record holders of Common Stock. The following table sets forth artain information known to Holdings, as of March 1, 1991 and before the completion of the 1991 Exchange Offer regarding the beneficial ownership of Holdings Common Stock by the stockholders who own more than 5% of the outstanding shares, by each director of Holdings and by all directors of Holdings and executive officers of the Registrants as a group. Beneficial ownership under the Securities and Exchange Commission's definition includes shares that can be acquired within 60 days upon the exercise of warrants or options. Except as othcrwise noted, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. Na.e saa Au,er(q NmAer .f Saartr of Caanea Stock emtlki.ny o.ua Pemat of cam.•. st«k(6) KKR Associates 9 West 57th Street New York, NY 10019(2) ...................... 577,084,746 97.7% R.7Leodore Ammon(2) ......................... Louis V. Gerstner, Jr.(3) ......................... 3,699,873 James H. Greene, Jr . ........................... Vernon E. Jordan, Jr.(4) ......................... 30,000 . Henry R. Kravis(2) ...:......................... John 0. Medlin, Jr.(4) .......................... 30,000 Paul E Raelber(2) ............................. Rozanne 4 Ridgway(4) ......................... 30,000 • Oifton S. Robbins .............................. George R. Robertr(2) ........................... Scott M. Stuart ................................ All directors and executive odiars as a group (other than as set forth in relation to KKR Assoetates)(5).. ,066,960 .2% • Las than 1%. (1) Menn. Arrsown, Gastna, Oreeae, Jordan, Kravis, Medlin, Raetber, Robbiru, Roberts and Stuart aod Ms. Ridg.ray ara directors of Holdings. (2) Shares of Holdings Comawa Stock shown as owned by KKR Associates are owned of record by two Bmitedp.r~qpa~tpa (the'Y3ommoa Stock partaerships") of which KKR Associata, a New York limitcd partaasaip .nd aa afldiate of KKR, Is the sole neaeral pertoer and as to which it possesse+ sole voting .nd invutmwt powu~ e~ nd'tug st.rea of Holdings Common Stock shown include 10,169,492 shares of H Stak isswble a n the exercise of arrertl~ exercisable warrants. One of the Common Stock Partnenhips also owns of record 8,000,000 shares of HoWtogs Preferred Stock. On a fully dilutod basis, including the issuance of I29,412,360 ahues of Hddi.~~ Common Stock in the 1991 Exchange Offer and assuming the conversion of all shares of Howingl Prekrrod Stock into Holdings Common Stack, the oorrvenion of atl Convcr4ng Debentura.nd the etercite of all warrants and o tions, including the Managa ment Optioast KKR Aasaiates would hold approximately 585%ofpthe Holdings Canmort Stock. Messrs. Knvn, Roberts, Raetha and Ammon as general partners of KKR Aasociates, rnay be deemed to share beaeLdal ownership of the shares shown as beneficially owned h KKRy Aaociatca. Measrs. Kravis, Roberts, Raether and Ammon have disclaimed beneficial ownership of such shares. (3) Shares of Haldt'ngs Canutson Stock ahown as owned bY Mr. Gerstner include 1,321,383 restricted sharea owned by Mr. Gerstner, of whieh 330,346 reatracted shares have vestod, with an additional 330,346 restricted shara vesting on March 13, 1991 and with the remainder not vesting until more than one year from the date hereof. The number shown includes 1,600 shares held in trust for the benefit of Mr. GerataePs children, as to which Mr. Gcrstner disclaims benefidal ownership fFnonn(a eavlnued cn Jorlnwrnl0^lr) 40
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABfSCO, INC NOM TO OONSOI]DATED FINANCiAL STATEMEN75-(Continued) Note 16-Retlremeat Bene6ts-(Coatinued) majority of salaried employees 1n the corporate group and food operations provide for individual accounts which offer lump sum or annuity payment options, with benefits based on acamulated compensation and interest credits made monthly throughout the eareer of each participant, with an Initial opening credit based on the value of retirement benefits accrued prior to the date of such amendment. RJRN's policy is to fund the cost of current service benefits and past service cost over periods not exeeeding 30 years to the extent that such costs are currently tax deductible. Additionally, R)RN p.rticlpates in several multi-employer plans, which provide defined benefits to certain of R]RN's union employees. Employees in foreign countries who are not US. citizens are covered by various postemployment bencfit arrangements, some of which are considered to be defined benefit plans for accounting purposes. A summary of the components of pension expense for RJRN-sponsored plans follows: 9.eer.m P"eem.or 34 FeM.~ry f Ifl9 J..wry t, tfxf Y 71, IffO Oeta.hr, t1K F Ntf U66 Defined benefit pension plans: Service cost-benefits earned during the period ................... Interest cost on projected benefit obligation ................... Actual return on plan assets ...... NU anrorlization and deferral ..... Total ..................... Multiemploycr plans ............:. Total pension expense ........ $ 88 S 88 S 4 $ 76 220 207 12 197 (195) (366) (20) (272) 43) 168 9 78 70 97 5 79 30 27 1 31 S 100 $ 124 $ 6 S 110 The principal plans used the following actuarial assumptions for accounting purposes: Weighted average discount rate ................. Rate of increase in oompensation levels ........... Expected long-term rate of return on asseu ....... F-28 D.ae.6ee 3t, Dcae.ba 31, 1990 NH 9.0% 8.0% 6.5% 6.5% 9.5% 9.0%
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R.1R NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC NOTES TO CONSOLIDATED F7NANl7AL STATFMENIS-(Continued) Note 17-Segment faforalation-(Cootlnued) Geographic Data The following tables show certain financial information relating to Holdings' continuing operations in various geographic areas. s.ae+.er P..laxor Net sales: United States (including US. export seles) .......................... Canada .......................... Europe ........................... Other geographic areu .............. l.ess transfen between geographic areas(1) ........................ Consolidated net sales .'............. Operating income: United States ...................... Canada .......................... Europe ........................... Other geognpbic areas .............. Corporate ........... :............. Caosolidated operating income(2) .... Yar EMee Deoai6a ]l, 1l90 F.M.rry 9 1919 J.w.rr 1, 19t9 Yur Fwkd Ilrwtti ~eeu6er ]I, Den.~er]I,HM Feh.r Ha9. l9t! $12,125 $10,521 $510 $10,968 881 827 63 853 875 661 49 730 184 256 16 230 (I86) (151) Se) (146) $13,97 9 512,114 _ 5650 SI 635 ` ~ S 2,6% 111 f 1,964 93 f 17 3 f 2,241 76 86 32 6 95 30 35 1 121 (105) (124) 14) (166) f 2,918 $ 2,0/0 113 52.367 Oaao.kr ]1. 1190 tkmYa ]I. 19" Assets: United States ....................................... $29,128 330,250 Canada ........................................... 1,183 1.366 Europe ............................................ 1,200 969 Other geogqphie areas ............................... 392 287 CAfporate .......................................... 1,012 1,240 32,915 34,112 Net assets available for sale ........................... = 2 300 Consolidated anets ................................. $32.915 f3_ 6~412 Liabilitics of Holdings' continuing operations loated in foreign ` countries .......................................... $ 1,307 f 1~199 (I) Tnnsfers between geographic areas (which consist principally of tobacco transferred principally from the United States to Europe) are generally made at fatr market value. (2) Includes anwAization of trademarks and goodwill of $608 million and S557 million for the 1990 and 1989 Suocessor periods respectively, and $10 million and $121 million for the 1989 and 1988 Predecessor periods, respoctively. F-31
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOiES'fO CONSOUDATED FINANCIAL SCATEMENTS-(Continued) Note 12-Commitments and Caatingencies-(Continued) $125 million principal amount of 8.9% Debentures due 1996 (the "1996 Debentures') and 8% Debentures due 2007 (the "2007 Debentures") for a 100% participation (the "ESOP Participation") in a note representing one tranche of an FSOP loan issued to Holdings in connection with the sale of Holdings stock to the ESOP. The ESOP Participation %.ill be guaranteed by Holdings which guarrntee will be secured by a pledge of the unamortized portion of the 1996 Debentures and 2007 Debentures acquired by Holdings. It is expected that the closing of the ESOP Participation will occur by the end of the first quarter of 1991, and in any event not later than August 1, 1991. The parties have further agreed in principle that, pursuant to the terms of the definitive settlement agreement, Metlife will become an equity investor in Holdings by exchanging up to an aggregate of $32.5 million principal amount of 1996 Debentures and 2007 Debentures (the remainder of the 1996 Debentures and 2007 Debentures then owned by Metlifc) with Holdings for Common Stock, par value $.01 per share, of Holdings at a price equal to the average elosing price for Holdings Common Stock over a specified period shortly before the date of issuance. It is expected that the closing of the equity inveatment will oaur on August 1,1991, and in any event not later than October 1,1991. The Holdings Common Stock to be issued to Metlife will be subject to eontractual transfer restrictions whereby Metlife may not dispose of any of the shares of such Common Stock prior to March 1, 1992; provided that up to 30% of such Common Stock may be transferred after December 2, 1991. In connection with its equity investanml. MeQife will be granted demand registration rights providing for not more than two shelf registrations of such Common Stock for specified periods. In connection with the ESOP Participation and the equity investment, Metlife has undertaken to offer to acquire all of the 2007 Debentures not now owned by it. Holdings has also undertaken to make exchange olfert to be consummated by December 15, 2002 for the 93S% Sinking Fund Debentures, Due April 1, 2016, the 8'h%Sinking Fund Debentures, Due February 1, 2017 and the 8'A%Siating Fund Dcbenturea, Due March 15, 2017 of RJRN then outstanding. Such exchange offers will be made at par and the consideration to be offerod will consist of 90% cash and 10% Holdings Common Stock or, at the option of Holding; a greater percentage of cash up to 100% with any balaate in Holdings Common Stock, any such Common Stock to be prioed in relation to the then current market price. In connection with the final settlement of the litigation, Holdings will reimburse Metlife for Metlife's and Jegersoa-Pilot's legal, executive and other costs and expenses related to the litigation. - The Registrants believe that the ultimate outcome of all pending tobacco, stockholder, bondholder and other litigation matters should not have a material adverse effect on the Registrants' financial condition. F-23
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Other Coinpensation Plans RJRN maintains its Annual Incentive Award Plan under which participants are awarded annual cash bonuses based upon attainment of individual and corporate goals. Bonuses awarded to executive officers of RJRN for 1990 are included in the table above. Under RJRN's Capital Accumulation Plan;'RJRN made matching contributions of up to 3% of a participant's salaried compensation. RJRN contributions that exceed statutory limitations are allo- eated on behalf of affected employeea as an unfunded general and administrative expense to a statutorily recognized excess benefit plan. During 1990. amounts allocated by RJRN to such plan for the accounts of each of the individuals listed in the table above and to all executive officers as a group were as follows: LV. Gerstner, Jr. $24,129. HJ. Greeniaus S10,500, J.W. Johnston $9,774, L.R. Ricciardi $5,224, and KM. von der Heyden $7,793; all exccutive officers as a group, 5104,127. i Rttirenunt Plans RJRN maintains a nonoontributory defined benefit retirement plan covering all salaried employeea of RJRN and certain of its subsidiaries. Credits are made monthly to each participant's personal retirement account ("PRA") consisting of a percentage of that month's eligible compensation, plus interest on his PRA balance, with vesting occurring after 5 years of s9rvioe. The compensation credit percentage varies according w age bracket, ranging from 4% to 7%, with an additional 3%uedit for any compensation in excess of the applicable Social Security wage base, prorated over the year. A participant's annual retirement benefit will be dUermined by dividing his PRA balance at retirement by an annuity conversion factor of 8.2 if retirement occurs at age 55 or older, with somewhat higher factors applicable to retirement at ages 50-54. Alternatively, a participant at retirement may elect a lump sum distribution of the PRA balance. The PRA benefit method became effective October 1, 1987 and a partleipant's PRA includes an opening balance equal to the present value of pension benefits accrued under the prior retirement plan applicable to, his prior RJRN servioe, plus certain enhmcoments. Pursuant to the Merger Agreement, any parttcipant whose employment was terminated after the acquisition of shares under the Tender Offer but prior to January 1,1990 and who was eligible for salary continuation under RJRN's severance programs or individual contracts is vested In that person's PRA balance. Any partidpant who u of January 1, 1998 was at least age 40 with 10 or more years servtoe, or at least age 55 with 5 or more years suvia, is eligible to reodve an alternative retirement bene6t that Is based on the terms of such partidpanPs prior wetiurcment plan. Such participants may receive an annual benefit based on a perceatage of average final ettmpensation, multiplied by ypn of credited serv7ce. Generally, average final oompeasation b the parlieipant's average amuat compensation during his last five yan of credited servia; compensation generally includes base salary and awards under RJRNs Annual Incentive Award Plan but not other forms of incentive compensation. The amount determined by this alternative benefit formula is reduced by a percentage of the parlldpant's Social Security benefit multiplied by years of credited service. At rctirement, an eligible participant will be provided with either the retirement benefit determined by his PRA, or, if greater, the alternative retirement benefit. Employees of certain subsidiaries suoh as RJRT are not covered by the PRA benefit method and continue to be covered by diHereat retirement plans. Certain executive otficets of RJRN, including those listed in the table above, arc oovered by an unfunded Supplemental Executive Retirement Plaa The plan provides an aonual pension commencing at a normal retirement age which, inclusive of benefits payable under RJRN's retirement plan and a portion of Social Security, will equal not less than 50% of average final compensation if the participanl has completed 20 or more years of credited service. The 5lY%amount is reduced proportionately for less than 20 years of credited servioe, subject to a 33.3% minimum benefit. Benefits under the Supplemental Executive Retirement Plan are payable only if the participant agrees to retire by a specified retirement age. 37
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. N(YTFS TO CONSOLIDATED FINANCUL STATEMENTS-(Continued) Note 11-Long-term Debt and Interest EYpwe-(Coetinaed) Long-term debt consisted of the following: RJRN Debt: 7ii-9if% Debentures with senti-annual and annual sinking fund payments through 2017 (net of S45 million and $62 million of such debentures held by RJRN on Deoember 31, 1990 and December 31, 1989, respectively, for future sinking fund requiremenu) ..... 10-10'/.% Notes, due 1991 to 1993 ................... 7.61-10.88% eAective interest rates, Foreign Currency Debt,due 1991 to 2001(2) ........................ Zero Cnupon Guaranteed Notes, due 199Z, net of discount of S53 million and S93 million at December 3 1, 1990 and December 31, 1989, respectively, effective interest rate of 14.64% ................................. lhherindebtednen ................................ Bank Dcbl(3): Term I.oan, variable interest (varies with prime rate and LIBOR)-10.82% at December 31, 1990, due in insullmenu beginning 1991 through 1995 ............ Revolving Credit Facility, .ariable interest (varies with prime rate and LIBOR)-1IK%at December 31. 1990, due in quarterly imtaBmenh beginning 1991 through 1995(4) ................................ 1990 Bank t}edit Fadlity. variable interest (varies with prime rate and 3-month LIBOR)-12A6% at Doafober 31, 1990, due In quarterly instaltments beginning 1995 through 1996 .................................. Asset Sale Bridge Facility, tepaid on July 27, I990 ...... Refinancing Bridge Facility, repaid on July 18, 1990 ..... Payment-In-Kind Debentures: Subordinated Debentures, net of discount of $78 million and $76 million at December 31, 1990 and December 31, 1989, respectively, effective interest rate of 15.88%, interest paya in-kind until May 15, 1994, sinking fund requirements beginning 1999, due 2001 .............. Subordinated Discount Debentures, net of discount of $1,740 million and $2,074 million at December 31, 1990 and December 31, 1989, respectively, effective interest rate of 15.88%, interest payable-in-ldnd until May 15, 1994,sinking fund requirements beginning 1999, due 2001 ......................................... Dece.ber 3t, 19" Oue D.e K7tW Afta One Yar O.e Ya,(t) Decea6er 31, NH IAe D.e WIW. After 0" Yar Ooe Yar . S 308 S 2,403 S 105 S 2,736 l50 350 100 500 183 448 11S 619 312 272 145 444 SO 615- 514 2,575 3,500 125 329 2,250 2,262 1,500 1,160 996 2.371 2.037 F-17
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC NOTES TO CONSOLIDATED FINANG7AL STATEMEhIfS-(Contiaued) Note 14-Common Stock aad Paid-ia Capatsl-(Continued) Warrants to purchase 45,529,024 shares of Holdings Common Stock were issued in connection with the sale of the payment-in-kind subordinated debentures and the subordinated discount debentures of Capiul. Such warrants arc exercisable at an exercise price of $007 per share, subject to adjustment in certain events, and expire February 1, 1992. Converting Debentures are convertible into 25,392,410 shares of Holdings Common Stock on the business day immediately preceding May 1, 1993, or earlier in the event af certain mergers or consolidations of Holdings, at a converiion prwo of 513.8301, subject to adjustment in certain events. Stock options have been issued to management investors and certain directors. These options generally vest equally over a five year period. The exercise prioe of such options is $5.00 per share. Paid-in capital of Group re8eets the cash contributed from Holdings and used by Group in the Purchase Program, and also reflects the value of Group Debentures acquired by Holdings' in the 1990 Exchange Offers and contributed to Group. Additionally, paid-in capital of Group retlects the 1989 issuance of the Converting Debentures or Holdings, and paid-in capital of Capital and RJRN further re0ects the 1989 issuance of the Group Debentures. The shares of common stock of RJRN (Prodeoessor) were repurchased or exchanged for other securities in connection with the Acquisition (See Note I to the Consolidated Financial Statements). Note 15-Retakcd Earotngs and (),mulatirc Traml.tiou Adjustments Retained earnings (accumulated dehdt) at December 31, 1990 and 1989 indudes noncash expenses related to accumulated trademark and goodwill amortization of $1.165 billion and $557 million, respectively. The changes in cumulative translation adjustments are shown as foliows: , s.ceeua Peedromx Y.v Fik1 FeMrWryw fa~ Na7 ik ~ 71, Dsse.ar 31, t1d9 Jawry t, 11a9 F 19a9 Balance at beginning of . period .................. $ I $101 Translation and other adjustments ........... 34 $ 1 34) Balance at end of period..... S 35 $ 1 $ 67 Note 16-Retiremeat Beaefits RJRN sponsors a number of non-contributory defined benefit pension plans covering most U.S. employees. Plans covering regular full-time employees in the tobaooo operafions (as well as hourly and certain salaried employees in the food operations) provide pension benefits that are based an the employei s length of service and final average compensation before retirement. Plans covering the F-27
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SCHEDULE III R7R NABISCO HOLDINGS GROUP, INC. SCHEDULE BI-CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS (Doilars in Millions) . Yar FidN Deeen6er 71, 1990 FeMrry 9, 1989 Derearer 1, 19B9 Interest expense and amortization of debt issuance costs ......... $(607) f(539) Other inoome (expense), net .............. ............. ..... (1) ` Income (Ioss) before inmme taxes ..................... (608) (539) Provision (benefit) for inoome taxes .......................... JL07) __J941 .(401) (445) Equity in income (bss) of subsidiary from operations of continuing businesses, net of income taxes ................... 118 _5371) Income (loss) from continuing operations ................ (283) (816) income (loss) of subsidiary from operations of Equity in , dwcontlnued businesses, net of income taxes ................. _ (!) Income (ioss) before extraordinary item ................. (283) (817) Extraordinary item-gain on early extinguisbments of debt, net of ineome taxes (including axtnordmary ion of $28 from subsidiary) ............................................ 112 - Net income (loss) .................................. (171) (817) Retained earnings (accumulated de6dt) at beginning of period .... 8/7 - Retained earnings (accumulated deBdt) at end of period ......... S 988 f 817 See Nofst to Conde+ued Financial Information. S-5
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I RJR NABISCO HOLDINGS CORP. SCHEDULE fIt SCHEDULE HI-CONDENSED FINANCIAL DdFORMATfON OF REGLSTRANf CONDENSED STATEMENTS OF CASH FLOWS (Dollars la Millions) Ye.r F:eed Dtu.ls JI, FaMwry f 1ri9 19" Den.ir 1, 19" Cash lows from (ued In) operating ac8.ltia: . Net income (loss) ................................... f (429) S (976) r Ad,betments to reconcile net income (loss) to net cash flows from (used in) operating activities: Defened income tax provision ........................ 39 - Non-nsh interest expense and auartiz.tion of debt • iesuanea oosts .................................. 277 241 Extraordinary item-(gain) lm on early extioguishments of debt ..................:.................... 22 - Equity iq (iuoome) Wss of iubsidiary, aetof moanetaxes ............................. 171 817 Other, net ....................................... (68) (82) Totaladjustment: ............................. 441 976 Net cash flows from (used in) operating activities ....... 12 - ^ Cash Eoet from (ased In) le.ealing aeti.ities: Dividends received from ulhsidiary ............ ......... 800 - Investment in subsidiary ............................. 1 504 (1,500) Net euh Bm from (used in) iovesting aUivitia........ (704) (1.500) Casb Oows tron (ased In) Eea.ei.p activities (Note Ak Repaytt><nta of lao$ taa debl fmdudiog aarly eztmgui.hmeats of debt 1e 1490) .................... (799) - Prooeedi from issuance of common stock and wartants ..... 1,701 1,757 Fwncing aad adriwory feet paid ...................... (28) (11) Repureha.e of and cancellation of eaawoa etoctc.......... (1) - Other, oet-indud'mg iateraompany ttatufen ............. 36 (246) Net ash (lavs from (used in) financing activities ....... 909 I Net change in cash aed euh equivalents .............. 217 - Cash and cash equivalents at beginning of period ............ - - Cash and cacb equivaknts at end of period ................ S 217 S_ I See No:es to Condensed Financial lnjoemal7on. S-2
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC NOTES TO CONSOLIDATED FINANCIAL STA'I'EMENfS-(Coatinned) Note 17-Segment fnformation lndrutry Segnreat Data Holdings classifies its continuing operations into two industry segments which are described in Management's Discausioa and Analysis of Financial Condition and Results of Operations, appearing duwhere herein. Summarized financial information for these operations is shown in the following tablea S.ca.ror Pdee.r« Yer Fdd F.Mr~.ry. f~.IfK lurq t, 17H Ye.r Fi1N Dtte.ba-31, IfH F 1989 Dws.Aw 71' Net ukr: Tobaewa .......................... $ 8,053 S 6,655 S326 $ 7,068 Food ............................. 5,826 5,45 9 324 _ 5,567 Consolidated net ales ............. Sl3 79 Sl 114 $650 S1_ 2,635 pper.treg intome. 7obaooo(l) ........................ $ 2,326 S 1,596 S 52 S 1,923 Food(l) .......................... 597 568 25 610 Corporate ......................... 105 124 14 , (166) Comalidatod operating inaome ....... S 2,818 $ ?~010 S 13 S 2,367 Capital expenditures: - - _ ~ Tobacco .......................... S 145 S 229 S 14 $ 459 Food ............................. 253 254 17 316 Corporate ......................... 28 5 3 62 Oun.olidated eapital expenditurel ..... S 426 S 488 S 34 S 837 pcpre p..tft cxpc= 'fobaoco .......................... S 262 Food ............................. 178 Corpxate ......................... 10 Camolidated deprociatiea expenre .... S 450 Apetf: Tobaeeo ........................................... Food ............................................. t:arpona(2) ....................................... Net assets availabk for sale ........................... Caoaolidtted usetr ................................. S 230 169 18 S 417 S 17 S 203 14 163 1 14 S 32 S 380 = z= t7srdr. 31,1ff~ Dacein 31, Nd $21,033 10,870 1.012 32,915 S22,037 10,835 1,240 34,112 ~2 300 532,915 536,412 (1) Indudes amortintieo of trademarks and ;oodwW for Tobacco and Food, rapew vely, for the year ended Dooeatba 31, 1990, of S403 w'Wmi and $205 million; for the perfod February 9, 1989 through Deoember 31, 1989, o( $368 milllon and $189 million; for the period January I, 1989 through Febnury 8 1989, of $0 and $10 million and for the year ended Deamber 31, 1988, of $l million and S12tj million. (2) AII cash and cash equivalents are included in Corporate assets. F-30
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SCHEDULE [It RdR NABISCO HOLDINGS CORP. SCHEDULE III-CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEEFS (Dollar. In Millions) , Den.bet 31, ~1990 Dee..Eer 3t, 1919 ASSETS Current asseta: Cash and cash equivalents (includi~ng $200 held u dividend reserve at Dceember 31, 1990) (Note B) .............. $ 217 f- Aocounts and notes reeeivable ......................... 1 85 Total current osseta ............................ 218 85 Investment in .ubsidiary ............................... 4,582 3,166 Other assets and deferred ebarges ..... . ................. 59 IO f 4,857 3~2_61 f LIABILITIES AND STOCKHOLDERS' EQUITY Current IiabiGtia: Accounts payable and accrued aocounts ................. _ $ 54 _ $ 4 Total cmreat tiabUi&s ......................... 54 4 Intercompany payable (receivable), aet ................... 55 (26) Long-term debt (Note C) .............................. 351 1,806 Interat acerued ...................................... 110 240 Commitments and contingencies (Note D) Redeemable convertible preferred stock-72,032,OO0.harcs issued and outst.ndiDB ............................... 1,195 ' Common atockholderi equity. Common stoclc-580,023;513 and 308,pgp 813 ahara issued and outstanding at December 31, 1990 ad 1989, reapectively ...................................... 6 3 Pa7d-In capital ............................ . ........ 3,860 2,213 t~tmulative translation adjustments .......... .......... 35 1 RetaiDed earnin8. (aoamuVted deficit) ................. (1,405) (976) Unamortized value or restricted stork ................... -A) ---04 Total aomeae uockialdee.' equity ................ ~2494 1.237 ~54859 f3,261 See Notu lo Cadensed FDmnclal IqfaemaNon. &3
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contracts covering approximately $4.1 billion of such debt at December 31, 1990. Neverthekss, Holdings will remain sensitive to prevailing interest ratcs. On November 1, 1990, Holdings completed the exchange of E 1.859 billion of the sum of principal of and accrued and unpaid interest on Converting Debentures and $541 million of the sum of principal of and accrued and unpaid interest on Group Debentures for an aggregate of approximately $800 million in eash and approximately $1.6 billion stated value of Holdings Preferred Stock (64,032.000 ahares) pursuant to the 1990 Exchange Offers. On March 2, 1991, Holdings completed the exchange of S 1.176 billion of principal amount of Group Debentures for an aggregate of approximately $547 million in cash and approximately 129.4 million shares of Holdings Common Stock pursuant to the 1991 Exchange Offer. fn connection with the 1990 Exchange Offers and the 1991 Exchange OHer, the board of directors of Holdings determined that no antidilution adjustments were required under the terms of Hoidings' public warranta, Haldings' private warrants or the Converting Debentures and, in addition, in the case of the 1991 Exchange Offer, the Holdings Preferred Stock. With the elosing of the 1991 Exchango OtTer, the Recapitalization Program is now complete and is expected to further reduce the overall level of interest expense of Holdings in subsequent periods through a reduction in nontash interest expense, partially offset by higher eash interest expense. The lower noncash interest expense results principally from the reduction of outstanding amounts of Converting Debentures and Group Debentures reacquired as a result of the Recapitalization Program, partially offset by the setting of fixed interest rates of 17iS%and 17% per annum, respectively, effective July 16,1990, on such Debentures remaining outstanding. Tbe increase in msh interest expense results from additional borrowings at fluctuating rates to partially finance the Recapitaliration Program. Cash flow of Holdings will be further reduced due to cash dividend requirements of 11.5% per annum of the stated value of the Preferred Stock, and cash interest requirements on such additional borrowings. Furthermore, Holdings' ratios of consoGdaled debt to total equity and consolidated debt and redeem- able preferred stock to common stockholders' equity has been reduced to approximately 3.7-to-I and 6.3-to-l, respectively. With the Recapitaliution Program eompleted, Holdings expects to continue to reevaluate its capital structure and the opportunities afTorded by the 6nancial markets. Holdings believes that the improvement to its capital structure by reason of the Recapitaliratioo Prognm, together with recent intprovements to the ratings of Holdings' and its subsidiaries' debt securities by a nationally rocognized rating agency, should improve its ability to take advantage of theae opportunities. Nonetheless, Holdiogt' and its subsidiariea' ability to take advantage of such opportunities is subject to many restriqions in its bank credit agreements and debt indentures. Holdings and Its subsidiaries expect that they will continue to consider opportunities as they present themselves, and such alternatives, if pursuat, could involve further acquisitions from time to time of securities of Holdings or its subsidiaries through open market purchases, tender or exchange offers or otherwise and/or the issuance from time to time of additional debt and/or equity securities by Holdings or its subsidiaries. Capital expenditures for 1990 were $426 million, compared to $522 million for 1989. The current level of expenditures planned for 1991 is expected to be in the range of approximately $500 to $550 million (approximately 60% Food and 40% Tobacco), which will be funded primarily by cash Bow from operating activities. Management expects that its capital expenditure program will continue at a level sufficient to support the strategic and operating needs of the Registrants' continuing businesses. RJRN has operations in many countries, utilizing 23 functional currencies in its foreign subsidiar ia and branches. The major functional currency is the U.S. dollar. Significant foreign currency net investments arc located in Germany, Canada, Hong Kong and Spain. Changes in the strength of these eountrics' eurrencies reladve to the US. dollar result in direct charges or credits to oquity. RJRN also bas rigni6ant exposure to foreign exchange sale and purchase transactions in currencies other than a functional currency. The exposures include the U.S, dollar, Japaneu yen, German mark British 28
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 11-Lane4erm Debt and Interest Expeau-4Coatinued) refinancing). Effective July 16, 1990, the interest rates on the Converting Debentures and Group Debentures were set permanently at fixed rates of 17t.i%per annum and 17% per annum, respcetivcly. At December 31, 1990, approximately $243 million of accrued payment-in-kind interest was included in "Other noncurrent liabilities". Such interest will be reported as additional "Long-term debt" when distributed as debt on the applicable interest due dates. The 1989 Credit Agreement, the 1990 Credit Agreement and indentures under which the debt securities have been issued contain certain restrictive covenants that, among other things, limit the ability of Holdings and its subsidiaries to incur indebtedness, pay dividends, transfer assets among subsidiaries, engage in transactions with stockholders and affiliates, create liens, engage in mergers and consolidations, engage in sales of assets and subsidiary stock and make investments in unrestricted subsidiaries. In connection with the Merger, RJRN guaranteed the debt of Capital. Accordingly, the financial statements of RJRN reflect ail of Capital's debt and all debt-rclaled costs since the Merger date. In accordance with certain of these guanntees, RJRN pledged the capital stock of oertain of its principal subsidiaries. Note 12-Commitaeeats and Coetiegeades Todeeeo-Rrlatel utigatioa Various legal actions, proceedings and claims are pending or may be instituted against RJRN or its subsidiaries, Including those claiming that lung cancer and other diseases have resulted from the use of RJRT's tobaeoo products. During 1990, 7 new actions were filed against RJRT or its indemnitea and I1 such actions were dismissed or otberwise resolved in favor of RJRT or ib iademniteea without trial. A tolal of 28 such actions In the United States and one against RJRTs Canadian company were pending on December 31, 1990. The plaintiffs in these actions seek recovery on a variety of kgal theaiet, including strict liability in tort, design defect, negligeaen, breach of warnnty. failure to warn and conspiracy. Punitive damages, often in amounts totalling many millions of dollara, are specifically pleaded in 19 eases in addition to oompensatory and other damages. The dotema raised by RJRT, where appliable, include preemption by the Federal Cigarette Labeling and Advertising Act (the'Y.Sgarette Act") of some or all such claims arising after 1965; the taek of any defect in the product; assumption of the risk; lack of proximate cause; and statutes of limitations or repose. RJRT intends to defend vigorously all such actions that may be brought against it. The issue of whether state law tort e4ims are preempted by federal law, and if so, the scope of that preemption has been considered by a number of federal oour'.s of appeal and two state supreme courts. Fve federal courts of appeal and the Minnesota Supreme Court have held that the Cigarette Act has preemptive e6eet. The New Jersey Supreme Court and an intermediate Texas Court of Appeal have held that it does sot. The issue Is currently the question presented in a petition lor certiorari to the United States Supreme Court in a case in which RJRT is not a party. It is not yet known whether the petition will be granted. In two recent smoking and health cases in which neither RJRN nor any subsidiary was a party, CYpolloae v. Lggett Group. er al. and Horton v. American Tobacco Company, er al.. juries have found F-20
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC NOI'ES'DO CONSOLIWTED FIIVANC[AL STA7FMENfS-(Coataued) Note 14-Common Stock aad Paid-tn Capital The changes in Common Stock and paid-in apial are shown aa followt: Common Stock-50.01 par value--authorixsd 1,200,000,000 abara at December 3!, 1990; ,f90 19a9 SY.nr A.a.rt SY.ro A.e~f (DoWS i, i.Itliw) &lance at beginning of year ....... :......... 308,090.813 Sharea issued to original investors ............. 272,000,000 Shura issued to management inverWn..... .... 232,100 Restricted shares iuuett ..................... - Management thua rcptteh.sod and atwellad .. (299,400) Balance at erd of year .................. 580,023,513 Pae3-in apital: S 3 3 300.000,000 S 3 - 6,769,430 - - 1,321,383 - S 6 308,090,813 i 3 flalanee at beginning of yeu ..........:...... $2,213 Shares issued during the period .............. 1,698 $037 Equity value of Converting Debeoturea......... - 452 Bquity value of trarrants .................... -- 224 Management shara reputrkased and anoelled .. - Prdorred Stock dividends deelared ............ _~) _ Balaace at tad of yrar .................. $3960 52.213 The Oh.ngea in stock options are shown as folbws: tff0 Uaf Baance at beginning of yar ................. 25,907,720 Options granted to aunagemeot inveatats and dirocton ............................... 933.200 25.907,720 Management options re}wtehased and anoelled.. (1,202,400) -- Balanee at end of year .................. 25,638,520 25.907.720 On Jul y 16, 1990, a partnenhip aQ'diated with ICKR purehaod 272,000,000 additioaal sharet of Comaton Stock of Holdiogs at $6.25 per share ($L7 billion toal purchase price) in oonneetioa.dth the Recapitaliration Program. The shares of Holdings Common Stock iasued to oanagement investota are generally wbJea to signiGant restrictions on tnnsferability and Holdings generally has the right to repurchase such shares under certain c7retunaatwea. On Febtuary 9, 1989, warrants.rere issued to purchase 15.254,238 shares of Holdings Common Stack. Such warrants are exerdsable at an exercise price of $5.00 per shate, subject to adjustment in certain events, at any time prior to the tentb anniversary of the Offa date. F-26
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SCHEDULE VI RJR NABI.SGO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. SCHEDULE V[-AOCI/MUTAlED'DEPRE(7AT7ON; DEPLEI7ON, AND AMORTIZATION OF PROPERTY, PLANf AND EQUIPMENT For tYe Yar Faded December 31, 1990+nd the Period February 9, 198914rough Deamber 31, 1989 (Dollars In Milliaa) Ca1011. A Ca4..  GL.. C C.1+r D Cwh.. E Cw4r F Lr16e.Ne. 69.L~..ee~,a~t dePulsd MpUen (ivaet te 0.2 Eapt..e. stire.uh ~4d (o i. eawn at P~eA.Nd Year ended December 31, 1990: Land and land improvements.... S 4 S S S- 5 1 $ 10 Buildings and kasehold improvements .............. 60 67 (5) 20 142 Machinery and equipment ...... 353 378 42 74 763 S 417 $450 S(47) S 95(A) $915 Period February 9 1989 through December 31, 1489: I.and and land improvements.... $ - $ 4 $ - f- $ 4 Buildings and leasehold improvemcnb .............. - 61 (1) - 60 Machinery and equipment ...... ~ 352 IO i l 353 $ - $417 S li $ 11 $417 (A) Induda balanea of the Nabisco Intanatlooal businesses at December 31, 1990 which were previously classified as "Net assets available [or alo'. S-10
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SCHEDULE X RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC SCHEDULE X-SUPPLEMEPiCARY INCOME STATEMENT INFORMATION For the Year Ended Deeea6u 31, 1990 and the Period Febrrarp 9, 1989 t6roagh December 31, 1989 (Dollars In Milliun+) CNr. A c4g+r s CLRN M Cwe..d 1990 1909 Maintenancc and repairs ......................................... S280 $253 Advertising cau ............................................... f668 $614 Amortiation of lndemarb ...................................... 5250 $229 Anwrtirat7m of goodwill ......................................... $338 $328 S-13
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(FOOLwIe.t tominued frum pre<ediny pnxe) and 1,585,660 shares of Holdings Common Stock issuable upon the exercise of currently axercisa- ble Management Options. Mr. Gerstner has additional Managcment Options that are not currently exercisable to purchase 1,585,660 shares of Holdings Common Stoc . 50% of such non- exercisable Management Options will become exercisable on each of the third and fourth anniversaries of the date of grant. (4) Holdings has granted immediately exercisable options to purchase 30,000 shares of Holdings Common Stock toeaeh of Mr. Jordan, Mr. Medlin and Ms. Ridgway. Mr. Jordan also owns 831 shares of Holdings Preferred Stock and $1,250 principaI amount of Converting Debentures and Mr. Medlin also owns 531,250 principal amounl of Converting Debentures. (5) Shires of Holdings Common Stock shown as owned by all directors and executive officers as a group include 3,031,660 shares issuable upon the exercise of currently exercisable Management Optiom out of the 10,945,668 Management Options granted to directors and executive officers to date, but does not include any shares of Holdings Common Stock issuable upon the conversion of approximately 19,836 shares of Holdings Preferred Stock held by such persons whicL are not convertible until May 1, 1991, or any shares issuable upon the conversion of approximately $89,460 principal amount of Converting Debentures held by such persons, which may bc converted an the first business day prior to May lr 1993. The number of shares shown includes 121,600 shares held in trust for the benefit of famtly members of certain directors and executive officers. Certain of such directors and executive officers disclaim beneficial ownership as to 61,600 of such shares held in trust. (6) For each person, the percentage of Holdings Common Stock beneficially owned is computed on the assumption that all shares which eould be acquired by such person within 60 days upon the exercise of warrants and options are outstanding. Item 13. Certale Relationships and Related Tnnsactions KKR renders management,'oonsulting and financial serviaes to Holdings and its subsidiaries for an annual fee. A fee of f 10,000,000 has been paid for such services performed in 1990. From time to time, KKR may receive customary investment banking fees for services rendered to Holdings and its subsidiaries In connection with divestitures, acquisitions, financing and certain other transactions. Partners and employees of KKR who also sme as directors and officers or Holdings, Group and/or Capital will not receive additional compensation for service in such capacity, other than customary directors' fees. KKR did not receive any investment fee for its setvvias in connection with the 1991 Exchange Offer or theRecapitaliution Program. On February 9, 1989, the Common Stock Partnerships purchased an aggregate of 284,745,762 shares of Holdings Common Stock for $5.00 per share from Holdings. The Common Stock Partner- ships ane two Delaware limited partnerships of which KKR Associates is the sole general partner and a number of institutional and other investors associated with KKR are the limited partners. KKR Associates is a New York limited partnership of wbicb Messrs. Kravis, Raether, Roberts and Ammon, together with Robert I. MacDonnell, Michael W. Michelson and Saul A. Fox, are the general partners. The Common Stock Partnerships have sole voting and investment power with respect to such shares. In addition, one of the Common Stock Partnersbips purchased 5500 million of debt securities (the °Partnership Debt Securities") and received a commitment foe from RJRN in the amount of $10 million in connection with such purchase. On February 23, 1990, one of the Common Stock Partnerships purchased the 10,169,492 shares of Holdings Common Stock and warrants to purchase an additional 10,169,492 shares of Holdings Common Stock at a price of f5.00 per share formerly owned by Drexel Bunham Lambert Incorporated. Tbe funds for these purchases were contributed by the limited partners of the Common Stock Partnerships and KKR Associates from their respective assets. In connection with the Recapitalization Program, one of the Common Stock Partnerships has (i) purchased an additional 272 million shares of Holdings Common Stock for an aggregate purchase price of S1.7 billion and (ii) exchanged 5200 million of the sum of principal of plus accrued and unpaid interest on the Partnership Debt Securities for 8 million unregistered shares of Preferred Stock which were later exchanged in a share for share exchange for 8 million shares of Preeferred Stock covered by a registntion statement relating to the 1990 Exchange Offers. Additional amounts of Partnership Debt Securities may also be refinanced. The law 6rm of Akin, Gump, Strauss, Hauer & Feld of Washington, D.C. and Dallas, Texas of which Mr. Jordan is a partner provided legal services to RJRN in 1990. 41 r w r m
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SCHEDULE III RJR NABISCO HOLDINGS GROUP, ING SCHEDULE RI-CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (Dollars In Millions) . Dace.6er 31, N90 Ds<eabx 31, 1989 ASSETS • Current aaets: Aeoountr and notes reeeiwble ......................... $= f 94 Total carrent asua ............................ - 94 Intercompany receivable (payable), net ................... 92 (25) Investment in subsidiary ............................... 7.357 7,677 Other asaets and doferted charges ....................... 78 23 . SJ527 57.769 LIAlILITIES AND STOCKBOLnEE'S•EQUITY Loog•term debt (Note B) .............................. $2,864 $4,500 Interest aaerued ...................................... 81 103 Commitmena ied contingetKla (Note C) Common stoekholder's equity. Common .Wrk, 1,000 iuued and outstanding shares ....... - - Paid-in capital ..................................... 5.535 3.982 Cumulative translation adjustments .................... 35 1 Retained arnings (accumulated de5cit) ................. 988) 817) Total ammon stoekholda's eqdty ................ 4.582 3,166 $J~527 57,769 See Notes to Condeared Flnaulai lqfornwflon. S-7
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SCHEDULE IX RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP; INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. ' S(3MULE iX-SHORT-TERM BORROWINGS For 86e Yeu Eaded Deeember 31, 1990 and the Perlod Febrrary 9, 1989 through December 31, 1989 . (Doitn In'MiWans) Cd.r A Cd...s C.ia.,. C CiMr D GLM E CaMw F M.ilw. Awsj e• A ease B.4.oe at Aed A.net dM..f1,K A.ea o.41.d IMwnt Yt; W1e • SYai~arMta + Puk/(A).' . Ya~ DF~rfe1~ = e) =lc Year ended December 31, 1990: Banks ....................... $287 11.63% S 889 5285 17.53% Commueial paper holdea(D) .... 8 12.31% 59 27 14.42% Paiod February 9 1989 through December 31, 1489: Banks ....................... t142 10,38% • $1,577 $520 17.19% Commercial paper holden(D) .... 39 12.09% 43 24 12.35% (A) Varying maturity datea with oo provision for extension at maturity. • (B) Priaurily daily average balance of total short-term debt. (C) Short term interest expense as a percentage of the average balance of interest bearing short-tcrm debt. High itwtuest rates re9ect oomind bortoMing rates in high in9ationary countries, primarily Latin America. (D) Commercial paper Interest rates reflect nominal Canadian borrowing oosts.
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SCHEDULE VII1 RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, ING RJR NABISCO CAPITAL CORP. R7R NABISCO, INC SCHEDULE VfII-VALUATION.AND QUALIFYING ACCOUNTS For the Yeu Faded Deeeaber 31, 1990 and the Period Fehrwry 9, 1989 through December 31, 1989 (Dollars In MflBons) Celwr A CNr B GIm C CaWan D Gl.n. L A16Nam Dnarl~llo. Those valuation and quaiifying accounts which are deducted in the balance aheal from the as=ets to which they apply. Year ended Doanmber 31, 1990: For disoounts and doubtful accounts .... Other assets ....................... 4b.ct at M Cab b Of1n 144ae .r BM.YU ~ Aecat.b Da ~B+e'Nw ~ $58 $44 25 22 $10 f(42) S 70 1 17) 31 $83 t66 $11 f 59) 5101 Pericd February 9, 1989 through Deamber 31, 1989: For discounts and doubtful accounts .... S67 $12 $(5) S(16) $ 58 25 Other asseta ....................... 18 19 1 U13 f85(C) 131 ~U4 U29 3 83 (A) Miscellanoous adjustments. (B) Principally charges against the accounts. (C) The balance at beginning ofperiod re8acts the fair value amount developed in the final allocation of the purchaxe cost incurred by Holdings for the acquisition of RJRN on February 9, 1989. S-II
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SCHEDULE X RJR NABISCO, I:NG AND SUBS[DIARIFS SCHEDULE X-SUPPIFMENTARY INCOME STATEMENT INFORMATION For the Period Jaeiary 1, 1989 throu8h FebnuP a 1989 .(DoWn l. Millions) lu. Mainteaana and repain ............ ..................... Advertising oosts .................................................. S-1B .
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SCHEDULE V RJR NABISCO, INC AND SUBSIDIARIES SCHEDULE V-PROPERTY, PLANT AND EQUIPMENT Year Ended Deeember 31, 1988 (Dollars In Millioas) C.Lr A G4.r B Orl+a. C Gl+r D CeMe. E Cwl.r F Rah.ce at l44aee al 6e~IW~.~ ANidor at rlther CYqa Fd of CL.i4ado. NYMoE Cml Rennwrnts Add(Dedaefl Puied Yar ended December 31, 1988: L.nd and land hnprovements... $ 177 $ 5 S(I) S 9 $ 190 Buildinga and leasehold • improvemats ............. 1,288 37 (13) 120 1,432 Machinery and equipment ..... 4,077 141 (129) 305 4,394 Construction-in-prooess........ 499 654 1 (480) 674 56.041 S 837 $142) 5(46)(A) SJ690 (A) Includes effects of divestments of ($40), reclassifications and miscellaneous adjustments. ProPeny. plant and equipment are depredated principally by the straight-line method. Annual depredation rates range principally from 5% to 10% for land improvements; 2% to 10% for buildings and lasehold improvements; and 5% to 33% for machinery and equipment. S-19 a,
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1 Ii SCHEDULE ftt RJR NABISCO HOLDINGS CORP. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF RECISfRANT NOTES TO CONDENSED FINANCIAL INFORMATION Note A-Suppkmental Cash Flows Iaformation On November 1, 1990, 51.859 billion of the sum of principal of plus aeerued and unpaid interest on the Converting Debentures and $541 million of the sum of principal of plus accrued and unpaid interest on the Group fXbentures were exchanged for an aggregate of approximately $800 million in cash and approximately $1.6 billion stated value of Holdings Preferred Stock (64,032,000 shares) pursuant to the 1990 Exchange Offers. On July 16, 1990, Holdings issued 8,000,000 unregistered shares of Holdings Preferred Stock ($25 stated value per share) in exchange for S200 million of the sum of principal of and accrued and unpaid interest on Capital's Partnership Debt Securities held by a partnership affiliated with KKR. On November 1, 1990, Holdings exchanged such shares in a share for share exchange for 8,000,000 registered shares of Preferred Stock. (See Note 11 to the Consolidated Financial Statements). - During 1989, Holdings issued Converting Debentures of $2.257 billion (including $452 million equity value) in exchange for RJRN (Predecessor) common stock in connection with the Merger (See Note I to the Consolidated Financial Statments). Note B-Di.idead Resene During 1990, Holdings set aside $200 million of the $1.7 billion cash proceeds received in connection with the purchase by a partnership a6iliated with KKR oi 272,OOD,000 sh.res of Common Stock to create a dividend reserve initially available to fund the 1991 eash dividend payments on the Preferred Stock. On January 15, 1991, Holdings pald the initial dividend on the Preferred Stock of approximately f50 million with funds from the dividend reserve. Substantially all of the remaintng funds in the dividend reserve were subsequently released in connection with the completion of the 1991 Exchange Offer. Note C-Loag-term Debt See Note l l to the Consolidated Financial Statements for information «lating to the Converting Debentures. Note D-Cosmitments and Contingeaeirs Holdings hu guaranteed the indebtedness of Capital under the I990l:redit Agreements, the 1989 Credit Agreement and the debentures. Holdings has also guaranteed the obligations of RJRN and its subsidiaries under the working capital agreement. The guarantees rank par( pasru with the Converting Debentures and are socurod by a pledge of the capital stock of Group owned by Holdings. For a discussion of certain restrictive covenants associated with these debt obUgations, «e Note I I to the Consolidated Financial Statements. For disclosure of additional contingent liabilities, see Note 12 to the Consolidated Financial Statements. S-4 rn r tJ C) J N W tn N
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SC1IEDULE X RJR NABISCO, ING AND SUBSIDIARIES SCHEDULE X-SUPPLEMENTARY INCOME STATEMENT INFORMATION Ynr Eaded Deamber 31, 1988 (Dollars lo MiUlons) CeMrA ' C.4rB . . . GY%,I M CMh Iur ' . . . - YlE.Kres .................. Maintenana and repain ......... :................. Advcrtising casts..................................................... S-23
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SCHEDULE V RJR NABISCO, INC, AND SUBSIDIARIES SCHEDULE V-PROPERTY, PLANT AND EQUIPMENT For the Period January 1, 1989 through February S, 1989 (Dollars in Millions) QMr A . C.1+.. B Celtoe C Glr D Calre E Cda F _ CLrMeadna Bga~h.ce.a~t etTerled AJdhion at Gel etleeewb lkW CY AM (De1 sakiact Kel Kq .c) Pak1 Land and land improvements .... S 190 $- >~ S(1) S 189 Buildings and leasehold . improvements ............... 1.432 1 - 6 1,439 Machinery and equipment ....... 4,394 7 (I) (5) 4,395 Conzlruction-in-process ......... 674 26 - 17) 693 $_6i90 534 WO S 7) 5~716 Property, plant and equipment are depreciated prindpally by the straight-6ne method. Annual depreciation ntes range principally from 5% to 10% for land improvements; 2% to 10% for buildings . u'Ipment. and kasehold improvements; and 5% to 33% for machinery and ~~u'Ipment S-14
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SCHEDULE VI[[ RJR NABISCO, INC AND SUBSIDIARIES SCHEDULE V111-VALUA'110N AND QUAIIFYING ACCOUNTS Yar Ended Deormber 31, 1988 (Dollars In Miltions) Glar A C.Irr ! Gl.w. C Cwir D GYr E AMtle.a Cy(=r1~e/ Gh.n d M hW M MLr l.r.n /eeW.e u/ Aca~..a De~wrlen .tF.e.f Dsal~tlw ' AAeAs3---fS~rw_- (A) ._ (B) P.dW__ Year ended Doambu 31, 1988: Those valuation and qwlifylng eooounts M6ic6 are deduded in the balance sheet from the assets to Nhich they apply. For discounts and doubtful axounts ... 45 21 5 (5) 66 oti,« asreU ...................... 319 135 16 31) 439 $364 $156 $21 - S(36) s50s (A) Miscellaneous adjustatents. (B) Principally charges a8linst the accounts. S-21
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SCHEDULE Vlll R]R NABISCO, ING AND SUBSIDIARIES SCHEDULE VIII-VALUA770N AND QUAUFY[NC ACCOUNTS For the Perlod January 1, 19g9 through Febnury 8, 115189 : (Dallara in Millions) CN.r A di+r B Gl.r C QMr D Cdrr E AMdiUo.+ ~/r~l~ CylA~ a ~ &etv.r Pai~w ~~ A (A) De ~tlor •P~ Those valuation and qualifying accounts which are deducted in the balance sheet from the assets to which they apply: For discounts and doubtful accounts ... S 66 S- $ 1 S- $ 67 Other atsets ...................... 439 11 _ L43) 'W7 $505 $11 $ 1 _ S47) $474 (A) Misodlanoous adjustments. (B) Principally charges against the accounts.
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SCHEDULE V[ RJR NABISCO, INC AND SUBSIDiARiFS SCHEDULE VI-AOCUMUTA7ED DEPRECIATION, DEPiEfION, AND AMORT[ZAT[ON OF PROPERTY, PLANT AND EQUIPMENT For the Period laauary 1, 1989 through February 8, (989 (Dollin in Millias) GY.. A Ql.ian B C.Ir C CeWr D GW.r E C.i... F at A18tlm CYr86 J b ~ ~ Bthan at qu.Nntlo. .f V.rki C q.« e. R.oU.aah aAY~I~) ~ Land and land improvements .... S 20 S- S- $ (1) $ 19 Buildings and leasehold improvements ............... 306 5 - 72 383 Machinery and equipment ....... 1,427 27 = 179) 1,375 L753 $32 S- Si)(A) 7 $1777 (A) Reclaui6catioas and miscellaneous adjustments. S-15
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMEN7S-(Contiaued) Note 13-Redeeaubk Convertible Preferred Stock The Prcfcrred Stock, 75,000,000 shares authorized, stated value $25 per share and par value 5.01 pcr share, bears a cumulative cash dividend rate of 11.5% of stated value per annum and is payable quarterly in arrears eommencing January 15, 1991, when, as and if declared by the board of directors of Holdings. Furthermore, the 1989 Credit Agreement, the 1990 Credit Agreement and various debt instruments of Capital contain certain restrictive covenants that, among other things, may. limit the ability of Holdings to pay cash dividends on the Preferred Stock.'Ihe Preferred Stock may be converted after May 1,1991 into shares of Common Stock at a conversion price of 39 of stated value per share of Common Stock, subject to adjustment in certain events. The Preferred Stock, which was the only class of preferred stock of Holdings outstanding at December 31,1990, is senior to the Common Stock as to dividends and prefercnees in liquidation, and is subject to mandatory redemption on November 1, 2015 at $25 per sbar, plus accrued and unpaid dividends. In addition to the mandatory redemption ttquirement, the Preferred Stock is redeeauble at the option of Holdings, in whole or in part, at any time on or after November 1, 1993, at an initial optional redemption price of $27.0125 per share, plus accrued and unpaid dividends. The initial optional redemption price deuines thereafter on an annual basis in the amount of f.2875 a year to $25 per share on November 1, 2000, plus accrued and unpaid dividends. Holders of Preferred Stock have certain voting rights with respect to the election of directors in the event that dividends on the Preferred Stock are in arrears and unpaid for six quarterly periods. Such voting rights will continue until such time as all the dividends in arrears have been paid or declared and set aside for payment. On July 16, 1990, Holdings Issued 8,000,000 unregistered shares of Preferred Stock, in exchange for $200 million of the suns of principal of and aeaued and unpaid interest on Capital's Partnership Debt Securities held by a partnership affiliated with KICR. On November 1,1990, Holdings exchanged such shares in a share for sharc exchange for 8,000,000 registered shares of Preferred Stock. On November 1, 1990, Holdings eompleted its 1990 Exchange Offers and issued, in partial consideration for the debentures accepted for eschange and payment, 64,032,000 shares of Preferred Stock. On December 21, 1990, the board of directors of Holdings deelared the initial Preferrcd Stock dividend which was distributed on January 15, 1991 to sharehoWers of rooord as of Dooember 31, 1990. Holdings paid the initial dividend on the Prcferred Stock of approximately $50 million on January 15, 1991 with funds from the Dividend Reserve (See Note 6 to the Consolidated Financial Statements). The remaining shares of preferred stock of RJRN (Predecessor) were repurchased during 1989 in connection with the Acquisition and were retired (See Note I to the Consolidated Financial Statements). F-25
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SCHEDULE IX RJR NABISCO, INC AND SIJBSID7ARIES SCHEDULE IX-SHORT-7ERM BORROKTNGS For the Period 7aauary 1, 1999 through Febwary 8, 1989 (DOOan la Millions) C.Ir A filr a Cal... l: Calr. D Cd. r C GYr F Me nae AwW49bkj . Mslw.. A. emm/ IMwqt Bd..ee.t VINaMd A.eWt O.bb .tl.a Rae Fad.f Aa.ae OWh.CLq Da4 Ke Qrl.[~Me Gfaan~ ~ S b r i µkt ~aaM O.4 tle d P ak Pe~~ )W Mfo/~ ..................... . . . Banks ..... $431 10.67% 66 u $3 26 9.59% (A) Varying maturity dates with no provision for extension at maturity. (B) Primarily daily avenge balance of total.hart-term debt. (C) Short-term interest expense aa a percentage of the average balena of interest baring short-term debt. S-17
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t I RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC R7R NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Contmued) Note 12-Commitmeats and Continge.cies---(Continued) to the exercise or cancellation of certain employee stock options. These actions have either been consolidated for all purposes or consolidated for discovery purposes. Two eases brought by holders of debt securities of RJRN based upon a number of allegations, including violations similar to those described above of federal securitics sws, fraud and breach of alleged fiduciary duties are currently pending. In addition, one of these actions alleges that the Merger would be a fraudulent conveyance. The plaintiffs generally seek damages or equitable relief, including rescission, along with attorney s fees. In one of the cascs, a olaas of psintiffs has been conditionally certified. - On May 9, 1989, one of the foregoing holders of debt securities gave RJRN and an affiliate notices purporting to be "Notices of Default" under certain debt issues of RJRN and its subsidiaries with an aggregate outstanding principal amount of approximately $1 billion, of which such holder holds approximately $230 million principal amount. On May 11, 1989, RJRN and an affiliate received notices from another of the toregoing holders of debt securities purporting to be °Noticax of Default" under certain additional debt issues of RJRN. Such notiees allege that the provisions of certain Mergenrelated credit arrangements create defaults under the provisions of the governing instruments cavering the ssues. RJRN believes that there is no basis for such default aasertiens and that such notices were issued improperly. A federal district court issued a preliminary injunction which stayed the effect of these notioa pcading a judicial determination of the issue. On June 25, 1990, the court or appeals vacated the preliminary injunction issued by the district court and reauaded the case to the district eaurt for further poocadingt. $ubsoquentlY; the partieaitgreed that •We .are psrieds under the indentures containing theoovenants at issue will extend unti118 days after the district court rendert its determination whether there has been a oaveaant breaeh. On July 13, 1990, the two holders of debt «auritirs amended their complaint in tbedistrkx court action to assert additional alkged defaulta under the indentures at iewe. RJRN believes that there is no basis for these additional default assertions. On July 27,1990, RJRN filed its motion for wmmary judgment on the oovenant default ataims in this action. On August 24, 1990, plaintiHs tavod a sacas-sration seeking sumrnary judgment with raspect to the alleged oovenant defaults at issue. T6ese plaiati6s also asserted in their erosa-rnotioa and supporting papers that their purported ootites of default were effective not only with respect to the two indentures governing a total of approximately 5165.6 million of debt securities for which one of the plaintiffs held the requisite percentage of the outstanding debt securities to send such notices, but also with respect to two other indentures, each governing $1.0 billion of outstanding debt, for which plaintiffs did not bold the requ'isiue debt percentages. In compliance with the scheduk established by the District Court, as n:viad, the motions were fully briefed and taken under consideration by the District Court as of October 19, 1990. On January 18, 1991, Holdings, RJRN and' Metl•ife agreed in principle to reinstitute normal business relations and to settle and dismiss the Metlife action. As part of such agreement. Metlife will become an equity investor in Holdings and one of the primary lenders with respect to an employee stock ownership plan (the "FSOP") to be formed by Holdings. On January 21, 1991, Jefferson-Pilot Life Insurance Company, Metlife, Holdings and RJRN requested that the District Court defer decision in the current action pending finalizatlon of a definitive settlement agreemenL The parties bave undertaken to enter into a definitive settlement agreement containing customary terms and conditions which will provide for the exchange by Metlife with Holdings or an aggregate of F-22
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SCHEDULE VI ' RJR NABISCO, INC. AND SUBSIDIARIES SCHEDULE VI-ACCl1MULATED DEPRECIATION, DEPLEC[ON, AND AMORTIZATION , OF PROPERTY, PLANT AND EQUIPMENT Year Ended December 31, 1988 (Dollars In Millions) CN.ar A C.l.r B C1o4.r C Gl.n. D Cdr E CN.r F q4Wncatlo. Rgd~..c~ei ~.at .rYa~hd ANiWn CYuad N Eqeww Ree4aae.b AId.(D) R.b.ee at Pek1 Year ended December 3l, 1988: Land and land improvements... S 18 f 4 S(5) f 3 $ 20 Buildings and kasohotd improvements ............. 233 50 (9) 32 306 Machinery and equipment ..... 11099 326 177) 79 1,427 SI•350 $380 S(91) f114 (A) S_1,753 (A) Includes efi'eeu of divatments of ($21), rerlassiftcatioru of prior reserva of $10 for buildings and lcasehold improvements and $77 for machinery and equipment and miscellaneous adjustments. S-20
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Conlinued) Note 12-Commitments and Contingencies-(Continued) in favor of plaintiffs. In Cfpollone. the jury awarded $400.000 in damages and in Horton, no damages werc awarded. T'he award of damagea in Cipol(one was reversed on appeal. Petitions seeking further review arc pending in both eases. Litigation is subject to many uncertainties, and it is possible that some of the legal actions, proceedings or claims could be decided against RJRN or its subsidiaries. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, eotild adversely affect the litigation against RJRN and its subsidiaries and increase the number of such claims. RJRN previously had maintained product liability insurance covering certain of these tobacco- related legal actions, proceedings and claims. As of April 13, 1990, R1RN became wholly self-insured for existing tobacco-related risks. Litigarion 6ef.red to tFe Merger Numerous complaints, many purporting to be class actions, have been filed against R]RN by stockholders, holders of Registnnts' debt securities and empbyces in eonnoction with the Merger or events related thereto. In some of these aotions, certain current and former members or RJRN's Board of Directors and certain former members of management are also named as defendants. Eight of the ases brought in Delaware by former stockholders have been eonsolidated into one action. This consolidated action generally alleges that the defendants breached fiduciary duties by entering into the agreemeat providing for the Merger, and through related activities, iadudiag the failure to accept a competing and alkgedly higher bid from a group kd by fonner members of management. In addition, plaintiffs in the onasolidated action have filed a motion to enjoin the Recapitalization Program aad a motion to amend their complaint to incorporate allegations that the Exchange Ofen arc coercive and that covenants in certain itdentures have been vtolated. The parties have reached an understanding to settle this action. The Registrants do not believe that the proposed settlement will have a material effect on the RegistrantP 6nanoial condition. One we brought in Georgia by a former stockholder contains essentially the same elAims relating to the Merger and related activities as the Delaware consolidated stockholder action. Such action has been stayed pending the outcome of the DeLware consolidated stockholder action. Another stockholder action has been filed in New York State court against RJRN's finandal advisors, Dillon, Read & Co. Inc. and Laurd Fr2res & Co. Plaintiffs claim that defendants acted negligently in providing financial advice in connection with the signing of the Merger Agreement and related activities. Defendants moved to dismiss or to stay this action. T1ul motion was denied by the trial court and the trial eourt's decision was appealed. The appellate court affirmed the denial of the motion to dismiss but reversed the denial of the motion to stay. It is andcipated that if the Delaware action is setlled, the New York action will be dismissed. Three of the actions brought by stockholders allege that RJRN violated federal securiQea laws or other laws or duties by failing to disclose information concerning discussions with third parties and alleged Internal plans relating to transactions similar to the Merger, principally relating to the offer by RJRN for shares of its common stock pursuant to which RJRN purchased on April 27, 1988 approximately 21,000,000 shares of such stock at a pria of $53.50 per share, but also include claims in respect of all trading in RJRN'a common stock after March 30, 1988 and until October 20,1988. The parties to one such stockholder action in Delaware have fikd a stipulation of dismissal for signature by the court. Three actions brought by former employees of RJRN contain similar allegations with respect F-21
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SCHEDULE V RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, ING RJR NABISCO CAPITAL CORP. RJR NABISCO, INC SCHEDULE V-PROPERTY, PLANI' AND EQUIPMENT For tbe Year F.aded December 31, 1990 and the Period Febru.ry 9, 19891imugh Deacmber 31, 1989 (DoBan Ia MiBions) Gl.r A GIum B Cd,~ C CaMs D Calr E Cd.r F OuJ6ntle. 6.4.ar.1 ~ .fT.Ael MNtlan a f..N ReWe...n Add (6d B.Woe.l ~.ct . P.de1 Year ended Deoember 31, 1990: Land and land irtmprovements.. $ 266 S 1 f(4) S l S 264 Buildings and laulald improvements ............ 1,550 20 (25) 5 9 1,604 Machinety and equipmat .... 3,162 6S (150) 43 3 3,510 Canstruction-in•pnoor.v; ...... 458 340 _124) (37 1) 403 S 5,436 S426 1f203) f 12 2 (A) f5,,7g1 Period February 9, 1989 through December 31, 1989: Land and land improvements.. S 264 S 2 S(3) $ 3 f 266 Buildings and kasehoid improvamcnb ...... :..... 1,533 16 (17) 1 8 1,550 MacblBUy and equipment .... 2,891 10l (190) 360 3,162 Coastruetioain•prooese ...... 630 369 ---U4 537 458 S SJig (B) !is$ f 214 f(156 )(C) 25.436 (A) Includes balanoes of the Nabisco International businesses at December 31, 1990 rrhieL wxte previously classified as "Net assets available for sale". roeiassi8catians and miaaUaaoous adjustments. . (B) The balance at beginning ofprn od raflects the fair value amount developed in the final allocation of the purchase cost incurred by Holdings for the acquisition of RJRN on February 9, 1989. (C) Includes diratmeats ($75), retLssifications and m'i.seellaneous adjustments. Property. plant and equipment aro depraiated principally by the straight-line method. Annual depreciation rates for new assets raage principally from 4% to 8% for land improvements; 2% to 33% for buildings and kasebold improvements; and 5% to 33% for maehinuy and equipment. Correspondingly higher depreciation rates ara applicable with rapect to assets in service at the acquisition date, since these assets had been used by Predeeessor. S-9
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9I SCHEDULE M RJR NABLSCO.HOLDINGS GROUP, INC. SCHEDUIE fH-CONDENSED FINANC[AL INFDRMATION OF REGI3TRANT CONDENSED STKfEMFMS OF CASH FLOWS (Dollars la MiUioa.t) Yar F.Ad Fd,wq f /fd9 DeeeaFa 31. 1990 Dtatlr 1, lfdf Cafh flows from (aud Io) openti.g aetMtiet . Netineome(loss) ...................................... 1 1711 S 817) Adjurimentt to reconcile net inoome (lM) to net ash 6ovr+ from luud in) opentiag aclivities: Deferred inoome tax provision .......................... 82 37 Non-ash interest ezpenu and amortization of debt issuance ~ ca4 ............................................. 607 539 Extraordinary item--(gain) loss on early atinguiahments of debt ........................................... (2064) - Equity in (income) loss of subsidiary, net ot Income tsxea .... (90) 372 Otha.net .......................................... 224 131) Totaladjustmata ........................:........ 171 817 - - Net a.b Ibwf from (used in) operating activities ........... Cah aoem froa (oed I.) IeroBeg actirltia: Divideeds received from subsidiary ........................ 800 . (1,500 Net eub 6ort from (used in) iare+tiug aetivitia ............ 800 (1 ,300) CLfb eowf frost (.:ea r) gea.d.g .ai.lcia (Note Ap Repaymats of long-tum debt (iaduding arly atingui.hmeats ofdebtin 1990) ..................................... (1 5641 - 'Fhuunclag .ad advLary fees paid .......................... (22) (25) Capital ecntribution from parent .......................... 1,504 - Divideods paid to paront ......................:.......... (900) - Otha. ad-induding intercampanyy traosfeaf ................ 2~2 1,525 Net eash Eovc from (used In) 8nanciag aetivitiea ........... (800) 15M Net ehange in acb and ash equivalats .................. - - - Casb and cub equiralents at beginning of period ............... - Gsb and afh equivalents at end of period .................... S= 1= See Notes to Condensed Financial lqfornwliorl S-6
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N~ABISCO 1301 AVENIIE OF THE AMERICAS NEw YORK, NEw Yocx ioaig
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENCS-(Continued) Note 16-Retirement Benefits-(Continued) The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at December 31, 1990 and 1989 for RJRN's defined benefit pension plans. The excess of the projected benefit obligation over plan assets at fair market value, determined as of February 9, 1989, was recorded as a liability in connection with the purchase eost allocation. Oeceobn 31, 1990 1leeeeler 31, 19r9 Pl.n WYwe Areb 6acuded Attvd.t•A &.ean Pks Wlwse AccwA.kd Be.eab FsttNeA Asda F1.a WWU Apeb f'xntdd Am.ulatd Be.fib PY4 wYere ACaneulaed Belefin Exeeeded Asda Actuarial present value of: Vested benefits .................... S1,947 $ 239 $2,039 $ 263 Non-vested benefits ................ 31 17 33 21 Accumulated benefit obligation ....... 1,978 256 2,072 294 Effect of future salary increases ...... 402 52 432 60 Projected benefit obligation .......... 2,380 308 2,504 344 Plan assets at fair market value ........ A371 118 Z539 181 Plan auets in excess of (Iess than) projected benefit obligat,on• ......... (9) (190) 35 (163) Unrecognized net (gainl loss .......... ~ (308) 20 (261) (1) Uureoogniud prior service caat :....... -_ _-4 -_--3 Net pension liabilities recognized in the Consolidated Balance Sheets ......... S(317) S l66) $ (223) $064) • Plans whose acuwmulated bene6ts exceeded assets primarily relate to RJRN's foreign defined benefit pension plans and RJRN's unfunded supplemental benefit pension plans. At December 31,1990, 93 percent of the plans' assets were invested in listed stocks and bonds and other highly liquid investaxnts. The balance consisted of various income producing investaunts. In addition to providing pension benefits. RJRN provides certain health eare and life irnurance bene6ts for retired employees and their dependents. Substantially all of its regular full-time employees, including certain employees in foreign eountries, may become eligible for those benefits if they reach retirement age while working for RJRN. RJRN has not yet adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which will be effective for years beginning after 1992 and will require the accrual of costs for rctireei health and other postretirement benefits other than pensions and the recognition or an unfunded and unrecognized accumulated benefit obligation for these benefits. However, in connection with the purchase cost allocation as of February 9, 1989, RJRN reoorded an atiauted present-valued obligation for these benefits, and accordingly, an accrual of approximately $1.1 billion is reflected in RJRN's Consolidated Balance Sheet at December 31, 1990. Accretion or 586 million and $75 million with respect to this aocrual was charged to operations for the year ended December 31, 1990 and the period February 9, 1989 through December 31, 1989, respectively. Claim payments, insurance premiums and other costs for retired employees and their dependents, which amounted to $35 million and $30 million for the year ended December 31, 1990 and the period February 9, 1989 through Decembcr 31. 1989, rospectively, were charged to this accrual. The corresponding claim payments of $30 million in 1988 were charged to operations. F-29
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SctleDtn.e Ix' RJR DIABLSCO, INC AND SUBSIDIARIES 'SCH6.DULE DC--SHORT-TERM BORROWINGS Year Fsded December 31, 1988 . (Doi4n In MiUioet) fil.rA C.Yrs GL..C f.l...D dlrC. CdwF Msl.aa A.ente A NWtNN Aw4a1 A.ml Iderat BJ..aa bnf=e ~ .d4{ Op. MI . ~ Oq./ Mi.a W1 p NI a e . 61a1.41,4= NnMI(A) t R.1e r . ~ Pe,fad . .~ Par/ad(B) r . ~ PMei(C) Year ended December 31, 1988: ~ Banks ..................... S291 12.83% $291 f 87 84.65%(D) Cammeraial paper holders..... - - 263 . 54. . ~ 8..11% (A) Varying maturity data with no prov (B) Primatily dtUy average balance of to ision for extension at matu tal short term debt. rity. . . . .. (C) Short-term interest expense as a perantage of the avenge bal.nee of interest bearing short-term deM. (D) Higher weighted average inta+eat rate is principally due to Bravlian borrowings. ". S-22
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; DEPOSITION EXHIBIT ~'f CD;fllarca~ S(f u(Lo q
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RJR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC RJR NABISCO CAPITAL CORP. RJk NABISCO, INC NOTES TO CONS0f1DATED FINANCIAL STATEMENTS-(Continued) Note 12-Commitments and Cautingeucies-(Coatinued) Commitments In agreements reached between the tobacco industry and the Flue Cured Stabilization Board and the Burley Pool during 1986, RJRN eommitted to buy certain q•:antities of leaf tobacco. The remaining commitments to be drawn down through 1996 total approximately $463 million subject to the timing or the purchases. At Decaniber 31, 199Q commitments totalled approximately 3142 million, principally for the purchase of machinery and equipment. Flnanciaf Instruments with Off-Balance Sheet Risk and Significanr Concentrations of Credit Risk Certain 6nancial instruments with o6-balance sheet risk have been entered into by Capital and RJRN to manage intereat rate and foreign currency exposures. At Deeembcr 31, 1990, Capital bad outttanding interest rate swap agreements with commercial banks having a total notional principal amount 43.7 billion. Alao at DooCUtber 31,1990, RJRN b.d outstanding forward foreign exchange contracts with oommerclal banks to purchase approximately $600 million in foreign currency. In addition, RJRN had ontfrcd into the hedging arrangements related to its foreign currency debt at December 31, 1990 (See Note 11 to the Consolidated Financial Statemenla). Appmxi6tely $1.0 billion and $2.1 billion of the interest rate swap agreements entered into by Capital mature during February, 1991 and At,guat, 1992, respectively. The diHerential to be paid or received on the interert rate awap agrecmiats entered into is aoaved as interest rates change aad is being rooogniiod over the life di the agreements. In addition. f400 million of Burodollar futures contracts matured during Doamber,1990 which will be amortized by Capital during the first qusrter of 1991. The forward foreign exchange contracts and other hedgmg arrangements entered into by RJRN generally mature at the tSme the bedged foreign currency transactions mature. Unrealized gains and losses on forward foreign exchange oontrade is determined based on changes in muket rates. The above financial inslruments entered into by Capital and R]RN involve, to varying degrees, elements ot market risk as a result of potentiil changes in future interest and foreign currency exchange rates. However, because the impact of suc6 potential changes in future interest and foreign currency exchange rates would o8'rtt the related impact on the underlying itema being hedged, these instruments do not subject Capital or RJRN to market risk that would have otherwise resulted from changes in future interest and foreign arrency eichange rates. Also, both Capital and RJRN may be exposed to credit losres in the event of non-performance by the eounterparties to these financial instruments. However, Capital and RJRN continually moditor their respective positions and the credit ratings of their respective eounterpariies and therefore, Capital and RJRN do not anticipate any non- performance. There are no significant concentrations of credit risk with any individual oounterparties or groups of eounterparties as a result of any financial instruments entered into including those financial instruments discussed above. F-24 1
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RIR NABISCO HOLDINGS CORP. RJR NABISCO HOLDINGS GROUP, INC. RJR NABISCO CAPITAL CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 18-Qu.rterly Results of Operations (Unaudited) The following is a summary of the quarterly results of operations for Holdings (Successor) and S.tta.er Fln1 SnW TLN F.arO 1990 NU sales ........................ .... ........... $3,204 $3,459 $3,529 $3,687 ~ ' vµratilr income .... : .. .......... .... .. . . . . . . . . . 602 735 •706 775 . Income (loss operetlons) from.... oonn...nung (1) ............ ( Net income loas)(2) ............... .... .... ........... ........... 222) 108) (86) 13) ) Income (loss from continuing operations share ......................... per .... eommon .......... . (0.72 3 0 6 0 1 Net income (loss) per common share .. .... ........... (0.72 (0 5) .1 ) ( ( . 0) Pnk,..er s.eaarx Jurry~~.~1,i1 a9 FeMw~,r~r ,9.~ 1919 FaMrry; 19a9 M.na--3~; I9a9 &c..d 7WJ F..r6 1989 Net sales(3) ...................... . . . $ 650 $2,276 f3,300 f2,999 $3,539 Opentin ineome(3) ..; .:.......... ... 13 389 547 452 652 Inoome oss NU Irrrawmtions from oonumm~g (41oa).................. ... (173) (66) (319) (4u42) (1u) Inoome (Ioa er l from aaatinuing operations ( ) ( ) 1.13 ) ( ) ( ) ~ p iaeoa(bu~pereommonihare... Ne ... (0.78) (022) J ) (l.~), (04 6) RJRN (Predecessor) for the quarterly periods of 1990 and 1989: (Dnllan la Mim.as Excep/ Per 61.n A.w.H) (1) The third quarter of 1990 indudes $75 snillion of advisory fees that were ineurred in oonaection with the Recapitalization Program and the establishment of fixed interest rates on the Oonrerting Debentures and Group Debentures. (2) In connection with the early exlinguishments of debt of Holdings, Groupand Gpital pursuant to the Roa p'talinlion Program, an extraordinary gain of $108 million, net of incorne taxes, was recorded ia the third quarler of 1990 and an extraordinary loss of $75 million, aet of inoonse taxes, was recorded in the fourth quarter of 1990. ' (3) The third and fourth quarters of 1989 include the effects of the implementation of a plan to eliminate excess domestic trade inventories of tobacco products which reduced operating inoorne by an estimated $230 million in the third quarter of 1989 and $130 million in the fourth quarter of 1989. No gain or loss has been recognized for financial statement purposes in respect of the businesses divested post-Merger since the estimated net proceeds in such transactions reflcct fair values of such businesses as of the date of Holdings' acquisition of RJRN. (4) Predecessor results for the period ended February 8, 1989 reflect a nonrecurring charge of $247 million attributable to change in control costs in connection with the closing of the Offer on Feburary 9, 1989. ' Note 19-Subsequent E.ent _ On March 2, 1991, Holdings accepted for exchange and payment approximately 51.176 billion of principal amount of Group Debentures pursuant to the 1991 Exchange Offer. Pursuant to the terms of the 1991 Exchange O}fer, Holdings is paying approximately $547 million in cash and is issuing approximately 129.4 million sharea of Holdings Common Stock in respect of the Group Debentures purchased in connection with the 1991 Exchange Offer.
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3 They're both doing fine - because each seems to have brought out the best in the other. To take the LBO first: In 1990, we completed our requi red asset sales and, as part of our recapitalization pmgram, we raised $1.7 billion in common equi- ty from Kohlberg Kravis Roberts & Co. fund investors; we issued $1.8 billion of convertible preferred stock; we taised $2.25 billion of new bank financing; we retired or refinanced 56.5 billion of existing debt. And all of that amid terrible market conditions. As a result of these transactions and our strong operating results, our original S29 billion ofdebt dropped to $18.7 bil lion at the end of 1990. At year s end, wc had $4.29 billion in equity capital on our balance sheet. In the first quarter of 1991 we completed an exchange offer that will lower our debt by another 51.18 billion and add approximately $700 million of equity to our balance sheet. The most difficult of the financial challenges are now behind us. While a great deal of credit goes to our financial and legal teams for helping to meet our immediate financial hurdles head-on, it was the fundamental strength of ou i operating companies that allowed us to deliver truly impressive results. The buy-out provided a healthy dose of urgency and focus to the operating companies. Nabisco Biscuit Company hit a record 44 percent share of the U.S. market. Camel's share of its domestic market segment improved well beyond our expectations. Tobacco International improved or maintained market share in 19 key markets. We launched a record number of new products and line extensions. We also had our share of misfires. But, overall, the pic ture was vcry positive. Despite the financial pressures related to our debt level, we have never sought to meet our immediate obligations by mortgaging the company's future. In fact, over the last two years, we have spent more than $6 billion on marketing. We've DEBT TO TOTAL BOOK EQUITY MTID AT DEC 31 sa..nuaxnnxsrw.r. a~~ spent $371 million on research and development and S948 million on new capital programs. None of these efforts has occurred in a vacuum, however, and it would be less than candid to say that our buy-out status hasn't changed the way we approach spending. It has, but we think it has changed for the bctter- We are owners - not caretakers. We spend your money and our money where it counts.
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I FIN/WCIA(HIGHrIGHTS l+ll nualxa~1 wN a.+d+-0 FBEECASNFEBWi tlEa I9a9• S2,702 - $647 DEBTTOTOLILBOOBEDUHYMTIB aTOECEM8ERa1 NETL11lS S79a t969' Tobacco $ 8,053 S 6,981 Food 5,826 5,783 $13,879 $12,764 1l90 N19• BUSINEfS UNIT rOMMBURON, 4-4-an-I 20-to-l U!0 Nt9• Tobacco S 2,729 S 3,016 Food 802 742 Corporate (105) (138) $3,426 S 2,620 NETINCOMERDSSI 1fED y!9' S (429) $(1,149) / FuLd~,~n.+d~KUaurtpotted. ' Flx Nahl¢a Irc. Emn kixmr L Ntl4hmu{h hbru.rv I. Iw9 a,d FIa Nl,YO Nnld~ry.~.ql. M1wn lArurry V, IiV Ihnuah ne[m,bn 31, I4F9. I a~NP'°°~nT. bdemuml'vnondvsdenurE, MARKET PRESENCE From Argentina to Zimbabwe, RIR Nabisco products havic earned a reputation for high quality and superior value. Our products am now sold in more than 160 countries and territories.
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SCHEDULE Ill RJR NABISCO HOLDINGS GROUP, [NC. SCHEDULE [fI-CbNDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INIFORMA770N Note A-Suppkattoal Cash Fbw, Infornratioa. On November 1,1990, S1.859 billion of thc sum o(principal of plus accrued and unpaid interest on the Converting Debentures and $541 million of the sum of principal of plus accrued and unpaid interest on the Group Debentures were exchanged for an aggregate of approximately 5800 million in eesb and approximately 51.6 billion stated value of Holdings PrefaTed Stock (64,032,000 shares) pursuant to the 1990 Exchange Offers. On July 16, 1990. Holdings issued 8,000,000 unregistered shares of Preferred Stock ($25 stated value per slure) in exchange for $200 million of the sum of principal of and accrued and unpaid jnterest on Capital's Partnership Debt Securities held by a partnership affiliated with KKR. On November l, 1990, Holdings exchanged such shares in a share for share exchange for 8,000,000 regisarcd shares of Preferred Stock. (See Note I I to the Consolidated Financial Statements.) During 1989, Group issued 54.065 billion sated value of cumulative exchangeable preferred stock in exchange for RJRN (Predecessor) common stock in connection with the Magu (See Note I in the Consolidated Financial Statements.) The shares of cumulative exchangeable preferred stock were subsequently exchanged for $4.065 billion aggregate principal amount of Group Debentures. In addition, during 1990 and 1989, Group issued $557 million and $435 miltion, respectively, of additional Group Debentures In lieu of cesh interest to the holders of such debentures, Note B-Inog-term Debt See Note 11 to the Consolidated Financial Statements for details of the Group Debentures. Note C-Commitmeaa aad Cuntingeadrs Gtoup hss guaranteed the indehtedness of Capital under the 1990 Credit Agreement, the 1989 Crodit Agreement aad the debentures. Group has also guaranteed the obligations of RJRN and its subsidiaries under the working apital agreement. The guarantees rank senior to the Group Debentures and are seaved by a pledge of tLe capital stock of Capital owned by Group. For a diuatssien of oertain restrictive covenants associated with these debt obligations, tee Note 1 t to the Consolidated Financial Satemena. For disclosure of additional oontingent liabilities, see Note 12 to the Coasdidated Firtanctial Statements. S-8
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~at Na 10.63 Letter Agreement,, dated July 27, 1989, between RJR Holdings Corp. and Lawrence IL Ricnardi (incorporated by reference to Exhibit 10.71 to the Form S-1, Registration No. 33-31937). 10.64 Employment Agreement, dated as of June 15, 1989, between RJR Nabisco, Inc. and Karl M. von der Heyden (incorporated by reference to Exhibit 10.72 to the Form S-1, Registration No. 33-31937). 10.65 Employment Agreement, dated as of June 1, 1989, by and among RJ. - Reynolds Tobaoco Company, RJR Nabiseo, Inc. and Mr. Jam Wa Johnston (incorporated by reference to Exhibit 10.73 to the Form S-1, Registration No. 33-31937). 10.66 Fq uity Seavitiu Purchase Agreement dated as of July 15, 1990 between RJR Nabiaco Holdings Corp. and Whitehall Associates, L.P. (incorponted by reference to Fshlbtt 4.4 to the Form S-4, Registration No. 33-36070). 10.67 Registration Righta Agreement (Common Stock), dated as of July 15. 1990, between RJR Nabisoo HO(~~~ Corp. and Whitehall Associates, LP. (incorporated by refereoae lo Rxhibit 4.5 to the Form S-4, Registration No. ' 10.68 33-36070). Righ~ts ARreement (Preferrod Stock), dated as of July IS, 1990, between RJR Nabiseo Holdinga Corp. and Whitehall Assoaates, LP. 3 ncopor.ted by reference to Exhibit 4.6 to the Form S-4, Registration No. 10.69 RJR60Nabiaco Holdin4aCorp1990 Loag Term Incentive Plan (incorpaa ted by refaance to Exhibrt 10.69 to the Form S-4, Registration No. 33-36070). 10.70 Preferred Stock Exch.nge Agreemeol dated as of October 1, 1990 between RJR Nabisco Haidmba' Corp. and Whitehall Associates, L.P. (incorporated by reference to Exhibtt 4.8 to the Form S~, Registrat'an No. 33-36070). •11.1 RJR Nabiwo, Inc. Computation of Earnings Per Share for the period January 1, 1989 through Febrwry 8, 1989 and the year ended December 31, 1988. •11.2 RJR Nabisco HddiagaCorp Computation of Earnings Per Share for the ye.r ended Daeembu 31, 1990 and the period February 9, 1989 through December 31, 1989. •22 Subsidiaries of the Regiatranta. •25. Powers or Attorney. 'Fled herewith. ® ux:'yxss-
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, EXHIBIT 11.2 0 RJR NABISCO HOLDINGS CORP. COMPUTATIONS OF EARNINGS PER SHARE (Dollars in Millions Except Per Share Amounts) Ynr Fadd - FeYn.ry ! 1919 ' Darmba 31. 1f90(A) Dr•aeaW S , 1919(A) Prisv Fdy 1lilred Prta F.n7 qMd Average number or common and common equivalent shares outstanding during the period: Common stock issued and outstanding at beginning of period (in thousands) ........... 308,091 308,091 300.000 300,000 l.eas: shares related to unamortized value of restricted stock .......................... (701) (701) _ - 307,390 307,390 300,000 300,000 Average number of shares of common stock iuued during the period (including 272,000,000 shares issued July 16, 1990) ................ 124,249 124,249 3,137 3,137 Average number of shares related to value of - renruxed stoek earned during the period ...... 179 179 563 563 Average number of stock warrants and options... - 51,158 - 39,475 Average shares iuuable on conversion of redeemable convertible preferred atock........ - 39,687 - - Average shares issuable on conversion of senior converting debuttures ..................... - 113,171 ^_ 130,611 Avenge number of common and common eQuivaleni thirw outstanding during •• period (in thousands) ........................... 431r818 Net income (loss) applicable to common stock: 635r834 303,700 473,786 Income (loas) from mntinuing operations ....... $ (462) $ (462) i(975) S(975) Interest on senior oonverl'mg debentures (aet of ioeome taxes) ........................... - 182 - 158 (50) - - - Prcferred stock dividends .................... Income (laa) from oontinuing operations - - applicable to common atock ................ (512) (280) (975) (817) inoome (lora) from operations of discontinued businesset, net of irKonre taxes .............. - - (1) (1) Extraordinary item-gain on early extinguitbments of debt, aet of inoome tazea... 33 33 _ _ Net income (loss) applicable to common stock ... S 479 S 247 S 976) $ 818) Net income (loss) per common end common equivalent share: Continuing operations ....................... $ (1.19) s(0.44) f(3.21) s(1.72) Discontinued operations ..................... - - - (.01) Extraordinary item ......................... 0.08 0.05 - - Net income (loss) .......................... S 1.11) S(0.39) S 3.21) S 1.73) (A) The calculations or fully diluted earnings per share are antidilutive; therefore, prinury earnings per share are used for 6nandal statement purposes.
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51267 1399
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ABOUETHECOVER R]R Nabisco is a long-establishcd company with a new outlook Our foundcrs- entrepreneursell - '~ created produds, packages and . 'advcrtising that are part ofAmer'ican - hLstory We Je chang<d a lot about `-' our company over the past two years, but we have never forgotten the courage ofour own beginnings. .; COMPANNOESEAIPEtON-;,i..>.:: ( RJR Nabtsco Ls a world leader in manufaainng and inarketing of ;. ,,,~~ ~ ~ ; gedi "Js~ cnusum>u.:~--~ 1t ; nrards v ~uctru ~ ~ `Aho~ Rttr, CamS1 Or.eo,& Ptemtum;'Shrcddpd]yhea~, _; r~fSas,ers; Ylzntersand tsre•Fae~ have . '. .'~becn household narrcs tugenerations ..O( families. These oamea-and . : ~ hundreds nsore .-,ere rynonymous '_. with bighyuality'an,d .$upcrior yalue. ~ Our history is rrmoted ~in entie=' ` preneurship, commitmcnt to quality + anse and and ttrvice, tcainwom of urgency. Today, these qualities are . as important as ever to R)R Nabiuds continuing growth and sucess ineach of the markets we serVe. : fINANCIAL I uxx.eiscaec u. n~..n MARKET PI fmm.' 'Limbabs' pnducts rcputatio and supc products murc tha and I:rri
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W g; MIM 0 ® 0 93 The SoderOnlmi opened its Ooors m loregn cyareRe braods /n a big way during 1990-by ptaznng a p biMOn cqarerte order wltb R J Reynofds Tobacco Inlernatloiaf The compmry becamelbe brsl Amencan tobacco company ro 1eeGVev its producrs to Sovier smokerf wben rhe Grsrload of Wlntron and mh v brarMs were shipped m Ocrober. The Sovisr lre,yNer Kabvodsk is shown bne, with workers badinp ane ollhe maM shi(.menls from Reynofds rhzrwiRbedeTixredeMough 1991. 0 ® m ~. ~~. f t I © ® 0 M 0
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EXHIBIT 11.1 ~ . RIR NABISCO, INC. COMPUTATfONS OF EARNINfS PER SHARE (Doi4rs In MiBlans Exapt Per Share Amounts) Nef.eener Js.rq 1, IfBf Yar F.1er F 1l~f D.p ~r ~t. Avenge number of eomm3n sharas outstanding before adjustments (in thousands) .......................... Add: Common shares that would be issued assuming that all slock options without SAR: outitaodiog during the year were eon.xrted into common ttock usmg the treasury stock method (in tLousands) .............. Less: Unearned portion of restricted stock which was issued on the grant date(in thousends) .................. Average common shares outstanding assuming full dilution (in thousands) .................................. Income (ksa) from oontinuing operations ................. f.as preferred dividends .............................. Income (bss) front oontinuing operations applicable to oommon stock .................................... Income (loss) from continuing operations per eommon share . 225,515 232,538 - $32 - 783 225,545 232,587 $ (197) S 1,171 (4) (IS) S 201 S 1,156 $ 0.89 S 4.91 Net Income (loss) applicable to common stack ............. S 17T Net income (loea) per tmcmwn share .................... S 0.78 S 1.378 $ 5.92 The difference between primary ineame pa shum and fully diluted ieeunte per share is insigei6cant; therefore, prinury income per share is aot presented.
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© I~spc: i.illy npl imism. Ptnplc hcru .cc t:h.1t thcc'vc aciumpli+h:d in nao rc.u" scn.c Ih: wind> uf.h.mgt blotring dtruug6nutltII: \.rhi:cu, znd I.rl c:rI pusiliee aUoW \rkal thr till u rt hulde in .qure. 1111) ..huulJ. lL:c'ri u.trn:J il. 'I'h; <s.:n' Ihal liillutcs tlti.4lt.r .Itnuld 6clp vuu bcimni rnorr I.unili.ir trilh dic RII: \abi•n,nl wd.ir. Th::6.ina;• h.u; b:.n I.utc.idiin". - znd wo think Ih:r'ec ban Ilr Ilir balrr.l'6r:hellrn,c, 6.nc A;ru rLnuning anJ th<aicamplirlt- m: n1, nwncrous. 'I'hrou4lt il .dl. nd\.' L1111101 nond tL.n IturJlc, 11.11, 6cat d:.rr:J ntmc lim;, in ihc .uinlvm'. p.rrl. And. in U<t, mudt ol uur>u.uss is m.idc 1,1110 I>c di.n tnudiliun W ulmnalinn.mJ irliiiAicc. I hLipC ruu .tgrcc xlitr rr.tding, Ihc rc,l 0 tic rq.onl frw unnuel rrpuri Icn<n cnd tridtoul rco ;cniiiu.~ wiiquc nnitri~ Inai,nnM J.J iu.lnldv.d..:\r.t riphih..I in uiir <.i.r. l yrt .ui.c., rvcr ihc Id.t ,cvcr.d cc.ir, 11.1, uat I":n Ili: r.,uli nl nnic imp;i,nn.il. in,iimti.m.d nuvnenmm. ( luilc Ili. innliai t. iOJnc inJiciJual, ,>nrkcJ lirclc•h' anJ Itrilli.mdr in 16; Iai<at nianwou, di.tllcn,t.. IndudcJ in Ihi, grnuy ire m.inc ul Ihc p.rtm:r::md asnci.nc. nfuur prin<ipal .L.u';ha1Jn: Mhlh:r~ha.ni.RuL.rl,: Ct~.llicc h.n. L;;n ur.u n,llr.r:u;,. 11111 0mi.iJr.6i;ttIn,,iq~l.l:ni. nl:J Ih;lr nb" n,in:ouw.i,; in iuwing uur nrv t. iih inu:h t, i,Jam au.l unJ: i,i.mdinc. I inelh. n.1nc nluur .ut:o„c. rvcrc bl. t,ii6..m Ili; nv.J, ~rdin.irv runiribuli'm,ul.,ll Ihc RIR :mplar;., tr6o IiteJ Ihrough Iho peinlyd anJ Jis:un:cnint I I I.IR1 pw.c,..mJ dicn Ituunt.d hnd, li1: p1.1C1liliiCllllrw1\TS J, the IKtx iump.i m. m. r' rd. \\'i .r• ut. nrn „t, e LOUIS V. GERSTNER, JR. uia CMeI F.eaume Ytlaw
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F.Wa, No. 10.6 Form of Indenture among RJR Holdings Capital Corp., RJR Holdings Corp., RJR Holdings Group, Inc. RJR Nabisco, Inc. and US. Trust Company of California. N.A., as tfrustee, relating to the 13'k% Subordinated Ilrbentures due 2001, including the form of securities (mcorporeted by reference to Exhibit 4.4 to the Regutration Statement on Form S-I of RJR Holdings Capital Corp., RJR Holdings Corp.. RJR Holdings Grouy, Inem and RJR Nabisco, Inc., Registration No. 33-27892, 8led on April 4, 1989, as amended (the °Form SI, Registration No. 33-27892")). 10.7 Form of Indenture among RJR Holdings Capital Corp., RJR Holdings t..orp. RJR Holdings ritnup, [no., RJR Nabtsoo, Inc. and US. Trust Gmpany of California, N.A, as Trusteo relating to the Subordinated Extendible Reset Debutturet, including tie form of socvritia (incorporated by reference to Exhibit 4.5 to the Form S-l, Registration No. 33-27892). 10.8 Credit Agreement dated as of Janusry 31, 1989 among RJR HoMings Corp., RJR Holdings Group, Inc. RJR Holdings Gpnal Corp., RJR Acqutnhon Corporation and the nanciat institutions party thereto, including Bankers Trust Company, The Chase Manbattan Bank, NA., Citibank. N.A., and Manufacturers Hanover Trust Company, as Manaaing Agents-Adminialratlon (incorporated by nference to Eabibit 4.12 to the Form S-4, Registration No. 33-27894). 10.8(a) FLst Consent and Amendment dated as of April 18, 1989, among RJR Holdinga Corp, RJR Holdingi Group, Inc., RJR Holdings Capital Corp, RJR Acquisition Corporation and the lending instilutiooa part thereto (uoorporated by reference to Exhibit 4.6(a) to Amendmast Nya 1, filed on may 3, 1989, to the Form Sl, Registration No. 33-27891 ("Amendment No. I to the Form SI, Registration No. 33-27891")). 10.8(b) Second Conseat and Atoeadmeat dated as or Ami125 1989 among RJR Holdings Carp, RJR Holdings Group, Inc., W R Holdiegs Gtapital Corp., RJR Acquisition Corporation and the lending institutioas party thereto (mootponted by refaenoa lo Exhibit 4.6(b) to Amendment No. I to the Form 5-l, Registration No. 33-27891). 10.8(e) Third Amendment dated as of Ma~p Holdings 1989, .mong RJR H RJR Holdiap~ ~Grou~p, Inc., RJR Holdingp GpiW Corp., RJR Na ' ' Inc. and the ' roslituttom party thereto ('moorponted by reference to Fshiblt 10,6(c) to Post-Effective Amendment TTo. 1, filed on August 3, 4989, to the Farot S-1, Regiuratioo No. 33-29401). 10.8(d) Fourth Consent aod Amendment dated as af June 30, 1989,aawng RJR Holdinga t~orp. RJR Holdings Group, loc~ RJR Holdings Capital Corp., RJR Nabisoo, fnc. and the lending institutaos party tbereto (moorporatod by reference to Exhibit 10.6(d) to Form S-1, Registration No. 33-31937). 10.8(e) Fifth Consent and Amendment dated as of October 12, 1989, among RJR Holdiags Corp. RJR Holdings Group, lnc., RJR Holdugs GpiW Corp., RJR Nabisoo, ~nc, and the lend~'ag mstitutions party thereto (mcorpotated by reference to Exhibit 10.6(c) to Form S-1, Registration No. 33-31937). 10.8(f) Sixth Consent and Amendment dated as of January 15, 1990 among RJR Nabisco Holdings Corp, RJR Nabisco Holdings Group, Inc., RJR Nabisco Gpital Corp. and the lead'utg institutions party thereto (inco~porated by reference to Exhibit 10.9(t) to the Annual Report on Form 10-K of the Registrants for the Year Ended Deoember 31, 1989, File Nor. 1-10215, 1-10214, 1-10248 and 1-16388 (the "1989 Form 10-K")). 10.8(g) Seventh Consent and Amendment dated as of February 1, 1990 among RJR Nabisco Holdings Corp., RJR Nabisco Holdings Group, Inc., RJR Nabisco Capital Corp. and tbe lending institutions party thereto (incorporated by referena to Exhibit I0.9(g) to the 1989 Form 10-K).
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E+raiblr Na •3.8 Amended and Restated By-laws of RJR Nabisco, Inc., as amended effective February 28, 1991. 4 The Registrants agree to furnish copies of any instrument defining the ri~hta of holders of Iong-term debt of the Registrants and their consolidated subsidiariea that doea aot exeeed 10percent of the total assets of the Aegistrants and their consolidated subsidiacies to the Commission upon -.re,queat. 10.1 Indenture, dated as of February 9, 1989, among RJR Holdings Corp, RJR Holdings.Group Ino., RJR Holdings Capital Coro RJR Acquurltion Corp~ratwn an~ Uniud Statea Trust Company of New York, as Trustce, relating to the First Subordinated Inereasin~ Rate Notes, inctud. ~ng.forms of securities (inc»rparated by referena to Eahtbit 4.6 to the Registration Statement on Farm S-4 of RJR Holdinga Corp. and RJR Hddia Group, Ine., Registration No. 33-27894, filed April 4, 1989, as amended ~the °Form S-4, Registration No. 33-27894")). 10.1(a) Form of First Supplemental Indenturq dated as of February 1 1990, among RJR Nabuoo Holdings C.orp., RJR Nabisco Holdings liroup, 1nc., RJR Nabiseo Capital Corp., RJR Nabisoo, Ine..nd United Sntes Trust Company of New York, as Trustee, nlaw'Ig to the First Subordinated Increasing Rate Notes( ted bp roferena to Bxhibit 4.1(a) to Amendaunt No. 2, filed on anua 26, 1990, to the Form S-1, Registration Statement No. 33-3197). 10.1(b) Revised Form of First Supplemental Indenture, ~dated as of February 1, 1990, artaag RJR Nabisco HoldipgsCorp RJIt Nabisco Holdings Group. Ine, RJR Nablseo Capital Cap., RJR Nabisa, Inc. and United Statet Trust Company of New York, as Trustee, relating to the Fsrst Subordinated Increasing Itate Notes (incorporated by referena to Exhibit 4.1 to Atnendmeat No. 3, 51od-Febmary_ 1,1990, to Form S-1, Registration No. 33-31937). 10.2 R~~. tron Rights t, dated as of February 9, 1989, amang RJR Hddings Corp, RJR~trs, 4P., KKR Partners 11 L.P., Drexel Burabam Lambert ted and Merrill Lynch ec & (u'sowporated by reference to Exhlbit 4.3 the.R~. taa Statement on Form 8-1 af RRJ Holdiogs Corpa Registration No. 33-2940I, filed on June 20, 1989, as amended (the Farm S-1, Registration No. 33-29401")). : 10.3 Form of Indentu.e anang RJR Holdings Capital Corp. RJR Holdings ~p~p_ RIR Hoidiuga Grapr, Inc. ItJR Nabuco, Inc. and Security Pacific Nat)ocal Trust Campaay(rvew ltork). as Truttee, relating to the Payment- in-Kind Subordiaated lebentures due 2001, including the form of securities ~s~oorpurated by reference to Exhibit 4.1 to the Form S-1, Registration No. ~3-27891). 10.4 Form of Indenture anwng RJR Hddings Capital Corp., RJIt Holdings Corp, RJR Holdings Greu~p,1nRJR Nabrsoo, Inc, aad Security PaeiBc Nabonal Tnut Campaay (New York), as Trustee, relating to the -Subordinated Distount Debeatures due 2001, including the form of securities (incorporated by reference to Exhibit 4.2 to the Form S-l, Registration No. 33-27891). 10.$ Warrant Agreement between RJR Holdings Corp and Bankers Trust Company, as Warrant Agent, dated as of May 22 1989, including the form of Warrant Certificate (i ted by reference to Exhibit 43 to the Form S-1, Registration Na 33-27891). 10.5(a) First Amendment to Warrant Agreement between RJR Holdings Corpand Bankers Trust Comnanv. n Warrant Aeent. dated as of July 28. 1989 (incorporated by referenoe to Exhibit 10.3(a) to Form S-l, Registrai~on No. 3-319 7 .
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2 OEAB FELLOW Im'ESTOBS: RJR Nabisco hasn't published an annual report in three years. Most of you, I suppose, are aware of the dramatic events that haae taken place over that period: changes in the company's ownership, management, and financial structure. Today, however, we are pleased to tell you - our new common and preferred share- holders - a fulkr story about what's happened to our company since our leveraged buy-out generated headlines. I know that some of you are old friends who had the opportunity to own our common shares in years past. You II find a lot that's familiar in this report - many of our brands, managers, operations. You Il also find a lot of change, especially in the way we work and think and measure success. We concluded 1990 as the sixth- largest packaged-goods company in the United States. That stature rests on a bedrock of familiar and powerful brands. Winston and Camel and Salem. Oreo and Ritz and Fleischmann's. Life Savers and Planters. And two hundred more. These brands are the cornerstones of our future. To reduce debt after the buy-out, we sold several food compa- nies (and other assets) for some $5.7 billion. All are good businesses, and we got better prices than most people expected. The result: We were able to keep all the crown jewels in our tobacco and food operations. BUSINESSINVESENIEHT awNS,ttaawwcamu. uww It's an understatement to say that the events of 1990 made for an exciting year for the company, but we ended the year exactly where we wanted to be. Our business unit contribution (which we define as operating income before amortiu- tion of trademarks and goodwill) increased 31 percent to $3.43 billion. We may not match that rate of increase in the future, but in achieving these results our 55,000 employees have learned much about running a more efficient company. There's a sign put up by a few of the more inspired managers in some of our buildings that says'Success is Positive Cash Flow." It's cash, not accounting profit, that pays the interest and principal on our debt and adds fundamental value to the company. Our people have understood this financial priority. They have pitched in wholeheartedly; their ideas alone have trimmed the better part of $550 million from our operating costs. Free cash flow- sepante from any asset salt proceeds and after capital expenditures - was $2.7 bil lion last yea r, and $647 million in 1989. People tend to ask'hows the LBO , doing?" and'how s the company doing?" as separate questions.
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Is The results that are emerging signal gains - some that already have been realized as well as many that are still to conte. During the final quarter of 1990, for example, Planters' share of market was increasing monthly. We look forward to continued growth from this unit. Now a part of our new RIR Nabisco Foods Group, Planters LifeSavers is well positioned to benefit (ront the economies of scale that are so important in the food business. In fact, all of our food businesses will be seeking opportunities to take advantage of our collective strengths. OPERATING RESULTS Our focus on building long-term strength did not prevent us from seizing opportunities to improve our short-term results. Quite the contnry, we worked hard to improve the current performance of each of our businesses. We've reduced operating costs by approximately S550 million using ingenuityand old-fashioned belt. tightening. Resourceful employees accounted for many important pro- ductivity improvements. We also sotd more product and at better margins. Total sales rose 9 percent in 1990 to $13.88 billion. NET SALES awx.nsm.nnxcscw. Tobacco sales climbed 15 percent to $8.05 billion, white food sales rose 5 percent, a@er adjusting for asset sales In the U.S., tobacco margins widened by 5.7 percentage points last
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RNABISCO 1j01 AVENVE OF THE AMERIUS NEw YoRlf. NEW Yo4R 10019
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"bit Na 10.8(b) Eighth Consent and Amendment dated as of June 20, 1990 anwng RJR Nabisco Holdings~ RJR Nabisco Holdings Group Inc., RJR Nabisco Capital Corp. RJR Nabiscot Inc., NABFIN, B.V„ R. ~. Reynolds Finance SAY and the tending instituttonrpa rty thereto (incorpotated by reference to Ezhibit 10.I2(h) to the Form S~, R~istntionTla 73-36070). 10.8(i) Ninth Caisent and Amendment dated as of November 1. 0 among RJR Nabisco Holdiny~O, RJR Nabisco Holdings firoup Inc., 1990RJR Nabisco Gpttai Cotp RJR Nabiwq Ino„ NABFIN, B.V., R. f. Reyoold+ Finana S.A and the~wding inatituttam party thereto (iooorponted ~p rcferepa to Exhibit 10.14(i) to the epatration Statement an Form S4 of RJR ' Nabisco Holdings Cbrp,RRegkiration No. 33•38227, Eled on December 14, 1990, as amended (the "Form S-4, Regiatration No. 33-38227"). 10.8(j) Tenth Consent aad Amendment dated as of January I, 1991 amot~g RJR Nabisco Haldinta Cbro~R Nabisco Holdinn t3roup Inc., RIR Nabisco Ca q'tal IfJR Na Ine., NABFIN, B V R j. Fuuna S.AT and ehe lending iastitutiam party thereto (ineorpotat~aence to Exhibit 10.14(j W ment Na 1, 81od on January 25, 1 l, to the Form S-4, Re tion No. 33-38227). •10.8(k) Consent dated as of February 20, 1991. 10.9 Working Capital Credit Agreement dated as of A~ 21, 1989, among RJR Holdings t..orp., Various Subsidiarier, Variaus Banlu and Bankers Trust Company, The Chase Manhattan B.ak, N.A., q'tibanit, NA. and Manufaduray Hanover Trust Qompany, u~ Managing Akeats- Admiaistrrtiea (the "Warkiog Qp'nl Credit Agtecmeat )(inoorperated by reference to _ ~xhtbit 4.7 to Form S-1, Registration No. 33-27891). 10.9(a) Firtt Consent and Amutdmeat to the Working Capital Credit Agreement (aee Exhibit 10A(e) above). 10.9(b) Second Consent and Amendment to the Worhiag Capital Credit Agreement <we Fxhibit 10.8(0 above). 10.9(c) Tldtd Consent and Amendment to the Rbrking Capital Credit AgreenKat (aca Exhibit 10.8(g) above). 10.9(d) Fourth paueat and Amendment to the Warking Capital Credit ASrarment (tee Exhibit 10.8(h) above). 10.9(e) FUth Coment.nd Amendment to the Warking Capital Credit Agreement (see Exhibit 10.8(i) above). 10.9(f) Sixth Consent and Amendment to the Working Capital fQedlt Agreement (ace Exhibit 10.30) above). 10.9(g) Oonaent dated as of February 20, I991 (see Exhibit 10.8(k) above). 10.10 CreditAgrxmen t dated as of July 9, 1990 among RJR Nabisco Holdingr Coro.. RJR Nabisco xotdtngs cra,p, Inc,.RJR Nabisoo Capital Oorn.. RJR Tlabisoo, Inc. and rhe lendin8 institutions party thereto (tbe" 9901 Qredit~~oe~n t°).(incorporated by reference to F~hibit 10.14 to the Form S-~ RagidraLon No. 33-36070)). 10.10(a) 10.8(Q(~a;and Amendment to the 1990 Credit Agreemeot (see Exhibit 10.10(b) Second Consent and Amendment to the 1990 Credit Agreement (toe Exhibit 10.8(j) above). 10.10(c) Consent dated as of February 20, 1991 (see Exhibit 10.8(k) above). 10.11 Form of Indenture among RJR Holdings Corp. and The Cl'tiu,na and Southern National Bank, as Trustee, relating to the Senior Converting Debentures Due 2009 of RJR Holdings , ineluding the form of securities (incorporated by reference to Faht it 4.1 to the Form 8-4, Registration No. 33-27894).
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We've introduced nrx produas, entered ntw markrti, im'entcd nrw walti to do lhings h•tlrl: \Cc'cc aapandcd (and deRndcdl market >harrs. We've increased prrxluaivity. \YCbc widentd oprra/ing merSins. U'c'vc alsn clinlin:nad "ni:e.w-havc•. (rills. In short. we've Inadc certain Ihcrc will Ilr a lxngihlc pay-nfffirr every dollar we s(xnd. 'l'hcsr accumpli>hlnanl, m;ltler. Cilnllx•titian i1 thccentral (,lil o(nur csi>IClxc. 1\'c rr in hChlinl; lrim today, alld wf ra' 11'II111111P i1Wre halllcs Ihan we lose. We like nur rrrrrcnl pt+rl Inliu nf ulx'ral iuns and hrand.c Wc'vc Ixnaitcd frnnl nur h.ll:ula between (ood znd lob.l:co. We like tile potentizl in our intcrn;rtion:d ryx•ral iou.. INTEBESTCOVERAGE IUIIx.rR4YxarMxGSCaY Look fnr us to be alRrc>sirc ill huilding nrarkcl sharc in cs(wxling nlarkct>, in applying the .trength of our leading brands to whnlc fnnlilics of new and related pnxlucts, and in rC (x l s i t i o ll l tl l Ilr'A I lt ra' h ril I h1> IO assunx new ndcs in tile markctpLr.c. Louk fi+r us to nl:lnagc fur prufil nrargins, (lr cash flow, li)r busincc unit cantrihuliun. and lirc salcs vulunlc. laxlk lilr us to lu active glwd citicrns in tile cnnlmunitics where we olx'ratc. Yuu haw rw6 for lhc nlust 1>,In, mel the managrmcnl tcam dl,lrg.d wilh lalding thcsc a'Obrls: liln luhnstun al ItcynoWs'lillwl.m. luhn Grecniaus at the ItIR N.Ibisco Forxls Grnup, and Palc Si.cl al lillxliin IwcnrlliolmL Grnc Croi.cln6 Karl von tier Heyden, Lirry Iticciardi, 11. Oglesby and David Kalis hcad tile :orlxnate staff. Ther are rrmarkahlr abla people who work wall togclhcr - and tlmc halc h?<ing ns nl udl as I do. lher Illsn ar, parulers witll you and umlr 43(1 ollnr rtic. W iccs uf RIR Vahisio who have im'tsted Ihtir own nhmf~ irl this CUlrl(\Inq Uur tCanl ul : sccutilr> h.ts put tlreir n. vn dulla rs yuilt lilmally at risk alnnsidc yuure; IIA'll'rlwll IKrlOrrrlalliv Kill la rgal v rlelirPlillf tile nuliUql[. II Ih<ri is one thin¢ I h.nr learned fram tile I.It(lcz(xricnc:. it is lhal thc lu>I wac lu nlUtiv'atf nutn.lgHi is lruly lu rnike thenl ulcners. Rckiudlilv, .1 v'tlsc rdrnlrcprcncru ship Ihuwlghnul 111<cunlpanv hu becn wu of r(Ir Irigh.N1 priaritics urcr Ihc past two li•ars. Sn•im, II cnlcrga ha, lucn oua uf uur grc,llosl cniAailionsi arxl llelr takrn stcp: In cclvlxl such r+pfwrlunilirs lo nlore cnlld"rs with a Iww clnpluycc suulk awncrship pl.m. As people Ixgin to aa lik.' uu•ncrs, olher lcau'kpl.l.c 1`dlu:, trlnlc inlu lix'us::uslunlCr A111YI.MlIUl1. 4:Illlworl:,illl111111t111fl11 to cuNinuirtg qu.dilr inlprtrrcnltnt, w'cir1P, aB1 nhiinli5111. reirG/.O'~VSerMr bo+IV. Ir,n. wwn'~`~, ~~•T>I,am rrmronl
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EAM No. 10.24 Form of Agreement eontaining Gross-Upprovu ions, dated January 27, 1989 (incorporated by reference to Exhibit I0( )d (iii) to the 1988 Form 10-K). 10.25 Trust Agreement between RJR Nabisoo, Ino, and Wachovia Bank and Trust Company, N.A., Trustee, dated January 27, 1989 (incorporated by reference to Exhibit 10(d)(iv) to the 1988 Form 10-K). 10.26 Agreement, dated September 29, 1986, between RJR Nabisco, Inc. and [Nars6all B. Bass (ineorpo~akd bY reference to Exhibit 10.12 to the Form S-4, Registntlon No. 33-27894). 10.27 Letter Agneemwt, dated March 21, 1988, between RJR Nabiseo, Inc, and Marshall B. Bass (ted by reference to Exhibit 10.13 to the Form S-4, Registration 10.28 Letter, dated June 30. 1988, from RJR Nab'iaco, Inc. to Marshall B. Bass (i ted by reference to Exhibit 10.14 to the Form S-4, Registration No. 327894). 10.29 Form of Fmoloymeot Agreement Without Change of Control provision Na 3-2718e9d4)by_ rehrc+roe to Exhibit 10.16 to the Form S-4, ReB~tntan ' 10.30 Speeial.Addendum, dated Deoembor 20, 1988 (incorporated by reference to 6xhibit 10(d)(u) to the 1988 Form 10-K). 10.31 Muter TrustAgreement, as amended and reatated as of October 12, 1988, between RJR Nabisco, Inc. and Wacbovia Baak and Trust Company, NA. No.B )~ reference to Exhibit 10.19 to the Form S-1, Registration 10.32 Ameodtnent No. I to Muter TntstAg raement, dated January 27, 1989 (inoorpotated by reference to Exhibit I0(g)(ii) to the 1988 Form 10-K). 10.33 Amendment No. 2 to Masta TrustAgroemen t, dated January 27, 1989 (incorporated by referenoe to Exhibit i0(g)(iu) to the 1988 Form 10-K). 10.34 Excess Benefit Mauer TnutAgroenren4 as amended and reuated as of October 12, 1988 betwaea RJR Na bisao, Inc, and Waahovia Bank and Trust Company', ~~I.A. (iooorpor.ted by reference to Fxhibit 1021 to the Form S4, Regutratioa No. 33-27894). 10.35 Amendmmt No. I to P.uria BeaeSt Matter Trust Aproemen dated Januay 2,~7,i989 (incorporated by reference to Exhibit 10(h)~'u) to the 1988 Form 10•K). 10.36 RJR Nabisco, Ina 1982 Long-term Incentive Plan, as amended on July 21, 1988.(ioQOrporatod by rdereaa to Exhibit 10.23 to theFiorm S-4). 10.37 1977 Stock Option Plan o[ RJR Nabiwo, Inc, as amended on July 21 , 1988 (incorporated by reference to Exhibit 10.24 to the Form S~4). 10.38 Supplemental Benefita Plan of RJR Nabisco Inc. and Participating - Cawpw es, as amended on October 12, 198g (ineorporatod by rehrenoe to Exhibit 10.25 to the Form S-4, RegisUation No. 33-27894). 1039 Amendment to Supplemental BeneBte Plan, dated November 23, 1988 (inaorporated by reference to Exhibit 10(k)(u) to the 1988 Form 10-K). 10.40 Amendment No. 2 to Suppleauatal Benefits Plan, dated January 27, 1989 (incorporated by referwee to Exhibit 10(k)(iii) to the 1988 Form 10-K). 10.41 Additional Benefits Plan of RJR Nabisao. Ina and Participating Campanics, effoctine October 12, 1988 (' ted by ref re.eee to Exhibit 1028 to the Form S4, Registration No. 33- 7894). 10.42 Amendment to Additional Benefits Plaa, dated October 28, 1999 ((incorporated by reference to Exhibit l0p)(ii) to the 1988 Form 10•K). 10.43 Amendment to Additional Benefits Plan, dated November 23, 1988 (incorporated by reference to Exhibit l0(1)(iii) to the 1988 Form 10-K). 10.44 Amendment to Additional Benefits Plan No. 3, dated January 27, 1989 (incorporated by reference to Exhibit 10(1)(iv) to the 1988 Form 10-K). - --- - ---------
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22 CONSOL)OATED CONDENSED FINANCIAL INFORMATION RJR NABISCO HOLDINGS CORP. 1l90 19e9• Gn.rdnN CaM.wA stnnnanb et bs wu Ndt sdes $13,879 $12,764 Yaan wd.d 0.<enlx ]1 H vaillianr) W MIF,.liM Cost of products sold 5,652 5.573 4Ma.uw..wa.r.aMn 4.aui~.,Iwry,4M Selling, advertising, administrative and general expense 4,801 4,571 Busineu unit contribution 3.426 2,620 Amortization of trademarks and goodwill 608 567 Operatingincome 2,818 2,053 I ntercst expense (3,000) (2,937) Amortiration of debt issuance costs (176) (447) Change in control costs (247) Other income (expensc), net (44) 184 Income (loss) from continuing operations before income taxes (402) (1,394) Provision (benefit)forinconse taxes 60 (222) Income (loss) from continuing operations (462) (1,172) Income (loss) from operations of discontinued businesses, n<t of income taxes 23 Income (Iass) beforc extraordinary item (462) (1,1491 Extraordinary itenl~gain on early exlinguishments of dtbt, net of income taxes 33 Net income (loss) S (429) $(1,149) BJg NABISCO HOLDINGS CUIIP. tls0 LanalN.aeC..4ned iutwe.n al Fne GN FMw t I ncomc (loss) from continuing operations S (462) S(1,172) 1'un w,Ad Mcw,Mr3101 .nFeal a.aapFx.aa4 Interest expense 3,000 2,937 [.ndlm4rwvl.bb.wb ,M,W LMMn.,/...1.wyM1 Amortization of debt issuance costs 176 447 fur..rJwl,.i,M Income tax provision (benefit) 60 (222) fRprecialion of propcrty, plant and equipment 450 449 Amonixation(principallyintangibles) 680 639 Change in control costs . 247 Accretion of other noncurrent liabilities 86 75 Earnings before inturest,taxes,depreciation and amortization 3,990 3,403 Interesl paid (1,424) (1,909) Taxes refunded (paid) 32 (229) Decrcase in workingcapital 58 93 Accounts receivable sold 321 Capital expenditures (426) (522) Other, net . 151 (186) Free nsh flow $2,702 S 647 ' InFdnxIMWA,.oIS.M1Umnru„rl./wa,I,m.afiH4rv.ryf,MnWala/LI:wItlN.peop./mnna.wryl.YM,M.µh nw.nan 11. mR , r.Ad,m,Gaa.nprc,.d,udfi,u,ci,xn:w;n.
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ExUbil Nu. 10.45 RJR Nabisco, Inc. Supplemental Executive Retiremeet Plan, as amended on July 21, 1988 (incorpo nted by reference to Exhibit 10.32 to the Form S-4, Registration No. 33-27894). 10.46 Amendment to Supplemental Executive Retirement Plan, dated November 23, 1988 (inoorporated by reference to Exhibit f 0(m)(ii) to the 1988 Form 10•K). 10.47 Amendment No. 2 to Supplemental Executive Retirement PlanS dated 10.48 Janwry 27, 1989 (uworpontod by refereoa to Exhtbit IO(m)(tit) to tbe 1986 Form 10•K). LetterAgreemrnt, dated November 29, 1988 between RJR Nabisco, Inc. and Ward M. Mi11er Jr. (' ted by re~a¢noe to Exhibit 10.35 to the Form S-4, Registration No. 33- 7894). 10.49 I.etter, dated December 7, 1987, from RJR Nabisoo, Inc, to W.G. Cham i oo Mitchell (ineotponted by reference to Pnhibit 10A2 to the Form S-4, ttegutration No. 33-27894 . ' 10.50 Letter Agreement, dated February 20, 1989, between RJR Holdings Corp and J. Paul Sdcbt (incorporated by refereoce to Exhibit 10(u) to the 1988 Form 10-K). 10.51 Addendum to Employment Agreement, dated November 10, 1988, between RJR Nabiseo, Inc. and Lester W. Pullea (uuwrporated by reference to Exhibit 10(v) to the 1988 Form 10-K). 10.52 Agreement, dated Mareh 10 1989, between RJR Holdings Corp, RJR aN-bisoo, Inc. aud Louis V. tierRner, Jr. (iooorporated4 re4reaa to Exhibit 10.45 to the Form S-4, Regictntion No. 33-27894). 10.53 Letter Agreement, dated March 10, 1989, between R1R Holdings Corp., RJR Nab4oo, Inc. tad Leaia V. Getstner, Jr. (m' oxpaa ted by refereeoe to Exhibit 10.46 to the Form S-4, RegBtr.tion No. 33-27894). 10.54 {.ctter-Assocam-0alod-A4~teb 10>1989, bctweeo RJR Holdings Corp.. RJR Nabisco, IacL and Louis V. t7eretner, Jr. (' ted by refetma to Exhibit 10.47 to the Form S-4, Regiatratioo No. 33- 7894). 10.55 Common Stock Subscription Agreement, dated as of March 10 1989, between RJR HoWinga Com and Louir V. Gartacr, Jr. (the'rGaaxr SubsaiptauA~ C) ted by reference to Exhibit 10.48 to the Form S 4, kegntratioo o. 33-27894). 10.56 Amendmen dated as of July 18, 1989, to tha Gastner Subeat'ption Agreement ~' tod reterence to Exhibit 10.68 to the Form S-1, Registration No. 3-29401 10.51 Amendment No. 2, dated u of September 27, -1990, to the Gentner _ SubsaiptionA~recmtyt(incaporatod by reference to Exhibit 10.60(a) to • the Form'S~, Regulraticn No. 33-36070). 10.58 Common Stock Subscription Agroeawnt, dated as of April 3, 1989, between ' RJR Holdings Corp. and J. Paul Sg ~t (inctonNo. orparated by reference to F~chibit 10.69 to the Form S-l, Re t 33-29(01). 10.59 Caounon Stock Subscription Agroemenl, dated u of June 15{ 1989, between RJR HoWin&s~y and f~arl M. vou der Heydea( ted by reference to Exhibit 10.70 to the Form S-1, Registration No.9401). 10.60 Stock Option' Plan for Directon and Kcy p~yaa of RJR Holdings Corp. and Subsd'urirs, dated at of July 21,~f989 ("moorporated by reference to Exbibit 10.71 to the Form S-l, Regictration No. 33-29401). 10.61 Form of Comnton Stock Subeaiptioa, Agreement between RJR Holdings Corp. and the purchacer,named therem ted by reference to Exhibit A to Post-EOboGve Amendment o~. ~fitcd on August 21, 1989, to the Form S-1, Registration No. 33-29401 ("Post-ESeclive Amendment No. 2 to the Form S-1, Registration No. 33d9401")). 10.62 Form of Non-Qualified Stock Ootion/t~~ ment between RJR Holdings Corp. and the opGonee named thaein (Tn..rporated by«ference to Exhibit B to Post-Elfecttve Amendment No. 2 to the Form S-l, Registration No. 33-29401).
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D Rerrnl/s ToOaccnYunchedlM hst neravl adcenpe'gn ltra apenrte awnd Gme{ pr 1913. rThe rampr(yn M'Ach itciAeE74c'e. merm fa the SanNeyEw<vwq Post eadauN wwked: By 1a7/, aUrortlr <ipurttes smdrel,n Ua U.S. nme 6mels. HerrWds Tobacco rerenrtVmmiymateerM CemdA'!lIA, nTYCA artef75y04S II raf aNM1 }N aed bstsmr emwmerappN RernLg the IwanJAes AupeQan uaM+np e tmaemwo- (Ly eQKT(iJV.q IaeyeWRAe ienY CrnYlaGr aSet eppeMs tn amNerr. Th nwk: A reunt cawmeraareceqnaa,eurveysAoneanll .loe rsAOan ee/aw'n New rurt r:as fwes Syuwnl evucar:y HW kad:p tiaoece's ad cAeruter, and after yran oldncC+e, Gmel's prow4p m ~Aetshere. PIAMERS EIFESAVERS COMPANY Few names have been more famil- iar to generations of consumers than Planters and Life Savers, the leading names in nuts and hard roll andies. The company also has several other very strong brands: Breath Savers Sugarfree Mints, Care•Free sugarless gum, and Bubble Yum Bubble Gum. Now Planters LifeSavers is extending the marketplace impact of several of those brands. New product introductions accelerated to a record pace with such promising items as Planters Select Mix nuts, Planters lightly Salted nuts and Life Savers Holes. New advertising was created, includingtheaw rd-winning "Challenge' campaign for Care•Fre• gum and the "Everybody Loves A Nut" campaign for Planters. To exploit these powerful new ampaigns, advertising expenditure levels were increased. Advances went beyond product development and marketing. We significantly upgraded customer service; made needed capital investments; and explored off-shore opportunities in conjunction with Nabisco Brands and R.1. Reynolds Tobacco International.
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I 0.1fl HA81SC0 TOOAY The conventional wisdom in recent years has suggested that companies emerging from leveraged buy-outs suffer from stifled investment and short-sighted perspective. We can't speak for any other company, but the impact has been just the opposite at RJR Nabisco. We have a new sense of urgcncyand entrepreneurial energy. We're successfully confronting challenges and wti re aggressively investing for the future. This commitment to long-term growth is visible in all dimensions of ou r company- in new product int ro- ductions, in record marketing and R&D budgets, in substantial capital improvement programs. Most impor- tandy it is visible in our clear sense of strategic priorities. We have worked hard in the past year to develop comprehensive, practical strategies (or each of ou r businesses. They will guide us well in the years ahead. Our objective is to be known as one of the most innovative, quality- driven and market-scnsitive packaged goods companies in the w•orld-creating a superior return for our shareholders and an exciting place to work for a diverse, highly motivated employee group. \t'e plan to achieve this by building on our leading brand names in tobacco, biscuits, foods, nuts and confections. We will introduce new products that complement those brand leaders. We will re-stage mature brands in our product portfolio and enter new markets. And we will do it with a sense of urgency and strategic rationale. Our ambitions are high. But they're attainable, thanks to a long tradition of innovation, a reputation for quality that goes back over a century and, of course, many powerhouse brands: Americi s two best-selling cookies, Oreo and Ch ips Ahoy!; the best-sclling crackers in Ritz and Premiumc the country's numbers two and three full-priced cigarettes, Winston and Salem, and the leading value-priced cigarette, NGW Oreo reokKs pOt the4 rwre's a mystery to Ws day &rt'rt'snomysrarywhy •rwisrip•.ne•dwaing- Ihe WM.ieA mokls hew Mrnr1e rNwrs la mAliatr olAmerican lrmFes. Tne soulie } a6stincl c/nco4te snleraandaeamyAFng t.mp/ mon Nuumert lo Euy OnesMn.ayaNwband. The first aI1eNctrt 6skery became a Magara FeGs tmBt.nrsctim wicn@ upeeedh Igg/. The Bpressbsry made.m-Vataceol(ip7i wowedvisnorsandwmbyalcustomersldisproduct,ShreddedWheat. Ninery ysars bter, ShreddedW7iear nmains an Amer'ran arWlast IMrde and Nebisca i leading careal Cren. The piglrwllerge-07scufr cereatand sevual additiorW nrktie; .:uA.aWg Span Sae and Iruirldled sersion; areOruduced in a comparry Dalery(sAovn on opposite page) in Napernlle- IKnois, as weg as h Niagara Fatls. Ln •a tJ 6t J W sD 0
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20 4 BUSINESS UNIT CONIBIBUTION IBUCI us u.nsca „ua+xs cav 7,;y,v, after paying our cash interest obliga- tions, and investing $948 million in capital expenditures, we produced more than $3.3 billion of free cash flow, apart from net proceeds from asset sales. We are paying our debt comfortably and have ample funds left over to invest in our businesses. We became, in one publiation s words, a"lean, mean cash machine" That's exactly the kind of machine- kveragedor not - most likely to suc- ceed in these highly competitive times. yaep:a+ple arMKpeNnse-bk:g auOeen an imponem iqr.J'rMh tl,e a.cnss nrNlBNrbisco-wMhrn drsebpPp anEmaraetAp rur pod,cts ubtrq a nspms3/e eilum'rr ine mmnuntleJ wMre ne dr Dusinesa. IMpvtipN's the earmmaneWau NaxtCenturySdnols nnd, a 6.r-rear, iAl m,L'ar hYieriw by [he Iil6 N+sisce huNdidr to nwa.nqQed Neu Iaiapver+npWaGC sraxasin In IM Mro yurs tnce atr pmprem i Yerch Z50.1Qemeraary' aenna0isre and hipl scAads aew aubmirteQprqpards tn inp,ova sadantacaieremem F ruCng.rd matR redun Arqrnurrare; anCmae cbsely inuNre pzrentr endkeM canmuMaes;n Me edrterlan pvicess. THE BALANCE SHEET Among the most significant challenges of the past two years has been shaping a longer-term capital structure for the company. Ii s a continuing priority, but we're pleased to say that we made substantial progress. We started out with 5>9 billion of debt and the need to reduce it quickly. The first step in this process was to raise cash through asset sales. Notably we didn i have to sell many core businesses to do this. In fact, we sold fewer businesses - and at better prices- than originally projected. In all, we sold sonte 55:7 billion in assets, including several European an< Asian food businesses and much of Del Monte Foods. Some businesses showed limited promise of improving Others, such as the Baby Ruth and Butterfinger andy businesses, were profitable operations. However, we sold them because they arc players in a very crowded market and had limited potential to bring additional value to our total food business. A key objective has been to reduce both the level and cost of debt and to eliminate short-term financing related to the buy-out. To that end, we undertook a comprehensive reapitalization program in 1990. A total of 56.5 billio .., tn F.a N a) J ~ W year (8.4 percentage points in two years), while international margins rose 2.4 points in 1990 despite increased marketingezpenditures in both businesses. In food. Nabisco's margins improved by 1.6 points (3 points since the LBO) and in 1990, margins at Planters LifeSavers, excluding businesses that were sold, improved by 1.3 points over 1989. Companywide, we chalked up 25 cents of business unit contribution (which we define as operating income before amortization of trademarks and goodwill) on every dollar of sales - a 4-cent improve- nrent over 1989. Business unit contribution rose 31 percent to $3.43 billion in 1990, on top of a 5-percent gain the year before. And in that two-year period,
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We also found new and creative ways to build on our long-standing, most popular brands. One example: What's the most popular way to eat an Oreo? Ii s to twist the two sandwich halves apart. So Nabisco re- taught America the twist, with twist datue contests, concerts by dance originator Chubby Checker, sweep- stakes, pronwtions, and advertising campaigns. Oreo sales jumped 8 per- cent - not bad for the world's best- selling cookie. We've embarked on an ambitious effort to upgrade our nine bakeries to keep up with our high level of new product introductions and continuing emphasis on quality. As a result, we maintained a very aggressive capital program last year, which will be accelerated in 1991. Nabisco is also spending record amounts on R&D. On the surface, consumers can seem cont rad ictory. They are eon- cerned about nutrition and fitness and want to reduce cholesterd kvels- Yet at the same time, consumers also want to treat themselves occasionally to indulgent foods. For sortme people, "grazing;'orcontinualsnacking, has replaced regular meals. We hava Niapfip m tM tun fusOtcmr s wd MH. aa'n.Nire p.nvsak orpmericans. NsGSCO Nr teppd Mu tl,is n+nd wM...rletYOl ade-etre ceutes ard Pukers The 6nse' Mini CNpsAA^Yy wR.ca ner Iwtped boeden s papvkr dessen heat Pae a Nwsnack rucdd found many new niches for our established brands and rolled out new products to capitalize on these trends. Fat Free Premiums, Harvest Crisps crackers and Fleischmann s Egg Beaters Vegetable Onxlene Mix arejust some of the new products that appeal to the nutrition con- scious consumers. For the'grazers," we introduced Mini Chips Ahoy!, Ritz Bits Sandwiches with Cheese and Ritz Bits Sandwiches with Peanut Butter. Nabisco Brands' traditional sales strength has been in supermarkets where our 4,000-person Nabisco Biscuit saks and merchandising force is considered the best. But, we ve entered new distribution channels as well, such as mass merchandisers and discount stores. K-Mart and Wal-Mart, as a result, tww sell Oreo cookies. And the Planters I.ifeSavers sales force is getting more Nabisco products into vending machines. Seeafip a nndY NetwmNnt mehln armmer's Iwr sMaumidity. CkvebMdua- 6ts-maerC6ranca Crane tumedro hardrandY in 1912. Ne mMe ro,sd cnn/rcans wiM Inbs iF tM middM fo nNer to baF ditlamt from Me ydbw'sAspedErrqxas m:rts Ihet wem popu6r Rtlr ame. NewYark adrMistrp man Edward Nade apat- fed the patenGa/ottife Sn..vs, anp4t tAe pmddxt riyhts and the restu Mstoy 0 ® With other leading food bra nds, such as A.I. Steak Sauce, Grey Poupon mustard, Ortega Mexican foods, Nabisco Shredded Wheat cere- als and Fkischrrunn's margarines, Nabisco has additional opportunities to increase its store presence in many locations other than the biscuit aisle. We've done so with product exten- sioru like new varieties of Grey Poupon mustard, and with caative and aggressive new advertising for ' our A.I. Steak Sauce, Fkischmann s margarines, Fkischmann's egg sub- stitutes, and Ortega Mexican foods. Nmv Life Sercrs Holes fshonn kM1l are 0e+q irooducednrtdnetlY..dCmp a tutY 1ne an.mion roW peWM hrandMs.ndY. n taa5. ropeAwl tln taMabDY m mawlaehrs smMaard-cudYMaWata n muaipk7fe,ers md NqeprsnFr'a; aN aw nsuks ne deany w 1-~ W LD 00
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21 of high-cost debt was refinanced or repaid. The proceeds for this recapitalization program came from both external and internal sources. Specifically, a new $2.25 billion bank facility, additional equity of $I.'t billion provided by Kohlberg Kravis Roberts & Co. partnerships, issuance of $1.8 billion of convertible preferred stock, and a n additional borrovi ng of E800 million from our bank group, of which $675 million was repaid by year-end. Early in 1991, we also completed a second exchange offer of a combina- tion of cash a nd common stock for more high-cost debt, which completed the recapitalivation program. The effects of this recapitalization are dramatic. At year-end, the company's total debt had fallen by 36 percent to I<ss than $19 billion from more than $29 billion in early 1989. Meanwhile, total book equity has climbed to more than $4 billion from about $1.2 billion the year before. The 1991 exchange offer reduced debt by a further $1.18 billion and increased equity by approximately $700 million. lmplementing these changes in the clinrate of the 1990 financial markets was daunting, to say the least. We look forward to further strengthening our balance sheet as we move into 1991. THE RJR NABISCO TEAM Of cou rse, the key to.Rl R Nabisco's strong record of the past • two years has been our employees. They have lived up to all that has been asked of them - and more. Throughout the past two years, our workforce has been true to the principles that guide this company: • T!u marketplace is the drivirgfnrce behind everything we do. • We will operate in an enrrepreneurial fashion. • We will think and act with a sense of urgency. • We will see quality as a way of life. • We will dunand rhat resources be used wisely and pruderuly • We will cherish tearrrwork. • We will treat each other, our customers, and the public in an ethical manner. • And we will be sensitive to the needs of all employees. The contributions made by our employees speak for themselves. Their efforts have helped increase productivity, improve product and service quality, and strengthen our operating performance. Time and again, RIR Nabisco employees have responded with imagination, dedication and urgency amid what, at times, were unsettled conditions. They really are the reason that this company has such a bright future. We believe the buy-out gave us many opportunities. Today, we ie stronger, more efficient, more productive, and more focused. We are genuinely proud of our accom- plishnxnts in the last two years. In 1916, PWters Nut6 0rocotzte Ce. mnk tAV earnp itep oradwrisap a heMolsaheE nutr nrfinvay. Prwmhem )n rns ads wzs tM corryenyk oapper new moemeM1 Mr. Peanu[ A NryeuroNVepiua rMOOOny aad cmtedrhe aumenlredpeawt as a rantest entry. A ednmercia/ artist 6teradded ft top Aat manock, srMcwx. Snenty-fie yeara 6ter, Mr Panutnmeinsane al the wnrtlk most enr4airg trWemukt an,i PYmers (AeSrwrs f.M1pN4' Aas arCVfn AIm to btr fY ft r~Mstam! II a Mw televi. slni advenisng umpaign oe,ebped toP•o•+oe HsiaSaykr 1M emyanyY nur 6ne belae a newaeneretion olsnack:ry cWUmers. - --------- - - -- - ---------- ------ - - ------------ -------
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tt BOARD OF DIRECTORS R. Theodore Amlrlon General Paruxr Kohlherg Kravis Robcns & Co. Louis V. Gerstner, Jr. Ch.sirnsan and Chief Executive Officer RIR Sabisco, Ipc: Iames H. GreesK, Jr. Ass.xiale Knhlberg Kravis Roberts & Co. H. John Grecnuus Presidem and Chief E.ecutive Officer Nabiem Brands, Inc. lamcs W. Johnston Ch.nrnlan a,ld Chief Eucusi.v Officer R.I. ReviwAdsTobaunCompany Vernon E./ordan,Jr. Parmer Akin. Gump, Strauss, Hauer & Feld Henry R. Kravis Founding Partner Knhltxrg Kravis Robertx & Co. John G. Medlin, Jr. Chairman, President and Chie( Emcutive Officer Firsl Wachovia Corporstion Paul E Raether General Partner Kohlberg Kravis Roberts & Co. Rozanne L Ridgway Former Assistant Secretary of State aiu Presidento(the Atlantic Council o(the United Slaies Clifton S. Robbins Associale KnhRxrg Kravis Rr>hcrts & Co. George R. Roberts kwnding Pariner Knhlherg Krjvis Ruberts & Cn. Scott M. Stuart As'xKiale Knhlbsvg Kravis 14ihens & Co. Karl M. von der Heyden Eaccutiva Vice Presid<ni and Chic(Financial Officer RIR Nabisco. Inc. • RJR NABISCO MANAGEMENT Louis V Gerstner, Jr. Chairman and Chiel E.eculive Officer Eugene R. Croisznl Eae:utiv<Vice Presidem Human Rewurces and Ad,ninislralion Lawrence It_ Ricciardi Executive Vice Presidenl and General Counsel Karl M. von der Heyden Ewcwivc Vice President and Chief Financial O((xcr Kenneth E. Glover SNnr Vice PKndCnl Corymraieand Guvcrnmrnl Affairs David B. Kalis Seniar Vice Presideol tsorldwide Communications M.B. Ogksby, Jr. Senior Vsce President Grnernrn<nt Relations J. Thorrras Pearson Senior Vice President Taxation Robert S. Roath ScniorVke Prrsidenl and Corporate Controlkr RogerD. Sernerad Senior Vice Presidem and President, R1R Nabisco Wundalian Stephen R. Wilson Senior Vice Presidcnt Corporate DeveMpnxnt Frederick W. Zuckerman Senior Vice President and Treasurer
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,&Y &A R~ rpeaeM ~A. pGeia'6( dpanns.Grnn.r Dnml; strong Fwsititnu in t1e inlrrnatinrral tnbacco markc•Is rrith Wiuston, Canlol :md tialrm; oul stalld iug (otxl Iranchi>th in Flciscltmann i, A.I., Nahisia Shredded Whcal andGrry Pnulxln; Pl.lntcrs, Ihc IcnJing nul hranJ; Lilt Savcr., Ihc numlwr-rnx• harJ-roll c,tnd,v. As z.urtlpam'. wr:uuldn 1 a>k lirr a linlc ul more apl+urlunilv alxl ihallengc. Wc h:nni t lusl sight ol the fact Ihat the key to gruwth is iunlin- ucJ invcstmrnl. At Nabixu Itr•nxl>, nav producls aiiaunlcd lilr 1.1 p: rccnt of 1991) rctail lb ktrp up witll changin" nl:rrkel>, we arc invcsting hcarily in Inarkaing, capital inrpruvrlncntz.:uld reaarih alxl devcktpmcnl. Wi• in[nxiund ntoro 111,111 IIH) Ilrlc prrxiu.l+in 10911.7halb un tup uf I(H) Ihc rt.t r lulixr. Nut evcrv nctr Ix'aduct .uicceds. We rclt•a lucnsiun.d hlil- ures. In taq. wc auourag: aur Ix•uplr ' lu rfmtmlwr that if,VUu Ilun 1 strike uut uns in utrhile, qou pluh.thlc artri t gin, hard <Ixmgh. hludt tdnur inveslnl.nt has Ixvu in ntakin•, and krrping nur hralxh anJ prrsrluils "Inp-nl-utind' ailh.on- sunrcrs hlxrkctilx,; czl><`nditur.. rusc• II) Ikr:cltl Iasl r'car lu S3.' hilliun. We have hard wurk:lltraJ of us. ~tllti' Uf UUr SIrJICVii Ultliilivis KIII lnke serersl ycan to z.inmplisll. (:mnpc•tition is nluth and Iht envimnnunt uncertain. 1'eI w< appnta.h Ihis fulure with grcat 8nI iiilr,tliUn 61x1 CWltlllil nlGnl. We ure hrnlly inmmiUed In I:xlxuxiing the brand (ranchisrs of our carr busin.sse.- R.I. Reynolds 'lidbaicn (]+., It.l. RrynulJe'Fuhaicu Intcrnation-d, Ini., Nahisco ISr•mJ., Inc, and Planlcrs I.i1ie41rus Glmp.rny. riyarenes It wasn't unr] 1911wirzn RshaN./ashua ReynWds nnoduced his menulaclured ciparenes Ar tlw lum of the cenfurr• etnst smUken sfiR roged fAES own Ruf snwYms began us~ng Ne pe'rMed ppaduH. ReynoNS•manlecrured[igarenes were an irsNnrAit an0 changed Ihe smoking preferences of a narian. 'h~ Mrhewa4fimasf SG~FInI ~'"WOyksM I i adwncedPmd.crian 4citles. The rampu7 ToD1000w3e, N.L P/an fshown! Deume fully qwal'rorWln1997.no sannlere modeminfio ol tlre neypy W}JWef /eA lecit y was f.tishe rom aM1r. T/w.uromrtfon.Harls apped a tl M'R'an IlornstY faWcto nresLrcnf progrsm RJ.REYNOLOSi08ACCOCOMPANY 71tc U.S, cigaralc nlarkct is dlallcngi ng. I Alnlat i: tobacco .um iuntptian is graJualh' Jaliniug ent lh: cunqkliliun lur u1,Irkc1 shuu is inlnlsc. lixLrc, lhcrcaro more Ilcm 3$p choices nl ill;dfillf hrAl1t15 Ulxl Stylf> fn1111 Whlill Ihf COI15t1111( C:111 ChIM4'. Our rlunx•stic tohaicu businc:s i~ the Ilxul pnllitWh4 picccuflhccur lxlralinn alxl lhc nluct vullwrnblc b ihanging linlc.. Winston. 5akn1. C:uncl and Ilural all rank muang tl Inp Icll dumesl i< branJs, a nJ 1)ura lcaJs the stving.+u•gnlrnt. We havc the nlusl adcalxtd prrrrluilion (z.i ti.s in the wnrld;uld the ialxriily b anywhcrc. lill viralallp any Irtdcr.
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26 OPERATING DIVISIONS R.J.REYNDLDSTDDACCOCOMPANY "No one person or drparrurrnr cmr build a rompnuy- it Inkea nrarly minds mrd hands. Iti• rnu build the best tobacco ronlpnny in the business -nnd with ourdediratirol to rennl rvork. I'ru roufideut n•e u•iR" JAMES W. JONNSTGN CMinna. aM rAiel Eceeni.. OMicer IC J. bpeldeTOl+aa Lw~Pq "Theinrernatiormltobncco business is an elciringplace to be thtse days. The rnpiddlanges that nre ocnrrring hnve creuled nrany new opportunities for us andt6e poltntial has nesrr been beuer. We're well positioned to capitalize on this pntentialand inteud to get our fair share of the business." DALE F. SISEL PleriRnl aM Chler f.rcmive Ollicu 0.J.IlerneldrTabaccelnremnional lames C. Schroer Exccutive Vice President Marketing and Sales David h Anderson Executive Vice President Finance and Administration and Chief Financial Officer M. B. Oglesby.lr. Executive Vice President GovernrnentRelations Thomas C. Griscom Eaecutise Vice President External Relations Robert R. Gordon, Jr. Senior Vice President Personnel David K. Isbiscer Senior Vice President Technology, Leaf,Tobacco Proceuing and Packaging Wayne W. luchatz Senior Vice President Secretary and General Counsat Locke M. Newlin Senior Vice President Strategic Planning Andrew I. Schindler Senior Vice President ManuGcturingand Engineering R J. REYNOLDS TOBACCO INTERNATIGNAL.INC. Edward /.lang Presidanl Americas Richard I. Marcotullio Vice President Public Affairs and Public Relations Klaus D. Eangner President Europ,, M iddle East ard Africa Joseph H, SAerrill, Jr. President Asia Pacific John T. Winebrenner Senior Vice President Marketing Wolfgang Dahne Vice President Research and Development Alan T. Kirby Vice President Human Rcsnurces Keith M. McCulloch Vice President Business Planning and D"lopmrnt laap Uinenbogaard Vice President and Chief Financial Ohicer Daniel M. Underwood Vice President Operations Peter J. Van Evcry Vice President General Counsel and Secretary
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"Strong rnsh flow fmru oprrnrions and nddr(rnnnl equiry fruns KKR alloua•d us to recapitalize (he coarpauy in 1990/91 amr sigrri/icanrly reduce our deb[ We made real prngren tawnrd fxcouriug an •insrsbncnr gradd cosnpmry nyain nmhdtomdd prngressfurt6erns neintpfeutnnruursrrotegic and npenrting 8ad," KARL M. VON DEe HEYDEN Leenin 1rC. /rerNrnl n/ Cl,i.l Finanrirl Utri.r R./N N.Aisce.lx. RJR NABISCO HOLDINGS CORP. CwnrfW. W t;.danM ld..ee ilueu wr. r.i o.e..Irr at p.n:al swlnfw.Mtw r.~..ce.ew a...o.r.e...w. awn.o.m.r....wr. e:","'rr.ryo.a i,..'vl<rfiti.,r w.,lba,yva:n 23 Total assets 532,915 lWBILFIlESWIDifOd(NDIDERSEDORY p90 Current liabilities: Notes payable Accounlspayablealdaccruedaccounts Current maturitks of long-term debt Inconse taxes accrued S 295 3.014 1,425 471 Total current liabilities 5.205 Long-term debt (less current mat uritics) Other noncurrent liabilities Deferred income taxes Redeemable convertible preferred stock Com nwn stockholders' equily 16,955 2,653 3,813 1,795 2,494 '(»r us 1990 nrts a singJnr 3rnr- I hope I sterer 6nre to lilr rhrougJr annrher-bu6 if corpnrnrc s6tffs rnle is to dear anny the dehris-IeFaf, fioancinl or nrhenvisa•-so dmt drr line mu gr nn witL ~+•aermingms6 nod inerensing mar$ins, rhm fd s0nr did n heff of npth in 1990." LAWRENCE 0. RICCIMDI Eus.riw V .hniNarM s....at c.,,.w R/R N.Liree. Me. ASSETS uN 1189 Current asaels: Cash and cash equiralcots S 323 S 142 Accountsand nuta n•cd.alJe, Iwl 703 998 Invcnlories 2,646 2,876 Prepaid expenses and excise taxes 444 358 Net assels availabk for sale 2,300 Totaleurrerstassets 4,116 6,674 Property, planl & equipnKn6 net 4,866 5,019 Tndemarks, net 9,531 9,771 Goodwill, net 13,607 13,965 Other assets and deferred charges 795 983 Total liabilities and stockholderi equity $32,915 $36,412 ~ $ 181 3,265 2,632 490 6,568 21,948 2,873 3,786 1,237 $36,412
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u 8J. REYNDtDS TOBACCO INfERNATIONAL Outside tlx U.S., demand for tobacco products is growing about 1 percent annually. The opportunities are especially attractive for manufac- turers ofAnxrican brands. Demand for milder American-bknd cigarettes is growing significantly faster. Our international tobacco business, working to meet that strong global demand, is one of the fastest-growing companies in its field. In 1990, saks of Winston, Camel and Sakm-our three major interna- tional brands - were up 10 percent with growth focused in the key development regions of Europe and Asia. Our strategy is to fuel this momentum by stepping up market- ing for our globally recognized brands in established markets, and seizing additional opportunities in emerging new markets like Eastern Europe and Asia. The most attention-grabbing development in new markets was last year's pact with the U.S.S.R., the world's third largest cigarette market and virtually untapped by U.S. com- panies. Our agreement will result in the sak of more than 14 billion cigaretles. We alco signed a protocol agreement that may lead to local pro- duction of Camll, Winston and other brands in the Ua`.S.R. Changes elsewhere in eastern Europe are equally dramatic, and market potential equally impressive. In 1990, for example, we agreed to acquire the Club trademark, one of the largest and best-known cigarette N/hen neW tCaeceo InlrtetlC'Mn aM.r•.14d rwN, R1 Reynolds 1oWcco MtenutiaW ~~aw~~ aDOressirdYWSUe+ ql9rit ~ aSrm 1n r990. ReyroNa ID 6iiiii;, apneQroupnie Ua CWa Eran( ane dtlr bemaaCe+ps9aro+ns n easrem fnn,ary. nowaens GdawqwiMarua rrge ahsiaenrnaw buds ir drt arYwi'v TNkes brands in eastern Cermany, and we were the first Western company to fidd our own sales force there. In a short time, that business became profitable, despite considerable business building investments. We also are actively exploring investment opportunities in Poland, Hungary and Czechoslovakia. International growth isn't limited to Europe. Asia and Latin America are also promising. We recently gained access to the large and grow- ing Thai market, and we continue to invest in growing our business in Japan, Korea and Taiwan. We are the only U.S. cigarette company with a manufacturing facility in the People's Republic of China - the world's largest cigarette market. In the Western hemisphere, we are negotiat- ing a joint.enture agreement in Mexico with a local company, La Moderna, to produce our international brands in that rapidly developing market. NABISCO BRANDS.INC- With a 43 percent share of the U.S. market in one of its principal produc. segments-the cookie and cracker market-Nabisco seemed a hard act to improve in 1990. Yet, we increased our share a full percentage point to 44 percent by year-end in this multi-billion-dollar category. And we're still not satisfied- Long-term, we think that we can capture a signifiantlygreater share by keeping in touch with the pulse of consumec and staying alert to new product forms and technologies. Increasingly new products are powering our sales Last year 14 percent of biscuit sales came from products that did not exist two years ago. Examples includ Suddenly S'mores, the first microwave cookie, Harvest Crisps Snack Crackers and Ritz Bits Sandwiches with Peanut Butter.
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EXIIIBIT INDEX E.a16k We. 3,1 Amended and Restated Crertiflate of Inoorporet'on of RJR Nabisco Holdings Corp., filed October 1; 1990 (incorporatod by rcfettna to Exhibit 3.1 to Amendment No. 4. filed oe October 2. 1990, to the Registntion Statemant on Form S-4 of RJR Nabiaco Holdings Corp., Re~stration No. 33-36070, 81ed on July 25, 1990, as amended (~e ~Form S-4• Regttuat+on No. 33-36070")). 3.1(a) Iw~tion o[RJR Nabisoo Ho1di~ngsaCorp~filed Jan~uary~ 9, 1991 ()moocponted by reference to Exhibit 3.1(a) to Amendment No. 3, filed on Nabisco Holdrn9gs~ Corp, Re~~'ttrat~ an No. 33-38227) ~~~~R •3.2 Amended and Restated By-Lws of RJR Nabisco Holdings CorP, ta amended etfeohve February 28, 1991. •3.3 Restated Certificate of Ioeorpotation of RJR Nabisco Holdings Group, Ine., filed February 1S, 1990. p~ and of Registered •3.3(a) Certifiate of Chan~e of Locatlon~Rpgl~ ~ July 6, 1990. Agent of RJR Nabisco Holdin8s •3.3(b) Restated Certifiate of Inoorporation of R]R Nabisco Holdings Group, Ine., as ameaded to July 6, 1990. '3.4 Avwnded and Restated By-T~~ ~~ Nabisco Holdings Group• Ine, as amended eflective February 3.3 Ceralficate of Inoorpontion of RJR Holdings Capital Corp. (iaoorPonted by refercna to Erbibit 3.1 to theR~stn ~oa Statanent oo Form S-I of RJR Holdings Ca qaal CaP, RJR FCold'mgs Corp~ RJR Holdings (houp, Ine and RJR Nabsoo Iue Regstratwa No.33-17891, filed on A (pril 1989 (the "Form S-1, ~strauoa No. 33-27891"1)• 33(a) Amendment to Catifiate of laooroor+~ ~~ f~ aH~°boe~to for Capulpo~ 61ed November 13 19g, p.Q F~thtbit 19.7'to the Quarterly ~~~ ~~ ber 1989, Fik Na. t-]0215,1- 0214, 1-10248 and 1-16388 the 'Septemba 1989 Form te of Amendment of the CerbGate of~uoorpaatica of RJR 33(b) Catifia a ta1 Carp., Gkd Jaau.ry 9.1 990. CuKarp«a S-I af Nabisco HoldiaSa t~3 d to lhe R twn Stalmatt Farmoo reference to BxLlbi ( ~~qy Corp., RJR Holdiuga Group. RJR Holdings Capital CaP~ RJR~~ No. 33 31937, Gled on N berovam Inc. tad RJR Nabisoq Inc, ReP)a ~ No. 33•31937")). 3, 1989, as amended (the "Form S-1, Regutra ~ •3.5(c) Certifiate of Change of f.oc.tion of Regist~ ~aud of Registered • Agent of RJR Nabisco Capital Corp.• Wed y •33(d) Restated CeRiBate of Inoorporation of RJR Nabisco Capital Corp, as amended to July 6, 1990. •3.6 amended eBoUive Febnuq' 28, 199 RJR Nabisco Capitd Corp.• aa 3.7 Restated CeriiBate of Inoorporation of RJR Nabisoo. Inc. (incorporated by reference to Exhibit 3.9 to Amendment No. 2, filed on May 12, 1989, to the Fam S-1, Rcg~stratson No."33-2789I ( Amendmmt No. 2 to the Form S-1, Registration No. 33-27891 )). 3.7(a) Certificate of Amendment of thc Certificate of Incorpontion of RJR Nabisoo, Inc., filed September 22, 1989(ineorporatod bp refereoee to Exhibit 3.7(b) to the Form S-1, Registration No. 33-31937). •3.7(b) Certifiate of Change of l.oation of Regis 9~ Gffice and of Registered Agent of RJR Nabisco. Inc., filed Jul Sy •3.7(c) Restated Certificate of Ineorporaiion of RJR Nabiseo, Inc., as amended to July 5, 1990. J r w J V-'
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27 ~ iewbal y ' We intend to havt RJR Nabisco Foods retogniudas a highly innova- tive and aggressive rnarketo of top qualiry food products, and we also intend to achinrfinancial results shattansiuenrly rank us among rht top tompanies in the industry.' H. JOHN GBEENIAUS BmupFart.aw Wa Na4rse rauda an.p Nabtaca Bi acu B GamPany Ellen R. Marram Prnidentard Chief Executive OBicer Bruce 6 Wood Senior Vice President Mar4eting Harold J. Lees Senior Vice President Sales ThomasG.McBndy Senior Ysce President Operailons andTechnology Nabisca hada Lslnpany William B. McKnight, Jr. Presidentand Chief ExeNtivt thficer Nabiaca BnIKa, ua Raymond 1. Verdon Preaidentand Chief Eaecvtive OtKcer Stanky Heath Executive Vice President and President. Biscuit Fred R Quance President Grocery M. Robert langille Senior Vice Praident Finana and Chieffimncial Ofhcer Pla nt an lite Seran Canpany Dolph W. von Arx• Chairman and CIKf EfeculK Officer Daniel L Clark Senior Vice President Markeing. R&D. and Planning Bruce/. WIwd1 President John C. Mitchell Cheryl & Bachelder Senior Vice Prtsident Ysu President RJR NABISCG FGBBS GNOUP Sales,Diuribution,and Marketingard Trade Marketing Business Development Nabiue Ionas, Ma. Henry R. Lambert Gary L Eck<nroth Yice President and Vre Peeaid<nt H. John Greeniaus General Manager, Human Resources and President and Food Service Mministration Chief Eucutive Oficer Norman G. /ungmann l.awrence H.Kleinberg Nablsae Intamalianal. Inc. Yse President Senior Vice President Operations Finance H. F. Powell President and Thomas K. McKiernan John F. Manfredi Chief Execulive Office, Yrce President Senior Vic<President Saks and Distribution Corpontc and Peter F. Brown Government ABain president David P. Sheets Bnzit Vice President C. Michael Sayeau Financeand Senior Vice President Warren W. Smith Chief Financial Officer Perwnnel Vice President and RegionatDircctor Sutanne L Jowdy Jamcs A. Kirkman III SnB Vice President ard Senior Vice President and Jose Pargman Gennal Counsel General Counsel Regional Director 'MaqW+I.HrI tIAmT.Y.rtM11.1911
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ah n Yet, many of our brands have declined at a faster rate than the industry as a whole - especially in the 1980's. To reverse this slide, we are re-emphasizing the fundamentals of the business - values like quality, innovation, and reinvestment. We are now investing money to re-stage our best brands with more contemponry positioning and higher quality stan- dards. We have implemented a new incentive program that rewards the trade for helping to improve R.1 Reynolds' market share. We've already shown that . , re-staging can work. Camel is a prime example. Our oldest brand is among our fastest growing. Who would have wagered that "Old loe." the 78-yearvold trademark of Camel cigarettes, could become a marketing success story for the 1990's? But that's what had to be done. Many smokers perceived Camel as a stodgy brand. In fact, Camel's market share had been slipping slowly for years. To appeal to today's smoker, we introduced new brand styles and revamped our advertising. "Old Joe" was no longer an aging dromedary but a fun-loving-evcn sophisticated -'Smooth Character." A recent sur- vey testing consumer ad recognit ion showed that Old Joe now outscores the leading cigarette's ad character. Camel has reversed its decline. The brand now is growing. Last year, we began a major effort to re-stage Winston cigarettes and so far have taken more than 100 different steps to improve Winston's quality. Among them: We are pack- ing the tobacco more tightly, so fewer tobacco shreds end up in the bottom of the package. We are doing a better job packing cigarettes to reduce wrinkles in the paper. For a fresher appearance, we brightened the printing on the cigarette and used whiter paper. Winston's new ads feature the Winston pagle, a symbol ofquality, freshness and freedom. Our goal is to make Winston the industry's 'gold standard' We are planning to re-stage other leading brands, too. Heyrnlds7nberto tetaut'rr raa0 ro nestadRSh sYmstan, AmencaY numAar-nw-teay r'pantre, as V,e -aoN sr.nderd-urc'pneae GaMs. Tla ellortaes led ru naaWn IOadMsrua quuFryArpwnro,as. ro+aiq au'n prefaairp ro rnWUU rue A naw adwrta'rpeampian Naavip Ihe sYmtor &pN md>seo'er the inpkWal to whkh the tortpairyu commdteQ-eansistmdyprw+d'ep amokers wAT Ihe hiahesr-awStyciaarone awl6de, Since 1989, Rl. Reynolds has successfully introduced several new brands or styles. Doral Ultra Lights i an extension of the successful fhral brand. Salem Box has a richer blend. And Camel Ultra Lights offer a new style for one of our oldest, most popular brands. Our emphasis on quality can also be aeen in our manufacturing facili- ties. Several years back we completec a $2 billion modernization of our domestic tobacco manufacturing facilities. The new Tobaccovflle manufacturing complex and renovated Whitaker Park, both in th Winston-Salem, N.C. area, iogether produce rrare than 800 million cigarettes daily. They're highly automated, allow for more accurate and consistent quality control and give us considerable growth capacit) That investment gave us the flexibility to take advantage of new opportunities while still being able t produce hundreds of brand varieties to meet a wide range of domestic an global consumer preferences.
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E.H6(i No. 10.12 Form of Indenture between RJR Holdings Group, Inc. and First Trust National Association, as Trustee, rolating to the Subordinated Exchange Debentures Due 2007 of RJR Holdings Group, Inc., including the form of securities (incorporated by reference to Exhibit 4..5.to the Form S-4, Registration No. 33-27894). 10.13 Securities Purchase -Agreement, dated u of February 9. 1989, between RJR . Holdin8a Cap'~tal Corp. and RJR Associates, LP„ relaung to the Pattnenbip Debt Secarities (inoorporated by reference to Exhibit 4.10 to the Form 5-4, Regittratioa No. 33-27894). 10.14 Subordinated Promiswry Note, dated FebruarX 9, 1989, issued by RJR Holdings Capital Corp. in favor of RJR Assoaatea, LP. andgua nnteed by RJR Acquisition Corporation (iacorporated by reference to Exhibit 4.11 to the Form S-4, Registration No. 33-27894). 1035 Form of Indenture among RJR Holdings Capital Corp., RJR Holdings CorP., RJR Holdings Group, Inc., RJR Nabuco, Inc. and US Triut Company of California, N,A., as Ttustee, relsting to the Subordinated Floa4ng Rate Notes due 1999 including the form of aocuri8es (mcarponted by reference to 8ahibit 4.19 to the Re istration Statement on Form S-1 of RJR Holdings Capital Corp., RJR Holdinp Corp., RJR Holdings (3roup, Inc. and RJR Nabiseohlnc., Aegutration No. 33-28524, filed on May 3, 1989, as amended (the Form S-l, Registnticn No. 33-28524")). . 10.16 Agreement to Hold Separate, dated January 30, 1989 among KKR Aasopatea, the genqeral partners of KKR Aasoaiatea, l:ohlberg Kravis Rolxrts dc Co., L.P, the 6euenfparttcra of Kohlberg I(raru Roberls & Co, LP, RJR Aaandatcs, L.P, RJR Hoidm'gx Carn., R]R Haldingr and tbe Fodcni Tnde Groupt Inc., RJR Aequisition Corporation Commission (inoorporated by refertaa to Exhibit 10.1 to the Form S-4, . Registration No. 33- 7894 . ' 10.17 t Cantai w'~g Coosent Order to Ceaae and Desist, dated January , 1989, among KKR Aawchtp, tbe tteoaal parteen of KKR Aesotiatea, Kobiberg Knvis Roberts Q. Co L.P., t~e general partners of ICahiberg Knria Robata & Co, L.P Rl'R Aaaoeiata, LP, RJR Holdings Corp., RJR HoMiny Group. Ina,'RJR AequidtionCorpor.tton and the Federal Trade Commission ( ted by reference w$xhibit 10.2 to the Fatm 5-4, Registntion No. 394). 10.18 . Letter Agreement, dated November 30, 1988, between RJR Holdings Cap. and Drexel Bumham Lambert Inootporated rela{:mg to the aak of av(ain debt aaarities (u'~oocpotated by rrterence to ErlubCt 10.3 to the Form S-4, . Registration Na 33-27894). ' 10.19 Letter Agreement, dated November 30, 1988, between RJR Holdings Corp. and Merrill Lynch Ca{ n'ul-Marketa rokting to the aale of certain debt securities (incorporated by reference to Fathibit 10A to fhe Form S-4, Registration No. 33-27894). . 10.20 Retirement Plan for Directors of RJR Nabiwo, Inc. as amended and restated an January 1, 1989( rated by reference to Exhibit 10(a to the Annual Report on Form IO-or the fiteel year ended December ii1, 1988, 81e nnm6er 1.6388, filed on March 9, 1989, as amended through April 14, 1989 (the "1988 Form 10-K")). ' 10.21 Redrament Truat/tgreement, made as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Baak and Trust Company, NA. ('tnoarporated by reference to Erhlbit 10.6 to the Form S-4, Registration No. 33-27894). 10,22 Form ot Emp~oyment Agreement containing Change of Control provision (ineorporated by reference to Exhibit 10.8 to the Form S-4, Registration No.3&27894). - 10.23 Special Addendum to Form of Employment Agreement filed as 8xblbit 1.0 22, dated December 20, 1988 (inaorporated by reference to Exhibit )0(d)(ii) to the 1988 Form 10-K). ._y~ .!. ~ ./.__. ..:
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Gq*rrairOflrc~ . ~ P a l Ar _ a i.. o f r L ~ Foi„~ 1~5-);arul h/ld,tional Frnno6.r.l ' Ir~Gn 1 ~ . . -_~Awrsnuyrcque.l.ddtirrirNlu~f - , n,arionontlrqKr.tlnniofR)kNahi-:o' kvriu I0PK,wiricbicircludeJinP.rltof . ' tbie dxunrnl,isthe CnniYar,ykannual . rcfwt6kdv.ilhrleSccuriliesI n1'-F*aang<C~n,mician. AMitinnalcq,icc ' oflhcForm 10-Kan.iotlKrLdonr,atlon -: arearailab(<wil},outelurgebye7liiry•,lo. WorWwideCommunicntiona . R1RNabivu,ln: 1301A•e:WeoftlKAnKlKac-- - Nc,t'od,NY10019 ' . Sharcholderlnquiric~ . : . OfBct of Sture)wkb.r krUl; •i.s R1kNahiccr_sWc. . 1101 A•>:nur of the An,eria r: Nc.: York, NY 10019 tor Relations InGJi I ~01GocofliI•-i., G:":,r: ' NRNabis-~~ Inr-~ .~:7t01k ,.,•dtlrAriT~ .k'u6:ay7radadSc.curillcs - A.~rlrlyofk)RNa4iuoKCUririr,urr F-~' :- ~r rr.&d 71k Grlloe.in~ ia u(Id of tL- mwstwiddyhddsr:arilic,,i0of r:!~::harttr.A<douJieNrwYoil '3U R N3`,Icc~ Ilnlaf i,g, C ConimonSlbd. - SyrnbolRN I RJk Nahisco I loldings Cory: -. Wanank to Yurchase Common Stock ' `Syn,tat: RNwt ' Erer:;ce Prke. f 0) 1cral.arc 6rr.i4 PcriaiFaPirca Ianuary Jl, 1991 RJR Nahiao }IoldinEs Corp, ConvcrtiLle Prefer red Stock ~. Sprrtwl:BNY . 1 . Ste«d Klue, $7S Pcr sha re Uiriderd Rsle IL59L o(elxted value , (csch),Yay.tdrquartcJyontltl5chof )anua ry, AYriI, luly and pc64Kr. . ~.kJkNatriscollo)dingsCnqr.Senior - t-L Convrrring Ikbenturs Due 2009 . '. Ir.in~.RRah . n n. i dIy on Ur Itl o(R1ay ani a, ,. RJk Nabiao }Inld -q;. Gr _-uyI, Subordinated @t~ }har2 r 1k,t,uurc Due2007 . . ., ... INCratIU'~ 175:.P~y.bleKUri- annrallyontlalsto(Mayan3 I.ovcndK: (Yaymeut-in kir¢ItLrough . D1ay 1,1995: eech payu<nt thenaflrr). R)k Nabisco Capltal C:orY. Suhordinated Uiscount Ikbenlurs I)ue 2001 Inlurst Ra1r. 15% yie6lionatu rity, Yaptk Kwl-annually on the ISdr of ASaysni Notimher (Pap,riu-3n-kind lhrwgh May 15, 199:; ud, (vynkiv . t)KlUftlr). RJR Nahiuo Capital Corp. Peyuient- in-Kind Subordinatcd IktMntures Due 2001 InlacN Ftate. 15%, Iuyafde Kmi- annually o10 he 15IF, of May a nd No•zmle, (Pa)nr,n,t-irrkio.i through Fl ey 15. 1991; ash Payurcr,t thar.fleQ. RJk NabiKO Capital CorY.13-S5% Subordinated Uebenture; Uue 2001 InteratRsle 17-459C.YayaN<Kroian nually orr t)r 15th of May ard Naea,tcr(ad,paprr„t). ' . liansftc a r.i Uividdld Uisbursing . Lgent for Common Stock. & ;; '.HtfcrredStock ~ ._-FlrrlG'.•j 1ru4Conq.anyc:
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25 -_ _ ._ 7~- SAROMA Gelwin SNLOMA PuAdiry SAROAU Fl.n SAROMA Drfnk Mu ANSE1MICmkin ANSHMIGdm FAMOSAGmkk, FAMOSACndm KOMIOS faakin NRfFNASGeokin PO0.TFtUS LMur. UNIVEAS.L Prcm.n rmen UNIVERSLLFkMen UNIVEKSALStillr,. UNIVF0.5ALF.m CORONACam Mal+ LIFE SAVEU Rdl G.ay IIFESAVFASIdlipvp, OMEW Wm FEPIN WhbleGum BURMEYVM WbNc W SI+UKIMdIUidy MARTINSONOndn FIESTAQnmLkG iy NMMTCadimenn POMMYMudmwn+ N.Msn Br.nds. SFd (C.n.d.) AYLMER Cannd fiuiu ud Veyubin AnMERSoup, AYLMERT uPmdu.u CNRISTIE Cnntin,Crrlen anJ Sn.h, DAD'SCnukin FMVIDCnnk:+ •DELMOME6xnbn •DEL MONTE C.mud Fruik.nd lkdelaNn •DEL MONTE Puddinb Cup. •UEL MONEE Tmula Pmdwk HARNOISGokin MAGIC Nklry Pa.der MILK-BONE M S-h. NABISCAG.aI. PEEK FR61H5 Bitii,. ud G.M, REDOVALiNIMC.dm •...... eir ua~........,hu°~a. Ii Planters LifeSavers Coopany PIANTERSl1FESAYEBS PLINTFAS N VIS IN UNS NVD /ARS OIL ROASTED NUTS S.hN fACk..a h.nun DSAny S.eea ('uhkil hanuu LiSklyS.hedMindNw. Vwhad WM.a hanuu SwnisAFbnun Mued Nuu UnWkd Mi.N Nun Delu.e Mi..d Nuu (.ruhan PonuU) Shn Mu C.,hev,.nh N~mnd+N h~am SrRn Mu C.,hwf riib P.an, & Pnnuu Se1mMu hawo Ca,Mn vilh Nnw.d+& Llkd Cuhev H,hn+wih Piern EYkd Fancy C..luua Um.IW F.nryCUMw. Sn+m. Nw Mu u..m M^. f°ul-Nfnudyhanw OM Fa+lhia,ed hanw C.ndy HONETROASrFDNU1S hanuu Dry Punad Ponuu CuMn h+wUG~Mu Miud Nw DRY-ROAfFED NUTS h,nnN LiShMMlkeFe.nuu UnM+ed h+nm, Sunllo^erNw MiW Nw, CnM+. ommm l1 +,'l7 L J.~F PLANEERSGOID MEASURE RAKING ANDCOOKINGNUFS W.huu Wil.l P.ces UnH.rckdNmm+a, ( (ll fli. SII i:,UttE cxa PLANFERS SNACKJNG NUTS IN BAGS GrFew C..hv H.ha r'u11 pna Red H.krAin SunBa.n Sn,L SwBu.er Ka.rcL D" ANaw P..,%" SpnW h wu WW FcaW. Dry Pau.d Vwloed pnnw. Mi.N Nw, Hwky Rm,kd h.nuu Ha.ey Ruwd PwuUG+M+Mu Hary Poawd C..M... DrY Ru.ued PanuLL F+uu'N Nw Mu Hary burad Nmad. Hmey Runkd Mwd Nw. Hurcy Ibukd Pwn PIANEERSPEANVEUNDY O+igiiul Panw S.r PIANTERSPEANUFBVETER SANOWICNES CMu Sqw RnuM Twn~ PLANEERSUNISTERSNACKS MuhnCM+. dm BJh N..In Ch.eu Ihn W rl, Chn, Bdl+ C u i CueU CanChlp. Kin Cnm Uip. PnkA i°ri+r. Tunal. Chip..NaAw Clasae FL+« T BIaCFIp.'Tr.Ei,iwlFl.wr PuNTFUOIL h+nw OJ ropomnOa PIANEER.SPOPC(1RN Mrmnw Aqcan.Bwkr Fl+wr Mrm.m. PaprumNwu~il Flawr LIFESAVERf HARD ROLLUNDY Pep-O-Mw W,noGmen SpnrBMim Gn_aMnn F.rcr FruiLL Troplnl huiu WJJ Chr.y Fiue Nwr WunA m SumMn. F.uin GynONinl An.MryFiunNken Cirv, hu., NuB luim Mwd hrrin Frue luiem Fluir Purch Frvil Nicm Gnpe Fr.il Ninn UFE SAVERS POPf Mwud FMm S,ri+W hu'v Nkrn Fbp LIFESAVERSHOIfS Fiw Fl..a. Bux Wm Sumhinr F.uiu Wun-0-Gmm Spa OMinl Pry-O-Nim BRE.STMSAVFAtSUGARERFFMINIS Pepp~m nr Wxkhnen Minl Cinn.man care•flec URE•FREEGUM hppermm (w.,h NwnS.wr) Spnrmim (vl~h NwnSne<I) (innamon Rryu4r Faw+Bubbl, Gum W krynenFkwrBUbMeGum WJEC1knyFl..a WLbkGum BUBBLE YUM GUM hVJar Gnp Mnan.b.rrySPl~~ CEtdnmin~ WJdChnry WN N' Wed Wakrmebn Slnwbsnykripe H.-ii.n Purch Fruh Purch quiliSEPioe db)tYum r) SUGARLESS BVBBLE YUM GUM FaSul., Gnpe An.berry P^PP~ daw EEECH-NVEGUM hPPnmiM Spau~ FRUfTSERIPEGUM w~ Tobacco Comp FW.REYNOLDSTDBACCO CIGARETTE BRANO FM/ILIES W won Mun S.km NOW 4n+el Ma{n. DmJ Cmrury wwFe wnin IW.IIFSNDLDSTOBALCD iNTEBNAIION/LL Rf FFRMITFONAL CFGARERE KMNDS C.ml Mu. W.s rn F,Lnn TE KEYNATIOFIAERRANDS LYYdC.Edam Danhmn B.IS:.nULav.bnurF SiMiM Ge~a^y ORrwa. (hb R^Hn MMJk Ew Gdd Cam Mmle 6ao Dv.l m aa :T EsPdTTI 4nd. E.yun•A' MacJwuk SeM MardauH Spnul ~. GNJm BrMp Sprinl I _....... . .......... __.___ .
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0.1H NABISCO PpODUCR 1 W {L/IVVV Bk U Y NL/Vn NABISCOOMNDS.INC. N.Aikte B7aaN Caqq' COOKIEs ALMOST HOME FAMILY ETYLE O~ne fidye Gip Caokin al~l R.ian Owkin Rrd Chxdau Chip CmMe. BAKERSBONUSOMmnlfivk'.e BABHUM'S ANIMA1S6edm BISCOSSuB.rWS4n lISCOS WankCmrn Bnwn Edp Walen BI!GS M/NNY Gnham CeeLln CAMEOCwmrSaidrih CH EW Y CHI PS ANOY! Chxdaie Qip Cackin CHIPS AHOYI Purt Omdan Qip Cualir. cHIPSAHOr.~iw LTunkY CAadare Chip Cookin Chnml arc Chadare OTUnk Cm4in CJnwlaie CAoculne Walnw Cadin Chombre CAunk Peun Cedin ar meal Qrcdn e O~unk CaoLir. MiniCHIPSAHOY1COdin Spink4d CHIPS ANOY! 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60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 idea; I can react to these numbers if you want me to react to them but-- Q Well, sure, I mean, it seems to me like it means something very easy; it seems to me that probably people who have more education are probably more concerned about the health risks that are posed and better informed about the health risks posed by cigarettes than people who are not. A Better informed, I don't know how you can get that out of the data. Q You don't know that; you can't see that? A How can you get that out of the data? Q I can get that real easy. People who have more education smoke less, and I think there would be a reason for it. You can't get a reason out of that? A No, I can't get that reason out of it. Q Well, what reason do you get out of it? A Well, as it turns out--did you ever see the good old war movies when people were under stress? Do you_know what they tend to do? Q Smoke. ^ Under 3FHs I,1 A They tend to smoke moreAand peZe that have a high school education live that kind of life; you see it around you all the time, and they smoke more. Q You think that people with less than a high school education are stressed more than people with more than a high .i'r.Oe~ V slawc<ale~ - I 501 Shepherd Street Winston-Salem, N.C. 27103 Phone: (919) 768-3694
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108 1 drinking. 2 Q The only time I smoke is when I'm drinkingt I 3 haven't smoked steadily since r was in the Navy. 4 A Do you play bridge? 6 Q I can play bridge. 6 A You don't smoke when you play bridge? You must do 7 that. 8 Q I don't think so. 9 A It makes me a better bridge player. 10 Q Does it really? 1I A Yes. 12 Q Maybe it's Alxheimer's. Do you have an y explanation 13 about w hy somebody like me--I really don't enjoy smokingt I 14 wouldn' t amoke a cigarette now for any reason. Rowever, if we 15 sit her e, and we have five or six beers, then I'll be just 16 17 like I never quit. Do you have any explanation for that? 16 A No, I do not. Q Did you have any scientists who then worked on or 19 20 did any studying on this or re searc h on this pr oble m--not 21 problem--on this relationship with Alzheimer' and Parkinson and nicotine? 22 A Yes, I do. 23 Q Who in your group worked on that? 24 A There was a whole group of people but the 25 biochemical piece of that is led by a fellow by the name of 601 Shepherd Street Wlnston-salem, w.0, 27103 Phone: (919) 788•3e94
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Cigarettes are promoted, sold, and smoked everywhere in the world. The United States participates in this worldwide trade in two ways. Nearly ten percent of all cigarette tobacco is grown in the United States, and three of the four transnauonal companies which con- trol much of the world trade are American companies. The transnationals carry on their business by manufacturing cigarettes in foreign factories, by own- ing all or part of local tobacco companies, by licensing their brand names, and by exporting their manufactured brands. [tt 1986. the four largest transnationals-three American and one British- produced 1.6 trillion cigarettes, approximately one-d third of the world's total production. A falling dollar and aggressive negotiations on the part of the United States Government with Japan and other Far Eastern countries have almost doubled the overseas market for American cigarettes in the past three years. Some 15 percent of all cigarettes manu- factured in the United States are now shipped overseas. S':' Estimated Shares of Wortd Cigargtte Output by Major Manufacturing Groups, 1986 ~: (lotal nutput, 5,000 bitlion dyareltol 27.5% he four tronsnational companies 31.4% British Americon Tobocco 11.1 % Philip Morris 10.2% RJR Nabisco 5.6% American Bronds 4.5% dno 26.1 % urope Socialist Producers 15.0'/0 Fomipn Agricultural Srtvic., USDA 33 ~. ;~. . ~- ; ,° e<. t:> ,..~.• at;> \.~.

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