LIMITED
RJR NABISCO, INC. UPDATE
MAY 1990
lmjs/465SM/5-16-90
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BATCo document for Province of British Columbia 26
October 1999


TABLE OF CONTENTS
Pacie No.
Executive Summary I
Background 4
Introduction 4
Highlights 5
Exhibit 1 - Summary of Completed, Pending and
Potential Asset Sales 13
Exhibit 2 - Long-Term Debt 14
Exhibit 3 - RJR Securities 17
Exhibit 4 - Original LBO (Optimistic) Projections
18
Exhibit 5 - Current Optimistic Projections 19
Exhibit 6 - Current Pessimistic Projections 20
Exhibit 7 - First Quarter 1990 Results 21
BATCo document for Province of British Columbia 26
October 1999


EXECLMVE SL44KARY
Conclusion
Despite RJR's current significant underperformance
of the domestic tobacco
business relative to LBO assumptions and a more
unfavorable financial
market. B&H ' s anal ys I s projects RJR can meet
operating and cash
requirements until 1994. However, analysis also
shows that in 1995. when a
significant portion of the junk bond debt begins
requiring cash interest.
RJR will not generate sufficient cash flow to meet
operating and cash
requirements. Cash interest requirements will
total approximately $3.5
billion in 1995 and a cash shortage of about
$1-1.5 billion is estimated.
Under this pessimistic scenario, annual cash
shortages would dramatically
increase, as additional cash interest and
principal payments come due from
1995 on.
B&W's analysis of the current situation shows that
RJR needs a combination
of a) significant domestic volume and margin
improvements and b) a
reduction of 4-6 percentage points in interest
rates to meet the original
LBO projections. Thus, B&W1s conclusion is that
the LBO will be
restructured near term and will undergo continuing
changes for It to work.
To avert projected unmanageable buildup of massive
cash interest and debt
requirements. RJR will need to restructure the
LBO's financial arrangements
before May 1991, the date by which interest rates
on the junk bonds must be
reset. Otherwise, the results of tobacco's
underperformance and higher
interest rate levels will accumulate and make the
LBO untenable by 1995.
Changes from the original LBO plan would be
expected in the 1990 to early
1991 time frame. Combined with performance
improvements and cost cutting,
RJR is estimated to have the following possible
options:
Sell additional assets in the range of $2-4
billion. A primary
business considered for sale by analysts is
Planters/Life Savers (i.e.,
$1.6 billion) and others as necessary.
Ask bondholders to accept a change in the junk
bond reset tems in
exchange for a lower stock conversion price or
more equity.
Partial buyback of bonds by KKR
money. This, hopefully would
resetting. Speculation among
repurchase is being considered.
using some of the firm's LBO fund
drive bond prices up and allow
analysts indicates a $2 billion
Do nothing and generate improved financial results
in the short term
'in hope, the financial markets will raise
valuation of the debentures
to about 90~ per dollar. At this level , RJR would
try to reset the
bonds' interest rates as quickly as possible at a
rate in the 14-16%
range. Once reset, the bonds don't have to trade
at par and RJR could
continue to buy back bonds at a discount if they
later traded lower
than par.
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BATCo document for Province of British Columbia 26
October 1999


Of note. reports indicate KKR already has two
investment firms (Merrill
Lynch and Morgan Stanley) developing potential
solutions to the reset
issue, which might indicate KKR's current
projections are in line with
B&W's pessimistic assessment.
Kev Findincis
- RJR's asset sales have progressed successfully
and will meet the LBO
requirements for 1990 debt repayment of $6 billion
by August 1990. Selling
prices to date have been at or slightly above
original estimates.
- Operating results for RJR in 1989 and to date In
1990 have generated
sufficient cash flow to meet cash interest. debt
payments and operating
requirements. For 1990, cash flow will exceed
interest. debt repayment and
operating requirements, especially given RJR's
1989 cost-cutting activities
which analysts estimate at about $550 million
annually. 1990 will be the
first full year RJR's results benefit from these
cuts.
RJR's Food and International tobacco businesses
have generated sales and
income growth in line with or ahead of the LBO
projections. Forecasts are
for continued performance improvements in these
businesses which are
estimated to represent slightly less than 40% of
RJR's operating income in
1990.
RJR has two critical issues which are key to the
long-term success of the
LBO's profitability. First is the performance of
RJR's domestic tobacco
business. Second is the unfavorable financial
market conditions. Both
issues are discussed below.
Domestic Tobacco
- In terms of domestic volume. RJR's brand
performance trends remain
soft. The original LBO volume projections were
optimistic and showed
RJR gaining share combined with reduced total
industry declines. RJR's
current brand trends have worsened due to
increased competition and
annual industry decline rates have increased.
Thus, both optimistic
and pessimistic RJR volume forecasts are
significantly lower than the
original forecast and the difference grows in the
outyears.
Volume Proiections
Cum.
(Billions) IM 1991 IM 1M 19.24 21a4
Original Forecast* 173 171 170 168 166 848
Current Optimistic 154 142 134 131 129 690
Current Pessimistic 148 137 125 116 107 633
Volume Reduction Range 19-25 29-34 36-45 37-52
37-59 158-215
*Based on information believed to be in line with
KKR's LBO forecast.
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BATCo document for Province of British Columbia 26
October 1999


Further complicating RJR's volume reduction is the
issue of domestic
operating margin improvement. KKR's LBO financial
projections Included
significant margin growth from RJR's domestic
business. Cash flow
estimates were based on obtaining operating
returns of over 40% (i.e.,
similar to Philip Morris' and Lorillard's domestic
operating returns).
For 1989, RJR reported a margin rate of 34.3%.
However, management
statements indicated without 1989 LBO and business
one-time
adjustments, the rate would have been about 39%.
RJR's current cash
flow projections appear based on 1990 operating
margins of nearly 42%
growing to about 44% by 1994. However. these
projections appear
optimistic based on RJR's continuing volume
shortfalls, mix
deterioration, increased value-for-money (VFM)
competition and possible
increases In industry regulation/taxation.
Financial estimates based on more conservative
domestic margins of
35.3% for 1990 growing to 39.3% in 1994, and
higher pricing indicate
RJR:
Will experience net pre-tax losses until 1994.
Can meet cash debt and interest payments through
1994 in the
present financial market situation. This assumes
the continued
Pay-in-Kind (PIK) treatment of the junk bonds as
allowed.
Won't meet cash requirements in 1995. when
significant amounts of
PIK debt will require cash interest and debt
payments. A shortage
of $1-1.5 billion is estimated.
Will have a total debt of $24-25 billion,
approximately the same
level as the initial LBO debt (i.e., nearly double
that originally
projected) at the end of 1994.
Of note. this negative situation results under
both the current
pessimistic and optimistic volume assumptions
based on the unfavorable
financial market conditions discussed below.
Financial Karket Conditions
The second, and equally critical issue, facing RJR
is the ability to
reset the interest rate or restructure favorably
the junk bond debt
($6.3 billion in total) before May 1991.
Based on the stock market's current devaluation of
junk bonds in
general, RJR would have to reset the interest rate
on both junk bonds
at about 20% to make the debentures trade at 100%
of par. This
compares to an original LBO assumption of interest
rates in the
13.5-15% range. RJR's total interest is projected
to double to over
$18 billion over the 1990-1994 time frame compared
to original total
interest estimates of over $9 billion. RJR's debt
level would rise to
the $24-25 billion level again by 1994 and
increase through 1999. Cash
interest payments would be approximately $3.5
billion for 1995 and grow.
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BATCo document for Province of BritiSh Columbia 26
October 1999


BACKGROUND
On November 30, 1988. Kohlberg. Kravis. Roberts
and Company (KKR) entered into
an agreement to purchase all of the common stock
of RJR Nabisco, Inc. for $109
per share. consisting of, on a blended per share
basis, $81 in cash, $18 in
Pay-in-Kind (PIK) exchangeable preferred stock,
and PIK Senior Convertible
Debentures, valued at $10 per share. The company's
series B preferred stock was
purchased for $108 in cash. In addition to the
purchase of the stock, KKR
assumed the old RJR corporate debt which amounted
to $5.5 billion. The total
cost to KKR was reported to be approximately $26
billion excluding the assumed
old debt. The excess of purchase cost over the
value of the net assets acquired
was reported to amount to about $21.7 billion.
The purchase was initially financed by a
combination of short-term bridge loans,
the PIK debt, preferred stock and subordinated
Increasing rate notes. KKR
contributed $2 billion of cash of which $.5
billion was made up by a short-term
loan. On April 6, 1989, KKR announced that it
would sell an additional $4
billion in bonds and use these funds to pay off
the original increasing rate
notes. The new bonds were sold during the week of
May 15. The issue contained
$2 billion of discount debentures which sold for
48.6 cents on the dollar. One
billion dollars of bonds which can pay PIK
interest through 1994 and another $1
billion of notes were issued.
Subsequent to the LBO, RJR has divested of assets
to fulfill financing
requirements, put a new management team in place
and undergone substantial
staff. overheads and other cost-cutting measures.
INTRODUCTION
The following highlights RJR Nabisco's key
financial activities since mid-year
1989 and provides comparisons to the original LBO
forecast. Included are
current projections and conclusions regarding LBO
financial requirements. Also
noted are some more recent indications of UR's
domestic tobacco strategy.
The LBO continues to cause substantial
organizational, management, cultural and
financial changes In RJR. Because of the extent of
these changes, RJR's
strategies and directions will be very fluid as
the new KKR management tries to
sort out financial and organizational pathways to
service the massive debt and
bring the new company into a profitable position.
This document represents the
best estimates of what KKR/RJR can do based on
statements. assumptions and RJR
performance. However. as the situation evolves,
these expectations could be
altered. B&W will continue to monitor RJR and
update its analysis.
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BATCo document for Province of BritiSh Columbia 26
October 1999


HIGHLIGHTS
Asset Sales (Reference Exhibit 1)
- RJR has met its first hurdle in asset sales of
$5 billion by February 1990
and appears to have no problems completing $6
billion by August 1990.
Analysts indicate the "right assets have been sold
at good prices.*
- The Refinancing Bridge note of $1.5 billion due
for payment in 1991 can be
m-.t through expected and additional non-core
asset sales if the current
bond market continues to make refinancing not
possible. Of note, Moody cut
RJR's credit rating from B2 to B3. This resulted
in cancellation of a
planned bond sale of $1.25 billion. to be used to
pay off the bridge note.
- Additionally, First Boston estimates there are
about $3 billion in other
assets that could be sold, if necessary, to pay
down debt (i.e., excluding
the tobacco and Nabisco cookie and biscu,.t
operations).
Debt Structure and Pavments (Reference Exhibits 2
and 3)
- Exhibit 2 lists RJR's long-term debt structure
as a result of the LBO.
Following each item is a brief description of the
terms and conditions of
each debt. Exhibit 3 lists those debts which are
actively traded as
securities. The last two, the Subordinated
Exchange Debenture and the
Senior Converting Debenture, are the two Ojunk
bonds" which the analysts
frequently reference. Both require resetting of
interest rates by 4/28/91
and are payable-in-kind for several years. The
Subordinated Exchange
Debenture has no conversion to common stock
feature and requires cash
interest payments beginning May 1995. The Senior
Converting Debenture
holders can elect to convert into comon stock on
4/30/93 and RJR would
forego interest payments. Otherwise. the Senior
Converting Debenture
requires cash payment beginning May 1993-3.
- For a total debt perspective. RJR had $5.2
billion in long-term debt
12/31/88 compared to $24.6 billion 12/31189. In
1990, RJR reports that
required cash debt payments are $2.6 billion. For
1991, cash debt payments
are listed at $3.0 billion.
- Total cash interest required by RJR is estimated
at $1.76 billion for 1989
and $1.50 billion in 1990. Total interest for 1990
appears only slightly
less than total earnings before depreciation,
interest and tax. Total
interest with the compounding of the PIK portion
of debts will continue
increasing over the 1990s if debt is not paid down
and bunk bonds interest
rates are not favorably reset.
- During 1990, RJR's two debentures do not present
immediate obstacles to
corporate cash requirements. Currently, these
bonds are trading at lower
prices and Drexel is selling portions that they
hold to other investors,
possibly allowing these bonds to trade lower for
some time. Prices as of
February 21 were 70 3/8 (Senior Unverting) and 63
1/2 (Subordinated
Exchance) compared to prices of 92 1/2 and 80 5/8
respectively January 9.
1990. However, prices have recovered to the $68-82
range currently.
Salomon analyst indicates this pr4ce represents an
opportunity for
aggressive investors to buy "stronger junk" and
indicate RJR is the
strongest credit available in the jUnK market. Of
note, RJR has been one U7
of the junk bond issuers who have been actively
buying back their own bonds CD
at discount prices. Analysts speculan KKR could
buy back about $2 billion rQ
to he!-. drive up prices and reduce the '30 debt
level. U7
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BATCO doCUrnent for Province of British Colurnbia
26 October 1999


Based on today's market volatility and recent
devaluation of all junk
bonds, RJR would not be able to reset the interest
rate on the bonds so
that they trade at par at acceptable interest
rates. Currently, the coupon
rate on the junk bonds is listed as 13.7%. The
maximum coupon interest
(i.e.. floating May/November) until resetting is
16.6%. However. to reset
the bonds to trade at 100% par today. the interest
rate would be over 20%.
RJR's total interest payments would be over $18
billion over the 1990-1994
time frame (i.e., not including principal). This
would require KKR to find
alternate ways to finance the LBO.
If resetting the interest rate is not possible,
RJR will be required to
find other cashlrefinancing alternatives. If this
occurs. another 200-400+
basis points would be added to financing costs and
additional assets would
have to be sold. Planters/LifeSavers is one prime
candidate analysts
indicated could be sold for about $1.6 billion
(Reference Exhibit 1).
Other possibilities are market conditions might
become more stable by
4/28191 or RJR might choose to try to use the
debentures' stipulation of
'fully distributed" and hence. delay resetting or
reset at a lower rate
(reference note below). Either of these could
potentially work to RJR's
benefit in interest resetting. However. estimates
are that the financial
markets will not significantly raise valuations of
junk bonds over the next
year and bond holder suits would arise if RJR
attempted to use the above
stipulation to its advantage. Thus. neither
alternative appears a viable
solution to RJR's interest resetting issue.
In summary, the 1991 interest resetting date is a
critical hurdle for RJR
and represents a make or break it date with
respect to LBO profits for
investors. Depending upon the situation, RJR may
have to 1) sell some
Tobacco or Biscuit/Cookie assets, 2) have KKR
invest additional cash in the
LBO to buyback some of the junk bond debt, 3) set
coupon rates at estimated
rates of about 20% or 4) appear to "renege* on the
resetting feature by
trying to buy both securities at discounted
selling prices, making a new
equity offer. delaying, etc. and consequently,
further weaken the company's
reputation in the financial community.
A second critical hurdle is the 5/1/93 date for
choice of conversion to
common stock by Senior Converting Debenture
holders. These debentures, if
converted, would represent over 27% of RJR's
common stock. KKR's LBO
assumptions have assumed the stock price would
warrant conversion and no
cash would be used to repay the debt. If the
resetting of the interest
rate does not allow RJR to continue to pay down
debt quickly, but rather
increases the future debt burden, conversion of
the Senior Converting
Debenture to common stock would probably not
occur. This will make the LBO
untenable long term. RJR could continue PIK
payments on the Senior
Converting Debenture until a cash payment was
required. However. RJR would
have to refinance this debt to avoid buildup of
unmanageable cash payments
in the future.
NOTE: The reset was described as follows, "The
Fixed Interest Rate will be
designed to result in the Senior Converting
Debentures trading at par once
fully and widely distributed among investors and
subject only to normal
trading activity 'fully distributed'..." The
"distributed basis" is not a
defined term.
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BATCo document for Province of British Columbia 26
October 1999


Oteratina Earnings and Cash Flow (Reference
Exhibit 4. 5 and 6)
1989 Domestic tobacco profits are estimated at
$1.7 billion flat with 1988
despite the drop in units due to inventory
adjustment (i.e.. causing a
profit reduction of an estimated $360 million).
RJR's retail tobacco market share is estimated
about 28-30% versus a 32%
shipment share in 1988. Shipments for 1990 are
estimated by Sanford
Bernstein analyst, Marc Cohen, to be around 154
billion units (i.e.. share
sligNtly over 29%). This volume (if achieved),
combined with pricing and
efficiency improvements. would allow RJR's U.S.
cigarette profits to rise
to around $2 to $2.1 billion.
RJR Is estimated by some analysts to have
accomplished about $550 million a
year in cost cutting. For example, one RJR tobacco
executive reported to
analysts that RJR will be able to slash product
returns by nearly 50%
(i.e., as a result of the decision to quit trade
inventory adjustments).
Estimated savings are between $50 and $75 million.
The 1989 staff cuts are
stimated to generate about $100 million in
savings. Tobacco advertising
xpenditures for RJR were cut in 1989 and further
cuts in sponsorship would
:
be expected for 1990. Estimated tobacco measured
media was reduced about
$13 million. On an operating basis, cutting
Premier was estimated to save
$125 million.
Internationally, tobacco operating income rose 20%
in 1989 and Salomon's
analyst predicts another 15% increase in operating
income for 1990. Beyond
1990, analysts project approximately 15% growth in
total tobacco and
biscuit operating income.
Based on original domestic tobacco volume and
margin assumptions that
appear optimistic today. Salomon analysts project
RJR will have excess
operating cash flow of $8-10 billion over the next
five years to pay down
the debt and avert excessive cash outlays in the
outyears (i.e., due to PIK
build-up). This requires meeting KKR's aggressive
income growth
proj ecti ons, successful interest resetting and
conversion to common stocks
of the Senior Converting Debenture. These
projections also assume that
RJR's profit per thousand cigarettes which is
still below the other
competitors will improve substantially over the
1990s time frame. For
example, RJR is estimated to have made $11 per
thousand, compared to $16
for Philip Morris, nearly $13.5 for BATUS and
American Brands and over
$16.5 for Lorillard in 1989. Free cash flow
estimates assume that RJR
brand trends and mix (i.e., following the 1989
inventory adjustment) remain
relatively stable at their historic decline rates
and that further mix
deterioration will not become substantial.
The key point regarding RJR's positive cash flow
over the 1990 to 1994 time
frame is the extent to which RJR can pay down debt
compared to the amount
of interest and debt which must be deferred.
Therefore, even though
current optimistic and pessimistic forecasts show
positive cash flow, it is
at the expense of deferring cash requirements
until 1995 versus the
original assumption of being able to reduce debt
levels significantly.
BATCo document for Province of British Columbia 26
October 1999


14--st recently. RJR's domestic tobacco business
has been soft and brand
.7 ends could worsen further in 1990, particularly
due to increased VFM
competition or a tax increase. Original domestic
volume estimates for RJR
forecast share growth based on relatively stable
volume (i.e., about the
1988 level) over the five-year period, combined
with margin growth. This
vas despi te continuing industry declines.
Currently. RJR's major
established brand families show continued
performance declines in 1990,
ccapetition has increased and the industry decline
has worsened compared to
" e
th original forecast. The following chart
estimates RJR's potential
volume shortfall compared to the original
forecast.
Volume Proiections
Cum.
(Billions) 1M 1M IM 1M 1994 2LL4
Original Forecast 173 171 170 168 166 848
Current Optimistic 154 142 134 131 129 690
Current Pessimistic 148 137 125 116 107 633
Volume Reduction Range 19-25 29-34 36-45 37-52
37-59 158-215
"ditionally. RJR's financial projections are based
on domestic tobacco
margin growth of about 10% by 1996 from 1989's
reported level of 34.3%.
Reported margins for 1990 were forecast to
Increase by over 7% compared to
1989- Based on the industry's environmental, tax
and regulation situation,
increasing competition and RJR's projected volume
performance shortfalls,
margin rates appear optimistic.
Also, RJR has had increased negative publicity
regarding reported plans to
rarket Uptown and Dakota. RJR cancelled test
market plans for Uptown
(i.e., Incurring an estimated $5-10 million
expense) and may modify plans
for Dakota. Longer term, this situation could
increase the negative public
;erception of the company and therefore raise
costs if RJR is required to
,,et additional refinancing.
In terms of RJR's International business. the
dollar has strengthened
(;..e.. mainly the Yen) and competition increased,
hence, export sales and
profit growth may slow.
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BATCo document for Province of British Columbia 26
October 1999


Conclusions
For 191-0. RJR's cash situation appears
manageable. Cash requirements and
Interest payments are estimated to be covered.
Ongoing asset sales and
cost citting activities appear in line with those
required to meet RJR
obligations. A must for RJR's future is the
ability to fix the interest
rate on the two junk bonds or obtain reasonable
alternative financing.
However. this does not appear viable based on the
current market climate.
If RJR chooses to delay cash payments by
continuing PIK, the amount of
corporatp debt which requires cash payments would
return to the $24-25
billion level by 1994 with cash interest payments
about $3.5 billion for
1995.
It should be noted that KKR's LBO financial
projections were based on
strong price increases, moderate domestic industry
declines. Improvement in
RJR brznd trends and margins, good international
growth and favorable
financlal markets. Besides the unsettling of the
junk bonds In the
financial markets, RJR's domestic volume estimates
are not in line. The
first six to nine months of 1990 are crucial ones
for RJR in terms of
domestic performance. Currently, industry and RJR
volume remain soft. For
first quarter 1990, RJR is estimated to have lost
1.1% market share based
on a c=parlson to first quarter 1989 after
adjusting for RJR's inventory
changes (Reference Exhibit 7). These 1990 business
conditions combined
with sore costly and less favorable financial
markets indicate KKR's
original financial forecast is not obtainable as
planned.
A more realistic estimate of RJR's future
financial situation is indicated
in the RJR Current Projections chart which
indicates key comparisons to the
original forecast. Based on today's market and
RJR's performance, current
optimistic and pessimistic projections look to be
more realistic with what
could cccur. Estimates show RJR continuing to meet
required cash interest
and dett payments through 1994, but not being able
to pay down the massive
debt. RJR's total debt would continue to increase
through 1995. Total
interest is dramatically higher due to higher
rates and increased debt
levels. Considering failure of Senior Converting
Debentures to convert,
debt %,auld grow even more by 1999. Cash debt
payments would increase
dramat'cally from 1993 to 1995. Estimates are that
cash requirements could
become unmanageable by 1995 based on the current
financial environment and
RJR's domestic performance. A cash shortage of
$1-1.5 billion is estimated
in 1955. To prevent debt growth, RJR would be
forced to sell off
additicnal assets to pay down/off the Senior
Converting Debenture or the
Subordinated Exchange Debenture. Thus, by the end
of 1990 or early 1991,
RJR will have to put plans in place to have
alternative financing available
based ,n market conditions and current performance
trends.
To max,;mize cash flow for debt repayment, RJR's
key operating requirement
will 16e to stabilize its domestic tobacco
business so that brand decline is
halted or slowed. RJR needs to achieve improved
margins through higher
value products, effective pricing, continued cost
cutting and reduced
promo-.. on/couponi ng. Longer term, RJR will
concentrate on building share
in the domestic full revenue business.
Internationally, RJR needs to
increasa operating income from the tobacco
business. For the remainder of
1990, UR will also concentrate on improved results
as reported compared to
1989, :o help increase positive public image of
the LBO's performance and
improve its financial rating.
BATCo document for Province of British Columbia 26
October 1999


CURRENT PROJECTIONS - KEY COMPARISONS
($ Millions)
Cum
Di ff Diff Diff Di ff Diff Di ff
QV9 12Ll Lqg 1W QHQ 1W QXJg 1294 Orio 2L-21
Domestic Sales Volume (Billionsl
Original* 173 - 171 - 170 - 168 - 166 - -
Opti.i sti c 154 (1g) 142 (29) 134 (36) 131 (37)
129 (37) (158)
pessimistic 148 (25) 137 (34) IZ5 (45) 116 (52)
107 (59) (215)
Domestic Maroin %
original 39.5 - 40.1 - 40.8 - 41.6 - 42.4 - KA
Opti.. L Pessi.. 35.3 (4.2) 36.3 (3.8) 37.3 (3.5)
38.3 (3.3) 39.3 (3.1) NA
Domestic Ooeratinct Profit
Original 2401 - 2618 - 2862 - 3134 - 3431 - -
Optimistic 1975 (426) 2060 (5S8) 2197 (665) 2426
(708) 2697 (734) (3091)
Pessimistic 1898 (503) 1987 (631) 2066 (796) 21AB
(986) 2737 (1194) (4110)
Profit Pre Interest and Tax
Ori gi ~al 2625 - 3002 - 3384 - 3797 - 4273 - -
Optimistic 2536 (89) 2852 (150) 3176 (208) 3603
(194) 4120 (153) (794)
Pessimistic 2459 (166) Z779 (223) 3045 (339) 3326
(471) 3660 (613) (1812)
Total Cash Interest Due
Original 1352 - llao - 967 - 727 - 1043 - -
Optimi sti c 14Z3 71 1242 62 1020 53 743 16 1408
365 567
Pessimistic 1423 71 1250 70 1037 70 776 49 1476
433 693
Total Interest (Cash and Noncash)
Ori gi n.1 1958 - 1882 - 1781 - 1671 - 1834 - -
Optimistic 3010 1052 3492 1610 3653 1872 3836 2165
4OZ2 2188 U87
Pess imi sti c 3010 1052 3501 1619 3669 1888 3869
2198 4089 U55 9012
'Total Debt
Original 13503 - 17699 - 16613 - 15266 - 13616 -
optimistic 23652 5149 23729 6030 24058 7445 24310
9044 24346 IMO
Pessimistic 23652 5149 23BOI 6102 24201 7588 245B6
9320 24916 11300
"Based on information believed to be in line with
KKR's LBO forecast.
-A 19% interest rate was assumed for both junk
bonds requiring resetting. The Senior Converting
Debentures were assumed not to convert in 1993.
NOTE: Other projections could show RJR in an
improved position, based on higher domestic
margins
and/or higher volumes, combined with interest
rates in the 14-15% range. However, the above
optimistic and pessimistic comparisons are
estimated to be in line current performance and
financial market conditions.
(-n
CD
--Q
BATCo document for Province of British Columbia 26
October 1999


RJR 1990 - Comoetitive Strateoic Activitv
- Because of the leveraged buyout, RJR is under
increased pressure to improve
tobacco performance. During 1990, besides
continuing cost reduction and
other activities to improve operating margins, RJR
is attempting to make a
strategic change toward targeted image-oriented
marketing for key brands
versus previous style of "couponing/promotion
across the board."
- RJR will increase image-oriented marketing of
selected brand styles (e.g..
advertising, rOS and other image
promotions/activities). These will be
skewed primarily to young adult smokers.
Primary audience: young adult males (Marlboro),
young adult females
(Marlboro), young adult females (menthol).
RJR's marketing plans have been leaked to the
press recently which could
cause the company to react unpredictably as it
attempts to halt volume
declines. Further, this could cause increased
negative tobacco industry
press/public reaction which could intensify
Congress' debate on the issues
of advertising/promotion restrictions and prompt
statellocal actions.
Key data from recent competitive information
confirm the above strategy (i.e..
also in line with that generally reported in late
1989 by new tobacco
management):
- RJR's goal is reported to be "to grow four share
points per year among
young adult smokers using best guns (e.g., Camel,
Magna and Salem/new).'
- 1990 workplans report permanent counter stocking
plans are to load the
displays with primary and secondary brands. Camel
is primary, Magna/new
brand secondary. In addition. all Winston
permanent displays have been
converted to stock Camel (i.e.. instead of
Winston) beginning in 1990.
- Special expansion is indicated for Hispanic.
black and military activities.
- Magna's share of smokers in what RJR tracks as
its 18-24 year old category
is reported to have increased from 1.2% in April
1989 to 4.1% by August
1989. This 18-24 year old volume brand was
reported as:
Name Aoril 1989 Auaust 1989
Camel 4.2% 4.4%
Magna 1.2% 4.1%
Marlboro 43.4% 41.8%
Winston 10.8% 10.7%
- Magna is reported to be getting 53% volume from
Marlboro. In total, 79% of
Magna volume is reported from full price brands
versus 21% from
value-for-money.
- The strategy indicated for Magna is a "full
price brand with price
advantage because young adult smokers are more
influenced by image versus
price reductions."
Qxi
C)
(j~
BATCo document for Province of BritiSh Columbia 26
October 1999


11
Additional new product activity indicated for
1990:
2/5/90 Uptown Philadelphia (black) previously
reported and cancelled
3/5/90 Salem Gold (Ohio) as a low menthol
4/2/90 Salem Box (North Atlantic sales area -
Memphis, Detroit, New
Orleans)
4/2/90 Dakota (Houston) as female/Marlboro
412/90 Chelsea/new name (California)
5/7/90 Fat Camel (Oklahoma. Denver. CharlestoW
Additionally, it appears that Doral will be
targeted against extra low
price products (as necessary). Comments regarding
Doral indicate RJR is
aware that retail stock is two to three months
older than competition.
Doral's couponing budget is reportedly increased
for 1990 and RJR is
prepared to increase coupon value in support of
Doral if competition
becomes more aggressive. based on Pyramid,
Cambridge, Montclair and other
competitive activities.
In regards to media, RJR reported cuts in
magazines, some up 40-50%.
Savings from custs in magazines (i.e., estimated
about $26-30 million) will
be shifted to out-of-home media, newspapers and
newspaper supplements. the
company said. RJR will rely more heavily on
targeted and regional
advertising. which it believes are more effective
approaches than general
magazine advertising. RJR's refocus is part of an
overall plan "to get
closer to the trade and consumer" through efforts
including both recast
media strategies and the integration of sales and
marketing.
In terms of outdoor, RJR spending has been
'redirected" but doesn't appear
to have been cut. A most recent article indicates
advertising account
executives have stated that "everything they've
(RJR) been buying has been
for Camel' and it appears that Winston and Salem
outdoor is being switched
to Camel.
- Of note. Camel Filter Box and Camel Lights Box
grew in 1989 based on
shipments (1989 Maxwell Report) even with RJR's
decision not to load.
Total Camel share appears level with 1987 share
though down .2% from 1988.
*Current assumption is that this is a
larger-than-normal circumference product.
:D
111i
(j7
BATCo document for Province of British Columbia 26
October 1999


E)OiIBIT I
SUMMARY OF COMPLETED, PENDING AND POTENTIAL ASSET
SALES
($ Millions)
Closing Gros s Cumulative
Date- Comoleted Sales Proceeds Total
6/6/89 Nabisco International - European Food
$2.500
6/21/89 Chun King 52
7/7/89 Associated Biscuits Limited 44
7/28189 Oxford Biscuits/Nabisco Brands Norge 20
1214/89 Nabisco International - Spain and Portugal
78
12/5/89 Del Monte Tropical Fruit 875
1/10/90 Del Monte Canned Foods 1,475
2126190 Curtiss Confections 370
319/90 New Zealand Food Unit 180
Total $5,594 5.594
ExDected Sales
20% Equity Ownership in ESPN Cable Television 2DO
Milk Bone Dog Snacks' 350
Total 550 6.144
Potential Sales
Latin American Food Unit 400
A-1 Steak Sauce/Grey Poupon Mustard 400
Chewing Gum 225
Total $1,0Z5 $7.169
'Per Business Week article, 4/23/90, Milk Bone
will be sold.
Source: Salomon Brothers - Tobacco Industry
Overview - January 24, 1990
Other Assets Sold (Since LBO)
Three Corporate Jets $46 million
Corporate Apartments and Houses __j million
Total $55 million
Other Assets That Could Be Sold (if necessarv)
Life Savers $1,000 million
Planters 600 million
Ready-to-Eat Cereals 600 million
Hot Cereals 300 million
Desserts 140 million
Margarine 550 million
Mexican Food (Ortega) 150 million
Total $3,340 million
Source: First Boston February 28, 1990
U7
01
(_1
BATCo document for Province of BritiSh Columbia 26
October 1999


14
EXHIBIT 2 - LONG-TERM DEBT
S Millions
December 31. 19e19
Due Due
Wi thi n After
One Year One elw'
RJR NABISCO. INC. fRORN) DEBT:
7 3/8 - 9 3/8% De:wtures with semi-annual and
annual sinking fund payments thru
2017 (reduced by $62 million and $54 million of
such debentures held by RJRN on
IZ/31/89 and 12/1-V88. respectively, for future
sinking fund requirements) S 105 $ 2,736
ID - 10 3/4% Not., due 1990 to 1993 100 SOD
7.61 - 10.88% effective interest rates. Foreign
Currency Debt, due 1990-20012 115 519
Zero Coupon Guar-teed Notes, due 1992. net of
discount of $93 million and $127
million at 12/31/19 and 12/31/88, rosptctively.
effective interest rate of 14.64% 272
Other indebtedness 50 515
RAW DEgT:3
Asset Sale Brid;e Facility, variable interest
(varies with prim and LIBOR
rat..) - 12.0% at 12131/89, due 1990 2.262
Refinancing Brie;* Facility. variable interest
(varies with prime and LIBOR
rates) - 11.8r. at 12/31/89. due 1991 1.5c0
Terin Loan, vari&zle interest (varies trith prime
and LIBOR rates) - 11.15% at
12/31/89. due in installments beginning 1991-1995
3.500
Revolving Credi- --acility. variable interest
(varies with prime and LIBOR rates)
- 12.D% at 12/327;19. due in quarterly
installments beginning 1991 through 19954 329
PAYMENT-IN-KIND :53ENTURES:
Subordinated De-bentures. 15% per annum, interest
payable-in-kind until 5/1S/94,
sinking fund re=4rements beginning 1999, duo 2001
1.072
Subordinated Dis--zunt Debentures, yield to
maturity of 15%. interest payable-
in-kind until 5.75/94, sinking fund requirements
beginning 1999, due 2001 2.185
Amounts allocatec- to arrants (224)
OTHER DEBENTURES AND NOTES:
Subordinated De:-tures and Notes, fixed rates of
13 1/8% and 13 1/2%. and
variable interes: (varies ith 3-month LIBOR) -
12.4% to 14.94% at 12/31/89,
due 1991 throucr ZOO]
~_n
01
UM
BATCo document for Province of British Columbia 26
October 1999


E)OUBIT 2 - LONG-TERM DEBT
$ Millions
(continued)
Deember 31. 1989
Due Due
Wi thi n After
One Year One Yearl
PARTNERSHIP DEBT:
Subordinated Debentures. variable interest (varies
with 7-year U.S. Treasury
Note) - 16.0% at 12/31/89, interest
payable-in-kind until 2/8/94. due 1997 - 538
RJRN and RJR Nabisco Corporation (Capital) 2.632
15.642
'SUBORDINATED EXCHANGE DEBENTURES:
Subordinated Exchange Debentures. variable
interest until reset occurs with
fixed interest rate established, (varies with
greater of 3-conth Treasury Bill.
10-year Treasury Note or 30-year Treasury Bond)
with a mini-im rate of 12 5/8%
and a maximum rate of 16 5/8% - 13.71% at
12/31/89. interest payable-in-kind
until 5/l/95, due 2007 4,500
RJR Nabisco Holdings Group, Inc. (Group) 2.632
20.142
*SENIOR CONVERTING DEBENTURES:
Senior Converting Debentures, variable interest
until reset occurs with fixed
interest rate established, (varies with greater of
3-month Treasury Bill. 10-
year Treasury Note or 30-year Treasury Bond) with
a minimum rate of 12 5/8%
and a maximum rate of 16 5/8% - 13.71% at
12/31/89. interest payable-in-kind
until 5/l/99, convertible into Holdings Common
Stock on 4130/93, otherwise
due 2009 1,806
TOTAL - RJR Nabisco Holding Corp. (Holdings)
$24,580 S 2,632 $21,948
IThe payment of debt through 12131/94 is due as
follows (in millions): 1991 - $3,OZ2; 1992 $1,879;
1993 - $1,776 and 1994 - $1,159.
2 RJRN has entered Into hedging arrangements
designed to offset the effects of future foreign
currency
exchange rate movements on these debt issues.
3 CApital has entered into hedging arrangements
designed to offset the effects of future interest
rate
movements on approximately $6.2 billion of bank
debt at 12131/89.
4 Capital has a Revolving Credit Facility of
$1.750 billion of which $1.421 billion was unused
at
12/31/89. Availability of the unused portion of
this facility is reduced by $550 million for a
separa-~
letter of credit facility. A commitment fee of
I/Z% per annum is payable on the unused portion of
the
facility.
*These two debentures are the ones commonly
referenced as "Junk bonds."
BATCo document for Province of British Columbia 26
October 1999


16
E)(HIBIT 2 - LONG-TERM DEBT
(continued)
Notes to Lona-Term Debt
The Credit Agreement requires that $5.0 billion of
the Asset Sale Bridge Facil-,-.y
be repaid by not later than 2/9/90 and that the
full amount of such Facility ($E.0
billion) be repaid by not later than 8/9/90. Of
the $6.0 billion, $5.0 bill,:n
must be repaid from the net cash proceeds of sales
of certain assets of RZZI.
Through 12/31/89, Capital repaid approximately
$3.738 billion to reduce the Asset
Sale Bridge Facility. Accordingly. the net
remaining amount of such Facili-,v
outstanding of $2.262 billion is included in
current maturities of long-tem deb:.
On 7/17/89, Group exchanged, pursuant to the terms
of the Cumulative Exchangea::e
Preferred Stock, all of the Group Preferred Stock
($4,065 billion stated valLe)
for Subordinated Exchange Debentures at the rate
of $1 principal amount cf
Subordinated Exchange Debentures for each $1
stated value of Group Prefer-ed
Stock. The debentures are classified as long-term
debt as of 12/31/89. Interes.
accrues on these debentures from the Offer date
and, accordingly, previoLs"y
recorded dividend accruals have been reclassified
as interest.
The terms of the Senior Converting Debentures of
Holdings and the Subordina:=-d
Exchange Debentures of Group require that the
interest rates on these securites
be set permanently at fixed interest rates by no
later than 4/28/91 (or ',f
substantially all of Capital's Increasing Rate
Notes are refinanced prior to
4/28/90, one year from the date of such
refinancing). The terms of s;:ch
Debentures provide that the fixed rates will be
equal to rates designed to res---it
in the respective Debentures trading at par on a
fully distributed basis, with:ut
taking into acccunt any accrued and unpaid
interest thereon and, in the case of
the Senior Converting Debentures, without giving
effect to the conversion fea-.zre
of such securities.
In May 1989, $4.0 billion principal amount of
Capital's Increasing Rate Notes v=re
redeemed with prcceeds from the issuance of
debentures, notes or warrants, leav_rg
$1.0 billion principal amount of Increasing Rate
Notes outstanding, which req,_`re
current payment of cash interest. Of these
debentures and notes. $1.0 bil",'^-n
require current payment of cash interest and the
remainder do not require currz-nt
payment of cash interest until 1994.
Un
CD
U_.
BATCo document for Province of British Columbia 26
October 1999


WHIT 3
RJR SECURITIES
Amount Cal I Yield to
Symbol Counon I= (MM) Maturity QLU friu ftiu
Maturity
R3 Y. F 13.12S% Sub Rst Deb 225 05/1S/01 05/15/92
$101-00 $95-250 13.93
RJ8.F 13.&S, Sub Fl Rt Deb 250 05/15/99 Current -
101.00 97-000 14.20
R3 X.F 13.50 Sub Deb 525 05115/01 05/15/94 106.75
92.375 14.98
RJZ.F 0115.00 Sub Disc Deb 2.187 05/15/01 05/15/94
107.50 37.500 19.21
RJN.F 15.00 Sub PIK No 1,075 OS/15/01 05/15/94
107.50 69.250 20.20
,RJJ.F 13.71 Sub Exch Uo 4,445 04/15/07 Current
100.00 51.250 67.62
"RJR.F 13.71 Senior Co- Deb 1,979 05/01/09 Current
100.00 69.750 50.46
NThese two debentures are the -wo commonly
referenced as ujunk bonds.m
Source: First Boston - February 28, 1990
BATCo document for Province of British Columbia 26
October 1999


18
E)aiIBIT 4
PZUECTED CONSOLIDATED INCOME STAT04ENT - ORIGINAL
FORECAST
($ Millions)
12 U IM JUI JM JM 1994
Revenue 18131 13310 14348 15384 16484 17649
Operating Prc-,it 3554 3463 3779 4147 4546 5006
Profit Pre I-.-terest and Tax 2454 2625 3002 3384
3797 4273
Interest Expense 1935 1958 1882 1781 1671 1834
Profit Pre TLx 272 667 1120 1603 2126 2438
Tax @ 0.39 106 260 437 625 829 951
Income After lormal Tax 166 407 683 978 1297 1487
Cash Flow Aviilable for
Debt Paymen 639 1410 1788 2161 2593 2571
PRCZECTED OPERATING INCOME STATEMENT - TOB.AC00 -
ORIGINAL FORECAST
($ Millions)
1991
Sales Volume
Domestic 176 173 171 170 168 166
InternationE' 118 126 135 144 152 160
Revenue/M
Domestic 32.19 35.15 38.14 41.38 44.90 48.71
InternationF' 17.57 18.52 19.52 20.10 20.71 21.33
Revenue
Domestic 5663 6079 6530 7014 75-34 8092
Internationa' 206a 2332 2630 2885 3150 3423
Marain %
Domestic 36.2 39.5 40.1 40.8 41.6 42.4
Internationz'~ 14.7 15.0 15.0 15.4 15.7 16.0
ODeratina P--:fit
Domestic 2050 2401 2618 2862 31-34 3431
InternationE" 304 350 395 444 495 548
Total Operat-ng Profit 2354 2751 3013 3306 3629
3979
Source: Coimetitive Strategy Summary - RJR LBO -
July 1989
BATCo document for Province of British Columbia 26
October 1999


19
EXHI BIT 5
PROJECTED CONSOLIDATED INCOME STATEMENT - CURRENT
OPTIMI STIC
($ Millions)
Actual
im lm 199-1 im im 13-IIA
Revenue 15225 13920 14613 15531 16699 17996
Operating Profit 3211 3374 3629 3939 4352 4851
Profit Pre Interest and Tax 2491 2536 2852 3176
3603 4120
Interest Expense 3388 3010 3492 3653 3836 4022
Profit Pre Tax -1150 -474 -641 -477 -233 98
Ta.x @ 0.39 -449 -185 -250 -186 -91 38
Income After Normal Tax -1150 -474 -641 -477 -233
60
Cash Flow Available for
Debt Payment 2747 1511 1922 2380 3058 2871
PROJECTED OPERATING INCOME STATEMENT - TOBACCO -
CURREKT OPTIMISTIC
($ Millions)
Actual
1991 im lm 1994
Sales Volume
Dernestic
International
Revenue/M
Domestic
International
Revenue
Domestic
International
Marain %
Domestic
International
Cl,.,eratinq Profit
Dcmestic
international
Total Operating Profit
149 154 142 134 131 129
118 126 135 144 152 160
33-03 36.33 39.96 43.96 48.35 53.19
17.51 18.46 19.45 20.04 20.64 21.26
4921 5595
2061 2325
5674 5891
2626 28BS
6334 6862
3137 3401
34.3 35.3
15.7 16.7
36.3 37.3
17.5 18.0
38.3 39.3
18.5 19.0
1688 1975 2060 2197 2426 2697
324 388 460 519 580 646
2012 2363 2519 2717 3006 3343
CD
N-1
LF
C;-,
C1 \
BATCo document for Province of BritiSh Columbia 26
October 1999


20
EXHIBIT 6
PROJECTED CONSOLIDATED INCOME STATEMENT - aJRRENT
PESSIMISTIC
($ Millions)
Actual
IM 1M 10-1 12U 1M 1994
Revenue 15225 13702 1"14 15179 15973 16826
Operating Profit 3211 3297 3556 3808 4075 4391
Profit Pre Interest and Tax 2491 2459 2779 3045
3326 3660
Interest Expense 3388 3010 3501 3669 3869 4089
Profit Pre Tax -1150 -551 -722 -624 -543 -429
Tax @ 0.39 -"9 -215 -281 -243 -212 -167
Income After Normal Tax -1150 -551 -722 -624 -543
-429
Cash Flow Available for
Debt Payment 2747 1439 1851 2247 2763 2359
PROJECTED OPERATING INCOME STATEMENT - TOBACCO -
CURRENT PESSIMISTIC
($ Millions)
Actual
M 1M JU1 12U JM 1994
Sales Volume
Domestic
International
Revenue/M
Domestic
International
Revenue
Domestic
International
Marain %
Domestic
International
ODeratinq Profit
Domestic
International
Total Operating Profit
149 148 137 126 116 107
118 126 135 144 152 160
33.03 36.33 39.96 43-96 48.35 53-19
17.51 18.46 19.45 20.04 20.64 21.26
4921 5377 5475 5539 5609 5691
2061 2325 2626 2885 3137 3401
34.3 35.3 36.3 37.3 38.3 39.3
15.7 16.7 17.5 18.0 18.5 19.0
1688 1898 1987 2066 2148 2237
324 388 460 519 __U_Q 646
2012 2286 2447 2585 2728 2883
(D
NJ
ON
BATCo document for Province of British Columbia 26
October 1999


E)aiIBIT 7
FIRST QUARTER 1990 RESULTS
RJR NABISCO
DescriDtion
Tobacco Sales ($ Billions)
1 M 1M % Chg.
1.26 1.62 +15.0
Adiusted Volume/Share
% Chg. IM JM Chg.
Domestic Volume (Billion Units) 36-B 36.1 + 1.9
36.8 39.6 7.1
Domestic Share M 34.5 33.2 + 1.3 29.6 30.7 1.1
Adiusted ODer. Income
1990 1W %chg. 1M M % Chg.
Operating Income ($ Millions) 602 402 50 602 500
+20.4
Tobacco Oper. Inc. ($ Millions) 637 453 40 637 551
+15.6
Comments on Adiustments
- Adjusted volume and share estimates compare
actual 1990 shipments to 1989
first quarter shipments after removing estimated
industry inventory loading
effects. On thi s adjusted basi s, RJR 1 ost real
share of about I . 1% market
share first quarter 1990.
- 1990 actual operating income and tobacco
operating income reflect the one
time first quarter positive effect of RJR's 1989
inventory adjustment.
Estimates are that 1989 shipments would have been
3.5 billion units higher
than reported if RJR had adjusted inventory in
1988. Based on an estimated
average variable margin of $28 per thousand
cigarettes, 1989 operating
income would have been about $98 million higher in
the first quarter.
Thus. 1990 first quarter operating income is
estimated to be up over
adjusted first quarter 1989 by 20.4% and tobacco
income Is estimated up
15.6%. These increases compare to reported
increases of 50% and 40% for
operating income and tobacco operating income,
respectively. The adjusted
tobacco income increase is estimated based on
domestic cigarette price
increases and cost cutting being partially offset
by volume declines and
mix deterioration.
311
BATCo document for Province of BritiSh Columbia 26
October 1999


Other Coments
- RJR Nabisco Inc. reported a net loss of $222
million for the first quarter
because of massive debt expenses.
- RJR's cash flow as a percentage of total
interest obligations reached 1.14
in the quarter. up from 1.04 three months earlier.
- Much of RJR's first quarter growth in operating
profit came from slashing
costs. The company has cut its headquarters work
force by more than half.
to fewer than 300 employees from more than 650.
The cost of maintaining
the head office fell to $24 million from $46
million a year earlier.
- Expenditures on advertising and marketing
reportedly rose more than 10% in
the quarter to more than $700 million.
- RJR reported U.S. consumption of its cigarettes
fell 3% in the quarter.
- RJR's two most widely held debentures have
rallied several points in the
past month, on the strength of analysts' high
expectations for the
company's operations and persistent rumors that
RJR may soon buy the bonds
back. or offer some other type of exchange for the
debt. Analysts indicate
these prices "are still about 30% or so from where
they've got to be to
reset" interest rates (i.e., by 4128/91).
~-n
,-D
C-\
C,
BATCo document for Province of British Columbia 26
October 1999