UNITED STATES 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 Commission file number 1-9076
ended September 30, 1994
AMERICAN BRANDS, INC.
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
------------
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 ( )
The number of shares outstanding of the registrant's Common stock, par
value $3.125 per share, at October 31, 1994 was 201,390,682 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- ------ --------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
September 30, December 31,
1994 1993
------------ ------------
(Unaudited)
Assets
Consumer products and corporate
Current assets
Cash and cash equivalents $ 92.6 $ 62.5
Accounts receivable, net 1,334.4 1,241.6
Inventories 1,702.7 2,043.2
Other current assets 279.4 385.8
--------- ---------
Total consumer products and
corporate current assets 3,409.1 3,733.1
Property, plant and equipment, net 1,386.3 1,472.1
Intangibles resulting from
business acquisitions, net 3,578.0 3,637.9
Other assets 414.6 379.4
--------- ---------
Total consumer products and
corporate assets 8,788.0 9,222.5
--------- ---------
Life insurance
Investments 6,238.8 5,808.8
Cash and cash equivalents 92.7 79.1
Deferred policy acquisition costs 499.3 470.5
Present value of future profits, net 177.2 170.0
Other assets 364.9 588.1
--------- ---------
Total life insurance assets 7,372.9 7,116.5
--------- ---------
Total assets $16,160.9 $16,339.0
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
September 30, December 31,
1994 1993
------------ ------------
(Unaudited)
Liabilities and stockholders' equity
Consumer products and corporate
Current liabilities
Notes payable to banks $ 167.7 $ 298.9
Commercial paper 300.8 711.3
Accounts payable, accrued expenses
and other liabilities 1,051.4 1,248.5
Accrued excise and other taxes 1,077.6 726.3
Current portion of long-term debt 303.6 172.7
--------- ---------
Total consumer products and
corporate current liabilities 2,901.1 3,157.7
Long-term debt 2,120.5 2,492.4
Deferred income taxes 121.8 124.7
Postretirement and other liabilities 511.3 520.3
--------- ---------
Total consumer products and
corporate liabilities 5,654.7 6,295.1
--------- ---------
Life insurance
Policy reserves and claims 2,723.8 2,553.4
Investment-type contract deposits 2,849.1 2,732.3
Other liabilities 447.3 486.8
--------- ---------
Total life insurance liabilities 6,020.2 5,772.5
--------- ---------
$2.67 Convertible Preferred stock -
redeemable at Company's option 16.0 17.1
--------- ---------
Common stockholders' equity
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 170.6 173.3
Unrealized (depreciation) appreciation
on available-for-sale investments (7.0) 5.3
Foreign currency adjustments (234.6) (317.4)
Retained earnings 4,556.3 4,393.4
Treasury stock, at cost (732.7) (717.7)
--------- ---------
Total Common stockholders' equity 4,470.0 4,254.3
--------- ---------
Total liabilities and
stockholders' equity $16,160.9 $16,339.0
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 1994 and 1993
------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1994 1993
---------- ---------
Revenues
Consumer products $ 9,396.4 $9,120.6
Life insurance 785.3 765.0
--------- --------
10,181.7 9,885.6
--------- --------
Operating expenses
Cost of products sold 2,862.7 2,659.0
Excise taxes on products sold 3,825.1 3,796.5
Insurance benefits 540.1 473.4
Advertising, selling and
administrative expenses
Consumer products 1,738.5 1,722.0
Life insurance 139.3 134.5
Amortization of intangibles 80.9 69.7
Restructuring charges, net - 35.2
--------- --------
9,186.6 8,890.3
--------- --------
Operating income 995.1 995.3
--------- --------
Interest and related charges 177.9 183.8
Corporate administrative expenses 52.7 50.7
Other expenses (income), net 6.4 (5.9)
--------- --------
237.0 228.6
Income before income taxes 758.1 766.7
Income taxes 293.1 283.3
--------- --------
Income before cumulative effect of
accounting changes 465.0 483.4
Cumulative effect of accounting changes
(net of income taxes of $124) - (201.0)
--------- --------
Net income $ 465.0 $ 282.4
========= ========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 1994 and 1993 (Concluded)
------------------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1994 1993
------ ------
Earnings per Common share
Primary
Income before cumulative effect of
accounting changes $2.30 $2.39
Cumulative effect of accounting changes - (.99)
----- -----
Net income $2.30 $1.40
===== =====
Fully diluted
Income before cumulative effect of
accounting changes $2.25 $2.33
Cumulative effect of accounting changes - (.95)
----- -----
Net income $2.25 $1.38
===== =====
Dividends paid per Common share $1.4925 $1.4775
======= =======
Average number of Common shares
outstanding during each period
Primary 201.6 201.8
===== =====
Fully diluted 213.6 213.7
===== =====
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended September 30, 1994 and 1993
--------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1994 1993
---------- ----------
Revenues
Consumer products $3,354.6 $3,046.2
Life insurance 300.9 255.8
-------- --------
3,655.5 3,302.0
-------- --------
Operating expenses
Cost of products sold 974.0 906.8
Excise taxes on products sold 1,456.5 1,319.8
Insurance benefits 220.1 162.8
Advertising, selling and
administrative expenses
Consumer products 589.3 565.3
Life insurance 42.8 45.4
Amortization of intangibles 27.4 23.9
Restructuring charge - 30.0
-------- --------
3,310.1 3,054.0
-------- --------
Operating income 345.4 248.0
-------- --------
Interest and related charges 56.8 60.1
Corporate administrative expenses 24.0 26.5
Other expenses (income), net 1.5 0.8
-------- --------
82.3 87.4
Income before income taxes 263.1 160.6
Income taxes 111.2 75.6
-------- --------
Net income $ 151.9 $ 85.0
======== ========
Earnings per Common share
Primary $.75 $.42
==== ====
Fully diluted $.73 $.42
==== ====
Dividends paid per Common share $.50 $.4925
==== ======
Average number of Common shares
outstanding during each period
Primary 201.3 201.7
===== =====
Fully diluted 213.3 213.5
===== =====
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Nine Months Ended September 30, 1994 and 1993
------------------------------------------------------
(In millions)
(Unaudited) 1994 1993
-------- --------
Operating activities
Net income $ 465.0 $ 282.4
Changes in accounting principles - 201.0
Depreciation and amortization 235.9 219.1
Loss (gain) on dispositions and investments, net 2.1 (76.7)
(Increase) decrease in accounts receivable (57.8) 146.0
Decrease in inventories 334.3 49.8
Decrease in accounts payable, accrued
expenses and other liabilities (172.0) (106.8)
Increase in accrued excise & other taxes 312.3 50.5
Increase in insurance policy and investment-
type contract related liabilities 295.3 227.9
Purchase of trading securities (229.8) -
Proceeds from sale of trading securities 235.6 -
Other operating activities, net 9.1 91.9
-------- --------
Net cash provided from operating activities 1,430.0 1,085.1
-------- --------
Investing activities
Additions to property, plant and equipment (124.9) (157.3)
Acquisition (14.4) (107.2)
Proceeds from sale of operations, net of cash 123.4 -
Purchases of investments (714.4) (1,691.3)
Proceeds from the maturity, call and sale
of investments 462.3 1,308.4
Other investing activities, net 9.2 14.6
-------- --------
Net cash used by investing activities (258.8) (632.8)
-------- --------
Financing activities
Deposits on annuity and other financial products 250.8 294.5
Withdrawals of annuity and other
financial products (254.0) (193.5)
Decrease in short-term debt (558.0) (0.5)
Issuance of long-term debt 34.6 164.9
Repayment of long-term debt (293.9) (391.4)
Dividends to stockholders (302.1) (299.4)
Other financing activities, net (18.7) (63.0)
-------- --------
Net cash used by financing activities (1,141.3) (488.4)
-------- --------
Effect of foreign exchange rate changes on cash 13.8 (9.3)
-------- --------
Net increase (decrease) in total cash and
cash equivalents 43.7 (45.4)
Total cash and cash equivalents at beginning
of period 141.6 140.2
-------- --------
Total cash and cash equivalents at end of period $ 185.3 $ 94.8
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of September 30, 1994,
the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 1994 and 1993
and the related condensed consolidated statement of cash flows for the
nine-month periods ended September 30, 1994 and 1993 are unaudited.
In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such
adjustments consisted only of normal recurring items. Interim results
may not be indicative of results for a full year.
The condensed consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. Balance
sheet accounts are segregated into two categories. Consumer products
and corporate accounts are classified as current or noncurrent,
whereas the life insurance accounts are unclassified, in accordance
with industry practice.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance
sheet was derived from the Company's audited financial statements, but
does not include all disclosures required by generally accepted
accounting principles. This Form 10-Q should be read in conjunction
with the Company's consolidated financial statements and notes
incorporated by reference in its 1993 Annual Report on Form 10-K.
2. Accounting Changes
On December 31, 1993, the Company elected early adoption of FAS
Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," requiring, among other things, that trading
securities purchased with the intent of being sold in the near term be
carried at fair value and the applicable unrealized gains and losses
be recorded in income.
Effective January 1, 1993, the Company adopted FAS Statement No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requiring accrual of the expected costs during the years
that employees render the service that qualifies them for coverage.
Also, effective January 1, 1993, the Company adopted FAS Statement No.
112, "Employers' Accounting for Postemployment Benefits," requiring
accrual of the expected costs of benefits provided to former or
inactive employees after employment but before retirement.
The initial effects of adopting FAS Statements No. 106 and 112 were
recorded as cumulative changes in accounting principles as follows (in
millions, except per share amounts):
- 7 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Accounting Changes (Concluded)
FAS Statements No.
106 112 Total
----- ----- -----
Pretax charges $310.0 $15.0 $325.0
Income taxes 119.0 5.0 124.0
------ ----- ------
Net loss $191.0 $10.0 $201.0
====== ===== ======
Net loss per Common share $.94 $.05 $.99
==== ==== ====
3. Pending Disposition
On April 26, 1994, the Company announced that it entered into an
agreement for the sale of The American Tobacco Company to B.A.T
Industries, PLC for a price of $1 billion, which would be largely tax
free. The proceeds from the sale could be used for share purchases,
debt reduction, strategic acquisitions or other general corporate
purposes. The transaction is subject to conditions, including review
by government antitrust agencies. The Federal Trade Commission is
challenging the sale and is seeking to enjoin it in court.
On April 26, 1994, the Company's subsidiary in the U.K., Gallaher
Limited, agreed to the sale to B.A.T Industries, PLC of its Silk Cut
trademark rights outside of Europe in exchange for a long-term
manufacturing arrangement. This transaction is contingent upon the
completion of the sale of The American Tobacco Company.
American Tobacco's revenues and operating income were as follows
(in millions):
Nine Months Ended Year Ended
September 30, December 31, 1993
------------------ -----------------
1994 1993
------ ------
Revenues $1,207.4 $1,143.1 $1,501.5
======== ======== ========
Operating income $174.2 $158.7 $169.2
====== ====== ======
If the transaction is consummated, the estimated gain, which will
be based on the carrying value of The American Tobacco Company at the
date of closing, will be in the range of $500 million, net of taxes,
or about $2.50 per share.
- 8 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Disposition
On July 12, 1994, Dollond & Aitchison Group PLC, a United Kingdom-
based subsidiary of Gallaher Limited, was sold for a total
consideration of about 94 million pounds ($146 million), which
approximated the carrying value of the company.
5. Acquisitions
During the fourth quarter of 1993, Whyte & Mackay, a subsidiary of
Gallaher Limited, completed its acquisition of Invergordon Distillers
Group PLC by purchasing the remaining 58.7% of the outstanding shares
of Invergordon. In 1991, Whyte & Mackay acquired 41.3% of the
outstanding shares of Invergordon. The aggregate cost of Invergordon
of $599.1 million exceeded the fair value of net assets acquired by
$492.9 million. The financial statements for prior periods were not
restated because the effect was not material. Operations, including
the effect of the application of the equity method to prior periods,
were consolidated from December 1, 1993.
On June 30, 1993, the Benson and Hedges cigarette trademark in
Europe was acquired from B.A.T Industries, PLC in exchange for the
assignment of the Lucky Strike and Pall Mall overseas cigarette
trademarks, and $107.2 million in cash, including expenses, and
contingent future payments based on volumes. Results from the Benson
and Hedges trademark were included in international tobacco from the
date of acquisition. A pretax gain of $25.5 million was recognized in
domestic tobacco as a result of the assignment of the Lucky Strike and
Pall Mall trademarks. Certain of the contingent payments were
guaranteed and, accordingly, their present value was included in the
initial $183 million of intangibles recorded. Any payments in excess
of the guarantees will also be amortized over periods not to exceed 40
years.
6. Inventories
The components of inventories are as follows (in millions):
September 30, December 31,
1994 1993
--------------- ------------
Leaf tobacco $ 446.3 $ 477.7
Bulk whiskey 362.7 359.3
Other raw materials, supplies and work
in process 290.5 306.9
Finished products 603.2 899.3
-------- --------
$1,702.7 $2,043.2
======== ========
- 9 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. The Franklin Life Insurance Company
Summarized income statement data for Franklin (in millions):
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1994 1993 1994 1993
------ ------ ------ ------
Revenues
Premiums $381.9 $329.1 $160.1 $110.6
Net investment income 356.4 347.3 118.3 117.1
Investment gains (losses) (4.3) 51.3 5.6 11.9
Other income 51.3 37.3 16.9 16.2
------ ------ ------ ------
785.3 765.0 300.9 255.8
------ ------ ------ ------
Insurance benefits 540.1 473.4 220.1 162.8
Advertising, selling and
administrative expenses 139.3 134.5 42.8 45.4
Amortization of intangibles and
present value of future profits 9.0 8.4 3.3 2.8
------ ------ ------ ------
688.4 616.3 266.2 211.0
------ ------ ------ ------
Operating income 96.9 148.7 34.7 44.8
Income taxes 37.0 54.5 11.9 18.8
------ ------ ------ ------
Income before cumulative effect
of accounting change 59.9 94.2 22.8 26.0
Cumulative effect of accounting
change (net of income taxes
of $10.9) - (20.6) - -
------ ------ ------ ------
Net income $ 59.9 $ 73.6 $ 22.8 $ 26.0
====== ====== ====== ======
- 10 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. The Franklin Life Insurance Company (Concluded)
Summarized cash flow data for Franklin (in millions):
Nine Months Ended
September 30,
----------------------
1994 1993
------- -------
Net cash provided from operating activities $ 310.0 $ 249.2
------- --------
Investing activities
Additions to property and equipment (3.3) (4.1)
Purchase of investments (714.4) (1,691.3)
Proceeds from sale of investments - 249.0
Proceeds from maturity and call of
investments 462.3 1,059.4
------- --------
Net cash used by investing activities (255.4) (387.0)
------- --------
Financing activities
Dividends to parent (37.8) (34.8)
Deposits on annuity and other
financial products 250.8 294.5
Withdrawals of annuity and other
financial products (254.0) (193.5)
------- --------
Net cash (used) provided by financing
activities (41.0) 66.2
------- --------
Net increase (decrease) in cash and cash
equivalents $ 13.6 $ (71.6)
======= ========
8. Credit Facilities
The Company extended to June 15, 1999 the expiration dates of
revolving credit agreements maintained by the Company with various
banks providing for unsecured committed borrowings of up to $4
billion, including $1 billion in various Eurocurrencies. Other terms
of the agreements remained unchanged.
- 11 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Supplementary Profit and Loss Information
Federal and foreign excise taxes included in consumer products
revenues (in millions):
Nine Months Three Months
Ended September 30, Ended September 30,
------------------ ------------------
1994 1993 1994 1993
------ ------ ------ ------
International tobacco $3,185.0 $3,190.1 $1,235.2 $1,117.1
Domestic tobacco 313.8 263.9 101.1 86.6
Distilled spirits 326.3 342.5 120.2 116.1
-------- -------- -------- --------
$3,825.1 $3,796.5 $1,456.5 $1,319.8
======== ======== ======== ========
Restructuring charges, net, for the nine-month period ended
September 30, 1993 included workforce reduction provisions of $44
million in domestic tobacco and $16.7 million in international
tobacco, partly offset by a $25.5 million gain in domestic tobacco on
the assignment of trademarks. The restructuring charge for the three-
month period ended September 30, 1993 reflected a $30 million
workforce reduction provision in domestic tobacco.
The higher effective income tax rate for the nine-month period
ended September 30, 1994 reflected lower reversals of tax provisions
no longer required. For the three-month period ended September 30,
1994, the lower effective income tax rate reflected last year's higher
taxes relating to foreign operations and the proportionally greater
impact of nondeductible goodwill on reduced income.
10. Earnings Per Share
Earnings per Common share are based on the weighted average number
of Common shares outstanding in each period and after preferred stock
dividend requirements.
Fully diluted earnings per Common share assume that any convertible
debentures and convertible preferred shares outstanding at the
beginning of each period, or at their date of issuance, if later, were
converted at those dates, with related interest, preferred stock
dividend requirements and outstanding Common shares adjusted
accordingly. It also assumes that outstanding Common shares were
increased by shares issuable upon exercise of those stock options for
which market price exceeds exercise price, less shares which could
have been purchased by the Company with related proceeds.
- 12 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
11. Pending Litigation
The American Tobacco Company subsidiary and other tobacco
manufacturers are defendants in various actions based upon allegations
that human ailments have resulted from tobacco use. It is not
possible to predict the outcome of the pending litigation, and
management is unable to make a reasonable estimate of the amount or
range of loss that could result from an unfavorable determination of
the pending litigation. It is possible that an unfavorable
determination could have a material effect on the Company's results of
operations and cash flows in a particular quarterly or annual period
and could encourage the commencement of additional litigation.
Management believes that there are meritorious defenses to the pending
actions and that the pending actions will not have a material adverse
effect upon the financial condition of the Company. These actions are
being vigorously contested.
12. Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify
with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that
the Company's subsidiaries may undertake in the future, in the opinion
of management, compliance with the present environmental protection
laws, before taking into account estimated recoveries from third
parties, will not have a material adverse effect on the Company's
financial condition or results of operations.
- 13 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------
To the Board of Directors of American Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
American Brands, Inc. and Subsidiaries as of September 30, 1994, the
related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 1994 and 1993
and the related condensed consolidated statement of cash flows for the
nine-month periods ended September 30, 1994 and 1993. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1993, and the related consolidated statements of income, cash flows
and Common stockholders' equity for the year then ended (not presented
herein) and in our report dated February 1, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1993, is fairly stated
in all material respects in relation to the consolidated balance sheet
from which it has been derived.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
November 8, 1994
- 14 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- AND RESULTS OF OPERATIONS.
-----------------------------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for Nine Months Ended September 30, 1994 as Compared
to Nine Months Ended September 30, 1993
-----------------------------------------------------------------------
Revenues Operating Income
---------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
(In millions)
Tobacco products
International $ 4,153.8 $4,163.9 $358.6 $343.3
Domestic 1,207.4 1,143.1 174.2 158.7
--------- -------- ------ ------
Total Tobacco 5,361.2 5,307.0 532.8 502.0
--------- -------- ------ ------
Distilled spirits 839.4 808.2 123.7 124.6
Life insurance 785.3 765.0 96.9 148.7
Hardware and home
improvement products 932.3 806.9 130.7 113.5
Office products 725.7 682.4 36.6 31.3
Specialty businesses 1,537.8 1,516.1 74.4 75.2
--------- -------- ------ ------
Total Nontobacco 4,820.5 4,578.6 462.3 493.3
--------- -------- ------ ------
$10,181.7 $9,885.6 $995.1 $995.3
========= ======== ====== ======
CONSOLIDATED
- ------------
Revenues increased 3% while operating income declined slightly. Tobacco
products revenues increased 1%. Domestic tobacco revenues increased 6%,
primarily from volume gains, partly offset by price changes reflecting the
industrywide list price reductions in August 1993. International tobacco
revenues declined slightly, primarily due to volume declines reflecting the
impact of the November 1993 U.K. government budget announcement, partly
offset by higher excise taxes. Record nontobacco revenues increased 5%,
primarily due to new products, the acquisition of Invergordon and price
increases, partly offset by the effects of the sale of the optical group in
July 1994 and volume declines. Tobacco products operating income rose 6%,
primarily from favorable comparisons to last year's $35.2 million
restructuring charges and $29.5 million in domestic tobacco trade inventory
buydown costs. Last year's restructuring charges included $60.7 million
related to tobacco workforce reduction programs, partly offset by a $25.5
million gain on the assignment of domestic tobacco trademarks. Nontobacco
operating income declined 6%, principally reflecting an unfavorable change
in investment gains/losses in life insurance.
- 15 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
The increase in the effective income tax rate to 38.7% from 37% in 1993
reflected lower reversals of tax provisions no longer required.
Net income was $465 million, or $2.30 per Common share, for the nine months
ended September 30, 1994, compared to net income of $282.4 million, or
$1.40 per share, and income before accounting changes of $483.4 million, or
$2.39 per share, last year. Last year included a one-time charge related
to the adoption of FAS Statements No. 106 and 112.
Despite intense competition, international tobacco is expected to achieve
operating income growth for the full year. In distilled spirits, in spite
of widespread competitive conditions creating pressure on pricing and
margins, modest growth in operating income is anticipated for 1994.
Overall for American Brands, last year's results benefited from
extraordinarily high investment gains at Franklin Life of $93 million,
including $41 million in the fourth quarter, compared with a loss of $4
million for the first nine months of 1994. Conversely, last year's net
income included a $198 million charge related to the adoption of FAS
Statements No. 106, 112 and 115. The Company anticipates that earnings per
share excluding these items will increase for the year, though reported
earnings per share before accounting changes may well show a modest
decline.
The American Tobacco Company subsidiary and other tobacco manufacturers are
defendants in various actions based upon allegations that human ailments
have resulted from tobacco use. It is not possible to predict the outcome
of the pending litigation, and management is unable to make a reasonable
estimate of the amount or range of loss that could result from an
unfavorable determination of the pending litigation. It is possible that
an unfavorable determination could have a material effect on the Company's
results of operations and cash flows in a particular quarterly or annual
period and could encourage the commencement of additional litigation.
Management believes that there are meritorious defenses to the pending
actions and that the pending actions will not have a material adverse
effect upon the financial condition of the Company. These actions are
being vigorously contested.
The Company is involved in proceedings concerning the discharge of
materials into the environment and the handling, disposal and clean-up of
waste materials and otherwise relating to the protection of the
environment. As of November 7, 1994 various subsidiaries of the Company
had been designated as potentially responsible parties under "Superfund" or
similar state laws with respect to 41 sites. While it is not possible to
quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance
efforts that the Company's subsidiaries may undertake in the future, in the
opinion of management compliance with the present environmental protection
- 16 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
laws, before taking into account estimated recoveries from third parties,
will not have a material adverse effect on the Company's competitive
position, financial condition or results of operations.
Tobacco Products
- ----------------
Worldwide tobacco revenues increased 1% and operating income increased 6%;
total cigarette units increased 6.2%.
International tobacco revenues in sterling were down 2% on a 14.3% decrease
in U.K. cigarette unit sales, partly offset by price increases principally
resulting from higher U.K. tobacco taxes and a substantial unit increase in
export sales, mainly on increased periodic shipments to the CIS and
increased shipments of Benson and Hedges to Europe. U.K. cigarette
industry volume declined about 10% and the underlying consumer demand is
estimated to have declined in the area of 3.2%. A change in the timing of
the U.K. budget announcement has significantly impacted U.K. cigarette unit
sales. The November 30, 1993 U.K. budget announcement had the effect of
drawing sales into the fourth quarter of 1993 from 1994's first quarter.
Despite this adverse effect, which was partly offset by manufacturers'
price increases in April 1994 and August 1993, Gallaher maintained its
position as the number 1 tobacco company in the U.K. and its 40% estimated
share of consumer sales. Operating income in sterling increased 2%,
primarily on improved gross margins and favorable comparison to last year's
workforce reduction provisions, partly offset by increased marketing costs
on export expansion and increased support for Benson and Hedges Special
Filter and higher administrative costs. Last year's marketing expenses
included significant expenditures associated with the launch in January
1993 of Benson and Hedges Superkings. In dollars, revenues declined
slightly and operating income increased 4% reflecting translation at higher
average exchange rates.
Domestic tobacco revenues increased 6% reflecting increased volume and
favorable comparison to last year's $29.5 million reduction related to a
buydown of trade inventories, partly offset by the effects of the August
1993 list price reductions. American Tobacco's U.S. unit shipments
increased 17.4% while industry shipments increased 8.2%, although these
numbers are distorted by comparisons to last year's disrupted market
conditions. American Tobacco increased its market share for the nine
months to 7.23% from 6.66% last year. For the latest twelve months,
American Tobacco's market share was 7.17%, compared to 6.80% last year.
Unit sales of the more profitable premium brands increased 6.6%, but
continue to lag the industry's performance. The underlying decline in
these brands has been in excess of the overall industry decline in recent
years. The industry's less profitable price-value category, comprising
- 17 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Tobacco Products (Continued)
- ----------------
discount and deep discount brands, accounted for approximately 37% of the
market in 1993 and about 33% for the first nine months of 1994. Price-
value brands accounted for 56% of American Tobacco's U.S. unit sales in
this year's nine months, compared to 52% in 1993's like period. American
Tobacco's price-value brands increased 27.5% as discount and deep discount
brands increased 39.2% and 7.7%, respectively. The discount brand increase
reflected a strong unit performance by Montclair and Misty resulting from
increased marketing support, while the deep discount increase largely
reflected the introduction of Summit in March 1993. Operating income
increased 10% on volume increases, favorable comparison to last year's
$29.5 million in trade inventory buydown costs, favorable effects of
workforce reductions and lower general and administrative expenses, partly
offset by lower prices, a less favorable product mix, an unfavorable
comparison to last year's gain on the assignment of trademarks and higher
marketing expenses.
Domestic tobacco will continue to be consolidated in American Brands'
results pending consummation of the sale of The American Tobacco Company to
B.A.T Industries, PLC. The transaction is subject to conditions, including
review by government antitrust agencies. The Federal Trade Commission is
challenging the sale and is seeking to enjoin it in court.
U.S. federal excise taxes on cigarettes increased four cents per pack on
January 1, 1991 and 1993. The Clinton administration has proposed
increasing the tax on cigarettes from 24 cents to 99 cents per pack.
Legislation has also been introduced in the U.S. Congress that would
increase excise taxes on cigarettes substantially more than the
administration's proposed increase. U.K. tobacco taxes increased by 11
pence and 10 pence per pack in November and March 1993, respectively, the
fourth consecutive year of increases. The likelihood and effects of any
future tax increases cannot be determined but would likely add to the
overall industry declines and the shift to lower priced brands.
Congressional hearings have been held to determine the appropriateness of
FDA regulation of cigarettes due to nicotine content, and extensive
publicity has occurred relative to cigarette ingredients. The industry has
released lists of cigarette ingredients.
A Florida statute, which took effect July 1, 1994, would permit the state
to sue manufacturers to recover Medicaid costs for individuals claiming
product-related illnesses. In such actions, the state would be permitted
to rely upon evidence showing injury to be statistically associated with
that product. The state would not have to prove that the Medicaid
recipient used the particular manufacturer's product; rather, the
legislation would impose liability on the basis of a manufacturer's "market
share." Manufacturers would be precluded from asserting various defenses
- 18 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Tobacco Products (Concluded)
- ----------------
against liability. While the statute does not mention the tobacco industry
by name, supporters of the legislation were reported as saying that
tobacco manufacturers were the target of the legislation. On July 10,
1994, the governor of Massachusetts signed legislation authorizing the
state's attorney general to sue cigarette manufacturers to recover medical
assistance payments made by the state to individuals for which the
cigarette manufacturers may be liable. Other states are considering
legislation authorizing the recovery of medical assistance that they have
provided as well as considering the commencement of actions seeking such
recovery. It is not possible to predict the impact of such legislation or
actions on American Tobacco or the industry.
Distilled Spirits
- -----------------
Worldwide revenues increased 4%, while operating income declined 1%.
Beam's revenues were down 4%, principally on lower domestic volume.
Estimated depletions of Beam's major brands from distributors to retailers
declined 2.5% in the U.S., in line with industry trends. Beam's
international revenues increased 21%. Total branded case sales were down
3.1% reflecting a 7.4% decline in domestic branded case sales tempered by a
17.1% increase in international branded case sales. Operating income
increased 1% as a result of lower media advertising and increased
international shipments at higher margins, largely offset by the reduced
domestic volume and higher international selling costs related to market
development.
Whyte & Mackay's revenues in sterling increased 37% on the inclusion of
Invergordon, consolidated beginning December 1, 1993. Total unit volume
was up 125.6%. Excluding Invergordon, U.K. and total volume declined 16.7%
and 10.6%, respectively, reflecting a more competitive environment.
Operating income in sterling declined 27% as last year included a dividend
from Invergordon. Excluding the dividend, operating income in sterling was
up 45% on the inclusion of Invergordon.
Life Insurance
- --------------
Revenues increased 3% reflecting higher premiums and net investment income,
partly offset by an unfavorable change in investment gains/losses. The
increase in premiums reflected the acquisition by assumption reinsurance of
a large block of business in the third quarter of 1994, principally
ordinary life policies. The $55.6 million unfavorable change in investment
gains/losses reflected substantially lower gains from high coupon bond
- 19 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Life Insurance (Concluded)
- --------------
redemptions and an unfavorable change in gains/losses from equity
securities (including the favorable effects from adoption of FAS Statement
No. 115). Although investment gains/losses and redemptions are dependent
on market conditions and cannot be predicted, bond redemption gain
comparisons are likely to be unfavorable for the remainder of the year.
FAS Statement No. 115, which requires inclusion of market fluctuations on
the trading portfolio in income, may continue to add increased volatility
to future results. Operating income declined 35%, principally reflecting
the unfavorable change in investment gains/losses. Excluding the
investment gains/losses, operating income increased 4% on higher revenues,
lower dividends to policyholders and benefit from the reversal of an
accounting reserve related to a disposed operation, partly offset by higher
policy reserves and expenses related to a reengineering project.
Hardware and Home Improvement Products
- --------------------------------------
Record revenues increased 16% on new products, volume gains and price
increases. All four companies achieved record revenues. The major
contributors with substantial increases were Moen, up on volume gains,
price increases and favorable product mix, Aristokraft, up on price and
volume increases including new products, and Waterloo, up on higher volume.
Master Lock was up on increased volume. Record operating income was up 15%
on revenue gains, partly offset by higher raw material costs at Aristokraft
and higher marketing and other operating expenses at Moen.
Office Products
- ---------------
Record revenues increased 6% on benefits from new products and volume
gains. ACCO continued to achieve share increases in the fast-growing
retail channels and is well positioned for further growth. Operating
income increased 17% principally on volume gains and improved operating
margins.
- 20 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Specialty Businesses
- --------------------
Specialty businesses revenues were as follows (in millions):
Nine Months Ended
September 30,
-------------------
1994 1993
------- ------
Golf products $ 417.5 $ 375.9
Optical goods and services 206.3 278.1
Retail distribution 918.9 967.4
Housewares 60.7 67.7
Rubber products 43.2 40.5
Other 5.0 5.1
-------- --------
1,651.6 1,734.7
Less intersegment elimination 113.8 218.6
-------- --------
$1,537.8 $1,516.1
======== ========
Revenues increased 1% and operating income decreased 1%.
Record golf products revenues and operating income were up 11% and 14%,
respectively. The increases primarily resulted from new golf ball products
and strong volume gains in shoes and gloves. Operating income was also
impacted by increased marketing and other operating expenses.
In sterling, operating income from foreign businesses declined 68%.
Excluding optical, which was sold on July 12, 1994, operating income
declined 1.5 million pounds, principally in retail distribution on volume
declines, partly offset by price increases and lower marketing and
administrative expenses. In dollars, the operating income percent change
approximated the sterling result.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from operating activities of $1.4 billion for the period
ended September 30, 1994 increased $344.9 million and exceeded the funds
required for capital expenditures and dividends by $1 billion. The
increase was largely attributable to the shift in international tobacco's
sales pattern resulting from the timing of the U.K. budget announcements in
1993. The shift in sales pattern impacted accounts receivable, accrued
excise taxes and inventories.
- 21 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (Concluded)
- -------------------------------
Net cash used by investing activities for the period ended September 30,
1994 was $258.8 million compared with $632.8 million in 1993, principally
reflecting lower insurance investment activity, proceeds from the sale of
optical, and lower acquisition activity.
In addition, the adoption of FAS Statement No. 115 has affected both the
operating and investing activities by classifying the transactions relating
to trading securities as operating activities, whereas prior to 1994 these
transactions were classified as investing activities.
Net cash used by financing activities for the period ended September 30,
1994 was $1.1 billion compared to $488.4 million in 1993, reflecting higher
repayments.
Total debt at September 30, 1994 aggregated $2.9 billion, a decrease of
$782.7 million from December 31, 1993 principally due to the timing of
international tobacco's receipts related to the November 1993 U.K. pre-
budget buy-in. The ratio of total debt to total capital decreased from
46.2% at December 31, 1993 to 39.2% at September 30, 1994, although the
year end ratio may be higher as a result of the November 29, 1994 U.K.
budget announcement.
The Company extended to June 15, 1999 the expiration dates of revolving
credit agreements maintained by the Company with various banks providing
for unsecured committed borrowings of up to $4 billion, including $1
billion in various Eurocurrencies. Other terms of the agreements remained
unchanged.
The Company believes that its internally generated funds, together with its
access to global credit markets, are more than adequate to meet its capital
needs.
Proceeds from the sale of The American Tobacco Company, if consummated,
could be used for share purchases, debt reduction, strategic acquisitions
or other general corporate purposes. For further information regarding the
pending sale of American Tobacco, see note 3, Notes to Condensed
Consolidated Financial Statements.
- 22 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------------------
Results of Operations for Three Months Ended September 30, 1994 as Compared
to Three Months Ended September 30, 1993
- --------------------------------------------------------------------------
Revenues Operating Income
---------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
(In millions)
Tobacco products
International $1,608.1 $1,459.2 $140.6 $133.6
Domestic 425.3 316.2 48.6 (34.5)
-------- -------- ------ ------
Total Tobacco 2,033.4 1,775.4 189.2 99.1
-------- -------- ------ ------
Distilled spirits 305.9 272.3 48.8 38.7
Life insurance 300.9 255.8 34.7 44.8
Hardware and home
improvement products 334.0 288.3 44.5 37.2
Office products 260.1 237.5 15.0 12.0
Specialty businesses 421.2 472.7 13.2 16.2
-------- -------- ------ ------
Total Nontobacco 1,622.1 1,526.6 156.2 148.9
-------- -------- ------ ------
$3,655.5 $3,302.0 $345.4 $248.0
======== ======== ====== ======
CONSOLIDATED
- ------------
Revenues and operating income increased 11% and 39%, respectively. Tobacco
products revenues increased 15%. International tobacco revenues rose 10%,
principally due to an increase in excise taxes and favorable foreign
exchange. Domestic tobacco revenues rose 35%, primarily from volume gains
and a favorable comparison to last year's $29.5 million reduction related
to a buydown of trade inventories. Nontobacco revenues increased 6%,
primarily from higher life insurance revenues, new products, the
acquisition of Invergordon and price increases, partly offset by the
effects of the sale of optical. Tobacco products operating income rose
91%, principally domestic tobacco reflecting favorable comparisons to last
year's $30 million restructuring charge and $29.5 million in trade
inventory buydown costs as well as this year's volume gains. Nontobacco
operating income increased 5%, principally from volume gains in hardware
and home improvement products and distilled spirits as well as lower
marketing expenses in distilled spirits, partly offset by lower investment
gains in life insurance and the absence of optical operations.
- 23 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
The decrease in the effective income tax rate to 42.3% from the 47.1% in
1993 reflected last year's higher taxes relating to foreign operations and
the proportionally greater impact of nondeductible goodwill on reduced
income.
Net income of $151.9 million, or 75 cents per Common share, was up 79%.
Tobacco Products
- ----------------
Worldwide tobacco revenues and operating income increased 15% and 91%,
respectively; total cigarette units increased 10.2%.
International tobacco revenues in sterling were up 7% on price increases
principally resulting from higher U.K. tobacco taxes and manufacturers'
price increases in April 1994 and August 1993, partly offset by a 2.6% U.K.
cigarette unit decline. Revenues also increased as a result of a 13.8%
unit increase in export sales, mainly on increased periodic shipments to
the CIS and increased shipments of Benson and Hedges to Europe. U.K.
cigarette industry volume was substantially unchanged from last year's
third quarter. Operating income in sterling increased 2% on higher
revenues, partly offset by higher marketing and administrative costs. In
dollars, revenues increased 10% and operating income increased 5%
reflecting translation at higher average exchange rates.
Domestic tobacco revenues increased 35% on increased volume and higher
prices, principally the favorable comparison to last year's $29.5 million
reduction related to a buydown of trade inventories. American Tobacco's
U.S. unit shipments increased 23.9% and industry shipments increased 5.3%,
although these numbers are distorted by comparisons to last year's
disrupted market conditions. American Tobacco's market share for the third
quarter increased to 7.38% from 6.27% in last year's third quarter. Unit
sales of the more profitable premium brands increased 9.8% in the quarter.
However, the underlying decline in these brands has been in excess of the
overall industry decline in recent years. The industry's less profitable
price-value category, comprising discount and deep discount brands,
accounted for about 32% of the market during the third quarter of 1994.
Price-value brands accounted for 57% of American Tobacco's U.S. unit sales
in the third quarter, compared to 52% in last year's third quarter.
American Tobacco's price-value brands increased 36.9% as discount and deep
discount brands increased 53% and 9.9%, respectively. The discount brand
increase reflected a strong unit performance by Montclair and Misty
resulting from increased marketing support. The deep discount increase
reflected higher unit sales of all brands. Operating income of $48.6
million in 1994 compared to a loss of $34.5 million in last year's third
quarter. The change principally reflected the favorable comparisons to
- 24 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Tobacco Products (Concluded)
- ----------------
last year's $30 million restructuring provision for a voluntary early
retirement program and $29.5 million in trade inventory buydown costs as
well as this year's volume increases, partly offset by increased marketing
expenses to meet intense competitive activity.
Distilled Spirits
- -----------------
Worldwide revenues and operating income increased 12% and 26%,
respectively.
Beam's revenues were up 7%, primarily on a domestic volume increase.
Changes in trade practices at Beam in the first quarter created volatility
in quarter-to-quarter comparisons, resulting in Beam's third quarter
results not being trend indicative. Total branded case sales were up 6.8%.
Operating income increased 28% on higher revenues combined with lower
advertising expenses.
Whyte & Mackay's revenues in sterling increased 32% on the inclusion of
Invergordon, consolidated beginning December 1, 1993. Total unit volume
was up 123.3%. Excluding Invergordon, U.K. and total volume declined 17.7%
and 10.6%, respectively, reflecting intense competitive promotional and
pricing activity. Operating income in sterling increased 33% on higher
volume reflecting the inclusion of Invergordon.
Life Insurance
- --------------
Revenues increased 18% reflecting higher premiums partly offset by lower
investment gains. Premiums increased 45% reflecting the acquisition by
assumption reinsurance of a large block of business, principally ordinary
life policies. Investment gains decreased $6.3 million reflecting
substantially lower gains from high coupon bond redemptions, partly offset
by higher gains from equity securities on benefits resulting from the
adoption of FAS Statement No. 115. Operating income declined 23%
principally reflecting the lower investment gains. Excluding investment
gains, operating income declined 11% reflecting higher expenses related to
a reengineering project and higher insurance benefits (including higher
death benefits), partly offset by higher revenues which included the
reversal of an accounting reserve related to a disposed operation.
- 25 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
----------------------------------------------------------
Hardware and Home Improvement Products
- --------------------------------------
Record revenues increased 16% on volume gains, new products and price
increases. All four companies in the group achieved record revenues. The
major contributors with substantial increases were Moen, up on new
products, volume and price increases and favorable product mix, and
Waterloo, up on higher volume and new products. Operating income was up
20% on higher revenues, partly offset by higher marketing and other
operating expenses at Moen.
Office Products
- ---------------
Record revenues were up 10% on new products and volume gains, and a
favorable foreign exchange effect. All principal operating groups reported
higher revenues. ACCO continued to achieve share increases in the fast-
growing retail channels. Operating income was up 25% mainly on volume
gains and the benefits from ongoing cost reductions, partly offset by
higher operating expenses in North America to improve customer service
levels and expand channels of distribution.
Specialty Businesses
- --------------------
Specialty businesses revenues were as follows (in millions):
Three Months Ended
September 30,
-------------------
1994 1993
------- ------
Golf products $116.1 $106.6
Optical goods and services 28.4 89.1
Retail distribution 268.5 313.6
Housewares 19.7 19.5
Rubber products 14.4 12.9
Other 2.0 1.5
------- -------
449.1 543.2
Less intersegment elimination 27.9 70.5
------- -------
$421.2 $472.7
======= =======
Revenues decreased 11% and operating income decreased 19%.
Record golf products revenues and operating income were up 9% and 13%,
respectively. The increases primarily resulted from benefits of new golf
ball products and strong volume gains in shoes and gloves, partly offset by
increased marketing and other operating expenses.
- 26 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
Specialty Businesses (Concluded)
- --------------------
In sterling, operating income from foreign businesses declined 2.8 million
pounds. Excluding optical, which was sold July 12, 1994, operating income
in sterling was down 45%, principally in retail distribution on volume
declines, partly offset by price increases and lower marketing and
administrative expenses. In dollars, the operating income percent change
approximated the sterling result.
- 27 -
<PAGE>
PART I - EXHIBIT A
------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Nine Months Ended
September 30,
----------------------
1994 1993
------ ------
Income before cumulative effect of
accounting changes $465.0 $483.4
Preferred stock dividend requirements (1.1) (1.2)
------ ------
Income available before accounting changes for
computing earnings per Common share - primary 463.9 482.2
Cumulative effect of accounting changes - (201.0)
------ ------
Net income for computing earnings
per Common share - primary $463.9 $281.2
====== ======
Income available before accounting changes for
computing earnings per Common share - primary $463.9 $482.2
Convertible preferred stock dividend requirements 1.1 1.2
Interest expense and related charges on
convertible debentures 16.1 16.0
------ ------
Income available before accounting changes for
computing earnings per Common share -
fully diluted 481.1 499.4
Cumulative effect of accounting changes - (201.0)
------ ------
Net income for computing earnings per Common
share - fully diluted $481.1 $298.4
====== ======
- 28 -
<PAGE>
PART I - EXHIBIT A (Continued)
------------------
Computation of Weighted Average Number of
Common Shares Outstanding on a Fully Diluted Basis (Unaudited)
--------------------------------------------------------------
(In millions, except per share amounts)
Nine Months Ended
September 30,
----------------------
1994 1993
------ ------
Weighted average number of Common shares
outstanding during each period - primary 201.6 201.8
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 2.1 2.3
Addition from assumed conversion of
convertible debentures 9.3 9.3
Other additions 0.6 0.3
----- -----
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 213.6 213.7
===== =====
Earnings per Common share
Primary
Income before cumulative effect of
accounting changes $2.30 $2.39
Cumulative effect of accounting changes - (.99)
----- -----
Net income $2.30 $1.40
===== =====
Fully diluted
Income before cumulative effect of
accounting changes $2.25 $2.33
Cumulative effect of accounting changes - (.95)
----- -----
Net income $2.25 $1.38
===== =====
- 29 -
<PAGE>
PART I - EXHIBIT A (Concluded)
------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Three Months Ended
September 30,
----------------------
1994 1993
------ ------
Net income $151.9 $85.0
Preferred stock dividend requirements (0.4) (0.4)
------ -----
Net income for computing earnings
per Common share - primary 151.5 84.6
Convertible preferred stock dividend requirements 0.4 0.4
Interest expense and related charges on
convertible debentures 5.4 5.1
------ -----
Net income for computing earnings per Common
share - fully diluted $157.3 $90.1
====== =====
Computation of Weighted Average Number of
Common Shares Outstanding on a Fully Diluted Basis (Unaudited)
----------------------------------------------------------------
(In millions, except per share amounts)
Weighted average number of Common shares
outstanding during each period - primary 201.3 201.7
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 2.1 2.3
Addition from assumed conversion of
convertible debentures 9.3 9.3
Other additions 0.6 0.2
----- -----
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 213.3 213.5
===== =====
Earnings per Common share
Primary $.75 $.42
==== ====
Fully diluted $.73 $.42
==== ====
- 30 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- ------ -----------------
(a) (i) The American Tobacco Company ("ATCO") and other leading
tobacco manufacturers have been sued by parties seeking damages for cancer
and other ailments claimed to have resulted from tobacco use and by certain
asbestos manufacturers seeking unspecified amounts in indemnity or
contribution in third-party actions against all or most of the major
domestic tobacco manufacturers. At November 7, 1994, ATCO or ATCO's
predecessor had disposed of 239 actions, and the industry a total of 434,
all without recovery by the plaintiffs or by the third-party plaintiffs.
Although there was a jury award which was overturned on appeal against
another tobacco manufacturer in the Cipollone case, discussed below, there
has been no actual recovery of damages to date in any such action against
the tobacco manufacturers; however, unfavorable decisions in other cases
could increase filing of additional actions against the tobacco
manufacturers, which would add to the high cost of defending such
litigation as well as increase the defendants' damage exposure. It has
been reported that certain groups of attorneys are interested in promoting
product liability and other types of tobacco and health suits against the
tobacco manufacturers.
Eighteen cases have come to trial, all against manufacturers as
direct defendants. Sixteen of such cases resulted in judgments for the
defendant or defendants. At November 7, 1994, ATCO was a defendant in 45
pending cases. In two cases, ATCO has been joined as a defendant with
members of the asbestos industry and it is alleged that the combination of
smoking and exposure to asbestos produced injury and death. In one case in
which ATCO is a defendant, Butler, et al. v. R.J. Reynolds Tobacco Co., et
al. (described under paragraph (a)(i) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993), plaintiffs are seeking damages for alleged injuries claimed to
have resulted from exposure to tobacco smoking of others. Plaintiffs have
filed a motion to dismiss this action and have filed a wrongful death
action asserting many of the same claims in the Circuit Court of Jones
County, Mississippi. In Wilkes, et al. v. The American Tobacco Company, et
al. (described under paragraph (a)(i) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993), the jury found in favor of the defendants on June 17, 1993.
Plaintiffs have appealed from the judgment entered on the jury verdict and
from the trial court's denial of their request to seek "lifetime damages"
unrelated to the cause of death and their request to seek punitive damages.
ATCO has cross-appealed from the trial court's pretrial ruling regarding
"absolute liability" and the court's ruling striking defendants'
affirmative defenses. In Horton, et al. v. The American Tobacco Company,
et al. (described under paragraph (a)(i) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993), on September 24, 1990, the jury found "for the plaintiffs
against [T]he American Tobacco Company and against New Deal Tobacco and
Candy Company, Inc. and assess[ed] actual damages at $0." Plaintiffs have
appealed from the judgment entered on the jury verdict and from the court's
denial of their post-trial motion for, alternatively, an additur on
damages, a new trial on the issue of damages or a new trial on all issues.
ATCO has cross-appealed from the judgment and from the court's order
- 31 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- ------ -----------------
denying its motion for judgment notwithstanding the verdict. Oral argument
on the appeals took place before the Mississippi Supreme Court on August
17, 1993.
In Broin, et al. v. Philip Morris Companies Inc., et al.
(described under paragraph (a)(i) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993), certain airline flight attendants are seeking unspecified
compensatory and $5 billion punitive damages for alleged injuries claimed
to have resulted from exposure to tobacco smoking of others and are seeking
to establish class-action status on behalf of other alleged nonsmoking
flight attendants. It has also been reported that other claims against the
tobacco manufacturers may be made seeking damages for alleged injuries
claimed to have resulted from exposure to tobacco smoking of others.
Additional purported "class actions" have been filed against ATCO
and other leading tobacco manufacturers. In Castano, et al. v. The
American Tobacco Company, et al. (described in Part II, Item 1(a)(i) of
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1994), plaintiffs have asserted an alleged class action claiming
that defendants caused members of the purported class to become "addicted"
to cigarettes through manipulation of nicotine levels. The alleged class
consists of all residents or domiciliaries of the United States who claim
to be "addicted" to cigarettes, as well as survivors who claim that their
decedents were injured by their "addiction" to tobacco products.
Plaintiffs seek equitable relief as well as compensatory and punitive
damages. In Allman, et al. v. The American Tobacco Company, et al.
(described in Part II, Item 1(a)(i) of Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1994), plaintiffs
asserted an alleged class action under the Racketeer Influenced and Corrupt
Organizations Act on behalf of all persons in the United States who have
become "addicted" to defendants' cigarette products and who have or who
will in the future be prescribed a "nicotine patch" to help them break
their purported "addiction." Plaintiffs sought treble compensatory damages
for amounts expended for "nicotine patches and associated medical
services," as well as unspecified injunctive relief. On September 21,
1994, the court dismissed the Allman case. Plaintiffs have filed a notice
of appeal. In Engle, et al. v. RJ Reynolds Tobacco Company, et al.
(described in Part II, Item 1(a)(i) of Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1994), plaintiffs claim
to represent all United States citizens and residents, as well as their
survivors, who have suffered or died from diseases allegedly caused by
smoking cigarettes containing nicotine. Plaintiffs seek compensatory
damages in excess of $100 billion as well as punitive damages in excess of
$100 billion. Plaintiffs additionally seek equitable relief, including the
establishment of a medical fund for future healthcare costs. On
October 28, 1994, the court in Engle granted plaintiffs' motion for class
certification. It has been reported in the press that a purported class
action was filed in June 1994 in the United States District Court for the
Southern District of California.
In Moore v. The American Tobacco Company, et al. (described in
Part II, Item 1(a)(i) of Registrant's Quarterly Report on Form 10-Q for the
- 32 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- ------ -----------------
quarterly period ended June 30, 1994), the Attorney General of the State of
Mississippi has filed an equitable action which, inter alia, seeks
restitution from tobacco companies of expenditures by the state for the
medical care provided to Mississippi citizens for alleged "tobacco-related
diseases." In State of Minnesota, et al. v. Philip Morris, Inc., et al.,
described below, the Attorney General of the State of Minnesota seeks
monetary damages and injunctive relief for claimed violations by the
defendants of various state laws and state antitrust law. In McGraw v. The
American Tobacco Company, et al., described below, the Attorney General of
the State of West Virginia has filed a lawsuit seeking to recover from the
tobacco companies and other defendants monies the state spends on claimed
tobacco-related health care costs. It has been reported that other states
are considering filing similar lawsuits.
ATCO's counsel, Chadbourne & Parke, have advised that, in their
opinion, the specified damages claimed in pending actions against ATCO,
which approximate $206,606,095,000 in the aggregate, are exaggerated.
In Cordova v. Liggett Group Inc., et al. (described under
paragraph (a)(i) of Item 3, "Legal Proceedings", of Registrant's Annual
Report on form 10-K for the fiscal year ended December 31, 1993),
plaintiffs are seeking injunctive relief and restitution on behalf of the
general public of the State of California for defendants' claimed failure
to disclose to the public information regarding research relating to
smoking and health sponsored by The Council for Tobacco Research, an
organization whose members include ATCO and other cigarette manufacturers.
Plaintiff's complaint in Cordova references the opinion filed February 6,
1992 by Judge Sarokin of the United States District Court for the District
of New Jersey in the case of Haines v. Liggett Group Inc., et al., to which
ATCO is not a party. In that opinion, Judge Sarokin ruled that plaintiff
had made sufficient showing of evidence to warrant disclosure under the
crime-fraud exception to the attorney-client privilege of documents
regarding research relating to smoking and health sponsored by The Council
for Tobacco Research which the defendants in that case had claimed were
protected from discovery by plaintiff. Defendants in Haines sought
appellate review of Judge Sarokin's February 6, 1992 opinion. On September
4, 1992, the United States Court of Appeals for the Third Circuit granted
defendant's petition for writ of mandamus and directed that Judge Sarokin's
February 6, 1992 ruling be vacated and that the case be remanded and
assigned to another District Court judge. The opinion of the Court of
Appeals also stated that the District Court judge to whom the case is
reassigned on remand may reconsider the magistrate judge's order stating
that the crime-fraud exception did not apply, which order had been reversed
by Judge Sarokin's ruling, or alternatively may remand the proceedings to
the magistrate judge for his reconsideration. On September 14, 1992, Judge
Sarokin, as directed, vacated his February 6, 1992 opinion and orders in
Haines. Plaintiff's allegations in Haines may be similar to allegations
which have been made in other actions in which ATCO is a defendant. ATCO
has been advised that the United States Attorney for the Eastern District
of New York has commenced a criminal investigation in connection with
activities relating to The Council for Tobacco Research following the
February 6, 1992 opinion in Haines. It is not possible to predict the
outcome of the investigation.
- 33 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- ------ -----------------
Another case, Cipollone v. Liggett Group, Inc., et al., tried
against manufacturers other than ATCO, resulted in a jury award of $400,000
against one of three defendants on a theory of breach of warranty. On
January 5, 1990, the jury award in Cipollone was reversed and remanded for
a new trial by the United States Court of Appeals for the Third Circuit.
Plaintiff petitioned the United States Supreme Court to review that ruling.
As described below, on June 24, 1992, the Supreme Court reversed in part
and affirmed in part the ruling of the Court of Appeals. The Cipollone
case was tried before Judge Sarokin. On September 11, 1992, following the
September 4, 1992 decision of the United States Court of Appeals for the
Third Circuit in Haines discussed above, Judge Sarokin removed himself from
the Cipollone case. On November 5, 1992, plaintiff voluntarily dismissed
the Cipollone case with prejudice. Counsel for plaintiff in Cipollone,
Mark Edell and the Budd, Larner law firm, also represented the plaintiffs
in Smith, et al. v. R.J. Reynolds Tobacco Co., et al. (described under
paragraph (a)(i) of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993) and the plaintiff in Haines. On December 2,
1992, plaintiffs' counsel in Smith filed a motion to withdraw as counsel of
record; that motion was granted on January 8, 1993. Plaintiffs appealed
the ruling. On August 9, 1993, the Appellate Division of the New Jersey
Superior Court vacated the lower court's ruling which had permitted
plaintiffs' counsel to withdraw. The appellate court directed that the
trial court convene a hearing on plaintiffs' counsel's motion to withdraw.
Plaintiff's counsel in Haines also sought to withdraw and be substituted by
new counsel. The motion to withdraw in Haines, however, was denied by
United States District Judge Lechner on January 26, 1993. On October 6,
1994, the court granted a motion filed by the law firm of Ness, Motley to
substitute it as plaintiff's counsel. That ruling terminated the
involvement of Mark Edell and the Budd, Larner law firm in the Haines case.
On June 24, 1992, the Supreme Court reversed in part and affirmed
in part the ruling of the Court of Appeals for the Third Circuit in
Cipollone. The Supreme Court held that the 1965 version of the Labeling
Act did not preempt lawsuits seeking money damages for personal injuries
allegedly caused by cigarette smoking. The Supreme Court further held that
the Public Health Cigarette Smoking Act of 1969, which, among other things,
amended the preemption provision of the 1965 version of the Labeling Act
effective July 1, 1969, preempts such lawsuits based on alleged failure to
warn and the neutralization of the federally mandated warnings to the
extent that those claims rely on omissions or inclusions in cigarette
advertising or promotions, but that the 1969 version of the Labeling Act
does not preempt claims based on alleged breach of express warranty, or
certain claims based on intentional fraud and misrepresentation or
conspiracy.
In addition, legislation has been introduced in the United States
Congress that if enacted would limit the effect of the preemption
provisions of the Labeling Act. It is not possible to predict whether or
not the Supreme Court's decision in Cipollone will affect, or whether or
not the enactment of any such legislation would affect, filing of
additional actions against tobacco manufacturers and, as a result,
litigation costs and defendant's damage exposure.
- 34 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- ------ -----------------
ATCO has received civil investigative demands from the U.S.
Department of Justice, Antitrust Division, seeking the production of
documents and testimony relating to matters including "fire-safe or self-
extinguishing cigarettes". The civil investigative demands state that they
have been issued in the course of an investigation to determine whether
there is or has been a violation of Section 1 of the Sherman Act. It is
not possible to predict the outcome of the investigation.
While it is not possible to predict the outcome of pending
litigation, management of Registrant does not believe that, based on
failure of recovery to date except as noted above and the advice of
counsel, the pending litigation will have a material adverse effect on
Registrant's financial condition. If, however, there were to be a
significant increase in such litigation, the increased financial burden
could be material. See note 11, "Pending Litigation" in the Notes to
Condensed Consolidated Financial Statements set forth in Part I, Item 1 of
this Quarterly Report on Form 10-Q, which note is incorporated herein by
reference.
ATCO's counsel have advised that, in their opinion, on the basis
of their investigations generally with respect to suits and claims of this
character, ATCO has meritorious defenses to the above-mentioned actions and
threatened actions. The actions will be vigorously defended on the merits.
With regard to proceedings of the above-described type terminated
since July 1, 1994, one case has been dismissed in addition to those whose
termination was previously reported in Part II, Item 1(a) of Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994:
Jensen v. American Brands, Inc., which was previously pending in the United
States District Court for the Eastern District of Michigan and instituted
on June 9, 1994, was dismissed without prejudice on August 15, 1994.
With regard to proceedings of the above-described type initiated
since July 1, 1994, eleven new cases have been filed in addition to those
whose initiation was previously reported in Part II, Item 1(a) of
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1994: State of Minnesota, et al. v. Philip Morris, Inc., et al.,
District Court of Ramsey County, State of Minnesota, August 17, 1994; Eric
J. Koenigshofer v. R.J. Reynolds Tobacco Co., et al., Municipal Court of
California, Small Claims Division, County of Riverside, August 19, 1994;
George Allen Koenigshofer, Jr. v. R.J. Reynolds Tobacco Co., et al.,
Municipal Court of California, Small Claims Division, County of Riverside,
August 19, 1994; George Andrew Koenigshofer v. R.J. Reynolds Tobacco Co.,
et al., Municipal Court of California, Small Claims Division, County of
Riverside, August 19, 1994; John E. Koenigshofer v. R.J. Reynolds Tobacco
Co., et al., Municipal Court of California, Small Claims Division, County
of Riverside, August 19, 1994; Kenneth A. Koenigshofer v. R.J. Reynolds
Tobacco Co., et al., Municipal Court of California, Small Claims Division,
County of Riverside, August 19, 1994; Melinda Hipp-Koenigshofer v. R.J.
Reynolds Tobacco Co., et al., Municipal Court of California, Small Claims
Division, County of Riverside, August 19, 1994; Paul J. Koenigshofer v.
R.J. Reynolds Tobacco Co., et al., Municipal Court of California, Small
- 35 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- ------ -----------------
Claims Division, County of Riverside, August 19, 1994; Hinkson v. J.D.
Swenson, Jr., et al., United States District Court for the Middle District
of Pennsylvania, August 26, 1994; Granier v. The American Tobacco Company,
et al., United States District Court for the Eastern District of Louisiana,
September 22, 1994; and McGraw v. The American Tobacco Company, et al.,
Circuit Court of Kanawha County, State of West Virginia, November 1, 1994.
(ii) Reference is made to the discussions of Dean v. Gallaher
Limited in paragraph (a)(ii) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993, in Part II, Item 1(a)(i) of Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1994 and in Part II, Item
1(a)(i) of Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1994. The appeal from the order refusing the "strike
out" applications of Gallaher and Hergall (1981) Limited (In Liquidation)
("Hergall"), a predecessor to Gallaher, is currently set for hearing on
November 28, 1994. Defendants' defenses in this case will not be due until
after final determination of such appeal. An application for Judicial
Review of the refusal to grant to approximately 225 prospective plaintiffs
Legal Aid to prepare and file smoking and health lawsuits against tobacco
manufacturers, including Gallaher, was heard by Mr. Justice Popplewell on
June 20, 1994. He ruled that the Legal Aid Board had committed procedural
error by applying inconsistent procedural standards in refusing applicants'
requests for legal aid, and remanded the applications to another Legal Aid
Board Area Committee, where the matter is currently being briefed, for
reconsideration. Reference is made to the discussion of Brennan v.
Gallaher Limited in paragraph (a)(ii) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993 and Part II, Item 1(a)(i) of Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1994. Plaintiff in Brennan
served a Summons on or about March 23, 1994, which is set for hearing on
November 30, 1994, seeking leave to substitute Hergall for Gallaher as the
defendant in this action. Gallaher has received a letter before action
dated October 11, 1994 from a solicitor in Scotland stating that a client,
Edward Havelin, has instructed him to make a claim against Gallaher for
Buerger's disease claimed to have been caused by smoking. No formal claim
has been received.
(b) Reference is made to the discussions of People of the State
of California ex rel. Daniel E. Lungren, Attorney General of the State of
California v. American Standard, et al., and the related action, Natural
Resources Defense Council, et al. v. Price Pfister, Inc., et al., in
paragraph (d) of Item 3, "Legal Proceedings", of Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993, in Part II, Item
1(b) of Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994 and in Part II, Item 1(b) of Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1994. The
plaintiffs in both actions moved for injunctive relief to require certain
of the defendants to provide prescribed warnings. In Natural Resources
Defense Council, the court refused to issue any order regarding the motion
pending resolution of defendants' demurrer challenging plaintiffs' standing
to bring the action, which demurrer was filed on April 16, 1993. By order
dated May 10, 1994, the court ruled that the plaintiffs, the Natural
- 36 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (concluded)
- ------ -----------------
Resources Defense Council and the Environmental Law Foundation, have
standing to sue with respect to non-residential faucets only, and also
ruled that the plaintiffs are not entitled to restitution, compensatory
damages or punitive damages. Defendants' motion to dismiss or stay this
case, filed on September 29, 1994, was denied on October 21, 1994. In
Lungren, on April 16, 1993, defendants filed a demurrer in respect of
plaintiffs' claims based on defendants' alleged intentional discharge of
lead from faucets to sources of drinking water. On May 5, 1994, the court
sustained the demurrer that water from faucets does not constitute a
prohibited "discharge" within the meaning of the statute. On or about May
25, 1994, the Attorney General appealed the demurrer decision, and on July
25, 1994, the California Court of Appeals issued a show cause order why the
peremptory writ of mandate requested by the plaintiffs should not issue.
Briefing on these issues is complete and oral argument, if requested by the
Court of Appeals, is not expected before the first quarter of 1995. A
formal opinion on the discharge issue is expected from the Court of
Appeals. These actions will be vigorously contested.
(c) Federal Trade Commission v. B.A.T Industries p.l.c., Brown &
Williamson Tobacco Corporation, American Brands, Inc. and The American
Tobacco Company is an action commenced in the United States District Court
for the Southern District of New York on October 31, 1994. The Federal
Trade Commission ("FTC") alleges, inter alia, that the proposed sale of The
American Tobacco Company to B.A.T Industries p.l.c. would violate Section 7
of the Clayton Act and Section 5 of the Federal Trade Commission Act in
that it may substantially lessen competition in the manufacture and sale of
cigarettes in the United States. The FTC seeks to preliminarily enjoin the
parties from completing the transaction, pending the issuance and
resolution of an FTC administrative complaint. A hearing on the FTC's
motion is currently scheduled to commence on December 5, 1994. This action
is being vigorously contested.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits.
--------
10a. Amendment effective January 1, 1994 to the
American Brands, Inc. Amended Supplemental
Retirement Plan constituting Exhibit 10c1 to the
Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1993.
10b. Amendment effective January 1, 1995 to the
American Brands, Inc. Amended Supplemental
Retirement Plan constituting Exhibit 10c1 to the
Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1993.
12. Statement re computation of ratio of earnings to
fixed charges.
- 37 -
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (concluded)
- ------ --------------------------------
15. Letter from Coopers & Lybrand L.L.P. dated
November 8, 1994 re unaudited financial
information.
23. Consent of Counsel, Chadbourne & Parke.
27a. Financial Data Schedule (CT).
27b. Financial Data Schedule (Article 5).
27c. Financial Data Schedule (Article 7).
In lieu of filing certain instruments with respect to long-term
debt of the kind described in Item 601(b)(4) of Regulation S-K,
Registrant agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
(b) Reports on Form 8-K.
-------------------
Registrant filed a Current Report on Form 8-K, dated July 25,
1994, in respect of Registrant's press release dated July 25,
1994 announcing Registrant's financial results for the three-
month and six-month periods ended June 30, 1994 (Items 5 and
7(c)).
Registrant filed a Current Report on Form 8-K, dated September 8,
1994, in respect of Registrant's press release dated April 26,
1994 announcing (i) Registrant's financial results for the three-
month period ended March 31, 1994, (ii) that Registrant had
entered into an agreement with B.A.T Industries p.l.c. for the
sale of The American Tobacco Company and (iii) that Registrant
had increased its dividend (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October 21,
1994, in respect of Registrant's press release dated October 21,
1994 announcing Registrant's financial results for the three-
month and nine-month periods ended September 30, 1994 (Items 5
and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October 28,
1994, in respect of Registrant's press release dated October 27,
1994 announcing that the Federal Trade Commission will challenge
the sale of The American Tobacco Company (Items 5 and 7(c)).
- 38 -
<PAGE>
This Quarterly Report shall not be construed as a waiver of the right to
contest the validity or scope of any or all of the provisions of the
Securities Exchange Act of 1934 under the Constitution of the United
States, or the validity of any rule or regulation made or to be made under
such Act.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMERICAN BRANDS, INC.
---------------------
(Registrant)
Date: November 8, 1994 By R.L. Plancher
---------------- -----------------------------
R.L. Plancher
Senior Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
10a. Amendment effective January 1, 1994 to the
American Brands, Inc. Amended Supplemental
Retirement Plan constituting Exhibit 10c1
to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended
December 31, 1993.
10b. Amendment effective January 1, 1995 to the
American Brands, Inc. Amended Supplemental
Retirement Plan constituting Exhibit 10c1
to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended
December 31, 1993.
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from Coopers & Lybrand L.L.P. dated
November 8, 1994 re unaudited financial
information.
23. Consent of Counsel, Chadbourne & Parke.
27a. Financial Data Schedule (CT).
27b. Financial Data Schedule (Article 5).
27c. Financial Data Schedule (Article 7).
EXHIBIT 10a
-----------
AMERICAN BRANDS, INC.
AMENDED SUPPLEMENTAL RETIREMENT PLAN
AMENDMENT TO REFLECT CHANGE IN
COMPENSATION LIMIT UNDER INTERNAL
REVENUE CODE SECTION 401(a)(17)
ADOPTED ON OCTOBER 25, 1994
EFFECTIVE JANUARY 1, 1994
Section 2(j) was amended to read in its entirety as follows:
(j) "401(a)(17) Limitations" means the Retirement Plan and
Profit-Sharing Plan provisions adopted pursuant to Section 40l(a)(17) of
the Internal Revenue Code to limit compensation considered for purposes of
computing Retirement Plan benefits and Profit-Sharing Plan contributions to
$150,000 (or such greater amount permitted for such year in accordance with
regulations promulgated by the Secretary of the Treasury or his delegate).
EXHIBIT 10b
-----------
AMERICAN BRANDS, INC.
AMENDED SUPPLEMENTAL RETIREMENT PLAN
AMENDMENTS TO PROVIDE FOR SUPPLEMENTAL TAX
REFUND CONTRIBUTIONS AND TO PROVIDE THAT ALL
HIGHLY COMPENSATED EMPLOYEES RECEIVE
A BENEFIT IN EXCESS OF THE IRS LIMIT
ADOPTED ON OCTOBER 25, 1994
EFFECTIVE JANUARY 1, 1995
Section 2(a) was amended to read in its entirety as follows:
(a) "Actual Earnings" means all earnings of an employee in any
Plan Year for Qualifying Employment, including overtime and extra shift
pay, holiday and vacation pay, amounts paid for periods of approved
absence, back pay which has been either awarded or agreed to by the
Company, earnings elected to be deferred by the Employee as tax deferred
contributions under the Company's Profit-Sharing Plan, supplemental tax
deferred amounts under this Plan, or as contributions under a plan
established pursuant to Section 125 of the Internal Revenue Code, and all
compensation under the Management Incentive Plan and Article XII of the By-
laws of American paid during such Plan Year, but excluding (1) Worker's
Compensation payments, (2) amounts paid by the Company for insurance,
retirement or other benefits and bonuses, and (3) contributions to or
allocations under any profit-sharing plan and benefits under this Plan or
other benefits. The Actual Earnings of an employee covered under a
disability income plan of the Company shall be deemed to continue as
provided in the Retirement Plan.
A new Section 2(v) was added as follows:
(v) "Tax Deferred Contributions" means salary reduction
contributions elected to be made to the Profit-Sharing Plan pursuant to
Section 401(k) of the Internal Revenue Code.
Section 3 was amended to read in its entirety as follows:
(a) Each person who was at any time a Highly Compensated
Employee and to whom benefits become payable under the Retirement Plan
shall be paid a supplemental annual retirement benefit under this Plan
equal in amount to the difference between (i) the benefit paid under the
Retirement Plan and the Affiliated Plans and (ii) the benefit that would be
payable if the 40l(a)(17) Limitations and the 415 Limitations were not
contained therein; provided, however, that for purposes of computing the
amount of benefit under this Plan, years of Qualifying Employment shall not
exceed 35. If such a Highly Compensated Employee's Surviving Spouse is
entitled to a pre-retirement spouse's benefit under the Retirement Plan and
subject to Section 6, the Surviving Spouse shall be paid a benefit
hereunder equal to the difference between (i) the spouse's benefit payable
under the Retirement Plan and the Affiliated Plans and (ii) the spouse's
benefit that would be payable if the 40l(a)(17) Limitations and the 415
Limitations were not contained therein.
<PAGE>
(b) Each Executive Participant who at any time held the office
of Vice President of the Company, or any office senior thereto, shall
retire hereunder at the date of his termination of employment and be paid a
supplemental annual retirement benefit under this Plan equal to 52 1/2% of
the Executive Participant's Average Actual Earnings reduced (i) for an
Executive Participant who retires prior to Normal Retirement Date with less
than 35 years of Qualifying Employment by 1 1/2% of Average Actual Earnings
for each year and fraction thereof that the Executive Participant's
retirement date precedes Normal Retirement Date and further reduced (ii) by
benefits payable under the Retirement Plan, the Affiliated Plans and the
defined benefit pension plans of any other prior employer and supplemental
retirement benefits payable under paragraph (a) of this Section 3. If a
pre-retirement spouse's benefit is payable under the Retirement Plan to the
Surviving Spouse of an Executive Participant who at any time before death
held the office of Vice President of the Company, or any office senior
thereto, or if an Executive Participant who held such office dies before
supplemental retirement benefits commence with a Surviving Spouse eligible
for a spouse's benefit under the Retirement Plan, the Surviving Spouse
shall be paid a benefit hereunder, subject to Section 6, equal to the
difference between (i) the spouse's benefit payable under the Retirement
Plan and the Affiliated Plans and (ii) the spouse's benefit that would have
been payable if the Participant's benefit had been calculated in accordance
with the formula set forth in the first sentence of this paragraph (b) of
this Section 3 (prior to any reduction for calculating the spouse's
benefit).
(c) Subject to Section 6, the supplemental retirement benefits
provided by this Plan shall be paid to the Executive Participant or Highly
Compensated Employee (or to any beneficiary designated by him in accordance
with the Retirement Plan, or to his Surviving Spouse if eligible for a
spouse's benefit under the Retirement Plan) concurrently with the payment
of the benefits payable under the Retirement Plan and in a form permitted
thereby. In the event the supplemental retirement benefit commences prior
to Normal Retirement Date or is payable in a form other than an annuity for
the life of the former employee only, the supplemental retirement benefit
shall be adjusted to the same extent as under the Retirement Plan. The
Committee may, however, direct that the supplemental retirement benefit
payable with respect to a former employee be paid as an actuarially
equivalent single sum payment (and shall direct that any supplemental
retirement benefit with a present value of less than $3,500 shall be paid
as an actuarially equivalent single sum payment), provided that (except for
a distribution to pay taxes as provided in Section 5 and except as provided
in Section 6) no such payment may be made prior to termination of
Qualifying Employment or prior to the date that benefits may become payable
under the Retirement Plan. In determining actuarial equivalency of a
single sum payment in cash, there shall be used 120% of the applicable
monthly immediate annuity purchase interest rate which would be used by the
Pension Benefit Guaranty Corporation for the purpose of determining the
present value of a single sum distribution on plan termination and the
mortality table used at the time under the Retirement Plan for funding
purposes.
Section 4 was amended to read in its entirety as follows:
2
<PAGE>
Section 4. SUPPLEMENTAL PROFIT-SHARING BENEFITS.
(a) In the event that the Allocation under the Profit-Sharing
Plan is limited by the 40l(a)(17) Limitations and the 415 Limitations for
1987 or any subsequent Plan Year for a Highly Compensated Employee, the
Highly Compensated Employee shall receive a supplemental profit-sharing
award under this Plan for such Plan Year equal to the difference between
(i) the Allocation actually made to the Highly Compensated Employee and
(ii) the Allocation that would have been made to the Profit-Sharing Plan
for such Plan Year if the 40l(a)(17) Limitations and the 415 Limitations
were not contained therein. In addition, in the event the contribution to
the Profit-Sharing Plan for any Plan Year is limited by the 404(1)
Limitation, each Highly Compensated Employee shall receive a supplemental
profit-sharing award under this Plan for such Plan Year equal to the
difference between (i) the Allocation actually made to the Highly
Compensated Employee and (ii) the Allocation that would have been made to
the Profit-Sharing Plan for such Plan Year for such Highly Compensated
Employee if the contribution to the Profit-Sharing Plan was not limited by
the 404(1) Limitation.
(b) Except as provided in Section 6, the award for any Plan Year
shall be made as of the first day of the following year and shall be deemed
to be thereafter invested in an interest bearing investment selected by the
Trusts Investment Committee (or successor committee) of the Company. The
amount of a Highly Compensated Employee's supplemental profit-sharing
benefits under this Plan shall be the aggregate amount of such awards
together with any deemed investment gain thereon and less any deemed
investment loss.
(c) Supplemental profit-sharing awards and deemed investment
gain thereon shall be fully vested and nonforfeitable.
(d) Supplemental profit-sharing plan benefits shall be paid by a
single sum payment as soon as practicable following termination of
Qualifying Employment, subject to Section 6.
(e) Subject to Section 6, a Highly Compensated Employee may
designate a beneficiary to receive the unpaid portion of his supplemental
profit-sharing benefits in the event of his death. The designation shall
be made in a writing filed with the Committee on a form approved by it
signed by the Highly Compensated Employee. If no effective designation of
beneficiary shall be on file with the Committee when supplemental profit-
sharing benefits would otherwise be distributable to a beneficiary, then
such benefits shall be distributed to the spouse of the Highly Compensated
Employee or, if there is no spouse, to the executor of the will or the
administrator of his estate or, if no such executor or administrator shall
be appointed within six months after his death, the Committee shall direct
that distribution be made, in such shares as the Committee shall determine,
to the child, parent or other blood relative of such Highly Compensated
Employee or to such other person or persons as the Committee may determine.
The second sentence of Section 5 was amended to read in its entirety as
follows:
3
<PAGE>
The Committee shall maintain records of supplemental profit-sharing awards
and supplemental tax deferred amounts and related Company matching awards
pursuant to Section 7 and the assumed investment thereof and records for
the calculation of supplemental retirement benefits.
The preamble of Section 6 was amended to read in its entirety as follows:
Notwithstanding Section 5 of this Plan, the Company may provide
for the establishment of Grantor Trusts and Segregated Accounts by or for
the benefit of individual Executive Participants to provide for the payment
of benefits (other than supplemental tax deferred amounts and related
Company matching awards pursuant to Section 7) under this Plan, consistent
with the following provisions:
In Section 6(f), the reference to "Section 4(c)" was changed to "Section
4(b)".
In Section 6(g), the reference to "Section 3(b), (c) and (d) and Section
4(f)" was changed to "Section 3(a), (b) and (c) and Section 4(e)".
Sections 7 and 8 were redesignated as Sections 8 and 9, respectively, and a
new Section 7 was added as follows:
SECTION 7. SUPPLEMENTAL TAX DEFERRED AMOUNTS AND RELATED COMPANY
MATCHING AWARDS.
(a) A Highly Compensated Employee who is a participant in the
Profit-Sharing Plan and whose Tax Deferred Contributions are limited by the
40l(a)(17) Limitations may elect that the Company reduce his compensation
and credit him with a supplemental tax deferred amount under this Plan for
any Plan Year equal to the difference between (i) an amount up to the
maximum Tax Deferred Contribution that the Highly Compensated Employee
could have elected to be made to the Profit-Sharing Plan but for the
40l(a)(17) Limitations and (ii) the maximum Tax Deferred Contribution that
the Highly Compensated Employee could have elected to be made to the
Profit-Sharing Plan with his compensation subject to the 40l(a)(17)
Limitations; provided that the sum of the Tax Deferred Contributions to the
Profit-Sharing Plan and the supplemental tax deferred amount credited under
this Plan for a Highly Compensated Employee for any Plan Year shall not
exceed the limitation set forth in Section 402(g) of the Internal Revenue
Code, or any successor provision, for such Plan Year.
(b) A Highly Compensated Employee who is credited with a
supplemental tax deferred amount under Section 7(a) shall also be credited
with a related Company matching award equal to his supplemental tax
deferred amount for any Plan Year provided that the sum of the Company
Matching Contribution (as defined in the Profit-Sharing Plan) to the
Profit-Sharing Plan and such related Company matching award hereunder for
any Plan Year shall not exceed 50% of the limitation set forth in Section
402(g) of the Internal Revenue Code, or any successor provision, for such
Plan Year.
4
<PAGE>
(c) An election by a Highly Compensated Employee pursuant to
paragraph (a) must be made by filing a form approved by the Committee with
the Committee no later than the beginning of the Plan Year for which the
election is to be effective specifying the amount of the supplemental tax
deferred amount elected; provided that if a Highly Compensated Employee
does not become eligible to elect Tax Deferred Contributions to the Profit-
Sharing Plan until after the first day of a Plan Year, the Highly
Compensated Employee may file his election pursuant to paragraph (a) for
such Plan Year with the Committee no later than the effective date of the
Highly Compensated Employee's eligibility to make Tax Deferred
Contributions. An election pursuant to this paragraph will continue in
effect for subsequent Plan Years unless changed by the Highly Compensated
Employee by filing a form approved by the Committee with the Committee
prior to the beginning of the Plan Year for which such change is to be
effective. The election shall be irrevocable for any Plan Year.
(d) The supplemental tax deferred amounts and Company matching
awards pursuant to this Section 7 shall be deemed to have been made as of
the first day of the Plan Year for which the election made pursuant to
paragraph (c) is effective and shall be deemed to be thereafter invested in
an interest bearing investment selected by the Trusts Investment Committee
(or successor committee) of the Company. The amount of a Highly
Compensated Employee's supplemental tax deferred amounts and related
Company matching award benefits under this Plan shall be the aggregate
amount of such awards together with any deemed investment gain thereon and
less any deemed investment loss.
(e) Supplemental tax deferred amounts and related Company
matching awards under this Plan and deemed investment gain thereon shall be
fully vested and nonforfeitable.
(f) Benefits under this Section 7 shall be paid by a single sum
cash payment as soon as practicable following termination of Qualifying
Employment.
(g) A Highly Compensated Employee may designate a beneficiary to
receive the unpaid portion of his supplemental tax deferred contribution
amounts and related Company matching award benefits in the event of his
death. The designation shall be made in a writing filed with the Committee
on a form approved by it and signed by the Highly Compensated Employee. If
no effective designation of beneficiary shall be on file with the Committee
when benefits under this Section 7 would otherwise be distributable to a
beneficiary, then such benefits shall be distributed to the spouse of the
Highly Compensated Employee or if there is no spouse, to the executor of
the will or the administrator of his estate or, if no such executor or
administrator shall be appointed within six months after his death, the
Committee shall direct that distribution be made, in such shares as the
Committee shall determine, to the child, parent or other blood relative of
such Highly Compensated Employee or to such other person or persons as the
Committee may determine.
5
PART II - EXHIBIT 12
--------------------
<TABLE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
------------------------------------------------------------- --------------
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income before income
taxes and minority interest........ $1,065.2 $1,044.6 $1,241.4 $1,401.9 $1,079.6 $760.2
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies................... 0.1 0.1 0.1 0.3 0.8 0.4
Capitalized interest........ 1.9 1.5 1.0 1.0 2.5 1.3
-------- -------- -------- -------- -------- ------
1,063.2 1,043.0 1,240.3 1,400.6 1,076.3 758.5
======== ======== ======== ======== ======== ======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses...................... 292.7 290.2 276.6 283.4 258.7 187.9
Portion of rentals representative
of an interest factor............. 22.0 27.6 30.7 32.6 30.1 22.1
-------- -------- -------- -------- -------- ------
Total Fixed Charges......... 314.7 317.8 307.3 316.0 288.8 210.0
-------- -------- -------- -------- -------- ------
Total Earnings Available.... $1,377.9 $1,360.8 $1,547.6 $1,716.6 $1,365.1 $968.5
======== ======== ======== ======== ======== ======
Ratio of Earnings to Fixed Charges.... 4.38 4.28 5.04 5.43 4.73 4.61
==== ==== ==== ==== ==== ====
</TABLE>
PART II - EXHIBIT 15
--------------------
November 8, 1994
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: American Brands, Inc.
We are aware that our report dated November 8, 1994, on our review of
interim financial information of American Brands, Inc. and Subsidiaries for
the three-month and nine-month periods ended September 30, 1994 and 1993
included in this Form 10-Q, has been incorporated by reference into (a)
Post-Effective Amendment No. 4 to the Registration Statement on Form S-8
(Registration No. 33-13363) relating to the Profit-Sharing Plan of American
Brands, Inc., the Registration Statement on Form S-8 (Registration No. 33-
45869) relating to the Profit-Sharing Plan of The American Tobacco Company
and the Registration Statement on Form S-8 (Registration No. 33-39855)
relating to the 1990 Long-Term Incentive Plan of American Brands, Inc., and
the prospectuses related thereto, and (b) the prospectuses related to the
Registration Statements on Form S-3 (Registration Nos. 33-50832, 33-42397,
33-23039 and 33-3985) of American Brands, Inc. Pursuant to Rule 436(c)
under the Securities Act of 1933, this report should not be considered a
part of such registration statements or prospectuses or certification by us
within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
PART II - EXHIBIT 23
--------------------
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions contained
in Part II, Item 1, "Legal Proceedings", of this Quarterly Report on Form
10-Q of American Brands, Inc. into (a) Post-Effective Amendment No. 4 to
the Registration Statement on Form S-8 (Registration No. 33-13363) relating
to the Profit-Sharing Plan of American Brands, Inc., the Registration
Statement on Form S-8 (Registration No. 33-45869) relating to the Profit-
Sharing Plan of The American Tobacco Company and the Registration Statement
on Form S-8 (Registration No. 33-39855) relating to the 1990 Long-Term
Incentive Plan of American Brands, Inc., and the prospectuses related
thereto, and (b) the prospectuses related to the Registration Statements on
Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of
American Brands, Inc.
CHADBOURNE & PARKE
30 Rockefeller Plaza
New York, New York 10112
November 8, 1994
<TABLE> <S> <C>
<ARTICLE> CT
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED
STATEMENT OF INCOME AS OF SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<TOTAL-ASSETS> $16,161
<COMMON> 717
0
16
<OTHER-SE> 3,753
<TOTAL-LIABILITY-AND-EQUITY> 16,161
<TOTAL-REVENUES> 10,182
<INCOME-TAX> 293
<INCOME-CONTINUING> 465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465
<EPS-PRIMARY> $2.30
<EPS-DILUTED> $2.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED
STATEMENT OF INCOME AS OF SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> $ 93
<SECURITIES> 0
<RECEIVABLES> 1,414
<ALLOWANCES> 80
<INVENTORY> 1,703
<CURRENT-ASSETS> 3,409
<PP&E> 2,641
<DEPRECIATION> 1,255
<TOTAL-ASSETS> 8,788
<CURRENT-LIABILITIES> 2,901
<BONDS> 2,121
<SALES> 9,396
<TOTAL-REVENUES> 9,396
<CGS> 2,863
<TOTAL-COSTS> 2,863
<OTHER-EXPENSES> 3,825
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 178
<INCOME-PRETAX> 661
<INCOME-TAX> 256
<INCOME-CONTINUING> 405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED
STATEMENT OF INCOME AS OF SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> $ 156
<DEBT-CARRYING-VALUE> 4,842
<DEBT-MARKET-VALUE> 4,580
<EQUITIES> 245
<MORTGAGE> 609
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,239
<CASH> 93
<RECOVER-REINSURE> 23
<DEFERRED-ACQUISITION> 499
<TOTAL-ASSETS> 7,373
<POLICY-LOSSES> 2,724
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3,048
<POLICY-HOLDER-FUNDS> 49
<NOTES-PAYABLE> 0
382
<INVESTMENT-INCOME> 356
<INVESTMENT-GAINS> (4)
<OTHER-INCOME> 51
<BENEFITS> 540
<UNDERWRITING-AMORTIZATION> 52
<UNDERWRITING-OTHER> 87
<INCOME-PRETAX> 97
<INCOME-TAX> 37
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
</TABLE>
