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Annual Report 1994 was the year when a "n ew" RJR Nabisco began to emerge.

Contents Financial Objectives and Mission 2 Letter to Shareholders 4 Operations Profiles 10 Nabisco Letter 12 Food Operations Review 16 R.J. Reynolds Letter 20 Tobacco Operations Review 24 Financial Information 28 Operating Companies 72 Board of Directors, Senior Management, Investor Information 73 Company Description R I N ABISC:O I RJR Nabisco is a world leader in consumer packaged goods. The company's brand names are synonymous with high quality and superior value in more than 160 countries and territories. INABLSCO Nabisco is a $7.7 billion multinational food business. Nabisco's brands include familiar household favorites such as Oreo, SnackWell's, Ritz, Life Savers, and Planters. Internationally, Nabisco has strong market positions in Canada, Latin America and Spain and a growing presence in Asia. R.J. Reynolds Tobacco Worldwide is a leader in the growing international tobacco industry. Three of its brands - Camel, Winston, Salem - are among the top-10 best-selling international brands in the world. In 1994, total worldwide tobacco product sales were $7.7 billion. Financial Highlights Net Sates RJR Nabisco Holdings Corp. (S in millions) '92 ! ; '93 '94 ~ Food / Tobacco Net Income* RJR Nabisco Holdings Corp. ($ in millions) $812 $806 (*exclusive of one-time charges in 1992, 1993 and 1994) Totat Debt RJR Nabisco Holdings Corp. ($ in millions) $29,100 (*at year-end) Operating Company Contribution* RJR Nabisco Holdings Corp. ($ in millions) $3,522 (*operating income before amortization of trademarks and goodwill and exclusive of one-time charges in 1992, 1993 and 1994) Cash Net Income* RJR Nabisco Holdings Corp. ($ in millions) $1,342 $1,346 (*net income before after-tax amortization of trademarks and goodwill and exclusive of one- time charges in 1992, 1993 and 1994)

Financial Highlights RJR Nabisco Holdings Corp. (1 in millions, except per share amounts) (per share calculations are on a primary basis) Net Sales Domestic Tobacco International Tobacco Total Tobacco Domestic Food International Food Total Food 1994 $15,366 4,570 3,097 7,667 5,729 1,970 1993 1992 $15,104 $15,734 4,949 6,165 3,130 2,862 8,079 9,027 5,491 5,283 1,534 1,424 7,699 7 025 6 707 , , .................................................................................................... .................................................................................................... ................................. Operati.... ng Co.. mpany Contr..ibution.. * 3,244 2,733 3,522 Domestic Tobacco 1,475 1,200 2,112 International Tobacco 755 644 575 Total Tobacco 2,230 1,844 2,687 Domestic Food 969 848 808 International Food -. 187 147 139 Total Food 1,156 995 947 Headquarters (142) (106) (112) .................................................................................................... .................................................................................................... ...................................... Pre-tax restructuring charge _ ............ .................................................................................................... .................................................................................................... ................................. 730 106 Operating Income 2,550 1,378 2,898 Total Tobacco 1,826 893 2,241 Total Food 931 624 769 .....Headquarters .................................................................................................... ..........................(207.............................. (207) (139) ..............................(112) Total interest expense 1,046 1,190 1,429 .. . . . .................................................................................................... .................................................................................................... ........... Income (loss) before extraordinary loss 764 (3) 776 Income (loss) per share before extraordinary loss .41 (.05) .55 . .............. .................................................................................................... .................................................................................................... ................... After-tax extraordinary loss 245 142 477 .................................................................................................... .................................................................................................... ............................... ............. Net income (loss) 519 (145) 299 Net income (loss) per share .25 (.15) .20 . ......... ........... ............................................ .......................... .............. ............. .......................................................................................... Netincome** 806 464.. 812 Net income per share** .44 .29 .58 .................................................................................................... .................................................................................................... ................................... Cash netincome** 1,346 1,001 1,342 ...... .................................................................................................... .................................................................................................... .................................. Total debt 11,149 12,448 14,218 Debt to equity ratio 1.0 to 1 1.4 to 1 1.7 to 1 .................................................................................................... .................................................................................................... .. Preferred stock dividends 131 68.. 31 Average number of common and common equivalent shares outstanding (in thousands) Number of employees Food Tobacco 1,538,127 70,600 49,400 21,200 1,349,196 66,500 45,000 21,500 *Operating income before amortization of trademarks and goodwill and exclusive of one-time charges, as applicable **Exclusive of one-time charges: extraordinary losses and restructuring charges in 1994, 1993 and 1992 and a gain on the sale of a business in 1992 RJR Nabisco Holdings Corp. is the parent company of RJR Nabisco, Inc., an international consumer products company with subsidiaries engaged in the domestic and international tobacco businesses and an 80.5 percent ownership position in the Nabisco Holdings Corp. food business. Prior to the January 1995 initial public offering of 19.5 percent of Nabisco stock, Nabisco was a wholly owned subsidiary of RJR Nabisco, Inc. The financial results and positions of the tobacco subsidiaries and the Nabisco food business are consolidated in this report. For improved readability of the annual report, these operating companies are sometimes referred to as businesses of RJR Nabisco Holdings Corp. or RJR Nabisco, Inc. 1,363,549 63,000 44,300 18,700 r

Financial Objectives In last year's annual report, RJR Nabisco defined financial objectives that, over time, should allow us to deliver the earnings necessary to create market recognition for our company's performance and help us fulfill our mission of shareholder enrichment through increased shareholder value. As we explained last year, cash net income is the foundation of our financial objectives. Cash net income simply adds back to reported earnings the non-cash charges the company records for after-tax amortization of trademarks and goodwill. In other words, it is the cash in excess of the businesses' normal capital expenditures, available to build shareholder wealth. Cash net income clearly shows that the resources available to invest in growth opportunities are greater than one would assume by looking only at the reported numbers. For example, exclusive of one-time charges in 1994, reported net income of $806 million really equals less than two-thirds of actual cash net income: $1.35 billion. Our 1994 performance met our initial financial objectives as described in last year's annual report. Given several significant transactions at our company since then - additional debt paydown, partial initial public offering of Nabisco stock, initiation of a cash dividend on common shares - we've adjusted two of our original financial objectives to accommodate these important steps. Both adjustments - which set more conservative objectives for debt levels and interest coverage - reflect RJR Nabisco's strengthened balance sheet. Our goal of a 20 percent average cash return on equity remains the same, as does our goal of 15 percent trendline growth for cash net income. 1. Cash Return on Equity Objective: RJR Nabisco's objective is to achieve a total of 20 percent or better after-tax cash return on year-beginning common shareholders' equity. Formula: cash net income (less certain preferred stock dividends) (year-beginning) common shareholders' equity All capital investment decisions - new businesses, plants, equipment, etc. - will be evaluated in terms of the potential cash return on equity (ROE) to the individual operating company and in comparison to potential returns from other RJR Nabisco businesses. Given the substantial cash flow of the company, reinvestment at the targeted return should have a substantial impact on profit growth and future dividends. Assuming we meet our ROE goal over time, the impact on our company would be substantial. 2. Trendline Cash Net Income Objective: RJR Nabisco's objective for trendline cash earnings: growth in excess of 15 percent annually. Formula: (cash earnings percentage growth forX years) X The company's trendline cash net income growth is a critical measurement of profit momentum, and consequently share price appreciation, over time. The company's share price should appreciate substantially over an extended period as the company achieves its cash return-on-equity objective and attains a superior trendline for growth. Attaining this performance standard would double our cash earnings in five years. Cash ROE* RJR Nabisco Holdings Corp. (*before one-time charges) ••••••••••••.•••••.••..••.•..••.••••••.•••.•• 15.8% 20% Objective '93 '94 '95 '96 '97 '98 Trendline Cash Net Income* RJR Nabisco Holdings Corp. (*before one-time charges) (S in billions) $1.35 ,,. $1.00 ,,~•,*•15% Trendline Objective '93 '94 '95 '96 '97 '98 2

RJR Nabisco's mission is to increase the wealth of all its shareholders through stock price appreciation, dividend payments or a combination of the two. 3. Capitalization Ratio Objec'tive: RJR Nabisco's objective is to reach and maintain a capitalization ratio of 35 percent debt. Formula: long-term debt total capital Long-term debt, including current maturities, is defined as debt that bears interest on an ongoing basis. Total capital includes long-term debt, deferred taxes, other long-term liabilities, and preferred and common equity. We have exceeded our former standard and at year-end we were at 39.2 percent. Our objective is to reach our new standard in 1995 while we continue to reinvest free cash flow at our return objectives. 4. Coverage Ratio Objective: The company's interest coverage objective is to produce cash flow from operations that is at least 3.5 times cash interest and preferred dividends. Formula: operating company contribution + depreciation cash interest expense + preferred dividends The coverage ratio measures the company's ability to service its annual interest payments and preferred stock dividend payments. Operating company contribution is defined as operating income plus amortization of trademarks and goodwill (exclusive of net charges). We believe a 35 percent capitalization ratio and a minimum 3.5 times coverage ratio are appropriate targets that balance the need to access capital markets at appropriate rates and the need to invest excess cash to grow our business. 5. Annual Dividend Policy Objective: RJR Nabisco's objective (beginning in 1995) is to distribute 35 to 45 percent of tobacco-generated cash net income to shareholders in the form of a regular quarterly common stock dividend. Formula: 35% to 45% tobacco cash earnings primary common shares outstanding Our focus on shareholder returns includes providing shareholders with an ongoing, tangible benefit: a common dividend. We expect to grow our dividend as we grow our earnings. 3 Capitalization Ratio RJR Nabisco Holdings Corp. 44.5% ... '93 '94 '95 '96 '97 '98 Coverage Ratio RJR Nabisco Holdings Corp. ............................................. 2.8x 2.8x 3.5x Objective '93 '94 '95 '96 '97 '98

"I am pleased to report that a new company is emerging....The leveraged buyout era at RJR Nabisco is over." Dear FeLLow Shareholders: RN~BISCO Charles M. Harper Chairman and ChiefE,recutive OJJicer RJR Nabisco Last year we took a number of steps toward enriching our shareholders with the objective of growing earnings, strengthening our balance sheet and positioning our businesses to be better recognized for their operating potential by the financial markets. I am pleased to report that a new company is emerging from this activity. The leveraged buyout era at RJR Nabisco is over. Strong Earnings Growth In last year's report, we expressed our commitment to achieving long- term earnings growth at RJR Nabisco. We made significant progress on that commitment. Before one-time charges, our cash net income rose 34 percent to $1.35 billion from $1 billion in 1993. Cash net income is a very important measure for our company. It is the company's net cash earnings after providing for taxes, depreciation and financing charges. The depreciation charges we take should cover the cash needed to fund normal maintenance, modernization and growth capital requirements in the company. In short, cash net income simply adds back to reported earnings the non-cash charges the company records for after-tax amortization of trademarks and goodwill. 4

"These results represent a good operating performance by our companies and a solid rebound in profitability in the domestic tobacco business." Before one-time charges, our reported net income rose by 74 percent to $806 million, and fully diluted earnings per share rose 38 percent to $.44. These results represent a good operating performance by our companies and a solid rebound in profitability in the domestic tobacco business. You'll hear more about how we delivered these results from John Greeniaus and Jim Johnston later in this report. A "New" RJR Nabisco We made significant progress during the year, strengthening the company's balance sheet. We now have a launching pad for a new RJR Nabisco, one with a manageable debt level, powerful consumer franchises and the talent and resources needed to focus exclusively on shareholder enrichment. - There are four cornerstones supporting the new RJR Nabisco: our financial flexibility, the public valuation of the Nabisco food business, the breadth and diversity of our shareholder base, and the political environment: 1. Financial Flexibility: Over the past two years, we've raised more than $4 billion in equity and reduced debt by a similar amount. This financing activity has placed RJR Nabisco on a solid footing. Most important, our new balance sheet has given us considerable flexibility to serve shareholders. 2. A Market Value for Nabisco: For some time, we've been concerned that the markets are not property rewarding RJR Nabisco for the performance of its food business. In January 1995, we completed an effort to address this problem. Nabisco Holdings Corp. sold 19.5 percent of its common stock to the public. Nabisco's shares were sold at a multiple that placed it, rightfully, among the elite companies in the food industry. The stock offering should encourage the financial markets to recognize the value of the food business in each common share of RJR Nabisco, since RJR Nabisco owns 80.5 percent of Nabisco's stock. Operating Company Contribution* as a Percentage of Net Sales RJR Nabisco Holdings Corp. ($ in millions) - ~ '92 '93 _'94 (*operating income before amortization of trademarks and goodwill and exclusive of one-time charges in 1992, 1993 and 1994) ~ Net Sales ~ Operating Company Contribution 5

"We now have a launching pad for a new RJR Nabisco..." 3. Diversity of Share Ownership: In December, Kohlberg Kravis Roberts & Co. acquired control of Borden, Inc., using a large portion of their RJR Nabisco shares to pay for the company. In the process, they also helped diversify RJR Nabisco's shareholder base. Upon completion of the transaction and Borden's disposition of RJR Nabisco shares held in its treasury, KKR will own only about 8 percent of RJR Nabisco, versus 46 percent at year-end 1993. 4. The Political Climate: Without question, the political environment in 1994 presented the greatest challenge for our domestic tobacco company. I characterized some of these matters as short-term obstacles in last year's report. Importantly, public-opinion polls have supported that view: some 80 percent of Americans oppose smoking bans and additional regulations. Our future is tied to how well we manage a policy environment that at times has been hostile to tobacco. We have made real progress in the past 15 months building a new RJR Nabisco on these cornerstones. Consider the following results: • RJR Nabisco has an investment-grade balance sheet. If we were to took at it for a moment on a"stand-alone" basis - with a separate Nabisco having its own separate debt of about $4 billion - RJR Nabisco would be left with only $5.3 billion of debt, and about $8 billion of equity. On a stand-alone basis, our capitalization ratio of 29 percent would leave our company conservatively leveraged relative to many peer companies in the packaged-goods industry. • The 213 million Nabisco shares owned by our company give us a food asset currently valued by the public markets at more than $5.5 billion. That would mean the value of our Nabisco stock could potentially exceed RJR Nabisco's "stand-alone" debt. • We declared our first quarterly cash dividend of $.075 per share to be paid on April 1, 1995 to shareholders of record on March 10, 1995. At RJR Nabisco's current stock price, that translates to an annual dividend yield of about 5 percent. The dividend payout also equals about 40 percent of the tobacco businesses' cash earnings. 6

":..our business fundamentals are strong, our cash flow is substantial and our outlook is bright...many value investors witl find (RJR Nabisco) appealing..." • Although we currently are not committed to pursuing a tax-free distribution of stock in Nabisco Holdings to RJR Nabisco's shareholders, we have structured the Nabisco IPO to preserve the option of a tax-free distribution at some later date, should we choose to do so. • The RJR Nabisco shares that were owned by KKR and distributed by them to Borden and its shareholders represent an increase of more than 50 percent in the number of our common shares trading in the public Business Investment market. That additional trading volume may put pressure on our stock price for several months until the shares find a home with long-term investors. However, this change will reduce uncertainty in the markets about KKR's future portfolio decisions, and the market should reward our stock over time for being owned by a--more diverse group of investors. • The policy environment for tobacco has improved. The political debate got far outside the mainstream in 1994, but by election day, there was little doubt that the public's concerns about how far government should reach into their personal lives spilled over into the voting booth. We don't expect a free ride in the new Congress, but we do expect to be able to engage in reasonable debate on things tike consumer choice, personal privacy and federal excise taxes. • The company has indicated that, under normal circumstances, the company does not plan to issue additional equity securities for purposes of balance sheet improvement. • Finally, at our annual meeting this year, we will ask shareholders to approve a one-for-five reverse split of RJR Nabisco common stock. If approved, this would result in a share price, dividend and earnings per share that are five times higher with, of course, one-fifth the number of shares outstanding. Turning Our Sights to the Future We believe the case for RJR Nabisco common stock is compelling. The reasons are simple: our business fundamentals are strong, our cash flow RJR Nabisco Holdings Corp. (S in millions) IM M $1,391 IM M $192; , $199 $211; '92 _ ~..L:93 . _'94 ~ / Acquisitions ~ Capital Expenditures / Research and Development 7

"Every employee who helped us succeed over the past five years deserves the company's gratitude - and has it." Operating Income* RJR Nabisco Holdings Corp. (S in millions) $2,906 ('before one-time charges) is substantial and our outlook is bright. In short, we're the type of company that many value investors will find appealing as we demonstrate that we can deliver our financial objectives over time. Our job now is to turn our sights to the company's future. By the end of 1994, with most of the financing activity behind us and an expectation for a reduced level of activity in the future, we concluded that we should reduce the size of our headquarters staff by half. This wasn't an easy decision, but it was the right one. Every employee who helped us succeed over the past five years deserves the company's gratitude - and has it. Management Changes Larry Ricciardi, our president and general counsel and a director of the company, and Gene Croisant, executive vice president of human resources and administration, retired from the company in March 1995. Larry, Gene and a number of other executives came to RJR Nabisco after its leveraged buyout in 1989. They faced an enormous challenge getting the company into shape. We owe them our thanks for bringing the company to where it is today financially. We're fortunate to add three new members to our senior management team: Steve Goldstone, a partner at the law firm Davis Polk & Wardwell, joined the company in March 1995, as general counsel; Jo-Ann Ford, vice president, assistant general counsel and corporate secretary, assumed added responsibility as senior vice president, law; and Jerry Angowitz, vice president, human resources, became senior vice president, human resources and administration. John Clendenin, chairman and chief executive officer of BellSouth, and Julius Chambers, chancellor of North Carolina Central University, joined our board of directors in 1994. Both men bring impressive experience to our company and we are fortunate to have them. Jamie Greene, Paul Raether and Mike Tokarz are not standing for reelection this year, reflecting KKR's declining ownership. We believe the shareholders will be well represented this year by a diverse, 12-member board as we go about our job of building value for shareholders in the years ahead.