UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended March 31, 1994
AMERICAN BRANDS, INC.
- - ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
- - ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock, par
value $3.125 per share, at April 29, 1994 was 201,842,764 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- - ------ --------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
March 31, December 31,
1994 1993
------------ ------------
(Unaudited)
Assets
Consumer products and corporate
Current assets
Cash and cash equivalents $ 87.5 $ 62.5
Accounts receivable, net 1,558.7 1,241.6
Inventories 1,864.6 2,043.2
Other current assets 293.7 385.8
--------- ---------
Total consumer products and
corporate current assets 3,804.5 3,733.1
Property, plant and equipment, net 1,454.9 1,472.1
Intangibles resulting from
business acquisitions, net 3,618.6 3,637.9
Other assets 397.2 379.4
--------- ---------
Total consumer products and
corporate assets 9,275.2 9,222.5
--------- ---------
Life insurance
Investments 6,057.6 5,808.8
Cash and cash equivalents 47.7 79.1
Deferred policy acquisition costs 478.6 470.5
Present value of future profits, net 167.9 170.0
Other assets 423.4 588.1
--------- ---------
Total life insurance assets 7,175.2 7,116.5
--------- ---------
Total assets $16,450.4 $16,339.0
========= =========
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
March 31, December 31,
1994 1993
------------ ------------
(Unaudited)
Liabilities and stockholders' equity
Consumer products and corporate
Current liabilities
Notes payable to banks $ 354.6 $ 298.9
Commercial paper 449.5 711.3
Accounts payable, accrued expenses
and other liabilities 1,064.7 1,248.5
Accrued excise and other taxes 1,310.3 726.3
Current portion of long-term debt 156.0 172.7
--------- ---------
Total consumer products and
corporate current liabilities 3,335.1 3,157.7
Long-term debt 2,312.4 2,492.4
Deferred income taxes 131.0 124.7
Postretirement and other liabilities 527.0 520.3
--------- ---------
Total consumer products and
corporate liabilities 6,305.5 6,295.1
--------- ---------
Life insurance
Policy reserves and claims 2,594.1 2,553.4
Investment-type contract deposits 2,766.5 2,732.3
Other liabilities 467.3 486.8
--------- ---------
Total life insurance liabilities 5,827.9 5,772.5
--------- ---------
$2.67 Convertible Preferred stock -
redeemable at Company's option 16.7 17.1
--------- ---------
Common stockholders' equity
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 172.3 173.3
Unrealized (depreciation) appreciation
on investments (2.5) 5.3
Foreign currency adjustments (314.3) (317.4)
Retained earnings 4,442.9 4,393.4
Treasury stock, at cost (715.5) (717.7)
--------- ---------
Total Common stockholders' equity 4,300.3 4,254.3
--------- ---------
Total liabilities and
stockholders' equity $16,450.4 $16,339.0
========= =========
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended March 31, 1994 and 1993
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1994 1993
---------- ----------
Revenues
Consumer products $3,000.9 $3,495.7
Life insurance 247.3 241.9
-------- --------
3,248.2 3,737.6
-------- --------
Operating expenses
Cost of products sold 911.2 874.5
Excise taxes on products sold 1,215.3 1,652.0
Insurance benefits 157.6 145.7
Advertising, selling and
administrative expenses
Consumer products 559.6 569.4
Life insurance 49.5 42.3
Amortization of intangibles 26.7 22.9
-------- --------
2,919.9 3,306.8
-------- --------
Operating income 328.3 430.8
-------- --------
Interest and related charges 61.4 61.9
Corporate administrative expenses 7.7 5.0
Other expenses (income), net 2.7 (5.7)
-------- --------
71.8 61.2
Income before income taxes 256.5 369.6
Income taxes 107.3 122.5
-------- --------
Income before cumulative effect of
accounting changes 149.2 247.1
Cumulative effect of accounting changes
(net of income taxes of $124) - (201.0)
-------- --------
Net income $ 149.2 $ 46.1
======== ========
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended March 31, 1994 and 1993 (Concluded)
-----------------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1994 1993
------ ------
Earnings per Common share
Primary
Income before cumulative effect of
accounting changes $.74 $1.22
Cumulative effect of accounting changes - (.99)
---- -----
Net income $.74 $ .23
==== =====
Fully diluted
Income before cumulative effect of
accounting changes $.72 $1.18
Cumulative effect of accounting changes - (.95)
---- -----
Net income $.72 $ .23
==== =====
Dividends paid per Common share $.4925 $.4925
====== ======
Average number of Common shares outstanding
Primary 201.8 202.0
===== =====
Fully diluted 213.5 214.2
===== =====
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 1994 and 1993
-----------------------------------------------------
(In millions)
(Unaudited)
1994 1993
-------- --------
Operating activities
Net income $ 149.2 $ 46.1
Changes in accounting principles - 201.0
Depreciation and amortization 78.6 73.4
Increase in accounts receivable (315.2) (710.1)
Decrease (increase) in inventories 181.1 (69.8)
Decrease in accounts payable, accrued
expenses and other liabilities (207.6) (80.6)
Increase in accrued excise and other taxes 579.8 826.1
Purchase of trading securities (135.0) -
Proceeds from sale of trading securities 168.3 -
Other operating activities, net 123.3 38.6
------- -------
Net cash provided from operating activities 622.5 324.7
------- -------
Investing activities
Additions to property, plant and equipment (34.3) (53.7)
Purchases of investments (350.8) (629.8)
Proceeds from the maturity, call and
sale of investments 259.5 447.7
Other investing activities, net 3.6 4.4
------- -------
Net cash used by investing activities (122.0) (231.4)
------- -------
Financing activities
Decrease in short-term debt (207.3) (37.1)
Issuance of long-term debt - 157.1
Repayment of long-term debt (198.2) (128.1)
Dividends to stockholders (99.7) (99.9)
Other financing activities, net (3.6) (11.0)
------- -------
Net cash used by financing activities (508.8) (119.0)
------- -------
Effect of foreign exchange rate changes on cash 1.9 (3.1)
------- -------
Net decrease in total cash and cash equivalents (6.4) (28.8)
Total cash and cash equivalents at beginning
of period 141.6 140.2
------- -------
Total cash and cash equivalents at end of period $ 135.2 $ 111.4
======= =======
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of March 31, 1994 and
the related condensed consolidated statements of income and cash flows
for the three-month periods ended March 31, 1994 and 1993 are
unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of such financial statements have been
included. Such adjustments consisted only of normal recurring items.
Interim results may not be indicative of results for a full year.
(For a discussion of results of operations, see Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations").
The condensed consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. Balance
sheet accounts are segregated into two categories. Consumer products
and corporate accounts are classified as current or noncurrent,
whereas the life insurance accounts are unclassified, in accordance
with industry practice.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance
sheet was derived from the Company's audited financial statements, but
does not include all disclosures required by generally accepted
accounting principles. This Form 10-Q should be read in conjunction
with the Company's consolidated financial statements and notes
incorporated by reference in its 1993 Annual Report on Form 10-K.
2. Accounting Changes
On December 31, 1993, the Company elected early adoption of FAS
Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," under which trading securities purchased with the
intent of being sold in the near term are carried at fair value and
the applicable unrealized gains and losses are recorded in net income.
Effective January 1, 1993, the Company adopted FAS Statement No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requiring accrual of the expected costs during the years
that employees render the service that qualifies them for coverage.
Also, effective January 1, 1993, the Company adopted FAS Statement No.
112, "Employers' Accounting for Postemployment Benefits," requiring
accrual of the expected costs of benefits provided to former or
inactive employees after employment but before retirement.
The initial effects of adopting FAS Statements No. 106 and 112 were
recorded as cumulative changes in accounting principles as follows (in
millions, except per share amounts):
- 6 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Accounting Changes (Concluded)
FAS Statements No.
106 112 Total
--- --- -----
Pretax charge $310.0 $15.0 $325.0
Income taxes 119.0 5.0 124.0
------ ----- ------
Net loss $191.0 $10.0 $201.0
====== ===== ======
Net loss per Common share $.94 $.05 $.99
==== ==== ====
3. Acquisitions
During the fourth quarter of 1993, Whyte & Mackay, a subsidiary of
Gallaher Limited, completed its acquisition of Invergordon Distillers
Group PLC by purchasing the remaining 58.7% of the outstanding shares
of Invergordon. In 1991, Whyte & Mackay acquired 41.3% of the
outstanding shares of Invergordon. The aggregate cost of Invergordon
of $599.1 million, exceeded the fair value of net assets acquired by
$492.9 million. The financial statements for prior periods were not
restated because the effect was not material. Operations, including
the effect of the application of the equity method to prior periods,
were consolidated from December 1, 1993.
On June 30, 1993, the Benson and Hedges cigarette trademark in
Europe was acquired from B.A.T Industries, PLC in exchange for
assignment of the Lucky Strike and Pall Mall overseas cigarette
trademarks, and $107.2 million in cash, including expenses, and
contingent future payments based on volumes. Results from the Benson
and Hedges trademark are included in international tobacco from the
date of acquisition. 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.
4. Inventories
The components of inventories are as follows (in millions):
March 31, December 31,
1994 1993
---------- ------------
Leaf tobacco $ 450.6 $ 477.7
Bulk whiskey 360.6 359.3
Other raw materials, supplies and work
in process 309.4 306.9
Finished products 744.0 899.3
-------- --------
$1,864.6 $2,043.2
======== ========
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. The Franklin Life Insurance Company
Summarized income statement data for Franklin (in millions):
Three Months Ended
March 31,
-----------------
1994 1993
------ ------
Revenues
Premiums $109.6 $101.1
Net investment income 119.2 116.2
Investments gains 1.6 18.4
Other income 16.9 6.2
------ ------
247.3 241.9
------ ------
Insurance benefits 157.6 145.7
Advertising, selling and
administrative expenses 49.5 42.3
Amortization of intangibles and
present value of future profits 2.8 2.8
------ ------
209.9 190.8
------ ------
Operating income 37.4 51.1
Income taxes 15.0 17.6
------ ------
Income before cumulative effect of
accounting change 22.4 33.5
Cumulative effect of accounting change
(net of income taxes of $10.9) - (20.6)
------ ------
Net income $ 22.4 $ 12.9
====== ======
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. The Franklin Life Insurance Company (Concluded)
Summarized cash flow data for Franklin (in millions):
Three Months Ended
March 31,
----------------------
1994 1993
------- -------
Net cash provided from operating activities $ 75.2 $ 104.2
------- -------
Investing activities
Additions to property and equipment (0.9) (1.5)
Purchases of investments (350.8) (629.8)
Proceeds from sale of investments - 136.9
Proceeds from maturity and call of
investments 259.5 310.8
------- -------
Net cash used by investing activities (92.2) (183.6)
------- -------
Financing activities
Dividends to parent (10.3) (14.2)
Deposits on annuity and other
financial products 77.6 107.2
Withdrawals of annuity and other
financial products (81.7) (60.1)
------- -------
Net cash (used) provided by financing
activities (14.4) 32.9
------- -------
Net decrease in cash and cash equivalents $ (31.4) $ (46.5)
======= =======
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Supplementary Profit and Loss Information
Federal and foreign excise taxes included in consumer products
revenues (in millions):
Three Months
Ended March 31,
--------------------
1994 1993
--------- ---------
International tobacco $1,028.3 $1,461.4
Domestic tobacco 96.3 85.0
Distilled spirits 90.7 105.6
-------- --------
$1,215.3 $1,652.0
======== ========
The increase in the effective income tax rate to 41.8% from 33.1%
in 1993 reflected last year's reversal of tax provisions no longer
required, this year's proportionally greater impact of nondeductible
goodwill on reduced income and a higher U.S. income tax rate.
7. Earnings Per Share
Earnings per Common share are based on the weighted average number
of Common shares outstanding in each period and after preferred stock
dividend requirements.
Fully diluted earnings per Common share assume that any convertible
debentures and convertible preferred shares outstanding at the
beginning of each period, or at their date of issuance, if later, were
converted at those dates, with related interest, preferred stock
dividend requirements and outstanding Common shares adjusted
accordingly. It also assumes that outstanding Common shares were
increased by shares issuable upon exercise of those stock options for
which market price exceeds exercise price, less shares which could
have been purchased by the Company with related proceeds.
8. 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.
- 10 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
9. 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.
10. Subsequent Event
On April 26, 1994, the Company announced that it entered into an
agreement for the sale of The American Tobacco Company to B.A.T
Industries, PLC for a price of $1 billion, which would be largely tax
free. The transaction is subject to review by government antitrust
agencies and other conditions. The proceeds from the sale could be
used for share purchases, debt reduction, strategic acquisitions or
other general corporate purposes.
On April 26, 1994, the Company's subsidiary in the U.K., Gallaher
Limited, agreed to the sale to B.A.T Industries, PLC of its Silk Cut
trademark rights outside of Europe in exchange for a long-term
manufacturing arrangement. This transaction is contingent upon the
completion of the sale of The American Tobacco Company.
American Tobacco's revenues and operating income were as follows
(in millions):
Year Ended Three Months Ended
December 31, 1993 March 31, 1994
-------------------- --------------------
Revenues $1,501.5 $376.5
======== ======
Operating income $169.2 $55.4
====== =====
If the transaction is consummated, the estimated gain, which will
be based on the carrying value of The American Tobacco Company at the
date of closing, will be in the range of $500 million, net of taxes,
or about $2.50 per share.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------
To the Board of Directors of American Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
American Brands, Inc. and Subsidiaries as of March 31, 1994, and the
related condensed consolidated statements of income and cash flows for
the three-month periods ended March 31, 1994 and 1993. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1993, and the related consolidated statements of income, cash flows
and Common stockholders' equity for the year then ended (not presented
herein) and in our report dated February 1, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1993, is fairly stated
in all material respects in relation to the consolidated balance sheet
from which it has been derived.
1301 Avenue of the Americas
New York, New York
May 12, 1994 COOPERS & LYBRAND
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - ------- AND RESULTS OF OPERATIONS.
-----------------------------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for Three Months Ended March 31, 1994 as Compared
to Three Months Ended March 31, 1993
-----------------------------------------------------------------------
Revenues Operating Income
---------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
(In millions)
Tobacco products
International $1,330.3 $1,889.3 $125.1 $165.1
Domestic 376.5 407.5 55.4 102.5
-------- -------- ------ ------
Total Tobacco 1,706.8 2,296.8 180.5 267.6
Distilled spirits 240.6 246.6 30.1 39.4
Life insurance 247.3 241.9 37.4 51.1
Hardware and home
improvement products 289.3 258.8 41.0 37.0
Office products 232.9 228.4 14.3 13.1
Specialty businesses 531.3 465.1 25.0 22.6
-------- -------- ------ ------
$3,248.2 $3,737.6 $328.3 $430.8
======== ======== ====== ======
CONSOLIDATED
- - ------------
Revenues and operating income decreased 13% and 24%, respectively. Lower
volume, principally a cigarette unit decline in international tobacco due
to a change in timing of the U.K. government budget announcements, and
domestic tobacco price reductions put in effect in August 1993 were the
major contributors to the declines. Nontobacco revenues increased 7% on
new products, price increases and the acquisition of Invergordon, partly
offset by volume declines. Nontobacco operating income decreased 9%,
principally on lower investment gains in the life insurance segment and
lower distilled spirits volume.
The increase in the effective income tax rate to 41.8% from 33.1% in 1993
reflected last year's reversal of tax provisions no longer required, this
year's proportionally greater impact of nondeductible goodwill on reduced
income and a higher U.S. income tax rate.
Net income was $149.2 million or 74 cents per Common share for the three
months ending March 31, 1994, compared to net income of $46.1 million, or
23 cents per share, and income before accounting changes of $247.1 million,
or $1.22 per share, last year. Last year included a one-time charge
related to the adoption of FAS Statements No. 106 and 112.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- - ------------
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 investment gains during 1993.
Domestic tobacco will continue to be consolidated in American Brands'
results pending consummation of the sale of The American Tobacco Company to
B.A.T Industries, PLC.
The 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.
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 May 12, 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.
Tobacco Products
- - ----------------
Worldwide revenues decreased 26% and operating income declined 33%; total
cigarette units decreased 16.5%.
International tobacco revenues in sterling were down 30% on a 42.1%
decrease in U.K. cigarette unit sales, partly offset by price increases
principally resulting from higher U.K. tobacco taxes and an 81.3% unit
increase in export sales. U.K. cigarette industry volume declined 40% and
the underlying consumer demand is estimated to have declined in the area of
4.6%. A change in the timing of the U.K. budget announcements has
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Tobacco Products (Continued)
- - ----------------
significantly impacted U.K. cigarette unit sales. The first quarter of
1993 benefited from trade buying in anticipation of the March 1993 U.K.
budget announcement. A second budget announcement on November 30, 1993 had
the effect of drawing sales into the fourth quarter of 1993 from this
year's first quarter. Operating income in sterling decreased 25% on the
cigarette volume decline, partly offset by lower operating expenses, as
1993 included significant marketing costs associated with the launch in
January of Benson and Hedges Superkings. In dollars, revenues and
operating income percentage changes approximated the sterling results.
Domestic tobacco revenues declined 8% reflecting the August 1993 list price
reductions, partly offset by increased volume and new products. American
Tobacco's U.S. unit shipments increased 13.8% while industry shipments
increased 8.4%. American Tobacco has increased its market share for both
the quarter (7.20% from 6.86% last year) and the latest twelve months
(6.83% from 6.66%). Unit sales of the more profitable premium brands
increased 1.9%, continuing to lag the industry's performance. The
industry's less profitable price-value category, comprising discount and
deep discount brands, accounted for approximately 37% of the market in 1993
and about 33% in the first quarter of 1994. American Tobacco's price-value
brands increased 26.2% as discount and deep discount brands increased 34.3%
and 11.7%, respectively. The discount brand increase reflected a strong
performance by Montclair and Misty while the deep discount increase
largely reflected the introduction of Summit in March 1993. Price-value
brands accounted for 54% of American Tobacco's U.S. unit sales in this
year's first quarter, compared to 49% in 1993's first quarter. Operating
income declined 46% reflecting the lower prices and a less favorable
product mix, partly offset by volume increases and lower marketing and
administrative expenses, reflecting cost and workforce reduction programs.
Profit comparisons for domestic tobacco will remain difficult in the second
quarter, but should be positive in the second half of the year.
U.S. federal excise taxes on cigarettes increased four cents per pack on
January 1, 1991 and 1993. The Clinton administration has proposed
increasing the tax on cigarettes from 24 cents to 99 cents per pack.
Legislation has also been introduced in the U.S. Congress that would
increase excise taxes on cigarettes substantially more than the
administration's proposed increase. U.K. tobacco taxes increased by 11
pence and 10 pence per pack in November and March 1993, respectively, the
fourth consecutive year of increases. The likelihood and effects of any
future tax increases cannot be determined but would likely add to the
overall industry declines and the shift to lower priced brands.
Congressional hearings have been held to determine the need for FDA
regulation of cigarettes due to nicotine content, and extensive publicity
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Tobacco Products (Concluded)
- - ----------------
has occurred relative to cigarette ingredients. The industry has released
lists of cigarette ingredients.
Legislation which has passed both Houses of the Florida State legislature
would permit the State to sue manufacturers to recover Medicaid costs for
individuals claiming product-related illness. In such an action, the State
would be permitted to rely upon evidence showing injury to be statistically
associated with that product. The State would not have to prove that the
Medicaid recipient used the particular manufacturer's product; rather, the
legislation would impose liability on the basis of a manufacturer's "market
share." Manufacturers would be precluded from asserting various defenses
against liability. While the measure does not mention the tobacco industry
by name, supporters of the legislation have been reported as saying that
tobacco manufacturers are the target of the legislation. It is not
possible to predict the impact of such legislation on American Tobacco or
the industry.
Distilled Spirits
- - -----------------
Worldwide revenues and operating income decreased 2% and 24%, respectively.
Beam's revenues declined 11% on lower domestic volume reflecting a
reduction in wholesale customers' inventory levels. With a continuing
consolidation of distilled spirits wholesalers and retailers, Beam has
increased its focus on retail point of purchase and encouraged its
wholesale customers to draw down their inventories. As a result, domestic
branded case sales declined 15.7%. Tempered by a 23.1% increase in
exported branded case sales, worldwide branded case sales declined 9.2%.
Operating income declined 26% on the impact of the deliberate reduction of
trade inventory levels and acceleration of both domestic spending to
support regional marketing programs and consumer point of purchase as well
as international spending for promotional support. Beam's decline
primarily resulted from changes in the operation of its business and is not
believed to be trend indicative.
Whyte & Mackay's revenues in sterling were up 35% on inclusion of
Invergordon. Worldwide unit volume was up 114.6%. Excluding Invergordon,
U.K. and worldwide unit volume declined 19.8% and 16.1%, respectively,
reflecting aggressive competition with increased promotional and pricing
activity within the industry. Operating income in sterling was up 46% on
inclusion of Invergordon and continuing profit improvement from higher
margins, despite the lingering effects of the U.K. recession and
competitive pricing pressures.
- 16 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Life Insurance
- - --------------
Record revenues were up 2% reflecting higher commissions and allowances on
group life and health reinsurance, as well as increased ordinary life
premiums and net investment income, partly offset by lower investment
gains. The $16.8 million decline in investment gains reflected
substantially lower gains from equity securities (including the effect of
adoption of FAS Statement No. 115), while gains from high coupon bond
redemptions slightly exceeded last year's level. Although investment gains
and redemptions are dependent on market conditions and cannot be predicted,
bond redemption gain comparisons are likely to be unfavorable for the
remainder of the year. The large number of high coupon bond redemptions
will continue to adversely affect future net investment income. FAS
Statement No. 115, which requires inclusion of market fluctuations on the
trading portfolio in income, may add increased volatility to future
results. Operating income declined 27% reflecting the substantially lower
investment gains. Excluding investment gains, operating income increased
9% as the higher revenues were partly offset by increased insurance
benefits and selling and administrative expenses.
Hardware and Home Improvement Products
- - --------------------------------------
Record revenues increased 12% on new products, line extensions, volume
gains and price increases. All companies were up except Waterloo. Moen,
the major contributor to the increase, posted record revenues on volume
gains from new marketing programs and introduction of several new faucet
lines last year. Record operating income was up 11% on the record
revenues, partly offset by higher marketing and administrative expenses.
Office Products
- - ---------------
Revenues increased 2% as benefits from new products contributed to an
increase in market share in ACCO's principal markets. The increase in
revenues was partly offset by volume declines, reflecting substantial trade
inventory reductions by national wholesalers in the U.S. and U.K., and
translation at lower average foreign exchange rates. Operating income was
up 9%, principally reflecting the higher revenues and the benefits from
ongoing cost reductions, partly offset by higher marketing expenses.
- 17 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Specialty Businesses
- - --------------------
Specialty businesses revenues were as follows (in millions):
Three Months Ended
March 31,
-------------------
1994 1993
------- -------
Golf and leisure products $133.5 $121.9
Optical goods and services 83.7 90.8
Retail distribution 333.5 332.5
Housewares 20.2 23.6
Rubber products 14.1 13.4
Other 1.6 1.9
------ ------
586.6 584.1
Less intersegment elimination 55.3 119.0
------ ------
$531.3 $465.1
====== ======
Revenues and operating income increased 14% and 11%, respectively.
Record golf and leisure products revenues and operating income were up 10%
and 15%, respectively. The increases primarily resulted from benefits of
new golf ball products and a 9.1% unit volume improvement in golf shoes,
partly offset by increased operating costs, principally marketing.
In sterling, operating income from foreign businesses declined 9%. The
decline was principally due to the effects of intense competition, which
had the greatest impact on optical volume. In dollars, the operating
income percent change approximated the sterling result.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Net cash provided from operating activities of $622.5 million for the
quarter ended March 31, 1994 increased $297.8 million and exceeded the
funds required for capital expenditures and dividends by $488.5 million.
The increase was largely attributable to the shift in international
tobacco's sales pattern resulting from the timing of the U.K. budget
announcements. The shift in sales pattern impacted accounts receivable,
accrued excise taxes and inventories.
Net cash used by investing activities for the quarter ended March 31, 1994
was $122 million as compared with $231.4 million in 1993, principally
reflecting lower insurance investment activity.
- 18 -
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (Concluded)
- - -------------------------------
In addition, the adoption of FAS Statement No. 115 has affected both the
operating and investing activities by classifying the transactions relating
to trading securities as operating activities, whereas prior to 1994 these
transactions were classified as investing activities.
Net cash used by financing activities for the quarter ended March 31, 1994
was $508.8 million as compared to $119 million in 1993, reflecting higher
repayments.
Total debt at March 31, 1994 aggregated $3.3 billion, a decrease of $402.8
million from December 31, 1993 principally due to the timing of
international tobacco's receipts related to the November 1993 U.K. pre-
budget buy-in. The ratio of total debt to total capital decreased from
46.2% at December 31, 1993 to 43.1% at March 31, 1994.
The Company believes that its internally generated funds, together with its
access to global credit markets, are more than adequate to meet its capital
needs.
Proceeds from the sale of The American Tobacco Company, if consummated,
could be used for share purchases, debt reduction, strategic acquisitions
or other general corporate purposes. For further information regarding the
agreement to sell American Tobacco, see note 10, Notes to Condensed
Consolidated Financial Statements.
- 19 -
<PAGE>
PART I - EXHIBIT A
------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Three Months Ended
March 31,
----------------------
1994 1993
------ ------
Income before cumulative effect of
accounting changes $149.2 $ 247.1
Preferred stock dividend requirements (0.4) (0.4)
------ -------
Income available before accounting changes for
computing earnings per Common share - primary 148.8 246.7
Cumulative effect of accounting changes - (201.0)
------ -------
Net income for computing earnings
per Common share - primary $148.8 $ 45.7
====== =======
Income available before accounting changes for
computing earnings per Common share - primary $148.8 $ 246.7
Convertible preferred stock dividend requirements 0.4 0.4
Interest expense and related charges on
convertible debentures 5.4 5.5
------ -------
Income available before accounting changes for
computing earnings per Common share -
fully diluted 154.6 252.6
Cumulative effect of accounting changes - (201.0)
------ -------
Net income for computing earnings per Common
share - fully diluted $154.6 $ 51.6
====== =======
- 20 -
<PAGE>
PART I - EXHIBIT A (Concluded)
------------------
Computation of Weighted Average Number of
Common Shares Outstanding on a Fully Diluted Basis (Unaudited)
--------------------------------------------------------------
(In millions, except per share amounts)
Three Months Ended
March 31,
----------------------
1994 1993
----- -----
Weighted average number of Common shares
outstanding during each period - primary 201.8 202.0
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 2.2 2.5
Addition from assumed conversion of
convertible debentures 9.3 9.4
Other additions 0.2 0.3
----- -----
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 213.5 214.2
===== =====
Earnings per Common share
Primary
Income before cumulative effect of
accounting changes $.74 $1.22
Cumulative effect of accounting changes - (.99)
---- -----
Net income $.74 $ .23
==== =====
Fully diluted
Income before cumulative effect of
accounting changes $.72 $1.18
Cumulative effect of accounting changes - (.95)
---- -----
Net income $.72 $ .23
==== =====
- 21 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- - ------ -----------------
(a) (i) The American Tobacco Company ("ATCO") and other leading
tobacco manufacturers have been sued by parties seeking damages for cancer
and other ailments claimed to have resulted from tobacco use and by certain
asbestos manufacturers seeking unspecified amounts in indemnity or
contribution in third-party actions against all or most of the major
domestic tobacco manufacturers. At May 12, 1994, ATCO or ATCO's
predecessor had disposed of 233 actions, and the industry a total of 422,
all without recovery by the plaintiffs or by the third-party plaintiffs.
Although there was a jury award which was overturned on appeal against
another tobacco manufacturer in the Cipollone case, discussed below, there
has been no actual recovery of damages to date in any such action against
the tobacco manufacturers; however, unfavorable decisions in other cases
could increase filing of additional actions against the tobacco
manufacturers, which would add to the high cost of defending such
litigation as well as increase the defendants' damage exposure. It has
been reported that certain groups of attorneys are interested in promoting
product liability and other types of tobacco and health suits against the
tobacco manufacturers.
Eighteen cases have come to trial, all against manufacturers as
direct defendants. Sixteen of such cases resulted in judgments for the
defendant or defendants. At May 12, 1994, ATCO was a defendant in 32
pending cases. In two cases, ATCO has been joined as a defendant with
members of the asbestos industry and it is alleged that the combination of
smoking and exposure to asbestos produced injury and death. One case in
which ATCO is a defendant, Butler, et al. v. R.J. Reynolds Tobacco Co., et
al., (described under paragraph (a)(i) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993), in which plaintiffs are seeking damages for alleged injuries
claimed to have resulted from exposure to tobacco smoking of others, is
scheduled to come to trial on November 28, 1994. In Wilkes, et al. v. The
American Tobacco Company, et al., (described under paragraph (a)(i) of Item
3, "Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993), the jury found in favor of the
defendants on June 17, 1993. Plaintiffs have appealed from the judgment
entered on the jury verdict and from the trial court's denial of their
request to seek "lifetime damages" unrelated to the cause of death and
their request to seek punitive damages. ATCO has cross-appealed from the
trial court's pretrial ruling regarding "absolute liability" and the
court's ruling striking defendants' affirmative defenses. In Horton, et
al. v. The American Tobacco Company, et al., (described under paragraph
(a)(i) of Item 3, "Legal Proceedings", of Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993), on September 24,
1990, the jury found "for the plaintiffs against [T]he American Tobacco
Company and against New Deal Tobacco and Candy Company, Inc. and assessed
actual damages at $0." Plaintiffs have appealed from the judgment entered
on the jury verdict and from the court's denial of their post-trial motion
for, alternatively, an additur on damages, a new trial on the issue of
damages or a new trial on all issues. ATCO has cross-appealed from the
judgment and from the court's order denying its motion for judgment
- 22 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- - ------ -----------------
notwithstanding the verdict. Oral argument on the appeals took place
before the Mississippi Supreme Court on August 17, 1993.
In Broin, et al. v. Philip Morris Companies Inc., et al.,
(described under paragraph (a)(i) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993), certain airline flight attendants are seeking unspecified
compensatory and $5 billion punitive damages for alleged injuries claimed
to have resulted from exposure to tobacco smoking of others and are seeking
to establish class-action status on behalf of other alleged nonsmoking
flight attendants. It has also been reported that other claims against the
tobacco manufacturers may be made seeking damages for alleged injuries
claimed to have resulted from exposure to tobacco smoking of others.
Additional purported "class actions" have been filed against ATCO
and other leading tobacco manufacturers. In Castano, et al. v. The
American Tobacco Company, et al., described below, plaintiffs have asserted
an alleged class action claiming that defendants caused members of the
purported class to become "addicted" to cigarettes through manipulation of
nicotine levels. The alleged class consists of all residents or
domiciliaries of the United States who claim to be "addicted" to
cigarettes, as well as survivors who claim that their decedents were
injured by their "addiction" to tobacco products. Plaintiffs seek
equitable relief as well as compensatory and punitive damages. In Allman,
et al. v. The American Tobacco Company, et al., described below, plaintiffs
have asserted an alleged class action under the Racketeer Influenced and
Corrupt Organizations Act on behalf of all persons in the United States who
have become "addicted" to defendants' cigarette products and who have or
who will in the future be prescribed a "nicotine patch" to help them break
their purported "addiction." Plaintiffs are seeking treble compensatory
damages for amounts expended for "nicotine patches and associated medical
services" as well as unspecified injunctive relief. In Engle, et al. v. RJ
Reynolds Tobacco Company, et al., described below, plaintiffs claim to
represent all United States citizens and residents, as well as their
survivors, who have suffered or died from diseases allegedly caused by
smoking cigarettes containing nicotine. Plaintiffs seek compensatory
damages in excess of one hundred billion dollars as well as punitive
damages in excess of one hundred billion dollars. Plaintiffs additionally
seek equitable relief, including the establishment of a medical fund for
future healthcare costs.
ATCO's counsel, Chadbourne & Parke, have advised that, in their
opinion, the specified damages claimed in pending actions against ATCO,
which approximate $206,618,185,000 in the aggregate, are exaggerated.
In Cordova v. Liggett Group Inc., et al., (described under
paragraph (a)(i) of Item 3, "Legal Proceedings", of Registrant's Annual
Report on form 10-K for the fiscal year ended December 31, 1993),
plaintiffs are seeking injunctive relief and restitution on behalf of the
general public of the State of California for defendants' claimed failure
to disclose to the public information regarding research relating to
smoking and health sponsored by The Council for Tobacco Research, an
organization whose members include ATCO and other cigarette manufacturers.
- 23 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- - ------ -----------------
Plaintiff's complaint in Cordova references the opinion filed February 6,
1992 by Judge Sarokin of the United States District Court for the District
of New Jersey in the case of Haines v. Liggett Group Inc., et al., to which
ATCO is not a party. In that opinion, Judge Sarokin ruled that plaintiff
had made sufficient showing of evidence to warrant disclosure under the
crime-fraud exception to the attorney-client privilege of documents
regarding research relating to smoking and health sponsored by The Council
for Tobacco Research which the defendants in that case had claimed were
protected from discovery by plaintiff. Defendants in Haines sought
appellate review of Judge Sarokin's February 6, 1992 opinion. On September
4, 1992, the United States Court of Appeals for the Third Circuit granted
defendant's petition for writ of mandamus and directed that Judge Sarokin's
February 6, 1992 ruling be vacated and that the case be remanded and
assigned to another District Court judge. The opinion of the Court of
Appeals also stated that the District Court judge to whom the case is
reassigned on remand may reconsider the magistrate judge's order stating
that the crime-fraud exception did not apply, which order had been reversed
by Judge Sarokin's ruling, or alternatively may remand the proceedings to
the magistrate judge for his reconsideration. On September 14, 1992, Judge
Sarokin, as directed, vacated his February 6, 1992 opinion and orders in
Haines. Plaintiff's allegations in Haines may be similar to allegations
which have been made in other actions in which ATCO is a defendant. ATCO
has been advised that the United States Attorney for the Eastern District
of New York has commenced a criminal investigation in connection with
activities relating to The Council for Tobacco Research following the
February 6, 1992 opinion in Haines. It is not possible to predict the
outcome of the investigation.
Another case, Cipollone v. Liggett Group, Inc., et al., tried
against manufacturers other than ATCO, resulted in a jury award of $400,000
against one of three defendants on a theory of breach of warranty. On
January 5, 1990, the jury award in Cipollone was reversed and remanded for
a new trial by the United States Court of Appeals for the Third Circuit.
Plaintiff petitioned the United States Supreme Court to review that ruling.
As described below, on June 24, 1992, the Supreme Court reversed in part
and affirmed in part the ruling of the Court of Appeals. The Cipollone
case was tried before Judge Sarokin. On September 11, 1992, following the
September 4, 1992 decision of the United States Court of Appeals for the
Third Circuit in Haines discussed above, Judge Sarokin removed himself from
the Cipollone case. On November 5, 1992, plaintiff voluntarily dismissed
the Cipollone case with prejudice. Counsel for plaintiff in Cipollone also
represented the plaintiffs in Smith, et al. v. R.J. Reynolds Tobacco Co.,
et al. (described under paragraph (a)(i) of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993) and the plaintiff
in Haines. On December 2, 1992, plaintiffs' counsel in Smith filed a
motion to withdraw as counsel of record; that motion was granted on January
8, 1993. Plaintiffs appealed the ruling. On August 9, 1993, the Appellate
Division of the New Jersey Superior Court vacated the lower court's ruling
which had permitted plaintiffs' counsel to withdraw. The appellate court
directed that the trial court convene a hearing on plaintiffs' counsel's
motion to withdraw. Plaintiff's counsel in Haines also sought to withdraw
and be substituted by new counsel. The motion to withdraw in Haines,
however, was denied by United States District Judge Lechner on January 26,
- 24 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- - ------ -----------------
1993. Counsel appealed. Argument on that appeal was heard before the
Court of Appeals for the Third Circuit on September 22, 1993.
On June 24, 1992, the Supreme Court reversed in part and affirmed
in part the ruling of the Court of Appeals for the Third Circuit in
Cipollone. The Supreme Court held that the 1965 version of the Labeling
Act did not preempt lawsuits seeking money damages for personal injuries
allegedly caused by cigarette smoking. The Supreme Court further held that
the Public Health Cigarette Smoking Act of 1969, which, among other things,
amended the preemption provision of the 1965 version of the Labeling Act
effective July 1, 1969, preempts such lawsuits based on alleged failure to
warn and the neutralization of the federally mandated warnings to the
extent that those claims rely on omissions or inclusions in cigarette
advertising or promotions, but that the 1969 version of the Labeling Act
does not preempt claims based on alleged breach of express warranty, or
certain claims based on intentional fraud and misrepresentation or
conspiracy.
In addition, legislation has been introduced in the United States
Congress that if enacted would limit the effect of the preemption
provisions of the Labeling Act. It is not possible to predict whether or
not the Supreme Court's decision in Cipollone will affect, or whether or
not the enactment of any such legislation would affect, filing of
additional actions against tobacco manufacturers and, as a result,
litigation costs and defendant's damage exposure.
ATCO has received a civil investigative demand from the U.S.
Department of Justice, Antitrust Division, seeking the production of
documents relating to matters including "fire-safe or self-extinguishing
cigarettes". The civil investigative demand states that it has been issued
in the course of an investigation to determine whether there is or has been
a violation of Section 1 of the Sherman Act. It is not possible to predict
the outcome of the investigation.
While it is not possible to predict the outcome of pending
litigation, management of Registrant does not believe that, based on
failure of recovery to date except as noted above and the advice of
counsel, the pending litigation will have a material adverse effect on
Registrant's financial condition. If, however, there were to be a
significant increase in such litigation, the increased financial burden
could be material. See note 8 "Pending Litigation" in the Notes to
Condensed Consolidated Financial Statements set forth in Part I, Item 1 of
this Quarterly Report on Form 10-Q, which note is incorporated herein by
reference.
ATCO's counsel have advised that, in their opinion, on the basis
of their investigations generally with respect to suits and claims of this
character, ATCO has meritorious defenses to the above-mentioned actions and
threatened actions. The actions will be vigorously defended on the merits.
With regard to proceedings of the above-described type initiated
since January 1, 1994, four new cases have been filed: Castano v. The
American Tobacco Company, et. al., United States District Court for the
- 25 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (continued)
- - ------ -----------------
Eastern District of Louisiana, March 29, 1994; Allman v. Philip Morris,
Inc., et al., United States District Court for the Southern District of
California, March 30, 1994; Higley v. Philip Morris, Inc., et al., United
States District Court for the Southern District of California, March 31,
1994; and Engle, et al. v. RJ Reynolds Tobacco Company, et al., Circuit
Court of the 11th Judicial Circuit, State of Florida, County of Dade, May
6, 1994.
(ii) Reference is made to the discussion of Dean v. Gallaher
Limited in paragraph (a)(ii) of Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1993. Plaintiff served a Statement of Claim against a predecessor to
Gallaher, Hergall (1981) Limited (In Liquidation) ("Hergall"), on February
22, 1994. Plaintiff's lawyers also purported to re-amend the Statement of
Claim against Gallaher. On February 28, 1994, Gallaher and Hergall each
filed applications to strike out parts of plaintiff's Statements of Claim
as irrelevant and likely to prejudice or delay trial of these actions.
These applications were refused (with leave to appeal) by Lord Justice
Nicholson at a hearing in the High Court of Justice in Northern Ireland on
May 5, 1994. Previous orders extending the time in which the defendants'
defenses had to be served, were extended by Lord Justice Nicholson. As a
result, defenses will not be due until after final determination of any
appeal from the order refusing defendants' "strike-out" applications. An
application for Judicial Review of the refusal to grant to approximately
225 prospective plaintiffs Legal Aid to prepare and file smoking and health
lawsuits against tobacco manufacturers, including Gallaher, is pending. At
a hearing in the High Court of Justice on April 22, 1994, Mr. Justice
Turner ruled that the tobacco manufacturers, including Gallaher, were not
entitled to participate in the judicial review proceedings as parties
"directly affected" within the meaning of Order 53 of the Rules of the
Supreme Court. An appeal is being considered. Reference is made to the
discussion of Brennan v. Gallaher Limited in paragraph (a)(ii) of Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993. Plaintiff in Brennan served a Summons
on or about March 23, 1994, which has not yet been set for hearing, seeking
leave to substitute Hergall for Gallaher as the defendant in this action.
(b) Reference is made to the discussion of People of the State of
California ex rel. Daniel E. Lungren, Attorney General of the State of
California v. American Standard, et al., and the related action, Natural
Resources Defense Council, et al. v. Price Pfister, Inc., et al., in
paragraph (d) of Item 3, "Legal Proceedings", of Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993. The plaintiffs
in both actions moved for injunctive relief to require certain of the
defendants to post prescribed warnings. In Natural Resources Defense
Council, the court refused to issue any order regarding the motion pending
resolution of defendants' demurrer challenging plaintiffs' standing to
bring the action, which demurrer was filed on April 16, 1993. By order
dated May 10, 1994, the court ruled that a plaintiff, the Natural Resources
Defense Council (the "NRDC"), has standing to sue with respect to non-
residential faucets only, and also ruled that the NRDC is not entitled to
restitution, compensatory damages or punitive damages. In Lungren, on
April 16, 1993, defendants filed a demurrer in respect of plaintiffs'
- 26 -
<PAGE>
Item 1. LEGAL PROCEEDINGS. (concluded)
- - ------ -----------------
claims based on defendants' alleged intentional discharge of lead from
faucets to sources of drinking water. At a hearing on the demurrer on May
4, 1994, the court sustained the demurrer that water from faucets does not
constitute a prohibited "discharge" within the meaning of the statute.
These actions will be vigorously contested.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- - ------ --------------------------------
(a) Exhibits.
--------
12. Statement re computation of ratio of earnings to
fixed charges.
15. Letter from Coopers & Lybrand dated May 12, 1994
re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke.
In lieu of filing certain instruments with respect to long-term
debt of the kind described in Item 601(b)(4) of Regulation S-K,
Registrant agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
(b) Reports on Form 8-K.
-------------------
Registrant filed a Current Report on Form 8-K, dated January 26,
1994, in respect of Registrant's press release dated January 24,
1994 announcing Registrant's financial results for the three-
month and twelve-month periods ended December 31, 1993 (Items 5
and 7(c)).
Registrant filed a Current Report on Form 8-K, dated February 22,
1994, in respect of (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 of Registrant and
consolidated subsidiaries (Items 5 and 7 (c)).
- 27 -
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (concluded)
- - ------ --------------------------------
Registrant filed a Current Report on Form 8-K, dated April 26,
1994, in respect of Registrant's press release dated April 26,
1994 announcing (i) Registrant's financial results for the three-
month period ended March 31, 1994, (ii) that Registrant had
entered into an agreement with B.A.T Industries p.l.c. for the
sale of The American Tobacco Company and (iii) that Registrant
had increased its dividend (Items 5 and 7(c)).
- 28 -
<PAGE>
This Quarterly Report shall not be construed as a waiver of the right to
contest the validity or scope of any or all of the provisions of the
Securities Exchange Act of 1934 under the Constitution of the United
States, or the validity of any rule or regulation made or to be made under
such Act.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMERICAN BRANDS, INC.
---------------------
(Registrant)
Date: May 12, 1994 By R.L. Plancher
------------ -----------------------------
R.L. Plancher
Senior Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- - ------- -------------
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from Coopers & Lybrand dated May 12,
1994 re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke.
PART II - EXHIBIT 12
--------------------
<TABLE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
------------------------------------------------------ --------------
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income before income
taxes and minority interest.......... $1,065.2 $1,044.6 $1,241.4 $1,401.9 $1,079.6 $257.0
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies................... 0.1 0.1 0.1 0.3 0.8 0.2
Capitalized interest........ 1.9 1.5 1.0 1.0 2.5 0.6
-------- -------- -------- -------- -------- ------
1,063.2 1,043.0 1,240.3 1,400.6 1,076.3 256.2
======== ======== ======== ======== ======== ======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses....................... 292.7 290.2 276.6 283.4 258.7 64.9
Portion of rentals representative
of an interest factor.............. 22.0 27.6 30.7 32.6 30.1 7.7
-------- -------- -------- -------- -------- ------
Total Fixed Charges......... 314.7 317.8 307.3 316.0 288.8 72.6
-------- -------- -------- -------- -------- ------
Total Earnings Available.... $1,377.9 $1,360.8 $1,547.6 $1,716.6 $1,365.1 $328.8
======== ======== ======== ======== ======== ======
Ratio of Earnings to Fixed Charges.... 4.38 4.28 5.04 5.43 4.73 4.53
==== ==== ==== ==== ==== ====
</TABLE>
PART II - EXHIBIT 15
--------------------
May 12, 1994
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: American Brands, Inc.
We are aware that our report dated May 12, 1994, on our review of
interim financial information of American Brands, Inc. and Subsidiaries for
the three-month periods ended March 31, 1994 and 1993 included in this Form
10-Q, has been incorporated by reference into (a) Post-Effective Amendment
No. 4 to the Registration Statement on Form S-8 (Registration No. 33-13363)
relating to the Profit-Sharing Plan of American Brands, Inc., the
Registration Statement on Form S-8 (Registration No. 33-45869) relating to
the Profit-Sharing Plan of The American Tobacco Company and the
Registration Statement on Form S-8 (Registration No. 33-39855) relating to
the 1990 Long-Term Incentive Plan of American Brands, Inc., and the
prospectuses related thereto, and (b) the prospectuses related to the
Registration Statements on Form S-3 (Registration Nos. 33-50832, 33 -42397,
33-23039 and 33-3985) of American Brands, Inc. Pursuant to Rule 436(c)
under the Securities Act of 1933, this report should not be considered a
part of such registration statements or prospectuses or certification by us
within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
COOPERS & LYBRAND
1301 Avenue of the Americas
New York, New York 10019
PART II - EXHIBIT 23
--------------------
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions contained
in Part II, Item 1, "Legal Proceedings", of this Quarterly Report on Form
10-Q of American Brands, Inc. into (a) Post-Effective Amendment No. 4 to
the Registration Statement on Form S-8 (Registration No. 33-13363) relating
to the Profit-Sharing Plan of American Brands, Inc., the Registration
Statement on Form S-8 (Registration No. 33-45869) relating to the Profit-
Sharing Plan of The American Tobacco Company and the Registration Statement
on Form S-8 (Registration No. 33-39855) relating to the 1990 Long-Term
Incentive Plan of American Brands, Inc., and the prospectuses related
thereto, and (b) the prospectuses related to the Registration Statements on
Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of
American Brands, Inc.
CHADBOURNE & PARKE
30 Rockefeller Plaza
New York, New York 10112
May 12, 1994
