10-Q 1 a2028831z10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 --------------------- NABISCO GROUP HOLDINGS CORP. (Exact name of registrant as specified in its charter)

7 CAMPUS DRIVE PARSIPPANY, NEW JERSEY 07054-0311 (973) 682-5000 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) ------------------------------ INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X , NO ___. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: OCTOBER 31, 2000: 326,452,420 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- INDEX

PART I ITEM 1. FINANCIAL STATEMENTS NABISCO GROUP HOLDINGS CORP. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 1 NABISCO GROUP HOLDINGS CORP. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN MILLIONS)

SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 2 NABISCO GROUP HOLDINGS CORP. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)

SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 3 NABISCO GROUP HOLDINGS CORP. CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN MILLIONS)

------------------------ * The sole asset of the subsidiary trust is the junior subordinated debentures of Nabisco Group Holdings Corp. The remaining outstanding junior subordinated debentures have an aggregate principal amount of approximately $101 million, an annual interest rate of 9 1/2%, and mature in September, 2047. The preferred securities outstanding as of September 30, 2000 will be mandatorily redeemed for $98 million upon redemption of the junior subordinated debentures. SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 4 NABISCO GROUP HOLDINGS CORP. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS GENERAL The consolidated condensed financial statements include the accounts of Nabisco Group Holdings Corp. ("NGH"), and its majority-owned subsidiaries, including 80.5% of Nabisco Holdings Corp. ("Nabisco Holdings") and its wholly-owned subsidiary, Nabisco, Inc. ("Nabisco"). For interim reporting purposes, certain costs and expenses are charged to operations in proportion to the estimated total annual amount expected to be incurred. The results for the three and nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the year ended December 31, 2000. In management's opinion, the accompanying unaudited consolidated condensed financial statements (the "Consolidated Condensed Financial Statements") of NGH contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The Consolidated Condensed Financial Statements should be read in conjunction with the consolidated financial statements and footnotes in the Annual Report on Form 10-K of NGH, as amended, at December 31, 1999. Certain prior period amounts have been reclassified to conform to the current period presentation. BUSINESS DISPOSALS In April 2000, Nabisco joined Finalrealm Limited ("Finalrealm"), a consortium of investors, which acquired the equity of United Biscuits (Holdings) plc ("UB"), a United Kingdom company. At that time, Nabisco invested approximately $45 million in cash in DeluxeStar Limited ("DeluxeStar"), an affiliate of Finalrealm. In July 2000, Nabisco sold its operations in Spain, Portugal and the Middle East, which included $10 million in cash and cash equivalents, to DeluxeStar and agreed to pay an additional $41 million in cash to Finalrealm. In exchange for the total cash consideration and businesses sold, Nabisco received mandatorily redeemable discounted preferred stock from DeluxeStar and warrants from Bladeland Limited ("Bladeland"), the indirect parent company of Finalrealm and Deluxestar. The discounted preferred stock and warrants were fair valued at approximately $277 million based on a valuation opinion received from an independent investment banker. The discounted preferred stock accretes non-cash dividend income at an annual rate of 11.72% and is mandatorily redeemable in 2049. The discounted preferred stock converts into 26.51% of the common equity of Bladeland upon the future exercise of the warrants. The warrants are exercisable at maturity, which is in 25 years, upon an initial public offering by Bladeland, or upon a change of control in Bladeland, in which the ownership of the equity investors becomes less than 50%. These securities are being accounted for on a cost basis. The sale of operations resulted in the recognition of a pre-and-after tax loss of approximately $18 million that was recorded in selling, advertising, administrative and general expenses in the quarter ended June 30, 2000. In 1999, these operations had annual net sales of approximately $290 million. As a result of the transaction, Nabisco recorded $12 million of investor financing fee income during the third quarter of 2000 in other income (expense), net. BUSINESS ACQUISITIONS In July 2000, Nabisco acquired UB's operations in China, Hong Kong and Taiwan for approximately $99 million as part of its agreement to join the consortium of investors discussed above. In 1999, these operations had annual net sales of approximately $66 million. In November 1999, Nabisco acquired certain assets and liabilities of Favorite Brands International, Inc., a company operating under Chapter 11 of Title 11 of the U.S. Code. As of June 30, 2000, the 5 NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED) purchase price allocation was completed and resulted in total goodwill of $106 million, an increase of $38 million from December 31, 1999. The after-tax net increase in goodwill consisted of:

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS During the second quarter of 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all derivative instruments be recorded on the consolidated balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. NGH will adopt SFAS 133, as amended, on January 1, 2001 but has not yet determined the impact that such adoption or subsequent application will have on its financial position or results of operations. In December 1999, The Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. NGH is required to adopt SAB No. 101, as amended, in the fourth quarter of 2000. SAB No. 101 provides additional guidance on revenue recognition, as well as criteria for when certain revenue is generally realized and earned, and also requires the deferral of incremental direct selling costs. NGH has determined that the impact of adoption or subsequent application of SAB No. 101 will not have a material effect on its financial position or result of operations. During the second quarter of 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF No. 00-14 addresses the recognition, measurement and statement of income classification of various sales incentives and will be effective for the fourth quarter of 2000. NGH has determined that the impact of adoption will be a reduction of approximately 1% to 2% on its net sales, with no impact on its net income. Certain sales incentives, principally for consumer coupon redemption expenses, currently included in selling, advertising, administrative and general expenses will be reclassified as a reduction of net sales and, upon adoption, prior period amounts will be restated for comparative purposes. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaced SFAS No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. NGH will adopt SFAS No. 140 for transactions occurring after March 31, 2000. NGH has not yet determined the impact that such adoption or subsequent application will have on its financial position or results of operations. 1998 RESTRUCTURING CHARGES In the second and fourth quarters of 1998, Nabisco recorded restructuring charges of $406 million ($216 million after tax, net of minority interest) and $124 million ($75 million after tax, net of minority interest), respectively. In the second quarter of 2000, Nabisco recorded a net reduction of $27 million in the previously recorded restructuring expense due to higher than anticipated proceeds from assets sold and lower than anticipated spending primarily in severance programs. This restructuring credit 6 NOTE 1 -- INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED) combined with the $67 million net restructuring credit recorded in 1999 resulted in a total net charge for the 1998 restructuring programs of $436 million ($238 million after tax, net of minority interest). These restructuring programs were undertaken to streamline operations and improve profitability and have resulted in the elimination of approximately 6,900 employee positions. The June 1998 program was completed in 1999 and the December 1998 program was completed as of June 30, 2000. The key elements of the restructuring programs were:

The key elements of the restructuring programs, after the restructuring credits of $94 million were:

Total charges and payments include net cash expenditures, non-cash charges primarily for asset impairments and committed severance and benefits to be paid. The total cash payments, net of cash proceeds applied against the restructuring reserves totaled $122 million, which is comprised of cumulative cash expenditures of $170 million and cumulative cash proceeds of $48 million. For the nine months ended September 30, 2000, cash payments, net of cash proceeds totaled $19 million, which is comprised of $46 million of cash expenditures and $27 million of cash proceeds which were applied against the restructuring reserves. Although projects have been completed, proceeds to be collected and certain cash payments, primarily severance and benefits that are paid over time, are being transacted after the program completion dates. This is expected to result in a net cash inflow of approximately $7 million subsequent to September 30, 2000. 7 NOTE 2 -- CHANGE OF CONTROL PROPOSED TRANSACTIONS On June 25, 2000, the board of directors of NGH approved two major transactions: (1) the sale of NGH's 80.5% interest in Nabisco Holdings to Philip Morris Companies, Inc. (the "Nabisco Sale") pursuant to a merger in which Philip Morris will acquire all of the outstanding Nabisco Holdings common stock for $55 per share (the "Nabisco Holdings merger"), and (2) the subsequent acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. ("RJR") pursuant to a merger in which RJR will acquire all of the outstanding NGH common stock for $30 per share (the "NGH merger"). Completion of the Nabisco Holdings merger is subject to customary closing conditions, including receipt of regulatory approvals. Completion of the NGH merger is also subject to customary closing conditions, including receipt of regulatory approvals and is conditioned on the completion of the Nabisco Sale. There can be no assurance that such approvals will be obtained. On October 27, 2000, the stockholders of NGH approved the acquisition of Nabisco Holdings by Philip Morris and the subsequent acquisition of NGH by RJR as discussed in Note 7--Subsequent Events. The transactions are expected to close during the fourth quarter of 2000. NGH STOCKHOLDER VOTE REQUIRED TO APPROVE THE NABISCO SALE AND THE NGH MERGER The Nabisco Sale requires approval by holders of a majority of the outstanding shares of NGH common stock because the Nabisco Holdings shares constitute substantially all of the assets of NGH. The Nabisco Sale represents approximately $11.728 billion in gross proceeds to NGH. NGH has entered into a voting and indemnity agreement with Philip Morris with respect to the Nabisco Sale which generally provides that, subject to receiving approval of the Nabisco Sale from NGH stockholders, NGH will promptly vote in favor of the Nabisco Holdings merger. The approval by NGH, as discussed above, is the only Nabisco Holdings stockholder approval required to complete the Nabisco Holdings merger. All costs and expenses incurred in connection with the Nabisco Holdings merger agreement and related transactions will be paid by the Company incurring such costs or expenses, except that Nabisco Holdings and NGH have agreed that Nabisco Holdings will be responsible for fees and expenses of the financial, legal and other advisors to Nabisco Holdings and NGH up to $50 million, and NGH will be responsible for all such fees and expenses in excess of $50 million. In connection with the Nabisco Holdings merger and the NGH merger, both NGH and Nabisco Holdings incurred costs during the third quarter of 2000 for financial, legal and other advisor fees. These costs amounted to $21 million at Nabisco Holdings and an additional $2 million at NGH. In addition, in accordance with the terms of the Nabisco Holdings merger agreement, and upon depletion of its existing treasury stock inventory, Nabisco Holdings paid cash to satisfy the excess of the market price of Nabisco Holdings stock at the time of exercise, over the exercise price of Nabisco Holdings stock options. As a result, NGH recognized compensation expense of $28 million during the third quarter and first nine months of 2000. These costs have been classified as selling, advertising, administrative and general expenses in the accompanying Consolidated Condensed Statements of Income. NOTE 3 -- INVENTORIES The major classes of inventory are as follows:

8 NOTE 4 -- NET INCOME PER SHARE

Common shares exclude 179,500 and 949,100 shares of restricted stock as the vesting provisions had not been met at September 30, 2000 and 1999, respectively. NOTE 5 -- SEGMENT REPORTING NGH is a holding company whose majority-owned subsidiaries are engaged principally in the manufacture, distribution and sale of cookies, crackers, and other food products. NGH is organized and reports its results of operations in three operating segments: Nabisco Biscuit Company, the Nabisco Foods Company and the International Food Group which are segregated by both product and geographic area. NGH's management evaluates the performance and allocates resources based upon operating company contribution ("OCC"). OCC for each reportable segment is operating income before amortization of intangibles and exclusive of a restructuring credit, loss on sale of businesses restructuring-related expenses and costs associated with the Nabisco Holdings merger and the NGH merger. Such costs include the cash buyout of exercised Nabisco Holdings stock options and financial, legal and other advisor fees. 9 NOTE 5 -- SEGMENT REPORTING (CONTINUED)

NOTE 6 - CONTINGENCIES TOBACCO LITIGATION As of November 1, 2000, NGH was a defendant in 22 lawsuits arising out of its now severed relationship with the tobacco business conducted by its former subsidiary, R.J. Reynolds Tobacco Company ("Reynolds Tobacco") or its subsidiaries. During the third quarter of 2000, NGH was not served with any new tobacco related cases and was voluntarily dismissed from 19 such cases. Since the close of the third quarter, NGH has been dropped from seven additional cases but, on November 9, 2000, was served in one new case (brought by the European Union). These tobacco related cases name NGH on a variety of theories, not always specifically pled, that seek to impose liability on NGH for injuries allegedly caused by the use, sale, distribution, manufacture, development, advertising, marketing or health effects of, exposure to, or research, statements or warnings regarding cigarettes. None of these cases is scheduled for trial in 2000 or the first quarter of 2001. Fifteen of the active suits were brought in state courts by claimants seeking recovery of health care costs they incurred for large numbers of beneficiaries whose illnesses are allegedly related to cigarettes. The plaintiffs in these cases include groups of union health-benefit trust funds, a Native American tribe and two foreign countries or political subdivisions. Four of the cases are non-union class action suits, one in Pennsylvania federal court, one in Indiana state court, one in New York federal court and one in Missouri state court. Although NGH had been named, and in many cases served in a number of anti-trust cases, also arising from the sale of tobacco products, as of November 1, 2000, NGH (as well as other present or former parent companies) had been voluntarily dismissed without prejudice from 18 anti-trust cases in which it had previously been a defendant in various state courts. In 14 additional such cases in which NGH had been named but not served, NGH has been dropped from the cases but plaintiffs have reserved the right to reinstate their cases against NGH in certain future circumstances. NGH and other 10 NOTE 6 - CONTINGENCIES (CONTINUED) parent or former parent companies were voluntarily dismissed from all the antitrust cases previously pending against them in federal courts. NGH has not yet been dismissed or dropped from three state court anti-trust cases. These cases, all of which seek to be certified as class actions, allege violations of state anti-trust law and are brought by plaintiffs who claim to represent direct purchasers, indirect purchasers and retail purchasers of cigarettes. NGH's defenses in all the cigarette cases in which it is named include the merits defenses of Reynolds Tobacco plus separate arguments that NGH is a holding company that does not engage in any of the activities for which plaintiffs seek to impose liability. NGH also seeks to be dismissed from some of these cases based on the fact that as a holding company that does not conduct business in most states, NGH lacks the minimum contacts with most states that would be necessary for the assertion of personal jurisdiction over it. In the health-care cost-recovery cases of the kind noted above, defendants also argue that the case should be dismissed because of the settled law that one who pays an injured person's medical expenses is legally too remote to maintain an action against the person allegedly responsible for the injury. Most courts that have decided motions to dismiss based on this argument, including the federal court of appeals for the Second, Third, Fifth, Seventh, Ninth and Eleventh Circuits, have granted motions to dismiss on these "remoteness" grounds. Ten of these union cases, all pending in New York State courts, have been consolidated and, on March 6, 2000, defendants' motion to dismiss these cases on "remoteness" grounds was granted. Plaintiffs have filed notices of appeal and have until January 2001 to perfect their appeals. NGH's litigation defense costs as well as any liabilities it might incur as a result of the cases pending against it are to be paid by RJR and Reynolds Tobacco under the indemnification provisions of an agreement between NGH, RJR and Reynolds Tobacco. NGH's cost of defense, as well as any liabilities incurred as a result of the cases brought by plaintiffs based on sales of cigarettes outside the United States, are generally also subject to an indemnity from Japan Tobacco Inc. ("Japan Tobacco") as provided under the sale agreement among Japan Tobacco, Reynolds Tobacco and RJR. If RJR and Reynolds Tobacco and Japan Tobacco cannot fulfill their respective indemnity obligations, NGH could be required to make the relevant payments itself. In addition to the cases pending against NGH, there are approximately 1,670 lawsuits relating to cigarettes in which Reynolds Tobacco, and sometimes RJR, are defendants. Eleven hundred of these cases are contained in two complaints filed in the last quarter by the same law firm in West Virginia. Reynolds is also a defendant in approximately 3,100 additional individual lawsuits arising from a Florida environmental tobacco smoke class action lawsuit that was settled in 1997. One Florida class action case, in which Reynolds Tobacco is a defendant, ENGLE VS. R.J. REYNOLDS TOBACCO COMPANY, is being tried in several phases. The jury, on July 7, 1999, found against Reynolds Tobacco and the other cigarette company defendants in the first phase which included issues of liability, general causation and entitlement to punitive damages. The second phase, considering the claims of class representatives, was completed on April 7, 2000 with an award of $12.7 million to three class members (although $5.831 million of this award was attributable to a plaintiff against whom the jury found that the statute of limitations had already run out). The same jury subsequently heard the case for a lump sum award of punitive damages and on July 14, 2000 awarded $145 billion against the defendants as a group of which $36.3 billion was allotted to Reynolds Tobacco. The defendants, including Reynolds Tobacco, on July 24, 2000 filed numerous post-verdict motions, including motions for a new trial and to reduce the punitive damages award. They also sought to remove the case to federal district court, but the federal court, on November 3, 2000, remanded the case back to the state court on the ground that removal was premature. Promptly upon remand, the state court judge issued an order denying all of the defendants' post-trial motions and purporting to enter a final judgment as to the second phase of the trial. 11 NOTE 6 - CONTINGENCIES (CONTINUED) Defendants intend to appeal the remand decision to the 11th Circuit Court of Appeals and have filed a notice of appeal of the state judge's order to the Florida 3rd District Court of Appeal. To prevent plaintiffs from seeking to recover the damages awarded during the second phase of trial while defendants are pursuing their appeals, Reynolds Tobacco has posted two bonds: a civil supersedeas bond of $100,000,000, the statutory limit, with respect to its potential obligations under the punitive damages award, and a second bond in the amount of the compensatory damages award plus interest. Under the trial plan, the third phase will address all other class members' claims in individual trials before separate juries. A recently enacted Florida statute established the limits for the supersedeas bond described above, but it is possible that plaintiffs will challenge the validity of this legislative limitation, and, if successful, require a bond in the full amount of the punitive damages award plus interest. If Reynolds Tobacco and RJR are unable to satisfy their payment obligations for any adverse judgments against them in ENGLE or any other of these cases pending against them, it is possible that plaintiffs in these cases would seek to recover the unsatisfied obligations from the assets of NGH by bringing lawsuits on various theories. Some of the claims against NGH seek recovery of hundreds of millions and possibly billions of dollars. This is also true of the litigation pending against Reynolds Tobacco and RJR. Litigation is subject to many uncertainties. While management believes it has strong defenses in the litigation against NGH, management is unable to predict the outcome of the litigation against NGH, or to derive a meaningful estimate of the amount or range of any possible loss in any quarterly or annual period or in the aggregate. NOTE 7 -- SUBSEQUENT EVENTS On October 27, 2000 the stockholders of NGH approved the acquisition of Nabisco Holdings by Philip Morris and the subsequent acquisition of NGH by RJR. In November 2000, Nabisco signed definitive agreements for the sale of its domestic breath mints, gum, dry mix dessert and baking powder businesses. These transactions are conditioned on completion of the acquisition of Nabisco Holdings by Philip Morris and are subject to customary closing conditions, including receipt of regulatory approval. In 1999, these businesses had net sales and operating income of approximately $314 million and $96 million, respectively. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of NGH's financial condition and results of operations. The discussion and analysis of the results of operations is divided into separate sections for sales and operating company contribution and operating income. The sales section includes information as reported in the historical financial statements, followed by management's discussion and analysis of these results. The operating income and operating company contribution section provides a reconciliation of operating income to operating company contribution, which excludes amortization of trademarks and goodwill and special items that management believes impact the comparability of historical results. This is followed by management's discussion and analysis of operating company contribution ("OCC") which is presented on a basis consistent with how the businesses are managed. Special items include a restructuring credit, loss on sale of businesses, restructuring-related expenses and costs associated with the Nabisco Holdings merger and the NGH merger that management believes affect the comparability of the results of operations. OCC should not be viewed as a substitute for the historical results of operations but as a tool to better understand the underlying trends in the business. The discussion and analysis of NGH's financial condition and results of operations should be read in conjunction with the historical financial information and the related notes thereto included in the Consolidated Condensed Financial Statements. NGH's business is conducted by Nabisco Holdings Corp.'s ("Nabisco Holdings") wholly-owned subsidiary Nabisco Inc. ("Nabisco"). The food business is conducted by the operating subsidiaries of Nabisco Holdings. Nabisco's businesses in the United States are comprised of Nabisco Biscuit Company and the Nabisco Foods Company. Nabisco's businesses outside the United States are conducted by Nabisco Ltd and Nabisco International, Inc. ("Nabisco International" together with Nabisco Ltd, the "International Food Group"). NET SALES

- Nabisco Biscuit Company's net sales increased 4% in the third quarter and 3% in the first nine months versus the same periods last year. The increase in both periods resulted from the continued momentum in volume growth from its cookie and cracker brands of 3% and 4 % for the third quarter and first nine months of 2000, respectively, versus the same periods last year, and favorable pricing actions. These volume gains were driven by new products, increased marketing investment and the increasing efficiency and effectiveness of Biscuit's reorganized direct store delivery sales force. Several discontinued breakfast food and snack products partially offset the improvements in both periods. - Nabisco Foods Company's net sales increased 37% in the third quarter and 38% in the first nine months versus the comparable periods last year. Excluding the impact on net sales resulting from the November 1999 acquisition of the Favorite Brands' business, net sales grew 4% in the third quarter and 8% in the first nine months, over the respective prior year periods. Volume gains from confections, including the impact of several new products, and condiments, coupled with favorable pricing actions continued to drive growth in both periods. Volume gains in nuts and pet snacks also contributed to the increase in net sales for the first nine months versus the same period last year. - International Food Group's net sales decreased 8% in the third quarter and 2% in the first nine months versus the same periods last year. Excluding the net sales of Spain, Portugal and the Middle East, whose operations were disposed of in July of 2000, International's net sales increased 4% in both the third quarter and first nine months of 2000 over the comparable 1999 periods. In the third quarter, the net sales increase, after excluding the disposals in 2000, was due to the additional volume contributed by the Canale acquisition and gains in Asia, primarily pricing, and Canada, due to volume, offset by softness in pricing for the Southern Cone Region of South America, principally Argentina and Uruguay. Year to date gains were attributable to the addition of Canale, higher volume in Venezuela offset in part by volume weakness in Mexico and both price and volume weakness in the balance of the Southern Cone business. 13 OPERATING INCOME AND OPERATING COMPANY CONTRIBUTION

THE FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON OPERATING COMPANY CONTRIBUTION: - Nabisco Biscuit Company's operating company contribution increased 18% in the third quarter and 14% in the first nine months versus the same prior year periods. The third quarter results were primarily attributable to gains in cookie and cracker volumes and favorable pricing actions offset in part by higher marketing investment. Driving the first nine months' improvement was strong cookie and cracker volumes, lower raw material costs, and higher pricing. Partially offsetting this improvement were increased marketing investments and lower breakfast snack volumes. - Nabisco Foods Company's operating company contribution was $100 million in the third quarter of 2000, an increase of $26 million over the third quarter of 1999, and $271 million in the first nine months of 2000, an increase of $75 million from the first nine months of 1999. The results in both periods were primarily driven by strong volume gains coupled with favorable pricing. Increased marketing investments partially offset the first nine months' comparison. - International Food Group's operating company contribution declined 18% in the third quarter of 2000 and 13% in the first nine months of 2000 from the comparable 1999 periods principally due to the disposal of its operations in Spain, Portugal, and the Middle East in July of 2000. Excluding the results of these businesses, the International Food Group's operating company contribution was up 3% in the third quarter and 12% in the first nine months versus the same periods last year. The third quarter increase is primarily attributed to the sales gains noted above as costs remained flat with the prior year period. Canada, Mexico, Asia, and Venezuela reported higher OCC while Brazil and Southern Cone were weaker. The first nine month 14 performance primarily reflects the sales gains noted, offset by higher marketing investment and foreign exchange. Strengths in Canada, Venezuela and the Asian businesses offset weaknesses in Brazil and Mexico. INTEREST AND DEBT EXPENSE Consolidated interest and debt expense of $73 million and $220 million for the third quarter and first nine months of 2000 increased 11% and decreased 13%, respectively, from the same 1999 periods. The third quarter increase is due to higher average debt levels and higher average interest rates. The decrease in the first nine months comparison is primarily due to the repurchase and redemption of Trust Originated Preferred Securities in May 1999 offset in part by increased interest expense due to higher average interest rates and higher average debt levels. OTHER INCOME (EXPENSE), NET Other income (expense), net was $4 million income and less than $1 million for the third quarter and first nine months of 2000 compared to $4 million expense and $14 million expense in the same 1999 periods. The third quarter comparison primarily reflects United Biscuits investor financing fee income of $12 million and dividend income accreted on the discounted preferred stock of $7 million. Partially offsetting these gains were increased foreign exchange losses primarily due to the impact of currency movements on this investment. The first nine months comparison also reflects lower foreign exchange losses not related to the United Biscuits transaction, offset in part by increased financing costs and lower interest income. DISCONTINUED OPERATIONS Total income from discontinued operations was nil and $3.0 billion in the third quarter and first nine months of 1999, respectively. Discontinued operations represent the results from tobacco businesses and RJR Nabisco, Inc.'s corporate headquarters' expenses prior to the sale in the second quarter of 1999 of the international tobacco business and subsequent spin-off to shareholders of the domestic tobacco business. NET INCOME Nabisco Group Holdings' net income of $56 million and $179 million for the third quarter and first nine months of 2000 compared with net income of $92 million and $2.9 billion for the same 1999 periods. The third quarter decrease primarily reflects lower operating income and higher interest and debt expense offset in part by a lower provision for income taxes and higher other income. The nine month decrease principally reflects the absence in 2000 of income from operations of discontinued businesses. COMPREHENSIVE INCOME Comprehensive income was $53 million income and $196 million income for the third quarter and first nine months of 2000 versus income of $76 million and $3.0 billion in the comparable 1999 periods. The third quarter decrease primarily reflects lower net income partially offest by lower foreign currency translation losses. The nine month decrease is primarily due to lower net income and a decrease in the reclassification of cumulative translation losses related to businesses sold partially offset by lower foreign currency translation losses. RESTRUCTURING Savings objectives set in Nabisco's 1998 restructuring programs are on target. As of September 30, 2000, the 1998 restructuring programs were complete. Pre-tax savings in 2000 are expected to be 15 approximately $140 million including cash savings of $133 million and are expected to be approximately $145 million annually including cash savings of $135 million in 2001 and thereafter. In the second quarter of 2000, Nabisco recorded a net restructuring credit of $27 million in addition to the $67 million net restructuring credit recorded in 1999. These net credits reduced the restructuring charges to $436 million. Cumulative cash expenditures, net of cash proceeds, to date have totaled $122 million with $19 million expended in the first nine months of 2000. Cumulative cash payments, net of cash proceeds is comprised of $170 million in cash payments and cumulative cash proceeds of $48 million. For the nine months ended September 30, 2000, cash payments, net of cash proceeds is comprised of $46 million of cash expenditures and $27 million of cash proceeds. Although projects have been completed, proceeds to be collected and certain cash payments, primarily severance and benefits that are paid over time, are being transacted after the program completion dates. This is expected to result in a net cash inflow of approximately $7 million subsequent to September 30, 2000. For a further discussion of the restructuring programs, see Note 1 to the Consolidated Condensed Financial Statements. LIQUIDITY AND FINANCIAL CONDITION Net cash flows from continuing operating activities for the first nine months of 2000 increased $352 million from the first nine months of 1999 to $351 million. The increase in net cash flows from continuing operating activities primarily reflects income from continuing operations in 2000 compared to a loss from continuing operations in 1999, lower working capital requirements and lower restructuring credits and payments partially offset by the absence of an extraordinary loss on the early extinguishment of debt in 2000. Cash flows used in investing activities for the first nine months of 2000 decreased $108 million from the first nine months of 1999 to $241 million, primarily due to maturities of financial investments in 2000 compared to net purchases of financial investments in 1999, lower acquisition expenditures, lower capital expenditures and increased proceeds from the exercise of Nabisco Holdings' common stock options partially offset by the investment in Finalrealm transactions. Capital expenditures were $132 million in the first nine months of 2000. Management expects that capital expenditures for 2000 will be approximately $270 million, which is sufficient to support the strategic and operating needs of Nabisco Holdings' businesses. Management also expects that cash flow from operations will be sufficient to support its planned capital expenditures in 2000. Cash flows used in financing activities were $118 million for the first nine months of 2000, a decrease of $1.7 billion from the first nine months of 1999. The decrease was principally due to the absence of trust preferred securities and ESOP preferred stock purchases and redemptions in 2000 and lower dividends paid on common and preferred stock partially offset by a reduction in net borrowings. The significant cash flows used in financing activities were sourced from cash inflows resulting from the sale of the international tobacco business in the third quarter of 1999. As of September 30, 2000, Nabisco's $1.5 billion revolving credit facility was unutilized and available to support borrowings. In addition, the 364-day $1.1 billion credit facility was utilized to support outstanding commercial paper borrowings of $1.01 billion, and accordingly, approximately $90 million was available. Effective October 26, 2000, the 364 day facility was renewed, amended and extended to January 25, 2001 to a $1.09 billion facility. Nabisco's credit facilities limit the ability of Nabisco Holdings and its subsidiaries to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, acquire, sell or dispose of certain assets and securities and engage in certain mergers or consolidations. Nabisco Holdings and Nabisco believe that they are currently in compliance with all covenants and restrictions imposed by the terms of their indebtedness. 16 The Nabisco Holdings merger agreement with Philip Morris Companies, Inc. dated as of June 25, 2000 requires Nabisco Holdings to conduct its business in the ordinary course consistent with past practice and limits the ability of Nabisco Holdings and its subsidiaries to incur indebtedness, acquire, sell or dispose of certain assets and securities, and take certain other actions. Similarly, the NGH merger agreement with RJR dated as of June 25, 2000, requires NGH to conduct its business in the ordinary course consistent with past practice and limits the ability of NGH to incur indebtedness, acquire, sell or dispose of certain assets and securities, and take certain other actions. At September 30, 2000, NGH's total debt (notes payable and long-term debt, including current maturities and mandatorily redeemable preferred securities) and total capital (total debt and stockholders' equity) amounted to approximately $4.1 billion and $7.4 billion, respectively, of which total debt is lower by approximately $75 million and total capital is higher by $15 million than at December 31, 1999. NGH's ratios of total debt to stockholders' equity and total debt to total capital were 1.3 to 1 and .56 to 1, respectively. NGH currently anticipates that it will pay a regular quarterly cash dividend that is approximately equal to the amount of the regular Nabisco Holdings' quarterly cash dividend that NGH expects to receive. There are no restrictions on the payment of Nabisco Holdings' customary quarterly dividend under the terms of the terms of the Nabisco Holdings merger agreement with Philip Morris Companies, Inc. However, the dividend payable on each NGH common share will be less than the dividend payable on each Nabisco Holdings' common share because the number of outstanding NGH common shares exceeds the number of Nabisco Holdings' shares owned by NGH. Passing through Nabisco Holdings' current annual dividend of $0.75 per share on NGH's 213,250,000 shares of Nabisco Holdings' stock would yield an annual dividend of approximately $0.49 per share on the 326,438,760 shares of NGH stock outstanding on September 30, 2000. CHANGE OF CONTROL PROPOSED TRANSACTIONS On June 25, 2000, the board of directors of NGH approved two major transactions: (1) the sale of NGH's 80.5% interest in Nabisco Holdings to Philip Morris Companies, Inc. (the "Nabisco Sale") pursuant to a merger in which Philip Morris will acquire all of the outstanding Nabisco Holdings common stock for $55 per share (the "Nabisco Holdings merger"), and (2) the subsequent acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. ("RJR") pursuant to a merger in which RJR will acquire all of the outstanding NGH common stock for $30 per NGH share (the "NGH merger"). Completion of the Nabisco Holdings merger is subject to customary closing conditions, including receipt of regulatory approvals. Completion of the NGH merger is also subject to customary closing conditions, including receipt of regulatory approvals and is conditioned on the completion of Nabisco Sale. There can be no assurance that such approvals will be obtained. The transactions are expected to close during the fourth quarter of 2000. NGH STOCKHOLDER VOTE REQUIRED TO APPROVE THE NABISCO SALE AND THE NGH MERGER The Nabisco Sale required approval by holders of a majority of the outstanding shares of NGH common stock because the Nabisco Holdings shares constitute substantially all of the assets of NGH. The Nabisco Sale represents approximately $11.728 billion in gross proceeds to NGH. NGH has entered into a voting and indemnity agreement with Philip Morris with respect to the Nabisco Sale which generally provides that, subject to receiving approval of the Nabisco Sale from NGH stockholders, NGH will promptly vote in favor of the Nabisco Holdings' merger. The approval by NGH was the only Nabisco Holdings' stockholder approval required to complete the Nabisco Holdings' merger. 17 The NGH merger also required approval by holders of a majority of the outstanding shares of NGH common stock. SUBSEQUENT EVENTS On October 27, 2000, the stockholders of NGH approved the acquisition of Nabisco Holdings by Philip Morris and the subsequent acquisition of NGH by RJR. In November 2000, Nabisco signed definitive agreements for the sale of its domestic breath mints, gum, dry mix dessert and baking powder businesses. These transactions are conditioned on completion of the acquisition of Nabisco Holdings by Philip Morris and are subject to customary closing conditions, including receipt of regulatory approvals. In 1999, these businesses had net sales and operating income of approximately $314 million and $96 million, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Nabisco is exposed to market risk in the areas of foreign currency exchange rates, interest rates and commodity prices. Nabisco employs a variance/co-variance approach to its calculation of Value at Risk ("VaR"), which is a statistical measure of potential loss in terms of fair value, cash flows, or earnings of market risk sensitive financial instruments over a one-year horizon using a 95% confidence interval for changes in market rates and prices. The model assumes that financial returns are normally distributed. For options and instruments with non-linear returns, the model uses the delta/gamma method to approximate the financial return. The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred by Nabisco, nor does it consider the potential effect of favorable changes in market factors. INTEREST RATE EXPOSURE The VaR, which is the potential loss in fair value of financial instruments resulting from Nabisco's exposure to changing interest rates, was $155 million after tax, net of minority interest at September 30, 2000, a decrease of $23 million from the December 31, 1999 amount. COMMODITY PRICE EXPOSURE The VaR associated with Nabisco's derivative commodity instruments due to reasonably possible near-term changes in commodity prices, based on historical commodity price movements, would not result in a material effect on the future earnings of Nabisco. The VaR associated with Nabisco's net commodity exposure (anticipated future purchases less derivatives, inventory and firm purchase commitments) would result in a potential loss in earnings, before taxes and minority interest of $19 million at September 30, 2000, a decrease of $11 million from the December 31, 1999 amount. The VaR associated with either Nabisco's derivative commodity instruments or its net commodity exposure would not have a material effect on the fair value or cash flows of Nabisco. ------------------------ The foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 6 to the Consolidated Condensed Financial Statements contains forward-looking statements concerning, among other things, the amount of savings from the restructuring program, the level of future capital expenditures, the level of dividends, the completion of the Nabisco Holdings and NGH mergers and litigation. These statements reflect management's current views with respect to future events and financial performance. These forward-looking statements are based on many assumptions and factors including competitive pricing for products, commodity prices, success of new product innovations and acquisitions, economic conditions in countries where Nabisco Group Holdings' subsidiaries do business, the effects of currency fluctuations, the effects of government regulation and the status of litigation. Any changes in such assumptions or factors could produce significantly different results. 18 PART II ITEM 1. LEGAL PROCEEDINGS NGH is a defendant in a number of lawsuits (22 as of November 1, 2000) as a result of its now severed relationship with the tobacco business conducted by Reynolds Tobacco or its subsidiaries. For information about this litigation see Note 6 to the Consolidated Condensed Financial Statements. Some of the claims against NGH in the tobacco-related litigation noted above seek recovery of hundreds of millions and possibly billions of dollars. This is also true of litigation pending against Reynolds Tobacco and RJR, former subsidiaries of NGH. Litigation is subject to many uncertainties. While management believes it has strong defenses in the litigation against NGH, management is unable to predict the outcome of the litigation against NGH, or to derive a meaningful estimate of the amount or range of any possible loss in any quarterly or annual period or in the aggregate. OTHER LITIGATION During the week of June 26, 2000, two actions were filed in the Court of Chancery for the State of Delaware and one action was filed in the Chancery Division of the Superior Court of New Jersey, in each case by alleged common stockholders of NGH on behalf of a purported class of similarly situated NGH stockholders. The actions are styled ALFONSE MAYER, ET AL. V. NABISCO GROUP HOLDINGS CORPORATION, ET AL., C.A. 18126, HARRIET RAND, ET AL. V. NABISCO GROUP HOLDINGS CORPORATION, ET AL., C.A. 18129NC, AND MARK SCHNEIDER V. STEVEN F. GOLDSTONE, ET AL., DOCKET NO. L-2028-00. The complaints in the actions name as defendants NGH and the members of its Board of Directors, and allege that the NGH directors breached their fiduciary duties to NGH stockholders by agreeing to the NGH merger and by allegedly failing to obtain the highest value for NGH stockholders in the NGH merger. The complaints sought injunctive relief and monetary damages in an unspecified amount. None of these complaints challenges the validity or fairness of the Nabisco Holdings' merger or seeks injunctive relief or monetary damages in connection with the Nabisco Holdings' merger. On October 3, 2000, the plaintiff in the New Jersey action filed an amended complaint, along with a demand for a court order granting a preliminary restraint to enjoin NGH from holding its October 27, 2000 stockholder meeting to vote on approval of the NGH merger and to require NGH to file a revised proxy statement. A hearing on this demand for a preliminary restraint was scheduled for October 25, 2000. On October 20, 2000, counsel for plaintiffs in the New Jersey and Delaware actions and counsel for defendants signed a memorandum of understanding in which the parties agreed in principle to settle the New Jersey and Delaware actions. The settlement will provide NGH, its directors, and all affiliated parties, with a full release and dismissal with prejudice. Among other things, the memorandum of understanding provides that NGH will obtain a written agreement from R. J. Reynolds Tobacco Holdings, Inc. ("RJR") to the effect that RJR will pay or cause to be paid to NGH stockholders, in the circumstances described in Section 2.02(b) of the NGH Merger Agreement (which relates to any transaction in which NGH receives, as a stockholder or Nabisco Holdings Corp. ("NA"), more than $55 per NA share), an amount equal to 100% of the difference between the Net Proceeds (as defined in the NGH Merger Agreement) and $11.729 billion. On October 20, 2000, the parties to the New Jersey action advised the court that they had agreed to settle the case and that plaintiff's demand for a preliminary restraint was withdrawn. Nabisco Holdings and Nabisco, both subsidiaries of NGH, are defendants in various lawsuits arising in the ordinary course of business. In the opinion of management, resolution of these matters is not expected to have a material adverse effect on those companies' or on NGH's financial condition or results of operations. 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The matters below were voted upon at the special meeting of stockholders of NGH held on October 27, 2000. Holders of Common Stock were entitled to vote upon the proposals to sell NGH's 80.5% interest in Nabisco Holdings Corp. to Philip Morris Companies, Inc., on the subsequent acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. for $30 per share and to grant discretionary authority to vote in favor of an adjournment of the meeting, if necessary. Holders present in person or by proxy at the meeting were entitled to vote 219,131,545 shares of Common Stock. (a) Sale of NGH's 80.5% interest in Nabisco Holdings Corp. to Philip Morris Companies, Inc. For......................................................... 216,324,824 Against..................................................... 1,691,531 Abstain..................................................... 1,115,190 Subsequent acquisition of NGH by R.J. Reynolds Tobacco Holdings, Inc. for (b) $30 per share For......................................................... 216,040,471 Against..................................................... 1,822,877 Abstain..................................................... 1,268,197 Grant discretionary authority to vote in favor of an adjournment of the (c) meeting, if necessary For......................................................... 162,166,246 Against..................................................... 49,710,706 Abstain..................................................... 7,254,593

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 First Amendment to the 364 Day Credit Facility dated as of September 8, 2000, among Nabisco Holdings Corp., Nabisco, Inc. and the lending institutions party thereto (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Nabisco Holdings Corp. and Nabisco, Inc. for the fiscal quarter ended September 30, 2000 (the "September 2000 Nabisco Form 19-Q")). 10.2 Nabisco, Inc. Deferred Compensation Plan, as amended and restated effective as of September 13, 2000 (incorporated by reference to Exhibit 10.2 to the September 2000 Nabisco Form 10-Q). *12.1 Nabisco Group Holdings Corp. Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends/Deficiency in the Coverage of Combined Fixed Charges and Preferred Stock Dividends by Earnings Before Fixed Charges for the nine months ended September 30, 2000. *12.2 Nabisco Group Holdings Corp. Computation of Ratio of Earnings to Fixed Charges/ Deficiency in the Coverage of Fixed Charges By Earnings Before Fixed Charges for the nine months ended September 30, 2000. *27 Nabisco Group Holdings Corp. Financial Data Schedule for the nine months ended September 30, 2000.

------------------------ * Filed herewith (b) Reports on Form 8-K ~~None.~~

20 SIGNATURES Pursuant to the requirements 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. NABISCO GROUP HOLDINGS CORP. (Registrant) /s/ JAMES E. HEALEY --------------------------------------------- James E. Healey Senior Vice President and Chief Financial Officer /s/ THOMAS J. PESCE --------------------------------------------- Thomas J. Pesce Senior Vice President and Controller Date: November 14, 2000

NABISCO GROUP HOLDINGS CORP 10-Q