10-Q 1 a2045890z10-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 MARCH 31, 2001 ------------------- NABISCO, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 1-1021 13-1841519 (State or other (Commission file (I.R.S. Employer Identification jurisdiction of number) No.) incorporation or organization)

7 CAMPUS DRIVE PARSIPPANY, NEW JERSEY 07054-0311 (973) 682-5000 (Address, including zip code, and telephone number, including area code, of the principal executive offices of Nabisco, Inc.) ------------------------ 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: APRIL 30, 2001: ~~100 SHARES OF COMMON STOCK, PAR VALUE $2.50 PER SHARE~~

------------------- NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- INDEX

PART I ITEM 1. FINANCIAL STATEMENTS NABISCO, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN MILLIONS) (UNAUDITED)

SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 1 NABISCO, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS) (UNAUDITED)

SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 2 NABISCO, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)

SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 3 NABISCO, INC. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN MILLIONS) (UNAUDITED)

SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 4 NABISCO, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--INTERIM REPORTING AND RESULTS OF OPERATIONS GENERAL In management's opinion, the accompanying unaudited consolidated condensed financial statements (the "Consolidated Condensed Financial Statements") of Nabisco, Inc. ("Nabisco" or the "Company") contain all adjustments, consisting only of normal recurring adjustments (excluding integration expenses recorded in the first quarter of 2001), 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 included in the Annual Report on Form 10-K of Nabisco for the year ended December 31, 2000. Nabisco is a direct wholly-owned subsidiary of Nabisco Holdings Corp. ("Nabisco Holdings"). On December 11, 2000, Nabisco Holdings became an indirect wholly-owned subsidiary of Philip Morris Companies Inc. ("Philip Morris"). 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 months ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ended December 31, 2001. Certain prior period amounts have been reclassified to conform to the current period presentation. ACCOUNTING CHANGE--DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 133"). These standards require that all derivative financial instruments be recorded on the consolidated balance sheet at their fair value as either assets or liabilities. Changes in the fair value of derivatives will be recorded each period in income or accumulated other comprehensive loss, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive loss will be included in income in the periods in which income is affected by the hedged item. The adoption of these new standards did not have a material effect on net income (less than $1 million) or accumulated other comprehensive loss (less than $1 million). The Company operates internationally, with manufacturing and sales facilities in various locations around the world and utilizes certain financial instruments to manage its commodity exposures, primarily related to forecasted transactions. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction will not occur, the gain or loss would be recognized in income currently. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not engage in trading or other speculative use of financial instruments. 5 NOTE 1--INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED) The Company uses commodity forward contracts, as cash flow hedges, to procure raw materials, primarily wheat, sugar and soy oil. Commodity futures and options may also be used to hedge the price of these commodities. In general, commodity forward contracts qualify for the normal purchase exception under SFAS 133 and are, therefore, not subject to the provisions of the statement. When using a commodity option as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The change in a commodity option's time value is reported in cost of products sold in the Company's consolidated condensed statement of income. The effective portion of unrealized gains and losses on commodity futures contracts and options is deferred as a component of accumulated other comprehensive loss and is recognized as a component of cost of products sold in the Company's consolidated condensed statement of income when the related inventory is sold. During the quarter ended March 31, 2001, ineffectiveness related to cash flow hedges was not material (less than $1 million). The Company is hedging forecasted transactions for no more than the next twelve months and expects all amounts reported in accumulated other comprehensive loss to be reclassified to the consolidated condensed statement of income within that timeframe. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement and statement of income classification for certain sales incentives and will be effective in the first quarter of 2002. As a result, certain items previously included in selling, advertising, administrative and general expenses will be recorded as reductions of net sales. The Company presently expects that adoption or subsequent application of EITF No. 00-14 will not have a material effect on its financial position or results of operations. Upon adoption, prior period amounts will be reclassified to conform to the new requirements. In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." EITF Issue No. 00-25 requires that certain expenses included in selling, advertising, administrative and general expenses be recorded as a reduction of net sales and will be effective in the first quarter of 2002. The Company is currently in the process of determining the impact of EITF Issue No. 00-25. OTHER OPERATING EXPENSES In the first quarter of 2001, Nabisco recognized integration expenses of $48 million ($34 million after tax), related to costs associated with the integration of Nabisco's businesses into Kraft Foods Inc. ("Kraft"), a wholly-owned subsidiary of Philip Morris. These integration expenses consist of $46 million for severance and benefit costs and $2 million for contract exit costs. The severance and benefit costs cover 1,131 employees, including severance and benefit costs associated with the announcement to close one U.S. plant. Severance and benefit costs of $21 million were provided for 269 employees in the fourth quarter of 2000, subsequent to the acquisition of Nabisco Holdings by Philip Morris. 6 NOTE 1--INTERIM REPORTING AND RESULTS OF OPERATIONS (CONTINUED) CHANGE IN INTEGRATION LIABILITIES

The balances as of March 31, 2001 are included in accrued liabilities on the Consolidated Condensed Balance Sheet and will be paid over the next year. RELATED PARTY TRANSACTIONS The net amount payable to Kraft affiliates bears interest at LIBOR plus 0.5%. Interest expense for the three months ended March 31, 2001 was $19 million. On April 1, 2001, Nabisco paid a non-cash dividend of approximately $19 million to Nabisco Holdings which consisted of the net book value of property and equipment of its shared service center. EXTRAORDINARY LOSS In January 2001, Nabisco purchased a call option on the $400 million of 6% notes due February 15, 2011. The call option was not exercised, which resulted in these notes being put to Nabisco at 100% of the principal amount in February 2001. As a result of these transactions, Nabisco recognized an extraordinary loss of $9 million ($6 million after tax). In addition, an international subsidiary refinanced $4 million of long-term debt in February 2001 and recognized an extraordinary gain of $2 million ($2 million after tax). NOTE 2--INVENTORIES The major classes of inventory are shown in the table below:

NOTE 3--SEGMENT INFORMATION Nabisco and its subsidiaries are engaged in the manufacture, distribution and sale of cookies, crackers and other food products in the United States and in certain foreign countries. As a result of the ongoing integration of Nabisco's businesses into Kraft, Nabisco's interim results for 2001 and 2000 are reported as one segment. 7 NOTE 4--CONTINGENCIES Nabisco is a defendant in various lawsuits arising in the ordinary course of its business. In the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the Company's financial condition, results of operations or cash flows. Nabisco or certain of its subsidiaries have been named "potentially responsible parties" with third parties under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, also known as Superfund. Superfund imposes joint and several liability on parties that arranged for the disposal of hazardous substances, and on current and previous owners and operators of a facility for the clean-up of hazardous substances released from the facility into the environment. Nabisco is involved in approximately 15 Superfund and other clean-up actions in the United States relating to its current operations and certain former or divested operations for which it retains environmental liability. Nabisco is potentially liable for certain environmental matters arising from the operations of Nabisco's former wholly-owned subsidiary, Rowe Industries ("Rowe"). Rowe operated a small engine manufacturing facility in Sag Harbor, New York in the 1950s, 1960s and early 1970s that used various solvents. About 20 homes downgradient from the site were connected to public drinking water in the mid-1980s after solvents were detected in their individual wells. Since 1996, three toxic tort cases have been brought against Nabisco in New York state court, collectively by or on behalf of approximately 80 individuals, including 17 minors. The first case, filed on March 6, 1996 in Supreme Court of the State of New York, was dismissed by the trial judge as barred by the statute of limitations. The plaintiffs appealed the judgment of the trial court and, on April 30, 2001, the Appellate Division of the Supreme Court of the State of New York affirmed the trial court's judgment dismissing the plaintiffs' complaint as time-barred. The other two cases, which were both filed on January 3, 2000 in Supreme Court of the State of New York, are at an early stage in the trial court. Each complaint states that the relief sought by the plaintiffs is $10 million in compensatory and $100 million in punitive damages. The primary claims are based on alleged personal injury, diminution of property value and fear or risk of cancer. Nabisco is also potentially liable for certain environmental matters arising from Nabisco's or a former affiliate's connection with Del Monte Corporation in the 1970s and 1980s. Del Monte Corporation operated a plantation on Oahu, Hawaii, which used various pesticides for crop application over an extended time period. A pesticide spill at the site led to the closure of nearby drinking water wells and an investigation, under the oversight of the United States Environmental Protection Agency ("EPA"), of soil and groundwater contamination associated with the site. Upon completion of this investigation, the EPA will be selecting a plan to remedy the contamination. In addition, two lawsuits were filed in 1999 against Del Monte Corporation and approximately six other Oahu growers and pesticide manufacturers seeking unspecified compensatory and punitive damages for alleged pesticide contamination of drinking water supplies. The Board of Water Supply of the City and County of Honolulu filed the first lawsuit on September 27, 1999 in the Circuit Court of the First Circuit of the State of Hawaii. The second lawsuit, which was filed on October 7, 1999 in the Circuit Court of the First Circuit of the State of Hawaii, was brought by numerous area residents alleging bodily injury, emotional distress and wrongful death. Both cases are in the early stages of discovery and, to our knowledge, Del Monte Corporation has not received a settlement demand in either case. Nabisco believes a third party has indemnification obligations for these potential Del Monte Corporation environmental liabilities, and Nabisco is vigorously seeking enforcement of these indemnification rights. 8 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS The following is a narrative analysis of Nabisco's results of operations for the three months ended March 31, 2001. The narrative for sales, operating company contribution and operating income includes information as reported in the historical financial statements, followed by items that management believes impact the comparability of historical results, ongoing results and management's discussion of ongoing results. Ongoing results are presented on a comparable basis and exclude sales, operating company contribution and operating income from divested businesses, and other operating expenses resulting from the acquisition by Philip Morris, all of which management believes affect the comparability of the results of operations. The ongoing results of operations 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. RESULTS OF OPERATIONS

------------------------ (1) Operating company contribution represents operating income before amortization of trademarks and goodwill and other operating expenses. The following narrative is based on results from ongoing businesses. NET SALES Nabisco's net sales of $2.0 billion increased 4% compared to 2000 due primarily to new cookie and cracker product introductions and favorable product mix. Internationally, net sales were flat as increases in Asian markets and the impact of a July 2000 acquisition were offset by weakness in Canadian canned vegetable volumes. OPERATING COMPANY CONTRIBUTION Nabisco's operating company contribution increased 6% due primarily to higher net sales and lower overhead cost attributable to the continued integration of the businesses obtained in the Favorite Brands acquisition. Partially offsetting these improvements were increased marketing investments. 9 OPERATING INCOME Nabisco's operating income was $159 million for 2001, an increase of 7% versus last year. The increase reflects higher operating company contribution discussed previously. OTHER OPERATING EXPENSES In the first quarter of 2001, Nabisco recognized other operating expenses of $48 million for costs associated with the integration of Nabisco's businesses into Kraft, a wholly-owned subsidiary of Philip Morris. These integration expenses consist of $46 million for severance and benefit costs and $2 million for contract exit costs. The severance and benefit costs cover 1,131 employees, including severance and benefit costs associated with the announcement to close one U.S. plant. Severance and benefit costs of $21 million were provided for 269 employees in the fourth quarter of 2000, subsequent to the acquisition of Nabisco Holdings by Philip Morris. Through March 31, 2001, $8 million of payments had been made. INTEREST AND DEBT EXPENSE Interest and debt expense of $68 million in 2001 decreased by $2 million or 3% from 2000 due to lower average debt levels and lower average interest rates. OTHER INCOME (EXPENSE), NET Other income (expense), net amounted to $2 million of income in 2001 versus $6 million of expense in 2000. The $8 million change reflects the losses on sales of trade receivables in 2000 which were not incurred in 2001 since the programs were terminated during 2000. PROVISION FOR INCOME TAXES The reported effective tax rate was 42.2% in 2001 versus 39.4% in 2000. The increase in the 2001 tax rate primarily resulted from lower foreign tax credits and a shift in international income before income taxes to countries with higher tax rates. NET INCOME Nabisco's net income of $22 million for 2001 decreased $38 million from $60 million for 2000. The decrease primarily reflects the $48 million of other operating expenses in 2001 as discussed above, and an extraordinary net loss in 2001 (see Note 1 to the Consolidated Condensed Financial Statements) partially offset by higher other income, net, and lower interest and debt expense. 10 PART II ITEM 1. LEGAL PROCEEDINGS Nabisco is a defendant in various lawsuits arising in the ordinary course of its business. In the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the Company's financial condition, results of operations or cash flows. Since the filing of its Form 10-K for the fiscal year ended December 31, 2000 (the "Form 10-K"), developments have occurred in the legal proceedings that were reported by Nabisco in its Form 10-K as follows: Nabisco is potentially liable for certain environmental matters arising from the operations of its former wholly-owned subsidiary, Rowe Industries ("Rowe"). Rowe operated a small engine manufacturing facility in Sag Harbor, New York in the 1950s, 1960s and early 1970s that used various solvents. About 20 homes downgradient from the site were connected to public drinking water in the mid-1980s after solvents were detected in their individual wells. Since 1996, three toxic tort cases have been brought against Nabisco in New York state court, collectively by or on behalf of approximately 80 individuals, including 17 minors. The first case, filed on March 6, 1996 in Supreme Court of the State of New York, was dismissed by the trial judge as barred by the statute of limitations. The plaintiffs appealed the judgment of the trial court and, on April 30, 2001, the Appellate Division of the Supreme Court of the State of New York affirmed the trial court's judgment dismissing the plaintiffs' complaint as time-barred. The other two cases, which were both filed on January 3, 2000 in Supreme Court of the State of New York, are at an early stage in the trial court. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ~~12 Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges For the Three Months Ended March 31, 2001.~~

(b) Reports on Form 8-K None 11 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, INC. (Registrant) /s/ DAVID J. WEST ...................................... (David J. West) SENIOR VICE PRESIDENT, FINANCE, NABISCO BISCUIT AND SNACKS Date: May 14, 2001 /s/ ROBERT L. HERST ...................................... (Robert L. Herst) VICE PRESIDENT AND ASSISTANT SECRETARY

NABISCO INC 10-Q