UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
February 22, 1994 (February 22, 1994)
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Date of Report (Date of earliest event reported)
AMERICAN BRANDS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-9076 13-3295276
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
l700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 698-5000
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INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events.
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The following exhibit is filed herewith as Exhibit 99 and is
incorporated herein by reference:
Exhibit 99 -- American Brands, Inc. and Subsidiaries (i)
Management's Discussion and Analysis of Results of Operations (1993
compared to 1992 and 1992 compared to 1991) and Financial Review, (ii)
Consolidated Statement of Income for the years ended December 31,
1993, 1992 and 1991, (iii) Consolidated Balance Sheet as of December
31, 1993 and 1992, (iv) Consolidated Statement of Cash Flows for the
years ended December 31, 1993, 1992 and 1991, (v) Consolidated
Statement of Common Stockholders' Equity for the years ended December
31, 1993, 1992 and 1991, (vi) Notes to Consolidated Financial
Statements, (vii) Report of Independent Accountants, (viii) Report of
Management, (ix) Information on Business Segments and (x) Eleven-Year
Consolidated Selected Financial Data.
References in such Exhibit to the Company are, unless the context otherwise
requires, to Registrant.
Item 7. Financial Statements and Exhibits.
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(c) Exhibits.
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23. Consent of Independent Accountants, Coopers & Lybrand.
99. American Brands, Inc. and Subsidiaries (i) Management's
Discussion and Analysis of Results of Operations (1993
compared to 1992 and 1992 compared to 1991) and Financial
Review, (ii) Consolidated Statement of Income for the years
ended December 31, 1993, 1992 and 1991, (iii) Consolidated
Balance Sheet as of December 31, 1993 and 1992, (iv)
Consolidated Statement of Cash Flows for the years ended
December 31, 1993, 1992 and 1991, (v) Consolidated Statement
of Common Stockholders' Equity for the years ended December
31, 1993, 1992 and 1991, (vi) Notes to Consolidated
Financial Statements, (vii) Report of Independent
Accountants, (viii) Report of Management, (ix) Information
on Business Segments and (x) Eleven-Year Consolidated
Selected Financial Data.
This Current 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.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Current Report to be
signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN BRANDS, INC.
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(Registrant)
By Robert L. Plancher
--------------------------------
Robert L. Plancher
Senior Vice President and
Chief Accounting Officer
Date: February 22, 1994
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EXHIBIT INDEX
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Sequentially
Exhibit Numbered Page
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23. Consent of Independent Accountants, Coopers
& Lybrand.
99. American Brands, Inc. and Subsidiaries (i)
Management's Discussion and Analysis of
Results of Operations (1993 compared to
1992 and 1992 compared to 1991) and
Financial Review, (ii) Consolidated
Statement of Income for the years ended
December 31, 1993, 1992 and 1991, (iii)
Consolidated Balance Sheet as of December
31, 1993 and 1992, (iv) Consolidated
Statement of Cash Flows for the years ended
December 31, 1993, 1992 and 1991, (v)
Consolidated Statement of Common
Stockholders' Equity for the years ended
December 31, 1993, 1992 and 1991, (vi)
Notes to Consolidated Financial Statements,
(vii) Report of Independent Accountants,
(viii) Report of Management, (ix)
Information on Business Segments and (x)
Eleven-Year Consolidated Selected Financial
Data.
Exhibit 23
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CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation 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 of 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 Statement and Post-Effective Amendments to Registration
Statements on Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and
33-3985) of American Brands, Inc., of our report dated February 1, 1994
accompanying the consolidated financial statements of American Brands, Inc.
and its subsidiaries as of December 31, 1993 and 1992, and for the years
ended December 31, 1993, 1992 and 1991, included in Exhibit 99 to this
Current Report on Form 8-K of American Brands, Inc.
COOPERS & LYBRAND
1301 Avenue of the Americas
New York, New York 10019
February 22, 1994
EXHIBIT 99
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FINANCIAL SECTION
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AMERICAN BRANDS, INC. AND SUBSIDIARIES
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CONTENTS
Results of Operations 1
Financial Review 9
Consolidated Statement of Income 14
Consolidated Balance Sheet 16
Consolidated Statement of Cash Flows 18
Consolidated Statement of Common Stockholders' Equity 20
Notes to Consolidated Financial Statements 21
Report of Independent Accountants 50
Report of Management 51
Information on Business Segments 52
Eleven-Year Consolidated Selected Financial Data 54
<TABLE>
<CAPTION>
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RESULTS OF OPERATIONS
Revenues Operating Income
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(In millions) 1993 1992 1991 1993 1992 1991
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<S> <C> <C> <C> <C> <C> <C>
Tobacco products
International $ 5,940.0 $ 6,376.6 $ 6,373.7 $ 486.5 $ 554.4 $ 528.4
Domestic 1,501.5 1,780.3 1,726.4 169.2 536.1 540.8
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Total Tobacco 7,441.5 8,156.9 8,100.1 655.7 1,090.5 1,069.2
Distilled spirits 1,194.6 1,268.3 1,061.2 214.7 195.8 151.6
Life insurance 1,070.9 965.5 870.4 217.3 165.3 151.8
Hardware and home improvement products 1,119.5 1,014.8 902.3 155.5 159.0 141.5
Office products 977.2 1,003.5 982.3 63.2 58.1 37.7
Specialty businesses 1,897.7 2,214.6 2,147.5 91.5 86.3 79.0
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$13,701.4 $14,623.6 $14,063.8 $1,397.9 $1,755.0 $1,630.8
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</TABLE>
1
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CONSOLIDATED
1993 compared to 1992
Revenues and operating income declined 6% and 20%, respectively.
Translation of foreign currencies at substantially lower average exchange
rates adversely affected revenues and operating income by $1.4 billion and
$100.3 million, respectively. Excluding the effect of foreign exchange,
revenues would have been up 3% on price increases (including excise tax
increases) and new products, partly offset by significant unit declines in
domestic tobacco. Operating income, excluding the effect of foreign
exchange, restructuring items and a $29.9 million domestic tobacco trade
inventory buydown, would have been down 10%. The decrease reflected lower
cigarette units, unfavorable tobacco product mix and higher marketing
expenses, partly offset by price increases and higher realized investment
gains in the life insurance segment.
Interest and related charges decreased $25.9 million (10%) on lower
average interest and foreign exchange rates.
Earnings per share before the cumulative effect of accounting changes
was $3.30, down 23% compared with $4.29 last year. Excluding restructuring
items, the buydown of domestic tobacco trade inventories and currency
translation, earnings per share before accounting changes would have been
$3.89, down 9% from last year. Net income of $469.8 million, or $2.32 per
Common share, was down 47%, also reflecting a non-cash charge of $198.4
million, or 98 cents per share, due to the adoption of FAS Statements No.
106, 112, and 115 as described on page 21, Notes to Consolidated Financial
Statements.
Several conditions indicate that profit comparisons in 1994 may continue
to be unfavorable. With slow growth, low inflation economies prevailing
through much of the world, price competition is intense in virtually every
market and seems likely to endure for the foreseeable future. This will
tend to have an adverse impact on margins and profits, particularly in
tobacco. Profit comparisons in the life insurance segment are also likely
to be difficult due to extraordinarily high realized investment gains
during 1993.
For a description of certain pending litigation, see page 49, Notes to
Consolidated Financial Statements. As stated therein, while it is not
possible to predict the outcome of such litigation or its effect on the
results of operations for any period, 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.
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 February 1, 1994, various subsidiaries of the Company
had been designated as potentially responsible parties under "Superfund" or
similar state laws with respect to 39 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
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.
2
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1992 compared to 1991
Record revenues and operating income rose 4% and 8%, respectively.
Revenues were favorably affected by higher prices (which included excise
tax increases in international tobacco products), the results of certain
distilled spirits products for which trademarks were acquired at the end of
1991 and benefits from new products and line extensions, partly offset by
volume declines (principally tobacco products). Operating income also
reflected higher realized investment gains in the life insurance segment.
Translation of pounds sterling did not have a significant impact on
results.
Corporate administrative expenses decreased $53.8 million, reflecting a
reduction in legal and stock appreciation rights expenses in 1992, while
1991 included a substantial increase in nontobacco legal reserves.
The effective income tax rate increased from 34.9% to 36.8%, reflecting
a lower tax differential relating to foreign operations and lower tax
benefits from the utilization of tax loss carryforwards.
Record net income was $883.8 million, or $4.29 per Common share,
compared with $806.1 million, or $3.91 per Common share in 1991.
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TOBACCO PRODUCTS
1993 compared to 1992
Worldwide revenues decreased 9% and operating income declined 40%; total
cigarette units decreased 1.5%.
International tobacco revenues in sterling increased 11% on price
increases, which principally resulted from higher U.K. tobacco taxes, and a
5.4% increase in total cigarette volume (including exports and line
extensions), partly offset by an unfavorable product mix. U.K. cigarette
volume increased 2.3% as compared to an estimated industry volume increase
of 1.9%. Underlying consumer demand is estimated to have declined in the
area of 5.5%. Results benefited from substantial buying by the trade in
anticipation of the November 1993 U.K. budget increase. Continuing the
trend in recent years, the U.K. budgets announced in November and March
1993, and March 1992 each provided for an increase in taxes on tobacco
products with the result that the tax on a typical pack of cigarettes
increased 11 pence, 10 pence and 13 pence, respectively. The continuing
impact of price increases, principally due to substantial excise tax
increases, combined with the prolonged recession, have reduced annual
industry volumes, led to greater price competition and increased trading
down by consumers to lower priced brands. These changes are particularly
affecting Gallaher, the majority of whose sales are in the premium sector.
Despite these factors, Gallaher maintained its position as the #1 tobacco
company in the U.K. with an estimated 41.7% cigarette market share for the
year compared to 41.5% in 1992 and its share of consumer sales increased.
Operating income in sterling increased 4%, resulting from price increases
and the 5.4% total volume increase, partly offset by higher advertising
costs associated with the launch of Benson and Hedges Superkings, and
restructuring charges. On a comparable basis with 1992, excluding
restructuring items, operating income in sterling would have increased 8%.
Gallaher has moved decisively to control costs, with a plant closing and
workforce reductions completed or announced totaling over 16% of its prior
year employment. Translated at substantially lower average exchange rates,
revenues and operating income in dollars declined 7% and 12%, respectively.
3
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Domestic tobacco revenues declined 16% on substantial volume declines,
price decreases, and a $29.9 million charge related to a buydown of trade
inventories, partly offset by new products. The effects of list price
reductions were partly offset by the four cents per pack increase in
federal excise taxes on January 1, 1993. Although both the industry and
American Tobacco's U.S. shipments declined about 9% in 1993, reflecting
changes in trade buying patterns, it is estimated that the underlying
decline in consumer demand was in the range of 3% to 4%. American Tobacco
maintained its market share for 1993 at about 6.75%. Unit sales of the more
profitable premium brands, particularly nonfilter and charcoal filter
brands, were down 20.9% and continued to decline in excess of the overall
industry decline in recent years. The industry's less profitable price-
value category, comprising discount and deep discount brands, grew from 30%
to 37% as price increases over the years, including excise taxes, have
resulted in trading down by consumers, particularly to deep discount
brands. American Tobacco's price-value brands unit sales increased 5.3% as
the introduction of deep discount brands (Private Stock in June 1992, Prime
in September 1992 and Summit in March 1993) more than offset declines in
discount brands. Price-value brands accounted for 52% of American Tobacco's
U.S. unit sales, compared to 45% in 1992. Operating income declined 68% on
volume declines, lower prices (including buydown costs), a less favorable
product mix, higher promotional expenses to meet intense competitive
activity and $44 million in restructuring provisions (principally for
voluntary early retirement programs), partly offset by a $25.5 million gain
in connection with an exchange of trademarks.
The intense price and promotional competition in the domestic tobacco
industry continues. In August, American Tobacco's principal competitors
decreased list prices of their premium and discount brands and increased
prices of their deep discount brands. American Tobacco announced similar
decreases in list prices of its premium and discount brands, but did not
significantly change the prices of its deep discount brands. In November,
American Tobacco and its competition raised prices of certain brands, but
the amount of these increases was far less than the amount of the August
decreases. Conditions in the U.S. tobacco market remain unsettled. Profit
comparisons for American Tobacco are likely to be difficult in 1994,
particularly in the first half. The full impact of the lower prices and,
conversely, the primary benefit of American Tobacco's cost reduction
programs including lower ongoing marketing expenses, will not be realized
until 1994. American Tobacco expects continued pressure on units, product
mix and margins, and is hopeful, based on its assessment of the current
market conditions, that comparisons will improve as the year progresses and
that full year results for 1994 will approximate 1993's result.
In addition to the previously discussed increases in U.S. and U.K.
tobacco excise taxes, 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. The effects of any of the foregoing cannot be determined but
will likely add to the overall industry declines and the shift to lower
priced brands. In addition, further restrictions on advertising and use of
tobacco products in the U.S., the U.K. and elsewhere are possible. A change
in timing of the U.K. budget resulted in a second budget announcement on
November 30, 1993, and thereafter will be at about the same time each year.
This change had the effect of drawing significant sales into the fourth
quarter of 1993 from the first quarter of 1994. As a result, the first
quarter 1994 comparison will be especially difficult as 1993's first
4
<PAGE>
quarter benefited from trade buying in anticipation of the March U.K.
budget increase.
Recent legislation restricts the use of imported tobacco in U.S.
manufactured cigarettes. Based on the preliminary rules issued, the impact
of this legislation may increase American Tobacco's 1994 manufacturing cost
by an estimated $10 million.
1992 compared to 1991
Revenues increased 1% and operating income increased 2%. Worldwide
cigarette unit sales decreased 3.8%.
International tobacco revenues in sterling increased slightly as price
increases, which principally resulted from higher U.K. tobacco taxes, line
extensions and new products were largely offset by a 10.9% decline in U.K.
cigarette unit sales. The U.K. industry declined 6.7%. Export sales
increased principally on shipments of cigarettes to markets in the C.I.S.
The U.K. budgets, announced in March 1992 and March 1991, each provided for
an increase in taxes on tobacco products with the result that the tax on a
pack of cigarettes increased 13 pence and 22 pence, respectively. The
decline in unit sales reflected the continuing impact of price increases,
including the effect of substantial excise tax increases, which, combined
with the prolonged recession, reduced industry volumes and led to greater
price competition and increased trading down by consumers to lower priced
brands. These changes particularly affected Gallaher, the majority of whose
sales are in the premium sector. Despite the decline in unit sales,
Gallaher maintained its position as the #1 tobacco company in the U.K. with
an estimated 41.5% cigarette market share for 1992, compared to 43.5% in
1991. Operating income in sterling was up 6% on higher gross margin,
favorable comparison to the 1991 provision for workforce reductions and
lower expenses. Dollar revenues and operating income percentage changes
approximated the sterling results.
Record domestic tobacco revenues increased 3% on price increases and
unit gains in price-value brands, resulting from product introductions and
exports, partly offset by substantial unit declines in premium brands.
American Tobacco's U.S. unit sales were down 4.3%, while industry unit
sales declined slightly, and market share for the year was 6.76% compared
to 7.03% for 1991. Price-value brands accounted for 45% of American
Tobacco's U.S. unit sales, compared with 38% in 1991. Operating income
declined 1% on substantially higher promotional expenses to meet
competitive activity and less favorable product mix, almost offset by price
increase benefits and reductions in coupon redemption accruals.
===========================================================================
DISTILLED SPIRITS
1993 compared to 1992
Revenues decreased 6% while record operating income in 1993 rose 10%.
Beam's revenues were down 5% on lower domestic volume principally
reflecting competitive pricing pressures, the effect of lower foreign
exchange rates and a domestic bulk sale last year. U.S. distilled spirits
consumption continued its long-term decline. Worldwide branded case sales
were down 1.7% and domestic branded cases declined 4.6%. Record operating
income was up slightly on the timing of operating expenses and higher
margins, partly offset by higher international selling costs. With recent
heavy price competition and consumer rebates, margins may well be under
pressure as the intensifying competitive situation may limit future price
increases.
5
<PAGE>
Whyte & Mackay revenues in sterling were up 6% on inclusion of
Invergordon for one month and higher volume, mainly in export markets,
partly offset by 1992's significant level of bulk sales. Excluding
Invergordon, worldwide case sales were up 10.4% and U.K. case sales were up
6.5%. Translated at substantially lower average foreign exchange rates,
revenues were down 9% in dollars. Operating income in sterling and dollars
was up with continuing profit improvement from higher margins, despite the
lingering effects of the U.K. recession and competitive pricing pressures,
partly offset by higher general and administrative expenses. Operating
income included a $6.7 million benefit resulting from the application of
the equity method to prior periods for Invergordon.
The 1993 U.K. budgets did not provide for increases in excise taxes on
distilled spirits as compared with an increase in taxes of 31 pence on a
typical bottle announced in March 1992 and an increase of 84 pence
announced in March 1991. The U.S. federal excise tax on distilled spirits
was increased by one dollar per proof gallon on January 1, 1991. It is
possible that any future tax increases as well as any restrictions on
advertising would have an adverse effect on unit sales and add to
continuing industry declines.
1992 compared to 1991
Record revenues and operating income increased 20% and 29%,
respectively, primarily reflecting the results of certain distilled spirits
products acquired by Beam at the end of 1991, which contributed to margin
growth and case sales.
Beam achieved record results, as revenues and operating income increased
30% and 39%, respectively, with worldwide branded case sales up 29%.
Excluding the acquired brands, Beam's worldwide branded case sales would
have increased 3%. U.S. industry volume continued to decline and was down
about 3% in 1992. Additionally, operations benefited from a domestic bulk
sale in 1992.
Whyte & Mackay revenues in sterling were down 9% on lower units, and
after translation into dollars, revenues declined 11%. While bulk sales,
which are highly profitable, declined substantially, worldwide branded case
sales rose 1.6%. Results continued to be adversely affected by severe price
competition, trading down by consumers to lower priced products in a
prolonged recessionary climate and higher marketing expenses.
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LIFE INSURANCE
1993 compared to 1992
Record revenues were up 11% on higher net investment income, reflecting
a larger investment portfolio and $51.8 million higher realized investment
gains (principally due to bond redemptions), as well as increased
commissions and allowances on group health reinsurance assumed. The higher
realized investment gains in 1993 will result in very difficult comparisons
through 1994. Future investment gains and redemptions are dependent on
market conditions and cannot be predicted. The adoption of FAS No. 115,
which requires that unrealized gains and losses on trading securities be
included as a component of income, could result in increased volatility in
future period results. The continuing large number of high coupon bond
redemptions will adversely affect future net investment income. Record
operating income increased 31% as the higher revenues were partly offset by
increased insurance benefits and selling and administrative expenses.
Excluding realized investment gains, operating income was up slightly.
6
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1992 compared to 1991
Revenues were up 11%, principally on a $47.8 million increase in net
investment income, reflecting both a larger investment portfolio and $20.2
million higher realized investment gains, due to bond redemptions. Premiums
increased $42.1 million, principally from assumption reinsurance agreements
and higher ordinary life and annuity sales. Operating income increased
$13.5 million (9%), reflecting the $20.2 million increase in investment
gains, partly offset by higher policy reserves, benefits paid and operating
expenses.
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HARDWARE AND
HOME IMPROVEMENT PRODUCTS
1993 compared to 1992
Revenues were up 10%, reaching record levels in all companies, on new
products, price increases and volume gains. Operating income was down 2%.
Excluding last year's one-time gain from a change in an employee benefit
program, operating income would have been up 2%, reflecting price and
volume gains, partly offset by higher manufacturing costs associated with
the introduction of several new faucet lines, unfavorable product mix and
higher marketing and administrative expenses.
1992 compared to 1991
Record revenues and operating income both increased 12%. All companies
posted record revenues on strong volumes, product introductions and price
increases. Moen increased its share of the U.S. faucet market and
Aristokraft increased its share of the U.S. kitchen and bath cabinet market
with higher volume. Excluding the one-time benefit from a change in an
employee benefit program in 1992, operating income would have been up 7%
despite substantially increased marketing expenses. Moen and Aristokraft
achieved record operating income while Master Lock, which was heavily
supporting new products, was down slightly.
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OFFICE PRODUCTS
1993 compared to 1992
Revenues declined 3%, reflecting the absence of two nonstrategic
businesses sold in 1992 and substantially lower average foreign exchange
rates. Excluding these items, revenues would have been up 8%. Revenues
benefited from new products and volume gains resulting in an increase in
market share, particularly in the faster growing channels of distribution,
despite continuing pricing pressures. Operating income was up 9%,
principally reflecting volume gains and the benefits of ongoing cost
reductions, partly offset by translation at substantially lower average
foreign exchange rates and the continuing effects of pricing pressures. On
a comparable basis, principally excluding the effects of the two businesses
sold and the lower average foreign exchange rates, operating income would
have been up 24%.
7
<PAGE>
1992 compared to 1991
Revenues and operating income increased 2% and 54%, respectively.
Excluding a gain on the sale of nonstrategic businesses in the U.K.,
operating income would have been up 32%. Significant improvements in
customer service contributed to unit growth and market share gain in spite
of weak economies in all of ACCO's major markets, particularly Europe and
Australia. Despite intense price competition and a shift of distribution
channels to larger retailers and buying groups, margins improved from
benefits of facilities rationalization, restructuring and cost reduction
programs.
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SPECIALTY BUSINESSES
1993 compared to 1992
Revenues declined 14%. In sterling, revenues from foreign businesses
declined 5% primarily on retail distribution's volume declines and fewer
outlets, partly offset by price increases. Optical, in sterling, declined
slightly as effects of lower exchange rates and volume declines were almost
offset by price increases. Golf and leisure products posted record
revenues, up 9%, on new products, volume gains and price increases, partly
offset by unfavorable exchange rates. Operating income increased 6%. In
sterling, operating income from foreign businesses increased 9%. Results of
optical were up 40% in sterling, reflecting improved margins on higher
prices and cost reductions, and lower advertising and other expenses.
Retail distribution declined 29% in sterling, on the volume decreases and
higher selling and other expenses. Record golf and leisure products
operating income increased 19% on record revenues, partly offset by higher
advertising costs to meet competitive activity. In dollars, revenues and
operating income from foreign businesses declined 19% and 5%, respectively,
due to translation at substantially lower average foreign exchange rates.
1992 compared to 1991
Revenues and operating income increased 3% and 9%, respectively,
primarily on golf and leisure products increases. Record revenues and
operating income for golf and leisure products rose 6% and 16%,
respectively, on product introductions, line extensions and price
increases. Results of optical in sterling were slightly ahead. Retail
distribution revenues declined 1% in sterling, reflecting volume decreases
in a recessionary market and unfavorable comparisons due to fewer outlets,
partly offset by price increase benefits. Operating income in sterling
decreased 28%, reflecting the volume decreases and higher marketing
expenses. Housewares revenues declined 5% in sterling on lower volume due
to effects of the continuing recession. Improved operating efficiencies
resulted in a lower sterling operating loss in 1992.
8
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FINANCIAL REVIEW
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AMERICAN BRANDS, INC. AND SUBSIDIARIES
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EARNINGS
Earnings per Common share decreased to $2.32 in 1993, from $4.29 in
1992, principally reflecting weaker domestic tobacco earnings, a one-time,
non-cash charge due to the adoption of the FAS Statements, the unfavorable
impact of sterling translation, and restructuring charges.
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DIVIDENDS
Dividends paid on Common stock in 1993 rose to $397.5 million, or $1.97
per share, from $368 million, or $1.805 per share in 1992, marking the 26th
consecutive year in which the dividend paid increased. The Common stock
dividend paid per share has increased 74% over the past five years compared
to an increase in the Consumer Price Index of 21%. 1993 marked the 89th
consecutive year in which the Company paid dividends.
The quarterly dividend on the Common stock paid during 1993 was
unchanged at 49.25 cents per share.
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CASH FLOW
Net Cash Provided from Operating Activities
Net cash provided from operating activities in 1993 of $967.6 million,
which compared with $1.08 billion in 1992, exceeded the funds required for
capital expenditures and dividends by $318.6 million. The reduction was
principally due to a decline in net income and an increase in inventories,
partly offset by a reduction in accrued excise and other taxes. The changes
in inventories and accrued taxes were primarily due to a change in the
timing of the U.K. budget and 1992 changes in pre-U.K. budget restrictions
on inventory movements. In addition, accrued excise and other taxes
decreased in 1992 due to a change in VAT collection procedures in the U.K.
Additionally, cash flow benefited from a decrease in accounts receivable
due to lower domestic tobacco sales and enhanced collections and an
increase in accounts payable, accrued expenses and other liabilities due to
higher provisions at domestic tobacco for advertising and rebates and
reserves for restructuring activities.
Net Cash Used by Investing Activities
Net cash used by investing activities of $1.04 billion compared with
$693.5 million in 1992.
The capital expenditures program is focused on the operating companies
becoming the lowest cost producers of the highest quality products. Capital
expenditures for 1993 of $249.9 million decreased 13.4% compared to 1992
expenditures of $288.5 million reflecting a reduction in expenditures in
domestic tobacco. Capital expenditures by industry segments are shown on
page 49, Notes to Consolidated Financial Statements. Funds for 1994 capital
expenditures, budgeted at approximately $260 million, are expected to be
generated internally.
9
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Acquisitions. On June 30, 1993, The American Tobacco Company acquired
from B.A.T Industries, PLC the Benson and Hedges cigarette trademark in
Europe in exchange for its Lucky Strike and Pall Mall trademarks overseas,
and $107.2 million in cash and contingent payments based on future volume.
During the fourth quarter 1993, Whyte & Mackay purchased the remaining
outstanding ordinary shares of Invergordon for $343.6 million.
Life insurance investing activities increased primarily due to
substantial calls of fixed income investments and reinvestment of the
proceeds.
Net Cash Provided (Used) by Financing Activities
Net cash provided by financing activities of $76.5 million compared to a
use of $333.1 million in 1992. The increase resulted primarily from higher
net borrowings and lower treasury stock purchases in 1993 and, in 1992, the
redemption of the $2.75 Preferred stock for $134.4 million. The increase
was partially offset by a lower net increase in deposits in investment-type
contracts.
===========================================================================
FINANCIAL POSITION
At year end, total debt increased $443.8 million to $3.7 billion. Short-
term debt increased $358.2 million to $1.2 billion and long-term debt
increased $85.6 million to $2.5 billion. The ratio of total debt to total
capital increased from 42.9% for 1992 to 46.2% at year-end 1993. The
increase was as a result of the acquisitions and the year end U.K. budget
announcement. The average ratio of total debt to total capital was 43.8% in
1993 compared to 42.7% in 1992.
During the year, the Company issued $150 million of 7-7/8% Debentures,
Due 2023. The net proceeds from this issuance was used for general
corporate purposes, including the repayment of outstanding debt. During
1993, 75 million pounds sterling of 9-3/4% Notes and $20 million in Medium
Term Notes matured.
At December 31, 1993, the Company had $850 million of debt securities
(including Medium Term Notes) available for sale under its shelf
registration with the Securities and Exchange Commission.
At year end, the Company had $4 billion of long-term credit facilities,
of which $3.8 billion remained unused. These facilities are available for
general corporate purposes, including acquisitions and support of the
Company's short-term borrowings in the commercial paper market. In
addition, Gallaher has committed short-term revolving credit agreements of
300 million pounds sterling (approximately $444 million) which are
available for general corporate purposes, including acquisitions.
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.
Working capital decreased from $664.4 million in 1992 to $575.4 million
in 1993. Management believes this is an adequate level to support continued
growth.
Life insurance net assets were $1.3 billion, up $69.8 million. Although
life insurance net assets and cash flow are consolidated in the financial
statements, generally Franklin is restricted by the insurance laws of the
State of Illinois as to amounts that can be transferred to the Company in
the form of dividends, loans or advances without approval of the Director
of Insurance. This restriction has not had and is not expected to have a
material effect on the ability of the Company to meet its cash obligations.
10
<PAGE>
Life insurance investments in 1993 increased by $487.6 million primarily
reflecting increases in fixed maturities and mortgage loans.
At December 31, 1993, the unrealized gain on Franklin's held-to-maturity
portfolio was $467.1 million.
In 1993, independent insurance analysts continued to rate Franklin
highly in terms of financial strength. Franklin has consistently followed a
conservative investment program and has maintained a high-quality
portfolio. At year-end, only 4.5% of Franklin's held-to-maturity portfolio
was in non-investment grade securities. Its mortgage loans represented 9.2%
of its investment portfolio, and its non-performing assets comprised less
than 1%.
Franklin's insurance and investment-type contracts contain provisions
that permit surrender for cash. At December 31, 1993, outstanding contracts
representing approximately 22% of the liabilities for these products
provided for withdrawal fees, which may discourage early surrender. During
1993, contracts representing less than 4% of these liabilities were
surrendered prior to maturity. Such surrenders are a part of the normal
course of business and do not reflect any significant change in surrender
activity.
===========================================================================
FOREIGN EXCHANGE
The Company has sizeable investments in, and derives substantial income
from, Europe (primarily the United Kingdom). Therefore, changes in the
value of foreign currencies, principally sterling, can have a significant
effect on its financial statements when translated into dollars.
===========================================================================
TAXES
Federal excise taxes on cigarettes increased four cents per pack on
January 1, 1993. In 1993, U.K. taxes on cigarettes increased 12%. Total
domestic and international excise taxes were $5.4 billion and income taxes
amounted to $407.9 million. Including Social Security and other taxes, the
Company's total taxes amounted to $6 billion, as compared with $6.5 billion
in 1992.
===========================================================================
COMMON STOCKHOLDERS' EQUITY
Common stockholders' equity at year end was $4.3 billion. Equity
remained flat primarily resulting from the charge to net income due to the
adoption of the FAS Statements and the purchase of 1.1 million shares for
the treasury, offset by results from operations net of dividends to
stockholders. In 1993, Common stockholders' equity also reflected a
decrease of $56.5 million due to foreign currency translation adjustments.
Return on average Common stockholders' equity was 11.1% as compared to
20.3% in 1992. Excluding the impact of the one-time charge due to the
adoption of the FAS Statements, the return on equity would have been 15.2%.
At year end, the Company had 27.8 million treasury shares, an amount
sufficient to cover future requirements of shares deliverable upon
conversions of outstanding preferred stock and debentures, the exercise of
outstanding stock options and in connection with other stock-based awards.
11
<PAGE>
During the year, American Brands Common stock traded within a range of
$28.50 to $40.625. The Common stock generated a total return of 258.7%, or
13.6% compounded annually, over the ten-year period ended December 31,
1993.
Book value per Common share was $21.09 at year end.
===========================================================================
QUARTERLY COMMON STOCK
DIVIDEND PAYMENTS
1993 1992
- ------------------------------ -----------------------------
===========================================================================
Payment Amount Payment Amount
Date per Share Date per Share
- ---------------------------------------------------------------------------
3/1/93 $ .4925 3/2/92 $ .4375
6/1/93 .4925 6/1/92 .4375
9/1/93 .4925 9/1/92 .4375
12/1/93 .4925 12/1/92 .4925
- ---------------------------------------------------------------------------
$1.97 $1.805
==========================================================================
===========================================================================
QUARTERLY COMPOSITE
COMMON STOCK PRICES
1993 1992
--------------------- ----------------------
===========================================================================
High Low High Low
- ---------------------------------------------------------------------------
First 40-5/8 31-7/8 46-1/2 42-3/4
Second 34-1/4 28-1/2 49-3/8 42-3/4
Third 34-3/8 29-7/8 49-7/8 44-1/2
Fourth 35-3/4 32 46 39
===========================================================================
The Common stock is listed on the New York Stock Exchange, which is the
principal market for this security. The high and low prices are as reported
in the consolidated transaction reporting system.
12
<PAGE>
===========================================================================
QUARTERLY FINANCIAL DATA unaudited
(In millions, except
per share amounts) 1ST 2ND 3RD 4TH
1993 -------- -------- -------- --------
===========================================================================
Revenues $3,737.6 $2,846.0 $3,302.0 $3,815.8
Operating income 430.8 316.5 248.0 402.6
Income before cumulative effect
of accounting changes 247.1 151.3 85.0 184.8
Cumulative effect of
accounting changes (201.0) -- -- 2.6
Net income 46.1 151.3 85.0 187.4
Earnings per Common share
Primary
Income before cumulative
effect of accounting changes $1.22 $.75 $.42 $.91
Cumulative effect of
accounting changes (.99) -- -- .01
- ---------------------------------------------------------------------------
Net income $ .23 $.75 $.42 $.92
- ---------------------------------------------------------------------------
Fully diluted
Income before cumulative effect
of accounting changes $1.18 $.73 $.42 $.90
Cumulative effect of
accounting changes (.95) -- -- .01
- ---------------------------------------------------------------------------
Net income $ .23 $.73 $.42 $.91
===========================================================================
1st 2nd 3rd 4th
1992 -------- -------- -------- --------
===========================================================================
Revenues $3,833.6 $3,245.0 $3,773.1 $3,771.9
Operating income 473.4 398.0 420.8 462.8
Net income 245.2 202.6 202.7 233.3
Earnings per Common share
Primary $1.18 $.98 $.98 $1.15
Fully diluted 1.14 .94 .95 1.10
===========================================================================
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
--------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
1993 1992 1991
For years ended December 31 (In millions, except per share amounts) --------- --------- ---------
=================================================================================================================
<S> <C> <C> <C>
REVENUES
Consumer products $12,630.5 $13,658.1 $13,193.4
Life insurance 1,070.9 965.5 870.4
- -----------------------------------------------------------------------------------------------------------------
13,701.4 14,623.6 14,063.8
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of products sold 3,587.6 3,823.5 3,685.6
Excise taxes on products sold 5,413.9 5,783.3 5,684.8
Insurance benefits 654.2 646.3 571.0
Advertising, selling and administrative expenses
Consumer products 2,315.2 2,388.5 2,271.4
Life insurance 188.2 143.1 136.8
Amortization of intangibles 103.6 92.4 83.4
Restructuring charges (credits), net 40.8 (8.5) --
- -----------------------------------------------------------------------------------------------------------------
12,303.5 12,868.6 12,433.0
- -----------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,397.9 1,755.0 1,630.8
- -----------------------------------------------------------------------------------------------------------------
Interest and related charges 244.2 270.1 264.0
Corporate administrative expenses 78.1 80.7 134.5
Other (income) expenses, net (0.5) 6.1 (5.7)
- -----------------------------------------------------------------------------------------------------------------
321.8 356.9 392.8
- -----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,076.1 1,398.1 1,238.0
Income taxes 407.9 514.3 431.9
- -----------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 668.2 883.8 806.1
Cumulative effect of accounting changes (net of income taxes of $122.5) (198.4) -- --
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 469.8 $ 883.8 $ 806.1
=================================================================================================================
14
<PAGE>
EARNINGS PER COMMON SHARE
Primary
Income before cumulative effect of accounting changes $3.30 $4.29 $3.91
Cumulative effect of accounting changes (.98) -- --
- -----------------------------------------------------------------------------------------------------------------
Net income $2.32 $4.29 $3.91
- -----------------------------------------------------------------------------------------------------------------
Fully diluted
Income before cumulative effect of accounting changes $3.23 $4.13 $3.74
Cumulative effect of accounting changes (.94) -- --
- -----------------------------------------------------------------------------------------------------------------
Net income $2.29 $4.13 $3.74
=================================================================================================================
DIVIDENDS PAID PER COMMON SHARE $1.97 $1.805 $1.5925
=================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
--------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
1993 1992
December 31 (In millions, except per share amounts) -------- ---------
=================================================================================================================
<S> <C> <C>
ASSETS
CONSUMER PRODUCTS AND CORPORATE
Current assets
Cash and cash equivalents $ 62.5 $ 54.8
Accounts receivable, net 1,241.6 1,255.3
Inventories 2,043.2 1,810.2
Other current assets 385.8 332.8
- -----------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER PRODUCTS AND CORPORATE CURRENT ASSETS 3,733.1 3,453.1
- -----------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,472.1 1,406.4
Intangibles resulting from business acquisitions, net 3,637.9 3,104.0
Other assets 379.4 631.1
- -----------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER PRODUCTS AND CORPORATE ASSETS 9,222.5 8,594.6
- -----------------------------------------------------------------------------------------------------------------
LIFE INSURANCE
Investments 5,808.8 5,321.2
Cash and cash equivalents 79.1 85.4
Accrued investment income 101.1 98.9
Deferred policy acquisition costs 470.5 437.9
Present value of future profits, net 170.0 175.6
Intangibles resulting from business acquisitions, net 83.2 86.5
Other assets 403.8 119.6
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIFE INSURANCE ASSETS 7,116.5 6,325.1
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $16,339.0 $14,919.7
=================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
1993 1992
December 31 --------- ---------
=================================================================================================================
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSUMER PRODUCTS AND CORPORATE
Current liabilities
Notes payable to banks $ 298.9 $ 247.1
Commercial paper 711.3 433.4
Accounts payable 454.1 339.6
Accrued excise and other taxes 726.3 884.0
Accrued expenses and other liabilities 794.4 740.4
Current portion of long-term debt 172.7 144.2
- -----------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER PRODUCTS AND CORPORATE CURRENT LIABILITIES 3,157.7 2,788.7
- -----------------------------------------------------------------------------------------------------------------
Long-term debt 2,492.4 2,406.8
Deferred income taxes 124.7 195.2
Postretirement and other liabilities 520.3 176.5
- -----------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER PRODUCTS AND CORPORATE LIABILITIES 6,295.1 5,567.2
- -----------------------------------------------------------------------------------------------------------------
LIFE INSURANCE
Policy reserves and claims 2,553.4 2,401.2
Investment-type contract deposits 2,732.3 2,265.9
Other policyholders' funds 238.1 217.1
Other liabilities 248.7 166.7
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIFE INSURANCE LIABILITIES 5,772.5 5,050.9
- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK-REDEEMABLE AT COMPANY'S OPTION
$2.67 Convertible Preferred stock, without par value, stated value $30.50 per share 17.1 19.1
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY
Common stock, par value $3.125 per share, 229.6 shares issued 717.4 717.4
Paid-in capital 173.3 177.9
Unrealized appreciation on investments 5.3 10.5
Foreign currency adjustments (317.4) (260.9)
Retained earnings 4,393.4 4,322.7
Treasury stock, at cost (717.7) (685.1)
- -----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY 4,254.3 4,282.5
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,339.0 $14,919.7
=================================================================================================================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
1993 1992 1991
For years ended December 31 (In millions) --------- --------- ---------
============================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 469.8 $ 883.8 $ 806.1
Depreciation and amortization 308.9 304.1 281.2
Changes in accounting principles 198.4 -- --
Gain on dispositions and investments, net (120.9) (43.2) (27.1)
Decrease (increase) in accounts receivable 40.1 (64.6) (20.6)
(Increase) decrease in inventories (147.9) 150.6 (114.8)
Decrease (increase) in other assets 15.1 (56.9) (40.8)
(Decrease) increase in accrued excise and other taxes (179.7) (344.9) 195.0
Increase in accounts payable, accrued expenses and other liabilities 192.5 33.9 47.3
Increase (decrease) in deferred income taxes 4.8 (5.3) (71.6)
Increase in deferred policy acquisition costs (32.6) (29.3) (21.7)
Increase in insurance policy and investment-type contract related liabilities 295.2 329.0 259.2
Other operating activities, net (76.1) (80.2) 10.6
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 967.6 1,077.0 1,302.8
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (249.9) (288.5) (233.9)
Proceeds from the disposition of property, plant and equipment 19.3 18.9 32.7
Proceeds from the disposition of operations, net of cash and income taxes 9.6 13.7 --
Acquisitions, net of cash acquired (456.7) -- (632.6)
Purchases of investments (2,079.7) (1,576.8) (890.2)
Proceeds from the maturity, call and sale of investments 1,708.2 1,142.7 472.8
Other investing activities, net 4.9 (3.5) --
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (1,044.3) (693.5) (1,251.2)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deposits on annuity and other financial products 386.0 427.3 363.2
Withdrawals of annuity and other financial products (268.5) (227.4) (200.3)
Increase (decrease) in short-term debt 296.9 399.8 (431.7)
Issuance of long-term debt 511.2 357.7 1,173.8
Repayment of long-term debt (387.3) (689.1) (561.3)
Dividends to stockholders (399.1) (377.8) (337.6)
Cash purchases of Common stock for treasury (57.9) (100.4) (106.7)
Redemption and purchases of $2.75 Preferred stock -- (134.4) (1.8)
Other financing activities, net (4.8) 11.2 3.3
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 76.5 (333.1) (99.1)
- ----------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash 1.6 (38.7) 22.0
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN TOTAL CASH AND CASH EQUIVALENTS $ 1.4 $ 11.7 $ (25.5)
============================================================================================================================
18
<PAGE>
Total cash and cash equivalents at beginning of year $140.2 $128.5 $154.0
Total cash and cash equivalents at end of year $141.6 $140.2 $128.5
============================================================================================================================
Cash paid during the year for
Interest, net of capitalized amount $245.1 $265.5 $239.8
Income taxes $464.4 $502.4 $493.8
============================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
--------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Unrealized
appreciation Foreign Treasury
Common Paid-in (depreciation) currency Retained stock,
stock capital on investments adjustments earnings at cost
(In millions) ------ ------- -------------- ----------- -------- --------
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991 $717.4 $137.7 $(15.4) $ 40.7 $3,348.2 $(626.6)
Net income -- -- -- -- 806.1 --
Cash dividends -- -- -- -- (337.6) --
Translation adjustments -- -- -- (21.7) -- --
Net unrealized appreciation -- -- 42.8 -- -- --
Purchases -- -- -- -- -- (110.3)
Conversion of securities and delivery of stock plan shares -- 44.6 -- -- -- 137.4
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 717.4 182.3 27.4 19.0 3,816.7 (599.5)
Net income -- -- -- -- 883.8 --
Cash dividends -- -- -- -- (377.8) --
Translation adjustments -- -- -- (279.9) -- --
Net unrealized depreciation -- -- (16.9) -- -- --
Purchases -- -- -- -- -- (122.5)
Conversion of securities and delivery of stock plan shares -- (0.2) -- -- -- 36.9
Redemption of $2.75 Preferred stock -- (4.2) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 717.4 177.9 10.5 (260.9) 4,322.7 (685.1)
Net income -- -- -- -- 469.8 --
Cash dividends -- -- -- -- (399.1) --
Translation adjustments -- -- -- (56.5) -- --
Net unrealized depreciation -- -- (5.2) -- -- --
Purchases -- -- -- -- -- (40.3)
Conversion of securities and delivery of stock plan shares -- (4.6) -- -- -- 7.7
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 $717.4 $173.3 $ 5.3 $(317.4) $4,393.4 $(717.7)
===================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
===========================================================================
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The 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. Fiscal
year ends of certain subsidiaries of Gallaher Limited and ACCO World
Corporation are November 30 to facilitate year-end closing.
Certain 1992 balance sheet amounts have been reclassified to conform to
the 1993 presentation.
Accounting Changes
On January 1, 1993, the Company adopted FAS Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" and
FAS Statement No. 112, "Employers' Accounting for Postemployment Benefits."
See Other Retiree Benefits and Postemployment Benefits notes on pages 41
and 42, respectively. On December 31, 1993, the Company adopted FAS
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." See "Investments" on page 29. The initial effects of adopting
these statements were recorded as cumulative changes in accounting
principles as follows:
===========================================================================
FAS Statements No.
(In millions, except per share amounts) 106 112 115 Total
- ---------------------------------------------------------------------------
Pretax charge (credit) $310.0 $15.0 $(4.1) $320.9
Income taxes 119.0 5.0 (1.5) 122.5
- ---------------------------------------------------------------------------
Net loss (income) $191.0 $10.0 $(2.6) $198.4
===========================================================================
Earnings per Common share $.94 $.05 $(.01) $.98
===========================================================================
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or
less are included in cash and cash equivalents. The carrying amount
approximates fair value.
Inventories
Inventories are priced at the lower of cost (principally average and
first-in, first-out and minor amounts at last-in, first-out) or market. In
accordance with generally recognized trade practice, the leaf tobacco and
bulk whiskey inventories are classified as current assets, although part of
such inventories, due to the duration of aging processes, ordinarily will
not be sold within one year.
21
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is
provided, principally on a straight-line basis, over the estimated useful
lives of the assets. Profits or losses resulting from dispositions are
included in income. Betterments and renewals which improve and extend the
life of an asset are capitalized; maintenance and repair costs are
expensed.
Intangibles Resulting from Business Acquisitions
Intangibles resulting from business acquisitions, comprising cost in
excess of net assets of businesses acquired, and brands and trademarks, are
being amortized on a straight-line basis over 40 years, except for
intangibles acquired prior to 1971, which are not being amortized because
they are considered to have a continuing value over an indefinite period.
Amortization amounted to $95.7 million, $84.9 million and $75.9 million in
1993, 1992 and 1991, respectively. The cumulative amortization amounted to
$476.1 million and $380.8 million at December 31, 1993 and 1992,
respectively.
Valuation of Investments
At December 31, 1993, held-to-maturity securities, which are fixed
maturity securities that Franklin has the ability and intent to hold until
maturity, are carried at amortized cost. Trading securities, principally
equity securities that Franklin purchased with the intent of selling in the
near term, are carried at fair value with unrealized gains and losses
included in income. Available-for-sale securities, representing fixed
maturity securities not elsewhere classified, are carried at fair value
with unrealized gains and losses included directly in Common stockholders'
equity, net of applicable deferred federal income taxes.
Prior to December 31, 1993, all fixed maturity securities were valued at
amortized cost. Unrealized appreciation and depreciation on marketable
equity securities (including Invergordon through November 1993) were
included directly in Common stockholders' equity, net of applicable
deferred federal income taxes.
Investment income is recognized as revenue when earned. Realized gains
and losses on disposals of investments are determined on a specific
identification basis and are included in income.
Recognition of Premium Revenue and Policy Benefits
For traditional life and annuity products, premiums are recognized as
revenue when received. Policy reserves have been established in a manner
which allocates policy benefits and expenses on a basis consistent with the
recognition of the related premiums and generally results in the
recognition of profits over the premium-paying period of the policies. For
investment-type contracts, principally deferred annuity contracts, premiums
are treated as policyholder deposits and are recorded as liabilities.
Benefits paid reduce the policyholder liability.
Deferred Policy Acquisition Costs
Costs directly associated with acquiring new business, principally
commissions, along with home office expenses relating to underwriting and
policy issue and certain agency expenses, all of which vary with and are
primarily related to the production of new business, have been deferred to
the extent recoverable. Deferred costs for traditional products are being
amortized over the anticipated premium-paying period of the related
policies, using the same assumptions that are applied in calculating policy
22
<PAGE>
reserves. For investment-type contracts, deferred costs are amortized at a
constant rate in proportion to the anticipated profits.
Present Value of Future Profits
The present value of profits to be realized from future premiums,
relating to insurance in force at the date of acquisition of Franklin and
additions related to assumption reinsurance agreements, is being amortized
over the years that such profits are anticipated to be earned. These future
profits have been discounted to provide an appropriate rate of return using
assumptions applied in calculating policy reserves and deferred policy
acquisition costs. Amortization, included in amortization of intangibles,
amounted to $7.9 million in 1993 and $7.5 million in each of 1992 and 1991,
net of imputed interest of $25.5 million, $26.3 million and $27.3 million
in 1993, 1992 and 1991, respectively. As a result of assumption reinsurance
agreements acquired, $2.2 million and $4.3 million was added to the present
value of future profits in 1993 and 1992, respectively. Approximately $8
million will be amortized in each of the next five years. The cumulative
amortization amounted to $131.1 million, $123.2 million and $115.7 million
at December 31, 1993, 1992 and 1991, respectively.
Policy Reserves and Investment-Type Contract Deposits
Policy reserves provide amounts adequate to discharge estimated future
obligations on policies in force. Policy reserves for traditional insurance
contracts are computed by the net level premium valuation method. Life and
annuity reserves have been computed based upon future investment needs,
mortality, withdrawals and current dividend scale assumptions applicable to
these coverages, including provision for reasonable adverse deviations.
Interest rates range from 2% to 11.5%, and mortality and withdrawal
assumptions reflect company experience and industry standards. The
assumptions vary by plan, age at issue, year of issue and duration.
For investment-type contracts, the liability for future policyholder
benefits and the policyholder account balance are equal. The policyholder
account balance includes premium deposits and interest credits less
mortality and expense charges.
Participating Policyholders' Interest
Income before taxes for participating policies is determined annually.
From this amount, a portion is allocated to participating policies for
dividends and to satisfy regulatory requirements. These amounts, net of
applicable income taxes, are included in other policyholders' funds.
Participating insurance accounted for 51%, 51% and 50% during 1993, 1992
and 1991, respectively, of the total ordinary insurance in force and
premium income from ordinary life participating policies amounted to 65%,
69% and 68% of total premiums during 1993, 1992 and 1991, respectively.
Income Taxes
Deferred tax liabilities or assets are established for temporary
differences between financial and tax reporting bases and are subsequently
adjusted to reflect changes in tax rates expected to be in effect when the
temporary differences reverse. A valuation allowance is established for any
deferred tax asset for which realization is not likely.
Deferred income taxes are not provided on undistributed earnings of
foreign subsidiaries, aggregating approximately $1.2 billion at December
31, 1993, as such earnings are expected to be permanently reinvested in
these companies.
23
<PAGE>
Under insurance tax laws in effect for years prior to 1984, a portion of
Franklin's accumulated statutory income has not been subject to tax. Should
the aggregated untaxed income exceed certain prescribed maximums or cash
dividends to the Company exceed the accumulated taxed portion, the excess
would be subject to federal income tax. Taxes of $70 million calculated
using the current federal statutory income tax rate have not been provided
on the untaxed income, which aggregated $201 million at December 31, 1993,
since Franklin does not contemplate distributing such income in the
foreseeable future.
Earnings Per Share
Earnings per Common share are based on the weighted average number of
Common shares outstanding in each year 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 year 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.
===========================================================================
ACQUISITIONS
During the fourth quarter of 1993, Whyte & Mackay completed its
acquisition of Invergordon Distillers Group PLC ("Invergordon") by
purchasing the remaining 58.7% of the outstanding shares of Invergordon for
a cost, including fees and expenses, of $343.6 million. In 1991, Whyte &
Mackay acquired 41.3% of the outstanding shares of Invergordon for a cost,
including fees and expenses, of $255.5 million. Due to absence of control,
this was recorded in "Other assets" as an investment in marketable equity
securities at a carrying value of $222.2 million at December 31, 1992. 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. Had operations been
consolidated from January 1, 1992, they would not have materially affected
the periods being reported. In connection with the acquisition of
Invergordon, liabilities amounting to $108.4 million were recorded at date
of acquisition.
On June 30, 1993, The American Tobacco Company acquired from B.A.T
Industries, PLC the Benson and Hedges cigarette trademark in Europe in
exchange for assignment of its 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 are 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 are guaranteed and,
accordingly, their present value is included in the initial $183 million of
intangibles that have been recorded. Any payments in excess of the
guarantees will also be amortized over periods not to exceed 40 years.
24
<PAGE>
On December 13, 1991, Jim Beam Brands Co. acquired certain distilled
spirits trademarks for an aggregate cost, including fees and expenses, of
$376.2 million. Results from these trademarks were included in operations
from January 1, 1992.
===========================================================================
ACCOUNTS RECEIVABLE, NET
The components of accounts receivable, net are as follows:
1993 1992
(In millions) -------- --------
===========================================================================
Accounts receivable $1,304.1 $1,315.3
Less allowances for discounts, doubtful accounts
and returns 62.5 60.0
- ---------------------------------------------------------------------------
$1,241.6 $1,255.3
===========================================================================
The Company's accounts receivable comprises amounts due from customers,
principally in the tobacco products segment. At December 31, 1993 and 1992,
approximately 45% and 42% of accounts receivable were related to U.K.
operations, and 6% and 5% were due from a U.K. tobacco distributor,
respectively.
===========================================================================
INVENTORIES
The components of inventories are as follows:
1993 1992
(In millions) -------- --------
===========================================================================
Leaf tobacco $ 477.7 $ 522.1
Bulk whiskey 359.3 272.6
Other raw materials, supplies and work in process 306.9 324.7
Finished products 899.3 690.8
- ---------------------------------------------------------------------------
$2,043.2 $1,810.2
===========================================================================
25
<PAGE>
===========================================================================
PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, net are as follows:
1993
------------------------------------
===========================================================================
Consumer
products and Life
(In millions) corporate insurance(a) Total
- ---------------------------------------------------------------------------
Land and improvements $ 92.3 $ 3.7 $ 96.0
Buildings and improvements to leaseholds 636.9 14.4 651.3
Machinery and equipment 1,847.2 33.7 1,880.9
Construction in progress 114.3 -- 114.3
- ---------------------------------------------------------------------------
2,690.7 51.8 2,742.5
Less accumulated depreciation 1,218.6 32.5 1,251.1
- ---------------------------------------------------------------------------
$1,472.1 $19.3 $1,491.4
===========================================================================
1992
------------------------------------
===========================================================================
Consumer
products and Life
(In millions) corporate insurance(a) Total
- ---------------------------------------------------------------------------
Land and improvements $ 88.9 $ 3.7 $ 92.6
Buildings and improvements to leaseholds 593.2 11.7 604.9
Machinery and equipment 1,729.2 30.0 1,759.2
Construction in progress 102.9 -- 102.9
- ---------------------------------------------------------------------------
2,514.2 45.4 2,559.6
Less accumulated depreciation 1,107.8 29.2 1,137.0
- ---------------------------------------------------------------------------
$1,406.4 $16.2 $1,422.6
===========================================================================
(a) Included in Life insurance-Other assets
26
<PAGE>
===========================================================================
THE FRANKLIN LIFE INSURANCE COMPANY
INCOME AND CASH FLOW STATEMENTS
Summarized income statement data for The Franklin Life Insurance Company
and its subsidiaries are as follows:
1993 1992 1991
(In millions) -------- ------ ------
===========================================================================
Revenues
Premiums $ 462.2 $459.8 $417.7
Net investment income 558.0 484.1 436.3
Other income 50.7 21.6 16.4
- ---------------------------------------------------------------------------
1,070.9 965.5 870.4
- ---------------------------------------------------------------------------
Insurance benefits
Benefits paid or provided and change
in policy reserves 561.9 551.9 477.7
Dividends to policyholders 92.3 94.4 93.3
Advertising, selling and administrative
expenses
Amortization of deferred policy
acquisition costs 68.0 58.3 58.6
Amortization of intangibles and present
value of future profits 11.2 10.8 10.8
Other 120.2 84.8 78.2
- ---------------------------------------------------------------------------
853.6 800.2 718.6
- ---------------------------------------------------------------------------
Operating income 217.3 165.3 151.8
Income taxes 79.5 56.2 50.4
- ---------------------------------------------------------------------------
Income before cumulative effect of
accounting changes 137.8 109.1 101.4
Cumulative effect of accounting changes
(net of income taxes of $12.4) (18.0) -- --
- ---------------------------------------------------------------------------
Net income $ 119.8 $109.1 $101.4
===========================================================================
Generally, Franklin is restricted by the insurance laws of its
domiciliary state as to amounts that can be transferred to the Company in
the form of dividends, loans or advances without the approval of the
Director of Insurance. Under these restrictions, loans or advances in
excess of $144 million and dividends in any twelve-month period aggregating
in excess of $72 million will require the approval of the Director.
27
<PAGE>
Summarized cash flow data is as follows:
1993 1992 1991
(In millions) --------- --------- ---------
==========================================================================
Operating activities
Net income $ 119.8 $ 109.1 $ 101.4
Depreciation and amortization 15.0 15.1 15.0
Changes in accounting principles 18.0 -- --
Gain on dispositions and
investments, net (92.6) (40.8) (20.6)
Increase in deferred policy
acquisition costs (32.6) (29.3) (21.7)
Change in policy reserves and claims
and other policyholders' funds 140.1 185.9 136.1
Interest, net of charges on
investment-type contract deposits 155.1 143.1 123.1
Other, net (23.5) (51.8) (44.7)
- ---------------------------------------------------------------------------
Net cash provided from operating
activities 299.3 331.3 288.6
- ---------------------------------------------------------------------------
Investment activities
Additions to property and equipment (6.5) (2.8) (1.9)
Purchases of investments (2,079.7) (1,576.8) (890.2)
Proceeds from the sale of
investments:
Fixed maturities 34.1 68.1 38.8
Other 256.5 220.5 118.6
Proceeds from maturity and
call of investments 1,417.6 854.1 315.4
- ---------------------------------------------------------------------------
Net cash used by investing
activities (378.0) (436.9) (419.3)
- ---------------------------------------------------------------------------
Financing activities
Dividends to parent (45.1) (55.1) (50.5)
Deposits on annuity and other
financial products 386.0 427.3 363.2
Withdrawals of annuity and other
financial products (268.5) (227.4) (200.3)
- ---------------------------------------------------------------------------
Net cash provided by financing
activities 72.4 144.8 112.4
- ---------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents $ (6.3) $ 39.2 $ (18.3)
===========================================================================
28
<PAGE>
INVESTMENTS
On December 31, 1993, the Company adopted FAS Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
effect of adoption of this statement, recorded as a cumulative change in
accounting principle, representing the unrealized gain on the trading
portfolio, was a benefit of $2.6 million, net of $1.5 million of income
taxes, or one cent per Common share. The net unrealized gain on the
available-for-sale portfolio, which amounted to $5.3 million, net of $2.9
million of income taxes, is included in unrealized appreciation on
investments in Common stockholders' equity at December 31, 1993.
The components of investments are as follows:
1993 1992
(In millions) ------- --------
===========================================================================
Held-to-maturity, fixed maturities at amortized cost $4,525.5 $ --
Trading securities:
Equity securities, at fair value, cost - $257.7 261.5 --
Other securities, at fair value, cost - $9.9 10.2 --
Available-for-sale securities, at fair value,
cost - $129.8 138.0 --
Fixed maturities, at amortized cost -- 4,286.9
Equity securities, at fair value, cost - $236.4 -- 252.5
Mortgage loans on real estate, at unpaid
principal balance 537.2 436.0
Policy loans, at unpaid principal balance 311.2 310.3
Other investments 25.2 35.5
- ---------------------------------------------------------------------------
$5,808.8 $5,321.2
===========================================================================
29
<PAGE>
The amortized cost and estimated fair value of investments in fixed
maturities are as follows:
1993
-----------------------------------------------
===========================================================================
Gross Gross
Amortized unrealized unrealized Fair
(In millions) cost gains losses value
- ---------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury
securities and
obligations of
U.S. Government
corporations and
agencies $ 47.2 $ 7.2 $ -- $ 54.4
Obligations of states
and political
subdivisions 25.9 2.3 (0.2) 28.0
Fixed maturity securities
issued by foreign
governments 97.1 11.2 (0.4) 107.9
Corporate securities
Public utilities 1,479.6 137.9 (6.1) 1,611.4
All other 2,407.5 273.6 (7.1) 2,674.0
Mortgage-backed
securities 465.4 48.6 (0.4) 513.6
Redeemable preferred
stocks 2.8 0.5 -- 3.3
- ---------------------------------------------------------------------------
4,525.5 481.3 (14.2) 4,992.6
- ---------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury
securities and
obligations of
U.S. Government
corporations and
agencies 125.9 7.2 (0.2) 132.9
Fixed maturity
securities
issued by foreign
governments 3.1 1.1 -- 4.2
Redeemable preferred
stocks 0.8 0.1 -- 0.9
- ---------------------------------------------------------------------------
129.8 8.4 (0.2) 138.0
- ---------------------------------------------------------------------------
$4,655.3 $489.7 $(14.4) $5,130.6
===========================================================================
30
<PAGE>
1992
-----------------------------------------------
==========================================================================
Gross Gross
Amortized unrealized unrealized Fair
(In millions) cost gains losses value
- --------------------------------------------------------------------------
Bonds
Federal, state and local $ 130.8 $ 9.4 $ (3.9) $ 136.3
Foreign governments 94.1 10.3 -- 104.4
Corporate securities
Public utilities 1,426.8 122.6 (6.3) 1,543.1
All other 2,161.4 162.9 (12.2) 2,312.1
Mortgage-backed
securities 468.4 35.9 (6.0) 498.3
Redeemable preferred stocks 5.4 -- (0.6) 4.8
- --------------------------------------------------------------------------
$4,286.9 $341.1 $(29.0) $4,599.0
==========================================================================
Franklin is restricted by the insurance laws of its domiciliary state as
to the amount which it can invest in any entity. At December 31, 1993 and
1992, Franklin's largest investment in any one entity was $39.3 million and
$24.9 million, respectively. Exclusive of the concentration noted above,
the fixed maturity investments in all other corporate securities did not
contain any significant geographic or industry concentrations of credit
risk.
The amortized cost and estimated fair value of investments in fixed
maturities at December 31, 1993, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
1993
----------------------
==========================================================================
Amortized Fair
(In millions) amount value
- --------------------------------------------------------------------------
Held-to-maturity:
Due in one year or less $ 38.4 $ 38.6
Due after one year through five years 501.2 556.2
Due after five years through ten years 1,479.9 1,625.4
Due after ten years 2,040.6 2,258.8
Mortgage-backed securities 465.4 513.6
- --------------------------------------------------------------------------
4,525.5 4,992.6
- --------------------------------------------------------------------------
Available-for-sale:
Due in one year or less 15.1 15.1
Due after one year through five years 4.7 5.2
Due after five years through ten years 44.5 46.6
Due after ten years 65.5 71.1
- --------------------------------------------------------------------------
129.8 138.0
- --------------------------------------------------------------------------
$4,655.3 $5,130.6
==========================================================================
31
<PAGE>
During 1993, 1992 and 1991, proceeds from sales of investments in fixed
maturities were $34.1 million, $68.1 million and $38.8 million,
respectively. During 1993, 1992 and 1991, gross gains of $1 million, $1.4
million and $1.7 million, respectively, and during 1993 and 1992, gross
losses of $0.2 million and $0.5 million, respectively, were realized on
those sales.
Summary of net investment income is as follows:
1993 1992 1991
(In millions) ------ ------ ------
==========================================================================
Fixed maturities $394.2 $383.5 $359.3
Equity securities 8.3 5.9 5.5
Mortgage loans 47.7 38.3 30.1
Net realized gains on investments 92.6 40.8 20.6
Policy loans 17.8 17.7 17.6
Other investments 3.8 3.7 9.4
- --------------------------------------------------------------------------
564.4 489.9 442.5
Less investment expenses 6.4 5.8 6.2
- --------------------------------------------------------------------------
$558.0 $484.1 $436.3
==========================================================================
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Information is provided about management's best estimates of the fair
value of certain financial instruments for which it is practicable to
estimate that value. This disclosure excludes certain insurance policy-
related financial instruments and all nonfinancial instruments. The
aggregate fair value amounts presented are not intended to represent the
underlying aggregate fair value of Franklin.
The methods and assumptions used to estimate fair value are as follows:
Fair values for held-to-maturity and available-for-sale (fixed maturity)
securities are determined from quoted market prices, where available. For
securities not actively traded, fair value is estimated by discounting cash
flows and using current interest rates considering credit ratings and the
remaining terms to maturity.
Fair value for trading (equity) securities is based on quoted market
prices.
Fair value for mortgage loans is estimated by discounting cash flows and
using current interest rates on similar real estate loans considering
credit ratings and the remaining terms to maturity.
Fair value for investment-type insurance contracts is estimated by
reducing the policyholder liability for applicable surrender or mortality
charges, if any.
Fair value for commitments to extend credit, principally mortgage loans,
is calculated using current interest rates that approximate the amount a
willing buyer would pay to acquire a similar instrument. The amount of
commitments to extend credit at December 31, 1993 and 1992 was $176 million
and $90 million, respectively, which approximates fair value.
Fair value for accrued investment income approximates the carrying
amount.
32
<PAGE>
Policy loans have no stated maturity dates and are an integral part of
the related insurance contract. Accordingly, it is not practicable to
estimate a fair value.
The estimated fair value of Franklin's financial instruments, for which
it is practicable to estimate that value, are as follows:
1993
---------------------
==========================================================================
Carrying Fair
(In millions) amount value
- --------------------------------------------------------------------------
Held-to-maturity securities $4,525.5 $4,992.6
Trading securities 271.7 271.7
Available-for-sale securities 138.0 138.0
Mortgage loans 537.2 559.4
Liabilities for investment-type contracts,
principally individual and group annuities (1,800.8) (1,713.1)
==========================================================================
1992
---------------------
==========================================================================
Carrying Fair
(In millions) amount value
- --------------------------------------------------------------------------
Fixed maturities $4,286.9 $4,599.0
Equity securities 252.5 252.5
Mortgage loans 436.0 449.6
Liabilities for investment-type contracts,
principally individual and group annuities (1,517.9) (1,444.0)
==========================================================================
===========================================================================
SHORT-TERM BORROWINGS AND
CREDIT FACILITIES
The estimated fair value of the Company's $298.9 million and $247.1
million of notes payable to banks and $711.3 million and $433.4 million of
commercial paper at December 31, 1993 and 1992, respectively, approximates
the carrying amounts due principally to their short maturity.
At December 31, 1993, there was $44 million outstanding under committed
bank credit agreements which provide for unsecured borrowings of up to $444
million for general corporate purposes, including acquisitions. Fees of
1/8% per annum are paid.
In addition, the Company had uncommitted bank lines of credit which
provide for unsecured borrowings for working capital of up to $824 million,
of which $253 million was outstanding at year end.
33
<PAGE>
==========================================================================
LONG-TERM DEBT
The components of long-term debt are as follows:
1993 1992
(In millions) -------- --------
==========================================================================
Notes payable(a) $ 300.0 $ 200.0
Revolving credit notes(a) 211.2 237.8
Other notes(b) 356.5 376.5
5-3/4% Eurodollar Convertible Debentures, Due 2005(c) 200.0 200.0
7-5/8% Eurodollar Convertible Debentures, Due 2001(d) 150.0 150.0
Other Eurodollar Convertible Debentures(e) 41.0 43.4
8-1/2% Notes, Due 2003 200.0 200.0
5-1/4% Notes, Due 1995 200.0 200.0
8-5/8% Debentures, Due 2021 150.0 150.0
9-1/8% Debentures, Due 2016 150.0 150.0
7-7/8% Debentures, Due 2023 150.0 --
7-1/2% Notes, Due 1999 150.0 150.0
9-3/4% Eurosterling Notes, Due 1993 -- 113.6
9% Notes, Due 1999(f) 100.0 100.0
9-1/2% Eurosterling Notes, Due 1994 74.0 75.7
9-1/4% Eurosterling Notes, Due 1998 74.0 75.7
12% Eurosterling Notes, Due 1995 59.2 60.6
12-1/2% Sterling Loan Stock, Due 2009 44.4 45.4
Miscellaneous 54.8 22.3
- --------------------------------------------------------------------------
2,665.1 2,551.0
Less current portion 172.7 144.2
- --------------------------------------------------------------------------
$2,492.4 $2,406.8
==========================================================================
(a) The Company maintains revolving credit agreements expiring in 1995 with
various banks which provide for unsecured borrowings of up to $4 billion,
including $1 billion in various Eurocurrencies. The interest rate is set at
the time of each borrowing, and a commitment fee of 1/4% per annum is paid.
Borrowings under these agreements may be made for general corporate
purposes, including acquisitions and support for the Company's short-term
borrowings in the commercial paper market.
The Company, in the event that it becomes advisable, intends to exercise
its rights under these agreements to refinance $300 million of short-term
notes payable; accordingly, short-term notes payable in this amount have
been classified as long-term debt at December 31, 1993.
(b) The Other notes have maturity dates ranging from one to eight years,
with a weighted average coupon of 8.4%.
(c) The 5-3/4% Eurodollar Convertible Debentures, Due 2005, are convertible
into Common shares at a conversion price of $39.50 per share. Each
debenture holder will have a one-time put on April 11, 1995, at a price of
114.74%, plus accrued interest, and if there is a fundamental change in the
Common stock prior to April 11, 1995, at a price of 105.75%, or thereafter
prior to April 11, 2000 at par, plus accrued interest. The Company may
redeem all or part of the debentures at its option any time after April 11,
1995 at par, plus accrued interest.
34
<PAGE>
(d) The 7-5/8% Eurodollar Convertible Debentures, Due 2001, are convertible
into Common shares at a conversion price of $53.19 per share. If a
fundamental change in the Common stock occurs, each debenture holder will
have the right to repayment at a price of 106.1% declining to par at
maturity, plus accrued interest. The Company may redeem all or part of the
debentures at its option any time on or after March 5, 1994 at a price of
105.3375% declining to par at maturity, plus accrued interest.
(e) The Other Eurodollar Convertible Debentures include 7-3/4% Debentures,
Due 2002, of $39.9 million and $40 million and 5-3/8% Debentures, Due 2003,
of $1.1 million and $3.4 million, in 1993 and 1992, respectively. These 7-
3/4% and 5-3/8% debentures are convertible into Common shares based on
conversion prices of $28.35 and $29 per share, respectively. During 1992
and 1991, $10.5 million and $155.2 million of these debentures were
converted and 0.4 million and 5.4 million treasury shares, respectively,
were issued upon such conversions.
(f) The holders of the 9% Notes, Due 1999, have a one-time put on June 15,
1994 at par, plus accrued interest.
Estimated payments for maturing debt and sinking fund requirements,
assuming one-time put options are not exercised, during the next five years
are as follows: 1994, $172.7 million; 1995, $815.1 million; 1996, $112.6
million; 1997, $56.4 million; and 1998, $169.4 million.
The estimated fair value of the Company's $2,665.1 million and $2,551
million total long-term debt (including current portion) at December 31,
1993 and 1992 approximated $2,880 million and $2,698 million, respectively.
The fair value is determined from quoted market prices, where available,
and from investment bankers using current interest rates considering credit
ratings and the remaining terms to maturity.
===========================================================================
REDEEMABLE PREFERRED STOCK
On August 17, 1992, the Company redeemed its outstanding $2.75 Preferred
stock at a redemption price of $31.46 per share, plus an amount
representing accrued dividends of 52 cents per share. The aggregate
redemption payment including accrued dividends was $133.9 million.
A cash dividend of $2.75 per share in the aggregate amount of $8 million
and $11.8 million was paid in the years ended December 31, 1992 and 1991,
respectively.
===========================================================================
CONVERTIBLE PREFERRED
STOCK-REDEEMABLE
AT COMPANY'S OPTION
Shares of the $2.67 Convertible Preferred stock issued and outstanding
at December 31, 1993, 1992 and 1991 were 561,286 shares, 624,933 shares and
742,382 shares, respectively. Reacquired, redeemed or converted authorized
shares that are not outstanding are required to be retired or restored to
the status of authorized but unissued shares of preferred stock without
series designation. The holders of $2.67 Convertible Preferred stock are
entitled to cumulative dividends, to three-tenths of a vote per share (in
certain events, to the exclusion of the Common shares), to preference in
35
<PAGE>
liquidation over holders of Common stock of $30.50 per share plus accrued
dividends and to convert each share of such stock into 4.08 shares of
Common stock. Authorized but unissued Common shares are reserved for
issuance upon such conversions, but treasury shares may be and are
delivered. 63,647 shares, 117,634 shares and 78,859 shares were converted
during 1993, 1992 and 1991, respectively. The Company may redeem such
Preferred stock at a price of $30.50 per share, plus accrued dividends.
A cash dividend of $2.67 per share in the aggregate amounts of $1.6
million, $1.8 million and $2.1 million was paid in each of the years ended
December 31, 1993, 1992 and 1991, respectively.
===========================================================================
CAPITAL STOCK
The Company has 750 million authorized shares of Common stock and 60
million authorized shares of preferred stock.
There were 201,744,048 Common shares outstanding at December 31, 1993.
The cash dividends paid on the Common stock for the years ended December
31, 1993, 1992 and 1991 aggregated $397.5 million, $368 million and $323.7
million, respectively.
Treasury shares purchased and received as consideration for stock
options exercised amounted to 1,159,262 shares in 1993, 2,882,362 shares in
1992 and 2,794,910 shares in 1991. Treasury shares delivered in connection
with exercise of stock options and grants of other stock awards and
conversion of preferred stock and debentures amounted to 326,494 shares in
1993, 1,541,437 shares in 1992 and 6,355,610 shares in 1991. At December
31, 1993, there were 27,825,976 treasury shares.
===========================================================================
PREFERRED SHARE PURCHASE RIGHTS
Each outstanding share of Common stock also evidences one Preferred
Share Purchase Right ("Right"). The Rights will generally become
exercisable only in the event of an acquisition of or a tender offer for
10% or more of the Common stock. If exercisable, each Right is exercisable
for 1/200th of a share of Series A Junior Participating Preferred Stock at
an exercise price of $52.50. Also, upon an acquisition of 10% or more of
the Common stock, or upon an acquisition of the Company or the transfer of
50% or more of its assets or earning power, each Right (other than rights
held by the 10% acquiror, if applicable), if exercisable, will generally be
exercisable for common shares of the Company or the acquiring company, as
the case may be, having a market value of twice the exercise price. In
certain events, however, Rights may be exchanged by the Company for Common
stock at a rate of one share per Right. The Rights may be redeemed at any
time prior to an acquisition of 10% or more of the Common stock at a
redemption price of $.005 per Right. Until a Right is exercised, the
holder, as such, will have no voting, dividend or other rights as a
stockholder of the Company. Unless either redeemed or exchanged, the Rights
will expire on December 24, 1997.
All 1.4 million of the authorized Series A Preferred shares are reserved
for issuance upon exercise of Rights, and at December 31, 1993, outstanding
Rights were exercisable as described above in the aggregate for 1,008,720
of such shares.
36
<PAGE>
===========================================================================
STOCK PLANS
The 1990 Long-Term Incentive Plan authorizes the granting to key
employees of the Company and its subsidiaries of incentive and nonqualified
stock options, stock appreciation rights, restricted stock, performance
awards and other stock-based awards, any of which may be granted alone or
in combination with other types of awards or dividend equivalents. Such
grants may be made on or before December 31, 1995 for up to 6.4 million
shares of the Common stock. The Company's Long-Term Incentive Plan for Key
Employees of Subsidiaries also authorizes the granting to key employees of
the Company's subsidiaries of similar types of awards other than stock
options and stock appreciation rights, and one million shares have been
reserved for issuance upon payment of any awards granted thereunder after
December 31, 1990. Stock options and stock appreciation rights may no
longer be granted under the Company's 1981 or 1986 Stock Option Plans, but
outstanding awards may continue to be exercised until their expiration
dates.
Stock options under the Plans have exercise prices of fair market values
at dates of grant. Options generally may not be exercised prior to one year
or more than ten years from the date of grant. Stock appreciation rights,
which may be granted in conjunction with option grants, permit the
optionees to receive shares of Common stock, cash or a combination of
shares and cash measured by the difference between the option exercise
price and the fair market value of the Common stock at the time of exercise
of such right.
Changes during the three years ended December 31, 1993 in shares under
option were as follows:
Option Prices Shares
---------------- ---------
==========================================================================
Under option at
January 1, 1991 $ 9.70 to $36.31 4,955,790
Options granted 40.19 to 46.63 1,977,200
Options exercised 9.70 to 34.59 (743,840)
Options lapsed -- (59,200)
- --------------------------------------------------------------------------
Under option at
December 31, 1991 $11.83 to $46.63 6,129,950
Options granted 44.38 to 46.81 1,554,550
Options exercised 11.83 to 44.56 (1,034,090)
Options lapsed -- (60,500)
- --------------------------------------------------------------------------
Under option at
December 31, 1992 $14.44 to $46.81 6,589,910
Options granted 33.75 TO 34.25 2,358,600
Options exercised 14.44 TO 33.91 (73,150)
Options lapsed -- (96,300)
- --------------------------------------------------------------------------
UNDER OPTION AT
DECEMBER 31, 1993 $15.03 TO $46.81 8,779,060
==========================================================================
37
<PAGE>
At December 31, 1993, options for 6,434,760 shares were exercisable.
Under the Long-Term Incentive Plans, awards of 93,000 restricted or
deferred shares were granted during 1990 and 1991 subject to a restriction
period of three years from date of grant. As of December 31, 1993, the
restriction period had ended as to 48,900 shares. At December 31, 1993,
performance awards were outstanding pursuant to which up to 54,246 shares,
145,390 shares and 112,855 shares may be issued in 1994, 1995 and 1996,
respectively, depending on the extent to which certain specified
performance objectives are met. 9,048 shares, 838 shares and 1,062 shares
were issued pursuant to performance awards during 1993, 1992 and 1991,
respectively. The costs of restricted and deferred shares and performance
awards are expensed over the restriction or performance period.
Shares available in connection with future awards under the Company's
stock plans at January 1 and December 31, 1993 were 3.6 million and 1.2
million, respectively. Authorized but unissued shares are reserved for
issuance in connection with awards, but treasury shares may be and are
delivered.
===========================================================================
PENSION AND OTHER RETIREE BENEFITS
The Company has a number of pension plans covering substantially all
employees. The plans provide for payment of retirement benefits, mainly
commencing between the ages of 60 and 65, and also for payment of certain
disability and severance benefits. After meeting certain qualifications, an
employee acquires a vested right to future benefits. The benefits payable
under the plans are generally determined on the basis of an employee's
length of service and earnings. Annual contributions to the plans are
sufficient to satisfy legal funding requirements.
U.S. PENSION PLANS
The components of net pension costs are as follows:
1993 1992 1991
(In millions) ------ ------ -------
==========================================================================
Service cost $ 23.7 $ 21.2 $ 18.7
Interest cost 70.1 67.8 65.3
Actual return on plan assets (92.3) (55.5) (118.9)
Net amortization and deferral 13.6 (22.1) 55.3
- --------------------------------------------------------------------------
$ 15.1 $ 11.4 $ 20.4
==========================================================================
38
<PAGE>
The funded status of the plans as of December 31 was as follows:
1993 1992
------------------------ ------------------------
==========================================================================
Assets Accumulated Assets Accumulated
exceed benefits exceed benefits
accumulated exceed accumulated exceed
(In millions) benefits assets benefits assets
- --------------------------------------------------------------------------
Accumulated benefit
obligation
Vested $744.2 $100.8 $657.3 $56.2
Nonvested 30.7 2.6 28.9 2.6
- --------------------------------------------------------------------------
$774.9 $103.4 $686.2 $58.8
==========================================================================
Projected benefit
obligation $903.2 $113.6 $810.0 $ 70.6
Fair value of plan assets,
principally equity
securities and
corporate bonds 883.0 66.5 848.0 24.7
- --------------------------------------------------------------------------
(Deficiency) excess of
assets over projected
benefit obligation (20.2) (47.1) 38.0 (45.9)
Unrecognized net transition
(gain) loss (0.6) 2.0 (2.3) 4.2
Unrecognized net loss from
experience differences 74.6 24.1 24.4 10.3
Unrecognized prior service
cost 8.7 25.5 13.0 7.3
Adjustment needed to
recognize minimum
liability -- (26.2) -- (11.6)
- --------------------------------------------------------------------------
Prepaid pension cost
(pension liability) $ 62.5 $(21.7) $ 73.1 $(35.7)
==========================================================================
Actuarial assumptions:
Discount rate 7.25% 7.25% 8.25% 8.25%
- --------------------------------------------------------------------------
Weighted average rate of
compensation increase 4.9% 5.1% 6.1% 6.1%
- --------------------------------------------------------------------------
Expected long-term
rate of return on
plan assets 9.5% 9.5% 9.5% 9.5%
==========================================================================
39
<PAGE>
NON-U.S. PENSION PLANS
The components of net pension costs are as follows:
1993 1992 1991
(In millions) ------- ------ -------
==========================================================================
Service cost $ 27.1 $ 29.1 $ 20.2
Interest cost 62.3 66.5 57.5
Actual return on plan assets (222.0) (32.1) (198.7)
Net amortization and deferral 144.4 (61.2) 125.5
- --------------------------------------------------------------------------
$ 11.8 $ 2.3 $ 4.5
==========================================================================
The funded status (assets exceed accumulated benefits) of the plans as
of December 31 was as follows:
1993 1992
(In millions) ------ ------
==========================================================================
Accumulated benefit obligation
Vested $720.1 $525.2
Nonvested 3.8 2.9
- --------------------------------------------------------------------------
$723.9 $528.1
==========================================================================
Projected benefit obligation $ 857.8 $633.1
Fair value of plan assets, principally
equity securities and corporate bonds 1,021.8 815.6
- --------------------------------------------------------------------------
Excess of assets over projected benefit
obligation(a) 164.0 182.5
Unrecognized net transition gain (35.1) (40.7)
Unrecognized net loss (gain) from
experience differences 3.3 (16.2)
Unrecognized prior service cost 49.9 52.3
- --------------------------------------------------------------------------
Prepaid pension cost $ 182.1 $177.9
==========================================================================
Actuarial assumptions:
Weighted average discount rate 8.0% 9.75%
- --------------------------------------------------------------------------
Weighted average rate of compensation
increase 7.0% 7.0%
- --------------------------------------------------------------------------
Expected long-term rate of return on
plan assets 9.5% 9.5%
==========================================================================
(a) The excess of assets over the projected benefit obligation, calculated
under the valuation method mandated by FAS Statement No. 87, "Employers'
Accounting for Pensions," arises principally in the U.K. At December 31,
under current U.K. legislation, no part of this excess could be repaid to
the Company from the U.K. plans.
40
<PAGE>
DEFINED CONTRIBUTION PLANS
The Company sponsors a number of defined contribution plans.
Contributions are determined under various formulas. Costs related to such
plans amounted to $24.4 million, $30.3 million and $25.4 million in 1993,
1992 and 1991, respectively.
OTHER RETIREE BENEFITS
The Company provides postretirement health care and life insurance
benefits to certain employees and retirees in the United States and certain
employee groups outside the United States. Most employees and retirees
outside the United States are covered by government health care programs.
Effective January 1, 1993, the Company adopted FAS Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
for its retiree benefit plans. Under FAS No. 106, the Company is required
to accrue the estimated cost of these benefits during employees' active
service periods. The Company previously expensed the cost of these benefits
as incurred.
The Company elected to recognize the one-time transition obligation
charge resulting from this change in accounting on the immediate
recognition basis. The transition obligation at January 1, 1993 was $310
million, net of $41.3 million of liabilities previously recorded. The
cumulative change in accounting principle, net of $119 million of deferred
income taxes, was $191 million, or 94 cents per Common share. The increase
in ongoing pretax expense for these benefits for 1993 was $19.6 million.
The components of the postretirement benefit costs for 1993 are $7.5
million for service cost and $28.9 million for interest cost, for a total
of $36.4 million.
The status of the plans was as follows:
DECEMBER 31, January 1,
1993 1993
(In millions) ------------ -----------
===========================================================================
Accumulated benefit obligation
Retirees $265.7 $231.0
Fully eligible active plan participants 42.2 40.7
Other active plan participants 98.7 79.6
- --------------------------------------------------------------------------
406.6 351.3
Unrecognized net loss from experience
differences (34.9) --
- --------------------------------------------------------------------------
Accrued postretirement costs $371.7 $351.3
==========================================================================
Assumed weighted average discount rate 7.4% 8.5%
==========================================================================
41
<PAGE>
The assumed health care cost trend rate used in measuring the principal
portion of the accumulated benefit obligation was 13.25% for 1993,
gradually declining to 6% by the year 2007 and remaining at that level
thereafter. A 1% increase in the assumed health care cost trend rate for
each year would increase the accumulated benefit obligation as of December
31, 1993 and postretirement benefit costs for 1993 by approximately 9%.
Postretirement health and life insurance benefits prior to January 1,
1993 were expensed as incurred and amounted to $14.3 million and $11.2
million in 1992 and 1991, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment benefits to former or
inactive employees after employment but before retirement. Effective
January 1, 1993, the Company adopted FAS Statement No. 112, "Employers'
Accounting for Postemployment Benefits," which required a change from the
cash basis to the accrual basis for these postemployment benefits.
Accordingly, the cumulative effect of the accounting change as of January
1, 1993 of adopting FAS No. 112, net of $5 million of income taxes, was a
charge of $10 million, or five cents per Common share.
===========================================================================
INCOME TAXES
The components of income before income taxes are as follows:
1993 1992 1991
(In millions) -------- -------- --------
==========================================================================
Domestic operations $ 495.8 $ 793.2 $ 657.2
Foreign operations 580.3 604.9 580.8
- --------------------------------------------------------------------------
$1,076.1 $1,398.1 $1,238.0
==========================================================================
Income taxes are as follows:
1993 1992 1991
(In millions) ------ ------ ------
==========================================================================
Currently payable
Federal $209.1 $277.1 $252.1
Foreign 187.2 181.2 190.1
Other 4.1 50.2 45.0
Deferred
Federal and other 20.6 0.3 (38.5)
Foreign (13.1) 5.5 (16.8)
- --------------------------------------------------------------------------
$407.9 $514.3 $431.9
==========================================================================
42
<PAGE>
A reconciliation of income taxes at the 35% federal statutory income tax
rate for 1993, and 34% for each of 1992 and 1991 to income taxes as
reported is as follows:
1993 1992 1991
(In millions) ------ ------ ------
==========================================================================
Income taxes computed at federal
statutory income tax rate $376.6 $475.4 $420.9
Other income taxes, net of federal tax
benefit 21.8 37.6 39.0
Realization of capital loss
carryforwards (0.9) (20.8) (28.4)
Goodwill not deductible for income
tax purposes 29.5 28.9 25.8
Tax differential relating to foreign
operations 11.0 (1.0) (17.4)
Miscellaneous, including reversals of
tax provisions no longer required (30.1) (5.8) (8.0)
- --------------------------------------------------------------------------
Income taxes as reported $407.9 $514.3 $431.9
==========================================================================
43
<PAGE>
The components of net deferred tax assets (liabilities) are as follows:
1993 1992
(In millions) ------- -------
==========================================================================
Consumer products and corporate
Current assets
Compensation and benefits $ 14.0 $ 11.2
Other reserves 37.1 48.8
Product coupons 21.7 23.7
Capitalized interest-inventory 26.9 25.4
Restructuring 29.0 16.5
Interest 6.6 9.4
Accounts receivable 12.4 13.3
Miscellaneous 39.2 25.5
- --------------------------------------------------------------------------
186.9 173.8
- --------------------------------------------------------------------------
Current liabilities
Inventories (27.9) (22.4)
Miscellaneous (18.0) (16.1)
- --------------------------------------------------------------------------
(45.9) (38.5)
- --------------------------------------------------------------------------
Deferred income taxes included in
Other current assets 141.0 135.3
- --------------------------------------------------------------------------
Noncurrent assets
Compensation and benefits 22.8 15.6
Other retiree benefits 132.7 15.7
Other reserves 11.7 6.2
Foreign exchange -- 11.1
Miscellaneous 15.7 13.6
- --------------------------------------------------------------------------
182.9 62.2
- --------------------------------------------------------------------------
Noncurrent liabilities
Depreciation (145.8) (131.8)
Pensions (96.7) (90.6)
Trademark amortization (30.8) (14.8)
Miscellaneous (34.3) (20.2)
- --------------------------------------------------------------------------
(307.6) (257.4)
- --------------------------------------------------------------------------
Deferred income taxes (124.7) (195.2)
- --------------------------------------------------------------------------
44
<PAGE>
Life insurance
Policy reserves 115.2 103.5
Participating policyholders' interests 63.4 57.4
Other retiree benefits 11.3 --
Miscellaneous 13.2 9.6
- --------------------------------------------------------------------------
Assets 203.1 170.5
- --------------------------------------------------------------------------
Deferred policy acquisition costs (141.5) (133.5)
Present value of future profits (59.7) (59.9)
Miscellaneous (20.5) (26.5)
- --------------------------------------------------------------------------
Liabilities (221.7) (219.9)
- --------------------------------------------------------------------------
Deferred income taxes included in Other
liabilities (18.6) (49.4)
- --------------------------------------------------------------------------
Net deferred tax liability $ (2.3) $(109.3)
==========================================================================
==========================================================================
COMMITMENTS
Leases
Future minimum rental payments under noncancelable operating leases as
of December 31, 1993 are as follows:
(In millions)
==========================================================================
1994 $ 83.1
1995 77.3
1996 73.5
1997 69.1
1998 65.1
Remainder 454.3
- --------------------------------------------------------------------------
Total minimum rental payments 822.4
Less minimum rentals to be received under noncancelable
subleases 17.5
- --------------------------------------------------------------------------
$804.9
==========================================================================
Total rental expense for all operating leases (reduced by minor amounts
from subleases) amounted to $89.7 million, $97.3 million and $91.6 million
in 1993, 1992 and 1991, respectively.
Other
The Company enters into a variety of contracts and agreements in order
to hedge known transactions, or achieve costs or obtain terms that might
not otherwise be available. The counterparties are major financial
institutions. Although the Company's theoretical risk is the replacement
cost at the then estimated fair value of these transactions, management
currently believes that the risk of incurring losses is remote and that
such losses, if any, would be immaterial.
45
<PAGE>
At December 31, 1993 and 1992, outstanding swap agreements effectively
converted $342.4 million and $269.8 million, respectively, of variable-
interest-rate debt into fixed-rate debt. These agreements mature at various
dates through 1999 and have resulted in weighted average fixed rates of
7.8% and 8.1% for 1993 and 1992, respectively.
The estimated fair value of these swap agreements, which represents the
estimated payment that would be made by the Company to terminate these
agreements, approximated $29 million and $19 million at December 31, 1993
and 1992, respectively. The fair value is based on dealer quotes,
considering current interest rates.
The estimated fair value of foreign currency contracts represents the
amount required to enter into like contracts with similar remaining
maturities based on quoted market prices. At December 31, 1993 and 1992,
the difference between the contract values and fair values was immaterial.
==========================================================================
SUPPLEMENTARY PROFIT AND LOSS
INFORMATION
Supplementary profit and loss information is as follows:
1993 1992 1991
(In millions) ------- -------- --------
==========================================================================
Federal and foreign excise taxes
included in consumer products
revenues
International tobacco $4,548.0 $4,894.1 $4,884.9
Domestic tobacco 360.9 337.0 350.3
Distilled spirits 505.0 552.2 449.6
- ---------------------------------------------------------------------------
$5,413.9 $5,783.3 $5,684.8
==========================================================================
Research and development expense $39.7 $33.7 $28.9
==========================================================================
Corporate administrative expenses in 1993 included a $5 million
provision for staff reduction at the corporate headquarters and in 1991
included a substantial increase in nontobacco legal reserves.
==========================================================================
INFORMATION ON BUSINESS SEGMENTS
The Company's subsidiaries operate principally in the following business
segments:
Tobacco products includes cigarettes manufactured by American Tobacco
and cigarettes and other tobacco products manufactured by Gallaher.
Distilled spirits includes products produced or imported by Jim Beam and
Whyte & Mackay.
Life insurance includes the operations of The Franklin group of
companies.
46
<PAGE>
Hardware and home improvement products includes kitchen and bathroom
faucets, plumbing supply and repair products manufactured, packaged or
distributed by Moen, locks manufactured by Master Lock, tool storage
products manufactured by Waterloo and kitchen cabinets and bathroom
vanities manufactured by Aristokraft.
Office products includes office supplies, stationery and other office
products manufactured by ACCO World subsidiaries.
Specialty businesses includes golf and leisure products and rubber
products of Acushnet, and optical goods and services, retail distribution
and housewares products of Gallaher subsidiaries.
The intersegment elimination primarily includes sales of international
tobacco products to retail distribution.
The Company operates in the United States, Europe (principally the
United Kingdom) and other areas (principally Canada and Australia).
Restructuring charges (credits), net by industry segments are as
follows:
1993 1992
(In millions) ------ -----
==========================================================================
Tobacco products
International $ 29.8 $ --
Domestic 18.5 --
- --------------------------------------------------------------------------
Total Tobacco 48.3 --
Distilled spirits (15.8) --
Hardware and home improvement products 4.7 --
Office products 3.6 (8.5)
- --------------------------------------------------------------------------
$ 40.8 $(8.5)
==========================================================================
Revenues and operating income for the years 1993, 1992 and 1991, and
identifiable assets for the related year ends by industry segments and by
geographic areas, are shown on page 52.
Specialty businesses revenues are as follows:
1993 1992 1991
(In millions) -------- -------- --------
==========================================================================
Golf and leisure products $ 452.7 $ 416.2 $ 391.0
Optical goods and services 368.9 433.7 429.2
Retail distribution 1,283.9 1,524.8 1,546.9
Housewares 91.8 109.5 116.7
Rubber products 52.3 48.1 44.5
Other 7.0 51.5 68.5
- --------------------------------------------------------------------------
2,256.6 2,583.8 2,596.8
Less intersegment elimination 358.9 369.2 449.3
- --------------------------------------------------------------------------
$1,897.7 $2,214.6 $2,147.5
==========================================================================
47
<PAGE>
Reconciliation of identifiable assets to consolidated total assets is as
follows:
1993 1992 1991
(In millions) --------- --------- ---------
==========================================================================
Identifiable assets $16,145.8 $14,689.9 $14,831.5
Corporate 193.2 229.8 230.1
- --------------------------------------------------------------------------
$16,339.0 $14,919.7 $15,061.6
==========================================================================
Depreciation by industry segments is as follows:
1993 1992 1991
(In millions) ------ ------ ------
==========================================================================
Tobacco products
International $ 29.2 $ 29.8 $ 28.8
Domestic 22.0 23.8 21.8
- --------------------------------------------------------------------------
Total Tobacco 51.2 53.6 50.6
Distilled spirits 31.6 29.5 23.9
Life insurance 3.8 4.3 4.2
Hardware and home improvement products 30.7 29.3 27.1
Office products 35.4 37.6 36.8
Specialty businesses 52.6 57.4 55.2
- --------------------------------------------------------------------------
$205.3 $211.7 $197.8
==========================================================================
Amortization of intangibles by industry segments is as follows:
1993 1992 1991
(In millions) ------ ------ ------
==========================================================================
International tobacco $ 2.3 $ -- $ --
Distilled spirits 32.2 23.0 13.5
Life insurance 11.2 10.8 10.8
Hardware and home improvement products 30.1 30.2 30.4
Office products 20.9 21.0 21.2
Specialty businesses 6.9 7.4 7.5
- --------------------------------------------------------------------------
$103.6 $92.4 $83.4
==========================================================================
48
<PAGE>
Capital expenditures by industry segments are as follows:
1993 1992 1991
(In millions) ------ ------ ------
==========================================================================
Tobacco products
International $ 43.1 $ 42.9 $ 29.5
Domestic 21.8 33.0 38.1
- --------------------------------------------------------------------------
Total Tobacco 64.9 75.9 67.6
Distilled spirits 29.8 41.4 32.4
Life insurance 6.5 2.8 1.9
Hardware and home improvement products 62.7 53.9 33.8
Office products 26.0 24.2 28.2
Specialty businesses 60.0 90.3 70.0
- --------------------------------------------------------------------------
$249.9 $288.5 $233.9
==========================================================================
==========================================================================
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. While it is not possible to
predict the outcome of the pending litigation or the effect of such
litigation on the results of operations for any period, 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. Such actions are being vigorously defended.
==========================================================================
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.
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
==========================================================================
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AMERICAN BRANDS, INC.:
We have audited the accompanying consolidated balance sheet of American
Brands, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income, cash flows and Common
stockholders' equity for the years ended December 31, 1993, 1992 and 1991.
These financial statements are the responsibility of the management of
American Brands, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Brands, Inc. and Subsidiaries at December 31, 1993 and 1992, and
the consolidated results of their operations and their cash flows for the
years ended December 31, 1993, 1992 and 1991, in conformity with generally
accepted accounting principles.
As discussed in Notes to Consolidated Financial Statements, in 1993 the
Company changed its methods of accounting for postretirement benefits other
than pensions, postemployment benefits and certain investments in debt and
equity securities.
Coopers & Lybrand
1301 Avenue of the Americas
New York, New York
February 1, 1994
50
<PAGE>
REPORT OF MANAGEMENT
==========================================================================
TO THE STOCKHOLDERS OF AMERICAN BRANDS, INC.:
We have prepared the consolidated balance sheet of American Brands, Inc.
and Subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, cash flows and Common stockholders'
equity for the years ended December 31, 1993, 1992 and 1991. The financial
statements have been prepared in accordance with generally accepted
accounting principles. Financial information elsewhere in the Annual Report
is consistent with that in the financial statements.
The system of internal controls of the Company and its subsidiaries is
designed to provide reasonable assurances that the financial records are
adequate and can be relied upon to provide information for the preparation
of financial statements and that established policies and procedures are
carefully followed.
Independent accountants are elected annually by the stockholders of the
Company to audit the financial statements. Coopers & Lybrand, independent
accountants, are currently engaged to perform such audit. Their audit is in
accordance with generally accepted auditing standards and includes tests of
transactions and selective tests of internal accounting controls.
The Audit Committee of the Board of Directors, consisting solely of
outside directors, meets periodically with the independent accountants,
internal auditors and management to review accounting, auditing, and
financial reporting matters. The auditors have direct access to the Audit
Committee.
51
<PAGE>
<TABLE>
<CAPTION>
INFORMATION ON BUSINESS SEGMENTS(1)
--------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
1993 1992 1991 1990 1989 1988
(In millions) --------- --------- --------- --------- --------- ---------
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
BUSINESS BY INDUSTRY SEGMENTS
REVENUES
Tobacco products
International $ 5,940.0 $ 6,376.6 $ 6,373.7 $ 6,394.8 $ 5,402.8 $ 5,453.5
Domestic 1,501.5 1,780.3 1,726.4 1,596.6 1,570.7 1,528.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tobacco 7,441.5 8,156.9 8,100.1 7,991.4 6,973.5 6,982.1
Distilled spirits 1,194.6 1,268.3 1,061.2 1,005.3 735.4 758.7
Life insurance 1,070.9 965.5 870.4 805.5 831.0 923.4
Hardware and home improvement products 1,119.5 1,014.8 902.3 632.6 503.7 437.2
Office products 977.2 1,003.5 982.3 1,024.6 968.3 883.2
Specialty businesses 1,897.7 2,214.6 2,147.5 2,321.5 1,909.5 1,995.4
- -----------------------------------------------------------------------------------------------------------------------------------
$13,701.4 $14,623.6 $14,063.8 $13,780.9 $11,921.4 $11,980.0
===================================================================================================================================
OPERATING INCOME
Tobacco products
International $ 486.5 $ 554.4 $ 528.4 $ 580.6 $ 418.2 $ 362.0
Domestic 169.2 536.1 540.8 506.8 481.5 455.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tobacco 655.7 1,090.5 1,069.2 1,087.4 899.7 817.3
Distilled spirits 214.7 195.8 151.6 135.5 106.8 100.4
Life insurance 217.3 165.3 151.8 140.5 156.8 203.3
Hardware and home improvement products 155.5 159.0 141.5 78.1 69.7 63.8
Office products 63.2 58.1 37.7 87.2 96.5 26.0
Specialty businesses 91.5 86.3 79.0 73.9 70.2 113.1
- -----------------------------------------------------------------------------------------------------------------------------------
$1,397.9 $1,755.0 $1,630.8 $1,602.6 $1,399.7 $1,323.9
===================================================================================================================================
IDENTIFIABLE ASSETS
Tobacco products
International $ 1,540.2 $ 1,251.0 $ 1,690.2 $ 1,733.6 $ 1,426.1 $ 1,606.4
Domestic 702.1 806.0 762.9 654.8 648.3 579.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tobacco 2,242.3 2,057.0 2,453.1 2,388.4 2,074.4 2,186.1
Distilled spirits 2,229.7 1,830.9 1,947.4 1,295.2 806.6 822.2
Life insurance 7,116.5 6,325.1 5,778.7 5,251.8 4,951.6 5,576.1
Hardware and home improvement products 1,809.0 1,786.4 1,734.6 1,720.4 633.1 639.6
Office products 1,465.7 1,510.5 1,588.4 1,692.9 1,542.8 1,553.7
Specialty businesses 1,282.6 1,180.0 1,329.3 1,349.5 1,107.7 1,116.3
- -----------------------------------------------------------------------------------------------------------------------------------
$16,145.8 $14,689.9 $14,831.5 $13,698.2 $11,116.2 $11,894.0
===================================================================================================================================
52
<PAGE>
BUSINESS BY GEOGRAPHIC AREAS
REVENUES
United States $ 5,486.1 $ 5,556.7 $ 5,077.2 $ 4,686.4 $ 4,521.7 $ 4,459.7
Europe 7,881.8 8,740.9 8,736.3 8,948.6 7,263.2 7,378.5
Other 333.5 326.0 250.3 145.9 136.5 141.8
- -----------------------------------------------------------------------------------------------------------------------------------
$13,701.4 $14,623.6 $14,063.8 $13,780.9 $11,921.4 $11,980.0
===================================================================================================================================
OPERATING INCOME
United States $ 775.4 $1,079.8 $ 995.6 $ 905.5 $ 882.5 $ 842.2
Europe 578.4 633.7 594.7 679.9 503.3 457.0
Other 44.1 41.5 40.5 17.2 13.9 24.7
- -----------------------------------------------------------------------------------------------------------------------------------
$1,397.9 $1,755.0 $1,630.8 $1,602.6 $1,399.7 $1,323.9
===================================================================================================================================
IDENTIFIABLE ASSETS
United States $12,160.2 $11,475.5 $10,808.9 $ 9,897.5 $ 8,430.0 $ 8,994.3
Europe 3,767.3 3,019.8 3,840.1 3,648.9 2,545.1 2,741.6
Other 218.3 194.6 182.5 151.8 141.1 158.1
- -----------------------------------------------------------------------------------------------------------------------------------
$16,145.8 $14,689.9 $14,831.5 $13,698.2 $11,116.2 $11,894.0
===================================================================================================================================
<FN>
(1) See page 46, Notes to Consolidated Financial Statements, for further information on business segments.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
ELEVEN-YEAR CONSOLIDATED SELECTED FINANCIAL DATA (1)
--------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
(In millions, except per share amounts 1993(2) 1992 1991(2) 1990(2) 1989(2) 1988(2)
and number of Common stockholders) --------- --------- --------- --------- --------- ---------
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $13,701.4 $14,623.6 $14,063.8 $13,780.9 $11,921.4 $11,980.0
Depreciation and amortization 308.9 304.1 281.2 259.2 218.1 227.7
Operating income 1,397.9 1,755.0 1,630.8 1,602.6 1,399.7 1,323.9
Interest and related charges 244.2 270.1 264.0 278.7 281.1 266.6
Income taxes 407.9 514.3 431.9 454.3 431.0 449.7
Income from continuing operations 668.2 883.8 806.1 588.6 633.3 544.5
Income from discontinued operations -- -- -- -- -- 21.4
Cumulative effect of accounting changes (198.4) -- -- -- -- --
Net income 469.8 883.8 806.1 588.6(3) 633.3 565.9
Earnings per Common share
Primary
Continuing operations $3.30 $4.29 $3.91 $2.95(3) $3.27 $2.74
Discontinued operations -- -- -- -- -- .11
Cumulative effect of accounting
changes (.98) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $2.32 $4.29 $3.91 $2.95 $3.27 $2.85
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted
Continuing operations $3.23 $4.13 $3.74 $2.80(3) $3.05 $2.59
Discontinued operations -- -- -- -- -- .10
Cumulative effect of accounting
changes (.94) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $2.29 $4.13 $3.74 $2.80 $3.05 $2.69
===================================================================================================================================
COMMON SHARE DATA
Dividends paid $397.5 $368.0 $323.7 $274.3 $238.0 $221.9
Dividends paid per share $1.97 $1.805 $1.5925 $1.405 $1.255 $1.13
Average number of shares outstanding 201.8 204.0 202.6 194.5 189.2 193.4
Book value per share $21.09 $21.14 $20.42 $17.98 $15.21 $13.20
Number of stockholders, December 31(4) 63,537 63,929 66,950 69,378 72,404 77,106
===================================================================================================================================
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<PAGE>
BALANCE SHEET DATA
Consumer products and corporate
Inventories $2,043.2 $1,810.2 $2,141.5 $2,043.8 $1,675.0 $1,815.9
Current assets 3,733.1 3,453.1 3,869.8 3,829.4 3,005.4 3,080.2
Working capital 575.4 664.4 609.4 622.3 440.2 434.5
Property, plant and equipment, net 1,472.1 1,406.4 1,472.4 1,488.3 1,201.7 1,179.6
Intangibles, net 3,637.9 3,104.0 3,284.0 2,975.3 1,831.4 1,911.2
Short-term debt 1,182.9 824.7 730.6 845.4 740.0 829.3
Long-term debt 2,492.4 2,406.8 2,551.9 2,433.8 1,717.4 2,359.2
Life insurance
Investments 5,808.8 5,321.2 4,859.7 4,341.6 4,050.8 4,418.3
Policy reserves and claims 2,553.4 2,401.2 2,230.8 2,111.5 2,007.5 2,398.7
Investment-type contract deposits 2,732.3 2,265.9 1,921.4 1,632.6 1,460.8 1,438.3
Total assets
Consumer products and corporate 9,222.5 8,594.6 9,282.9 8,616.4 6,511.7 6,606.4
Life insurance 7,116.5 6,325.1 5,778.7 5,251.8 4,951.6 5,576.1
Redeemable preferred stock -- -- 130.1 131.9 135.6 137.5
Common stockholders' equity 4,254.3 4,282.5 4,163.3 3,602.0 2,912.4 2,466.4
Capital expenditures 249.9 288.5 233.9 296.7 256.8 235.3
===================================================================================================================================
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
(In millions, except per share amounts 1987(2) 1986 1985 1984 1983
and number of Common stockholders) --------- -------- -------- -------- --------
===================================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $10,076.6 $8,114.2 $6,983.0 $6,669.4 $6,568.5
Depreciation and amortization 168.7 127.4 107.9 104.1 92.4
Operating income 1,087.7 797.6 844.1 835.0 786.2
Interest and related charges 150.4 95.5 99.2 98.6 84.5
Income taxes 379.0 284.1 306.9 263.1 319.1
Income from continuing operations 492.6 357.0 407.5 443.9 357.6
Income from discontinued operations 20.0 4.8 16.9 20.4 26.0
Cumulative effect of accounting changes -- -- -- -- --
Net income 512.6 361.8 424.4 464.3 383.6
Earnings per Common share
Primary
Continuing operations $2.16 $1.55 $1.78 $1.94 $1.54
Discontinued operations .09 .02 .07 .09 .12
Cumulative effect of accounting
changes -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $2.25 $1.57 $1.85 $2.03 $1.66
- -------------------------------------------------------------------------------------------------------------------
Fully diluted
Continuing operations $2.09 $1.52 $1.74 $1.89 $1.51
Discontinued operations .09 .02 .07 .09 .11
Cumulative effect of accounting
changes -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $2.18 $1.54 $1.81 $1.98 $1.62
===================================================================================================================
COMMON SHARE DATA
Dividends paid $232.4 $224.1 $214.9 $204.4 $195.0
Dividends paid per share $1.055 $1.019 $.975 $.928 $.887
Average number of shares outstanding 220.3 219.7 220.4 220.2 219.7
Book value per share $13.24 $11.51 $10.82 $9.52 $8.93
Number of stockholders, December 31(4) 83,004 86,477 94,862 101,303 106,588
===================================================================================================================
BALANCE SHEET DATA
Consumer products and corporate
Inventories $1,693.4 $1,264.4 $1,254.8 $1,180.4 $1,259.3
Current assets 3,414.0 2,052.3 1,975.6 1,750.0 1,880.6
Working capital 1,006.6 415.6 660.0 621.3 680.6
Property, plant and equipment, net 1,078.7 745.1 637.1 532.1 528.4
Intangibles, net 1,381.6 532.1 453.5 407.1 407.3
Short-term debt 751.4 465.0 375.6 397.7 427.7
Long-term debt 1,631.5 671.1 735.5 727.7 595.5
56
<PAGE>
Life insurance
Investments 4,114.9 3,773.1 3,530.0 3,246.1 2,409.4
Policy reserves and claims 2,316.6 2,225.9 2,187.0 2,191.5 1,647.5
Investment-type contract deposits 1,185.1 1,021.4 848.4 672.9 505.6
Total assets
Consumer products and corporate 6,080.5 3,947.3 3,589.2 3,189.7 3,317.2
Life insurance 5,216.2 4,863.6 4,557.0 4,347.0 3,218.2
Redeemable preferred stock 137.5 137.5 137.5 137.5 152.7
Common stockholders' equity 2,915.3 2,529.1 2,369.2 2,098.2 1,962.7
Capital expenditures 216.2 201.8 135.8 145.6 110.3
===================================================================================================================
<FN>
(1) See pages 1 through 13 for Financial Section.
(2) See page 24, Notes to Consolidated Financial Statements, for
information related to acquisitions. 1990 includes the acquisitions of The
Moen Group, Inc. in August and Whyte & Mackay in February. Southland Life
Insurance was sold in March 1989. 1988 includes the acquisition in February
of Aristokraft, Waterloo Industries, Twentieth Century Companies, Day-
Timers and Vogel Peterson. 1987 includes acquisitions in May of National
Distillers and Chemical Corporation's distilled spirits business and in
August of ACCO World Corporation.
(3) Net income and primary and fully diluted earnings per Common share
include $179.9 million and 93 cents and 83 cents, respectively, relating to
a write-down of an investment.
(4) On January 31, 1994, there were 62,978 Common stockholders of record,
not necessarily reflecting beneficial ownership.
</TABLE>
57
