RJR Nabisco

Tax shields

1989

1990

1991

1992

1993

Prebid Strategy Management Strategy KKR Strategy

145.79 738.74 728.69

153.99 357.99 619.41

175.16 340.27 528.39

183.36 313.01 499.55

182.57 274.38 349.53

PV Prebid Strategy Management Strategy KKR Strategy

145.79 738.74 728.69

134.78 313.33 542.14

134.18 260.66 404.78

122.94 209.87 334.95

107.14 161.02 205.12

Asset Sales

1989

Prebid Strategy Management Strategy KKR Strategy

1990

0 12680 3500

1991 0 0 2700

1992 0 0 0

1993 0 0 0

0 0 0

PV Prebid Strategy 0 Management Strategy 12680 KKR Strategy 5863.171731 Capex

1989 Prebid Strategy Management Strategy KKR Strategy Terminal Value PV Prebid Strategy Management Strategy KKR Strategy

Operating improvements

1990

1991

1992

1993

1,708 432 774

1,462 381 556

1,345 380 555

930 389 572

738 396 586

1708 432 774

1279.61 333.47 486.64

1030.35 291.10 425.16

623.56 260.82 383.52

433.09 232.39 343.89

1989

1990

1991

1992

1993

Prebid Strategy Management Strategy KKR Strategy

2898 1917 2862

3336 2385 3228

3838 2814 3811

4216 3266 4140

4634 3589 4508

PV Prebid Strategy Management Strategy KKR Strategy

2898 1917 2862

2919.83 2087.47 2825.30

2940.14 2155.69 2919.46

2826.80 2189.83 2775.84

2719.46 2106.20 2645.51

Column1 Prebid Strategy

Tax Shield 910.62

Asset Sales 0.00

Capex 8100.84

Operating Inc 46902.38

Management Strategy KKR Strategy Average

1909.93 2512.03 1777.53

12680.00 5863.17 6181.06

3525.80 5541.58 5722.74

35760.13 44541.65 42401.39

% Value Prebid Strategy Management Strategy KKR Strategy

Tax Shield 51% 107% 141%

Asset Sales 0% 205% 95%

Capex 142% 62% 97%

Operating Inc 111% 84% 105%

250% 200% Sources of Value:

150% 100% 50% 0%

Prebid Strategy Management Strategy KKR Strategy

Management Strategy

1994

1995

1996

1997

1998

174.10 224.90 287.88

157.17 165.11 213.26

121.18 92.87 128.86

108.48 0.00 5.56

68.53 0.00 0.00

Terminal Value 627.25 0.00 0.00

89.43 115.52 147.86

70.66 74.23 95.87

47.68 36.54 50.70

37.36 0.00 1.91

20.66 0.00 0.00

Sum of PV 910.62 1909.93 2512.03

1994

1995 0 0 0

1994

1996 0 0 0

1995

1997 0 0 0

1996

1998 0 0 0

1997

0 0 0

1998

735 402 598

735 412 618

735 422 638

735 432 658

735 442 678

377.52 206.48 307.16

330.43 185.22 277.83

289.21 166.05 251.04

253.13 148.78 226.61

1775.93 1269.48 2065.73

1994

1995

5093 3945 4906

2615.96 2026.30 2519.91

50000.00 45000.00 40000.00 35000.00 30000.00 25000.00 20000.00 15000.00 10000.00 5000.00 0.00

5596 4337 5341

2515.75 1949.75 2401.11

1996 6149 4768 5815

2419.50 1876.10 2288.08

1997 6756 5243 6335

2326.71 1805.64 2181.72

Growth Rate Terminal Value 0 5156.73 2% 3769.56 3% 6175.15

Sum of PV 8100.84 3525.80 5541.58

1998 7424 5766 6902

Terminal Value 67951.34 52775.79 63173.51

22720.24 17646.14 21122.73

Sum of PV 46902.38 35760.13 44541.65

Tax Shield Asset Sales

50000.00 45000.00 40000.00 35000.00 30000.00 25000.00 20000.00 15000.00 10000.00 5000.00 0.00

Tax Shield Asset Sales Capex Operating Inc

ources of Value: Pre-bid Operating Income fueled by Capital expenditure Management Strategy More distributed. They will sell assets, as well as earn on Tax Shields KKR Tax Shields, Assets as well as operating efficiecies

Terminal Value Growth Rate assumption

3%

Terminal Value Growth Rate assumption

3%

Interest Prebid Strategy Management Strategy KKR Strategy

1989 551 2,792 2,754

1990 582 1,353 2,341

1991 662 1,286 1,997

1992 693 1,183 1,888

1993 690 1,037 1,321

1994 658 850 1,088

Tax rate 0.264593 Tax Shield = Interest*Tax Rate 1989 1990 1991 1992 1993 1994 Prebid Strategy 145.7908 153.9932 175.1606 183.363 182.5692 174.1022 Management Strategy 738.7439 357.9944 340.2667 313.0136 274.383 224.9041 KKR Strategy 728.6894 619.4124 528.3924 499.5517 349.5275 287.8773

1995 594 624 806

1996 458 351 487

1997 410 0 21

1998 259 0 0

1995 1996 1997 1998 157.1683 121.1836 108.4832 68.52961 165.1061 92.87217 0 0 213.262 128.8568 5.556455 0

Exhibit 2 Exhibit 2 Condensed Operating and Stockholder Information for RJR Nabisco, 1982-1987 (in millions of dollars, except per share data). 1982 1983 1984 1985 1986 Operations: Revenues $7,323 $7,565 $8,200 $11,622 $15,102 Operating income 1,142 1,205 1,412 1,949 2,340 Interest and debt expense 180 177 166 337 565 Income before provision for income taxes 1,012 1,110 1,353 1,663 1,782 Income from continuing operations 548 626 747 917 1,025 Income from discontinued operationsa 322 255 463 84 39 Net income 870 881 1,210 1,001 1,064 Tax 142 229 143 662 718 Tax rate 14.0% 20.6% 10.6% 39.8% 40.3%

Source: Casewriter. a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital.

-1987 (in millions of 1987 $15,766 2,304 489 1,816 1,081 128 1,209 607 33.4%

26.5%

es - change in working capital.

Column1 1986 Beta Equity 1.24 Debt 5547 Equity 13991.1 Value 19538.1 Asset Beta 0.887955533 Average Beta 0.694803178 MRP Risk free rate

9% 8%

Pretax WACC 0.142532286

1987 0.67 4219 12571.875 16790.875 0.5016508222

Assumption Assumption

Exhibit 2 Exhibit 2 Condensed Operating and Stockholder Information for RJR Nabisco, 1982-1987 (in millions of dollars, except per share data). 1982 Operations: Revenues Operating income Interest and debt expense Income before provision for income taxes Income from continuing operations Income from discontinued operationsa Net income Stockholder Information: Earnings per share Dividends per share Closing stock price at year end Price/earnings at year end Numbers of shares at year end (millions)b Betac

1983

1984

1985

1986

1987

$7,323 1,142 180 1,012 548 322 870

$7,565 1,205 177 1,110 626 255 881

$8,200 1,412 166 1,353 747 463 1,210

$11,622 1,949 337 1,663 917 84 1,001

$15,102 2,340 565 1,782 1,025 39 1,064

$15,766 2,304 489 1,816 1,081 128 1,209

$3.13 1.14 20.40 6.5x 281.5 0.80

$2.90 1.22 24.30 8.38x 283.2 0.70

$4.11 1.30 28.80 7.01x 258.4 0.74

$3.60 1.41 31.38 8.72x 250.6 1.21

$3.83 1.51 49.25 12.86x 250.4 1.24

$4.70 1.76 45.00 9.57x 247.4 0.67

Source: Company reports and Casewriter estimates. a

Divestitures and acquisitions for the years 1982 to 1987 are as follows:

1982—Heublein acquired for $1.36 billion. 1983—Energy Division sold for an after-tax gain of $275 million. 1984—Divestiture of transportation division completed by spinning off common stock to Sea-Land Corp. (transportation accounted for as a discontinued operation since 1983). 1985—Nabisco brands, Inc., acquired at a total cost of $4.9 billion. 1986—Kentucky Fried Chicken sold at an after-tax loss of $39 million. 1987—Heublein, Inc. sold at an after-tax gain of $215 million. b

Figures include a 2 1/2-for-1 stock split, effective May 17, 1985.

Calculated using daily stock price data for each year by ordinary least-squares regression.

c

Exhibit 3

Consolidated Balance Sheets for RJR Nabisco, 1986-1987 (in millions of dollars). 1986

Assets: Cash Net receivables Inventories Other current assets Property, plant and equipment, net Goodwill and other intangibles Net assets of discontinued operations Other assets Total assets Liabilities: Notes payable Accounts payable Current portion of long-term debt Income taxes payable Long-term debt Deferred income taxes Redeemable preferred stock Other noncurrent liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity

Source: Company reports.

1987

$827 1,675 2,620 273 5,343 4,603 716 644 $16,701

$1,088 1,745 2,678 329 5,847 4,525 -649 $16,861

$518 2,923 423 202 4,833 751 291 1,448 $11,389 5,312 $16,701

$442 3,187 162 332 3,884 846 173 1,797 $10,823 6,038 $16,861

4,219

Exhibit 4

Financial Summary of RJR Nabisco by Business Segment, 1982-1987 (in millions of dollars). 1982

1983

1984

1985

1986

Tobacco: Sales Operating profit Identifiable assets Depreciation Capital expenditures Operating profit/identifiable assets Restructuring expense

$4,822 1,187 3,219 81 238 36.9% --

$4,807 1,150 3,378 78 383 34.0% --

$5,178 1,305 3,812 107 527 34.2% --

$5,422 1,483 4,496 146 647 33.0% --

$5,866 1,659 4,882 205 613 34.0% --

$6,346 1,821 5,208 244 433 35.0% (261)

Food Products: Sales Operating profit Identifiable assets Depreciation Capital expenditures Operating profit/identifiable assets Restructuring expense

$2,501 21 1,710 51 84 1.2% --

$2,758 129 1,761 56 94 7.3% --

$3,022 181 2,211 68 86 8.2% --

$6,200 549 9,598 195 279 6.0% --

$9,236 820 9,822 376 344 8.0% --

$9,420 915 10,117 380 445 9.0%

Spirits and Wines: Sales Operating profit Identifiable assets Depreciation Capital expenditures Operating profit/identifiable assets Restructuring expense

$392 53 1,084 14 11 4.9% --

$746 $703 $766 $876 113 122 131 138 740 815 895 991 24 22 24 30 13 13 26 25 15.3% 15.0% 14.6% 14.0% -----

Other (including “corporate”):a Sales Operating profit Identifiable assets Depreciation Capital expenditures Operating profit/identifiable assets Restructuring expense

$-(66) 3,106 11 16 -2.1% --

$-(74) 3,197 16 15 -2.3% --

$-(74) 2,257 16 29 -3.3% --

$-(83) 1,684 13 20 -5.0% --

Source: Company reports. a

Includes earnings on cash and short-term investments and miscellaneous discontinued operations.

$-(139) 1,319 24 65 -10.5% --

1987

18

$--------

$-(182) 1,536 28 58 -11.9% (7)

Exhibit 5

Cash Flow Projections for RJR Nabisco Under Its Prebid Strategy, 1988-1998 (in millions of dollars).

Tobacco sales Food sales Total Operating income Tobacco Food Corporate Total Interest Net income Depreciation, amortization, & deferred tax Capital expenditures Change in working capital Cash flow available for capital paymentsa

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

7,061 9,889 16,950

7,650 10,438 18,088

8,293 11,383 19,676

8,983 12,092 21,075

9,731 12,847 22,578

10,540 13,651 24,191

11,418 14,507 25,925

12,368 15,420 27,788

13,397 16,393 29,790

14,514 17,428 31,942

15,723 18,533 34,256

1,924 1,079 -350 2,653 551 1,360 730 1,142

2,022 1,163 -287 2,898 582 1,498 807 1,708 80 517

2,360 1,255 -279 3,336 662 1,730 791 1,462 111 948

2,786 1,348 -296 3,838 693 2,023 819 1,345 98 1,399

3,071 1,459 -314 4,216 690 2,259 849 930 105 2,073

3,386 1,581 -333 4,634 658 2,536 866 738 113 2,551

3,733 1,713 -353 5,093 594 2,858 867 735 121 2,869

4,115 1,855 -374 5,596 458 3,251 867 735 130 3,253

4,534 2,011 -396 6,149 410 3,625 867 735 140 3,617

4,998 2,178 -420 6,756 259 4,094 867 735 151 4,075

5,508 2,361 -445 7,424 -21 4,625 861 735 162 4,589

Source: Casewriter. a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital.

Exhibit 6 dollars).

Cash Flow and Capital Structure Projections for RJR Nabisco Under the Management Group Strategy, 1989-1998 (in millions of

Panel A: Operating Information Sales Operating income Interest Amortizationa After-tax income Depreciation, amortization, & deferred tax Capital expenditures Change in working capital Net proceeds from asset sales Cash flow available for capital paymentsb Panel B: Capital Structure Principal payments to: Assumed debt Bank debt Subordinated debt Preferred stock Convertible preferred stock Total Year-end book values: Assumed debt Bank debt Subordinated debt Total Preferred stock Convertible preferred stock Common stock Total Source: Casewriter.

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

7,650 1,917 2,792 388 -965 777 432 41 12,680 12,018

8,293 2,385 1,353 388 293 725 381 45 0 593

8,983 2,814 1,286 388 621 726 380 48 0 919

9,731 3,266 1,183 388 987 735 389 52 0 1,282

10,540 3,589 1,037 388 1,297 749 396 57 0 1,594

11,418 3,945 850 388 1,655 754 402 61 0 1,946

12,368 4,337 624 388 2,063 758 412 67 0 2,344

13,397 4,768 351 388 2,527 763 422 72 0 2,797

14,514 5,243 0 388 3,073 769 432 78 0 3,332

15,723 5,766 0 388 3,418 774 442 85 0 3,666

310 11,708 0 0 0 12,018

375 218 0 0 0 593

721 198 0 0 0 919

816 466 0 0 0 1,282

400 1,194 0 0 0 1,594

728 1,217 0 0 0 1,946

1,854 0 490 0 0 2,344

0 0 2,510 287 0 2,797

0 0 0 3,332 0 3,332

0 0 0 3,327 339 3,666

4,894 3,292 3,000 11,186 1,632 1,035 1,535 4,202

4,519 3,075 3,000 10,594 1,938 1,229 1,828 4,995

3,798 2,877 3,000 9,675 2,303 1,460 2,449 6,212

2,982 2,411 3,000 8,393 2,736 1,735 3,436 7,907

2,582 1,217 3,000 6,799 3,250 2,061 4,733 10,044

1,854 0 3,000 4,854 3,861 2,448 6,388 12,697

0 0 2,510 2,510 4,587 2,909 8,451 15,947

0 0 0 0 5,162 3,455 10,978 19,595

0 0 0 0 2,801 4,105 14,051 20,957

0 0 0 0 0 4,538 17,469 22,007

The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988. The difference between the purchase price and book value is amortized over 40 years using the straight-line method. a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds from asset sales. b

Exhibit 7

Cash Flow and Capital Structure Projections for RJR Nabisco Under KKR's Strategy, 1989-1998 (in millions of dollars). 1989

Panel A: Operating Information Tobacco sales Food sales Total Operating income Tobacco Food Corporate Total Interest expense Amortizationa After-tax income Depreciation, amortization & deferred tax Capital expenditures Change in working capital Noncash interest expense Net proceeds from asset sales Cash flow available for capital paymentsb Panel B: Capital Structure Principal payments to: Assumed debt Bank debt Subordinated debt Preferred stock Total Year-end book values: Assumed debt Bank debt Subordinated debt Converting debtc Total Preferred stock Common stock

1990

1991

1992

1993

1994

1995

1996

1997

1998

### ### ###

### ### ###

### ### ###

### ### ###

4,998 1,561 -224 6,335

5,508 1,630 -235 6,902

7,650 8,540 ###

8,293 6,930 ###

8,983 7,485 ###

9,731 8,084 ###

### 8,730 ###

### 9,428 ###

2,022 1,060 -219 2,862 2,754 388 -281 1,159 774 79 206 3,500 3,732

2,360 1,026 -158 3,228 2,341 388 233 991 556 84 237 2,700 3,521

2,786 1,191 -167 3,811 1,997 388 845 899 555 87 312 0 1,414

3,071 1,245 -176 4,140 1,888 388 1,134 907 572 94 366 0 1,740

3,386 1,307 -185 4,508 1,321 388 1,751 920 586 102 0 0 1,983

3,733 1,367 -194 4,906 1,088 388 2,168 924 598 110 0 0 2,383

310 3,422 0 0 3,732

375 3,146 0 0 3,521

721 816 400 400 2,182 0 0 0 693 924 1,583 1,983 629 0 0 0 0 0 0 0 21 3,330 149 0 0 0 0 0 0 0 3,806 4,319 1,414 1,740 1,983 2,383 2,832 3,330 3,956 4,319

4,894 8,958 3,500 1,580 ### 2,896 1,219

4,519 5,812 3,500 1,817 ### 3,331 1,452

3,798 5,119 3,500 2,129 ### 3,958 2,297

2,982 4,195 3,500 2,495 ### 4,702 3,430

2,582 2,612 3,500

4,115 1,430 -203 5,341 806 388 2,641 928 618 119 0 0 2,832

4,534 1,494 -213 5,815 487 388 3,164 933 638 129 0 0 3,330

21 0 388 388 3,814 4,203 939 945 658 678 140 151 0 0 0 0 3,956 4,319

2,182 0 0 629 0 0 3,500 3,470 149 0 0 0 0 8,694 6,311 3,470 149 5,586 6,636 7,883 9,365 7,320 7,676 9,844 ### ### ###

0 0 0 0 0

0 0 0 0 0 4,377 ###

Total

4,115

4,783

6,255

8,132

###

###

###

###

###

###

Source: Casewriter. The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988. The difference between the purchase price and the book value is amortized over 40 years using the straight-line method. a

Cash flow available for capital payment = net income + noncash interest + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds from asset sales. b

Assumes converting to equity in 1993.

c