UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended September 30, 1995
AMERICAN BRANDS, INC.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock, par value
$3.125 per share, at October 31, 1995 was 181,491,242 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- ------ --------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
September 30, December 31,
1995 1994
------------ ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 392.7 $ 110.1
Accounts receivable, net 1,391.8 1,067.9
Inventories
Leaf tobacco 171.1 132.2
Bulk whiskey 349.9 351.4
Other raw materials, supplies and
work in process 291.4 266.8
Finished products 491.8 1,265.3
------- --------
1,304.2 2,015.7
Net assets of discontinued
operations - 1,170.0
Other current assets 227.6 307.2
-------- --------
Total current assets 3,316.3 4,670.9
Property, plant and equipment, net 1,118.1 1,212.7
Intangibles resulting from
business acquisitions, net 3,355.2 3,549.1
Other assets 401.5 361.7
-------- --------
Total assets $8,191.1 $9,794.4
======== ========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
September 30, December 31,
1995 1994
------------ ------------
(Unaudited)
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 65.4 $ 77.3
Commercial paper - 103.3
Accounts payable 256.6 471.4
Accrued expenses and other liabilities 700.3 856.2
Accrued excise and other taxes 1,197.5 1,082.1
Current portion of long-term debt 128.0 525.2
--------- --------
Total current liabilities 2,347.8 3,115.5
Long-term debt 1,382.9 1,512.1
Deferred income taxes 143.4 133.0
Postretirement and other liabilities 396.3 396.3
--------- --------
Total liabilities 4,270.4 5,156.9
--------- --------
$2.67 Convertible Preferred stock -
redeemable at Company's option 14.6 15.7
--------- --------
Common stockholders' equity
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 173.1 174.6
Foreign currency adjustments (227.9) (249.0)
Retained earnings 4,732.7 4,724.4
Treasury stock, at cost (1,489.2) (745.6)
--------- --------
Total Common stockholders' equity 3,906.1 4,621.8
--------- --------
Total liabilities and
stockholders' equity $ 8,191.1 $9,794.4
========= ========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 1995 and 1994
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1995 1994
(Restated)
-------- ----------
Net sales $8,282.5 $9,396.4
-------- --------
Cost of products sold 2,367.7 2,862.7
Excise taxes on products sold 3,859.5 3,825.1
-------- --------
6,227.2 6,687.8
-------- --------
Gross profit 2,055.3 2,708.6
-------- --------
Advertising, selling and
administrative expenses 1,204.6 1,738.5
Amortization of intangibles 71.8 71.9
-------- --------
1,276.4 1,810.4
-------- --------
Operating income 778.9 898.2
-------- --------
Interest and related expenses 122.2 165.5
Corporate administrative expenses 64.9 52.7
Other (income) expenses, net (21.4) 6.4
-------- --------
165.7 224.6
-------- --------
613.2 673.6
Gain on disposal of businesses 20.0 -
-------- --------
Income from continuing operations before
income taxes 633.2 673.6
Income taxes 244.2 260.4
-------- --------
Income from continuing operations before
extraordinary item 389.0 413.2
Income from discontinued operations - 51.8
Extraordinary item (2.7) -
-------- --------
Net income $ 386.3 $ 465.0
======== ========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 1995 and 1994 (Concluded)
-----------------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1995 1994
(Restated)
------ ---------
Earnings per Common share
Primary
Income from continuing operations $2.05 $2.04
Income from discontinued operations - .26
Extraordinary item (.01) -
----- -----
Net income $2.04 $2.30
===== =====
Fully diluted
Income from continuing operations $2.01 $2.01
Income from discontinued operations - .24
Extraordinary item (.01) -
----- -----
Net income $2.00 $2.25
===== =====
Dividends paid per Common share $1.50 $1.4925
===== =======
Average number of Common shares outstanding
Primary 189.1 201.6
===== =====
Fully diluted 198.3 213.6
===== =====
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended September 30, 1995 and 1994
------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1995 1994
(Restated)
-------- ----------
Net sales $2,895.3 $3,354.6
-------- --------
Cost of products sold 762.7 974.0
Excise taxes on products sold 1,442.5 1,456.5
-------- --------
2,205.2 2,430.5
-------- --------
Gross profit 690.1 924.1
-------- --------
Advertising, selling and
administrative expenses 388.1 589.3
Amortization of intangibles 23.6 24.1
-------- --------
411.7 613.4
-------- --------
Operating income 278.4 310.7
-------- --------
Interest and related expenses 36.1 52.7
Corporate administrative expenses 22.7 24.0
Other (income) expenses, net (5.4) 1.5
-------- --------
53.4 78.2
-------- --------
225.0 232.5
Gain on disposal of businesses 20.0 -
-------- --------
Income from continuing operations before
income taxes 245.0 232.5
Income taxes 91.7 100.7
-------- --------
Income from continuing operations 153.3 131.8
Income from discontinued operations - 20.1
-------- --------
Net income $ 153.3 $ 151.9
======== ========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended September 30, 1995 and 1994 (Concluded)
------------------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1995 1994
(Restated)
------ ----------
Earnings per Common share
Primary
Income from continuing operations $.82 $.65
Income from discontinued operations - .10
---- ----
Net income $.82 $.75
==== ====
Fully diluted
Income from continuing operations $.80 $.64
Income from discontinued operations - .09
---- ----
Net income $.80 $.73
==== ====
Dividends paid per Common share $.50 $.50
==== ====
Average number of Common shares outstanding
Primary 184.7 201.3
===== =====
Fully diluted 191.7 213.3
===== =====
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Nine Months Ended September 30, 1995 and 1994
-----------------------------------------------------
(In millions)
(Unaudited)
1995 1994
(Restated)
------ ----------
Operating activities
Net income $ 386.3 $ 465.0
Income from discontinued operations - (51.8)
Extraordinary item 2.7 -
Depreciation and amortization 194.4 224.2
Gain on disposal of businesses (20.0) -
Increase in accounts receivable (350.0) (57.8)
Decrease in inventories 640.6 334.3
Decrease in accounts payable, accrued
expenses and other liabilities (214.0) (154.5)
Increase in accrued excise and other taxes 124.7 312.3
Other operating activities, net 24.6 48.3
-------- -------
Net cash provided from continuing operating
activities 789.3 1,120.0
-------- -------
Investing activities
Additions to property, plant and equipment (129.7) (121.7)
Proceeds from the disposition of operations,
net of cash 1,305.8 123.4
Other investing activities, net (11.4) (5.1)
-------- -------
Net cash provided (used) by investing
activities 1,164.7 (3.4)
-------- -------
Financing activities
Decrease in short-term debt (135.1) (558.0)
Repayment of long-term debt (490.1) (259.4)
Dividends to stockholders (286.6) (302.1)
Cash purchases of Common stock for treasury (780.7) (20.1)
Other financing activities, net 15.9 1.5
-------- -------
Net cash used by financing activities (1,676.6) (1,138.1)
-------- -------
Effect of foreign exchange rate changes on cash 5.2 13.8
-------- -------
Cash provided by discontinued operations - 37.8
-------- -------
Net increase in cash and cash equivalents 282.6 30.1
Cash and cash equivalents at beginning of period 110.1 62.5
-------- -------
Cash and cash equivalents at end of period $ 392.7 $ 92.6
======== =======
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of September 30, 1995,
the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 1995 and 1994
and the related condensed consolidated statement of cash flows for the
nine-month periods ended September 30, 1995 and 1994 are unaudited. In
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such
adjustments consisted only of normal recurring items. Interim results
may not be indicative of results for a full year.
The 1994 condensed consolidated financial statements were restated
to reflect the Franklin life insurance business as a discontinued
operation.
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 1994 Annual Report on Form 10-K.
2. Dispositions
On July 12, 1994, Dollond & Aitchison Group PLC, a subsidiary of
Gallaher Limited, was sold for total consideration of $146 million,
which approximated the carrying value of the company.
On December 22, 1994, the Company sold The American Tobacco
Company, its domestic tobacco business, for $1 billion in cash, before
related expenses. An after-tax gain of $508.3 million, or $2.52 per
Common share, was recognized on the transaction in the fourth quarter
of 1994.
The Company announced plans to dispose of a number of nonstrategic
businesses and product lines, including U.K.-based Forbuoys (Retail
Distribution) and Prestige (Housewares), both subsidiaries of Gallaher
Limited, and in the fourth quarter of 1994 recorded an after-tax loss
provision of $241.3 million, or $1.20 per Common share. The sale of
Prestige was completed on May 2, 1995. With the sale of the retail
distribution operations on July 24, 1995, the Company has substantially
completed the disposition of nonstrategic businesses and product lines.
As a result, $20 million of the provision that was recorded in 1994 in
connection with the dispositions was reversed in the third quarter of
1995.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Discontinued Operations
On November 30, 1994, the Company entered into an agreement to
sell its Franklin life insurance business for $1.17 billion in cash,
before related expenses. A net loss of $206.8 million was recognized on
the transaction in the fourth quarter of 1994 in discontinued
operations. The sale was completed on January 31, 1995.
Summarized data for Franklin, net of interest allocation, is as
follows (in millions):
Nine Months Ended Three Months Ended
September 30, 1994 September 30, 1994
------------------ ------------------
Revenues $785.3 $300.9
====== ======
Income before taxes $84.6 $30.7
====== =====
Net income $51.8 $20.1
====== =====
4. Supplementary Profit and Loss Information
Federal and foreign excise taxes included in net sales are as
follows (in millions):
Nine Months Three Months
Ended September 30, Ended September 30,
------------------ -------------------
1995 1994 1995 1994
-------- ------- -------- --------
International tobacco $3,528.0 $3,185.0 $1,330.4 $1,235.2
Distilled spirits 331.5 326.3 112.1 120.2
Domestic tobacco - 313.8 - 101.1
-------- -------- -------- --------
$3,859.5 $3,825.1 $1,442.5 $1,456.5
======== ======== ======== ========
The lower effective income tax rate for the three-month period ended
September 30, 1995 principally reflected the reversal of $20 million
provided in connection with the disposition of nonstrategic businesses
for which no taxes were recorded.
5. 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
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Earnings Per Share - (Concluded)
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.
6. Dividends Declared
The Board of Directors declared dividends on the Company's Common
stock and $2.67 Convertible Preferred stock for the fourth quarter of
1995 in the amount of $.50 and $.6675, respectively, on September 27,
1995, payable in December 1995. The dividends for the fourth quarter of
1994 were declared on October 25, 1994, payable in December 1994. The
accrued expenses and other liabilities balance sheet caption as of
September 30, 1995 includes $91.4 million of dividends payable in
December 1995.
7. Credit Facilities
The Company extended to September 1, 2000 the expiration dates of
revolving credit agreements maintained by the Company with various
banks providing for unsecured committed borrowings of up to $4 billion,
including $1 billion in various Eurocurrencies. The commitment fee was
reduced to 0.15% per annum of the unused facility. The commitment fee
is subject to increases up to a maximum level of 0.25% per annum in the
event the Company's long-term debt rating falls below specified levels.
Other terms of the agreements remained substantially unchanged.
8. Pending Litigation
The Company and its subsidiaries are defendants in various
lawsuits associated with their business and operations, including
actions based upon allegations that human ailments have resulted from
tobacco use. It is not possible to predict the outcome of the pending
litigation, but 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 results of operations, cash flow or
financial condition of the Company. These actions are being vigorously
contested.
On December 22, 1994, the Company sold The American Tobacco
Company subsidiary to Brown & Williamson Tobacco Corporation, a
wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with
the sale, Brown & Williamson Tobacco Corporation and The American
Tobacco Company agreed to indemnify the Company against claims arising
from smoking and health and fire safe cigarette matters relating to the
tobacco business of The American Tobacco Company.
<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 upon the results of operations,
cash flow or financial condition of the Company.
10. Extraordinary Item
On April 11, 1995, holders of $199.5 million of the $200 million 5
3/4% Eurodollar Convertible Debentures, Due 2005, exercised their right
to "put" their debentures at a price of 114.74%, plus accrued interest.
This resulted in a total payment by the Company of $240.4 million,
including premium and accrued interest, and reduced the number of fully
diluted shares outstanding by 5.1 million. The extinguishment of debt
resulted in a charge of $4.1 million ($2.7 million net of taxes).
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of American Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of American
Brands, Inc. and Subsidiaries as of September 30, 1995, the related
condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 1995 and 1994 and the related
condensed consolidated statement of cash flows for the nine-month periods
ended September 30, 1995 and 1994. 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, 1994,
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, 1995, 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, 1994 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
November 9, 1995
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- AND RESULTS OF OPERATIONS.
-----------------------------------------------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Nine Months Ended September 30, 1995 as
Compared to the Nine Months Ended September 30, 1994
-----------------------------------------------------------------------
Net Sales Operating Income
------------------------ -----------------------
1995 1994 1995 1994
(Restated) (Restated)
-------- --------- ----- ---------
(In millions)
International tobacco $4,568.6 $4,153.8 $400.1 $358.6
Distilled spirits 877.8 839.4 126.4 123.7
Hardware and home
improvement products 962.4 932.3 127.7 130.7
Office products 844.6 725.7 42.3 36.6
Golf and leisure products 478.8 417.5 78.2 70.2
-------- -------- ------ ------
Ongoing operations 7,732.2 7,068.7 774.7 719.8
Domestic tobacco - 1,207.4 - 174.2
Other businesses 550.3 1,120.3 4.2 4.2
-------- -------- ------ ------
Continuing operations $8,282.5 $9,396.4 $778.9 $898.2
======== ======== ====== ======
CONSOLIDATED
- ------------
Net sales and operating income from ongoing operations, which excludes domestic
tobacco, life insurance and other businesses disposed (see notes 2 and 3 in the
Notes to Condensed Consolidated Financial Statements), increased 9% and 8%,
respectively. Excluding the favorable effects of higher average foreign exchange
rates of $227.5 million and $18.6 million, net sales and operating income from
ongoing operations were up 6% and 5%, respectively. Net sales increased due to
price increases (including international tobacco excise tax increases), new
products and line extensions, partly offset by volume declines. Operating income
increased due to the higher sales, partly offset by increased operating
expenses.
Net sales and operating income from continuing operations, which include
domestic tobacco for 1994 and other businesses disposed, decreased 12% and 13%,
respectively.
Corporate administrative expenses increased $12.2 million, reflecting
unfavorable comparisons to last year's reversal of accruals, notably for
nontobacco legal fees and a headquarters workforce reduction accomplished in
1994, and this year's higher stock appreciation rights expense.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
Interest and related expenses decreased due to lower average borrowings. Higher
interest income caused the favorable change in other (income) expenses, net.
Both changes reflected the use of proceeds from the disposition of The American
Tobacco Company and the Franklin life insurance business.
The gain on disposal of businesses reflected a reversal of $20 million of the
$241.3 million provision recorded in 1994 in connection with the disposition of
nonstrategic businesses.
Income from continuing operations before extraordinary item of $389 million, or
$2.05 per Common share, for the nine months ended September 30, 1995, compared
with $413.2 million, or $2.04 per share, last year. The decrease was largely due
to the absence of The American Tobacco Company's results of operations, partly
offset by the $20 million provision reversal for disposal of businesses.
The extraordinary item resulted from a charge ($4.1 million, $2.7 million net of
taxes) for the extinguishment of debt resulting from holders of the Company's 5
3/4% Eurodollar Convertible Debentures exercising their right to "put" the
debentures.
Net income of $386.3 million, or $2.04 per Common share, for the nine months
ended September 30, 1995, compared with $465 million, or $2.30 per share, last
year, which included $51.8 million, or 26 cents per share from discontinued
operations. Lower average Common shares outstanding in 1995 benefited E.P.S. by
13 cents.
Reported income from continuing operations in 1995 will continue to be
negatively affected, when compared to 1994, by the absence of the results of
domestic tobacco and 1994's fourth quarter net gain on disposal of businesses,
partly offset by lower interest expense and higher interest income based on
existing levels of borrowings and investments.
With the sale of its retail distribution operations on July 24, 1995, the
Company has substantially completed the disposition of nonstrategic businesses
and product lines announced earlier this year.
Earnings per Common share in 1995 will continue to benefit from the Company's
purchase of shares of its Common stock. The 20 million share Common stock
purchase authorization adopted by the Board of Directors in connection with the
sale of American Tobacco and Franklin was completed during the third quarter. In
addition, the Company has authority to purchase another five million shares
which, subject to market conditions, it intends to purchase by year end.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
The proportion of the Company's income from foreign sources in 1995 has
increased significantly due to the absence of the domestic businesses sold. As a
result, fluctuations in foreign currencies, principally sterling, will increase
the volatility of dollar results in future periods.
The Company is seeking acquisitions with the principal objective of accelerating
the growth of its hardware and home improvement, office products, golf and
leisure and distilled spirits businesses.
See notes 8 and 9 in the Notes to Condensed Consolidated Financial Statements
for discussion of pending litigation and environmental matters.
International Tobacco
- ---------------------
Net sales in sterling were up 5%, principally on price increases resulting from
higher U.K. tobacco taxes and manufacturers' price increases in April 1995 and
1994. The effect of these price increases was partly offset by a 2.3% U.K.
cigarette unit sales decline. Gallaher's worldwide cigarette unit sales were
down 1.5%. Gallaher maintained its position as the number one tobacco company in
the U.K. Gallaher's estimated share of cigarette sales to consumers was 39.3%,
as compared with 39.7% for last year's comparable nine-month period. Overall
U.K. consumer demand is estimated to have declined in the range of 2%, as
compared with a decline of 3.2% last year. The U.K. cigarette industry volume is
estimated to have declined 5.7%. Changes in trade buying patterns related to the
U.K. budget announcements at the end of 1993 and 1994 caused distortions in the
comparison between the first nine months of 1994 and 1995. Operating income in
sterling increased 7% on higher sales, partly offset by higher operating
expenses, including increased advertising costs on U.K. support for Benson and
Hedges Special Filter. In dollars, net sales and operating income increased 10%
and 12%, respectively, reflecting translation at higher average foreign exchange
rates.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Distilled Spirits
- -----------------
Worldwide net sales and operating income increased 5% and 2%, respectively.
Beam's net sales increased 2% on the introduction of After Shock cordial, higher
international shipments and price increases, partly offset by lower domestic
shipments. Operating income increased 2% on the higher sales and on improved
margins from favorable product mix, partly offset by higher marketing expenses.
These expenses included costs to promote Jim Beam bourbon's 200th anniversary
and the introduction of After Shock as well as higher international
expenditures. International sales and operating income increased on higher
shipments (principally Australia and Germany) and higher average foreign
exchange rates.
Whyte & Mackay's net sales in sterling increased 8% on the effects of a 26 pence
tax increase in the U.K. on a typical bottle, effective January 1, 1995, and an
8% volume gain primarily reflecting export volume increases in scotch whisky and
commodity bulk. Operating income in sterling decreased 4% on higher operating
expenses, principally due to an unfavorable comparison to last year's
non-recurring items. Reported comparisons for the year for Whyte & Mackay will
be negatively affected by non-recurring items in the fourth quarter of 1994,
principally one-time bulk sales.
Hardware and Home Improvement Products
- --------------------------------------
Record net sales increased 3% on price increases, line extensions and new
products, partly offset by volume declines. Operating income was down 2% as the
sales increase and lower operating expenses (including the reversal of reserves
related to a joint venture) were more than offset by increased raw material
costs and effects of lower volume. A significant softening of orders at Moen was
the principal reason for the decline, reflecting the general slowdown at home
centers and in new construction, trade inventory reductions and a very weak
Canadian housing market. Waterloo had strong results due to volume gains with
Sears.
Office Products
- ---------------
Record net sales increased 16% on new products and volume increases reflecting
continued market share gains, higher average foreign exchange rates and price
increases. Operating income was up 16% reflecting the sales increase, partly
offset by higher raw material costs which were not fully recovered by price
increases in the first nine months, higher volume-
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Office Products (Concluded)
- ---------------
related expenses and the unfavorable impact of gains on the disposal of assets
last year. The net sales and operating income increases reflected improvements
in both domestic and international businesses. Further price increases effective
in the fourth quarter and early 1996 have been announced.
Golf and Leisure Products
- -------------------------
Record net sales were up 15% on increased volume in all product lines,
reflecting benefits from line extensions and new products. Record operating
income increased 11% on record sales, partly offset by higher operating
expenses, including costs related to European expansion and volume-related
marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from continuing operating activities of $789.3 million for the
nine months ended September 30, 1995, decreased $330.7 million yet exceeded the
funds required for capital expenditures and dividends by $373 million. The
decrease was largely attributable to the absence of American Tobacco's cash flow
of $151.5 million, higher working capital requirements and the payment of $29.4
million related to the "put" exercise premium on the 5 3/4% Eurodollar
Convertible Debentures (see note 10 in the Notes to Condensed Consolidated
Financial Statements).
Net cash provided from investing activities for the nine months ended September
30, 1995 was $1,164.7 million as compared with net cash used of $3.4 million in
1994, principally reflecting proceeds received from the disposition of the
Franklin life insurance business.
Net cash used by financing activities for the nine months ended September 30,
1995 was $1,676.6 million as compared with $1,138.1 million in 1994, reflecting
the purchase of Common stock for treasury.
The Company completed purchases under the 20 million share purchase
authorization during the third quarter. In addition, the Company has authority
to purchase another five million shares which, subject to market conditions, it
intends to purchase by year end.
Total debt at September 30, 1995 aggregated $1.6 billion, a decrease of $641.6
million from December 31, 1994, largely reflecting the exercise of
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES - (Concluded)
- -------------------------------
the 5 3/4% Eurodollar Convertible Debentures' "put", the maturity of 5 1/4%
Notes and the retirement of commercial paper borrowings. The ratio of total debt
to total capital decreased from 32.4% at December 31, 1994 to 28.7% at September
30, 1995 reflecting the lower debt levels, partly offset by the purchase of
Common stock for treasury.
The Company extended to September 1, 2000 the expiration dates of revolving
credit agreements maintained by the Company with various banks providing for
unsecured committed borrowings of up to $4 billion, including $1 billion in
various Eurocurrencies. The commitment fee was reduced to 0.15% per annum of the
unused facility. The commitment fee is subject to increases up to a maximum
level of 0.25% per annum in the event the Company's long-term debt rating falls
below specified levels. Other terms of the agreements remained substantially
unchanged.
Management believes that the Company's internally generated funds, together with
its access to global credit markets, are more than adequate to meet the
Company's capital needs.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Results of Operations for the Three Months Ended September 30, 1995 as
Compared to the Three Months Ended September 30, 1994
---------------------------------------------------------------------------
Net Sales Operating Income
---------------------- -----------------
1995 1994 1995 1994
(Restated) (Restated)
-------- --------- ----- ---------
(In millions)
International tobacco $1,711.5 $1,608.1 $152.0 $140.6
Distilled spirits 307.3 305.9 51.4 48.8
Hardware and home
improvement products 327.9 334.0 39.7 44.5
Office products 300.1 260.1 16.4 15.0
Golf and leisure products 136.5 116.1 18.0 16.1
-------- ------- ------ ------
Ongoing operations 2,783.3 2,624.2 277.5 265.0
Domestic tobacco - 425.3 - 48.6
Other businesses 112.0 305.1 0.9 (2.9)
-------- -------- ------ ------
Continuing operations $2,895.3 $3,354.6 $278.4 $310.7
======== ======== ====== ======
CONSOLIDATED
- ------------
Net sales and operating income from ongoing operations, which excludes domestic
tobacco, life insurance and other businesses disposed (see notes 2 and 3 in the
Notes to Condensed Consolidated Financial Statements), increased 6% and 5%,
respectively. Excluding the favorable effects of higher average foreign exchange
rates of $33 million and $2.6 million, net sales and operating income from
ongoing operations were up 5% and 4%, respectively. Net sales increased due to
price increases (including international tobacco excise tax increases), new
products and line extensions, partly offset by volume declines. Operating income
increased due to the higher sales, partly offset by increased operating
expenses.
Net sales and operating income from continuing operations, which include
domestic tobacco for 1994 and other businesses isposed, decreased 14% and 10%,
respectively.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
Interest and related expenses decreased due to lower average borrowings. Higher
interest income caused the favorable change in other (income) expenses, net.
Both changes reflected the use of proceeds from the disposition of The American
Tobacco Company and the Franklin life insurance business.
The gain on disposal of businesses reflected a reversal of $20 million of the
$241.3 million provision recorded in 1994 in connection with the disposition of
nonstrategic businesses.
The decrease in the effective income tax rate to 37.4% from 43.3% in 1994
principally reflected the reversal of $20 million provided in connection with
the disposition of nonstrategic businesses for which no taxes were recorded.
Income from continuing operations of $153.3 million, or 82 cents per Common
share, for the three months ended September 30, 1995 compared with $131.8
million, or 65 cents per share, last year. The increase reflected improved
results from ongoing operations and the $20 million provision reversal for
disposal of businesses, partly offset by the absence of The American Tobacco
Company's results of operations.
Net income of $153.3 million, or 82 cents per Common share, for the three months
ended September 30, 1995, compared with $151.9 million, or 75 cents per share,
last year, which included $20.1 million, or ten cents per share from
discontinued operations. Lower average Common shares outstanding in 1995
benefited E.P.S. by seven cents.
International Tobacco
- ---------------------
Net sales in sterling were up 5%, principally on price increases resulting from
higher U.K. tobacco taxes and a 1.8% worldwide cigarette unit sales increase,
mainly reflecting increased periodic shipments to the Former Soviet Union.
Gallaher's U.K. cigarette volume declined 3.4%. Operating income in sterling
increased 6% on higher sales, partly offset by higher operating expenses. In
dollars, net sales and operating income increased 6% and 8%, respectively,
reflecting translation at higher average foreign exchange rates.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Distilled Spirits
- -----------------
Worldwide net sales increased slightly and operating income increased 5%.
Beam's net sales decreased 2% as lower domestic shipments were partly offset by
the introduction of After Shock cordial, higher international shipments and
price increases. Operating income was up 2% as the lower sales and increased
marketing expenses (After Shock promotional costs and higher international
expenditures) were more than offset by improved margins reflecting favorable
product mix. International sales and operating income continued to increase on
higher shipments.
Whyte & Mackay's net sales in sterling increased 8% on the effects of a 26%
volume gain primarily from export volume increases and a 26 pence tax increase
in the U.K. on a typical bottle, effective January 1, 1995. Operating income in
sterling increased 74% to 2.1 million pounds resulting from higher sales and a
favorable product mix.
Hardware and Home Improvement Products
- --------------------------------------
Net sales decreased 2% on volume declines, partly offset by line extensions,
price increases and new products. Operating income was down 11% principally at
Moen due to effects of increased raw material costs and lower volume, which
reflected the general slowdown at home centers and in new construction, trade
inventory reductions and a very weak Canadian housing market.
Office Products
- ---------------
Record net sales increased 15% principally due to new products and price
increases. Operating income increased 9% as the sales increase was partly offset
by higher raw material costs which were not fully recovered by price increases
and higher volume-related operating expenses. Domestic operations reported
increased operating income while international businesses were down principally
due to competitive pricing activities in the U.K.
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
Golf and Leisure Products
- -------------------------
Record net sales were up 18% on volume increases in all product lines reflecting
benefits from line extensions and new products. Record operating income
increased 12% and reflected the higher sales, partly offset by higher operating
expenses, including costs related to European expansion and volume-related
marketing expenses.
<PAGE>
PART I - EXHIBIT A
------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Nine Months Ended
September 30,
----------------------
1995 1994
(Restated)
------ ---------
Income from continuing operations before
extraordinary item $389.0 $413.2
Preferred stock dividend requirements (1.0) (1.1)
------ ------
Income from continuing operations available for
computing earnings per Common share - primary 388.0 412.1
Income from discontinued operations - 51.8
Extraordinary item (2.7) -
------ ------
Net income for computing earnings
per Common share - primary $385.3 $463.9
====== ======
Income from continuing operations available for
computing earnings per Common share - primary $388.0 $412.1
Convertible preferred stock dividend requirements 1.0 1.1
Interest and related expenses on convertible
debentures 10.5 16.1
------ ------
Income from continuing operations available for
computing earnings per Common share -
fully diluted 399.5 429.3
Income from discontinued operations - 51.8
Extraordinary item (2.7) -
------ ------
Net income for computing earnings per Common
share - fully diluted $396.8 $481.1
====== ======
<PAGE>
PART I - EXHIBIT A (Continued)
------------------
Computation of Weighted Average Number of
Common Shares Outstanding on a Fully Diluted Basis (Unaudited)
--------------------------------------------------------------
(In millions, except per share amounts)
Nine Months Ended
September 30,
----------------------
1995 1994
(Restated)
----- ---------
Weighted average number of Common shares
outstanding during each period - primary 189.1 201.6
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 1.9 2.1
Addition from assumed conversion of
convertible debentures 3.8 9.3
Other additions 3.5 0.6
------ ------
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 198.3 213.6
====== ======
Earnings per Common share
Primary
Income from continuing operations $2.05 $2.04
Income from discontinued operations - .26
Extraordinary item (.01) -
----- -----
Net income $2.04 $2.30
===== =====
Fully diluted
Income from continuing operations $2.01 $2.01
Income from discontinued operations - .24
Extraordinary item (.01) -
----- -----
Net income $2.00 $2.25
===== =====
<PAGE>
PART I - EXHIBIT A (Continued)
------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Three Months Ended
September 30,
----------------------
1995 1994
(Restated)
------ ---------
Income from continuing operations $153.3 $131.8
Preferred stock dividend requirements (0.3) (0.4)
------ ------
Income from continuing operations available for
computing earnings per Common share - primary 153.0 131.4
Income from discontinued operations - 20.1
------ ------
Net income for computing earnings
per Common share - primary $153.0 $151.5
====== ======
Income from continuing operations available for
computing earnings per Common share - primary $153.0 $131.4
Convertible preferred stock dividend requirements 0.3 0.4
Interest and related expenses on convertible
debentures 2.4 5.4
------ ------
Income from continuing operations available for
computing earnings per Common share -
fully diluted 155.7 137.2
Income from discontinued operations - 20.1
------ ------
Net income for computing earnings per Common
share - fully diluted $155.7 $157.3
====== ======
<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
September 30,
----------------------
1995 1994
(Restated)
----- ---------
Weighted average number of Common shares
outstanding during each period - primary 184.7 201.3
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 2.0 2.2
Addition from assumed conversion of
convertible debentures 3.8 9.3
Other additions 1.2 0.5
----- -----
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 191.7 213.3
===== =====
Earnings per Common share
Primary
Income from continuing operations $.82 $.65
Income from discontinued operations - .10
---- ----
Net income $.82 $.75
==== ====
Fully diluted
Income from continuing operations $.80 $.64
Income from discontinued operations - .09
---- ----
Net income $.80 $.73
==== ====
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- ------ -----------------
(a) Reference is made to paragraph (a)(i) of Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and to paragraph (a) of Part II, Item 1, "Legal
Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995. On October 2, 1995, Registrant was voluntarily
dismissed as a defendant in Michener v. The American Tobacco Company, et al.,
District Court of Oklahoma County, State of Oklahoma. In connection with the
sale of Registrant's former subsidiary, The American Tobacco Company ("ATCO"),
to Brown & Williamson Tobacco Corporation ("Brown & Williamson") on December 22,
1994, Brown & Williamson and ATCO agreed to indemnify Registrant against claims
arising from smoking and health and fire safe cigarette matters relating to the
tobacco business of ATCO. Registrant's counsel have advised that, in their
opinion, on the basis of their investigations generally with respect to suits
and claims of this character, Registrant has meritorious defenses to these
actions and threatened actions. The actions will be vigorously contested.
(b)(i) Reference is made to the discussion of Dean v. Gallaher Limited, in
paragraph (a)(ii)(A) of Part I, Item 3, "Legal Proceedings", of Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994. A
hearing has been set for November 10, 1995 to consider a motion by Gallaher to
dismiss the action against Hergall and to order a trial on a preliminary issue
against Gallaher.
(ii) Reference is made to the discussion of the granting by the English
Legal Aid Board on January 31, 1995, of limited legal aid certificates to
approximately 200 claimants seeking to bring proceedings against tobacco
manufacturers for the harm they have allegedly suffered through smoking
cigarettes, in paragraph (a)(ii)(B) of Part I, Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1994. On October 31, 1995, a group of tobacco manufacturers submitted
representations to the Legal Aid Board in opposition to the award of full legal
aid certificates to these claimants.
(iii) On October 9, 1995, Gallaher received a demand letter from solicitors
in Strabone, Northern Ireland, acting for Mary Shiels (as the personal
representative of Brian Shiels, deceased) requesting "adequate compensation"
based on allegations that Mr. Shiels developed "Buerger's disease and/or
premature onset arteriosclerosis" and died on October 28, 1992, from smoking
cigarettes manufactured by Gallaher. Mrs. Shiels has obtained a limited award of
legal aid for purposes of issuing a Writ of Summons, and has made an application
for legal aid to prosecute this action. A Writ of Summons was issued on October
24, 1995, seeking damages "by reason of the negligence of the Defendants ... in
and about the manufacture and supply to the deceased of cigarettes." Plaintiff
must
<PAGE>
Item 1. LEGAL PROCEEDINGS. (Continued)
- ------ -----------------
serve the Writ of Summons within twelve months.
(iv) Registrant's counsel have advised that, in their opinion, on the basis
of their investigations generally with respect to suits and claims of this
character, Gallaher has meritorious defenses to these actions and claims. The
actions will be vigorously contested.
(c) 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 (b) of Part I,
Item 3, "Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994. In Natural Resources Defense Council, by
order dated May 10, 1994, the court denied defendants' demurrer challenging
plaintiffs' standing to bring the action but ruled plaintiffs are not entitled
to restitution or compensatory damages. Following a ruling on July 12, 1995 by
the Court of Appeals that the defendants' faucets were not subject to the
discharge provisions of the Proposition 65 law, plaintiffs agreed to settle all
claims in the action against Moen and five other defendants. Plaintiffs entered
a Consent Judgment on August 31, 1995. On October 24, 1995, plaintiffs
voluntarily withdrew that Consent Judgment and their action against Moen and
five other defendants was dismissed with prejudice. Moen and five other
defendants agreed on that date to an out-of-court settlement of all claims that
were or could have been alleged in this matter. In Lungren, on April 16, 1993,
defendants filed a demurrer in respect of plaintiffs' claims based on
defendants' alleged intentional discharge of lead from faucets to sources of
drinking water. On May 5, 1994, the court sustained defendants' demurrer. The
Attorney General appealed this ruling to the Court of Appeal on May 25, 1994,
and on July 12, 1995, the Court of Appeal affirmed the lower court's ruling. The
Attorney General and intervenors petitioned the California Supreme Court for
review on August 14, 1995. Following the July 12, 1995 ruling by the Court of
Appeals that defendants' faucets were not subject to the discharge provisions of
the Proposition 65 law, the Attorney General agreed to settle all claims that
were or could have been alleged in the action against Moen and five other
defendants. The Attorney General filed a Consent Judgment in Superior Court on
August 30, 1995 with respect to the six settling defendants, which was entered
by the court on October 6, 1995. A motion for reconsideration has been filed by
certain non-settlors and is pending.
(d) It is not possible to predict the outcome of the pending litigation
referenced above, but 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 results of operations, cash flow or financial condition
of the Registrant. Reference is made to
<PAGE>
Item 1. LEGAL PROCEEDINGS. (Concluded)
- ------ -----------------
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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits.
--------
10a. Amendment effective as of August 1, 1995 to Severance
Agreement between Registrant and Randall W. Larrimore.
10b. Letter dated August 11, 1995 from Registrant with respect
to deferred payment of fees to Gordon R. Lohman.
12. Statement re computation of ratio of earnings to fixed
charges.
15. Letter from Coopers & Lybrand L.L.P. dated November 9,
1995 re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
In lieu of filing certain instruments with respect to long-term debt of the
kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to furnish
a copy of such instruments to the Securities and Exchange Commission upon
request.
(b) Reports on Form 8-K.
-------------------
Registrant filed a Current Report on Form 8-K, dated July 25,
1995, in respect of Registrant's press releases dated July
24, 1995 announcing Registrant's financial results for the
three-month and six-month periods ended June 30, 1995 and
that Registrant had completed that day the sale of its
U.K.-based retail distribution group, including Forbuoys
Limited, the TM Group Limited and Marshell Group Limited
(Items 5 and 7(c)).
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (Concluded)
- ------ --------------------------------
Registrant filed a Current Report on Form 8-K, dated
September 29, 1995, in respect of Registrant's press release
dated September 28, 1995 concerning certain statements by
Registrant at an investment conference (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October
23, 1995, in respect of Registrant's press release dated
October 23, 1995 announcing Registrant's financial results
for the three-month and nine-month periods ended September
30, 1995 (Items 5 and 7(c)).
<PAGE>
This Quarterly Report shall not be construed as a waiver of the right to contest
the validity or scope of any or all of the provisions of the Securities Exchange
Act of 1934 under the Constitution of the United States, or the validity of any
rule or regulation made or to be made under such Act.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN BRANDS, INC.
---------------------
(Registrant)
Date: November 9, 1995 By /s/ R. L. Plancher
---------------- -------------------------
R.L. Plancher
Senior Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
10a. Amendment effective as of August 1, 1995 to
Severance Agreement between Registrant and
Randall W. Larrimore.
10b. Letter dated August 11, 1995 from Registrant
with respect to deferred payment of fees
to Gordon R. Lohman.
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from Coopers & Lybrand L.L.P. dated
November 9, 1995 re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
EXHIBIT 10a
AMENDMENT TO SEVERANCE AGREEMENT
This AMENDMENT effective as of August 1, 1995 to the Severance
Agreement (the "Agreement") dated as of March 7, 1988, as amended, between
AMERICAN BRANDS, INC., a Delaware corporation (the "Company"), and RANDALL W.
LARRIMORE (the "Executive");
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Executive entered into the Agreement in
order to provide severance benefits in the event of termination of employment;
and
WHEREAS, the Company and the Executive desire to amend the Agreement
as set forth herein;
NOW, THEREFORE, in consideration of the premises and to further assure
the retention of the Executive in the employ of the Company after the date of
this Amendment to Severance Agreement, the parties hereto do hereby agree as
follows:
1. Section 2(b)(ii)(B) of the Agreement is hereby amended in its
entirety as follows:
"(B) the lesser of the number two and the number of years (and fraction
thereof) from the Termination Date to the Executive's Normal Retirement
Date (as defined in the Retirement Plan for Employees and Former Employees
of American Brands, Inc. (the "Retirement Plan"))."
2. Section 2(c) of the Agreement is hereby amended by changing
"one-year period" in each place it appears therein to "two-year period".
3. Section 2(d) of the Agreement is hereby amended in its entirety as
follows:
"(d) If the Company shall terminate the Executive's employment other
than for Disability or Cause, then in addition to the retirement benefits
to which the Executive is entitled under the Retirement Plan, the
Supplemental Plan and any other defined benefit pension plan maintained by
the Company or any affiliate, and any other program, practice or
arrangement of the Company or any affiliate to provide the Executive with a
defined pension benefit after termination of employment, and any successor
plans thereto (all such plans being collectively referred to herein as the
"Pension Plans"), the Company shall pay the Executive monthly beginning at
the date that payments commence under the Retirement Plan an amount equal
to the excess of (i) over (ii) below where
(i) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) to which the
Executive would have been entitled under the terms of each of the
Pension Plans in which he was an active participant (without regard to
any amendment made subsequent to the date hereof which adversely
affects in any manner the computation of the Executive's benefits)
determined as if he were fully vested thereunder and had accumulated
two additional years (or, if less, the number of years (and fraction
thereof) from the Termination Date to the Executive's Normal
Retirement Date) of Service thereunder (subsequent to his Termination
Date) at his rate of Actual Earnings in effect on the date hereof plus
any increases subsequent thereto,
and where
(ii) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) to which the
Executive is entitled under the terms of each of the Pension Plans in
which he was an active participant at the date hereof or subsequently.
For purposes of clause (i), the amounts payable pursuant to Sections
2(b)(ii)(A)(1) and (2) and (2)(b)(ii)(B) shall be considered as part of the
Executive's Actual Earnings and such amounts shall be deemed to represent
two years (or, if less, the number of years (and fraction thereof) from the
Termination Date to the Executive's Normal Retirement Date) of Actual
Earnings for purposes of determining his highest consecutive five year
average rate of Actual Earnings. The supplemental pension benefits
determined under this Section 2(d) shall be payable by the Company to the
Executive and his contingent annuitant, if any, or to the Executive's
Surviving Spouse as a spouse's benefit if the Executive dies prior to
commencement of benefits under this Agreement, in the same manner and for
the same period as his pension benefits under the Supplemental Plan and
shall be adjusted actuarially to reflect payment in a form other than a
straight life annuity. Benefits hereunder which commence prior to age 60
shall be actuarially reduced to reflect early commencement to the extent,
if any, provided in the Retirement Plan as if the Executive's Termination
Date were an Early Retirement Date. All capitalized terms used in this
Section 2(d) shall have the same meaning as in the Retirement Plan as in
effect on the date hereof, unless otherwise defined herein or otherwise
required by the context."
IN WITNESS WHEREOF, the Company has caused this Amendment to Severance
Agreement to be signed by its officer thereunto duly authorized and its seal to
be hereunto affixed and attested and the Executive has hereunto set his hand as
of the th day of August, 1995.
AMERICAN BRANDS, INC.
By Steven C. Mendenhall
---------------------
(Corporate Seal) Steven C. Mendenhall
Senior Vice President and
ATTEST: Chief Administrative Officer
Louis F. Fernous, Jr.
---------------------
Secretary
Randall W. Larrimore
--------------------
RANDALL W. LARRIMORE
NY2:25018.01
EXHIBIT 10b
[Letterhead of American Brands, Inc.]
August 11, 1995
Mr. Louis F. Fernous, Jr.
Vice President and Secretary
American Brands, Inc.
1700 East Putnam Avenue
Old Greenwich, Connecticut 06870-0811
Re: Cash Director's Fees
Dear Lou:
I hereby elect that American Brands, Inc. (the "Company") defer
payment to me of any fees to which I will be entitled as a director of the
Company, including fees for service on any committee of the Board of Directors
of the Company until the January next following the calendar year in which I
cease to be a member of the Board of Directors of the Company. The deferral
shall be for fees for my services for the period commencing August 1, 1995 and
thereafter until I notify the Company that I am rescinding the election for
periods of service subsequent to the recission. This election is irrevocable for
fees that have been deferred.
I understand that interest on deferred fees will be paid at the time
of payment of such fees. Interest will be accrued each quarter on deferred fees
and interest already earned at the start of such quarter at a rate equal to the
average rate of the final auction of the prior quarter for the sale of 13-week
U.S. Government bills, rounded up to the next highest .05%. Interest will be
calculated on the basis of actual days over a 360 day year and will be credited
as of the end of each quarter.
In the event of my death prior to receipt of the deferred fees and
accrued interest thereon, the Company shall promptly pay the deferred fees and
interest to my beneficiary, the Gordon R. Lohman Trust dated December 3, 1993.
If my designated beneficiary does not survive me, the deferred fees and accrued
interest shall be promptly paid to my estate.
In the event of a Change in Control of the Company, the deferred fees
and accrued interest thereon shall become immediately payable in full. A "Change
in Control" of the Company shall be deemed to have occurred if (A) any person
(as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), as in effect on February 28, 1995) is
or becomes the beneficial owner (as that term is used in Section 13(d) of the
Exchange Act, and the rules and regulations promulgated thereunder, as in effect
on February 28, 1995) of stock of the Company entitled to cast more than 20% of
the votes at the time entitled to be cast generally for the election of
directors, (B) more than 50% of the members of the Board of Directors shall not
be Continuing Directors (which term, as used herein, means the directors of the
Company (1) who are members of the Board of Directors on February 28, 1995 or
(2) who subsequently became directors of the Company and who were elected or
designated to be candidates for election as nominees of the Board of Directors,
or whose election or nomination for election by the Company's stockholders was
otherwise approved, by a vote of a majority of the Continuing Directors then on
the Board of Directors), (C) the Company shall be merged or consolidated with,
or, in any transaction or series of transactions, substantially all of the
business or assets of the Company shall be sold or otherwise acquired by,
another corporation or entity and, as a result thereof, either (I) the
stockholders of the Company immediately prior thereto shall not directly or
indirectly have at least 50% or more of the combined voting power of the
surviving, resulting or transferee corporation or entity immediately thereafter
or (II) any person (as that term is used in Sections 13(d) and 14(d) of the
Exchange Act, as in effect on February 28, 1995) is or becomes the beneficial
owner (as that term is used in Section 13(d) of the Exchange Act, and the rules
and regulations promulgated thereunder, as in effect on February 28, 1995) of
more than 20% of the combined voting power of the surviving, resulting or
transferee corporation or entity, or (D) any change in control of the Company
shall have occurred of a nature that would be required to be reported in
response to Item 1(a) of Form 8-K promulgated under the Exchange Act as in
effect on February 28, 1995, regardless of whether the Company is at the time of
such change in control subject to the reporting requirement thereof.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have
occurred if an acquisition of stock that would otherwise constitute a Change in
Control pursuant to clause (A) or (D) of the preceding sentence is made by the
Company or a subsidiary thereof, by any corporation in a merger or consolidation
that does not constitute a Change in Control pursuant to clause (C) of the
preceding sentence or by any employee benefit plan (or related trust) sponsored
or maintained by the Company or a subsidiary thereof.
I understand that this obligation of the Company to make payment of
deferred fees and accrued interest thereon is not required to be funded.
Please sign on behalf of the Company and return a copy of this letter
to me acknowledging receipt of and agreeing to my deferral election.
Very truly yours,
Gordon R. Lohman
----------------
Gordon R. Lohman
Acknowledged and agreed to this 17th day of August 1995.
AMERICAN BRANDS, INC.
Louis F. Fernous, Jr.
- ---------------------
Louis F. Fernous, Jr.
Vice President and Secretary
cc: Salary Committee
PART II - EXHIBIT 12
--------------------
<TABLE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
-------------------------------------------------------------- -------------
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income from continuing operations
before income taxes, minority
interest and extraordinary item.. $ 923.5 $1,107.0 $1,255.1 $ 878.9 $1,354.0 $634.2
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies.............. 0.1 0.1 0.3 0.8 0.4 0.1
Capitalized interest....... 1.5 1.0 1.0 2.5 1.4 0.2
-------- -------- -------- -------- -------- ------
921.9 1,105.9 1,253.8 875.6 1,352.2 633.9
======== ======== ======== ======== ======== ======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses..................... 290.2 276.6 283.4 258.7 224.9 130.9
Portion of rentals representative
of an interest factor............ 27.4 30.4 32.3 29.8 27.1 16.6
-------- -------- -------- -------- -------- ------
Total Fixed Charges........ 317.6 307.0 315.7 288.5 252.0 147.5
-------- -------- -------- -------- -------- ------
Total Earnings Available... $1,239.5 $1,412.9 $1,569.5 $1,164.1 $1,604.2 $781.4
======== ======== ======== ======== ======== ======
Ratio of Earnings to Fixed Charges.... 3.90 4.60 4.97 4.04 6.37 5.30
==== ==== ==== ==== ==== ====
</TABLE>
PART II - EXHIBIT 15
November 9, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: American Brands, Inc.
We are aware that our report dated November 9, 1995, on our review of
interim financial information of American Brands, Inc. and Subsidiaries for the
three-month and nine-month periods ended September 30, 1995 and 1994 included in
this Form 10-Q, has been incorporated by reference into (a) the Registration
Statement on Form S-8 (Registration No. 33-64071) relating to the Defined
Contribution Plan of American Brands, Inc. and Participating Operating
Companies, the Registration Statement on Form S-8 (Registration No. 33-64075)
relating to the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the
Registration Statement on Form S-8 (Registration No. 33-58865) relating to the
1990 Long-Term Incentive Plan of American Brands, Inc., and the prospectuses
related thereto, and (b) the prospectuses related to the Registration Statements
on Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of
American Brands, Inc. Pursuant to Rule 436(c) under the Securities Act of 1933,
this report should not be considered a part of such registration statements or
prospectuses or certification by us within the meaning of Sections 7 and 11 of
that Act.
Very truly yours,
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
PART II - EXHIBIT 23
--------------------
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions contained
in Part II, Item 1, "Legal Proceedings", of this Quarterly Report on Form 10-Q
of American Brands, Inc. into (a) the Registration Statement on Form S-8
(Registration No. 33-64071) relating to the Defined Contribution Plan of
American Brands, Inc. and Participating Operating Companies, the Registration
Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand
Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on
Form S-8 (Registration No. 33-58865) 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 LLP
30 Rockefeller Plaza
New York, New York 10112
November 9, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED
STATEMENT OF INCOME AS OF SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> $ 393
<SECURITIES> 0
<RECEIVABLES> 1,437
<ALLOWANCES> 45
<INVENTORY> 1,304
<CURRENT-ASSETS> 3,316
<PP&E> 2,102
<DEPRECIATION> 984
<TOTAL-ASSETS> $8,191
<CURRENT-LIABILITIES> 2,348
<BONDS> 1,383
<COMMON> 717
0
15
<OTHER-SE> 3,189
<TOTAL-LIABILITY-AND-EQUITY> 8,191
<SALES> $8,283
<TOTAL-REVENUES> 8,283
<CGS> 2,368
<TOTAL-COSTS> 2,368
<OTHER-EXPENSES> 3,860
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 122
<INCOME-PRETAX> 633
<INCOME-TAX> 244
<INCOME-CONTINUING> 389
<DISCONTINUED> 0
<EXTRAORDINARY> (3)
<CHANGES> 0
<NET-INCOME> $ 386
<EPS-PRIMARY> $2.04
<EPS-DILUTED> $2.00
</TABLE>
