Philip Morris
RJR Nabisco Holdings Corp.
Fields
- Area
- WOODWARD,ELLIS/OFFICE
- Attachment
- 2047002132/2047002168
- Type
- REPT, REPORT, OTHER
- BUDG, BUDGET, BUDGET REVIEW
- CHAR, CHART, GRAPH, TABLE, MAPS
- PHOT, PHOTOGRAPH
- BUDG, BUDGET, BUDGET REVIEW
- Site
- N622
- Named Person
- Black, G.
- Broin
- Burns, A.
- Castano
- Chakalian, R.
- Engle
- Frome, R.
- Fulford, R.
- Granier
- Hanson, D.
- Lacey
- Lampen, R.
- Lebow, B.
- Ridings, B.
- Stanley, M.
- Starbuck, W.
- Strauss, P.
- Uydess, I.
- Wigand, J.
- Zuckerman, F.
- Broin
- Request
- Stmn/R1-016
- Recipient (Organization)
- Board of Directors
- Document File
- 2047002122/2047002199/Lebow - Liggett
- Litigation
- Stmn/Produced
- Author (Organization)
- Brooke Group
- Named Organization
- Amer, American Tobacco
- Bat, British American Tobacco
- Board of Directors
- Brooke Group
- Bw, Brown & Williamson
- Calpers
- Chrysler
- Ebita
- Everready Batteries
- FDA, Food and Drug Administration
- Gallaher
- Hanson Plc
- Ibm
- Imperial Tobacco
- It
- Itt
- Lm, Liggett & Myers
- Loews
- London Brick
- Lor, Lorillard
- Management Board
- Nabisco
- New Valley
- Nyu
- Olshan Grundman
- RJR Intl
- RJR Nabisco
- RJR, R.J.Reynolds
- Rjrn
- Shareholder Board
- Texaco
- Tobacco
- United Gas Industries
- Ust
- Alex Brown
- Bat, British American Tobacco
- Master ID
- 2047002132/2168
Related Documents: - Date Loaded
- 05 Jun 1998
- UCSF Legacy ID
- zxn65e00
Document Images
2Q47002133
RJR NABISCO HOLDINGS CORP.
Proxy Solicitation
for the Board of Directors
by Brooke Group Ltd.
2047002134
SPINOFF - IT'S Now OR NEVER FOR NABISCO! !!
If you want a Nabisco shinof'f now, this is your only chance
IIONVEVER...
If you really believe the tobacco companies will win every case against them for the next 25 years
If you really believe the 601aw firms representing the nationwide Castano class will go away
If you really believe none of the 5 grand juries investigating tobacco will issue any indictments
If you really believe all the state Attorneys General trying Medicaid cases will lose interest
If you really believe the FDA will say it's OK to market tobacco to children If yocc really believe
no more Philip Morris or other whistleblowers will come forward
If you really believe their testimony will make no difference in any of these cases
If you really believe RJR Nabisco's current Board will spin off Nabisco any time soon
...THEN MAYBE THE BROOKE PROGRAM IS NOT FOR YOU
I
2047002135
THE BR0OKE GROUP PROGRAM
2047002136
SPINOFF - IT'S Now OR NEVER FOR NABISCO!!!
IMMEDIATE SPINOFF OF NABISCO
PERIOD!
2047002137
SPINOFF - IT'S Now OR NEVER FOR NABISCO!!!
IMMEDIA TE SPINOFF OF NABISCO
Attorney Generals and Castano plaintiffs have agreed not to seek injunctions
Eliminated risk, if there was any
Only Castano and the Medicaid suites are of sufficient size to have
possibly risked a fraudulent conveyance injunction (which in any case we
do not believe was likely)
Nabisco could be spun off in six to eight weeks
At stock prices on March 19, 1996, shareholders would receive $21.50 of
Nabisco stock
We believe Nabisco will be worth more than $25.00 per RJRN share post
spinoff
4
2047002138
SPINOFF - IT'S Now OR NEVER FOR NABi5co!!!
ML,RGIJI? WITH LIGGETT NOT REQUIRED
I f'a mejger is proposed, a subsequent independent
shareholder vote is jequij-ed
2047002139
LITIGATION ISSUES AND SETTLEMENT
2047002140
LITIGATION ISSUES
Overview of Litigation Environment
Estimated
# of Cases(l )
~ Class action cases
- Ca
t
(
ddi
ti
s
ano
a
c
on): 50,000
000
- Engle (Florida/addiction/personal injury): ,
3,000
000
- Broin (flight attendants): ,
60
000
- Lace
(Al
b
/
dditi
/
t
ifi
d ,
y
a
ama
a
ves
no
cert
e
): 300
000
,
ani
- G
(L
i
i
/
ddi
ti
/
ifi
d
r
er
ou
s
ana
a
c
on
not cert
e
): 700,000
~ State Medicaid reimbursement clainis
- Six states filed (FL, LA, MA, MN, MS, WV) 4,500,000
~ Personal injury cases
40
ears of suc
f
l d
f
i
800
y
cess
u
e
ense
n over
cases 140
- Freedom to choose defense
(1) Based on media reports.
204'7002141
LITIGATION ISSUES
NICOTINE ADDICTION BASED CLAIMS
""1'h
t d
"
Bl
G
k
e nios
angerous game
(
ary
ac
)
New information being released constantly, disclosing alleged nicotine and
addiction relationships known by industry
Whistle Blowers
-- Ian Uydess (Philip Morris) and Jeffrey Wigand (BAT)
- Others to come...including, possibly, RJR employees?
CriininalIndictments?
2047002142
LITIGATION SETTLEMENT
Overview of Litimation Environment
Estimated
# of Cases
~ Class action cases
- Castano (addiction-related): 50,000,000 Settled
- Engle (Florida/addiction/personal injury): 3,000,000 Covered
- Broin (flight attendants): 60,000 Nominal risk
- Lacey (Alabama/additives/not certified): 300,000 Nominal risk
- Granier (Louisiana/addiction/not certified): 700,000 Stayed
~ State Medicaid reimbursel11e11t clalllls
- Six states filed (FL, LA, MA, MN, MS, WV) 4,500,000 Five settled
~ Personal injury cases
- 40 years of successful defense in over 800 cases 140 Nominal risk
- Freedom to choose defense
- Addiction no longer a cause Settled
Over 95~I-~ Settled
.9
2047002143
LITIGATION SETTLEMENT
Proposed settlement of Castano (nicotine addiction) class action
- Settles most important tobacco claim (also covers distributors)
5% of domestic tobacco's pretax income each year (up to maximum $50
million)
Payment terminated if remaining defendants prevail in litigation
If certification overturned, settlement applies if Castano-type class certified
elsewhere
Assured of settlement terms substantially more favorable than any other
defendant (payments could be reduced to zero)
2047002144
LITIGATION SETTLEMENT
Settlement of five State Attorney General suits (FL, LA, MA, MS, WV)
- Assuming a tobacco company merger, initial payment of $125 million
Annual percentage of 2.5% to 7.5% of domestic tobacco pretax income,
depending on whether additional states join the settlement
Settles claims of the most aggressive states with high Medicaid populations
Provides mechanism for other states which sue (if any) to join settlement
Payment terminated if remaining defendants succeed on merits
Most Favored Nation Clause: Benchmark figure of three times Brooke
Group's payments per point of market share
2047002145
LITIGATION SETTLEMENT
Settlement is applicable to:
RJR (First Option)
Lorillard
BAT
American Brands
UST
2047002146
LITIGATION SETTLEMENT
No commitment to cooperate except as required by law
- Not waiving attorney/client or any other legal privileges
- Continue to vigorously defend all other litigation
Model of new agreement based on responsible co-existence
- Cannot legislate away the industry
- Cannot continue to ignore public health authorities
The settlement is a no-lose situation
- Wins if the industry wins
- Limits liability if industry loses
2047002147
LITIGATION SETTLEMENT
Catastrophe Insurance
Some cases being tried by a judge only, no jury
No need to bond potential judgments at lower court level
RI;MF1,MI3ER TEXACO!!
Can RJR afford a multi-billion dollar bond?
2047002148
C
LITIGATION SETTLEMENT
Estimated Cost of Catastrophe Insurance
($ in millions)
~
RJR Domestic Tobacco 1995 EBITA $1,420
Less Pro-Rata Interest Expense (390)
Less Pro-Rata Corporate Overhead (42)
Pre-Tax - Domestic Tobacco $ 988
Castano Payments 49
Medicaid Payments (assumes all states) 74
Less Estimated Legal Fee Reduction (40)
Total $ 83
SE'.ttlelllellt Cost I"ei L'ack 1.4 Cents / Pack
204'7002149
LITIGATION ISSUES
Estimated cost of catastrophe insurance, if applied to:
Lori l 1 ard
Settlel»ent Cost Per I'ack
Brown & Williamson (BAT)
Settlement Cost Per Ptack
2.8 Cents / I'lack
l.(i Cents / Pack
201'7002150
SPINOFF VALUE WI'1,H O Urh SETTLEMENT
RJRN Stock Could Be Worth More Than $47 Per Share
Nabisco could be worth $38 or more post spinoff
$25 per RJRN share
Tobacco could be worth $22 or more post spinoff 1)
9% yield with $2 dividend
Without benefit of Liggett Group's settlement
(1) Morgan Stanley estimated up to a $17 dollar per share value for a stand-alone tobacco company
2047002151
SPINOFF VALUE WIr1'H SETTLEMENT
RJRN Stock Could Be Worth More Than $58 Per Share
Nabisco could be worth $38 or more post spinoff
$25 per RJRN share
Tobacco could be worth $33 or more post spinoff, with the litigation
settlement
6% yield with $2 dividend
2047002152
DIVIDENDS
Significant Dividend Increase
Adopt a new dividend policy
- At least 6(1 °Io of the Tobacco Company's Net Cash Flow
Net Cash Flow = Net Income plus After-Tax Amortization
plus Depreciation less Capital Expenditures
An annual dividend of $2 for the Tobacco Company, commencing in the second
half of 1996 based on UB/E/S estimates of RJRN's earnings in 1996 and 1997
2447002153
DIVIDENDS
Reynolds Tobacco Company
Computation of Cash Net Income Per Share - Twelve Months Ended June 30, 1997
($ in millions, except per share numbers)
Total Per Share
UB/E/S Estimate(t) for RJR Nabisco $ 904 $ 2.74
I/B/E/S( t) for Nabisco (432) (1.31)
Plus: 19.5% Nabisco 84 0.26
Net Income for RJR Tobacco 556 1.68
Plus: Amortization After Tax 368 1.12
Plus: Depreciation 238 0.72
After Tax Cash Net Income 1,162 3.52
Less: Preferred C Dividends (80)
Less: Capital Expenditurest21 __(223)
Net Cash Flow $ 859
Net Cash Flow per Share $ 3.15
Cash Dividends at 60% $ 2.00
Per Cent of Net Cash Flow(3) 63%
(I) At March 15, 1996.
(2) Assumes Capital Expenditures total $223 in 1996 (three-year average of Company's Capital
Expenditures)
(3)
1995 $232
1994 $215
1993 $224
Dividend payout ratios of comparable companies before buyback programs (after buyback programs):
Philip Morris 59%
(993b), American Brands 629'0 (24890), UST 6290 (12690). BAT and Loews are insurance companies with
lower payout
ratios.
I
2047002154
PROVEN TOBACCO MANAGEMENT
Ronald Fulford to Lead RJR Tobacco
Turnaround specialist at Hanson plc from 1982 to 1996
- Senior Associate Director of Hanson plc (market cap. $15 billion, 55% sales in U.S.)
- Nine years of successful Tobacco operating experience at Imperial Tobacco
(38% of U.K. market)
Chief Executive Officer:
1980-1982 ............................................................. United Gas Industries
1982-1987 ............................................................. EverReady Batteries
1984-1987 ............................................................. London Brick
1987-1996 ............................................................. Imperial Tobacco
Fulford has developed a proven management system for turnaround situations
- Repeatedly implemented and refined the system during his career
- The system has worked successfully in a tobacco company
- Fulford provides leadership
2047002155
PROVEN TOBACCO MANAGEMENT
Fulford Has a History of Successful Turnarounds at Hanson plc
60
50
(n
~
Ca
~
~
0
~ 40
v
~
~
.
v
a.
~
C° 30
v
E
0
u
c
~
c 20
.~
~
a
a
0
10
0
70
60
50
40 30
Capital Employed as Percent of Sales
20
10
0
-22-
2047002156
PROVEN TOBACCO MANAGEMENT
Stage One at Imperial Tobacco: Cost-Cut
Head Count
10,000
200%
c
0
5,000
0
n.
Jq
a°
50%
Productivity
0 16 ~-
r oo rn o ..y N r~ v v~
00 00 0? rn a o1 rn v. a
n n n n n. n. a a n,
a a+ a a u W a ai ai
In In (n ~ V) (n
1987 1988 1989 1990 1991 1992 1993 1994 1995
Change the organizational structure to achieve a low cost structure
- Decentralize into profit centers
- Create financial targets: transfer prices and benchmarking
- Incentivize management based on divisional and corporate productivity and working
capital
- Create a self-governing organization
-23-
204700215'7
PROVEN TOBACCO MANAGEMENT
Stage Two at Imperial Tobacco: Marketing Strategy
30%
-4 N M I-?
00 O, ~ Q'
fV N Q~
a
00
00 00
N a
. ~ .. , .,
.-. - - .. - -
,..,
Take control of the marketing strategy
- Reinvest a portion of the cost savings
- Adopt a portfolio approach to marketing (de-emphasize brand management)
- Introduce regional brand strategies
a a a a a a
- 24 -
2047002158
PROVEN TOBACCO MANAGEMENT
Stame Three at Imperial Tobacco: International Sales
120
100
~
0 80
...,
...
~
.,.,
~
[ 60
...,
4a
40
20
1987
1988 1989 1990 1991
1992
Identify growth opportunities, especially international
- Yrioritize resource allocation
- Aggressively enter newly developing markets
- Attain critical mass regionally, or exit
1993
1994
1995
204-'7002159
PROVEN TOBACCO MANAGEMENT
Results at Imperial Tobacco: Operating Profit Growth 1987-1995
1987 1988 1989 1990 1991 1992 1993 1994 1995
2047002160
CORPORATE GOVERNANCE
Dale Hanson to join Board of Directors
- CEO, CaIPERS from 1987 to 1994 (third largest pension system in the world)
- A leader of the shareholder rights movement
Independent Nabisco
- Neither Brooke nor its affiliates will exercise any management control over Nabisco
Restrictions on affiliate transactions
- Transactions greater than $2 million per year between RJR Nabisco and Brooke Group
will be subject to approval by stockholders of RJR Nabisco
No staggered Board of Directors or poison pill at RJR Tobacco or Nabisco
Confidential voting on all future matters to be acted upon by shareholders
Termination of Directors' Retirement Plan
- Current plan grants $60,000 per year for up to 15 years
2047002161
THE MANAGEMENT PROGRAM
2,047002162
THE MANAGEMENT PROGRAM - MORE OF THE SAME
NO SPINOFF OF NABISCO! ! !
Nominal dividend increase
Management in disarray
RJR Tobacco's U.S. market share continues to decline
48% ,
42% -I
36%
30% -I
24%
Philip Morris
RJR
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
204'7002163
THE MANAGEMENT PROGRAM - MORE OF THE SAME
The Company remains blind to the basic facts:
- "The domestic tobacco side of our business was the standout in a year which was
essentially disappointing." (RJR Nabisco Schedule 14A, February 8, 1996)
These are the statistics that "standout":
Fourth Quarter Full Year 1995
Versus 1994 Versus 1994
Volume ...................................................... +1% -5%
Market Share .............................................. -1.0 point -1.0 point
Net Sales .................................................... +5% -2%
EB ITA ....................................................... + 1 % -2%
Source: RJR Nabisco Schedule 14A, February 8, 1996
"RJR SItIPPED MORE 4Q VOLUME "I'IIAN CONSUMERS 13C)U(;I ITAT RF:TAll.._..4Q
SIIII'MENT SIIARES MAY IIAVE OVERSTATED AC"1'[lAl. ('UNSt Ir\1t:R t3tl}'ING"
- (GARY BLACK FEB. 14, 1996)
Even RJR Tobacco International has faltered in a growing market
- EBITA declined 15% in 1995 befiwe a $54 million restructuring charge
-30-
2047002164
PROPOSED BOARD OF DIRECTORS
204'7002165
PROPOSE D BOARD OF DIRECTORS
The Shareholder Board is a stronger Board than the Management Board
- Both Tobacco operating experience and understanding of legal issues
Brooke Group Management
Program Program
Tobacco Operating ExperienceM ...... 5 1
Attorneys ............................................ 3 1
Academics .......................................... 1 1
Investment Bankers ........................... I
0
Corporate Governance Experts.......... I
U
Food Operating Experience ............... 0
2
"1-Ionorary" Appointees ..................... 0 5
Total ............................................ 11 10
(1)
More than three years
-32-
2047002166
k
PROPOSED BOARD OF DIRECTORS
The Brooke Group Program
Director (Age)
Arnold Burns(I) (65)
Rouben Chakalian(2) (60)
Robert Frome (56)
Ronald Fulford (61)
Dale Hanson (53)
Richard Lampen(2) (42)
Bennett LeBow(2) (58)
Barry Ridings(I) (43)
William Starbuck (61)
Peter Strauss (63)
Frederick Zuckerman (61)
Experience
Former U.S. Deputy Attorney General
Chairman of Liggett, Ex-EVP, RJR International
Partner, Olshan Grundman Frome
Ex-CEO, Imperial Tobacco
Ex-CEO, CaIPERS
General Counsel, New Valley
Chairman, Brooke Group
Managing Director, Alex. Brown
ITT Professor of Management, NYU
Ex-SVP, American Tobacco
Ex-Treasurer, RJR, IBM and Chrysler
(I) Brooke Group Independent Director
(2) Brooke Group Insider
2047002167
SUMMARY
2047002168
SUMMARY
An inTjnediate spinoff of Nabisco
$2.00 Tobacco dividend
Tobacco operations led by Ronald Fulford, ex-CEO of Imperial
Tobacco (Hanson plc)
Corporate governance guidelines overseen by Dale Hanson
First option on Brooke Group's litigation settlement
